Pooling of Intellectual Property Rights: American Needle v. NFL

In its decision in American Needle Inc. v. National Football League on May 24, 2010, the United States Supreme Court unanimously held that an association formed by the member teams of the National Football League (NFL) to market their intellectual property rights collectively should be treated, for anti-trust law purposes, as a “combination” rather than a single entity. The consequence of this treatment is that the agreement between them could be regarded as an anti-trust violation if it was in restraint of trade. This decision reversed findings by the district court and the Seventh Circuit Court of Appeals which had held the association to be a single entity so that antitrust liability would only arise in the case where the higher standards of monopolization or attempted monopolization were proved.

In 1963, the member teams of the National Football League set up the National Football League Properties (NFLP) to license their intellectual property rights, such as the right to mark clothing and headwear with member teams’ logos or colors. Up to 2000, such rights were licensed on a non-exclusive basis and American Needle was the recipient for such a license with respect to the right to manufacture and sell headwear bearing team insignias. In 2000, the NFLP changed its policy and granted Reebok International Inc. an exclusive license to manufacture and sell headware for all 32 teams. American Needle alleged an antitrust law violation.

Section 1 of the Sherman Act makes illegal “every contract, combination in the form of a trust or otherwise or conspiracy in restraint of trade or commerce among the several states or with foreign nations”. In cases where only a single entity is involved, Section 2 of the Sherman Act applies. This makes it a felony to “monopolize or attempt to monopolize … any part of the trade or commerce among the several states or with foreign nations” irrespective of whether one or more parties is involved. It is, however, much harder to establish a case of monopolization than one of restraint of trade.

It therefore became important in the American Needle case to determine whether NFLP was a single entity or a combination.

Having noted that at one time it had held that intraenterprise agreements could fall afoul of Section 1 of the Sherman Act, but that it had rejected that view in 1984 in Copperweld Corp. v. Independence Tube Corp., the Supreme Court emphasized that it was not the legal relationship between participants that mattered but rather whether, whatever the legal framework whether the arrangement joins together “separate economic actors pursuing separate economic interests” that deprived “the marketplace of independent centers of decisionmaking” and of a “diversity of entrepreneurial interests … and thus of actual or potential competition.”

The lower courts had effectively decided that since one cannot play football without there being distinct teams, there was little potential competition among the NFL’s 32 member teams regarding use of their intellectual property because the teams “can function only as one source of economic power when they collectively produce NFL football.”

The Supreme Court disagreed. It noted that “the teams compete with each other not only on the playing field but also to attract fans, for gate receipts and for contracts with managerial and playing personnel.” More directly relevant, the Supreme Court found:

the teams compete in the market for intellectual property. To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licenses its intellectual property, it is not pursuing the “common interests of the whole” league but is instead pursuing the interests of each “corporation itself; teams are acting as “separate economic actors pursuing separate economic interests and each team therefore is a potential independent center of decisionmaking. Decisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that deprive the marketplace of independent centers of decisionmaking and therefore of actual or potential competition.

The Court noted that just because a group of firms agree to produce a joint product this does not mean that cooperation between them has to be treated as independent conduct exempt from antitrust scrutiny. Similarly, “the mere fact that the teams operate jointly in some sense does not mean that they are immune”. In a footnote the Court pointed out that even if league-wide agreements were necessary to produce football, it did not follow that concerted activity in marketing intellectual property is necessary to produce football. Having reached these conclusions as to the action of the NFL itself, the court concluded that the NFLP was simply an instrumentality of the league and its distinct legal status did not save it from antitrust inquiry.

Based on these findings, the Supreme Court remanded the case for consideration as to whether there was in fact any antitrust violation in the grant of the exclusive license to Reebok using a Rule of Reason analysis; that is to make a determination of “whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” The Court stated that such analysis should include consideration of the extent to which other features of the NFL might justify collective decisions made by the teams. The Court commented “What role it properly plays in applying the Rule of Reason to the allegations in this case is a matter to be considered on remand.”

The decision in this case may be relevant to any pooling of intellectual property rights where the effect of such pooling is to reduce the number of decision-makers who can license any of those rights. To this extent it is applicable beyond the limited field of joint marketing of sports teams’ logos. The Court’s emphasis on looking at the actual effect on decisionmaking, rather than the legal form in which cooperation takes place, should also be taken seriously. On the other hand, it should be noted that the court has not yet held that what was done is actually an antitrust violation; but rather simply that one cannot rely on some particular form of business as the basis that one is not part of a “contract, combination or conspiracy” as being a way to avoid one’s obligations under the antitrust laws.