Is the NFL a “single entity” (and therefore exempt from many anti-trust laws)? A round-up

That’s the question presented in the upcoming U.S. Supreme Court case. And while there has already been some hyperbole (ESPN: “Antitrust case could be Armageddon”), the case does present some real and interesting questions, including ones beyond the narrow issue of the NFL and other sports leagues — I know, it’s hard to imagine anything beyond sports leagues. Here is how the full issue was summarized by David Savage in the ABA Journal:

[I]n American Needle v. National Football League, the justices will decide a legal question that has long hung over pro sports. Are their leagues a “single entity” and, therefore, immune from antitrust laws, or can these independently owned teams be sued for conspiring to restrain trade? A suburban Chicago maker of stocking hats and caps, American Needle sued in 2004 after it was shut out from using NFL logos. The league had made an exclusive deal with Reebok. The suit was thrown out by the 7th Circuit, but the justices agreed to decide whether pro leagues are shielded from antitrust charges.

Upon reading this you probably have an impulsive answer right away. Either, “Hey, of course the NFL is just one entity!” Or “Hey, of course there are thirty-two teams!” But you have to understand the weird nature of sports leagues as a branch of joint ventures, and the stakes — that a ruling of them as a joint entity makes them immune from anti-trust action, even with respect to other possible competitors.

Without getting too complicated, baseball has long enjoyed a unique place in anti-trust law — it doesn’t apply to it. Other leagues have come close, but haven’t been so lucky. There’s really no reason for these leagues to have such unique status, but baseball does and football wants it, anyway it can get it. The best they can muster from a policy perspective is that “hey, we’re the NFL, we’re important right!” And, within the cloistered halls of the NFL (not to mention ESPN, and the like) the world begins and ends insofar as it affects The Game, be it terrorism or the stockmarket or whatever else.

But legal battles in real courts deal with larger themes. Specifically, the government, in the form of the Solicitor General’s office, was asked to chime in on this case. This put them in an awkward position because (a) American Needle has a very weak case, even apart from this “single-entity theory,” and (b) the government really only cares about this case insofar as it affects other joint-ventures beyond sports leagues. As Morrison & Foerster partner Deanne Maynard noted at a recent Supreme Court panel, if the Court rules in favor of the NFL, this case could have wide-ranging implications beyond just sports organizations.

“I think it could affect any kind of joint business venture,” she said. “It could mean that in doing these (joint) activities, the companies are a single entity.”

Moreover, here’s some excellent commentary and background from Lyle Denniston of SCOTUSBlog (written while the Justices were still considering whether to hear the case):

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. . . .

So no one really knows what might happen, but some people have different theories. Obviously the place to start is to read the Seventh Circuit’s opinion. And then a couple of the filings are interesting (the full list can be found here). An interesting amicus (or “friend of the court”) brief is from a group of sports economists recommending that the Supreme Court hold that the NFL is not a single-entity: “We believe that a ruling that any sports league is a single entity in which teams cannot [by definition] engage in anticompetitive collaboration in ‘core venture functions’ is inconsistent with the consensus among economists about the efficient scope of league authority and the nature of competition in professional sports.”

The most wortwhile brief to read, and the one the Justices are likely to give the most weight to, is the one from the Solicitor General urging that the Justices reverse the Seventh Circuit and hold that the NFL is not a “single-entity” and therefore is not exempt from antitrust scrutiny. The SG’s brief though takes a slightly middle path, however, arguing that the proper way to look at this case is not the black-and-white way the parties have looked at it:

The NFL is a legitimate joint venture of 32 separately owned and operated teams that compete vigorously in many respects but, out of reasonable necessity to create and sustain the league, cooperate in others. Although lower courts generally have applied rule-ofreason analysis when challenges to the conduct of sports leagues have been brought under Section 1 of the Sherman Act, this Court has not definitively addressed whether or when such a hybrid organization may be considered a “single entity” for purposes of Section 1.

This Court’s decisions make clear that concerted action occurs when separately owned teams form a league,
or cede to the league authority over an aspect of their operations. Similarly, there is concerted action when teams decide collectively to constrain “the way in which they will compete with one another” in the marketplace. NCAA v. Board of Regents. Because such agreements restrict actual or potential competition among the teams, they are subject to Section 1, though they may ultimately be found procompetitive and lawful.

The reasoning of Copperweld Corp. v. Independence Tube Corp., and Texaco Inc. v. Dagher, however, supports a more nuanced analysis to the extent that teams (or other joint venturers) have effectively merged an aspect of their operations, completely eliminating competition among themselves in that respect. In Copperweld, the Court held that, because a parent and its subsidiary are not actual or potential competitors, collaboration between the two does not “raise the antitrust dangers that [Section] 1 was designed to police.” Dagher illustrates that similar considerations are relevant when competitors have entered into a joint venture.

The functional analysis of the enterprises in Copperweld and Dagher can be extended to the NFL, which is
a legitimate joint venture among competitors. Single entity treatment for the teams and the league is appropriate if, but only if, two conditions are satisfied. First, the teams and the league must 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. Second, the challenged restraint must not significantly affect actual or potential competition among the teams or between the teams and the league outside their merged operations. Only a limited range of conduct would qualify for single-entity treatment under this standard, since most forms of collaboration are not equivalent to an effective merger, and many restraints have competitive effects on more than one aspect of operations.

