This article was presented on July 13, 2010 at the ABA-ALI's Audio Webcast "American Needle: Supreme Court Sacks NFL for Loss of 9, Holding Joint Ventures Not Outside Reach of Sherman Act." © Copyright 2010 Barbara Sicalides and the American Law Institute. Reproduced with the permission of ALI-ABA. All rights reserved.
For the first time in almost two decades, the U.S. Supreme Court has ruled in favor of a plaintiff in an antitrust action. Specifically, the Court held in American Needle, Inc. v. National Football League,1 that the decisions of a lawful joint venture entity remain subject to Section 1 of the Sherman Act’s prohibition of conspiracies or agreements in restraint of trade if they are the result of an agreement among “independent centers of decisionmaking.”
Before the Court’s decision on May 24, 2010, commentators and practitioners alike were predicting that American Needle would provide guidance and perhaps even clarity on at least two issues: (1) whether the professional sports leagues and other firms established by actual or potential competitors constitute a single entity under Copperweld v. Independence Tube Corp.2 and (2) the extent and nature of the integration required for a joint venture’s activities restraining competition to be lawful under the Sherman Act. For example, one author wrote about the changes that American Needle might bring:
Among the decisions most important consequences will be what it has to say about another recent decision, the underappreciated 2006 ruling in Texaco Inc. v. Dagher. If the Court reverses in American Needle, it may signal that Dagher is to be a narrow decision, limited to a fairly peculiar set of facts. If the Court affirms, and particularly if it does so in explicit reliance on Dagher, then American Needle could, as a practical matter, do significant damage to the enforceability of Section 1 of the Sherman Act; it could in effect immunize significant swaths of concerted conduct among competitors.3
These predictions and a number of similar other predictions have not come to pass. Instead, the Court left the law essentially as it was before and left antitrust counselors still looking for guidance on what level of integration is necessary for a joint venture and its parent companies to act without fear of Section 1 of the Sherman Act.
A Little Bit of Recent Supreme Court History -- Texaco Inc. v. Dagher
The decision many hoped would be clarified – Texaco v. Dagher4 – involved somewhat unique facts. In Dagher, the Supreme Court held that a lawful, economically integrated joint venture formed by competitors did not commit a per se violation of Section 1 by setting the prices at which it sells its products.5 The decision placed the regular activities of a structural joint venture essentially on par with those of a single firm, at least when formation of the joint venture ended competition between its members. Although the decision itself was rather narrow, the Court’s opinion contained intriguing dicta that might have meant diminished antitrust risks for the internal operations of legitimate joint ventures.
In 1998, Shell Oil and Texaco entered into a “massive” nationwide alliance consisting of two separate joint ventures. One joint venture, named Equilon Enterprises, combined Shell's and Texaco’s downstream operations in the western United States. The other venture, named Motiva, was formed by Shell, Texaco and Saudi Refining Inc.,6 and combined the three companies downstream operations in the eastern United States.
Texaco and Shell Oil pooled their resources and shared the risks of profits and losses from Equilon’s business. The creation of the alliance ended the national competition between Shell and Texaco in their downstream operations via non-compete agreements, shared ownership of the two joint ventures, and a unitary pricing scheme whereby the Shell and Texaco brands would have the same price in the same market areas, despite the fact that each parent company maintained its respective brand as a distinct product with its own unique composition, trademark, and marketing strategy. The two oil companies, however, continued to compete with each other with respect to oil and gas exploration and production operations.
The FTC and several state attorneys general had reviewed the formation of Equilon and had approved it subject to some modifications and divestments. The consent order conditionally approving the formation of Equilon placed no restrictions on its pricing of its gasoline.
Employees of Texaco and Shell Oil comprised Equilon’s board of directors. The two companies agreed not to compete with Equilon, and further agreed not to manufacture or market certain other fuels in the western United States. A single Equilon executive set a uniform price for the two brands of gasoline.
The plaintiffs brought suit on behalf of themselves and 23,000 other Texaco and Shell Oil service station owners who had purchased gasoline from Equilon. They brought suit in the U.S. District Court for the Central District of California, alleging that Equilon’s consolidated pricing for Texaco and Shell Oil gasoline amounted to horizontal price-fixing that allowed Equilon to raise gasoline prices at a time when the price of crude oil had dropped. The plaintiff service station owners disclaimed any reliance on the traditional rule of reason, and instead based their claim entirely on either the per se rule or a “quick look” rule of reason theory of liability.
