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Supreme Court's Ruling in American Needle Creates Uncertainty Over Future of NFL Licensing

In a landmark decision, released (coincidentally?) on the first day of the International Trademark Association’s Annual Meeting, the U.S. Supreme Court held, in American Needle, Inc. v. National Football League, that the NFL’s licensing activities are covered by Section 1 of the Sherman Antitrust Act which prohibits “every contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint of trade.”  As a result, the NFL will now be required to demonstrate, on remand, that such activities comport with the so-called “Rule of Reason.”

In the early 1960s, the NFL member clubs, all of which separately owned the intellectual property rights in their names, colors, and logos, created NFL Properties as the league’s licensing arm.  Each team exclusively licenses its trademarks to NFL Properties, which in turn further licenses those rights to a variety of companies that produce official NFL merchandise. 

American Needle was one of these licensees; a non-exclusive licensee for headwear.  In late 2000, the NFL decided to allow NFL Properties to grant exclusive licenses, and the headwear license went to Reebok on an exclusive basis.  This bothered American Needle, in part because they lost the NFL business, but also because the practical impact of the exclusive deal with Reebok (and what should matter to you, the consumer) was that hats which once cost $15 now cost in the neighborhood of $30.  So American Needle sued, claiming that the NFL clubs’ decision to pool their trademarks together to be jointly licensed by NFL Properties to the highest bidder was anticompetitive.  Today, the Supreme Court agreed…sort of.

In its ruling, the Supreme Court basically said it wasn’t buying the NFL’s argument that it was actually operating as a “single entity” in the licensing of its intellectual property.  While it is certainly true that the clubs act “as one” in order to conduct exhibitions of football games during a regular and post season, the Supreme Court concluded that in other aspect of their business, each NFL club competes against the others for things like player contracts, gate receipts, fan support, and personnel.  Most importantly, the teams are potentially competing suppliers in the market for branded merchandise, despite the fact that they haven’t operated this way for more than 45 years.  When a team licenses its own intellectual property, it does so for its own benefit, and for its own corporate interests, and its interest in licensing team trademarks is not necessarily aligned with that of the other clubs.  Therefore, because you have 32 teams conspiring to license their intellectual property as a “package deal,” the arrangement potentially violates the antitrust laws.

Wow…

So, where does this leave us?  Well, now the case goes back down to the District Court, where the Court will be required to apply the Rule of Reason to the arrangement by which the clubs license their marks to NFL Properties.  The Court must determine whether the agreement merely regulates or even promotes competition (in which case, there is no problem) or whether it suppresses or destroys competition (here — problem).  The Court will look at a variety of facts specific to the case, including a picture of how things were working before the restraint was imposed and after.  It will be interesting to see whether the Court looks merely at pre-NFL Properties dealings or views things a bit more myopically, looking at pre-exclusive NFL Properties relationships, given that this activity is what triggered the dispute. 

We won’t know anything for a while, but the impact of this ruling could change the face of licensing in every single sports league in this country.  Right now, the leagues (and, notably, the NCAA) all have licensing arms that control the flow of member teams’ intellectual property.  Really, it is convenient to do it this way, as someone looking for a license to produce NFL shirts doesn’t have to negotiate 32 separate contracts with each team; he can simply go to NFL Properties and get one license that covers all 32 teams.  But what if, say, that person just wants a license to make Bengals shirts (why, I don’t know)?  Under the current setup, he can’t get one — he has to buy the rights to all 32 teams.  This prevents one team from being over-exposed or over-licensed because they are more “valuable” or “popular” or have a bigger fan base.  Sure, the products will sell differently in different markets, but it keeps you from seeing Bengals shirts and nothing but Bengals shirts.  A lot of owners, Jerry Jones of the Cowboys for example, find this system to be rather inequitable, because someone is going to pay a lot more for a Cowboys license than they would a Bengals license.  Jerry is a business man, and he doesn’t want the league setting the price for the licenses of his stuff or for the other teams to drag down his brand value.  Jerry, however, gets around these rules by doing things like building his own stadium with his own money and doing whatever he wants — but most owners don’t have these kinds of options.  Of course, the other benefit of the current scheme, particularly to the NFL, is by packaging all 32 brands together, it can charge a higher price for each license.  And if someone wants to be the exclusive shirt provider of the NFL, the price goes through the roof.  Naturally, this fills the NFL’s coffers, which makes the league grow stronger, but it also raises the prices you and I have to pay for that Bengals shirt.  And when this happens, the government starts to get a little concerned.

So, if the NFL Properties contract fails the Rule of Reason, you will start to see each team licensing its trademarks on its own, and, presumably, a little differently from each other.  In Green Bay, you may see Packers cheddar cheese.  In Cincinnati, you may see Bengals chili.  While this certainly allows teams to target their own markets in a discrete manner and become somewhat more entrepreneurial in their licensing ventures, who’s to say that Packers cheese or Bengals chili is actually a good thing for the NFL?  And that’s where the train may come off the rails.  From a trademark perspective, the single most valuable aspect of the NFL Properties system is the one-source brand management of the “package" that is professional football.  When this falls away, the NFL loses the vice-grip on how its brands are presented.  This ruling could also potentially affect how we watch football as well.  Individual television networks could buy up rights to broadcast only certain teams’ games.  Suddenly, the multi-billion dollar major network contracts are gone, as teams decide to take what they can get if a local broadcaster wants to show the games.  If we follow the money, the decentralization of the licensing function threatens to upset the apple cart of carefully crafted competitive balance that exists in the NFL right now; the aspect of the game that has made it the most exciting sport to watch in the U.S.  Individual teams will collect vastly different sums from their licensing ventures, allowing them to compete at higher or lower levels on the field.  You could see one or two dominant teams emerge that whip the little guys every single year. 

Now, of course, you can fix all this with a collective bargaining agreement between the players and the owners that address all these issues.  Ironically, the CBA is on the table for negotiation as we speak.  The timing of the Supreme Court’s decision, then, couldn’t have been worse for the league…

5/24/2010 at 5:30 p.m. ET — Update: Mike Florio over at Profootballtalk.com has some great analysis posted on how this decision potentially impacts the NFL, labor negotiations, revenue sharing, and a host of other issues. You can read that analysis here, here, and here.