By: Timothy Davis
Responding to Am. Needle, Inc. v. NFL, 130 S. Ct. 2201 (2010).
I. The Intersection of Labor and Antitrust Law
In September 2010, the National Football League Players Association (“NFLPA”) sought authorization from players to decertify its union.Since the announcement, players on more than half of the National Football League’s (“NFL”) thirty-two teams have voted in favor of vesting union leaders with the authority to seek decertification. The NFLPA may resort to decertification as a labor-negotiation strategy if the union and NFL owners are unable to agree to a new collective bargaining agreement (“CBA”) prior to the expiration of the current CBA on March 3, 2011. As explained below, decertification is a bargaining maneuver that the NFLPA may employ to counteract an expected lockout by owners if the two sides are unable to agree to a new CBA.
The significance of union decertification lies at the core of the intersection of labor and antitrust law and the inherent conflict that permeates that relationship. The conflict is derived from the competing purposes of the two bodies of law. Antitrust laws seek to foster competition and forbid agreements between competitors that decrease competition. Preserving a competitive marketplace is crucial to achieving another principal goal of antitrust laws: promoting consumer welfare. In contrast, labor law assumes that its purposes—maximizing benefits for employees collectively and fostering industrial harmony—often can only be accomplished by agreements that are anticompetitive. According to one commentator, “Organized labor limits competition because unions regularly seek agreements with employers that establish uniform terms and thereby limit the opportunity of any individual employee to sell his or her services for the most favorable terms.” The Supreme Court has recognized the conflicting objectives of antitrust and labor law:[W]e have two declared congressional policies which it is our responsibility to try to reconcile. The one seeks to preserve a competitive business economy; the other to preserve the rights of labor to organize to better its conditions through the agency of collective bargaining. We must determine here how far Congress intended activities under one of these policies to neutralize the results envisioned by the other.
The antitrust and labor law conflict is revealed in section 1 of the Sherman Antitrust Act (“Sherman Act”), which prohibits agreements that unreasonably restrain interstate trade or commerce. If applied literally, section 1 would prohibit much of the joint action between employers and employees that is instrumental to allowing employees to collectively bargain with employers and obtain the benefits that are a product of collective bargaining. Under a literal application, unreasonable and therefore illegal restraints would include employer/employee agreements that result in player drafts, salary caps, and restrictions on free agency, as well as agreements regarding guaranteed minimum salaries and player pension benefits.
The application of the Sherman Act to restraints of trade in sports was fully realized beginning in the 1970s, when football and basketball players successfully prevailed in antitrust actions against their leagues on a range of owner-imposed restraints, such as restrictions on free agency and on the entry-level player draft. Thus players effectively used antitrust laws as a mechanism to ameliorate the severe imbalance in their relationship that had tilted heavily in favor of owners. The result was a fundamental reordering in player and owner interaction from what had been a paradigm in which owners could largely dictate and unilaterally impose restrictions on important matters such as player mobility.
Notwithstanding this success in court, antitrust law was a tool that players in the NFL and other team sports leagues willingly relinquished when players’ unions entered into CBAs with league management. Entering into CBAs imposed upon players’ unions and owners a duty to engage in good faith collective bargaining over mandatory subjects of wages, hours, and other terms and conditions of employment. In addition, collective bargaining prevented restraints arising from union and management collective bargaining from constituting illegal restraints of trade. The nonstatutory labor exemption is the legal concept that accomplished this end and partially reconciled the conflict between antitrust and labor law.
The nonstatutory labor exemption is a judicially created doctrine developed to foster “the strong labor policy favoring the association of employees to eliminate competition over wages and working conditions” through collective bargaining. “[T]he implicit exemption recognizes that, to give effect to federal labor laws and policies and to allow meaningful collective bargaining to take place, some restraints on competition imposed through the bargaining process must be shielded from antitrust sanctions.” As noted above, the nonstatutory exemption reconciles the conflict between labor law and antitrust laws by exempting from antitrust scrutiny concerted action between owners and unions relating to mandatory subjects of collective bargaining even though the end result is to restrain trade or inhibit competition. Moreover, disputes between players and teams over various restraints are governed by labor law rather than antitrust law principles. Indeed, the Court has observed that not only are courts ill-equipped to apply antitrust principles to matters that fall squarely within the auspices of labor law, but that allowing courts to do so would jeopardize the labor-related benefits of collective bargaining.