The district court granted defendants’ motion for summary judgment on the ground that Equilon and Motiva were not operations designed to conceal an elaborate price-fixing scheme, and that they had produced sufficient efficiencies and were sufficiently integrated to constitute legitimate joint ventures under either the per se rule or a quick look analysis.7
The Ninth Circuit disagreed and found that Equilon’s internal price-setting was actually per se illegal price-fixing.8 The Supreme Court granted certiorari to answer the question “whether it is per se illegal . . . for a lawful, economically integrated joint venture to set the prices at which the joint venture sells its products.”
The Supreme Court rejected the Ninth Circuit’s application of the ancillary restraints doctrine to Equilon’s unified pricing and stated that the doctrine should only apply to those restrictions imposed by a joint venture on its external or non-core activities. Because pricing of the product sold by a joint venture was a quintessential “core activity,” the Court held that the “ancillary restraints doctrine ha[d] no application here . . .”9
The Court unanimously held that price-setting by a lawful joint venture is not subject to per se treatment. It said that, when companies that are otherwise competitors “pool their capital and share the risks of loss as well as the opportunities for profit . . . such joint ventures [are] regarded as a single firm competing with other sellers in the market.”10 In reaching its decision, the Court relied on the plaintiff station owners’ concession that Equilon would not be subject to per se liability, if it had chosen to sell its gasoline under a single brand, rather than continuing to sell under both the Texaco and Shell Oil brands. The Court saw no reason to treat Equilon differently simply because it had chosen to sell under two brands at the same price.
The Dagher Court also said that, while Equilon’s pricing of its two brands of gasoline was pricefixing in the literal sense, it was not price-fixing in the “antitrust sense.”11 The Court thereby likened Equilon’s pricing decisions to those of any single-firm entity, which are not subject to Section 1 of the Sherman Act.
Back to American Needle
In 1922, the Court, in Federal Base Ball Club v. National League,12 held that major league baseball was exempt from the antitrust laws. Despite the fact that the teams in all other major sports – basketball, ice hockey, soccer and football – must coordinate and integrate their activities for a variety of purposes, including to setting schedules and establishing game rules, no other sport has been granted such immunity.
The facts of the dispute between American Needle, the National Football League (NFL) and Reebok International Ltd. (Reebok) were relatively simple. Each of the NFL teams has its own logo, colors and name and each owns the associated the intellectual property. Until 1963, each team made its own intellectual property licensing decisions. In 1963, the teams formed National Football League Properties (NFLP) for the purpose of developing, licensing and marketing their intellectual property. Until 2000, NFLP granted nonexclusive licenses to a number of firms to manufacture and sell apparel and equipment with the NFL team logos. In 2000, however, the teams voted to authorize NFLP to grant exclusive licenses and NFLP granted an exclusive license to Reebok to manufacture and sell team hats for the 32 NFL teams.
The license at issue in the litigation was not an exclusive license of the NFL’s own independent intellectual property, but a license for the intellectual property of the individual teams. American Needle was one of the companies whose license was not renewed in favor of Reebok.
American Needle filed the instant case alleging that the agreements between the NFL, its teams, NFLP and Reebok violated Sections 1 and 2 of the Sherman Act. The defendants argued consistently that they were incapable of conspiring within the meaning of Section 1 “because they are a single economic enterprise, at least with respect to the conduct challenged.”13
In the lower courts things went well for the NFL’s licensing regime. The district court granted summary judgment in favor of the defendants and found that the NFL and its teams were “acting as a single entity” with respect to licensing the teams’ intellectual property.14 Specifically, the court determined: “in that facet of their operations they have so integrated their operations that they should be deemed a single entity rather than joint venturers cooperating for a common purpose.”15
The Court of Appeals for the Seventh Circuit affirmed. The Seventh Circuit agreed with American Needle that “when making a single-entity determination, courts must examine whether the conduct in question deprives the marketplace of the independent sources of economic control that competition assumes.”16 Accordingly, the court limited its review to the act of licensing team intellectual property.
