Monday, January 18, 2010

Justices Needle Counsel in Oral Argument of NFL Licensing Antitrust Case

This posting was written by John W. Arden.

While NFL teams prepared to do battle in league divisional playoff games, lawyers clashed in the U.S. Supreme Court last Wednesday on whether the NFL and its 32 teams engaged in an illegal antitrust conspiracy by granting an exclusive trademark license to apparel manufacturer Reebok International.

On January 13, the Supreme Court heard arguments on behalf of the league, a complaining apparel manufacturer (American Needle, Inc.), and the Solicitor General.

Under review was a decision by the U.S. Court of Appeals in Chicago, rejecting American Needle’s Sherman Act Section 1 claim on the ground that the league and teams were acting as a single entity when collectively licensing their intellectual property through a jointly-owned licensing affiliate (American Needle, Inc. v. National Football League, 2008-2 Trade Cases ¶76,259).

In its petition for review, American Needle asked:

(1) Whether the league and its teams were a single entity exempt from rule of reason claims under Section 1 of the Sherman Act “simply because they cooperate in the joint production of NFL football games, without regard to their competing economic interests, their ability to control their own economic decisions, or their ability to compete with each other and the league” and

(2) Whether the league’s license agreement with Reebok—under which the teams agreed to refrain from competing with each other in the licensing and sale of apparel—was subject to a rule of reason claim.

The league and its teams also asked the Supreme Court to review the decision, on the grounds that the federal circuit courts were divided on the question and in order to secure a uniform rule recognizing the single-entity nature of the NFL as a highly integrated joint venture.

The FTC and Department of Justice Antitrust Division had filed an amicus brief, urging the Court to deny review.

American Needle’s Argument

Opening the argument was Glen D. Nager, representing American Needle, who stated that “there is a longstanding consensus, judicial and legislative, that agreements among sports teams about whether and how they will participate in the marketplace is subject to scrutiny under the Sherman Act, Section 1.”

He referred to NCAA v. Board of Regents of the University of Oklahoma (1984-2 Trade Cases ¶66,139) as most directly on point. “In that case, the Court held that a policy of the NCAA that restricted the ability of member institutions of the NCAA to sell TV rights violated Section 1. Just as with the NFL, the decisions of the NCAA were ultimately controlled by the vote of its members, and for that reason, the Court held that the NCAA was a horizontal restraint.”

Some of the justices questioned Nager about what kind of joint action by the league—such as scheduling games or prohibiting teams from playing outside the league—would not be subject to scrutiny under the rule of reason.

Justice Breyer went farther, arguing that there might not be competition between the teams in the market for licensed apparel, since fans of a particular team were not likely to purchase items identified with a rival team.

Finally, Justice Scalia asked whether the only issue was whether the lower court was wrong to dismiss the suit on the ground of unitary operation by the league. When Nager answered in the affirmative, Justice Scalia asked “Well, why am I worrying about this other stuff?” Nager replied “Because Counsel has an obligation to respond to questions.”

On the issue of unitary operation, Nager answered that the exclusive license constituted concerted activity because it was “between separately owned and controlled businesses.”

Solicitor General’s Perspective

Malcolm Stewart argued on behalf of the United States as amicus curiae, supporting neither party’s theory.

He focused on “a rather mundane aspect of the NFL commissioner’s powers”—that is, the power to incur expenses to carry on the ordinary business of the league. This might include renting office space, hiring employees, and procuring supplies. If the commissioner decides from which company to procure supplies, “our view is that that’s the conduct of a single entity,” he observed.

It was the delegation of authority to the commissioner that would be subject to a Section 1 challenge, rather than the commissioner’s decision to grant a license to a single licensee or multiple licensees, Stewart indicated. It would be “highly unlikely that such a challenge would prevail.” Chief Justice Roberts wondered why that would be so.

NFL’s Position

Gregg H. Levy, arguing on behalf of the NFL, stated that the formation of a sports league—like the formation of any joint venture—may be subject to scrutiny under Sherman Act Sction 1. However, in this case, there was no challenge to venture formation.

“There is no dispute that the NFL, including its licensing arm, NFL Properties, is a lawful venture. If venture formation is not an issue, then decisions by the venture about the ventures’s product are unilateral venture decisions, unilateral venture actions. They are not concerted actions of the—of the venuture’s members.”

Justice Kennedy then asked a series of questions regarding whether the sales of NFL apparel was considered at the time the league was formed and even whether that was a relevant inquiry.

Levy said that the decision to use licenses of league intellectual property as a promotional tool goes back to the 1960s. Upon questioning by Justice Sotomayor, he said that there was some exploitation of intellectual property by franchises prior to the creation of NFL Properties in 1963.

Levy explained that the purpose of licensing was to promote the game and that NFL teams were not independent sources of economic power in generating the game. However, Justice Scalia observed that the purpose of the licensing could be to make money.

“But—but don’t tell me that . . . absent this agreement, there would not be an independent, individual incentive for each of the teams to sell as many of its own . . . shirts or helmets as possible.”

According to Levy, the purpose of the licensing is “to promote the attractiveness of the game product, to get more people interested in watching the games on television, to get more people interested in buying tickets to the game.”

Justice Scalia disagreed and said that could be a triable issue.

Justice Sotomayor later summarized:
“I’m very swayed by your arguments, but I can see a counterargument that promoting T-shirts is only to make money. It doesn’t really promote the game. It promotes the making of money. And once you fix prices for making money, that is a Sherman Act violation.”

Text of the 65-page transcript in American Needle, Inc. v. National Football League appears here on the U.S. Supreme Court website.

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