By Daniel E. Lazaroff

On May 24, 2010, the Supreme Court unanimously determined that the National Football League (NFL) is not a single business entity for purposes of federal antitrust law when marketing its intellectual property. Section 1 of the Sherman Act requires concerted action to restrain interstate trade; unilateral conduct, no matter how anticompetitive, cannot be challenged under that provision. Consequently, if the Supreme Court had determined that the NFL is a single entity rather than 32 separate actors, the exclusive license given to Reebok to produce and sell NFL trademarked headgear could not be the subject of a Section 1 claim. Instead, the 9-0 decision subjects the NFL's agreement with Reebok to substantive Section 1 analysis and promises to have significant implications for other NFL joint activity. Further, American Needle will undoubtedly influence the conduct of other American sports leagues and business joint ventures in other commercial markets.

The decision does not represent an adjudication on the merits of the underlying antitrust claim. On remand, the lower federal courts will have to determine whether the exclusive license violates the rule of reason. This will require the plaintiff to prove anticompetitive effects within a properly defined market. If that effort is successful, the NFL will be afforded an opportunity to offer precompetitive justifications for the trade restraint. Ultimately, the legality or illegality of the exclusive license will be discerned by a balancing of its negative and positive economic effects to determine the net impact on consumer welfare. Nevertheless, American Needle will have great importance in the determination of just what types of business activity will be deemed concerted rather than unilateral and therefore sufficient to trigger Section 1 antitrust scrutiny.

The debate over the proper characterization of the NFL and other sports leagues for Section 1 purposes spans several decades. The academic commentary is voluminous and often contentious. In the interest of full disclosure, this writer has argued that the NFL is not a single entity for over 25 years. While some law professors have agreed, other notable contributors to the literature have passionately taken the opposite view.

Some of the early case law suggested that the single entity approach is appropriate. In one case involving the movement of an NHL team from San Francisco to Vancouver, a federal district court noted that the league was more of a single entity than a combination of separate actors. Similarly, in a case involving the transfer of ownership of an NBA franchise, another federal district court viewed the league as more of a partnership than a collection of individual businesses. However, both the 2nd and 9th Circuits rejected this approach in two cases in the 1980s. The 2nd Circuit determined that the NFL was not a single entity when a fledgling soccer league challenged a cross-ownership ban, and the 9th Circuit rejected single entity status for the NFL when the league interfered with the Raiders attempts to move from Oakland to Los Angeles. These cases focused on the fact that individual teams competed with each other for fans, coaches and players. Although much revenue was shared, the teams functioned as separate profit centers and pursued their own individual economic interests as well as those of the joint venture.

In 1984, when the Supreme Court decided Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) and determined that a parent and wholly-owned subsidiary could not legally conspire for antitrust purposes, single entity enthusiasts were heartened and believed that the case would signal a shift in the judicial approach toward league sports. While Copperweld did reject the idea that mere separate incorporation of two entities is sufficient to trigger Section 1, it predicated single entity treatment on the lack of separate corporate consciousness and centralized control. Several lower federal courts rejected the notion that Copperweld supported single entity treatment for the NFL and other leagues. However, the 7th Circuit took a different view in the Chicago Bulls dispute with the NBA over the broadcasting of Bulls' games on WGN and strongly suggested that the league was indeed a single entity with regard to the marketing of television rights. The 1st Circuit, in a dispute involving Major League Soccer, was unsure whether that league was or was not a single entity despite the fact that it was organized as an LLC in Delaware.

Against this conflicted background, the 7th Circuit decided American Needle in favor of the NFL. The Supreme Court unanimously rejected the court's conclusion, focused on competitive realities, and determined that even though the NFL sought to market its trademarked merchandise through NFL Properties, it was not a single entity. Rather, the conduct was concerted and subject to rule of reason analysis under Section 1.

It is important to reiterate that American Needle does not condemn the NFL's conduct on the merits. The case must now proceed for a determination of whether the joint conduct of the teams constitutes an unreasonable restraint of trade. Although antitrust defense lawyers may be quick to point out that there is considerable expense involved in defending rule of reason cases, we must remember that plaintiffs and their attorneys recover nothing if their claims ultimately fail. Some may view American Needle as inconsistent with the perceived pro-business trend in recent Supreme Court antitrust decisions. The Court has expressly overruled three Section 1 per se rules over the last three decades and also severely restricted the scope of illegal unilateral conduct for purposes of section two monopolization claims. However, one can see a certain consistency in the cases. The Court wishes to avoid "false positives" associated with per se rules that do not permit analysis of the facts in individual cases. False positives in antitrust law represent a waste of resources and can lead to inefficiencies in the marketplace. American Needle arguably addressed the potential for "false negatives" - i.e., a failure to remedy truly anticompetitive behavior. If the NFL and other leagues can avoid any review of their allegedly anticompetitive behavior by enjoying single entity status, it is possible that consumer welfare could be jeopardized. Substantive review under the rule of reason permits both sides to present evidence of actual economic effects and can prevent either false positive or false negatives that would be inconsistent with sound antitrust policy.

Although there has been speculation about the impact of American Needle on NFL/NFLPA collective bargaining, it seems unlikely that the decision will have much effect on the process. Unless the union decertifies or there is an unusually long impasse in labor negotiations, the Supreme Court's 1996 decision in Brown v. Pro Football Inc., 518 U.S. 231, will preserve the nonstatutory antitrust exemption for mandatory subjects of bargaining - i.e., wages, hours and working conditions. American Needle may create a greater sense of urgency for management to negotiate a deal, but the efficacy of decertification as a strategy is questionable. There would be no guarantee of victory for players under the rule of reason even though they have been successful in earlier challenges to the draft and free agency restrictions. Retaining the collective bargaining relationship may be viewed as a more pragmatic approach. Of course, others may disagree with this conclusion.

I doubt that we have heard the end of this story. Despite unanimity in the American Needle decision, I am confident that scholarly commentary will be forthcoming that is severely critical of the opinion. Personally, I feel some vindication because proponents of the single entity approach have criticized my long-standing endorsement of separate entity treatment in the literature. At least I am in some pretty good company now - the fact that the conservatives, moderates and liberals on the Court all agreed was a welcome surprise. Speaking of surprises, do not be shocked if the single entity battle finds its way again to the halls of Congress. These guys won't give up the fight.

Dan Lazaroff is the Leonard Cohen Professor in Law and Economics at Loyola Law School and Director of the Loyola Sports Law Institute. He teaches antitrust, business associations, and sports law and writes on those subjects.