The court stated that even if “the several NFL teams [had] competing interests regarding the use of their intellectual property that could conceivably rise to the level of potential intra-league competition. those interests [would] not necessarily keep the teams from functioning as a single entity.”17 The Seventh Circuit found that because the teams “can function only as one source of economic power when collectively producing NFL football” and that “NFL teams share a vital economic interest in collectively promoting NFL football” to compete with other forms of entertainment.18 “It thus follows . . that only one source of economic power controls the promotion of NFL football..”19 “[I]t makes little sense to assert that each individual team has the authority, if not the responsibility, to promote the jointly produced NFL football.”20 Thus, the Seventh Circuit held that Section 1 did not apply to the licensing decisions of the NFL, NFLP and the NFL teams.
American Needle petitioned the Supreme Court, raising two questions: (1) when the teams had competing economic interests and controlled their own economic decision, were the NFL and its member teams a single entity under Section 1 of the Sherman Act and (2) whether the agreement among the NFL teams not to compete over marketing and to grant an exclusive license to Reebok violated Section 1. The NFL’s response to the certiorari petition maintained that a professional sports league of separately owned teams constitutes a single entity under Section 1, but supported American Needle’s request that the Court hear the case in order to address the division among the lower courts regarding application of Copperweld to joint ventures involving a high degree of economic integration.
Despite the fact that the parties to the dispute both argued in favor of certiorari, the Court asked the Solicitor General for the government’s views. In response, the government expressed concern over the Seventh Circuit’s opinion, but argued against review. Specifically, the Solicitor General stated that the decision was limited to the unique facts of the case and argued that the “sports-league context is not . . . suitable” for “address[ing] broader questions concerning the application of single-entity principles to joint ventures generally.”21
The Supreme Court granted American Needle’s petition for certiorari and issued a unanimous opinion written by Justice Stevens. The analysis begins with the Court ‘s restatement of the question before it -- “only a narrow issue to decide: whether the NFL respondents are capable of engaging in a `contract, combination . . .. or conspiracy’ as defined by §1 of the Sherman Act, 15 U.S.C. §1, or, as we have sometimes phrased it, whether the alleged activity by the NFL respondents `must be viewed as that of a single enterprise for purposes of §1.”22).
As if to reassure its more conservative members that the American Needle decision in favor of an antitrust plaintiff would not alter the course of other recent antitrust opinions increasing the burden of proving an antitrust violation, the Court was careful to note the distinction between Section 1 and Section 2 and the importance of not chilling ordinary business operations.
Congress “treated concerted behavior more strictly than unilateral behavior. This is so because unlike independent action “[c]oncerted activity inherently is fraught with anticompetitive risk” insofar as it “deprives the marketplace of independent centers of decisionmaking that competition assumes and demands.” And because concerted action is discrete and distinct, a limit on such activity leaves untouched a vast amount of business conduct. As a result, there is less risk of deterring a firm’s necessary conduct; courts need only examine discrete agreements; and such conduct may be remedied simply through prohibition.23
The Court reviewed briefly past Supreme Court decisions examining the functional relationships of how parties involved in alleged antitrust conspiracies actually operated and thus, whether the parties could conspire. As part of that review, the American Needle Court provided an entirely unremarkable description of Copperweld. According to the Court, the proper analytical format is
not whether the defendant is a legally single entity or has a single name; nor is the question whether the parties involved “seem” like one firm or multiple firms in any metaphysical sense. The key is whether the alleged “contract, combination . . . , or conspiracy” is concerted action – that is whether it joins together separate decisionmakers. 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.”24
Once a court determines that an agreement joins together “independent centers of decisionmaking” and therefore is capable of conspiring under Section 1, the examining court must decide whether the trade restraint is unreasonable and accordingly illegal.
