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Tuesday, June 30, 2009

American Needle Cert Granted - Some Initial Thoughts

Posted by Chris Sagers

A very big, possibly game-changing event has occurred in antitrust.  Yesterday, on the last regularly scheduled sitting of its October Term 2008, the Supreme Court granted certiorari to review the Seventh Circuit's decision in American Needle, Inc. v. NFL, 538 F.3d 736 (7th Cir. 2008), /cert. granted,/ 77 U.S.L.W. 3326 (U.S. June 29, 2009) (No. 08-661). The court below offered one of the most dramatic rulings yet in the long-running debate whether sports leagues can be Copperweld "single entities," finding the National Football League a single entity--and therefore immune from section 1 liability as a matter of law--even with respect to the member teams' licensing of their own, individually owned trademarks.  Were it ever in doubt, American Needle should prove that the sports league question is not a curiosity of interest mostly to specialists in sports law.  The decision below, and the current make-up of the Supreme Court that will decide its fate, pose a larger threat to the scope of Section 1 of the Sherman Act than it has faced in many decades.

The decision below was so dramatic because it found single entity status even as to a kind of conduct in which the teams most obviously do or could compete in horizontal price competition: the licensing of their trademarks for the making of sports memorabilia.  In late 2000 the teams of the NFL voted collectively to enter into a 10-year exclusive license with Reebok to produce headwear bearing the teams' trademarked logos. 

Thus ended what had been a long period of some competition among headwear manufacturers.  Prior to 1963 the teams had individually licensed their own IP directly to manufacturers or through agents, and
in many cases a team would license more than one manufacturer to make products bearing its mark.  In 1963, some of the teams established a California corporation to act as their licensing agent, but even
thereafter the agent and sometimes the individual teams continued to license more than one maker to use its marks.  Plaintiff American Needle had been a licensee of the various teams' marks and for many years had made headwear bearing their marks in competition with other licensee manufacturers.  But shortly after the exclusive Reebok contract took effect American Needle's contract was allowed to expire, as were those of other outstanding Reebok competitors.  There is some reason to believe the Reebok contract has had bad effects already:  even with no discovery at all as to the question of the exclusive deal's purpose or effect, plaintiff American Needle was able to adduce evidence of substantial and persistent price increases for the products now exclusively made by Reebok.

Still, the Seventh Circuit affirmed an order of summary judgment that found single-entity status after only limited discovery.  Judge Kanne wrote for a unanimous panel that in reaching the exclusive license deal,
the teams acted together as one entity.  Though he marched dutifully through several quotations from Copperweld and a summary of the existing section 1 caselaw on sports leagues, the only actual defenses he offered for the ruling were two. First, he noted that the teams had been collectively licensing their trademarks for a long time (since 1963). 

Though he characterized this point as the "most important[]," since Copperweld characterized section 1's concern as the removal of independent economic forces, it actually seems irrelevant.   As a few of
the parties pointed out in briefing to the Court, that a conspiracy has succeeded for a long time cannot determine its legality. What really seems much more important was Judge Kanne's rejection of the idea that the question should depend to any extent on whether the teams did or *could have* competed with one another.  He wrote first that the panel "[was] not convinced that the NFL's single-entity status . . . turns entirely on whether the league's member teams can compete with one another . . . ."  Then, with virtually no analysis of whether their ability to compete *could* be relevant to their entity status, he wrote
that "with that said, American Needle's assertion that the NFL teams have deprived the market of independent sources of economic power"--seemingly the critical question under Copperweld--"unravels." 
The brief analysis following that claim boils down more or less exclusively to the panel's view that "the NFL teams share a vital economic interest in collectively promoting NFL football."

Importantly, plaintiffs were afforded no discovery as to whether the NFL teams did or could compete with respect to trademark licenses to headwear manufacturers, and in fact the panel ruled against American
Needle on a Rule 56(f) discovery dispute on that point, which was also on appeal.

In other words, a unanimous panel of a federal court of appeals has held the following conduct to be categorically exempt from section 1 liability:  a collection of business firms that happened to share an
"economic interest in collectively promoting" one product could establish a horizontal conspiracy fixing the price of a different product, with quite different economic characteristics and as to which they have competed even in the recent past.  They may also boycotting all but one downstream distributor of that product with the purpose of maximizing its revenue.

Today, the Court granted cert on the following QP:

"Should the National Football League and its member teams be treated as a single entity that is exempt from rule of reason claims under Section 1 of the Sherman Act, which outlaws any "contract, combination ... or conspiracy, in restraint of trade," because they cooperate in joint production of NFL football games, while at the same time they may have competing economic interests, have the ability to control their own economic decisions, and have the ability to compete with each other and the league?"