The nonstatutory labor exemption is only operative, however, if a group of employees is organized as a union. Players’ decisions to organize as a union and to collectively bargain with owners transform the mutually agreed upon restrictions (e.g., salary caps and player drafts) into allowable anticompetitive behavior that is shielded from antitrust scrutiny. As it relates to the impending dispute between NFL players and owners, decertification would transform the NFLPA into a trade organization. Consequently, actions taken by owners, which would constitute legitimate negotiation tactics under labor law (e.g., player lockouts), would become subject to antitrust scrutiny.
Decertification has only been used as a labor tactic by one players’ union, the NFLPA, when it renounced its status as the exclusive bargaining representative for NFL players after bargaining with the NFL reached an impasse in 1989. Whether the NFLPA will exercise the authority players have begun to grant it remains uncertain. The likelihood of decertification increased significantly, however, in the aftermath of the Supreme Court’s ruling in American Needle, Inc. v. National Football League. The following discussion examines the antitrust and labor law implications of American Needle.
II. Analysis of American Needle
The events that cast American Needle, Inc., a relatively obscure apparel firm, into a prominent role in one of the most important sports law cases ever decided, arose from a contractual relationship between American Needle and NFL Properties (“NFLP”). Prior to 1963, NFL teams profited from individually licensing their intellectual property and marketing trademarked apparel, including caps and jerseys. In 1963, NFL teams formed the NFLP to develop, market, and license their intellectual property with a substantial portion of the considerable revenues generated from its licensing and marketing activities going toward charity or being equally divided among teams. Between 1963 and 2000, the NFLP granted nonexclusive licenses to vendors permitting them to manufacture and sell apparel bearing team insignias. American Needle was granted a nonexclusive license to manufacture caps bearing NFL team insignia. In December 2000, however, American Needle’s status as an NFLP licensee ended after league owners voted to grant an exclusive ten-year license to Reebok to manufacture and sell headgear for all thirty-two NFL teams. Consequently, the NFLP did not renew its contract with American Needle.
In response to the NFLP’s termination of their contractual relationship, American Needle brought an antitrust action asserting that the NFLP’s exclusive licensing arrangement with Reebok violated sections 1 and 2 of the Sherman Act. The NFL sought dismissal of the section 1 claim by asserting the “single-entity defense,” which if accepted would have provided that NFL teams and the NFLP constitute a single economic enterprise for antitrust purposes. As such, the NFL would have been deemed incapable of conspiring, an essential element of a cognizable section 1 Sherman Act claim. The trial court agreed with the NFL’s defense and held that with respect to the league’s exploitation of its intellectual property rights, “they have so integrated their operations that they should be deemed a single entity rather than joint venture cooperating for a common purpose.”Affirming the trial court’s recognition and application of the single-entity defense, the Seventh Circuit agreed that the NFL operates as a collection of independently owned firms with respect to some of its business activities. Focusing on the narrow issue before it, however, the Seventh Circuit concluded that the NFL operates as a single entity for purposes of exploiting its intellectual property. Accordingly, it dismissed American Needle’s section 1 Sherman Act claim.
Relying on its decision in Copperweld Corp. v. Independence Tube Corp., the Supreme Court narrowly framed the issue before it as “whether the alleged activity by the NFL respondents ‘must be viewed as that of a single enterprise for purposes of § 1.’” The Court began its resolution of this issue by appropriately pointing out that the Sherman Act has never been literally interpreted because to do so would invalidate every agreement since, even the most simple contract restrains trade. Rather, the focus of the Sherman Act is to invalidate agreements that unreasonably restrain trade. Having articulated this important principle, the Court then considered a fundamental premise of section 1 of the Sherman Act, namely that it only subjects to antitrust scrutiny concerted action that restrains trade. The Court noted that concerted action is more suspect as anticompetitive than is unilateral conduct given that the former is “‘inherently . . . fraught with anticompetitive risk’ insofar as it ‘deprives the marketplace of independent centers of decisionmaking that competition assumes and demands.’” Moreover, stated the Court, only those arrangements that are the product of concerted action are subject to section 1’s prohibition on contracts, combinations, or conspiracies.
