Monday, May 24, 2010

High Court Allows Antitrust Claims over Exclusive Licensing to Proceed Against NFL

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

An arrangement among the 32 separately-owned member teams of the National Football League (NFL) to license their intellectual property collectively through their jointly-owned licensing affiliate—National Football League Properties (NFLP)—constituted concerted activity under Section 1 of the Sherman Act, a unanimous U.S. Supreme Court has decided.

The High Court today reversed a decision of the U.S. Court of Appeals in Chicago (2008-2 Trade Cases ¶76,259) holding that the NFL and its members did not engage in an illegal antitrust conspiracy by granting an exclusive trademark license to Reebok International for purposes of producing and selling trademarked headwear for all 32 teams.

Prior to granting an exclusive 10-year license to Reebok, the NFL had granted nonexclusive licenses to a number of vendors, including American Needle, Inc., permitting the companies to manufacture and sell apparel bearing team insignias.

After the NFL declined to renew American Needle’s nonexclusive license, the vendor brought antitrust claims challenging the exclusive licensing arrangement.

American Needle argued before the Court that under Nat'l Collegiate Athletic Assn. v. Bd. of Regents (1984-2 Trade Cases ¶66,139), agreements among sports teams about whether and how they will participate in the marketplace are subject to scrutiny under the Sherman Act, Section 1. The NFL asked the Court to establish a uniform rule recognizing the single-entity nature of the NFL as a highly integrated joint venture.

Functional Analysis

In an opinion authored by Justice John Paul Stevens, the Court explained that the issue of concerted action did not turn simply on whether the parties involved were legally distinct entities. The focus was on substance rather than legal form.

Under a ‘’functional analysis,’’ the key was whether the conduct joined together separate decisionmakers. If the agreement joins together separate decisionmakers, then the entities are capable of conspiring under Section 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one, the Court explained.

Applying this analysis, the Court concluded that the NFL teams did not possess the unitary decision-making quality or the single aggregation of economic power characteristic of independent action. Each of the teams was a substantial, independently owned, and independently managed business.

While the NFL teams might have been similar in some sense to a single enterprise that owned several pieces of intellectual property and licensed them jointly, they were not similar in the relevant functional sense. The teams' interests in licensing team trademarks were not necessarily aligned.

The Court also addressed the fact the NFLP was a separate corporation with its own management and that most of the revenues generated by NFLP were shared by the teams on an equal basis. It decided that that the NFLP’s actions also were subject to Section 1, at least with regards to its marketing of property owned by the separate teams, for the same reasons the teams’ conduct was covered by Section 1.

Rule of Reason Analysis

On remand, the challenged agreement was to be reviewed under a flexible rule of reason analysis, the Court ruled. While the interests of the teams in promoting NFL football did not justify treating them as a single entity for purposes of Section 1 of the Sherman Act when it came to the marketing of the teams’ individually owned intellectual property, it could justify a variety of collective decisions made by the teams.

Rule of reason analysis would enable the NFL to offer justifications for its collective decisions. “Football teams that need to cooperate are not trapped by antitrust law,” the Court noted.

Government Position

The Court did not pass upon the position taken by the federal antitrust agencies in their 2009 friend-of-the-court brief. In its brief, the government suggested that it was taking a middle ground between the parties' arguments.

The government contended that ‘’single-entity treatment for the teams and the league was appropriate if the teams and the league have effectively merged the relevant aspect of their operations, thereby eliminating actual and potential competition among the teams and between the teams and the league in that operational sphere . . . and the challenged restraint [does] not significantly affect actual or potential competition among the teams or between the teams and the league outside their merged operations.”

The May 24 decision in American Needle Inc. v. National Football League, No. 08-661, appears at 2010-1 Trade Cases ¶77,019.

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