American Needle v. NFL and the Single Entity Defense: Sports Law Takes Center Stage

January 13, 2010
Guest Post

By Michael McCann, professor of sports law and antitrust at Vermont Law School and legal analyst at Sports Illustrated

I would like to begin by thanking the American Constitution Society for the opportunity to share my thoughts on American Needle v. NFL, 129 S. Ct. 2859 (2009), oral arguments for which will be heard by the U.S. Supreme Court later today.

American Needle represents a crucial moment in sports law. The case concerns whether the NFL and its teams-and by extension similar professional sports leagues and their teams-should be considered a "single entity" for purposes of federal antitrust law. As a single entity, a league would be exempt from Section 1 of the Sherman Act, which bars collaborations by competitors that unduly harm competition and consumers.

In the case of a league like the NFL (or the NBA or NHL), the respective teams are independently-owned and they compete both on and off the field. Put another way, teams resemble competitors and thus, per Section 1, their collaborations are presumably subject to Section 1 scrutiny. Subjecting collaborations to Section 1 scrutiny does not necessarily mean those collaborations violate Section 1; many types of collaborations by NFL teams, such as game rules or various procedures for league operations, promote competition and satisfy Section1 scrutiny. Other types of collaborations, however, such as an exclusive licensing contract between every team and one clothing company, could prove more anti-competitive than pro-competitive. Exclusive contracts in sports can limit competition in ways that raise prices and reduce consumer choices.

According to the U.S. Court of Appeals for the Seventh Circuit, whether an exclusive contract for licensed NFL apparel promotes or hurts competition is not an appropriate question for a court. In American Needle v. NFL, 538 F.3d 736 (7th Cir. 2008), the Seventh Circuit reasoned that, at least for purposes of apparel sales, the NFL and its teams are not competitors-they are part of a single entity known as the NFL. A single entity cannot compete with itself, and thus cannot be subject to Section 1. Therefore, in the Seventh Circuit's view, the NFL and its teams can enter into an exclusive contract for licensed NFL apparel with one company (in this case Reebok) without any scrutiny under Section 1 -- even if, by preventing competition from other companies (in this case American Needle), the exclusive contract is arguably anticompetitive.

Other U.S. Courts of Appeals have rejected the Seventh Circuit's single entity analysis, instead concluding that the NFL and its teams are part of a joint venture, which is an association of competitors for a business purpose and which is subject to Section 1 scrutiny. Examples of joint ventures include stock exchanges, credit card networks, and, until American Needle, professional sports leagues. Characterization of professional sports leagues as joint ventures has seemed sensible given the Supreme Court's limitation of single entity recognition in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). Specifically, the Copperweld Court limited single entity recognition to parents and wholly-owned subsidiaries, a business relationship that clearly does not reflect the NFL and its independently-owned and often competing teams-several owners of which, including Al Davis and Jerry Jones, have waged litigations with the NFL.

It is difficult to predict how the nine justices on the Supreme Court will consider American Needle. If the justices value precedent and assurances that competitors compete, they may disfavor recognition of the NFL as a single entity. Alternatively, if they value autonomy for businesses, or if they believe that litigation costs for the NFL and similar leagues in defending Section 1 claims are excessive and unreasonably disruptive of business planning, they may find the NFL's arguments to be persuasive.

Keep in mind, the Court could go farther than the Seventh Circuit, which limited its recognition of the NFL as a single entity to apparel sales. The Court could extend single entity recognition to other types of exclusive contracts (such as those related to leagues and video game publishers) and to league-owned television channels, such as the NFL Network or the MLB Network, which arguably reduce viewership of games for those unable to afford cable or satellite television. Much to the concern of the National Football League Players' Association, the Court could even extend single entity recognition to matters that normally require collective bargaining for Section 1 exemption-meaning leagues could unilaterally impose wage and other employment limitations on players.

American Needle is not entirely about sports. If the NFL is considered a single entity for any purpose, other types of businesses, such as restaurant chains, banks, or credit card companies, could then contend that their business models-which share some characteristics with the NFL in terms of mixed competition and collaboration-warrant single entity recognition as well. American Needle could thus lead to a less robust form of Section 1 scrutiny.

Whichever direction the Supreme Court takes in American Needle, expect Congress to take an active role in ensuring that consumers' interests remain paramount. Congress could propose narrowly-tailored exemptions to Section 1 for professional sports leagues that clearly limit any exemptions.

For more on this topic, please consider reading my forthcoming publication in the Yale Law Journal titled "American Needle v. NFL: An Opportunity to Reshape Sports Law, 119 YALE L.J. 101 (2009)" and my Sports Illustrated column from January 12, 2010 titled "Why American Needle v. NFL is most important case in sports history."