Reaffirming the concerted action requirement of section 1, the Court next considered the standard for determining whether actors should be construed as a single entity for antitrust purposes. Eschewing any notion that concerted action turns simply on whether parties constitute legally distinct entities, the Court rejected a formalistic approach in favor of one that turns on the substantive nature of the relationship between actors. Adopting this functional approach, the Court articulated the following standard for determining single entity status: “The relevant inquiry . . . is whether there is a ‘contract, combination . . . or conspiracy’ amongst ‘separate economic actors pursuing separate economic interests’ such that the agreement ‘deprives the marketplace of independent centers of decisionmaking,’ and therefore of ‘diversity of entrepreneurial interests,’ and thus of actual or potential competition.”
Finding support for its functional approach in its Copperweld decision and having established the governing standard, the Court provided a series of examples. Joint action between the president and vice president of a company would fall outside of the scope of section 1 of the Sherman Act since such a relationship constitutes true “‘unilateral behavior flowing from decisions of a single enterprise.’” Also falling outside the scope of section 1 would be the “‘internally coordinated conduct of a corporation and one of its unincorporated divisions’” given the common interests that the divisions pursue on behalf of the whole. Adding that the competitive realities of relationships between actors are determinative, the Court reiterated that the mere fact that entities are legally distinct or that they have organized themselves as a joint venture is not determinative of whether they are distinct for section 1 purposes. In short, what controls is whether the agreement is a product of joint conduct by “‘independent centers of decisonmaking.’ If it does, the entities are capable of conspiring under section 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one.”
Applying the standard to the operations of the NFL and the NFLP, the Court noted that teams do not engage in the type of unitary decision making that would immunize their conduct from section 1. The Court stated as dictum that NFL teams compete with one another in a range of economic activities including for the interest of fans, for gate receipts, and for management and player personnel. With respect to the narrow issue before it, the Court found that teams compete against each other in the market for intellectual property. Explained the Court, “When each NFL team licenses its intellectual property, it is not pursuing the ‘common interests of the whole’ league but is instead pursuing interests of each ‘corporation itself,’ . . . teams are acting as ‘separate economic actors,’ and each team therefore is a potential ‘independent cente[r] of decisionmaking.’”
Having explained the analytical framework, the Court’s inevitable conclusion was that NFL teams’ decisions to collectively license their independently owned trademarks to one vendor is subject to section 1 scrutiny given that the arrangement would “depriv[e] the marketplace of independent centers of decisionmaking.” Relying on its determination that the organizational structure adopted by the defendants does not solely determine the presence of independent centers of decision making, the Court stated that to accept the NFL’s single-entity defense would allow parties to evade application of section 1 by creating organizational structures that in form appeared to constitute a single entity. According to the Court, to allow such a result in the matter before it would be inappropriate because, while NFL teams have a common interest in marketing the NFL brand, their interests diverge when marketing the trademarks of individual teams.
The Court was careful to articulate that single-entity status should not be rejected in all cases involving joint ventures. Indeed, the Court went to great lengths to explain why it would not afford the NFL the presumption of independent action normally afforded agreements within a single firm. Initially, the Court stated that such a presumption should not be sustained when parties to the challenged agreement act to promote interests that are separate and independent of the single firm. Focusing specifically on the NFLP, the Court reasoned that the thirty-two individually owned teams that created and thus comprise the NFLP are competitors with economic interests that are distinct from the profit-generating interests of the NFLP. In this regard, the Court stated,
Unlike typical decisions by corporate shareholders, NFLP licensing decisions . . . reflect not only an interest in NFLP’s profits but also an interest in the teams’ individual profits. The 32 teams capture individual economic benefits separate and apart from NFLP profits as a result of the decisions they make for the NFLP.
