Supreme Court Ruling on NFL’s Collaborative Licensing Program Addresses Antitrust Treatment of Joint Ventures

Antitrust Update

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On May 24, 2010, the Supreme Court unanimously ruled that the National Football League’s joint licensing of its teams’ intellectual property constitutes collective action not categorically immune from scrutiny under §1 of the Sherman Act. American Needle v. National Football League et al., No. 08-661, 2010 WL 2025207 (U.S. May 24, 2010). In so holding, the Supreme Court reversed the Seventh Circuit’s decision that the NFL acted as a “single entity” in jointly marketing and licensing its teams’ logos and related intellectual property.

The lawsuit arose after the NFL teams’ joint marketing organization, National Football League Properties (NFLP), granted exclusive use of NFL team logos to Reebok. The plaintiff, American Needle, Inc., a former licensee of NFLP, brought suit claiming that NFLP’s exclusive license to Reebok collectively on behalf of all NFL teams violated Section 1 of the Sherman Act. The Seventh Circuit and the district court rejected American Needle’s claim, holding that the NFL was not engaged in collective conduct when it jointly licensed its teams’ intellectual property because this amounted to the actions of a single entity. They reasoned that by necessity football must involve a degree of cooperation among teams, individual teams cannot conduct football games on their own, and the NFL teams share a collective, venture-wide interest in promoting and marketing the NFL.

The Supreme Court reversed, with Justice Stevens writing for the Court that, “[a]lthough NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.” 2010 WL at *10. The NFLP’s joint marketing on behalf of the NFL teams deprived the market of “independent centers of decisionmaking” and therefore amounted to collective conduct that must be subject to further scrutiny under a Section 1 Rule of Reason analysis. Id. at *9. The Court was careful to note that it was not deciding whether the conduct was unlawful, but instead only addressing the element of plaintiffs’ Section 1 claim that requires a finding of collective conduct.

Clarified Test for “Collective” Conduct By Joint Ventures

The American Needle decision comes on the heels of the Supreme Court’s ruling in Texaco v. Dagher, 547 U.S. 1 (2006), where the Court dismissed claims challenging pricing decisions by a petroleum joint venture as per se unlawful. The Court in Dagher held that after the formation of the venture, the co-venturers “did not compete with one another in the relevant market” and were therefore a single entity for purposes of the alleged Section 1 claims. Even though the Court in Dagher specifically addressed only per se claims, many commentators believed that Dagher’s reasoning suggested that at least some conduct of joint ventures should be exempt from either a per se or Rule of Reason challenge, because courts’ characterization of a firm as engaged in single-entity conduct typically meant that its actions could not be considered collective, and therefore could not be subject to either type of scrutiny under Section 1.

The American Needle decision, however, does not appear to interpret Dagher in this manner. It acknowledges that courts – including the Supreme Court itself in Dagher and Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) – have often described the proper inquiry for these purposes as whether a venture is a “single entity,” but suggests that the use of this term is “perhaps a misdescription.” Id. at *8. According to the Court, the key question “is not whether the defendant is a legally single entity,” but instead “whether the alleged ‘contract, combination . . ., or conspiracy’ is concerted action – that is, whether it joins together separate decisionmakers.” Id.

Thus, according to American Needle, the “relevant inquiry” is “whether there is a ‘contract, combination . . . or conspiracy’ amongst ‘separate economic actors pursuing separate economic interests, such that the agreement ‘deprives the marketplace of independent centers of decisionmaking, and therefore of ‘diversity of entrepreneurial interests,’ and thus actual or potential competition.” Id. (quoting Copperweld, 467 U.S. at 768-69). If it does, then “the entities are capable of conspiring under §1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one.” Id. at *9. In so holding, the Court emphasized that the analysis is not formalistic, and does not depend on whether the case involves distinct legal entities, but instead requires examination of substantive and “functional” considerations. Id. at *6.

Although the Department of Justice and Federal Trade Commission had submitted an amicus brief that proposed a test to determine when co-venturers should be deemed a single entity, the Court stated that it did not need to consider the appropriateness of that test because its conditions were not met in the circumstances of American Needle. This proposed test would allow venturers to be deemed engaged in collective activity for some purposes and not others, depending on whether the joint conduct had an effect in an area in which the venturers still compete. In particular, the government had argued that the Court should hold that co-venturers are incapable of conspiring under Section 1 “if they ‘have effectively merged the relevant aspect of their operations, thereby eliminating actual and potential competition . . . in that operational sphere’” and “the challenged restraint [does] not significantly affect actual or potential competition outside their merged operations.” Id. at *12 n. 9. Because the Court reserved decision on this proposal by the government, it remains an open question whether a joint venture may be deemed exempt from Section 1 scrutiny under such circumstances.

Application to NFL Joint Licensing

Applying its analysis to the NFL’s licensing activities, the Court held that NFL teams do not possess either the “unitary decision making quality” or “single aggregation of economic power” that are characteristic of non-collective action, noting that the NFL’s 32 teams are independently owned and managed. Id. at *9. The teams compete with one another to “attract fans, for gate receipts and for contracts with managerial and playing personnel” and, “[d]irectly relevant to this case, … in the market for intellectual property.” Id. To a firm making hats, for example, the Court explained, “the Saints and the Colts are two potentially competing suppliers of valuable trademarks.” Id. Moreover, the Court found it significant that, although the teams were collectively earning profits from the joint license, the NFL teams “are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.” Id. at *10.

The Court was not swayed by the NFL’s claim that “there would be no NFL football” without cooperation among the teams. Id. It explained that the justification for the cooperation is not relevant to whether the conduct amounted to concerted action. Instead, the Court stated that whether cooperation is necessary for the NFL to function is relevant for other aspects of the analysis under Section 1, as described below. Indeed, the thrust of the Court’s decision is that the arguments made by the NFL are relevant not to whether there is a collective agreement, but instead to whether that agreement is reasonable under Section 1.

Clarification of Rule of Reason Standard

Although the Court did not accept the NFL’s argument that it was immune from Section 1 scrutiny because cooperation among its teams was necessary, and left it to the lower courts on remand to apply the Rule of Reason to the joint licensing activity challenged by American Needle, the Court emphasized that the “special characteristics” of professional football provide “a perfectly sensible justification for making a host of collective decisions.” Id. at *12. The Court further reaffirmed its previous holding that the Rule of Reason applies where a restraint of trade is necessary “if the product is to be available at all,” adding that in such cases the collective conduct is indeed “likely” to survive Rule of Reason scrutiny, sometimes “in the twinkling of an eye” without any detailed analysis. Id. (citing NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85, 109 n. 39 (1985)). The Court cited precedent establishing that collective conduct may sometimes be condemned as unlawful with a truncated “quick look” analysis; but the Court’s statement suggests that a truncated analysis can also be used to approve collective conduct. This development may encourage lower courts to approve joint venture conduct as lawful with a more abbreviated Rule of Reason analysis at earlier stages of litigation, which some courts have been reluctant to do in the past.

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Although the American Needle decision leaves open important questions, such as whether conduct by co-venturers may be deemed not collective under the test proposed by the Department of Justice and Federal Trade Commission, it provides useful guidance regarding application of Section 1 to joint ventures. Joint ventures and their participants are encouraged to seek advice from counsel regarding application of the decision to their circumstances.

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