Tuesday, July 21, 2009

A Needle In A Legal Haystack

The U.S. Supreme Court has agreed to hear the case of American Needle vs. the National Football League, a case in which American Needle, Inc. filed an antitrust lawsuit against the NFL claiming under the Sherman Anti-Trust Act that the league was using its monopoly powers to deprive the company of its share of the market for hats and caps bearing NFL team logos. The NFL terminated the relationship with American Needle in 2000 when it awarded an exclusive contract to Reebok to manufacture these and other products. American Needle filed their lawsuit in 2004, and lost the suit at the trial court and in an appeals court. It would seem that the case was dead in the water, but American Needle asked the Supreme Court to review the case and the merits of their claim. The Supreme Court accepts only about 10% of these requests, and unless there was an egregious error at the trial or appellate level, would probably deny this request. However, in a shocking development, the NFL petitioned the Supreme Court to hear this case and render a decision. The NFL has asked the Supreme Court to grant the league total immunity from ALL anti-trust actions. In October 2007, the Supreme Court has said that they will hear the case, and the ramifications of this case could significantly impact every sports league.

The NFL is taking the position that it is a "single entity" rather than a collection of 32 teams that compete with each other. The league claims that the individual franchises only have value in the context of the league itself, and the Seventh Circuit Court of Appeals agreed with this position by concluding that the league operates as a single entity by collectively licensing each NFL team's intellectual property. The Seventh Circuit's ruling went against almost 50 years of precedent from other courts with this ruling. By petitioning the Supreme Court to hear this case, the NFL is seeking an expansion of the Seventh Circuit's ruling. Should they win this case and be deemed to operate as a single entity, the NFL will be exempt from the provisions of the Sherman Anti-Trust Act. This will allow the NFL not only to avoid the anti-trust challenges to the marketing functions of the league, but also for all "core venture functions" of their business. This would include the setting of salaries for players and coaches, movement of players through free agency, the location of franchises, and the setting of ticket prices, to name some of those "core venture functions".

This is not the first attempt by the NFL to get the courts to view it as a "single entity", and prior to the Seventh Circuit's ruling, they had failed on all attempts. Prior court rulings had acknowledged that NFL teams compete with each other for free agents, coaches, sponsorships, and executives as well as fans. Should the NFL get the Supreme Court to expand the exemption granted by the Seventh Circuit Court, most, if not all, business decisions made by the league would be exempt from anti-trust consideration.

There are numerous legal arguments that will be debated before the Supreme Court in this case. Foremost will be the consideration of 50 years of case law that has consistently been set against the NFL's claim of being a single entity. Gabe Feldman, at Sports Law Blog, has called the Seventh Circuit's decision an "outlier" which would lead one to believe there is a high probability of reversal. It is difficult to predict the outcome of a case that is heard before the Supreme Court, but the bent of the Court in recent years has been more pro-business, and I am certain that the NFL believes that they have a very good chance of success in taking this case to the Supreme Court at this time. It is telling that the Major League Baseball Players Association and the National Hockey League Players Association have already assembled all-star teams of lawyers to support American Needle in this case. At this time, both the NBA players union and the NFL players union have yet to retain attorneys for this trial. Players unions and their counsel are now trying to formulate a strategy to present their views to the Supreme Court.

The average sports fan may not be aware of this case, and even if they are, their response may be, "So what?" Consider these examples. Prior to 2000, American Needle was one of several companies that were licensed to sell official NFL caps and hats, and all companies competed for this business. The average price of a cap with an NFL team logo was $19.99. After the exclusive contract for caps and merchandise was awarded to Reebok, the average price of a cap with an NFL team logo rose to $30.00. Prices of replica jerseys rose on average 60%. Imagine now that the NFL is treated as a "single entity". This would allow the league to set ticket prices for all markets; establish a salary scale for both players and coaches, and have control over ownership and location of their franchises. Under this arrangement, I believe that prices for tickets and merchandise would inevitably rise since the league would have no anti-trust concerns. Free agency would be severely curtailed if not altogether eliminated. The NFL would gain greater control over team operations under the single entity concept. The world of professional sports would be dramatically changed should the NFL prevail with the Supreme Court.

Should the NFL prevail in this case, the precedent would be established for other sports leagues as well. Control of all operations of the any sports league would centralize in the league office. Would this be good for hockey (or any other professional sports league)? Would owners in the NHL lose the ability to tailor their product to their local market? And what happens to the players? I believe that under a single entity business model, the only recourse that would be available to players in a labor dispute would be a strike/work stoppage, which is a nuclear option. Decertification of a players union and pursuit of anti-trust remedies will no longer be an option. Collective bargaining will take on a new tenor as the league would hold the upper hand in this process. I believe in this scenario, each sports league would establish a firm salary scale from which there would be no deviation.

This is a case that bears watching. A ruling in favor of the NFL will impact all professional sports and the fans that pay the freight for their favorite sports team. The case is scheduled to be heard in the spring of 2010, and if the NFL wins, it will transform the sports world.

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