Petitioner contends that the conduct of NFL teams is always subject to Section 1 because the teams are separately owned and controlled. But courts and commentators have recognized that neither the single-entity nor the conspiracy characterization is apt for all actions of a hybrid organization like the NFL. While Section 1 scrutiny is appropriate for restraints that affect actual or potential competition among the teams (or between the teams and the league), it should not be applied to putative horizontal agreements among the participants in a hybrid organization when such competitive concerns are absent.

The NFL respondents’ request for a broad judicially created exemption from Section 1 also should be rejected. That proposal extends far beyond the rationale of Copperweld and Dagher, and it oversimplifies the competitive landscape the teams inhabit. Such blanket proposals are properly addressed only to Congress. Moreover, the limited record makes this case an unsuitable vehicle for considering such a wide-ranging limitation on the application of Section 1. The decisions below were specific to the NFL respondents’ licensing of marks and logos, and the record lacks key evidence about other aspects of the league’s operations. More generally, a broad-brush approach to the single-entity concept could affect antitrust enforcement far beyond the sports-league context. The judgment below should be vacated, and the case remanded. Although the court of appeals was correct that each “facet” of the league’s operation must be considered separately, its analysis of the particular facet at issue here—licensing of marks and logos—was flawed and incomplete. On remand, the lower courts should clarify the scope of petitioner’s Section 1 claim, perhaps allow appropriate additional discovery, and then apply the principles from this Court’s decision.

On the academic side, Gabe Feldman of Tulane Law School has an interesting article called “The Puzzling Persistence of the Single Entity Argument for Sports Leagues: American Needle and the Supreme Court’s Opportunity to Reject a Flawed Defense.” And, finally, Michael McCann of Vermont Law School has written a paper called “American Needle v. NFL: An Opportunity to Reshape Sports Law.” The abstract for that article states:

This Feature will explore American Needle v. NFL and its potential impact on professional sports in the United States. In August 2008, the United States Court of Appeals for the Seventh Circuit held that the National Football League (“NFL”) and its teams operate as a “single entity” for purposes of apparel sales. Because a single entity cannot conspire with itself, it cannot violate section 1 of the Sherman Act, which prohibits concerted action that unreasonably restrains trade. . . .

As this Feature will detail, American Needle presents the most meaningful sports law controversy in recent memory. For the first time, a U.S. court of appeals has expressly recognized that in certain settings of collusive behavior, a professional sports league and its independently-owned franchises may function as a single entity. American Needle offers the Supreme Court an opportunity to settle a longstanding source of confusion: how should antitrust law regulate the peculiar, if incomparable, business entity known as a professional sports league?

The stakes could not be higher. If the Supreme Court agrees with the Seventh Circuit or, as the NFL hopes, furnishes an even more sweeping recognition of single entity status, professional sports leagues could be shielded from section 1 in a bevy of decision-making contexts that have traditionally been subject to section 1 scrutiny. Particularly when compared to their past treatment, leagues could become uniquely sovereign and commanding.

. . . This Feature will conclude with a recommendation that the Court reject the NFL’s single entity defense on grounds that it would belie legal precedent and mistakenly characterize league operations. The recommendation, however, will leave open the door for leagues to pursue, and for Congress to consider, targeted exemptions from section 1.

I don’t know what the Supreme Court will do, but, while the Justices no doubt will care how this affects the NFL, they will be well aware of what effect their decision might have on areas beyond sports. Any sports commentator who can’t see that far is probably not worth listening to.

  • Homyrrh

    Yes, yes it is.

  • James

    As an avid video game player, I’m confused about the current case law as it applies to the licensing of teams and likenesses for stuff like Madden. If the league isn’t a single-entity under the law, does that mean that any individual team could rescind their permission to use their likenesses, and that Electronic Arts has to negotiate with each team individually? Or am I missing something and a league can negotiate collectively but not be considered a single entity for the purpose of antitrust law?

  • http://smartfootball.com Chris

    James: The video game thing is a different question regarding likenesses, as the licensee of that is the NFL Players Association.

    More generally, the “single-entity” determination is only relevant here for anti-trust law; there is no question that the NFL is a legitimate “joint-venture” between the 32 teams, meaning that if the NFL signs say a TV agreement or apparel agreement (the kind of agreement at issue here), it binds all of them based on whatever procedure they had previously agreed to. (Usually they have some kind of owners meeting I think where they need some form of consensus.)

    But again, let’s say the Supreme Court says — as every court of appeals except the Seventh Circuit has said, meaning it is ALREADY the law of the land in most of the country — that the NFL is not a single-entity. That has no effect on the NFL as a “joint venture” which can bargain as one unit in variety of business contexts. The question in American Needle is simply whether section 1 of the Sherman Act’s restrictions on anti-trust violations apply to the league’s business decisions.

