Everything You Wanted To Know About American Needle v. NFL (But Were Afraid To Ask)

On Wednesday, January 13, 2010, the United States Supreme Court heard oral arguments in American Needle v. NFL. According to many legal experts, this is the most important case in sports law history. Indeed, more than 15 amicus briefs have been filed, including briefs from the NFLPA, NHLPA, MLBPA, NBAPA, MLS, ATP, NHL, NBA, NCAA, EA Sports, MasterCard and Visa (together!), and naturally the United States of America (at the Court's request, now that Obama is in office). Needless to say, there is a lot at stake.

As a lawyer, I think the case is fascinating because it juxtaposes antitrust law with the most financially powerful sports league in the country, while also touching on elements of labor law (specifically collective bargaining) and even intellectual property law. But the outcome of this case may have a tremendous "Armaggedon-like" impact on all sports fans, all sports teams, and the entire sports industry. I am going to explain the basics of the case, as well as link to some more thorough analyses, in order to flesh out the most important parts of American Needle v. NFL. My goal is to educate you, NYaT readers, so that you will have a solid handle on a very complex case.

First, a brief primer on antitrust law. This case revolves around the Sherman Antitrust Act. Most people learned in high school that this statute prohibits monopolies. That's true -- the first section of the Sherman Act prevents competitors from conspiring with each other against other competitors, thereby restraining trade. Thus, Section 1 says that McDonalds and Burger King can't work together to squeeze Wendy's out of the fast food hamburger industry. Section 1, on the other hand, does not prohibit a parent corporation and a wholly-owned subsidiary from acting jointly since they are part of “single entity,” and thus cannot be conspiring with each other against some other competitor. (Example: McDonalds can allow Heinz to be the sole ketchup-packet provider for each of its McDonalds restaurant locations.) That was the Supreme Court's 1984 holding in Copperweld v. Independence Tube, anyway. The American Needle case will determine whether a sports league, comprised of 32 independently owned teams, can qualify as a “single entity” under Section 1 when the league and its teams jointly decide, just like McDonalds decided that only Heinz can provide ketchup packets to its restaurants, that only one company (Reebok) can sell NFL-trademarked apparel.

Next, a brief primer on antitrust law vis-a-vis professional sports leagues. In 1922, the SCOTUS decided Federal Base Ball Club v. National League and awarded an antitrust exemption to Major League Baseball. This allows MLB to exclude competition however it likes. Lucky them! The courts have never awarded such immunity to any other professional sports league, and Congress hasn't done so, either. But what about when modern sports leagues take collective action to squeeze out competitors, presumably to make even more money for themselves? Are they immune to the Sherman Act now? Well, the Supreme Court's upcoming opinion in American Needle v. NFL just might answer that question. And yes, as Deadspin points out, this incredibly important decision, affecting thousands of sports fans, pro athletes, team owners, business executives (and countless others) will be decided by nine old people in robes.

Finally, here are the facts of the case. American Needle is a small company from Buffalo Grove, Illinois, that manufactured knit caps bearing NFL team logos ever since the 1970's. But in 2000, the NFL signed a contract enabling Reebok to be the only company that could manufacture apparel featuring the NFL and its teams' logos. Naturally, this upset the nice folks at American Needle. So they did what Americans do: they sued, arguing that the NFL violated the Sherman Act by giving Reebok an exclusive license to produce NFL apparel, thereby excluding competitors (like American Needle) from the market.

Why would such exclusion be wrong? Because Reebok's sweetheart deal prevents American Needle and any other apparel company from negotiating with individual teams to sell their products. Imagine Adidas agreeing with the Yankees to be their exclusive provider of team apparel, while the other teams in the league went with some other company?

Oh wait, that already happened! That's exactly what American Needle would love to see in the NFL.

Anyway, another reason why the NFL's agreement with Reebok is wrong is the absence of any competition allows Reebok to charge the NFL and its 32 teams higher prices. So much for the free market. Thus, we have the American Needle company suing the NFL, NFL Properties, Reebok, et al for violating Section 1 of the Sherman Act by squeezing out the little guy.

I could write a book about all the issues at play: the way other courts have handled antitrust issues in professional sports, the effect of giving the NFL broad antitrust immunity on the league's teams, players, players' associations, and fans, the effect of broad immunity on the business that comprise the professional sports industry, etc. But here's the deal. If the Supreme Court granted the NFL broad antitrust immunity, it would be setting an incredible precedent, one that would surprise a lot of lawyers (including me). The league would be considered a single entity, and could "conspire within itself" to issue exclusive licensing agreements in every industry, including apparel, merchandise, food and drink, TV, radio, and countless others. The league would also have an improved bargaining position against the union, possibly resulting in a league-set salary cap, frozen salary structures, and the de-evolution of the free agency system that's in place in the Big Four leagues. Simply put, broad immunity for the NFL would be bad not just for the NFL's constituents, but for other professional sports leagues as well.

