NFL Players vs. Owners: A Hail Mary of a Lawsuit

Take a knee, sports fans, we have some issues to discuss. The National Football League (“NFL”) team owners and the players’ union have been squabbling over how to divvy up the dough (a paltry $9 billion a year).  They couldn’t come to an agreement (because $185 million is really hard to split) so on Friday, they broke off labor negotiations, decertified the union, and 10 players sued the owners in federal court in Minneapolis.  See NFLPA decertifies.  Normally, I really couldn’t care less about a bunch of billionaires arguing with a bunch of millionaires.  But this case has major antitrust and intellectual property issues and that makes me very happy.  So now I’m paying attention.  It all stems back to a teeny little case called American Needle and a unanimous United States Supreme Court (“USSC”) decision that appeared to all but greenlight antitrust suits against the NFL.  Finally!  A sports related intellectual property issue that has some staying power.  Let’s just jump right in, shall we?

First, we need to do a little bit of background in American antitrust law.  To start, this is a very big, very complex body of law.  I am just providing enough background on the topic to make it relevant to the issues at hand.   So, trust me, this is definitely a very narrow and cursory overview.  The –ahem-“Reviewer’s Compilation” version, if you will.  It works like this. American antitrust law (more appropriately called “competition law”) starts with the Sherman Act of 1890.  Basically, competition law prohibits agreements or practices that restrict free trading and competition between businesses.  An entity can’t dominate a market or engage in anti-competitive practices like predatory pricing, price gouging, refusals to deal, and that kind of thing.  As explained by the USSC in Spectrum Sports, Inc. v. McQuillan:

The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.

The Act is only meant to punish businesses that intentionally dominate the market through misconduct, which generally consists of the shady type of stuff forbidden by Sherman Act.  Sooooo…. just because you may have a monopoly or a large corner of the market doesn’t necessarily give rise to a presumption that you are eeee-vil. The crux of the matter is intent, not success.

Now the structure of the NFL in terms of their intellectual property rights is a little tricky.  Each individual team owns the rights to its own trademarks, and the NFL owns the rights to the Superbowl and licensing for televised broadcasts. The NFL requires revenue sharing among all teams in the league, that way teams who make a ton of money (like the Cowboys) have to spread their profits to smaller, less lucrative teams (like the Jaguars).  The teams do not have individual TV contracts, so that blackout rule can be meddlesome, but the arrangement does give smaller teams a more even playing field and access to higher paid players. This arrangement includes revenues generated from each team’s trademarks, and for the last several years, NFL teams typically jointly licensed their trademarks for stuff like t-shirts, baseball caps, mugs, etc. through a company called National Football League Properties (“NFLP”).

So about 10 years ago, the NFLP decided that they wanted Reebok (and only Reebok) to make hats with the teams’ logos on them.  American Needle, Inc., a competitor of Reebok, had been making these types of hats for the NFL for a really long time, and as a result of the NFLP’s deal with Reebok, it lost its contract with NFLP to make said hats.  American Needle, Inc. did not have much of a sense of humor about this and sued the NFL under Antitrust principles.  Enter American Needle v. National Football League et al. Needle is a big case because if the NFL had gotten what it asked for, the player’s union wouldn’t have been able to decertify and the players wouldn’t have been able to bring an antitrust suit.

Long story short, American Needle Inc. argued that the NFL violated antitrust law because all 32 NFL teams worked together to freeze it out of the NFL-licensed hat-making business and gave Reebok an exclusive 10-year license.  The NFL asked for broad antitrust law protection and argued that it was a single entity comprised of 32 different teams working together so the license wasn’t anticompetitive.  The USSC didn’t buy it.  Justice Stevens wrote for a unanimous court (yes, we actually had Justices Scalia and Sotomayor agreeing on something) and said:

Although NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.

For those of you playing at home, the NFL lost.  Big time.  OK, it wasn’t as bad as the Redskins in 1940, but still…. Ouch. Had they gotten the antitrust exemption they asked for, it could have meant that they would have been able to set prices of everything from player salaries to tickets, team jerseys, and hot dogs at every stadium without a care in the world.  Talk about a game changer.  But no need to wring your hands and wail just yet; not all hope is lost.  The Court didn’t resolve the issue as to whether the agreement actually did violate competition laws; they kicked it back to the 7^th Circuit to decide that.  But what they did say is that American Needle’s claims needed to be analyzed under a standard that antitrust lawyers call the “rule of reason” to determine whether the league’s licensing practices harmed competition.

The rule of reason is a fact-dependent totality of the circumstances test, and asks whether the challenged practice (the exclusive license to Reebok) promotes or suppresses market competition.  Intent and motive are crucial here. The court will analyze facts peculiar to the business, the history of the restraining, and the reasons why the practice was imposed to determine the effect on competition in the relevant product market.  So there’s still a big unanswered question as to where this is going or if the trademark issue is even going to stay an issue.

