A League of Their Own
Usually winners in lawsuits count up their take and go home. They don’t ask the U.S. Supreme Court to take another look.
So the National Football League received plenty of attention when it asked the high court to review an antitrust decision that gave it the exclusive right to license sales of caps, T-shirts and other memorabilia bearing league and team insignias to a single supplier—rather than open the deal to more vendors.
But the justices accepted the case and could forever alter the way professional sports leagues do business. Arguments in American Needle Inc. v. NFL are scheduled for Jan. 13.
The Supreme Court took the case because “it’s much more than just caps and shirts,” says Indiana University-Indianapolis law school dean Gary R. Roberts, editor of a widely used casebook on sports law.
At the NFL’s request, the justices expanded the stakes beyond the merchandise. A victory for the NFL would give it—as well as Major League Baseball, the National Basketball Association and the National Hockey League—almost total control over nearly every aspect of operations on and off the field, including repeated disputes over franchise location, players union relations, individual player contracts and televised delivery of games.
Owners of NFL franchises want the court to put them beyond the law’s grasp by declaring the 32 separately owned teams a single business for antitrust purposes.
With contracts that are set to expire in 2011, unions representing players in the four major professional team sports—football, baseball, basketball and hockey—see the leagues as poised to run right over them.
“The NFL owners’ appeal in this case is a Trojan horse designed to free owners from [antitrust] scrutiny so they can restrain competition with impunity in the market for player services,” opens an amicus brief from the players associations for MLB and the NBA, NFL and NHL.
Strikes are likely if the leagues get their way, players warn. In a separate brief, the NFL Coaches Association worries that its members’ salaries would suffer if teams no longer had to compete for their services.
“Their concern is that they don’t want judges micromanaging what they see as internal governance decisions,” says Matthew J. Mitten, director of Marquette University’s National Sports Law Institute.
The justices in 1922 declared baseball a game, not a business engaged in interstate commerce, and thus held it beyond the scope of antitrust laws. But beyond the franchise location issue in 1922, the limits of baseball’s exemption are fuzzy.
“Exactly what is protected is unclear,” Roberts says. “Most people don’t believe it applies to TV or to memorabilia.”
At issue here is whether the NFL, an unincorporated association, functions as a single entity and is thus exempt from section 1 of the 1890 Sherman Antitrust Act, which forbids conspiracies to restrain trade. Because a single entity can’t conspire with itself, the reasoning goes, it can’t violate the Sherman Act.
But most courts have considered leagues as collections of separate businesses and analyze their actions under the rule of reason, a painstaking doctrine of proof that juggles the benefits of collaborations with effects on competition and consumers.
The licensing case before the justices began in 2001 when NFL owners, concerned with sagging memorabilia income, got rid of the several companies it used to market its goods and consolidated the operation in Reebok International, which won a 10-year exclusive contract after a bidding war. The athletic gear maker has similar deals with the NHL and NBA.
The marriage between Reebok and the NFL was an immediate hit. By the end of 2002, sales had increased 21 percent, to $1.1 billion. Fans evidently paid a lot of that. For example, fitted caps that sold for $19.99 before the deal rose to $30 by 2006.
Not everyone was so happy. After it lost its contract to Reebok, Buffalo Grove, Ill.-based American Needle sued in antitrust. Few question that antitrust laws need to bend so sports teams can cooperate with each other just to put teams on the field to play the leagues’ games. Off the field, however, the arguments for and against protection become hotter.
SINGLE-ENTITY THEORY AFFIRMED
American Needle maintains that despite the need for coordination on the field, the separately owned teams are perfectly capable of competing with each other in areas removed from the action. The Chicago-based 7th U.S. Circuit Court of Appeals disagreed and affirmed a summary judgment the trial court had granted, holding that at least in the licensing context, the league comprised a single entity. The case made the 7th Circuit the only appeals court to rule that way.
But the circuit court also said sports antitrust claims must be examined “one league at a time” and “one facet of a league at a time.” The NFL, however, is seeking a wider, almost across-the-board exemption, citing a long list of cases where courts have rejected the single-entity defense and forced antitrust claims to trial.
The players complain that the NFL teams compete against each other for every penny and every fan, and that they don’t share their profits and losses. Indeed, the players association maintains, besides competing for fans, players and franchise territories, teams even compete in licensing activities such as those currently before the Supreme Court. Moreover, the players maintain that the league had the option of organizing itself as a single business entity from the beginning but chose not to.
“Having chosen to be separate economic entities for their own business reasons, the NFL teams cannot ask to be treated as a single entity solely when it suits their purposes,” the players argue.
In another unusual move, the justices took the case despite the objections of the Obama administration. Solicitor General Elena Kagan argued in an amicus brief that the 7th Circuit panel’s decision, limited to apparel licensing, was one that conflicts with all the other circuits and, though problematic in some respects, basically remains faithful to the Supreme Court’s antitrust jurisprudence.
And Kagan noted that American Needle, which also supported cert as the petitioner, had a simpler objective.
“The goal of the American Needle case is to have the ability to compete,” says company lawyer Glen Nager of Washington, D.C.
The Supreme Court has applied the single-entity theory in a case involving a parent and a wholly owned subsidiary. That’s not even close to the NFL’s structure, where the teams, mostly sole proprietorships, remain independent of each other.
The prospect that the distinction could disappear makes the grant of cert worrisome, says Stephen F. Ross, director of Penn State University’s Institute for Sports Law, Policy and Research.
That’s because companies that function as true single entities have central decision-making bodies whose members have a fiduciary duty to act in the best interests of the company as a whole. Individual teams and their owners, such as Al Davis and his famous roaming Raiders, can and have defied the other clubs and guarded their own interests instead.
“That is much more like an illegal cartel than a single entity,” Ross says.
It’s not as if single entities are unknown in American sports. Ross notes that a single family owns, operates and makes decisions for the NASCAR stock car racing league. He says the NHL could use a structure like that to accelerate the move of a bankrupt franchise from Phoenix to Hamilton, Ontario, over the objections of the nearby Buffalo Sabres and Ottawa Senators.
“If this league was NASCAR, that team already would be there,” Ross says.
Opportunity awaits the NFL if it becomes an all-purpose single entity. It could end free agency for players, limiting their ability to reap megasalaries when they pit teams against each other. It could cabin coaches into salary scales that don’t pay them to switch jobs—the typical road for advancement in the profession.
Fans, besides paying more for souvenirs, also could wind up forking out money just to vegetate on their couches on Sunday afternoons and watch games. Professional teams already have a statutory antitrust exemption for game broadcasts, and a broad decision also could bolster the NFL’s controversial cable subscription venture and help it maintain its upper hand in satellite delivery.
Still, experts say, couch potatoes shouldn’t start digging through the cushions for loose change in anticipation of a victorious NFL going all-pay-per-view all the time. After all, soaking TV viewers can exact a high PR toll.
“Even if they win a big victory,” says Marquette’s Mitten, “the leagues have to be careful.”