Tuesday, September 16, 2008

Antitrust Implications of Exclusive Deals by Groups of Sports Teams

Exclusive NFL Headwear License: The NFL season kicked off recently, and millions of Americans have begun spending their Sunday afternoons glued to their television sets. The NFL is big business, including the sale of NFL-branded apparel. The Seventh Circuit issued a ruling a couple weeks ago on a case raising an antitrust challenge to the exclusive license of team names and logos for use on hats and other headwear.

Plaintiff American Needle Inc. produces headwear, and had a non-exclusive license to produce headwear for the NFL for over 20 years. In 2001, NFL entered into an exclusive 10-year licensing agreement with Reebok for headwear and for other apparel. American Needle responded by filing an antitrust lawsuit, alleging a combination in restraint of trade in violation of the Sherman Act Section 1 by the NFL, NFL Properties, and the individual NFL teams, along with monopolization in violation of Section 2.

Challenge to Joint Conduct by the NFL and its Teams: The NFL defendants argued that they should be considered a single entity for antitrust purposes, relying on the Supreme Court’s Copperweld decision, which found that a parent and its wholly owned subsidiary are a single entity for antitrust purposes. Subsequent court rulings have gradually extended Copperweld to certain affiliated companies. The Seventh Circuit stated that, when making the single-entity Copperweld determination, courts should examine whether the conduct in question “deprives the marketplace of the independent sources of economic control that competition assumes.”

Examining the evidence, the court found uncontradicted evidence that “the NFL teams share a vital economic interest in collectively promoting NFL football,” pointing out that a single football team cannot produce a football game. Thus, the Seventh Circuit held that the Copperweld exception applied, and that the NFL defendants functioned as a single entity when collectively promoting NFL football by licensing the teams’ intellectual property. It observed that antitrust law encourages cooperation within a business organization to promote competition with competitors, such as other entertainment providers.

The Court cautioned that its ruling was limited, however, and that “[w]e have yet to render a definitive opinion as to whether the teams of a professional sports league can be considered a single entity. . . . The characteristics that sports leagues generally exhibit make the determination difficult. In some contexts, a league seems more aptly described as a single entity immune from antitrust scrutiny, while in others a league appears to be a joint venture between independently owned teams that is subject to review.” See American Needle, Inc. v. Nat’l Football League, __ F.3d __ , 2008 WL 3822782 (7th Cir. 2008).

Big 10 Network: The NFL and its teams are not the only sport entities that are under legal scrutiny. The Big 10 conference and its affiliated schools recently have “pushed the envelope” with respect to the legality of their practices. Roughly two years ago, the conference and the schools started the Big 10 Network, a new network devoted only to Big 10 sports. The conference and schools share in the revenues of the network and, to maximize profits, demanded high fees from cable companies to carry the network. Cable companies across the Midwest have not willingly agreed to the Big 10 and the schools’ fees. In response, the Big 10 and its affiliated schools boycotted any cable company that would not pay their fees. This boycott resulted in a clear anticompetitive effect: a number of Big 10 football and basketball games that had been televised in previous years were not televised last year throughout the Midwest. In antitrust terms, product supply had been reduced.

Fans were outraged, as were we at Kotchen & Low (we are big sports fans, and Daniel Kotchen is an ardent Wisconsin Badger fan). The Big 10 and the schools’ boycott carries substantial legal risk under the antitrust laws: a group boycott accompanied by an anticompetitive effect often violates Section 1 of the Sherman Act. In response to complaints from Big 10 fans, Kotchen & Low was researching and developing an antitrust suit against the Big 10 and its schools on a pro bono basis. The suit would have sought injunctive relief: a court order to televise Big 10 football and basketball games. While such a suit would have required us to overcome the single-entity defense addressed in American Needle, the Big 10 schools would have more trouble than NFL teams describing themselves as a single entity, as each of the Big 10 teams compete with teams from outside of the Big 10. We have stopped working on the case, though, because the Big 10 and cable companies have now come to terms, and the games are back on the air.


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