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Tuesday, August 26, 2008

GUEST BLOG: NFL and Market Power

Daniel Sokol and I are pleased to have the following guest blog from Steven Semeraro.  Thanks for the contribution, Steven, and we look forward to future commentary. 

In American Needle, Inc. v. National Football League, the Seventh Circuit held that (1) the NFL is a single entity for the purposes of licensing rights to produce caps with team logos, and (2) the league's decision to issue an exclusive license to manufacturer logo caps, therefore, could not be challenged under either Section 1 or Section 2 of the Sherman Act.  The reasoning in this case strikes me as inadequate to support the holding, and for that reason it may be a candidate for en banc or Supreme Court review.

Judge Kanne's opinion for the court properly draws on Judge Easterbrook's earlier analysis of the National Basketball Association's limitation on telecasts by individual teams.  In Chicago Professional Sports v. NBA, Easterbrook, writing for the court, observed that a sports league cannot be labeled as a single entity or joint venture for all purposes.  "[A]n organization such as the NBA," he wrote, may be "best understood as one firm when selling broadcast rights to a network in competition with a thousand other producers of entertainment, but is best understood as a joint venture when curtailing competition for players who have few other market opportunities."  He drew a comparison to McDonald's franchises that can surely coordinate "the release of a new hamburger," but probably cannot "agree on wages for counter workers."  Importantly, and despite citing a litany of reasons why the NBA was likely a single entity with respect to licensing television rights, the Chicago Professional Sports panel refused to bless the NBA's conduct on that ground.  Instead, it remanded, recommending that the trial court treat it as a traditional Section 1 Rule of Reason case in which the court assessed market power and then examined the competitive effects of limiting individual team telecasts.

Citing Easterbrook's opinion, Judge Kanne correctly recognized that each facet of a sports league must be analyzed independently, and he properly claimed to limit the opinion to the NFL's licensing of intellectual property.  The analysis in the opinion, however, fails to explain why, unlike Chicago Professional Sports,  no analysis of market power or competitive effects was necessary.

First, Judge Kanne claimed that the NFL had to be a single source of economic power because a single team could not produce the product, i.e. professional football games.   "Asserting that a single football team could not produce a football game," he quipped, "is less of a legal argument than it is a Zen riddle: Who wins when a football team plays itself."  From this truism, he concluded that "[i]t thus follows that only one source of economic power controls the promotion of NFL football; it makes little sense to assert that each individual team has the authority, if not the responsibility, to promote the jointly produced NFL football."

To the extent that this makes any sense at all, it sweeps way too broadly.   One simply cannot conclude that the need for standards to produce a product efficiently renders competition unnecessary among those agreeing to adhere to the standards.  The NCAA football telecasts case made this point abundantly clear.  Universities had to agree on many rules to make NCAA football possible, but they could nonetheless compete on licensing television rights, and Section 1 of the Sherman Act required them to do so.  Judge Easterbrook carefully distinguished the NBA from the NCAA, and even then was reluctant to pronounce the NBA a single entity exempt from Section 1 liability.  Judge Kanne never explains why the NFL’s licensing of logo caps is different from the NCAA’s licensing of football telecasts.

Second, Judge Kanne relied on "uncontradicted evidence that the NFL teams share a vital economic interest in collectively promoting NFL football" and must compete against other forms of entertainment.  But that was true of NCAA football, and would also apply to any group of competitors fixing prices.  The cartel members share a vital interest in promoting their own products to better compete with those outside the cartel.  Indeed, any group of competitors will share a common interest in minimizing competition among the members of the group.  That hardly eliminates the need for Section 1 scrutiny. 

Finally, and "most importantly," Judge Kanne asserted, the NFL has licensed its intellectual property through NFL Properties, a single entity, for more than 40 years.  Presumably realizing that the length of an anticompetitive agreement can't change its effect, the court focused on NFL Properties' articles of incorporation, which say that it was created to promote the NFL.  And promoting ones product, the court concluded, is obviously a good thing.

Again, though, the reasoning sweeps too broadly.  The American Needle case wasn't about advertising to promote NFL Football.  It's about selling merchandise.  One might legitimately conclude that a unified approach to purchasing magazine and television ads promoting NFL Football could be performed most efficiently by a single entity that could effectively coordinate the impact of the various media buys in the context of a very competitive advertising market.

Selling caps, by contrast, is another story entirely.  Each NFL team very likely has market power in a cap market (or sports logo cap) market because each team could readily charge well above the marginal cost, plus normal profit, of producing a logo cap.  The exclusive license attacked in American Needle allows the NFL to exploit that market power more fully by eliminating the closest competitors for each individual team's logo caps, i.e. logo caps from other NFL teams.  Fans wishing to purchase NFL logo caps will have only a single choice of cap brand, presumably at a high price.  No team may try to capture additional cap sales by also licensing its logo to another cap manufacturer that could produce lower cost products.  Cap output is almost certain to be lower with a single exclusive license than it would be if teams licensed their own logos to different cap manufacturers.

In the NBA television licensing case, one could argue that an individuals team might not fully internalize the negative effects that over-saturation of the airwaves could have on the marketability of NBA games on television, particularly given the substantial competition from other sports and non-sports programming.  Limiting the individual teams' ability to televise games locally might thus have been a legitimate decision in the interest of the league as a whole.  Could a similar argument really be made about NFL logo caps?  Would over-saturation or poor quality really hurt the NFL in any substantial way that would not be internalized by the individual team licensing its logo?  By simply declaring the NFL a single entity, the American Needle court side-stepped what should have been the critical question.

Steven Semeraro, is a Professor of Law at the Thomas Jefferson School of Law and a former trial attorney at the United States Department of Justice, Antitrust Division.

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Comments

the nfl is simply a juggernaut. if there was another phrase for cash cow, that is what they would be called.

Posted by: antiques | Aug 26, 2008 7:29:15 AM

very interesting

Posted by: Justin | Aug 28, 2008 11:27:45 AM

Thanks for posting.
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Andrew William

Dating Business

Posted by: Andrew William | Oct 6, 2008 3:13:11 PM

Cap output is almost certain to be lower with a single exclusive license than it would be if teams licensed their own logos to different cap manufacturers.

Posted by: James Morgan - Puritan Financial Advisor | Oct 10, 2010 7:19:02 PM

To the extent that this makes any sense at all, it sweeps way too broadly.

Posted by: James Morgan - Puritan Financial Advisor | Oct 21, 2010 2:31:56 AM

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