Responding to the NFL’s argument that the special characteristics of sports leagues justified affording the NFL single entity status, the Court reaffirmed the special treatment to be afforded sports leagues in antitrust actions. The NFL argued that without a legally protected ability to cooperate, it could not produce football. Indeed, competition and cooperation are inherent and necessary features of sports leagues. Like other business enterprises, sports teams individually seek to maximize profit as they compete for fans and merchandising revenues. It is not, however, in the self-interest of teams to drive each other out of business. Indeed, a league’s constituent clubs are economically interdependent and thus must cooperate in order to survive. Moreover, they must cooperate in order to maintain a competitive balance that ultimately helps to preserve fan interest.
Recognizing these economic realities, the Court nevertheless wisely concluded that the need for NFL teams to cooperate in order to survive economically in producing the sport of football should not shield their conduct from antitrust scrutiny. It emphasized, however, that the need for the constituent members of a sports league to cooperate is critical to assessing the legality of a challenged restraint. The Court directed lower courts to continue to treat anticompetitive restraints that would amount to per se antitrust violations in nonsports cases differently in sports cases where the rule-of-reason standard should be applied. As one commentator noted, “A high level of economic integration is a rationale for applying rule of reason scrutiny, not for granting single entity immunity.”
In American Needle, the Court was careful to restrict its holding to the narrow issue before it. The NFL and other sports leagues are likely to seize upon this holding in arguing that the Court rejected the single-entity defense only as it relates to the NFL’s agreements involving its intellectual property. It is unlikely, however, that the leagues will prevail if the Court or lower courts are called on to respond to the single-entity defense in the future. Scholars are likely to debate the extent to which American Needle provides guidance to courts regarding when joint ventures outside of the sports context constitute single entities. In the sports context, however, American Needle likely settles the uncertainty regarding the availability of the single-entity defense as it relates to the four major sports leagues in the United States—the NFL, the National Basketball Association, the National Hockey League, and Major League Baseball—in matters that extend beyond leagues’ marketing and selling of their intellectual property.
In dictum, the American Needle Court stated that areas of competition between NFL teams include not only intellectual property but also “gate receipts and . . . contracts with managerial and playing personnel.” Through its holding and dictum, the Court made a major step toward resolving an issue, the availability of single-entity status for sports leagues, the resolution of which had proved problematic for some lower courts. The Court sided with the majority of lower-court decisions prior to American Needle, which had rejected the single-entity defense in cases involving sports leagues. Thus, it is highly unlikely that any of the major professional sports leagues will be able to establish single-entity status with respect to a wide range of business activities. This is particularly true given the similarity in structure of the NFL and other major professional sports leagues. Teams are managed and owned separately, retain most of their own profits, and compete for players and management personnel. Consequently, it becomes readily apparent that sports leagues are not fully integrated joint ventures—a characteristic essential to finding single entity status.
When it was announced that the single entity-defense would be considered by the Court, much of the commentary centered around the impact of the decision on matters such as the NFL becoming a cartel that could engage in unilateral restraints ranging from imposing caps on coaches’ salaries to increasing prices for sports-related merchandise to limiting access to broadcast and webcast of games. While a ruling favoring the NFL would have impacted intellectual property and these other matters, my initial reaction to the case was to reflect on its potential either to upset or to maintain the balance between antitrust and labor law as it relates to the even more delicately balanced relationship between players and owners. With respect to the latter, the Court’s rejection of the single entity defense does much to preserve this delicate balance.