As to the controversy before it, the Supreme Court concluded that the NFL teams do not have unified decisionmaking or single aggregation of economic power. The Court noted that the teams are “substantial, independently owned, and independently managed” and have separate corporate consciousnesses that determine their actions and objectives.25 The Court also found that the teams compete in the market for intellectual property, and each team licenses its intellectual property for its own corporate interests, not the common interests of the whole. To a supplier making hats, like American Needle, the different teams are potentially competing holders of valuable trademarks.26 The Court, however, acknowledged that NFL teams have a common interest of promoting the NFL brand and that the NFLP has been “a single driver” of promotion of the teams and the common interests of the whole league. Despite the interdependence of the NFL teams and their reliance on NFLP, the Court held that their independent decisionmaking and independent economic interests regarding intellectual property ruled out the NFL’s single entity defense.
With respect to the conduct of NFLP, the Court declared the question of whether the NFLP’s decisions were concerted activity under Section 1 a closer call. Because the NFL teams shared most of NFLP’s revenues, made the its licensing decisions and each team actually owned its portion of the jointly managed assets, the Court concluded that Section 1 covered NFLP’s conduct, at least with respect to its licensing decisions.27 The Court noted that regardless of whether the joint venture took the form of a separately managed entity, if the shareholders’ or members’ decisions about the activities of the joint venture at issue reflected not only the interests of the separate entity’s profits but also the profits of each shareholder itself, the potential for concerted action exists.28
The Court thus found that the collaborative licensing activities of NFLP, the NFL and its teams were not the actions of a single entity. The fact that the teams needed to cooperate to survive was not relevant to its determination of whether the cooperation was concerted or independent action.29 Instead, the need to cooperation was a factor relevant to whether the arrangement would be judged under the rule of reason or per se rule.30 Ultimately, the American Needle Court made clear that the rule of reason, not the per se rule, would apply on remand.
The Goal Line Stand
In the end, the American Needle decision was a straight forward recitation of existing law and did little to clarify the standard for judging the conduct of joint ventures. The dire predictions that the Court would continue to curtail litigants ability to bring antirust claims and that American Needle would create an impenetrable shield behind which competitor collaborations would be free to restrain competition did not come to pass. The hope that American Needle would clarify Dagher was not realized. The opinion included just two passing references to Dagher -- one for the proposition that not all contracts are illegal and one for the proposition that the rule of reason applies to joint venture activities where cooperation is necessary. Neither of these references nor any other aspect of American Needle provides any new insights into understanding how to apply the rule of reason to joint venture activities so that the parties and their counsel might be able to better assess risks and guide the conduct of the joint venture.
1 Civ. A. No. 08-661, 2010 U.S. LEXIS 4166 (May 24, 2010).
2 467 U.S. 752 (1984).
3 Chris Sagers, American Needle, Dagher, and the Evolving Antitrust Theory of the Firm: What Will Become of Section 1, Antitrust Source, Aug. 2009, at 1.
4 547 U.S. 1 (2006).
5 Id. at 6-7.
6 Saudi Refining Inc. was dismissed from the case based on the plaintiffs lack of standing to pursue a claim against it. No named plaintiffs had purchased gasoline from either Saudi Refining Inc. or from Motiva. Dagher v. Saudi Ref., Inc., 369 F.3d 1108, 1115-1116 (9th Cir. 2004).
7 Dagher v. Saudi Ref., Inc., Civ. A. No. 99-6114, 2002 U.S. Dist. LEXIS 27935, *10-12, 16, 34-35 (C.D. Cal. Aug 13, 2002).
8 Dagher, 369 F.3d at 1124-1125.
9 Dagher, 547 U.S. at 7-8.
10 Id. at 6.
12 259 U.S. 200 (1922).
13 American Needle, 2010 U.S. LEXIS 4166 at *9.
14 American Needle, Inc. v. New Orleans La. Saints, 496 F. Supp. 2d 941, 943 (N.D. Il. 2007).
16 American Needle, Inc. v. NFL, 538 F.3d. 736, 742-743 (7th Cir. 2008).
17 Id. at 743.
21 Brief for the United States as Amicus Curiae at 7, American Needle, Inc. v. NFL, No. 08-661 (May 28, 2009).
22 American Needle, 2010 U.S. LEXIS 4166 at *11 (quoting Copperweld, 467 U.S. at 771).
23 Id. at *13-14.
24 Id. at *21-22.
25 Id. at *23-24.
26 Id. at *24.
27 Id. at *30.
28 Id. at *31-32.
29 Id. at *27-28.
30 Id. at n. 6.
Barbara T. Sicalides
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.