American Needle Inc. v. NFL

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Argued January 13, 2010.

Authorship: Lyle Denniston of SCOTUSblog

Docket: 08-661

Issue: Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities.”

Contents

Briefs and Documents

Oral Argument

Transcript (January 13, 2010)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Oral Argument Analysis

The following was originally written by Lyle Denniston for SCOTUSblog.

If the National Football League, and other pro sports leagues, want to combine their efforts in commercial activity, they probably are going to have to justify that in federal court, in perhaps prolonged trials focusing on whether any such action is really for the good of the game, or is aimed only at making more money. Just one trip to the Supreme Court to avoid that, it appears, will not be enough. That prospect loomed on Wednesday as the Justices weighed the NFL’s broad claim to antitrust immunity for joint operations, a claim that the other pro sports leagues similarly make.

The Court heard 70 minutes of oral argument in American Needle v. NFL (08-661), a case that supposedly was to focus on a single, simple question: is the NFL, along with its 32 teams, a “single entity” and therefore immune to the Sherman Antitrust Act when they act jointly in a business effort? But Justice after Justice insisted strenuously that that is not really the issue, and that the case probably needs to go back to the lower courts for a potentially penetrating inquiry into what kinds of commerce are closely enough related to pro football itself that they escape antitrust liability.

The specific kind of activity under legal attack in the case is the joint effort of the NFL and its teams to sell, through only one dealer, hats, jerseys, and other fan gear displaying the teams’ trademarked logos. While the NFL insists that that is crucial to promoting the popularity of the games on the field, it did not appear that any Justice was firmly convinced — right now — of that. From the bench, for example, came the question of whether the NFL could escape antitrust liability if it decided, jointly, to build houses. While the NFL’s lawyer said that would not promote the game, Chief Justice John G. Roberts, Jr., shot back, reciting the other side’s contention that selling trademarked goods was closer to selling houses than it was to promoting football games. And that, it seems, is precisely the issue that would dominate a subsequent trial on the legality of joint selling of fan goods.

While some of the Justices did seem sympathetic to the notion that it could be very costly, in court and legal fees, to pursue an inquiry into the necessity of a joint economic project by a sports combine, they did not appear to be saying that the expense would be enough to head off that inquiry entirely, especially if some way could be found to settle the issue without a full-scale trial. It was not clear what such a short-cut procedure might be, however. The Chief Justice at one point seemed to be saying that it would not be easy to simplify or narrow down a rule-of-reason inquiry

One issue that did not seem to be in the case when it reached the Court did make an appearance during the argument: whether forcing the NFL to justify joint activity by it and its teams would extend to collective writing and enforcing the playing rules. Justice Anthony M. Kennedy, for example, wondered if changes that might benefit teams with one style of play — such as a rule to give quarterbacks more protection — might be open to an antitrust challenge that it would harm other teams with different game plans, and thus did not benefit all of the league. It was not clear that the Court would allow such claims to go forward, but it also was not clear that a ruling in the case against the NFL’s immunity claim would foreclose that kind of challenge. The lawyer for the NFL’s challenger, American Needle, Inc., Glen D. Nager, suggested that such a claim might be made, but could be fairly easy for the NFL to defeat.

The content of the entire argument strongly suggested that there was not now a majority either to uphold broad immunity for pro sports leagues’ joint commercial enterprises, or to make everything the league and its teams do jointly open to antitrust challenge. What most of the Justices seemed to be tempted by was a middle-ground approach, with each specific joint effort tested under a “rule of reason” analysis to determine whether it was essential to the success of the sporting enterprise. Justice Kennedy, for example, said the degree of antitrust liability was “serious stuff,” including the prospect for tripled damages verdicts, and thus he sought guidance on “a zone where we are sure a rule-of-reason inquiry would be inappropriate?”

But if the outcome of this case is to mandate some rule-of-reason inquiry, even that would amount to a significant tactical loss for pro sports. The NFL, clearly representing the views of all pro sports leagues and teams, wants the Court to establish firmly that the teams have no independent economic power, so their joint efforts make them a legally immune “single entity.”