This all bodes very poorly for the future of section 1.  On the current Court there are probably four solid votes for affirmance (judging from opinion authors and voting in the past several years, one could well
expect Justices Roberts, Scalia, Thomas and Alito to vote to affirm).

Affirmance therefore calls only for one more vote.  Presumably Justice Stevens will vote for reversal, given his frequent dissents in the Court's pro-defendant decisions of the past few decades (including, importantly, in Copperweld, though not in Dagher, from which no one dissented).  Justice Ginsburg too seems a likely vote for reversal, as she has joined some Stevens dissents.  I suppose one might expect
Justice Breyer, the Court's strongest antitrust expert, to oppose a decision so logically flawed and so damaging to antitrust enforcement (though one might also have expected him not to join in Twombly, for the same reasons). But Justice Kennedy seems no friend of private antitrust enforcement, having written for the Court in Leegin and Brooke Group, as well as Iqbal's recent and controversial application of the Twombly rule and the pro-defendant ruling in securities litigation, Stoneridge Investment Partners.

And finally, assuming Judge Sotomayor is confirmed to the Court in time, it is a bit hard to predict how her presence might alter the Court's balance with respect to a case like American Needle.  On the one hand, she would replace a Justice whose record in antitrust is often a bit confusing and surely not very friendly to antitrust policy.  Justice Souter, after all, wrote Twombly, and accordingly believed that the benefits of private enforcement are very frequently outweighed by its costs, and the strange metaphysical tightrope he walked in California Dental raises more questions than it answers of his view of antitrust.

So would a Justice Sotomayor much change the Court by replacing the antitrust views of Justice Souter? Like much else about her, it is hard to say.  The few antitrust opinions she authored while on the Second  Circuit, for example, were mostly pro-defendant (e.g., finding a professional football labor dispute to be within the non-statutory labor exemption and ruling against a Robinson-Patman plaintiff, but leaving glimmers of hope for plaintiffs (e.g., reversing 12(b)(6) dismissal for a class of employees against Exxon and a major procedural ruling in credit card litigation, but which didn't reach antitrust merits). 

Another critical fact in trying to read these particular tea leaves is that no Justice dissented in Dagher, a much overlooked decision that happens to be absolutely freighted with dark potential and that bears important affinities with the issues presented in American Needle.  That all of the Justices failed to see the potential that Dagher would ultimately lead to judicial repeal of section 1 does not bode well for how they will view American Needle.

In short, there are probably four pretty solid votes for affirmance, one more (Kennedy) that seems only marginally less solid for defendants, and either of two (Breyer and Sotomayor) that might also sign on for affirmance.

One of the most interesting aspects of this case is that the Solicitor General, weighing in at the Court's request, opposed cert. The Court made the request just one month after the new President's inauguration, just after the confirmation of his new SG, and just before the new AAG's confirmation vote.  That in itself is interesting, as one must wonder exactly why the Court made its request--it only takes four votes, and neither the number of votes nor their identities are made public, but why exactly was the Court interested in the administration's views of this case? 

While one presumes the Court merely offered the administration a courtesy as to this area of enforcement policy that might well change fairly drastically, it is tantalizing to speculate whether there were some more cynical motives surrounding this very bad lower court decision with potentially very broad consequences.  But in any event, what is really interesting is that the SG's brief was substantively quite weak.  The brief begins by stressing that the opinion below is incorrect and could have major, negative consequences, but then works through a handful of quite strained and unpersuasive arguments that the case is not well suited for review under the Court's cert standards.  This was so even though the signatories include a handful of the nation's best appellate lawyers and several absolute powerhouses in antitrust.  A conclusion one might draw is that though the signatories would like very much to see Judge Kanne's decision reversed, they fear as much as I do that this particular Court will get its hands on it.

In any event, for those of us who would like to see federal antitrust survive the Roberts era without sub silentio judicial repeal, there is one bright spot in these affairs.  American Needle's able trial counsel, who developed a strong fact case at the pre-trial stage with only the most limited discovery, has been joined on the Supreme Court appeal by two of Jones Day's best lawyers:  Meir Feder, one of the country's most able Supreme Court advocates, and the head of JD's antitrust group, Joe Sims.  Mr. Sims, in particular, brings not only world-class antitrust expertise to the table, but an important measure of gravitas--he is not exactly a man the Court will perceive as a leftie firebrand or some reckless pro-plaintiff populist, and rather was a top antitrust enforcement official in the Nixon administration and currently one of the country's leading antitrust practitioners.  Their supplemental brief for American Needle in reply to the SG's brief opposing cert is a work of art.  One expects that their merits briefs will be devastating.

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Comments

Chris:

Great post. I think you make a brilliant point about the United States's amicus brief.

