June 10, 2010

Squawking Baseball

The American Needle Fallout

by Shawn Hoffman

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It’s been a pretty long road for American Needle Inc. in its lawsuit against the NFL (and NFL Properties, and Reebok), and while it’s not over yet, things are looking up. Two weeks ago, the Supreme Court rejected the NFL’s argument that the 32 teams needed to act as a single entity when it came to licensing its trademarks to apparel makers, saying that the teams could only act in concert when it was absolutely necessary to promote football games (which obviously involve more than one franchise). The case now goes back to the lower courts, where the NFL will have to prove that giving Reebok exclusive rights to produce official merchandise wasn’t an unreasonable restraint of trade—without their “single entity” defense.

You can read more about the case here, but what’s more important is what, if anything, this means for the major American sports leagues and their businesses going forward. Most of the sports business media seems pretty relieved—remember the hysteria last summer when the Supreme Court decided to hear the case? There were a lot of writers and commentators who thought that this could be the first stage of the rapture if the NFL won: free agency would be gone, merchandise would cost five times as much, home games would no longer be on TV, and so on. But as I wrote then, almost all of that was complete nonsense, and in the end, very few of the really important stakeholders—i.e. fans and players—would have noticed any significant differences.

In fact, I actually thought the NFL’s downside seemed a lot bigger than its upside:

The leagues already act as single entities regarding those issues listed above, meaning that a win in this case simply reaffirms their existing practices. But a loss could be a major blow; the leagues could lose control over territorial rights and ownership access, the teams would all have to negotiate supplier contracts separately, and just about every collective practice would be open to scrutiny.

So now that the SCOTUS has shot down the “single entity” argument, could any of these things actually happen? We’ll assume for now that ANI will win the case—I honestly don’t know if that’s true, but given that the NFL’s top argument just got neutralized, you’d have to think ANI is in pretty good shape. What would the effects be—not just for the NFL, but for Major League Baseball and the other major sports leagues as well?

(One quick note: yes, MLB technically operates under an 88-year-old antitrust exemption. That exemption is meaningless at this point. It hasn’t been truly put to the test in over 50 years—MLB has gone out of its way to make sure of this—and just about any semi-rational court would treat baseball the same as the other leagues.)

Exclusive Licensing Deals Are History

This is the most obvious result, since it’s the one being tried. If ANI wins—or really, even if the NFL settles—any exclusive licensing deal will be subject to lawsuits from companies that are shut out.

This goes beyond apparel. Video games, trading cards—are these any more essential in “promoting games” than selling apparel is? If ANI wins outright, what’s to stop one of Electronic Arts’ competitors from suing the NFL for only licensing its trademarks to EA?

The same could be said for MLB, who actually sued Upper Deck (and effectively won, via settlement) for selling non-licensed trading cards after MLB signed an exclusive deal with Topps. If the NFL loses, baseball is likely to be hit with a bunch of lawsuits by companies that feel left out (regardless of their product categories), and they’d probably have to settle or accede entirely.

Taking It One Step Further...

A bigger question might be whether the court will simply force the NFL to do deals with multiple manufacturers, or actually kill off the entire collectivized licensing model. The leagues have subsidiaries—NFL Properties, MLB Properties, etc.—that sell licensing rights for all of their teams at once. Whether you buy a Yankees hat or a Pirates hat, it all goes to the same place and is divided equally among the teams. That obviously helps small-market teams, and pisses off the Yankees and Cowboys.

But it’s conceivable—if not entirely likely—that the courts could rule that this entire model is an unreasonable restraint of trade. After all, getting rid of collectivized licensing agreements would open up more competition among manufacturers, and almost undoubtedly lead to cheaper products for consumers. So it could just come down to how much the courts want to rock the boat—killing off NFL Properties would create serious shock waves in the industry, and would have all of the major sports leagues scrambling for a solution.

Larger Issues

That’s about as brave as I could ever imagine any court being in this case—this is squarely about apparel, and if it was going to become any more wide-ranging, it would have been the SCOTUS that did it.

But if the NFL does lose, it definitely opens up more issues to scrutiny. Are territorial rights necessary to promote football games? Approval for moving teams? What about approval for transferring team ownership? If Mark Cuban wants to buy a baseball team, but fails to gain approval from the other owners, could MLB prove that this is a necessary joint activity?

That’s the risk the NFL now runs for it and its peers. TV contracts are covered by the Sports Broadcasting Act of 1961, which gave leagues an antitrust exemption in regards to pooled broadcasting rights, and player-related issues were never going to be affected here since, as I wrote last summer, those are subject to collective bargaining. But just about any other business practice that isn’t an obviously necessary joint activity (such as scheduling games) could eventually be put under the microscope. That’s not a very fun outcome for the NFL, or any of the other leagues.

 Now, it’s entirely possible that the NFL could still end up winning—we don’t know what their argument will be going forward, and most believe that they’re heavy underdogs. But if nothing else, they’re still talking tough, and seem very willing to go to trial. The other leagues—including MLB—don’t seem quite as comfortable. They know what’s potentially at stake here, and some are worried that the NFL is overplaying its hand. But all they can do now is wait and hope.  

Shawn Hoffman is an author of Baseball Prospectus. 
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