    And Homyrrh: How nice of you to give us such a perfunctory answer. Why not educate us as to why the NFL is a legal, Sherman Act “single-entity” rather than just a joint-venture under Radovitch v. NFL, Copperweld, and the Sherman Act’s statutory language? Hmm?

  • JP – Chicago

    Yes! Teams can not set up their own schedules, they need each other. The Bears can’t decide we don’t want to play the Steelers this week we agree to play the Bucs. The NFL is entertainment. They compete against movies, recreational sports (boating, hunting,golf) among many other choices.

  • http://smartfootball.com Chris

    JP: Let me ask you this. Let’s say you’re a wide receiver cut from the Bears, and now you have a few tryouts and hope to make another team. Are those teams all a “single-entity” to you?

  • Homyrrh

    Wow, how touchy…

    Perfunctory, yes, but the League is its 32 teams. It isn’t the NFL without 32 teams, and any of the 32 teams is not a professional team without the NFL (i.e. — where/who would they play?). Isn’t McDonald’s not McDonald’s without its franchises and its franchises could not be franchises without the McDonald’s branding? How could teams act in any other manner (in matters pertaining to trade) than as a whole? This can’t be what’s being debated (?).

    In the FBC v. National League case that actually decided baseball’s fate as being exempt from the Sherman Act, it was on the basis that the games conducted by the Major Leagues (the AL and NL and I think another league or so that was still predominant back then) did not consititute interstate commerce and were, as per Justice Holmes, simply exhibitions that were purely matters of state and thus not subject to the Sherman Act.

    Additionally I’m not familiar with the Copperweld case (all I could find on it was the following which is a labor case: http://library.law.emory.edu/6circuit/may97/97a0160p.06.html)

    Ultimately though, doesn’t some part of the justification for prosecuting its exclusive merchandising agreements have to fall back on whether it can be a joint venture if it, by definition (?), isn’t a league without its teams.

  • http://smartfootball.com Chris

    Homyrrh: Your comment seem rather garbled and I can’t figure out the point you’re trying to make. In any event, the problem with the Seventh Circuit’s opinion, according to the commentators, the petitioner, and the United States, is that it adopted a blanket rule that the NFL is always a “single-entity” regardless of context. The Court of Appeals noted that the single-entity determination should vary by context — not just league by league, by “facet by facet.” Hence that is why both a group of former NFL coaches and the NFL Players Association both support reversal and oppose the NFL here: clearly in the hiring and firing context, the NFL does *not* act as a single-entity. (Nor does McDonald’s in the hiring and firing context either. Your choice of a franchise scenario is very weird since all that requires is the franchisee pay a fee. Copperweld is the case the Seventh Circuit analogized this case to, as in Copperweld the Supreme Court held that a parent corp and its wholly owned subsidiaries were “single-entities,” a proposition few would argue with.)

    And the baseball case that Holmes wrote holding it exempt is based on a rationale that is no longer accepted. Indeed, in Radovich v. National Football League the Supreme Court held that the NFL explicitly was, unlikely baseball, subject to the antitrust laws. http://supreme.justia.com/us/352/445/

    Anyway again your comment was confusing. There’s a wealth of scholarship on this subject, and I linked to a lot of it. In any event, it’ll be interesting what the court does. When they have oral argument I will paste some excerpts.

  • JP – Chicago

    Chris -” Let me ask you this. Let’s say you’re a wide receiver cut from the Bears, and now you have a few tryouts and hope to make another team. Are those teams all a “single-entity” to you?”

    Yes, again! The WR is an employee. It does not matter if it is a WR cut, an assistant coach fired or a staff accountant let go, the NFL is a single entity. The BUSINESS of producing their product requires each team cooperating to produce that product.

    I am watching the Steeler /Charger game right now. I have other options to watch and/or spend my leisure time. THAT is the NFL’s competition.

  • Mr.Murder

    Didn’t Al Davis already take on the League itself via lawsuit and establish precedent that pro football IS NOT a single entity when he favored competing policy for market share in moving his team?

    The lawsuit came post merger….

  • 4.0 Point Stance

    Chris, I think you know it’s not that simple. You can be fired from your job as a stockboy at Wal-Mart, then get rehired at the Wal-Mart two towns over. That doesn’t mean that the two Wal-Marts are competitors under the Sherman Act. Same applies to franchised businesses like Burger King.

    I’m far more familiar with the law with respect to the NCAA than to the professional leagues. And reading those cases I can’t help but think it’s effectively a political decision. Judges who think “people like college football too much for me to rule against the NCAA.” I suspect that the SC will come out the same way, but who knows.

  • Homyrrh

    I was unaware until recently that the NFL cannot broadcast games within 75 miles (I think that’s the figure) of markets where NCAA and/or HS games are being played. Not wholly relevant…but interesting.

  • Homyrrh

    ^^^Sorry, but that is from a certain point in September to a certain point in December, which is apparently why NFL Network starts broadcasting on Thursdays toward the end of the season (I think it’s during Week 12).

  • James

    If the NFL did count as a single entity, would something like the AFL-NFL merger come under antitrust scrutiny?

  • Mr.Murder

    What of the fact that Green Bay fans actually hold stock in their team? Does this not create an exception to current rules as they apply to other pro sports leagues?

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