Stephen Feldman in The Antitrust News: “Will the Supreme Court address the application of Copperweld to professional sports Leagues?”

Update: On June 29, 2009, the Supreme Court granted American Needle’s petition for writ of certiorari.

This article previously appeared in Antitrust News (June 2009, Vol. 19, No. 2). It is reprinted with permission.

By Stephen Feldman

The Supreme Court of the United States appears poised to hear a case that might affect the price of your next Carolina Hurricanes replica jersey.

Pending before the Supreme Court is a petition for writ of certiorari by American Needle, Inc., the losing party in a decision last summer by the United States Court of Appeals for the Seventh Circuit. See American Needle, Inc. v. Nat’l Football League, 538 F.3d 736 (7th Cir. 2008). In American Needle, the Seventh Circuit concluded that the NFL and its member teams are a single entity under the seminal decision of Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). Were it to grant American Needle’s certiorari petition, the Supreme Court would have the chance to decide whether Section 1 of the Sherman Act precludes the NFL, or any other sports league, from entering into exclusive licensing agreements for merchandise, such as replica jerseys.

Unlike most certiorari petitions, American Needle’s petition is no Hail Mary: the NFL and its member teams support the petition. This article examines the Seventh Circuit’s decision, the submissions currently before the Supreme Court, and the likelihood of the Court granting the petition.

Copperweld

In Copperweld, the Supreme Court held that a single entity cannot violate Section 1 of the Sherman Act. As the Supreme Court explained, Section 1 “reaches unreasonable restraints of trade effected by a ‘contract, combination, … or conspiracy’ between separate entities.” Id. at 768 (emphasis in original). Put another way, Section 1 is concerned with “the sudden joining of two independent sources of economic power previously pursuing separate interests” that “deprives the marketplace of the independent centers of decision making that competition assumes and demands.” Id. at 769 (emphasis added), 771-72.

Before Copperweld, most courts treated joint venture decisions of professional sports leagues as arrangements among separate competitors-and, therefore, subject to scrutiny under Section 1. Those decisions retain vitality today. See, e.g., Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1148 n.17 (9th Cir. 2003) (endorsing pre-Copperweld decision of Los Angeles Mem’l Coliseum Comm’n v. Nat’l Football League, 726 F.2d 1381 (9th Cir. 1984)).

On the other hand, a minority of courts, including the Seventh Circuit, have held that Copperweld could apply to professional sports leagues. See Chicago Prof’l Sports Ltd. P’ship v. Nat’l Basketball Ass’n, 95 F.3d 593, 598-99 (7th Cir. 1996) (Easterbrook, J.).

American Needle

American Needle filed suit in the Northern District of Illinois against the NFL, its member teams, and Reebok, alleging that an exclusive licensing agreement among these entities violated Sections 1 and 2 of the Sherman Act. American Needle also sued NFL Properties, Inc., a separate corporate entity charged with licensing the NFL’s intellectual property and promoting the league’s ventures. The NFL’s teams authorized NFL Properties to grant licenses to vendors so that the vendors could use the teams’ intellectual property to manufacture such products as jerseys, shirts, and headwear.

American Needle argued that the collective agreement among NFL teams to authorize NFL Properties to award an exclusive license to Reebok amounted to a conspiracy that restricted the ability of other vendors, such as American Needle, to obtain licenses for the teams’ intellectual property. The NFL and its co-defendants, however, successfully moved for summary judgment, arguing that the NFL, its member teams, and NFL Properties were a single entity under Copperweld, and therefore immune from Section 1 liability.

On appeal, American Needle contended that the NFL’s agreement deprived the market of sources of economic power that control the intellectual property. More specifically, individual teams control their intellectual property, and they can compete with one another when licensing that property.

The Seventh Circuit disagreed. That the NFL’s teams could conceivably have competing interests regarding the use of their intellectual property did not end the single-entity analysis under Copperweld.

The better perspective, according to the Seventh Circuit, is that “the NFL can function only as one source of economic power when collectively producing NFL football.” American Needle, 538 F.3d at 743. That is, without its member teams playing games against one another, no individual NFL team would have any power at all. For this reason, the court concluded that a single source of economic power controls NFL football, and it affirmed the summary judgment against American Needle.

Notably, the Seventh Circuit attempted to limit the reach of its holding, explaining that Copperweld should be applied to the activities of professional sports leagues on a case-by-case basis. In some contexts, according to the Seventh Circuit, “a league seems more aptly described as a single entity immune from antitrust scrutiny, while in others a league appears to be a joint venture between independent owned teams that is subject to review under ¤ 1.” Id. at 741. In the Seventh Circuit’s view, “the question of whether a professional sports league is a single entity should be addressed not only one league at a time, but also one facet of a league at a time.” Id. at 742.