. Jason La Canfora, NFLPA Seeking Signatures for Possible Decertification, NFL.com (Sept. 12, 2010, 8:55 AM), http://www.nfl.com/news
/story/09000d5d81a70089/article/nflpa-seeking-signatures-for-possible-decertification. . Associated Press, Broncos Agree to NFLPA Decertification, ESPN.com (Oct. 21, 2010, 9:31 PM), http://sports.espn.go.com/nfl/news/story?id=5712714; Mike Florio, As Labor Talks Languish, 25 Teams and Counting Have Voted To Decertify, Profootballtalk.com (Nov. 4, 2010, 5:27 PM) (reporting that as of November 4, 2010, players on twenty-five NFL teams had authorized decertification). . See Brown v. Pro Football, Inc., 518 U.S. 231, 241 (1996); Matthew J. Mitten, Timothy Davis, Rodney K. Smith & Robert C. Berry, Sports Law and Regulation: Cases, Materials, and Problems 238 (2d ed. 2009). . Mitten et al., supra note 3, at 421. . Brown, 518 U.S. at 241. . Robert A. McCormick, Labor or Antitrust? Let the Players Choose, 4 Vill. Sports & Entm’t L.J. 39, 41 (1997). . Allen Bradley Co. v. Local Union No. 3, Int’l Bhd. of Elec. Workers, 325 U.S. 797, 806 (1945). . Sherman Antitrust Act, 15 U.S.C. § 1 (2006). . See Mackey v. NFL, 543 F.2d 606, 622 (8th Cir. 1976) (holding that the rule requiring a team that entered into an agreement with a free agent to compensate the player’s former team violated antitrust law). . See Smith v. Pro Football, Inc., 593 F.2d 1173, 1185–86 (D.C. Cir. 1978) (holding that the entry-level player draft had an unreasonable anticompetitive impact on the market for players’ services). . Brown v. Pro Football, Inc., 518 U.S. 231, 236 (1996). . Connell Constr. Co. v. Plumbers & Steamfitters Local Union No. 100, 421 U.S. 616, 622 (1975). It is important to differentiate collective bargaining between unions and employers from unilateral union activity such as group boycotts and picketing. Unilateral union conduct of this nature does not violate antitrust laws because of an explicit statutory exemption that is drawn from the text of the Clayton Act, 15 U.S.C. § 17 (2006), 29 U.S.C. § 52 (2006), and the Norris-LaGuardia Act, 29 U.S.C. §§ 101–115 (2006). The explicit statutory exemption’s scope is limited to unilateral union activity and thus would not encompass agreements that were the product of collective bargaining between unions and employers. Connell Constr. Co., 421 U.S. at 621–22. . Brown, 518 U.S. at 237. . Id. at 240–41. . See Mitten et al., supra note 3, at 437–38; Mark T. Gould, Brown v. Pro Football, Inc.: To Decertify or Not To Decertify, Ent. & Sports Law., Summer 1996, at 9, 9. . See Mitten et al., supra note 3, at 451 (explaining decertification and the effect of the loss of antitrust immunity). . 130 S. Ct. 2201, 2215 (2010). . Id. at 2207. . Id. . Id. . Id. . Id. . Am. Needle, Inc. v. New Orleans La. Saints, 496 F. Supp. 2d 941, 943 (N.D. Ill. 2007), aff’d, 538 F.3d 736 (7th Cir. 2008), rev’d, 130 S. Ct. 2201 (2010). . Am. Needle Inc. v. NFL, 538 F.3d 736, 743 (7th Cir. 2008), rev’d, 130 S. Ct. 2201 (2010). . Id. at 744. . 467 U.S. 752, 767–68 (1984) (holding that section 1 only applies when there is concerted action by more than one actor). . Am. Needle, Inc. v. NFL, 130 S. Ct. 2201, 2208 (2010) (citations omitted). . Id. . Id. at 2209 (citations omitted). . Id. . Id. . Id. . Id. at 2212 (citations omitted). . Id. In Copperweld, the Court reexamined and rejected the intra-enterprise conspiracy doctrine, finding it inconsistent with the “distinction between concerted and independent action.” Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 767 (1984) (quoting Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984)). The Court noted that Copperweld, exemplifies a substantive rather than a formalistic approach to determining single entity status. . Am. Needle, 130 S. Ct. at 2212 (quoting Copperweld, 467 U.S. at 767). . Id. (quoting Copperweld, 467 U.S. at 770). . Michael A. McCann, American Needle v. NFL: An Opportunity To Reshape Sports Law, 119 Yale L.J. 726, 737–38 (2010) (defining joint ventures as associations of “two or more persons formed to carry out a single business enterprise for profit for which purpose they combine their property, money, effects, skill, and knowledge” (quoting 46 Am. Jur. 2d Joint Ventures § 1 (2006)). . Am. Needle, 