A Legal Perspective on American Needle and the NFL

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As suggested in my several previous posts on this litigation, I can certainly understand why the Supreme Court was unwilling to side with the NFL in this appeal. The NFL wanted itself declared a "single entity" for antitrust purposes. This pronouncement would ostensibly have put the NFL beyond the reach of the antitrust law for all practical purposes. Such a decision might also have allowed the NFL to operate in the labor market for players without antitrust oversight. In theory, the NFL could have imposed restrictions on player salaries, free agency and tenure, limited only by the collective willingness of the player union to withhold labor by going on strike.

[It should be noted that, for many decades, the NFL has in fact dealt with its players without antitrust concern simply because the presence of the Collective Bargaining Agreement with the Players Association gives the league an exemption from antitrust scrutiny. But the players always had the implicit threat, once actually utilized and even more often raised, of decertifying itself (thus terminating the NFL's exemption) and resorting to antitrust law to challenge league labor practices.]

The Supreme Court was offered several plausible middle grounds short of the NFL's desired decree. Most notable was that of the intermediate Court of Appeals for the Seventh Circuit. The lower court had ruled that the NFL constitutes a single entity for some purposes, but not others. This nuanced, sophisticated rule promised a gradual iteration in antitrust law, separating instances where the NFL in fact competes with other business entities in the large, national market for entertainment from those instances where the NFL (as in the hiring of football players) for all practical purposes has no competitor at all. Instead of adopting this complex but promising middle ground, the Court wrote the easy opinion. It described the NFL as a joint venture much like any other, and held it to be a multiple entity subject to antitrust review.

In my view, the Court committed a serious mistake. This decision will hinder the continued prosperity of the NFL, and could devastate other, less secure professional sports leagues.

1. The NFL is a growing business. It has evolved from a sport that depended mostly on local ticket sales to one whose business model encompasses a national market. Today, most fans consume professional football on television. The league's television package is sold to national networks; its best games feature the top teams, regardless of geography. Even in its ancillary businesses, including merchandise and fantasy play, the NFL competes with other sports and other brands. Of course there remains some competition among NFL teams for local revenue in merchandise, radio broadcasts, and stadium-derived revenues. But the national television contracts dominate the league profits, and coupled with aggressive revenue sharing among teams, form the principal reason for increased value of franchises.

2. The Court's resolution of the appeal should have taken some account of the predominately national character of this particular professional sports league. The jurisprudence should advance to reflect contemporary economic realities. "Substance over form" is the maxim the court promised in its opinion to follow. It must have been joking. The punchline is that the Court did the opposite, concluding that a business entity that is divided into 32 separate franchises is a joint venture for antitrust purposes, even though the reality is that those franchises are locally owned primarily to enhance on-field competition and are united as one for most everything else. Yet the court took no account of the evolving national character of the NFL. It treated the league as if it were 32 independent mom-and-pop operations staging football games. That is the league of the 1960's and 70's, the football the ancient Justices remember from their youth. It is not the league today. Yet, as a result of the court's opinion, antitrust law will continue to regulate every aspect of the NFL.

3. Despite the claims of those who favor the American Needle decision, the continued threat of antitrust scrutiny presents a serious obstacle to efficient business operations. The governing standard in antitrust law is the "rule of reason," which calls for an assessment of the the competitive effects of a joint action. It sounds great on the page, but in practice the rule of reason is a nightmare as a regulatory tool. Fundamentally, the rule requires a difficult and intensive factual inquiry, buttressed by the testimony of expert witnesses. Consequently, antitrust litigation is notoriously expensive. To make matters worse, it is unpredictable. No easy rubric exists to compare the pro-competitive and anti-competitive effects of any course of action. Yet because the NFL is a multiple entity, every one of its business decisions potentially opens the league up to an unpredictable and expensive antitrust lawsuit. Every business decision must be considered not only for its wisdom in terms of profits and costs, but also for its possibility to give rise to a major piece of litigation. This is a serious cost that is not imposed on the NFL's numerous competitors in the entertainment market.

4. Few people are aware that the NFL, like other professional sports leagues, stands on very thin ice. As a joint venture, all meaningful league decisions and contracts are vulnerable to antitrust review. In the area of marketing, the American Needle decision renders objectionable the league's decision to license its valuable trademarks exclusively to one head wear company. Similar deals in other sports, such as Major League Baseball's lucrative exclusive license for baseball caps, are now similarly open to antitrust scrutiny. The NFL's even more huge broadcasting agreements are also objectionable, as are those of the other major professional sports leagues. Despite the common understanding, the exemption from antitrust law created by the Sports Broadcasting Act is far too narrow to encompass the NFL's contracts with ESPN and Direct TV. The sport's ongoing efforts to claim ownership of intellectual property in the significant fantasy markets will also one day become an antitrust issue. Add to these the longstanding and unanswered antitrust questions involving player drafts, salary caps, schedule restrictions, revenue sharing, waiver restrictions, arbitration rules, salary slots, and limitations on free agency, and one can see that the pro leagues could have quite a bit of litigation on their hands. Now the NFL may well win many of these cases, as I suspect it eventually will in American Needle with respect to its trademark licensing. The league will, I predict, be able to justify its conduct under the rule of reason. But the victories will be costly, if only in substantial legal fees. Any litigation losses will be devastating. For example, a decision that precludes the NFL from enforcing its schedule on teams, allowing teams to set their own schedule, would alter the league forever.

5. Other professional sports leagues are even worse off. The NFL stands today as America's premier league, and has already advanced its industry far into the national market. A fan will watch a key game featuring top teams no matter where that fan lives. Other sports, however, lag behind the NFL, and still depend more heavily on local broadcast contracts and local ticket sales. These other leagues see the NFL as a model in moving their products up from a local to a national or even international market. These leagues do not have the resources of the NFL to wage major antitrust litigation wars, and are less able to withstand a negative ruling. The American Needle decision deals these leagues a heavy blow.

6. Of course, it is always true that the leagues could be disaggregated. Players could be perpetual free agents, much like any worker. Teams could be free to relocate at will. Owners could barnstorm their teams, playing in only the most desirable contests at optimal times. Football and other sports would persist at the professional level. Only they would persist in a form very different than that to which Americans have become accustomed. But for unaccountable reasons of taste, Americans do not seem to like their professional sports in disaggregated form. They like players to remain with teams for a time, teams to remain in cities, and schedules to culminate in earned berths in playoff tournaments. We could consume our sports differently and maybe one day we will. But that change, if it ever occurs, should be in response to changing consumer preferences. It should result from the injunction of a federal judge wielding the outdated, amorphous standards of antitrust law.