With respect to Sonia Sotomayer, I am somewhat more optimistic than you about her ruling in favor of American Needle. Even though Sotomayor's majority opinion in Clarett v. Nat'l Football League would make some scoff at Rush Limbaugh's notion of her as a liberal, Sotomayer limited her ruling in Clarett to just pushing forward the 2d. Circuit's already iconoclastic view of the non-statutory labor exemption.

Also, as a partial aside, I recently published two law review articles on the American Needle case--one of which was cited in American Needle's supplemental brief. In case you were interested, I have attached them below:


Why the Single Entity Defense Can Never Apply to NFL Clubs

http://ssrn.com/abstract=1291974


Single Entity Ruling: 'Needle' in Haystack

http://ssrn.com/abstract=1348554

All the best.
Marc Edelman
Visiting Professor of Law, Rutgers School of Law.

Posted by: Marc Edelman | Jun 30, 2009 1:16:51 PM

Chris:
As I understand it, American Needle’s claim is that a cartel appointed an exclusive distributor for the purpose of extracting supra-competitive profits from the sale of the cartel’s product. This claim describes no consumer injury. The interests of suppliers and consumers are aligned with respect to the cost of distribution, which is only one more input into the cost of a finished, delivered product. Not even a monopolist would willingly raise its own costs of distribution by endowing its distributor(s) with supra-competitive profits (with the exception of an exclusion story, but there is no hint of such a story here). If a monopolist wants to extract the monopoly price for its products, it may do so at the wholesale level, irrespective of the number of downstream distributors it happens to use. In fact, a monopolist would likely prefer to charge the monopoly price to many distributors, not just one, and drive the cost of distribution to the end user down to its marginal level through downstream intrabrand competition while extracting the monopoly profit from its distributors. There is only one monopoly profit, and I am aware of no theory that would describe how appointing a single distributor could allow a monopolist to extract any more from consumers than it could already extract from its distributors. The same analysis hold for a cartel, which seeks monopolistic outcomes through collusive means. If the NFL teams want to extract the monopoly price from their customers, they may do by licensing their property collectively (as they have done since 1963, apparently, but this is not American Needle’s case) and licensing as many distributors as is necessary to realize cost-efficient distribution. Against this backdrop, the decision to go through the trouble of selecting and appointing a common distributor must have been done for pro-competitive, output enhancing reasons, rather than reducing output, because output was (or could have been) already reduced to the monopoly level. You write: The NFL teams “may also [be] boycotting all but one downstream distributor of that product with the purpose of maximizing its revenue.” To be fair, the flaw (if one there is) is in American Needle’s theory in the first instance, but nevertheless I ask: What theory are you relying on here? How does this describe a coherent theory of consumer injury?

That said, I agree that American Needle was poorly decided, at best. The problem is in Copperweld, which doesn’t give us a coherent theory of what work the agreement element is doing in antitrust law, and why. Copperweld, I argue, stands for the proposition that the agreement element is devoid of content and is to be interpreted purposively with an eye towards furthering the underlying aims of antitrust law, that is, the welfare standard embodied in the “restraint of trade” element of Section 1. Agreements are ubiquitous. They are the essence of cooperative economic activity, and the activities of a single firm could be called an “agreement” of its owners, managers and employees without doing violence to the concept. In fact, American Needle resembles Copperweld, in that both involved an “agreement” that could not have possibly harmed competition (no market power in Copperweld). In both cases, the agreement element was actually used as a sort of very quick look, or screen, to evaluate the welfare effects of the challenged conduct. It’s true that the conduct in American Needle could have been evaluated under the rule of reason after a formal and perfunctory acknowledgement that yes, indeed, this was concerted action. But why bother? In fact, the same argument was made by the Copperweld dissenters: we have this flexible rule of reason, and we could apply it to all agreements and quickly immunize those least likely to harm the public. This argument was rejected in Copperweld. If you accept the authority of that case, then in at least some cases courts can cut off a rule of reason inquiry by holding that an agreement is not the sort of “agreement” we care about under the antitrust laws. The question is when, and neither Copperweld nor the appellate opinion in American Needle give us much guidance as to what those cases should look like, or how courts should structure the inquiry and any limited discovery that might be necessary. Such guidance may be forthcoming.

Posted by: Chris | Jun 30, 2009 6:47:47 PM

Chris,

I am not well-versed on the legal theory concerning consumer injury involved. It does seem relatively obvious that NFL logo gear has increased substantially in price in recent years.

If I had more than one distributor to go to get my Broncos jersey the competition should drive the price down some. Appointing one distributor could also allow that distributor to limit supply easily and therefore keep prices higher that if numerous distributors were competing.

Just food for though from a laymen. Thanks for the very interesting post and reply

Posted by: pepster | Oct 15, 2009 1:11:20 PM

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