Justice Stephen G. Breyer, in particular, strove throughout the hearing to frame the kind of inquiry that would have to be made to test the legality of joint commercial enterprises, at least in the sports industry. Although at one point Justice Antonin Scalia, who seemed intent on simplifying the case, succeeded in driving Breyer into silence with his complex inquiries on antitrust process, Breyer did not remain silent for long. It was clear, by the end of the argument, that other Justices, like Breyer, were trying to figure out what’s next on joint economic activity by independently owned enterprises, especially in pro sports.

Justice Scalia’s approach appeared to be for the Court to directly address, now, the granted question — whether the NFL and its teams comprise a “single-entity” — and then, if the finding is that they are not, send the case back for a specific inquiry into the legality of joint marketing of fan goods. But Scalia did not propose a line of inquiry that would determine when, in fact, a single entity did exist, apparently assuming that that would occur to the Justices as they moved toward a decision.

Measuring the intensity of the probing by the Justices, it was apparent that the NFL’s lawyer, Gregg M. Levy, was under more pressurer than American Needle’s counsel. He had a simpler argument, repeatedly storessing that NFL individual teams have no economic power of their own, but that was an argument largely confined to the single-entity question. He had significant difficulty, it seemed, navigating through the Justices’ questions on how legally to justify the cap-selling monopoly the NFL and its teams had awarded to Reebok International and how to show that that approach was crucial to the success of staging pro football games

Pre-Argument Articles

Argument Preview

Lyle Denniston originally wrote the following for SCOTUSblog.

The more professional sports in America acts like hard-nosed Big Business, and the less it seems like an idyllic revival of Olympian competition, the more it risks trouble with the federal antitrust laws. And that evolution has put the Supreme Court, too, in the bleachers. The Court, indeed, has been fascinated with the subject for nearly a century. And, except for its early starry-eyed vision of baseball, it has been a fairly tough cop on the sports antitrust beat. It returns to that patrol in a new case, involving the marketing to the fans of hats, sweatshirts, and other team-identifying gear.

Background

Since 1922, and the decision in Federal Base Ball Club v. National League, giving major league baseball an antitrust exemption, the Court has been monitoring the business side of the pro sports industry. It has given no other sport such immunity to the Sherman Act (and Congress has not done so, either), but the Court has never settled a fundamental legal question. That question is whether the pro sports leagues are immune to antitrust scrutiny when they take action together, potentially or actually adding to their enormous potential as money-making machines. The question takes on added significance given today’s commercial profile of pro sports, with astronomically wealthy businessmen owning most of the teams, with many of the players, too, being fantastically rich, with most if not all of the sports stadiums and arenas being re-named for a profit-oriented company, and with a fan having to dig down deeply to buy a ticket to get in. A victory for pro sports in the new case of American Needle v. NFL may well add to the industry’s economic prowess.

While the case focuses on pro football, the outcome is expected to have a significant impact on other pro sports leagues as well – basketball, hockey, soccer, stock-car racing, tennis. Even major league baseball, despite its antitrust immunity, has been sued over joint promotion of fan goods. And while the case focuses on the joint marketing of fan gear, the outcome may well reach beyond the vending enterprise to at least some facets of the competition on the field or court. That is because combined activity by league owners is not confined to marketing fan gear. (Beyond sports, the principles at stake in this dispute may well affect the legal future of other joint ventures that take integrated action, because the Court may decide more broadly than the sports context.)

The American Needle case turns on a basic concept of antitrust law, specifically, Section 1 of the 1890 Sherman Antitrust Act. Under that section, it is illegal for any group or combination of independent enterprises to join together to “restrain trade or commerce.” Under a 1984 Supreme Court ruling (Copperweld v. Independence Tube), Section 1 does not apply to a parent corporation and a wholly-owned subsidiary acting jointly because they are part of a single whole, a “single entity,” and thus cannot be thought to get together for concerted action. The American Needle lawsuit does not challenge that basic premise. What it does test is whether a pro sports league, made up of independently owned teams, can qualify as a “single entity” under Section 1 when the league and its members act jointly — at least when the joint enterprise is refusing to compete in selling trademarked goods.

