Kensington Antitrust Advisors Group

Updated May 2010:  The U.S. Supreme Court has reversed the Seventh Circuit, holding that the NFL constitutes a group of separate individual teams that may conspire in violation of the Section 1 of the Sherman Act.

Update July 2009: The U.S. Supreme Court has granted certiorari to decide whether a sports league can constitute a single entity, despite the contrary recommendation of the SG’s office.

Update June 2009:  After American Needle petitioned for cert., the NFL, NBA, and NHL all joined in the request for high court review.  The Supreme Court requested the views of the Solicitor General’s Office, which opposed hearing the case.  The SG argued that the decision does not conflict with the decisions of other circuits and is limited to its facts.  Although amenable to overbroad interpretation, the SG did not believe that the 7th Circuit’s decision warranted Supreme Court review.

In American Needle, Inc. v. National Football League, the Seventh Circuit held that (1) the NFL is a single entity for the purposes of licensing rights to produce caps with team logos, and (2) the league’s decision to issue an exclusive license to manufacturer logo caps, therefore, could not be challenged under either Section 1 or Section 2 of the Sherman Act.  The reasoning in this case strikes me as inadequate to support the holding, and for that reason it may be a candidate for en banc or Supreme Court review.

Judge Kanne’s opinion for the court properly draws on Judge Easterbrook’s earlier analysis of the National Basketball Association’s limitation on telecasts by individual teams.  In Chicago Professional Sports v. NBA, Easterbrook, writing for the court, observed that a sports league cannot be labeled as a single entity or joint venture for all purposes.  “[A]n organization such as the NBA,” he wrote, may be “best understood as one firm when selling broadcast rights to a network in competition with a thousand other producers of entertainment, but is best understood as a joint venture when curtailing competition for players who have few other market opportunities.”  He drew a comparison to McDonald’s franchises that can surely coordinate “the release of a new hamburger,” but probably cannot “agree on wages for counter workers.”  Importantly, and despite citing a litany of reasons why the NBA was likely a single entity with respect to licensing television rights, the Chicago Professional Sports panel refused to bless the NBA’s conduct on that ground.  Instead, it remanded, recommending that the trial court treat it as a traditional Section 1 Rule of Reason case in which the court assessed market power and then examined the competitive effects of limiting individual team telecasts.

Citing Easterbrook’s opinion, Judge Kanne correctly recognizes that each facet of a sports league must be analyzed independently and properly claims to limit the opinion to the NFL’s licensing of intellectual property.  The analysis in the opinion, however, fails to explain why, unlike Chicago Professional Sports,  no analysis of market power or competitive effects was necessary. 

First, Judge Kanne claimed that the NFL had to be a single source of economic power because a single team could not produce the product, i.e. professional football games.   “Asserting that a single football team could produce a football game,” he quipped, “is less of a legal argument than it is a Zen riddle: Who wins when a football team plays itself?s.”  From this truism, he concluded that “[i]t thus follows that only one source of economic power controls the promotion of NFL football; it makes little sense to assert that each individual team has the authority, if not the responsibility, to promote the jointly produced NFL football.” 

To the extent that this makes any sense at all, it is simply wrong.  It simply sweeps way too broadly to encompass any situation in which a product must be standardized.  That standards are required to efficiently produce a product does not mean that those agreeing to adhere to the standards are not independent sources of economic power that could compete and promote that product independently.  The NCAA football telecasts case made this point abundantly clear.  Universities had to agree on many rules to make NCAA football possible, but they could nonetheless compete on licensing television rights and Section 1 of the Sherman Act required them to do so.  Judge Easterbrook carefully distinguished the NBA from the NCAA, and even then was reluctant to pronounce the NBA a single entity exempt from Section 1 liability.

Second, Judge Kanne relied on “uncontradicted evidence that the NFL teams share a vital economic interest in collectively promoting NFL football” and must compete against other forms of entertainment.  But that was true of NCAA football, and would also apply to any group of competitors fixing prices.  The cartel members share a vital interest in promoting their own products to better compete with those outside the cartel. 

Finally, and “most importantly,” Judge Kanne asserted, the NFL has licensed its intellectual property through NFL Properties, a single entity, for more than 40 years.  Presumably realizing that the length of an anticompetitive agreement can’t change its effect, the court focused on NFL Properties’ articles of incorporation, which say that it was created to promote the NFL.  And promoting ones product, the court concluded, is obviously a good thing.

Again, though, the reasoning sweeps too broadly.  The American Needle case wasn’t about advertising to promote NFL Football.  It’s about selling merchandise.  One might legitimately conclude that a unified approach to purchasing magazine and television ads promoting the NFL Football could be performed most efficiently by a single entity that could effectively coordinate the impact of the various media buys in the context of a very competitive advertising market. 

Selling caps, by contrast, is another story entirely.  Each NFL team very likely has market power in a cap market (or sports logo cap) market because each team could readily charge well above the marginal cost, plus normal profit, of producing a logo cap.  The exclusive license attacked in American Needle allows the NFL to exploit that market power more fully by eliminating the closest competitors for each individual team’s logo caps, i.e. logo caps from other NFL teams.  Fans wishing to purchase NFL logo caps will have only a single choice of cap brand, presumably at a high price.  No team may try to capture additional cap sales by also licensing its logo to another cap manufacturer that could produce lower cost products.  Cap output is almost certain to be lower with a single exclusive license than it would be if teams licensed their own logos to different cap manufacturers.

In the NBA television licensing case, one could argue that over-saturation of the airwaves could hurt the marketability of NBA games on television, where they faced substantial competition for other sports and non-sports programing.  Limiting the individual teams’ ability to televise games locally might thus have been a legitimate decision in the interest of the league as a whole.  Could a similar argument really be made about NFL logo caps?  Would over-saturation really hurt the NFL in any substantial way?  By simply declaring the NFL a single entity, the American Needle court side-stepped what should have been the critical question.