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Zen in the NFL, I.P. Holding Companies and Antitrust

The U.S. Supreme Court, in American Needle, Inc. v. National Football League et al., 560 U.S. , Case no. 08-661, decided May 24, 2010, 2010 U.S. LEXIS 4166 (2010) , ruled that I.P. associations, when organized by separate decisionmakers, are subject to Section 1 of the Sherman Act (the federal antitrust laws).  In 1963, thirty-two (32) teams in the National Football League (NFL) formed the National Football League Properties (NFLP), an intellectual property (I.P.) organization, to manage their IP rights (the “NFL Defendants”).  In 2000, the NFL teams voted to authorize NFLP to grant exclusive trademark licenses to third parties.  Earlier, NFLP had issued non-exclusive licenses to various third parties, which included Plaintiff American Needle, Inc., to manufacture and sell branded hats, shirts and other NFL merchandise.  American Needle’s non-exclusive license for NFL hats was not renewed and NFLP then granted Reebok a 10 year exclusive license for headgear.  American Needle sued arguing that the NFL Defendants had illegally restrained trade in the branded goods and this restraint of trade violated Section 1 of the Sherman Act.  The federal antitrust law states that “[e]very contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade … is declared to be illegal.”  15 U.S.C. sec. 1.

The Supreme Court noted that each NFL team must play another team to provide NFL’s primary service to the public, that is, sports entertainment services, and cited the Zen riddle: Who wins when a football team plays itself.  Notwithstanding this basic intra-league competition, the Court applied a function-based organizational analysis to the NFL Defendants to answer the antecedent question of whether there is a contract, combination or conspiracy among the defendant organizations.  Essentially, without a contract, combination or conspiracy between two or more parties, there can be no violation of Section 1 of the Sherman Act.

Traditionally, two or more contracting parties easily fulfill this condition.  The analysis is more complex with intraenterprise situations.  When a single organization is involved, the analysis looks to the actual functions of the co-acting parties, not a formalistic analysis of corporate law.  A functional analysis “consider[s] … how the parties involved in the alleged anticompetitive conduct actually operate.”  Slip opn. pg. 6.

“The relevant inquiry, therefore, 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,’” Slip opn. p. 10, quoting Copperweld Corp. v. Independence Tube Corp., 467 U. S. 752, 769 (1984).

The question is whether the agreement, for example a joint venture, joins together separate or independent centers of decisonmaking.

In the 1984 Cooperweld decision, the Court held that there is no conspiracy or combination when the co-acting parties are integrated into a single corporate structure, a so-called intraenterprise activity which can never violate Section 1 of the Sherman Act.  Copperweld, 467 U. S. at 767. In its basic form, an officer of a company cannot conspire with others in the organization to violate Section 1 because the company is a singular decisonmaker.  By extension, a parent corporation and its wholly owned subsidiary are separate for purposes of their formal titles, but since they are controlled by a single decisionmaking center and this center controls a single aggregation of economic power, the parent-subsidiary combination cannot form a combination under Section 1 of this antitrust law.

If a combination or conspiracy is present, it is easier to establish an illegal restraint of trade under Section 1 rather than Section 2 of the Sherman Act which requires proof of monopolization.  15 U.S.C. sec. 2.  Sherman Act Section 1 is broader than Section 2 of the Act.  Slip opn. pg. 5.  If the contract, combination or conspiracy is a restraint of trade, then the unlawful conduct may be remedied by an injunction which prohibits the multi-actor conduct. Id. Section 2 of the Sherman Act, requires a finding of monopolization and is narrower than Section 1’s prohibition of contracts, combinations or conspiracies in restraint of trade.  Id.

Commentary: From an IP standpoint, the American Needle decision will effect the decisionmaking powers assigned to the parties to IP joint ventures.  I.P. holding companies are popular corporate structures to protect I.P. assets while permitting exploitation of the I.P. assets held by the organization.  I.P. joint ventures are useful to combine different assets from different companies into a singular enterprise to create new products or services with the jointly controlled patents, trademarks, copyrights and trade secrets.  A functional analysis of who decides what about which IP assets will determine whether third parties view the joint venture as a potential illegal restraint of trade or whether the Cooperweld intraenterprise immunity attaches to the venture.

Please note that the foregoing analysis and commentary does not represent the views of Kain & Associates.  This is a general overview of a recent case and, upon further reflection, the opinions expressed herein may change based upon the commentary of others and further case law analysis.  The application of law to facts alters the conclusions in any particular case.  The above analysis contains general concepts which may not be applicable to the specific facts in any given situation.

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