University of Florida | Journal of Undergraduate Research | Volume 15, Issue 2 | Spring 2014 1 American Needle and the NFLs Trademark Licensing Practices Courtnei Smith Warrington College of Business Administration, University of FloridaBetween 1963 and 2000, the NFL teams issued nonexclusive licenses to vario us manufacturers for the production and sale of their logoed mer chandise In 2000, however, the teams revoked these nonexclusive licenses and instead granted an exclusive contract to Reebok. When American Needle, one of the foreclosed manufacturers, sued the NFL for violation of Section 1 of the Sherman Act, the Supre me Court ruled that the NFL is not a single entity for antitrust purposes and demanded the NFLs licensing practices be combed for anticompetitive effects. This paper examines the anticompetitive and pro competitive effects of the NFLs licensing structure and investigates the implications of the Supreme Courts decision. Anticompetitive effects arise from the lack of incentive to invest in logos and reduction in logo competition associated with league wide licensing. Pro competitive effects, however, stem from lower transactions costs and economics of scale. The ruling that the NFLs cooperative behavior could amount to a conspiracy in restraint of trade has implications for the NFL Network, the NFLs relationship with Electronic Arts and future collective bargaining agreements INTRODUCTION In 1963, the National Football League (NFL) teams abandoned the practice of independently licensing their trademarks to merchandise vendors and formed National Football League Properties (NFL P ro perties ), a separate corporate entity that develops, markets, and promotes the intellectual property of the thirty two teams. Between 1963 and 2000, NFL Properties granted nonexclusive licenses to multiple vendors for the manufacturing and sale of product s bearing team insignias. In 2001, however, after a vote among the teams, NFL Properties declined to renew these nonexclusive licenses and instead granted one exclusive ten year license to Reebok International Ltd. for the manufacture of trademarked headw ear, among other things. American Needle, Inc., a headwear manufacturer and one of the foreclosed former vendors, filed an antitrust suit against NFL Properties alleging violation of Section 1 of the Sherman Act. In a unanimous decision, the Supreme Court found that each team has a separate corporate consciousness and thus that the NFL is a collection of independent economic actors subject to antitrust scrutiny (American Needle, Inc. v. National Football League, 2010). For decades, various professional sp orts leagues, including the NFL, have argued that the need for cooperation among independently owned clubs to produce games effectively makes league members a single entity and shelters them from Section 1 of the Sherman Act (McCann, 2010). The Supreme Courts holding that NFL Properties behavior represented concerted activity subject to Section 1 considerations clearly has broad implications (Keyte, 2010). This paper begins by relaying the litigation narrative and then examines the economic arguments for and against an exclusive license and the implications of the Supreme Courts decision on the NFL and other professional sports leagues. HISTORY OF LITIGATION When the hat manufacturer American Needle challenged NFL Properties exclusive license to Reeb ok as a violation of Section 1 of the Sherman Act, the NFL teams turned to Copperweld Corp. v. Independent Tube Corp. (Feder, 2011). The decision in Copperweld held that a parent corporation and its wholly owned subsidiary are incapable of the kind of concerted activity that would raise Section 1 suspicions (Copperweld Corp. v. Independent Tube Corp., 1984). According to the NFL, the agreement among the thirty t wo teams could not represent a conspiracy because, per Copperweld the teams constituted a single entity with respect to the conduct challenged. American Needle responded that Copperweld was not applicable because the relationship between a true parent com pany and a wholly owned subsidiary lacks the agreement to limit competition observed in the NFL teams collective decision to issue an exclusive license (Feder, 2011). The District Court, however, sided with the NFL and granted summary judgment in its favor. The Seventh Circuit affirmed the lower courts decision. The court did not agree with American Needles claim that the separate and sometimes divergent interests of the NFL teams prevented them from being considered a single entity under Copperweld It concluded that the NFL teams can function only as one source of economic power when collectively produc ing NFL football and that the teams intellectual property serves mainly to promote the thirty
COURTNEI SMITH University of Florida | Journal of Undergraduate Research | Volume 15, Issue 2 | Spring 2014 2 two teams collectively produced product (American Need le, Inc. v. National Football League, 2008). American Needle then turned to the Supreme Court with a petition for a writ of certiorari The NFL supported the petition in the hopes of achieving a uniform decision that would eliminate uncertainty among the circuits (Edelman, 2011). The Supreme Court found, though, that any given NFL team pursues its independent corporate interests when it licenses its trademarks and not the common interests of the whole league; teams behave as independent actors in pursuit of independent interests and are therefore independent centers of decision making. The Supreme Court reversed both the district and appellate court decisions and found unanimously that the NFLs exclusive trademark license is subject to inquiry under Section 1 of the Sherman Act. The Court remanded American Needle to the U.S. District Court for the Northern District of Illinois. When restraints of trade are necessary to the availability of a product, per se rules of illegality are set aside and the restr aint is instead judged according to the rule of reason (Edelman, 2011). In its decision, the Supreme Court recognized the special needs of sports leagues related to collective decision making. In the next stage of litigation, the competitive effects of the NFLs exclusive licensing practice will be examined. (American Needle, Inc. v. National Football League, 2010). The following analysis looks at the potential anticompetitive and pro competitive effects of the Supreme Court decision ECONOMIC ARGUMENTS FOR AND AGAINST AN EXCLUSIVE LICENSE Whether