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June 10, 2010

Squawking Baseball

The American Needle Fallout

by Shawn Hoffman

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It’s been a pretty long road for American Needle Inc. in its lawsuit against the NFL (and NFL Properties, and Reebok), and while it’s not over yet, things are looking up. Two weeks ago, the Supreme Court rejected the NFL’s argument that the 32 teams needed to act as a single entity when it came to licensing its trademarks to apparel makers, saying that the teams could only act in concert when it was absolutely necessary to promote football games (which obviously involve more than one franchise). The case now goes back to the lower courts, where the NFL will have to prove that giving Reebok exclusive rights to produce official merchandise wasn’t an unreasonable restraint of trade—without their “single entity” defense.

You can read more about the case here, but what’s more important is what, if anything, this means for the major American sports leagues and their businesses going forward. Most of the sports business media seems pretty relieved—remember the hysteria last summer when the Supreme Court decided to hear the case? There were a lot of writers and commentators who thought that this could be the first stage of the rapture if the NFL won: free agency would be gone, merchandise would cost five times as much, home games would no longer be on TV, and so on. But as I wrote then, almost all of that was complete nonsense, and in the end, very few of the really important stakeholders—i.e. fans and players—would have noticed any significant differences.

In fact, I actually thought the NFL’s downside seemed a lot bigger than its upside:

The leagues already act as single entities regarding those issues listed above, meaning that a win in this case simply reaffirms their existing practices. But a loss could be a major blow; the leagues could lose control over territorial rights and ownership access, the teams would all have to negotiate supplier contracts separately, and just about every collective practice would be open to scrutiny.

So now that the SCOTUS has shot down the “single entity” argument, could any of these things actually happen? We’ll assume for now that ANI will win the case—I honestly don’t know if that’s true, but given that the NFL’s top argument just got neutralized, you’d have to think ANI is in pretty good shape. What would the effects be—not just for the NFL, but for Major League Baseball and the other major sports leagues as well?

(One quick note: yes, MLB technically operates under an 88-year-old antitrust exemption. That exemption is meaningless at this point. It hasn’t been truly put to the test in over 50 years—MLB has gone out of its way to make sure of this—and just about any semi-rational court would treat baseball the same as the other leagues.)

Exclusive Licensing Deals Are History

This is the most obvious result, since it’s the one being tried. If ANI wins—or really, even if the NFL settles—any exclusive licensing deal will be subject to lawsuits from companies that are shut out.

This goes beyond apparel. Video games, trading cards—are these any more essential in “promoting games” than selling apparel is? If ANI wins outright, what’s to stop one of Electronic Arts’ competitors from suing the NFL for only licensing its trademarks to EA?

The same could be said for MLB, who actually sued Upper Deck (and effectively won, via settlement) for selling non-licensed trading cards after MLB signed an exclusive deal with Topps. If the NFL loses, baseball is likely to be hit with a bunch of lawsuits by companies that feel left out (regardless of their product categories), and they’d probably have to settle or accede entirely.

Taking It One Step Further...

A bigger question might be whether the court will simply force the NFL to do deals with multiple manufacturers, or actually kill off the entire collectivized licensing model. The leagues have subsidiaries—NFL Properties, MLB Properties, etc.—that sell licensing rights for all of their teams at once. Whether you buy a Yankees hat or a Pirates hat, it all goes to the same place and is divided equally among the teams. That obviously helps small-market teams, and pisses off the Yankees and Cowboys.

But it’s conceivable—if not entirely likely—that the courts could rule that this entire model is an unreasonable restraint of trade. After all, getting rid of collectivized licensing agreements would open up more competition among manufacturers, and almost undoubtedly lead to cheaper products for consumers. So it could just come down to how much the courts want to rock the boat—killing off NFL Properties would create serious shock waves in the industry, and would have all of the major sports leagues scrambling for a solution.

Larger Issues

That’s about as brave as I could ever imagine any court being in this case—this is squarely about apparel, and if it was going to become any more wide-ranging, it would have been the SCOTUS that did it.

