Tom and Mike have climbed to the top of the Hill of Nonsense and unleash another wave of insane wagering on the world.
26 May 2010
by Mike Kurtz and Tom Gower
Back before 2000, NFL teams would sign contracts with different companies to sell their apparel rights. Most apparel rights were sold collectively through NFL Properties, but some companies would create contracts with individual teams to sell only that team's apparel. American Needle was one of those companies. Then in 2000, the NFL clubs, who were the members and owners of NFL Properties, decided they could make more money if they gave one company an exclusive license to sell all NFL apparel from every team. In 2002, NFL Properties signed an exclusive contract with Reebok.
American Needle was understandably unhappy with losing its license and Reebok's exclusive deal. Like any business that loses a big contract, the company undoubtedly huddled with its lawyers. They then tried to come up with a way either to break Reebok's new stranglehold or to force the NFL teams they worked with to stick with the old contracts.
American Needle launched a two-pronged attack, claiming that the NFL violated Section 1 or Section 2 of the Sherman Antitrust Act.
CAUTION: Lots of legal language below.
In the U.S., merely having a monopoly is not illegal or otherwise improper. The Sherman Antitrust Act, which has been the basis of the law since it was passed in 1890, has two provisions. Section 1 makes agreements ("trusts") which cause a "restraint of trade" illegal. Section 2 makes monopolization illegal.
As part of its Section 1 claim, American Needle argued that the NFL is 32 separate businesses and that these 32 businesses entered into an agreement (embodied in NFL Properties) not to compete and to make decisions as a group in the area of merchandising. The government is not very fond of this sort of behavior, because allowing competitors to act as a cartel usually means an increase in price for consumers and companies who do business with the cartel. In the 1890's spirit of the Sherman Antitrust Act, it helps if you imagine the various NFL teams with handlebar mustaches, tying American Needle (and us all!) to railroad tracks where it can be hit by a very large and aerodynamic Reebok Train.
American Needle's Section 2 claim covered the contract (or, more specifically, the behavior that lead to the contract) between NFL Properties and Reebok. Monopolization under Section 2 covers monopolistic agreements not to sell, purchase or otherwise use goods of a competitor. NFL Properties, which had a monopoly on the apparel merchandising for NFL teams, had given all the eggs to Reebok and, by definition, refused as a group to license with any other firm. American Needle claims this is monopolistic behavior.
American Needle went to the United States District Court for the Northern District of Illinois, suing pretty much everybody involved (the NFL, all of its teams, NFL Properties and Reebok), as is the custom of the day. Trials are divided into two parts: pre-trial, where each side swaps documents and fights over various legal issues, and trial, which is to determine the actual facts of the case. Before trial, the NFL asked for summary judgment, a declaration by the court that even if all the facts as alleged by one party (American Needle) are true, the other side (the NFL) is entitled to win based on the law. The NFL argued that its teams could not possibly be colluding by creating NFL Properties because, in the realm of merchandising, the entire league is so integrated that the court should think of them as The NFL instead of 32 separate teams. You can't compete with yourself, right? The district court agreed, and entered summary judgment with regard to American Needle's Section 1 (collusion) claim. American Needle appealed.
It is important to keep in mind that American Needle's appeal was only on the summary judgment motion against the Section 1 collusion claim. The Section 2 claim (monopolization) is still sitting around at the district court, waiting to be resolved. The appellate court agreed with the district court that "in some contexts, a league seems more aptly described as a single entity immune from antitrust scrutiny" and that one of those contexts was merchandising. The appeals court then talked about zen riddles, and how one team could play itself, and how "only one source of economic power controls the promotion of NFL football." Confused? Don't worry, so is pretty much everyone else. The Seventh Circuit Court of Appeals follows a unique brand of antitrust intertwined with the so-called "Chicago School," a very laissez-faire legal approach focused on the creation of wealth and competition. This theory is notable because pretty much every other court in the country disagrees -- including the Supreme Court.