The NFL is an association of the 32 separately-owned teams. Every year, the league and the teams work it out jointly to stage more than 250 games each season. It takes a great deal of coordination and integration of activity to make a season work. No single team can stage a game on its own, the way a schoolyard pickup team can choose up sides and play. Putting on the championship game at the end of the season — the Super Bowl — is itself a highly complex affair.

In the early 1960s, seeking to stir greater fan excitement over pro football, the teams and the NFL decided that they would act together to promote their “brand” — the NFL “brand” as well as the identifying logos and trademarks of the individual teams. They set up NFL Properties as a separate marketing entity; one of its primary activities has been to control how the legally-protected intellectual property — the trademarks – can be used on merchandise. Vendors obtained licenses to produce and sell the identifying caps, jerseys, pennants, and so on.

Initially, NFL Properties gave licenses to a number of separate vendors to produce bill caps and stocking caps.. One of those vendors was American Needle, Inc., a company located in Buffalo Grove, Ill. For 20 years, it had a license to produce NFL team caps. In 2000, the league and its members concluded that team products were not doing very well commercially, and they decided the answer was to give a license to a single vendor. They agreed not to compete with each other in this marketing enterprise. Ultimately, in May 2001, Reebok International Ltd., a well-known producer of sports goods, won an exclusive license, lasting ten years, to sell team headwear. One of the documents in the Supreme Court case quotes a Reebok executive as saying later that caps that had sold for $19.99 a few years earlier were selling for $30.

American Needle sued the NFL, NFL Properties, the teams, and Reebok, claiming a violation of the Sherman Act. The exclusive deal for Reebok, the lawsuit contended, was a result of a combination designed to restrain commerce in caps. The NFL, the teams, and the affiliates contended that they were all part of a single enterprise; just as they had to work together to put on games, they had to act jointly to market pro football’s and the teams’ brands. A federal judge agreed, limiting the ruling to the exploitation of the trademarks. The Seventh Circuit Court upheld the “single entity” finding, but stressed that it was only dealing with the gear marketing. “The NFL teams can function onlyh as one source of economic power when collectively producing NFL football,” the Circuit Court said. And that single power, it concluded, controls the promotion of the sport.

American Needle then took the case on to the Supreme Court, filing for review on Nov. 17, 2008.

Petition for Certiorari

In its initial plea to the Supreme Court, sparing in length, American Needle raised two questions: were the NFL and member teams a single entity under Sherman’s Section 1, when the teams have competing economic interests and control their own economic decisions, and have the ability to compete, and whether the exclusive licensing deal with Reebok, including its pact among the teams not to compete over the marketing, violated Section 1.

In just six pages of argument, the petition contended that the Seventh Circuit ruling conflicted with the Supreme Court’s 1957 decision in Radovitch v. NFL, holding that pro sports leagues were subject to Section 1. It also claimed a conflict on the single-entity immunity issue between the Seventh and seven other federal Circuit Courts. “The Seventh Circuit’s decision…stands alone,” it asserted.

In response last January, the NFL, while not giving up on its “single-entity” claim, urged the Court to hear and decide the case. Conceding the disagreement among the lower courts on “whether a professional sports league of separately owned teams can constitute a single entity for purposes of Section 1″, the league arfgued that this division represented a deeper conflict over how to apply the Copperweld decisino to “joint ventures that involve a high degree of economic integration.” The resulting uncertainty, it said, “chills collaboration and decision-making” for the NFL and other nationwide joint ventures, the league said. Further review in lower courts would only aggravate the conflict, the brief suggested. It noted that there had been “a cascade of antitrust suits” against pro sports leagues, including even major league baseball over trademark licensing.

The National Basketball Association and its marketing affiliate, and the National Hockey League, while supporting the NFL, joined in urging the Court to grant review.

The Court did not agree promptly to hear the case. Instead, it first sought the federal government’s views. The U.S. Solicitor General argued against review. While expressing concern about the Seventh Circuit’s ruling, the government said the case was limited to the specific facts, and it insisted that there was no conflict among the appeals courts. “The sports-league context is not a suitable one,” it contended, “in which to address broader questions concerning the application of single-entity principles to joint ventures generally.”