But if the NFL does lose, it definitely opens up more issues to scrutiny. Are territorial rights necessary to promote football games? Approval for moving teams? What about approval for transferring team ownership? If Mark Cuban wants to buy a baseball team, but fails to gain approval from the other owners, could MLB prove that this is a necessary joint activity?

That’s the risk the NFL now runs for it and its peers. TV contracts are covered by the Sports Broadcasting Act of 1961, which gave leagues an antitrust exemption in regards to pooled broadcasting rights, and player-related issues were never going to be affected here since, as I wrote last summer, those are subject to collective bargaining. But just about any other business practice that isn’t an obviously necessary joint activity (such as scheduling games) could eventually be put under the microscope. That’s not a very fun outcome for the NFL, or any of the other leagues.

 Now, it’s entirely possible that the NFL could still end up winning—we don’t know what their argument will be going forward, and most believe that they’re heavy underdogs. But if nothing else, they’re still talking tough, and seem very willing to go to trial. The other leagues—including MLB—don’t seem quite as comfortable. They know what’s potentially at stake here, and some are worried that the NFL is overplaying its hand. But all they can do now is wait and hope.  

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Major Leagues,  Territorial Rights,  NFL

10 comments have been left for this article. (Click to hide comments)

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bravejason

I still don't understand how what the NFL did would constitue an anti-trust violation. As far as I can tell, the teams collectively put the selling of their caps out for bid and Reebok was the high bidder. That seems like a basic market economy function and American Needle just has sour grapes that it was unable to match Reeboks' bid.

Or is the issue that the teams collective decision not to compete with each other by itself a anti-trust violation? And even then, are the teams really competing with each other? It's not like the Falcon's are going to be selling 49er's caps.

Jun 10, 2010 08:42 AM
rating: 0
 
krissbeth

Think of each of those NFL teams as a separate business, which is what they are to a certain degree. Once you do that, this makes a bit more sense. Pepsi and Coke can't collaborate to put the contract for canning their soda or their shipping out to bid for the highest bidder. American newspapers can't put out to bid their paper buying to a single company. The reason is that it's not just the other canners or timber companies that get harmed; it's the American consumer. Warning: I am not an economist.

Jun 10, 2010 14:29 PM
rating: 0
 
trueblue
(127)

I find it remarkable that after boasting about the restraint shown a year ago against "writers and commentators who thought that this could be the first stage of the rapture if the NFL won," the rest of the article jumps off the deep end with lots of logical leaps.

I don't believe it's proper at all to simply assume that ANI will win the case on remand, simply because the Court shot down the single entity defense. The parties could settle out of court before any judicial hearing occurs. Even if they continue to litigate, however, it is entirely possible that the NFL could still prevail -- ANI needs to demonstrate that the Reebok deal contract has more anti-competitive than pro-competitive effects.

That's a tall order. The NFL could argue that a single licensing contract provides the league with better control over licensed products, which in turn means better quality NFL products for consumers. it may very well be the case that league-wide trademark licensing produces some pro-competitive benefits by reducing the transaction costs of obtaining licenses to use all club logos on a single piece of merchandise. In a recent law review article, one professor noted that defendants have won 221 of the past 222 cases that have involved a court’s final determination under the Rule of Reason analysis. It is wrong to simply assume that "exclusive licensing deals are history."

Furthermore, it's also far too simplistic to assert that the MLB antitrust exemption is meaningless because "it hasn’t been truly put to the test in over 50 years" and that "just about any semi-rational court would treat baseball the same as the other leagues." The exemption established in the Federal Baseball case in 1922 was 50 years old itself when the Court revisited it in the Flood case in 1972, and though the Court recognized its faults, it maintained the exemption, in part. Since then, the exemption has been whittled further through the Curt Flood Act, but still exists until Congress or the Court takes further action. Simply assuming it is toothless is foolish.

Jun 10, 2010 09:30 AM
rating: 1
 
Brian24

Calm down--he said "We’ll assume for now that ANI will win the case—I honestly don’t know if that’s true." Shawn's just thinking out what the implications might be IF the NFL lost, which I for one appreciate.