[Tom interjects: As an alumnus and loyal son of the University of Chicago Law School, I have to register an objection here. The reason we have antitrust laws in the first place is to prevent economic injury to consumers, with a lesser degree of protection for competitors. What we should be concerned with is the degree to which we believe there's been a loss inflicted on the consumers and the competitors. Instead, antitrust law (for most of its history) has been concerned with legal doctrines that make almost no economic sense. There's been a gradual evolution, starting in the mid-1970s, away from strict legal doctrine in antitrust toward more economic sense. But, outside of the Seventh Circuit, this is a very incomplete evolution.]
Long story short: The NFL and NFL Properties as a whole create the economic value for branded merchandise, therefore it is a single entity in this context. The district court was affirmed. American Needle didn't give up, and petitioned the Supreme Court for certiorari, which is Latin for "please tell the appellate court they're full of it." The NFL, surprisingly, also filed a petition for certiorari, which in this case meant "please tell the appellate court it's not just 'in this context,'" ostensibly because they wanted the Supreme Court to flat-out state that the NFL is a single entity for at least merchandising (and they hoped more), solving this entire headache.
The NFL's plan backfired horribly. The Supreme Court didn't buy the single entity theory, because the NFL teams do not possess the "unitary decisionmaking quality" required. In particular, the court took aim at the appellate court's "source of economic power" reasoning, stating that just because the financial performance of a team is related to other teams does not mean it necessarily rises and falls with that of the others. While NFL Properties is one entity, in the end, it is just a label for the 32 separate teams with only partially united economic interests -- the NFL brand. Since it's not a single entity, then the summary judgment (which was entered because the district court believed the NFL was a single entity) was improper.
It's important to note at this point that American Needle won, and won decisively. However, "winning" at the Supreme Court doesn't mean what most people think it means. The Supreme Court did not determine that the NFL teams were engaging in illegal behavior. All the Supreme Court said was that there needed to be a trial (or at least summary judgment based on a different theory) to determine whether the NFL teams' behavior in creating and utilizing NFL Properties was an illegal restraint on trade. The Supreme Court told the appellate court that it was wrong and told the district court that the trial should continue. In fact, what looks like a rout could actually be a Pyrrhic victory.
Antitrust law only operates against agreements which create restraints on trade, not all agreements without exception. Competitors have formed joint ventures, even cartel-like organizations, to realize specific goals without being shredded by the courts. The courts recognize that sometimes competitors have to work together for a legitimately joint interest (copyright enforcement, for instance) and allow companies to do so. Twin standards have been developed to help protect this legitimate behavior while punishing illegitimate behavior.
If an agreement meets the exact requirements of Section 1, then it is referred to as a per se violation. Per se violations mean that the defendant is done -- the plaintiff does not need to prove potential market effects or any evil intent by the conspirators. The reasoning is that these actions have such a pernicious effect on competition with no redeeming value that there is no legitimate reason to allow such behavior. The most famous per se violation is an agreement between competitors to fix prices.
If the agreement isn't a per se violation, then the court will take an in-depth look at the situation, the intent of the conspirators, probable consequences, market conditions, and any number of other factors which led to the agreement. The court will look at the "totality of the circumstances" and determine how much of a restraint on trade the agreement is. If the restraint is reasonable, then it is not illegal.
How does that apply to this case? The Supreme Court could have simply just sent the case back down to the district court without any parting words. It didn't do that. In the last sentence of the opinion, the court explicitly told the district court to apply the rule of reason, the softer test, to NFL Properties, because the product the teams have conspired to sell (the merchandising) could not exist without such an agreement. Furthermore, the last page of the opinion is largely spent making a case that the NFL's actions were reasonable. The court suggests that football itself may be special ("the special characteristics of this industry may provide a justification for many kinds of agreements"), and that sports in general have an interest in maintaining a competitive balance. The court even suggested that the district court forego a detailed analysis and apply this test "in the twinkling of an eye." Finally, the opinion concludes with the thought (directed, again, at the district court, we can assume) that marketing each team's intellectual property as a group is "unquestionably an interest that may well justify a variety of collective decisions made by the teams."
What the Supreme Court provided here was a blueprint for the district court to decide the case. It told the lower court what standard to use (the soft one), told it how exacting it had to be (not very, some variation of eye-twinkling), and arguably even told it how to rule (that marketing individual teams' IP as a group justifies collective decisions). It seems that American Needle won the battle overwhelmingly, but is in serious danger of losing the war.