Another alternative is the Supreme Court concluding that the NFL's pact with Reebok violated the Sherman Act. Another is granting the NFL a limited antitrust exemption -- limited only to the apparel and merchandise context. Either of these two alternatives would avoid what the Atlantic Wire termed "NFL Omnipotence."

Looking ahead to last week's oral arguments, the three most active justices were Antonin Scalia, Stephen Breyer, and newcomer (and rabid Yankees fan) Sonia Sotomayor. Clarence Thomas, of course, said nothing. But when the other justices did speak, they seemed ready to either remand back to the federal district court in Chicago, or perhaps carve out a narrow antitrust exemption, thus allowing the NFL (and similarly-situated professional sports leagues) to contract with companies to monopolize certain business segments. You know, such as NFL hats and other merchandise...the exact industry that American Needle wants to compete in.

At one point, NFL hired gun and hotshot Covington & Burling litigator Gregg H. Levy argued that an NFL team is worthless by itself. Levy needed to make this point to establish that the NFL is a single entity, in that its 32 member teams are not standalone economic competitors. American Needle, of course, would oppose that assertion, arguing that each team is an independent source of economic power and that the teams compete with one another for players, coaches, and income. Thus, the teams should be subject to antitrust liability when joining together to sell hats and caps. In response to Levy's argument, Scalia simply said, "Wow." Obviously, the Court isn't buying what the NFL is saying, at least not as broadly as the NFL is saying it.

What's likely is that the SCOTUS will conclude that the NFL is comprised of 32 individual teams working together on selling NFL-trademarked apparel. The key is that the court cannot rule broadly in favor of the NFL. If it ruled broadly, it could shield professional sports leagues from antitrust liability in several areas, including player salaries, location of teams, video game rights, and television broadcasting rights. That would be a disaster, and I agree with Sotomayor that the NFL, in seeking such a broad antitrust exemption, is "seeking through this ruling what [the NFL hasn't] gotten from Congress: an absolute bar to an antitrust claim." Boo, NFL.

A better solution? Giving the league antitrust immunity based on this narrow way in which teams work together. As Justice Breyer argued, it is unlikely that sports teams will compete with each other in selling apparel: "I don't know a Red Sox fan who would wear a Yankees sweater even if you gave it away." Thus, since teams don't really compete in selling league and team merchandise, the leagues function as a single entity in this respect alone.

That result would mean that American Needle loses, but the sports industry as a whole wins. While the NFL won't get broad immunity in "its core business functions," as it initially sought, at least free agency will probably remain intact, salary caps won't be drastically reduced, and video games won't be channeled into a single offering per sport. And at least one Pro Bowl QB will be very, very happy.

My prediction? It's unlikely that the Supreme Court will take the stance taken by the First, Second, Third, and Ninth Circuits, which is a complete rejection of the NFL's single entity defense. I think they will follow the 7th Circuit (which had never before considered this issue prior to its decision in American Needle) and rule tht the single entity defense should be evaluated on a case-by-case basis. The Supreme Court will then decide that within this case of sports apparel merchandising, the NFL does function as a single entity, and the 32 teams do not compete against each other. Thus, the NFL will gain antitrust immunity only within this specific context.

Thus, American Needle will lose, the NFL will win (sort of), and sports fans can breathe easy...for now. But wait until the NBA decides to grant EA Sports an exclusive license to produce NBA Jam, and that no other video game company can release a game with the NBA logo, NBA team logos, and player names and jersey numbers. That might spawn an EA Sports v. NBA lawsuit that will essentially mirror the American Needle case. What then? Does the Supreme Court grant the NBA limited antitrust liability only within the video game context? Will this pattern continue until these professional sports leagues get antitrust immunity within every single context, until that "limited immunity" transforms into a general or complete immunity? Or will Congress step in and give the NBA, NHL, and NFL a statutory antitrust exemption?

These are all great questions. Stay tuned to the Supreme Court website in June to read the court's opinion. While there has been more written about this case than any human being could read between now and June, here are some links just in case you're interested in learning more...

Steve Pearlstein of the Washington Post believes it's time to break the NFL's monopolies.
Gwen Knapp of the San Francisco Chronicle praises Drew Brees for siding against the NFL.
The New York Times reacts to the Supreme Court's reaction to oral arguments.
Marc Edelman (with whom I have personally emailed about this case) has a solid write-up about the case on the always-popular Above the Law.
Slate pokes fun at how little the justices of the Supreme Court know about football.
As always, the most American Needle coverage is on the Sports Law Blog -- click here to run a search for all posts about the case, including a recent analysis of last Wednesday's oral arguments.