Monday, May 24, 2010

American Needle Bursts the NFL's Bubble

In a 9-0 ruling today, the U.S. Supreme Court reversed a 7th Circuit Court of Appeals ruling and said that the National Football League cannot be treated as a "single entity" for the purposes of marketing and "core business decisions".

This case arose when the NFL terminated a contract with American Needle, a manufacturer of hats and apparel licensed with the NFL, and awarded the contract for the entire League apparel business to Reebok. American Needle sued on the basis of an anti-trust violation under the Sherman Anti-Trust Act, claiming the NFL had limited competition. The trial court in Northern Illinois ruled in favor of the League, and that ruling was upheld by the 7th Circuit Court.

American Needle then filed for the case to be heard by the Supreme Court. In a surprising move, the NFL also petitioned the court to hear the case.

The crux of the case revolved around the concept of a "single entity", which the League claimed it was. Although the NFL is comprised of 32 teams, the premise was that the League operated as a single entity to promote the sport; make key business decisions; and market the game, League approved apparel, and the players themselves.

The NFL claimed that operating as a single entity was efficient, cost effective, and helped to expedite the decision making process regarding marketing and other core business functions (remember that phrase because it it going to be very important in just a moment). The NFL was joined by the National Hockey League, Major League Baseball, and the National Basketball Association in support of this position. Each league went as far as to file an amicus brief with the Court and provide very high paid legal assistance to support the NFL.

In writing the opinion of the Court, Justice John Paul Stevens stated that the League was comprised of separate, profit maximizing entities whose interests in marketing team apparel are not necessarily aligned. (Remember when the NFL sued the Dallas Cowboys and Jerry Jones for cutting their own licensing deal with Nike?). The Court deemed that
"this agreement joined together separate economic actors pursuing separate economic interests such that it deprives the marketplace of individual centers of decision making and therefore of diversity of entrepreneurial interests and thus of actual or potential competition."

The Court said that although all 32 teams work together to promote the game, they were still 32 separate business entities that competed for the same talent both on and off the field as well as had divergent economic interests particular to their local markets. There was, in the eyes of the Court, enough difference between the franchises to preclude the League acting as a single entity.

The League had asked the Court to rule on its single entity status for the purpose of making "core business decisions" for all 32 franchises. The marketing of team apparel was the nexus for the hearing before the Court, but the League was requesting a broad anti-trust exemption for all of its business functions.

Why is this significant?

Simply put, as a single entity, any sports league could centralize the control of operations within the league office. Salaries could be placed on a standardized scale for players and coaches. Free agency would change dramatically as the league would have greater control over player movement. As a single entity, a sports league could unilaterally impose restrictions on the players that limits movement due to free agency or salary restrictions and not have to worry about the anti-competitive considerations of such actions.

Now that the single entity concept has been dismissed by the courts, the NFL, and all sports leagues, will have to collectively bargain with their players in good faith to avoid anti-trust considerations. The impact of this will be felt next year, as the CBA's for all the professional sports leagues are up for re-negotiation. Wonder why the other sports leagues were vigorously supporting the NFL in this case? Now you know.

The net effect of today's ruling by the Supremes is that all the sports leagues are still going to have to be aware of anti-trust considerations, not just in the marketing of a particular league and its licensed products, but also in the more contentious area of labor negotiations with their players. Single entity status would have given the leagues tremendous power in negotiating the upcoming CBA's and would have changed the dynamic between a league and its players to highly favor the league.

This case has been remanded back to the lower court for further analysis of the anti-trust violations cited in this case. I would not expect this case to be over, as the NFL feels it has some valid arguments about their position. They could settle out of court, but I believe that they may attempt to argue this position from other legal angles.

With all the sports leagues facing potentially contentious labor negotiations, single entity status would have given them a decided advantage. As it is, the players still have leverage in their negotiations, so I would expect to see some fireworks in more than one league after next season.

NHL fans all too painfully remember our last lockout season, and are hopeful that we do not have to endure another season without hockey.

Here is to hoping the owners and the players don't burst our bubble.

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