The Court declined to take that advice, and granted review at the end of last Term, putting the case over to October Term 2009.

Merits Briefs

American Needle’s brief on the merits focused mainly on the Copperweld decision, contending that it reaffirmed a “long-standing antitrust principle” that applies, without exception, to “all agreements between separately owned and controlled entities” even when “substantial cooperation was inherent in the nature” of the business. That principle, it said, has been reinforced by the Court over more than a century. The teams in the NFL, the brief asserted, directly fit the definition of an combination that directly comes under Sherman Section 1. The special deal with Reebok, it went on, “is the very definition of concerted conduct by multiple entities, as it required the specific approval” of every one of the 32 teams.

The brief also relied on the Radovitch precedent, and noted that, two weeks after the Copperweld decision came down in 1984, the Supreme Court had applied Section 1 to the teams in college football (National Collegiate Athletic Association v. Board of Regents). The NCAA ruling, American Needle said, is “substantively indistinguishable” from the present case. The balance of its brief is an attempt to refute the Seventh Circuit point by point.

The Justice Department, taking American Needle’s side in the case, argued in its amicus merits brief that the NFL “is a legitimate joint venture,” of what it called a “hybrid” nature: teams that compete vigorously in some respects, but of necessity cooperate in others. The Court, it said, had not previously decided whether such a “hybrid” was covered by Section 1. It went on, however, to assert that the rationale of Copperweld could be extended to the NFL, with a “more nuanced analysis.”

It offered the Court a two-part test to determine whether the NFL and its teams were to be treated as a “single-entity.” They could be, it suggested, if they have “effectively merged” the challenged part of their operations, eliminating competition among the teams, and if their joint actions have not “significantly affected” the actual or potential competition among the teams beyond the merged activity. “Only a limited range of conduct would qualify for single-entity treatment,” it summed up. It disputed American Needle’s argument that NFL teams’ conduct was always subject to Section 1 because of their separate ownership and control.y u

However, the government brief also contended that the NFL’s “request for a broad judicially created exemption from Section 1″ should be rejected. That “oversimplifies the competitive landscape the teams inhabit,” and goes far beyond what the Supreme Court had said previously about “single-entity” treatment. If the NFL wants that sweeping exemption, it added, it should ask Congress for it. The brief concluded by urging the Court to overturn the Seventh Circuit, and order it to reconsider.

The NFL’s merits brief returned to the league’s basic theme that it and the 32 teams are the functional equivalent of “a single firm,” with economic power only to act as a unit. It did offer a seeming concession, saying that “single-entity” treatment should be available for a sports league “in at least some aspects of its operations.” It then went on to defend such treatment for the promotional activities at stake in this case. “Such intellectual property is an integrated part of the production of NFL Football as well as its promotion.” It has been the approach sports leagues have used for generations, it said, and the approach has, indeed, included the use of blanket licenses for caps.

Without disputing the Radovitch and NCAA precedents, the NFL brief argued that they involved agreements between leagues, not efforts within a league to “produce a joint product.” The brief rejected the federal government’s two-step formula for judging single-entity treatment for sports leagues, saying that test “is neither helpful nor necessary.” The focus should be on whether joint venture members have independent economic power, not on whether they have merged their operations, it asserted.

Reebok International filed its own merits brief, a spare document making the main point that, if the Seventh Circuit were uphold only so far as it found “single-entity” status for licensing NFL trademarks, that would end any claims that American Needle had against Reebok.

The potentially wider reach of the American Needle case, to other pro sports leagues, to league activities beyond trademark licensing, and to other industries is the theme of most of the amici briefs in the case. The players’ unions in pro football, baseball, basketball and hockey argued, for example, that the NFL is using this case as “a Trojan horse designed to free sports team owners from Section 1 scrutiny so they can restrain competition with impunity in the market for player services.” They predicted the loss of gains made by players over the years, and forecast “labor disputes and work stoppages” if the pro leagues and their team owners gain “broad single-entity” protection. The National Football League Coaches Association also argued ust” that an NFL victory would effectively end competition in the “currently robust” labor market for professional coaches.