Then again, anything can happen. And remember, they still have their Section 2 (monopolization) claim lying in wait. Even if the NFL can legally act as a group, the district court might take issue with Reebok's contract, which would be a pretty significant victory for American Needle.
Now, we get to the real reason the NFL filed for certiorari. The current era of NFL labor peace dates back to the 1993 collective bargaining agreement. That CBA came at the end of a seven-year process and was the result of court decisions. Back in 1987, the existing labor agreement had expired, but the players elected to go on strike without a collective bargaining agreement and returned to work without a new CBA in place.
The key issue in the late 1980s and early 1990s was free agency. NFL teams had never made free agency broadly available in the past and did not want to change the quite satisfactory state of affairs. Since the relationship between players and owners with no CBA resembled the relationship under the expired CBA, there was no free agency.
Since the CBA was between the NFL and NFL Players Association (NFLPA), the existing rules could be applied legally so long as there was a union representing the players. So the players took the step of formally disavowing the NFLPA, a process known as "decertification." Rather than one union representing 1,484 members, there were 1,484 players, none of whom was a member of a labor union. In this new state, the players were under contract to particular teams, and other teams' refusal to sign players when their contracts expired with another team sounded like, and was ruled to be, an illegal conspiracy in restraint of trade under Section 1 of the Sherman Act.
When the NFL asked the Supreme Court to hear the case, its dream was for the Supreme Court to rule that the NFL was exempt from Section 1 scrutiny altogether. This ruling would have removed the threat of decertification altogether. The league's chance of having success on this claim was never very big. Baseball enjoys immunity from the Sherman Act and has since1922, but the Supreme Court denied the NFL the same immunity in 1957 and emphatically refused to change that position.
In a world where the NFL remains subject to Section 1 scrutiny, here's how the near future could play out. The NFL and NFLPA fail to reach an agreement by the time the current CBA expires in February 2011. The two sides continue to negotiate but make no progress. The NFL declares that the parties are at an impasse, and under labor law, invokes its right to repeat its 1987 move and act as though the current CBA were still in place with some relatively minor modifications.
These modifications might include things like applying the current (final year) free-agency rules, including the Final 8 and Final 4 rules, and moving away from 2006's change in the player's slice of the pie from Designated Gross Revenue to Total Revenue. This change forced the owners to do more sharing of team-specific revenues, including things like naming rights and local sponsorships.
How much of this revenue should be shared is a genuinely difficult issue with no easy solution, and it was a compromise that made owners at both ends of the spectrum unhappy. Low local revenue owners like Mike Brown (Bengals) and Ralph Wilson (Bills) didn't like it because they knew that if the richer owners stopped sharing their revenue with them, they might have to cut costs to the bone every year -- or lose money. Higher local revenue owners like Dan Snyder (Redskins) and Bob McNair (Texans) didn't like it either, because they'd spent a great deal of time, energy, and money building up a strong local revenue base. Why should Brown and Wilson get FedEx's and Reliant's money when they named their stadiums after people (his dad and himself, respectively)?
If the NFL owners do try to impose something like this, the players have two potential lines of attack. First, they could work within the labor laws and claim that the changes imposed by the owners deviate too greatly from the expired CBA. The NFL could try pointing to changed circumstances within the broader economy and argue that these sorts of changes are necessary to maintain all teams' financial viability. It is impossible to say now just how a decision on this might come out. But if the NFL had the Section 1 immunity it asked for -- if it had won the case -- the players could be truly sunk. Now, though, if the players lose here (or even before that), they could again pursue decertification and claim Section 1 conspiracy in restraint of trade against the owners. As in the early 1990s, there could be a trial on this and one side could lose.
The final possibility is the players could apply to the highest sources of power in the land. The labor and antitrust laws are statutes, passed by Congress. A big reason for the election of NFLPA chief DeMaurice Smith was link to the current administration, including experience working for Attorney General Eric Holder in the Clinton administration. So far, there's no politics in football, but there most definitely can be politics in labor wars, and that may be where NFL v. NFLPA battle is eventually resolved.
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