The Petition for Writ of Certiorari

In its certiorari petition, American Needle urged the Supreme Court to clarify not only a split among the circuits as to whether a professional sports league is a single entity under Copperweld, but also a direct conflict between the Seventh Circuit’s decision and the Supreme Court’s decision in Radovitch v. National Football League, 352 U.S. 445 (1957).

Circuit Split

American Needle’s emphasis on the circuit split was predictable. The First, Second, Third, Sixth, Eighth, Ninth, and

D.C. Circuits have all concluded that professional sports leagues are subject to the rule of reason analysis under Section 1. Notwithstanding the case-by-case approach urged by the Seventh Circuit, American Needle portrayed the Seventh Circuit’s decision as being irreconcilable with the rulings of its sister circuits. Thus, American Needle forecasted that the Seventh Circuit’s decision “threatens to cause major disruption in the heretofore consistent application of the Sherman Act to professional sports.” Am. Needle Pet. at 7.

Conflict with Radovitch

American Needle’s second argument — that the Seventh Circuit created a direct conflict with Radovitch — is more novel. In Radovitch, an offensive lineman for the Detroit Lions sued the NFL when, after he played in a competing football league, the NFL and its member teams conspired to prevent him from becoming a player-coach in the Pacific Coast League, a league affiliated with the NFL. The trial court dismissed the complaint, holding that the antitrust exemption that applies to professional baseball under Federal Baseball Club of Baltimore v. National League, 259 U.S. 200 (1922) and Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953), also applies to all team sports.

The Supreme Court, however, concluded that baseball’s antitrust exemption does not extend to football. Rather, that exemption was limited to baseball alone, and it survived only because “more harm would be done in overruling [the exemption] than in upholding a ruling which at best was of dubious validity.” Radovitch, 352 U.S. at

1. Decided many years before Copperweld, Radovitch does not discuss whether the NFL is a single entity for purposes of Section 1. Nonetheless, American Needle argued that the Seventh Circuit did not explain “its radical departure” from Radovitch. Am. Needle. Pet. at 10.

Policy Supports a Writ of Certiorari

As a final pitch, American Needle’s petition offered two policy reasons why the Supreme Court should hear the appeal. First, the Seventh Circuit’s decision could be extended to all professional sports. Thus, every sports league had an interest in having the issue resolved. Second, although the Seventh Circuit fashioned its rule as a flexible one, American Needle observed that “there is little, if any, aspect of professional sports teams’ businesses that would not be exempt from Section 1 scrutiny” under that rule. Am. Needle Pet. at 12.

The NFL’s Surprising Response

In response to American Needle’s petition, the NFL took the “unusual step” of supporting it. Br. for NFL at 4. The NFL’s response reveals several reasons that might explain its decision.

First, the NFL could not deny the deep split among the circuits concerning the application of Copperweld to professional sports leagues. In light of this split, the NFL might believe that the current Supreme Court provides as good an opportunity as the league will ever have to argue successfully that it and its member teams are a single entity under Copperweld.

To this end, the NFL invited the Supreme Court to turn to the principles from its recent decision in Texaco, Inc. v. Dagher, 547 U.S. 1 (2006). See Br. for NFL at 5-6 (portraying American Needle as “an appropriate opportunity … to provide further guidance on the principles recently articulated by this Court in … Dagher”). In Dagher, the Supreme Court held that a joint venture’s price-fixing activities were not per se unlawful under Section 1.

The NFL further emphasized that a decision by the Supreme Court in American Needle would affect not only professional sports leagues but also “highly integrated joint ventures,” such as a cooperative of separately owned electrical utilities. Id. at 4. This might be another nod to Dagher, which applied to an “economically integrated joint venture.” Dagher, 547 U.S. at 3. The plaintiff in Dagher alleged only a per se violation of Section 1 and did not raise a rule-of-reason claim. Id. at 7 n.2. Thus, the Supreme Court has not addressed whether a “highly integrated joint venture” is subject to rule-of-reason analysis — or whether, in certain cases, Copperweld might preclude any Section 1 liability at all. The NFL’s response invites this discussion. See Id. at 14-15 (“In Dagher, the Court did not have the opportunity to address whether the single-entity doctrine renders Section 1 inapplicable to joint ventures that involve extensive integration and interdependence among separately owned entities…. That question is squarely presented in this case.”).