Some business groups, some economists who have studied sports antitrust issues, and the American Antitrust Institute, joined by the Consumer Federation of America, also supported American Needle’s side of the case. The latter two groups argue that Section 1 immunity is not necessary “beyond the production of football games” — an area of pro league joint activity that no one in the case challenges under Section 1.

Much of the amici support for the NFL and its teams comes, predictably, from other pro leagues — for basketball, tennis, soccer, stockcard racing, hockey — and from the NCAA. Those groups, in solidarity with the NFL, express their aspiration for “single-entity” status for all production, promotion and marketing decisioins of their leagues — as the National Hockey League put it, “any internal business decision concerning how and where to make, promote or sell the venture’s output.” The NCAA brief urged the Court to free “all sports leagues, including the NCAA,” from having to grow timid “over baseless antitrust litigation.” It added that the analysis should focus on the character of a challenged joint restraint, not on a league’s “governance structure.”

On the broader business implications of the case, two of the nation’s best-known commercial operations that started out as joint ventures — MasterCard and Visa — called for a balancing test of the need for antitrust enforcement with the need to provide joint ventures “space to promote vigorous interbrand competition.” The NFL has on its side its own group of economists who study sports antitrust policy. Also on its side is Electronic Arts Inc, the software company that markets sports video games under the brand label “EA Sports,” including “Madden NFL Football,” described as “one of the highest-revenue producing video game titles of all time.” It has licenses from the NFL, and from the pro football players’ union. Another fan clothing gear producer with licenses from pro sports leagues, VF Imageware, Inc., lined up with the NFL.

Analysis

The Court faces a clear-cut choice among ways to approach the decision in the American Needle case: it can engage in a fact-intensive inquiry, paying closest attention to the details of how the NFL and its teams handling their fan wear vending business, or it can broaden its vision to the role that joint ventures, an increasing business model, play in the Nation’s economy. The case has attracted most of its attention because it involves the highly visible phenomenon of professional sports. But, unless the Court produces a really narrow ruling on the case, anything it concludes may well produce significant legal guidance for joint ventures across a variety of markets.

The NFL, strategically, would prefer to keep the case narrowly focused, on the apparent belief that a close examination of just the trademark licensing arrangement would seem less threatening to economic competition as a general matter. The Justice Department, which did not support Supreme Court review at all, is interested in a narrow outcome that would reach so-called “hybrid” joint ventures, perhaps not reaching much beyond pro sports. American Needle, of course, wants a broad ruling but only in the pro sports context, seeking to have every facet of the leagues’ business decision-making covered by Section 1.

Because the case has attracted comparatively little amici interest beyond the pro sports community, the strongest temptation for the Court that sometimes prides itself on “minimalism” would be to keep the focus there, and leave it to later litigation in other sectors of the economy to test the wider reach of a ruling.

It is impossible to know whether sentimental notions will play any part in the Court’s consideration. Americans have a strong romantic involvement with sports, both college and pro, and some of the Justices may well share some of that. If they do, however, it is not clear which way that might incline them: do they see the leagues and their teams as vulnerable to damaging economic injury if their joint promotional efforts are impaired, or do they see those entities as threats to the economic futures of players and coaches (and thus, perhaps, to the integrity of the games)? Justice Sonia Sotomayor, during the consideration of her nomination, got highly favorable publicity as the supposed “savior of baseball” for her lower court decision putting an end to a player strike in 1995 when she ruled against the owners. Perhaps, if her colleagues remember that, and are impressed by it, it could have some influence on the sentimental side of this case.

Grant Write-up

During the presidential campaign, when Barack Obama went out for exercise, he was often wearing a ball cap displaying his loyalty to the Chicago White Sox. That hat, though well-worn, apparently was so dear to him that he would not cast it aside when the Sox’s board chairman, Jerry Reinsdorf, offered him a couple of new hats to take its place, the Chicago Tribune has reported.