American Needle will be able to prove that the NFLs licensing practices cause antitrust injury is yet to be seen. American Needle may posit that the NFLs league wide licensing practices lessen each teams incentive to i nvest in their logos and reduce competition among the teams related to their logos (Edelman, 2011). An article published in the Philadelphia Inquirer in 1996, for example, suggests that the collective licensing of trademarks through NFL Propertie s had discouraged the teams from updating their team colors and logos (Smith, 1996). Similarly, a 2007 article in the Chicago Tribune notes that the Chicago Bears navy blue colors were made darker by the NFL to achieve standardization among the teams, w hich suggests that the NFL teams may no longer compete on team colors (Mooshil, 2007). In response, the NFL may argue that the procompetitive effects stemming from lower transaction costs and economies of scale overshadow these anticompetitive effects. Th e one stop shopping offered by NFL Properties clearly must lower transaction costs associated with products that contain trademarks of multiple NFL teams, such as an NFL video game. Whereas a video game manufacturer would otherwise have to approach the t hirty two teams separately for trademark licenses, the existence of NFL Properties allows one licensing transaction, as opposed to thirtytwo (Edelman, 2011) In Broadcast Music, Inc. v. Columbia Broadcasting Systems the Supreme Court found that the pooli ng of individual composers copyrights, alleged to be a restriction on price competition among rivals, increased economic efficiency and made the relevant markets more efficient (Broadcast Music, Inc. v. Columbia Broadcasting Systems, 1979). The NFL teams may argue that, by pooling the intellectual property of the individual teams, their league wide licensing produces similar economies of scale (Edelman, 2011) When American Needle returns to the District Court for the Northern District of Illinois, the per tinent question will be whether these procompetitive effects outweigh the anticompetitive effects discussed above. IMPLICATIONS FOR THE NFL The Supreme Courts ruling that the NFL is not a single center of economic decision making has certainly dashed the NFLs hopes of torpedoing future antitrust allegations (Keyte, 2010). It also has implications for the NFL Network, the NFLs relationship with the video game publisher Electronic Arts and future collective bargaining agreements (McCann, 2010). The NFL Ne twork is a cable and satellite channel owned by the NFL that exclusively broadcasts a limited number of NFL games and special features. Because it is not protected by the Sports Broadcasting Act, it is susceptible to antitrust scrutiny. The NFL Networks l imits on the number of view er s of televised games and high prices charged to cable subscribers are controversial. The NFL received a reported $400million license fee from Electronic Arts for an exclusive fiveyear contract to produce games using the NFLs trademarks and logos. Prior to this license, Sega, one of Electronic Arts competitors, produced a lower priced NFL video game that competed with Electronic Arts Madden NFL The NFL could potentially face a Section 1 allegation for its exclusive license to Electronic Arts (McCann, 2010) In the American Needle litigation, the players unions in the four largest American sports leagues the NFLPA, MLBPA, NBAPA and NHLPA jointly filed an amicus brief in support of the NFLs opponent, American Needle, Inc. (A merican Needle, Inc. v. National Football League, 2010). Days after the Supreme Courts decision, NFLPA chief DeMaurice Smith told press that he hoped American Needle would lead to improved collective bargaining agreement negotiations (Leahy, 2010). If the NFL were to lose protection under the nonstatutory labor exemption, its lack of single entity status could drastically change the landscape of the player labor market (McCann, 2010).
AMERICAN NEEDLE AND THE NFLS TRADEMARK LICENSING PRACTICES University of Florida | Journal of Undergraduate Research | Volume 15, Issue 2 | Spring 2014 3 CONCLUSION In American Needle, the Supreme Court held that concerted conduct among separately owned sports teams must be judged by its competitive effects. Reversing the Seventh Circuits decision, the opinion by Justice Stevens does not exempt at the outset league wide activity due to the necessity of cooperation in produc ing games. Though the Supreme Court recognized that the special characteristics of sports leagues provide a perfectly sensible justification for making a host of collective decisions, these decisions must indicate pro competitive effects in a rule of rea son inquiry. REFERENCES American Needle, Inc. v. National Football League, 538 F. 3d 736 (2008). American Needle, Inc. v. National Football League, 130 S. Ct. 2201 (2010). Blair, R. D., & Kaserman, D. L. (1985). Antitrust Economics (2nd ed.). New York, NY: Oxford University Press. Blair, R. D. (2012). Sports Economics New York, NY: Cambridge University Press. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979). Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). Edelman, M. (2011). Upon further review: will the NFLs tradem ark licensing practices survive full antitrust sc rutiny? The remand of American Needle v. NFL. Stanford Journal of Law, Business and Finance, 16, 183 221. Feder, M. (2011). Is there life after death for sports le ague immunity? American Needle and beyond. Villano va Sports and Entertainment Law Journal, 18, 407 408. Jones, A. (2010, May 24). American Needle: High Court delivers 9 0 shout out against NFL. Wall Street Journal. Retrieved from http://www.wsj.com/ Keyte, J.A. (2010). American Needle: A new quick look for joint ventures. Antitrust 25, 48 52. Leahy, S. (2010, May 24). NFL, NFLPA offering contrasting statements after Supreme Court rejects leagues bid for antitrust freedom. USA To day. Retrieved from http://www.usatoday.com/ McCann, M. (2 010). American Needle v. NFL: A n opportunity to reshape sports law. Yale Law Review, 119, 726 781. Mooshil, M. (2007, February 2). Style points. Chicago Tribune Retrieved from http://www.chicagotr ibune.com/ Smith, M. C. (1996, August 29). A move to make other NFL fans green with envy: N ew colors, new logo. Philadelphia Inquirer. Retrieved from http://www.philly.com/ Werden, G. J. (2011). American Needle and the application of the Sherman Act to professional sports leagues. Villanova Sp orts and Entertainment Journal, 18, 395 406.