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American Needle and the NFL's Single Entity Argument

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In less than two weeks, the United States Supreme Court will hear oral arguments in American Needle v. NFL, a case that has been called "Super Bowl of sports litigation," "Armageddon," "the biggest sports law case since Curt Flood," and "a revolution in 3-D cinema" (actually, I think that last one was probably about Avatar). The case itself involves an unremarkable set of facts. For many years, all of the NFL teams jointly licensed their trademarks and logos to a variety of apparel manufacturers. American Needle was one of these licensees, and had sold NFL-logoed hats since the late 1950's. After retail sales of sports-related merchandise struggled in the 1990's, the NFL teams decided to grant an exclusive license to Reebok to manufacture all NFL-licensed apparel, thus eliminating American Needle's ability to continue selling NFL hats. In response, American Needle brought an antitrust lawsuit against the NFL and its teams, claiming that the exclusive license with Reebok eliminated competition in the market for NFL apparel and constituted an illegal "contract, combination...or conspiracy" in violation of the Sherman Antitrust Act. In American Needle's brief to the Supreme Court, they note that "a Reebok vice-president hailed the elimination of price competition as 'a godsend from a profitability standpoint,' explaining that '[b]asic fitted caps that were selling for $19.99 a few years ago because of the price pressures are now selling for $30.'"(For a broad summary of the case, you can read more here. Sports law blog For a more detailed discussion, you can read more here. All of the Supreme Court briefs are available here.)

Not surprisingly, this case is about a lot more than whether the NFL's exclusive license violates Section 1 of the Sherman Act. Instead, at issue here is whether the NFL is even capable of violating Section 1. Section 1 of the Sherman Act only applies to agreements, and (as Rob Bass and DJ EZ Rock might have put it) it takes two to make an agreement. So, for example, if all of the manufacturers of wool hats in the world got together to make a series of agreements, those agreements would be scrutinized under Section 1 to ensure they were not anticompetitive (e.g., to ensure that the manufacturers were not agreeing to fix prices). The question is, what happens when all of the NFL teams in the world get together and make a series of agreements? Should those agreements be scrutinized under Section 1?

In American Needle, the NFL argued that they are a single entity, and thus incapable of violating Section 1 (because a single entity cannot reach an agreement with itself). The NFL concedes that they do not look like a traditional single entity -- that is, a single firm with a single owner. Instead, the NFL argues that they are a single entity because the NFL is a product that can only be created by cooperation among its teams, and none of its teams have any economic value without the league. The NFL's argument is that the product created by the NFL teams is an interconnected series of games (the regular season) that leads to a playoffs, that eventually produces a Super Bowl champion, and that no individual team can produce this product on its own. Rather, the teams must make a series of agreements with each other--where to play, when to play, under what rules, etc. The NFL believes that this interdependence and need for cooperation renders the league a single entity, and that all of the agreements made by the league and its teams --ranging from scheduling to free agency restrictions to salary cap rules to franchise relocation restrictions --should thus not be subject to scrutiny under Section 1.

This is not a new argument. Sports leagues have been making this same argument for over thirty years, and virtually every court to address the issue has rejected the argument for over thirty years, often finding that agreements made by teams have violated Section 1. In American Needle, however, the district court held -- and the 7th Circuit affirmed -- that the NFL acts as a single entity when collectively licensing its intellectual property, and that the single entity classification of the league must be made "one facet of the league at a time." I'll talk a bit more about the merits of the NFL's argument and the broad implications of the case in a later post, but I want to quickly touch on three basic points that have either been overlooked or misconstrued by the press covering this story.

1) If the NFL loses the case before the Supreme Court, it does not mean that all of their exclusive licensing arrangements illegal. This case is a lottery ticket for the NFL. If they win, it could be a significant victory. I'll discuss why and how it might impact fans, players, and potential licensees in a later post. If the NFL loses, nothing really changes. The issue before the Supreme Court is not whether the NFL's exclusive licensing arrangement is legal under the antitrust laws. The issue is whether the licensing arrangement should even be subject to scrutiny under the antitrust laws. If the NFL wins, they escape Section 1 scrutiny. If the NFL loses, their arrangement will then be analyzed under the rule of reason, where a court will weigh the pro-competitive benefits of the agreement versus its anticompetitive effects.

There is no reason to believe that the Supreme Court's rejection of the single entity argument makes it any more (or less) likely that American Needle would prevail in the underlying antitrust case (or that a suit against the NFL's exclusive deal with EA would be successful). Rather, it only subjects the NFL to the same antitrust scrutiny they have been subjected to for the last 50 years. American Needle could win the underlying case, but only if it could prove that the anticompetitive effects of the NFL's exclusive apparel licensing deal outweighed its pro-competitive benefits

2) Curt Flood lost his case before the Supreme Court. Although only indirectly related to the case, there has been much discussion of Curt Flood and his fight for baseball free agency that went all the way up to the United States Supreme Court in 1972. Despite what some commentators have been writing, Flood lost that case. His fight is an important part of baseball history, but that case actually reaffirmed baseball's (and thus the reserve clause's) exemption from competition law. For a terrific read on that case and its significance, I highly recommend Brad Snyder's A Well Paid Slave: Curt Flood's Fight for Free Agency in Professional Sports. Major League Baseball players actually won free agency in a 1975 arbitration involving Dave McNally and Andy Messersmith.

3) The NFL already has an exemption from the antitrust laws for its television deals with CBS, NBC, and Fox. In the 1950's, the NFL teams agreed to pool their broadcast rights together and sell them as a package to the networks. A federal court held that this agreement violated Section 1 of the Sherman Act and prohibited it. Thus, the NFL teams were required to sell their television rights individually. In 1961, however, Congress passed the Sports Broadcasting Act, which permits NFL teams to pool all of their television rights and sell them as a package on network television. In other words, it exempts the network television deals from scrutiny under Section 1. Thus, regardless of the Supreme Court's decision in American Needle, the NFL's television deals with the CBS, Fox, and NBC cannot be challenged under Section 1. American Needle could, however, have an impact on the NFL's deals with DirecTV and with the NFL Network. More on that, and much more on American Needle, in posts to come.

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