Justice Stevens wrote that “the league’s decision to license independently owned trademarks collectively to a single vendor, deprived the marketplace “of actual or potential competition.”  Here’s the thing: the NFL arrangement, e.g., separately owned but collectively managed marks is not exactly rare.  Most professional sports do it this way. A ruling against the NFL finding antitrust violations would mean that every virtually agreement, from equipment to sponsors, would be subject to competition law, not just for the NFL, but for professional sports in general.  So, theoretically, we could see a flurry of lawsuits challenging all sorts of deals that have been in place for years.  Except in Major League Baseball.  They called, by the way, and said to say “neener neener.”  You see, Major League Baseball enjoys immunity from antitrust lawsuits thanks to the so-called baseball exemption.

What does this have to do with trademarks, you ask?  A lot.  More than any other flavor of intellectual property because trademarks are heavily driven by fairness in the marketplace and consumer protection.  Trademark licensing agreements have ALWAYS been subject to fair competition rules, so all that really changed is that, potentially, a new collection of them could be welcomed into the antitrust family.  But in terms of competition law, just because your mark is worth a lot doesn’t mean you’re a no good dirty rotten cheater. And just because a team has a really strong trademark doesn’t mean they are going to be raked over burning coals.  Remember, it all goes back to the intent.

Is the team using that strong mark in a way that squeezes out competitors and are they doing it on purpose is the question.  But let’s pretend that there is binding precedent that says the current NFL way of managing and /or licensing trademarks is violative of the Sherman Act.  If this argument wins out, it could mean that all previously negotiated licenses under the NFL arrangement could go bye-bye- from salary caps to restraints on free agency to trademark licensing agreements.  Yes, that’s a big deal.   EA games and Reebok stand to lose millions.

Currently, each team owns its own marks, so that wouldn’t change.  But what a Sherman Act violation could mean is that each team would be considered independent in terms of their marks.  Instead of collective licensing, each separate team would have the ability to act freely as a separate entity or business and would have the power to control and license use of their marks.   There would no longer be an umbrella of collective licensing and management.  No more exclusive rights granted for NFL video games, equipment, sponsors, or merchandise.   No more one for all and all for one type of license.  The NFL couldn’t package and license the entire league to a single video game publisher or sponsor.  Individual teams would separately negotiate these deals.  Individual teams may be able to charge their own prices for tickets, or merchandise, or refuse to contract with a certain sports drink or apparel manufacturer.  “Big deal, I think the teams should have more control – it might make ticket prices go down,” you say?  True, it could, but there’s a downside.  Let’s take a moment to shoot down the slippery slope, shall we?

If the current licensing scheme goes away, so could the revenue sharing.  So a very popular team with a strong mark could demand a higher share of the league’s apparel revenue because they sell more t-shirts than a smaller team.  Also, tickets for popular teams could be (natch remain) sky high, and other teams would be “the cheap seats.”  Poorer fans lose.  This could also create a scenario that the only tickets sold are for really wealthy teams in populous cities, and the smaller teams can’t afford to play anymore because they just don’t have the fan base.   Teams and fans lose.  I’ve also seen an argument that dissolving the current arrangement would permit more valuable teams an unfair advantage because only they could afford the highest played players, but I think that one is a little thin.  I’m no football guru, but it seems to me that there is a lot of talent out there, and just because a player commands a huge salary doesn’t mean he deserves it (insert your most hated high paid player here).

On the other hand, this does have the potential to be a great thing for smaller markets to drive a more dedicated fan base in the local community.  If one of our smaller teams wanted to say, tell Nike to go pound sand in favor of a smaller, local business, they would be free to do so and keep more money in the local economy.  Fans would feel more connected to the players and might be more inclined to root root root for the home team because of that connection.   Allowing teams more control over their marks could encourage bidding among competitors for use of those marks, be it apparel, equipment, souvenirs, tickets, and all sorts of other things, so we may actually see a decrease in the costs of those goods. The concept of one huge company charging whatever it wanted for an item (because no one else is allowed to sell it) could go away forever.  Teams would have a choice of one or several manufacturers and so would the fans.  It could also give more control to the team in terms of dispute resolution in infringement cases.   Besides, teams could still cooperate in their licensing schemes, they just better be careful.

I could go on and on.  Alas, this is all just conjecture and Needle doesn’t mean that the NFL is toast.  Justice Stevens did say “Decisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that “deprive the marketplace of independent centers of decision making … and therefore of actual or potential competition,” but he also said “although the joint licensing activities are anticompetitive, they may not be illegal and in fact may be necessary to make the product of NFL Football available to the public.”   So a decision that is intended to maintain a competitive balance among the teams would probably be OK.  No harm, no foul.

All the NFL really lost in Needle was a magic cloak that shields it from antitrust challenges.  A person suing still has to show that the NFL’s actions were intended to stifle competition, and it’s a long road to proving that.  So don’t go assuming that Needle means that the antitrust brigade is going to be breaking down conference room doors, upending the negotiations table, and hauling those NFL bigwigs off to the deepest darkest dungeon.  It just means that the negotiations should probably take place knowing that the agreement could be subject to scrutiny, so negotiate with care.  And never forget that just because players can now challenge the NFL practices under antitrust laws doesn’t mean those suits will win or even be heard.  We have a long way to go, sports fans, before this one sorts itself out.  Ready? Break!