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American Needle v. NFL and the future of professional sports

Picture the following situations:

After three years of a top-rated defense Greg Manusky gets interviewed for a head coaching job. He wants to take the job but because of the league's monopoly he can't negotiate a price--he has to accept the slotted amount for a head coach.

In two years Patrick Willis' rookie contract comes up. At this point he's been to five Pro-Bowls and is widely regarded as the best linebacker in the country. He wants to negotiate for more money but he can't because the owners have determined slotted wages for various starting salaries in the league.

At the time this post goes up (7am), the United States Supreme Court will begin hearing oral arguments in the case of American Needle, Inc. v. National Football League, Docket No. 08-661.  I don't like to exaggerate tooooo much, but I have no problem stating that if the Court finds for the NFL in certain respects, this would be arguably the biggest decision in the history of professional sports.  It would have enormous repercussions for the NFL in everything from merchandise to their relationship with the NFL Players Association.  Furthermore, it's a decision that could be jumped on by the other professional leagues for their own gain.

Before we get into the details, some quick procedural information.  Although oral arguments happen today, the decision will likely not be reached for 3-4 months.  The average turn-around time is much less than that, but that factors in decisions that don't require an entire written opinion.  Generally, the Court will hand down its decision and opinions approximately 14-16 weeks after the oral arguments.

For the purposes of this post, I've been emailing with smileyman about this topic.  We each wrote up some thoughts on the topic and I've decided to combine them together into a single post.  Thanks to smileyman for his thoughts, in particular those related to the impact of the case on free agency.  Although I'm in law school, there's still a lot of jargon and legal analysis I don't fully understand, so I'm going to try and keep this relatively simple for all parties involved.  All sources are linked at the bottom.

NFL Properties was created by the NFL as a marketing entity that would push the NFL Brand.  As part of that job, they would sell official licenses to merchandising companies to slap the NFL's intellectual property on everything from caps to jerseys to t-shirts.  American Needle was one of the companies to obtain that official, exclusive license for bill caps and stocking caps.  The Illinois-based company produced such caps for 20+ years.  In 2000, the NFL decided to change vendors and instead have the license go to a single company, Reebok.

American Needle proceeded to file a lawsuit against NFL, the 32 teams, NFL Properties and Reebok international Ltd. alleging that the teams' exclusive licensing agreement with Reebok violated Section 1 of Sherman Antitrust Act (among other things).  Section 1 outlaws any "contract, combination ... or conspiracy, in restraint of trade."  Basically, American Needle is claiming that by providing Reebok with the sole license for this kind of gear, the above parties are imposing a restraint of trade.  At the appellate level, the court described it as follows: "As American Needle saw it, because each of the individual teams separately owned their team logos and trademarks, their collective agreement to authorize NFL Properties to award the exclusive headwear license to Reebok was, in fact, a conspiracy to restrict other vendors' ability to obtain licenses for the teams' intellectual property."

There's a lot of detail to this, so I've posted most of it after the jump...

Procedural History
The defendants (NFL, etc) moved for summary judgment, arguing that based on the case Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) and its subsequent affirmations, the NFL and the teams were immune from liability because they were in fact a single entity for antitrust purposes.  The NFL was saying they and their 32 teams were one business entity for the purposes of the Sherman Act.  Section 1 requires an agreement between entities and if the NFL and its teams are a single entity, they can't make an agreement with them self so they couldn't violate the Sherman Act.

The district court granted summary judgment to the NFL, concluding that "the NFL and the teams act as a single entity in licensing their intellectual property" and the collective licensing agreement was meant to promote "NFL football."  In a nutshell, that means the court decided that even if everything American Needle said was true, there was no way they could win in front of a jury.

American Needle appealed to the Court of Appeals, which affirmed the lower court's judgment, holding that the NFL and its 32 teams were a single entity because they collectively produce NFL football games.  This decision conflicted with the Supreme Court's decision in Radovitch v. NFL, 352 U.S. 445 (1957) and decisions in the First, Second, Third, Sixth, Eighth, Ninth and D.C. Circuit Courts of Appeal.  The Radovitch case basically said that due to the volume of interstate business involved in organized professional football, it falls under the provisions of the antitrust laws.

Often times this procedural information isn't particularly interesting.  However, in this case it got rather interesting.  Since American Needle lost, they naturally appealed to the Supreme Court.  However, the NFL (which had won the case) ALSO appealed the decision.  The NFL appealed the decision because they find themselves in a relative win-win position.  If they lost this appeal, the situation will remain status quo.  The NFL will remain a license to print money, even if they won't be able to walk all over anybody and everybody.

However, if the NFL were to win this case, it would change all the rules.  If the NFL is ruled a single entity, as MDC states over at Battle Red Blog, the league would potentially have free reign over things ranging from merchandise to player and coach salaries to contracts in general.  Free agency has been an integral part of the NFL for 17 years. It's hard to remember a time when there wasn't free agency, and it's hard to see a future where there won't be free agency. However, this case could change all of that and could alter the landscape of all professional sports in such a way that it would be unrecognizable to current fans.