The NFL’s response also tried to draw a parallel with Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). When it revised the standards for Rule 12(b)(6) pleading for a Section 1 claim in Twombly, the Supreme Court noted the expense and burden of antitrust discovery and litigation. If professional sports leagues could invoke the single-entity defense under Copperweld, the NFL argued, it would encourage early resolution of antitrust challenges, and avoid the burdensome discovery described in Twombly.

The NFL’s decision to support the American Needle’s petition might also have been based on momentum from other federal courts on the same issue. On the heels of the Seventh Circuit’s ruling in American Needle, the United States District Court for the Southern District of New York addressed a Rule 12(b)(6) motion based on Copperweld by the National Hockey League in a Section 1 case. See Madison Square Garden, L.P. v. Nat’l Hockey League, No. 07 CV 8455(LAP), 2008 WL 4547518, at 6 (S.D.N.Y. Oct. 10, 2008) (“MSG”). In MSG, the owner of the NHL’s New York Rangers franchisee alleged that the NHL and its member teams violated the Sherman Act by restricting off-ice competition in areas such as merchandising and licensing, broadcasting, and advertising. Id. at *1-2.

After noting that the Second Circuit had previously rejected the application of Copperweld to a professional sports league, the MSG court concluded that Copperweld’s application is a fact question, and not one that can be resolved at the Rule 12(b)(6) stage. Id. at 12-13. Although the NHL did not win the motion, the court’s decision that Copperweld requires a fact-based inquiry follows the reasoning of American Needle. In this way, the MSG court rejected the notion that Copperweld should never apply to a professional sports league’s activity. The NFL’s response to the Supreme Court takes the same position. Br. of NFL at 6 (characterizing majority position as a “categorical rule”).

Next, the NFL invoked a more pragmatic argument: professional sports leagues are regular defendants, and the uncertainty concerning Copperweld’s application decreases inter-brand competition.

Finally, the NFL intimated that legal scholarship supports its position. In particular, the NFL cited the Antitrust Law treatise of Professors Areeda and Hovenkamp for the proposition that the NFL’s member teams have no independent value absent for participation in the league itself. Id. at 12. In each of the last 10 antitrust cases in which the Supreme Court granted certiorari, either the petitioner or the Solicitor General pointed to Hovenkamp as supporting the position being urged upon the Court. Thomas G. Hungar & Ryan G. Koopmans, “Appellate Advocacy in Antitrust Cases: Lessons from the Supreme Court,” Antitrust, Spring 2009, at 55.

Additional Factors Affecting Certiorari

Several factors beyond those raised in American Needle’s petition and the NFL’s response might affect whether the Supreme Court hears the case.

First, at the Supreme Court’s invitation, the Solicitor General filed a brief last month that recommends that the Court deny American Needle’s certiorari petition. In the brief, the Solicitor General explained that American Needle concerns narrow and unique conspiracy allegations — an exclusive licensing agreement with an apparel manufacturer — that makes the case a poor vehicle for a broad ruling that could affect the application of Copperweld to all professional sports leagues. The Solicitor-General then urged that a rule-of-reason inquiry should govern allegations of collective actions by sports teams and that the Seventh Circuit’s failure to consider this position makes American Needle ill-suited for Supreme Court review. The Solicitor General further explained that the Seventh Circuit decision does not contradict Radovitch or any other federal appellate decision. Radovitch, said the Solicitor General, was a limited decision that addressed only whether baseball’s antitrust exemption extends to football. She then argued that the decisions of the federal circuit courts were factually distinguishable from American Needle, thereby negating the need to grant certiorari to resolve a circuit split.

Second, the NFL’s position that the Supreme Court review of American Needle could affect a wide range of “highly integrated joint ventures,” and not simply professional sports leagues, might create the impression that the case presents too blank canvas for appellate review. (The Solicitor General’s brief advanced this argument.) Although the Supreme Court achieved consensus in Dagher, that consensus might be less likely to hold up if the issue is indefinite.

Third, two amici briefs have been submitted by the NHL and by the National Basketball Association. Thus, three major professional sports leagues are now pressing the issue before the Supreme Court.

Finally, the Seventh Circuit’s decision in American Needle contained a second issue: whether American Needle was able to pursue enough discovery to oppose the NFL’s motion for summary judgment. The Seventh Circuit concluded that discovery had been sufficient. The MSG decision, however, highlights the fact-intensive nature of applying Copperweld to professional sports leagues. The Supreme Court might deny American Needle’s petition and instead, wait for a cleaner vehicle — a case without an underlying dispute about whether sufficient discovery had taken place — to decide whether or not Copperweld applies to professional sports leagues.