If the hat is still around, someone should check to see who made it. There is a fair chance it was made by Reebok. And that may be of some legal significance.

One of Reebok’s would-be rivals in the hat business is a company in Obama’s home state, American Needle, Inc., a manufacturer of sports hats, uniforms, and other apparel. It is based in the village of Buffalo Grove, 35 miles north of Chicago.

Now that Obama is President, his government lawyers will be weighing in — at the Supreme Court’s invitation — on a case filed at the Court by American Needle, a case that has the major pro sports leagues’ rapt attention. (The petition and other filings are linked at the bottom of this post, after the jump.)

In fact, the National Football League, the National Basketball Association, and the National Hockey League — all the big-time sports combines except baseball and soccer — have told the Court they want it to hear Amercian Needle’s case, even though it is targeted at one of them, the NFL, with a potential impact on all of them.

The case raises a core question of antitrust law: what kind of joint ventures, perhaps including pro sports leagues, are immune to the Sherman Act because they may qualify as “single entities”? To American Needle, it is all about whether it is going to be allowed to compete with Reebok International, Ltd.., to sell league-sanctioned sports apparel, like hats.

The NFL used to license American Needle to sell hats that bore the logos, the names or other insignia of pro football teams. That was when NFL Properties was allowing various companies the right to produce goods bearing their trademarked imagery. It was all part of an effort to build up the public exposure of pro football as an event on which the public would spend its entertainment dollars.

But, in 2000, the NFL opted to solicit bids for an exclusive license to produce caps and other headwear. Reebok won the bidding, and in 2001 got an exclusive ten-year license. American Needle’s license was not renewed. So it sued the NFL, all of its teams, NFL Properties, and Reebok.

American Needle’s case was thrown out by lower courts. Most of the discussion there focused on the Sherman Act’s Section 1. It outlaws “every contract, combination in the form of trust or otherwise, or conspiracy” that seeks to restraint commercial activity among the states. If an entity sued is considered a single operation, though, there is no one to “combine” or “conspire” with but itself, so the Sherman Act does not apply, as a general rule.

The Seventh Circuit Court, in rejecting American Needle’s Sherman Act claims last August, focused upon a premise that clearly led to its conclusion: that is, the NFL and its 32 teams are just one entity, at least for purposes of licensing their protected images for sale on consumer goods for fans.

“Certainly,” the Circuit Court said, “the NFL teams can function only as one source of economic power when collectively producing NFL football. Asserting that a single football team could produce a football game is less of a legal argument than it is a Zen riddle. Who wins when a football team plays itself?”

Selling identifying goods to build itself up in the entertainment market, the Circuit Court found, is part of selling its single product: pro football games. It concluded: “The NFL teams are best described as a single source of economic power when promoting NFL football through licensing the teams’ intellectual property, and we thus cannot say that the District Court was wrong to so conclude.”

The case, from a sports perspective of law, may turn on what the Supreme Court meant in the 1957 decision in Radovitch v. NFL. There, as American Needle notes in its petition to the Supreme Court, the Justices ruled that the NFL is subject to antitrust liability for violations of Sherman Act Section 1. The Court declined to extend to pro football and other sports leagues the antitrust immunity that major league baseball alone has had since an idiosyncratic 1922 Supreme Court ruling.

But, for businesses beyond big-time sports, American Needle’s case may be seen as more important for what it might lead the Court to say about the present meaning of a 1984 ruling, in Copperweld Corp. v. Independence Tube Corp. There, the Court ruled that a parent corporation and its wholly-owned subsidiary can be treated as a single entity for antitrust purposes.

Lower courts have extended this approach to other arrangements, including affiliated companies involved in joint ventures. American Needle argued that it is time for the Supreme Court to get involved again, at least as to pro sports. It argues that the Seventh Circuit ruling not only conflicts with the Radovitch decision, but with rulings in six other federal Circuit Courts.

“The Court has stated, on more than one occasion,” American Needle asserted, “that application of the Sherman Act to professional sports teams is wholly consistent with Congressional inent.” The Seventh Circuit, it added, “stands alone” in concluding otherwise.

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