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18 March 2010
On January 13 2009 the Supreme Court heard oral argument in American Needle Inc v National Football League,(1) a case likely to have a profound effect on the application of Section 1 of the Sherman Act(2) to commercial joint ventures. At its base, American Needle is a case about antitrust's first principles. Under Copperweld Corp v Independence Tube Corp,(3) Section 1's prohibition of "contract[s], combination[s]..., or conspirac[ies] in restraint of trade" requires concerted action between independent economic enterprises. That case held that a parent corporation and its wholly owned subsidiary were a single economic enterprise and were thus incapable of conspiring under Section 1 of the Sherman Act.
The question in American Needle is whether the National Football League's (NFL) 32 separately owned and operated member clubs are independent economic enterprises and thus capable of conspiring among themselves or whether, as legitimate joint venturers interdependent in the production of NFL football, they are a single economic enterprise whose internal decisions are beyond the reach of Section 1. How the court answers that question will have a substantial effect on antitrust analysis of competitor collaborations, including those outside the realm of sports.
On the surface, American Needle hardly seems the stuff of landmark antitrust cases. For many years American Needle licensed from the NFL all team logos and related intellectual property, which it then used on caps and similar merchandise. In 2001 the NFL exclusively licensed logos to Reebok International for certain apparel, including headwear. American Needle sued, claiming that the exclusive licence decision constituted an unlawful agreement among the NFL's 32 member clubs to restrict competition in the market for licensed apparel. The NFL responded that its member clubs are incapable of conspiring in violation of Section 1 because they are part of a single economic enterprise that produces a single product - NFL football - that no club can produce alone. Licensing, in the NFL's view, is merely one form of promoting that league product and thus it is also the action of a single enterprise.
The district court granted the NFL summary judgment and the US Court of Appeals for the Seventh Circuit affirmed.(4) The Seventh Circuit's judgment conflicts with decisions from other circuits that have treated the conduct of sports leagues as concerted action among their member clubs under Section 1.
The parties and several amici curiarum (friends of the court) have broadly suggested three different approaches to identify a single enterprise under Copperweld. All have shortcomings and, to the extent that anything can be divined from oral argument, the justices may not adopt any of them fully.
The ownership and control approach
American Needle and its supporting amici curiarum, notably several professional players' unions, argue that a joint venture is a single enterprise only when venturers are under common ownership and control. With this approach, neither sports leagues nor most commercial joint ventures in the United States (eg, law firms or other common partnerships) would ever be deemed a single enterprise under Section 1.
The benefit of American Needle's approach is administrative simplicity. Conduct of separately owned and controlled entities that are part of a joint venture, even on internal venture matters, will always be subject to Section 1 review. To avoid protracted litigation over legitimate internal venture decisions that are competitively benign (in the NFL's case, decisions such as those establishing the rules of the game or the scheduling of contests), American Needle advocates an undefined 'calibrated' rule-of-reason analysis. Other matters on which the venturers compete or could compete against one another (in the NFL's case, licensing of logos or acquisition of players) would be subject to ordinary Section 1 analysis.
American Needle's approach raises at least two potential concerns. First, the focus on ownership and control of the venturers appears to be at odds with Copperweld, which stressed that capacity to conspire turns not on form but economic substance. Second, as the court noted in Bell Atlantic Corp v Twombl,(5) and some justices mentioned during oral argument, even a 'calibrated' rule of reason may impose substantial litigation costs on defendants in cases in which there is no real threat to competition.
The internal decision approach
The NFL, supported by several amici curiarum, contends that the product that it sells - NFL football - cannot be produced by any member club acting alone, and therefore that the clubs have no economic significance apart from the league. Under this approach, licensing and other internal decisions are part of the league product and are the actions of a single enterprise. More broadly, the NFL contends that initial formation of a joint venture is properly considered concerted action subject to Section 1, but once it is formed and deemed legitimate, internal decisions affecting venture output and operation are those of a single firm. Thus, only decisions far outside the scope of the league (eg, formation of a trucking company) would be subject to antitrust review.
This approach avoids exposing virtually every joint venture decision to rule-of-reason analysis. Nonetheless, it does pose practical enforcement problems. Distinguishing 'internal' venture conduct from that beyond the venture's scope can be challenging, particularly with non-sports commercial joint ventures. Decisions to expand the venture to produce a new product could be considered internal matters affecting venture output, but might also be treated as new formations, given the growth in the venture's scope and the potential effect on competition among the venturers outside the venture. Because the line between internal and external decisions will not always be clear, placing a decision in the internal category could effectively shield some competitively significant conduct from Section 1 scrutiny. In fact, at oral argument Justice Sonia Sotomayor asked whether this approach would grant the NFL a judicially created Section 1 exemption that Congress has never conferred.
Effective merger approach
The Department of Justice Antitrust Division and the Federal Trade Commission suggest a third approach that seeks to steer a middle course. The government would treat a joint venture as a single enterprise when the venturers had effectively merged their internal operations on a certain issue, thus eliminating actual and potential competition among them, and the challenged practice did not significantly affect actual or potential competition among the venturers outside their merged operations. In one respect, this approach is nominally similar to that of the Seventh Circuit, in that it suggests that the same joint venture may be a single economic entity for some purposes and not others. However, the government acknowledges that few venture operations will satisfy its proposed test.
The effective merger standard shares some of the same shortcomings as the ownership-and-control test offered by American Needle. A requirement that venturers effectively merge their operations appears to make the single-enterprise determination turn on form, at least to some degree, and could encourage joint venturers to merge certain operations precisely to avoid Section 1 scrutiny, even if the venture might operate more efficiently with a different structure.
Predicting the outcome of American Needle is not easy. As with most cases addressing first principles, the court's task is likely to be a line-drawing exercise. A narrow application of the Copperweld doctrine will give broad reach to Section 1 and potentially encourage joint venturers to use the Sherman Act to gain leverage in resolving what are no more than internal venture disputes. In contrast, a broad reading may substantially reshape antitrust law by effectively removing a number of business practices historically policed by the Sherman Act from Section 1 scrutiny. Such a ruling would loosen the constraints that lower courts have applied to joint ventures among competitors.
At oral argument, the justices seemed to probe for a middle ground - one that neither exposes every internal decision of a joint venture to the vagaries of antitrust litigation nor gives joint venturers a substantially unchecked hand when their decisions may have some effect on competition. This may ultimately lead the court to the test advanced by the government or perhaps the more flexible Seventh Circuit approach, which contemplates case-by-case analysis of ventures and the conduct at issue, with perhaps a more definitive analytical framework than that suggested by the appellate court. What this portends for the parties on the specific facts of the case will have to await the opinion, but the outcome is almost certain to have significant effects for the future application of antitrust law to competitor collaborations.
For further information on this topic please contact Janet L McDavid or William T Monts at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (firstname.lastname@example.org or email@example.com ).
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