Wednesday, January 13, 2010

NFL Under Review

Today the Supreme Court heard arguments in the case of American Needle, Inc. v. National Football League, the first case to be apply the Sherman Act, the U.S. antitrust statute, to a professional sports league in quite some time. In this case the NFL hopes to obtain immunity from U.S. antitrust laws, which in turn could have a sweeping impact on the NFL and other professional sports organizations.

The plaintiff, American Needle, used to produce hats for the NFL before the NFL gave Reebok the exclusive rights to produce official NFL team memorabilia such as T-shirts and hats nine years ago. American Needle sued the NFL, claiming that the agreement among the league's 32 teams allowing only Reebok to produce NFL apparell is unfair collusion that restricts competition in violation of Section 1 of the Sherman Antitrust Act. The trial court found the Sherman Act inapplicable to the NFL, which the Seventh Circuit Court of Appeals affirmed, claiming that the NFL was a "single entity" and therefore incapable of constraining trade.

Interestingly, both parties appealed this ruling to the Supreme Court-- American Needle hoping to reverse the ruling of the 7th Circuit and trial court banning it from bringing suit and the NFL hoping that the Supreme Court would expand upon the 7th Circuit's ruling that it is a single entity and basically solidfy an exemption for the NFL from antitrust suits into federal law. So why the big deal on both sides? Well, if the NFL's interpretation takes hold, the NFL argues that it will both avoid costly lawsuits and cement the ability to make agreements like those with Reebok that maximize league profits. The NFL Players' Association argues that such a broad antitrust exemption could then spill over into other areas, such as player compensation and ticket prices, increasing costs for the average NFL fan and lowering player compensation. The end result of such a lack of competition, according to Drew Brees in an Op-ed "written by him" in the Washington Post could be greater labor unrest and increased prices for NFL fans.

From a legal perspective though, I doubt the NFL succeeds in making its single entity argument. First, the Supreme Court seemed highly skeptical of the NFL's argument and with good reason. As Justice Sotomayor pointed out during oral argument, only the MLB has explicity gone to Congress looking for an antitrust exemption. The NFL appears to be trying to backdoor its way into something that had to be explicitly approved by another professional sports league with a similar business model. The NFL may in fact be a single entity for purposes of competing against other professional sports leagues in the way it schedules games and promotes its product in some respects, but not in others. Teams compete not just against the MLB, NBA, NHL, and UFL, but also against each other for ticket sales, coaches, and the best players. Although the league shares revenue, it is more like a hybrid joint-venture than a single entity-- one that bands together in ways to promote its product, but also has distinct entities that compete internally. This doesn't seem to be the type of "single entity" that the courts have made an exception for it its previous rulings on the Sherman Act.

Additionally, the NFL's argument that the marketing agreement is necessary to promote the league's product on the field is tenuous at best. As Chief Justice Roberts noted, the marketing of NFL apparell seems closer to selling a product unrelated to the league, like houses, rather than promoting the game of football. As such, it is at least debatable as to why the NFL needs antitrust immunity in this area, since the Reebok agreement is unrelated to the product the NFL actually sells.

My guess at the end result is that the Supreme Court reverses the 7th Circuit immunity decision, holding that while the NFL may be exempt from antitrust law in some instances where it acts cooperatively to promote its product, it is not blanketly exempt from the Sherman Act. The Supreme Court would then send the case back to the trial court, to hold a trial on whether or not the marketing agreement was essential to the sucess of the legaue (known as a "rule of reason" analysis). What does this mean? The NFL is likely in the same position it was before the case was brought-- liable for antitrust litigation in areas not essential to the sucess of the NFL and exempt in others. So fear not fans, a seachange in the business of the NFL is unlikely to come.

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