This would impact other sports as well.  And the other leagues have recognized this and joined the fight.  When a case is going before the Supreme Court, outside parties often file amicus briefs presenting specific issues.  The NBA and MLB, among others, have filed amicus briefs supporting review of this decision.  Many government agencies did not want review given the potential implications of the NFL being ruled a single entity.

If the NFL were to win, spillover could affect everybody from the New York Yankees to the New Jersey Nets.  For example, the New York Yankees have their own television network that generates revenue for them. MLB could dictated to the Yankees what programming they could show, or even if they could have a tv show at all.  Merchandise prices could skyrocket (they've already increased dramatically since the league entered it's exclusive contract with Reebok).  There is a quote from a Reebok executive in the SCOTUS blog linked below, stating that caps that had sold for $19.99 a few years ago, were now going for $30.  Some would argue inflation, but obviously that's a sizable jump.

Now this might seem like an invocation of the slippery slope argument here and normally I would try to avoid going down that road. However, the sticking point for me is the League's request to have it exempted from all anti-trust scrutiny. If it restricted itself just to the American Needle issue there would probably be little impact on everything else. Including that bit about all anti-trust exemptions expands the reach of this case exponentially and could potentiall undo all the changes won by the players since the 80s. I think this decision would be bad for the league as well, since the end of things like free agency would make it harder for teams to improve and would end the mystique of the "Any Given Sunday" that the league tries so hard to promote.

The last major NFL case to go before the Supreme Court was the antitrust lawsuit brought by Freeman McNeil and Reggie White against the League in the late 80s and early 90s. White and McNeil argued that the league's restriction on free agency was harmful to competition and economically injurious to the players involved. In those cases the verdict came against the league. In 1993 the league and the union sat down and reached a collective bargaining agreement that has been in effect since then.  Since then the NFL has enjoyed great prosperity. It's popularity has grown by leaps and bounds. The last strike/lockout happened in 1987 and there's been none since then.

If the court rules against American Needle all that could change.

So will we see some kind of antitrust Armageddon come from this case?  I would like to think we will not.  There is an old phrase called "splitting the baby" that I think will be applied to this case.  The parties submit questions presented to frame the issues being discussed on appeal.  There are two questions presented for this case:

1. Are the NFL and its member teams a single entity that is 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?

2. Is the agreement of the NFL teams among themselves and with Reebok International, pursuant to which the teams agreed not to compete with each other in the licensing and sale of consumer headwear and clothing decorated with the
teams' respective logos and trademarks, and not to permit any licenses to be granted to Reebok's competitors for a period of ten years, subject to a rule of reason claim under Section 1 of the Sherman Act, where the teams own and control the use of their separate logos and trademarks and, but for their agreement could compete with each other in the licensing and sale of Team Products?

I'm not exactly sure if this is legally possible, but I could see them providing a fairly narrow ruling that at most provides the single entity status strictly for the licensing of NFL merchandise.  One could argue that under revenue sharing, we see a split up of a lot of merchandise dollars.  The way this has operated has allowed the league to act as a sort of single entity because the teams are sharing in the success of merchandise sales (although there is the issue of the deals the Cowboys have cut, but I don't know enough about that at this point).  However, if you accept that as a legal fact, it is much harder to then extrapolate that out to say the league is a single entity for everything else.  While they share a variety of revenues, they don't really "share" players or coaches.  Rather, there is a highly competitive market for both.

On reason I see the Court coming down with a fairly narrow decision, even if they rule for the NFL, is that this is a Court that doesn't seem to push too far one way or the other in decisions.  Whether one agrees or disagrees with decisions handed down by this Court, it has incrementally moved in a given direction.  At this point, to suddenly declare the NFL a single entity and change so much precedent would seem a bit out of character for this Court.  Of course crazier things have happened.

In the piece I linked earlier, MDC put together a good run-down of the various justices and how they might decide the case.  Basically he states that the decision will come down to the votes of Justice Stephen Breyer and Justice Anthony Kennedy.  Kennedy is generally the swing vote so he's a guy worth keeping an eye on.  The Court will actually have transcripts of the oral arguments posted at some point later today.  During oral arguments the justices will often fire questions at the parties, so it might be worth checking out to see what kinds of questions Kennedy and Breyer have for the lawyers.

When the decision comes down later this spring/early summer, we'll definitely post about it here.

SCOTUS Blog (Official Supreme Court Blog): Pro Sports and antitrust: Argument Preview

Washington Post: Drew Brees Op-Ed Piece

USSC Docket Information

New York Times: American Needle: From Green Celluloid Visors to Caps of All Kinds

Battle Red Blog: American Needle, Inc. v. National Football League: Apocalypse Soon?

American Needle v. National Football League, 538 F.3d 736 (7th Circ. 2008)