130 S. Ct. at 2212. . Id. (quoting Copperweld, 467 U.S. at 769). . Id. at 2213 (quoting Copperweld, 467 U.S. at 769–70). . Id. (quoting Copperweld, 467 U.S. at 769). . Id. . Id. at 2215 (citations omitted). . Id. at 2214. . Mitten et al., supra note 3, at 422. . Id. at 423; McCann, supra note 37, at 730 (stating that the uniqueness of sports leagues resides in their need to compete and to collaborate in order to survive. While teams must compete in games and off the field for players and management personnel, they must also collaborate in order to establish the rules of the game and address other matters fundamental to producing the relevant sport). . McCann, supra note 37, at 736–37 (observing that a per se standard allows courts to engage in a streamlined analysis in determining antitrust culpability because certain forms of conduct have such a “predictable and pernicious anticompetitive effect” that liability is presumed “regardless of precompetitive effects or motives” (citations omitted)). . Id. at 737 (stating that, in contrast to the truncated per se analysis, a rule-of-reason approach requires a fact-intensive inquiry that permits courts to balance the anticompetitive consequences and the procompetitive benefits of the challenged restraint). . Am. Needle, 130 S. Ct. at 2216. . M. Scott LeBlanc, American Needle, Inc. v. NFL: Professional Sports Leagues and “Single-Entity” Antitrust Exemption, 5 Duke J. Const. L. & Pub. Pol’y Sidebar 156, 158 (2010). . Gregory J. Werden, Initial Thoughts on the American Needle Decision, Antitrust Source, Aug. 2010, at 1, 1, available at http://www.abanet.org
/antitrust/at-source/10/08/Aug10-Werden8-2f.pdf. But see Matthew Bester, The NFL’s Quest To Be Treated Like General Motors Should Stop at the Supreme Court, Entm’t & Sports Law., Winter 2010, at 1, 28, available at http://new.abanet.org/Forums/entsports/PublicDocuments/winter10.pdf (suggesting that the impact of American Needle on judicial determination of whether a joint venture is a single entity will extend beyond cases involving sports leagues); Matthew L. Cantor & Marlene Koury, Pleading Standards for Antitrust Plaintiffs Post-Twombly, Practising Law Inst., Sept. 2010, at 37, 43–44 (stating that American Needle may evince a greater willingness by courts to expose potential antitrust liability to the conduct of joint ventures); John J. Hamill, Health Care Antitrust Cases and Strategies for Lawyers, Aspatore, Aug. 2010, at 1, 2–3 (stating the same). . Am. Needle, 130 S. Ct. at 2212–13. . See Am. Needle, Inc. v. NFL, 538 F.3d 736, 741–42 (7th Cir. 2008) (noting the confusion among the circuits regarding the application of the single-entity defense to sports leagues). For cases in which courts struggled with both adopting and with applying the appropriate standard to resolve questions relating to single-entity status as a defense to antitrust liability in sports cases, see Fraser v. Major League Soccer, L.L.C., 284 F.3d 47, 55 (1st Cir. 2002) (rejecting single-entity status); and Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593, 599–600 (7th Cir. 1996) (signaling support for the single-entity notion in the sports context). . See, e.g., Sullivan v. NFL, 34 F.3d 1091, 1098 (1st Cir. 1994); Los Angeles Mem’l Coliseum Comm’n v. NFL, 726 F.2d 1381, 1390 (9th Cir. 1984); N. Am. Soccer League v. NFL, 670 F.2d 1249, 1256–57 (2d Cir. 1982). . See Derek Taylor, Splitting the Uprights: How the Seventh Circuit’s American Needle Holding Created a Circuit Court Split and Exempted the NFL from Antitrust Scrutiny, and Why the Supreme Court Should Overturn the Seventh Circuit, 6 DePaul J. Sports L. & Contemp. Probs. 143, 146–47 (2010). See generally McCann, supra note 37 (discussing how the Supreme Court’s rejection of the single-entity defense is likely to impact the other major professional sports leagues and the NCAA). . Bester, supra note 51, at 27. . Id. . Lester Munson, Antitrust Case Could Be Armageddon, ESPN.com (July 17, 2009), http://sports.espn.go.com/espn/columns/story?columnist=munson
_lester&id=4336261. . See McCann, supra note 37, at 764–65 (discussing what impact a decision recognizing the NFL’s single entity status would have on intellectual-property issues within the NFL).