And I have to agree with Shawn on your last point. Can you really envision a situation where the courts lay down a decision on the NFL's antitrust status but then in another case they specifically decide to treat MLB by different rules because of the precedent of the 1922 Federal League case? I just don't see any possibility of that happening.

Jun 10, 2010 17:20 PM
rating: 0
 
trueblue
(127)

I'm all for exploring different scenarios, Brian, but Shawn's article simply assumes things will go one way (the NFL will lose) without really meaningful explanation why the NFL will lose and without exploring what would happen if they win. That's my problem with it.

As for the MLB antitrust exemption, the courts have treated the NFL and MLB as different for nearly 100 years. In so doing, they have consistently and specifically held that their decision to allow an exemption to MLB does not apply to other leagues.

Most importantly, though, in the Curt Flood Act, Congress specifically recognized that the antitrust exemption still applies to "any conduct . . . of persons engaging in, conducting, or participating in the business of organized professional baseball relating to or affecting . . . the marketing or sales of the entertainment product of organized professional baseball and the licensing of intellectual property rights owned or held by organized professional baseball teams individually or collectively." As it pertains to licensing, baseball's antitrust exemption is no longer an antiquated Supreme Court doctrine; it's black-letter statutory law.

Jun 11, 2010 10:21 AM
rating: 0
 
ahemmer

As I understand it, if ANI were to win, the NFL would not have the right to make exclusive agreements, unless it involves the promotion of games - because more than one team is involved.

Regarding the EA Sports exclusive agreement, the video game wouldn't be an NFL games without all 32 teams, jerseys, players, etc. Everything comes as a package, and dealing with individual teams would be very difficult. To me, it seems that the exclusive game agreement could be held up as valid.

Jun 10, 2010 10:18 AM
rating: 0
 
nateetan

Um, why is the antitrust exemption being ignored? That's the sole reason why Al Davis can move his team hither and yon at will and the A's can't. It's also why Mark Cuban owns the Mavericks and not the Cubs.

Now, if Congress wants to revoke the exemption, they can do that whenever they want, but until the do, MLB is not subject to antitrust laws.

Remember, antitrust laws are not bits of the Constitution, they are rules set up by Congress and they can freely determine who falls under them.

Jun 10, 2010 10:45 AM
rating: 0
 
youwouldno

The baseball exemption is not irrelevant by any means. Congress has had the better part of a century to overrule it and has not done so. The Curt Flood Act of 1998 ostensibly limits the exemption with respect to players' rights but otherwise leaves it alone. Existing law is that "the business of baseball" is exempt. I'd be stunned if that was overturned outright.

The reason MLB prefers to avoid the question is because what exactly constitutes "the business of baseball" is not clear. MLB uses the exemption as a form of deterrence rather than risk a narrow interpretation which would encourage litigation. This approach has been successful in limiting the amount of litigation compared to the other major sports leagues.

So far as the NFL, their persistence is a bit curious but they may have been motivated to resolve the ambiguities in existing law (which was simply reaffirmed by the Supreme Court in American Needle). There isn't much downside- the single entity defense is settled law in a wide range of contexts, including the right of a league to restrict who may become an owner. The NFL hoped to remove the remaining gray areas and failed, but otherwise the ruling will have a minimal impact.

Jun 10, 2010 15:08 PM
rating: 0
 
R.A.Wagman

Regarding right to own teams - this was recently highlighted by a Phoenix-area judge's decree that the NHL was fully within its rights to select which owner to approve, even if said owner was offering less than whan a non-approved owner was offering - see the NHL vs Jim Balsillie.

Jun 10, 2010 15:39 PM
rating: 0
 
Michael
(736)

"... just about any semi-rational court would treat baseball the same as the other leagues ..."

No, I think that semi-rational courts would follow a Supreme Court precedent that is directly on point even if it is from the early 1970s. I wouldn't dismiss MLB's court-established anti-trust exemption so readily. Subsequent Congressional actions, including trimming the scope of baseball's anti-trust exemption, make it unlikely that courts would change their rationale.

Jun 15, 2010 07:39 AM
rating: 0
 
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