The NFL recently announced that Nike will replace Reebok as the official supplier of its uniforms, and that New Era will replace Reebok as its official cap manufacturer. The league negotiated these deals after the U.S. Supreme Court’s decision in American Needle, Inc. v. National Football League et al. In remanding that case, the Court said “football teams that need to cooperate are not trapped by antitrust law.” Let's explore why such licensing contracts are pro-competitive.
The case: NFL Properties, a company owned by the NFL teams, granted Reebok an exclusive license to produce and sell trademarked headwear for all 32 NFL teams. American Needle’s license was not renewed, so it sued the NFL, its member teams, and Reebok, alleging that the contract between NFL Properties and Reebok was the result of an illegal conspiracy among the NFL and its teams. The NFL said it was incapable of conspiracy because the league and its teams were a single entity. The District Court agreed with the NFL and dismissed the case, and the Seventh Circuit affirmed. However, the U.S. Supreme Court unanimously held that the NFL and its member teams are not a single entity with respect to the licensing of intellectual property. American Needle’s claim is being sent back to the federal district court in Chicago and the collective conduct at issue will be analyzed under the rule of reason standard.
The analysis: It must take into account the effects of centralized licensing on three critical factors: competitive balance, free-riding, and economies of scale. A look at each offers strong pro-competitive justification for the league’s licensing policies, generally, and its contract with Reebok, in particular.
Competitive balance is a critical component of the NFL’s popularity. Fans must believe that their team has a reasonable opportunity to compete for a championship. One of the ways the NFL achieves this balance is by practicing revenue sharing. The revenues from the NFL’s national television contracts and the licensing of its marks, for example, are distributed equally among all the NFL teams. This arrangement gives all teams the financial wherewithal to hire top players and coaches and move toward competitive parity.
Free-riding occurs when the actions of one firm benefit another firm without the latter firm’s having to pay for that benefit. The NFL’s primary product, a championship season, is jointly created by 32 teams, each of which derives value from its participation in the creation process. If one team licenses its marks for use on a low-quality product, it can negatively affect customers’ perceptions of all NFL-licensed products – and, by extension, of the NFL. By contrast, a centralized trademark organization, such as NFL Properties, can ensure that licensing decisions are made in the best interests of all the teams, the league, and consumers.
Competitive balance is a critical component of the NFL’s popularity. Fans must believe that their team has a reasonable opportunity to compete for a championship. One of the ways the NFL achieves this balance is by practicing revenue sharing.
Finally, centralized licensing gives the NFL (and its licensees) efficiencies that each of the 32 teams could not achieve on its own. NFL Properties can realize economies of scale and scope in quality control, marketing, product development, and intellectual property enforcement.
The big picture: In bringing its claim, American Needle appears to believe that the relevant market consists only of NFL marks, in which case the NFL would be a monopolist. To accept this, one must conclude that the next-closest substitute for any team’s marks would be the marks of other teams in the same league. But as Justice Stephen Breyer said during oral arguments, he didn’t “know a Red Sox fan who would take a Yankees sweatshirt if you gave it away.” If the NFL tried to increase its prices to license its trademarks, there are many other trademarks a licensee could turn to. Absent market power, an entity like NFL Properties that pursues its own interests is also pursuing consumers’ interests. ■
Evan Hoffman Schouten, a Vice President in the Boston office, participated in an Amicus brief and provided consulting to the NFL on this matter.
From Analysis Group Forum (Winter 2011)