June 1, 2010
On May 24, 2010, the Supreme Court of the United States revisited what it means to engage in a “contract, combination…, or conspiracy” as defined by §1 of the Sherman Act, 15 U.S.C. §1. In American Needle, Inc. v. National Football League, (No. 08-661), the Court unanimously ruled that licensing activities by the National Football League (NFL) constitute concerted action that is not categorically beyond the coverage of §1 and must be judged under the Rule of Reason. This is the first time the Supreme Court has ruled in favor of an antitrust plaintiff on a substantive (non-immunity) matter since 1992. The decision may spark closer antitrust scrutiny of the decisions of joint ventures and other non-unitary business enterprises.
The NFL is an unincorporated association of 32 separately owned professional football teams, each of which owns its own name, colors, logos, trademarks, and related intellectual property. In 1963, the teams formed National Football League Properties (NFLP) to license and market their intellectual property jointly. The teams did not, however, transfer ownership of their intellectual property to NFLP; instead, they retained separate ownership of their intellectual property. Prior to 2000, NFLP granted nonexclusive licenses to various vendors, including American Needle, to manufacture and sell apparel bearing team insignias. In December 2000, however, NFLP granted Reebok International Ltd. an exclusive 10-year license to make and sell trademarked headwear for all 32 teams. American Needle’s nonexclusive license was accordingly not renewed.
American Needle filed suit, alleging that the agreements between the NFL, its teams, NFLP, and Reebok violated §1 of the Sherman Act, which makes “[e]very contract, combination … or, conspiracy, in restraint of trade” illegal. In response, the defendants denied that they were capable of conspiring within the meaning of §1 “because they are a single economic enterprise, at least with respect to the conduct challenged.” The District Court agreed, granting summary judgment. The Court of Appeal for the Seventh Circuit affirmed. Finding that the NFL teams “share a vital economic interest in collectively promoting NFL football,” it held that “only one source of economic power controls the promotion of NFL football,” and therefore §1 did not apply to this “single entity.”
Supreme Court Opinion
In a unanimous decision authored by Justice John Paul Stevens, the Supreme Court reversed and remanded for further proceedings. The Court observed it had 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,” or, in other words, whether the alleged activity by the NFL “must be viewed as that of a single enterprise for purposes of §1” under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (parent corporation and wholly owned subsidiary held incapable of conspiring with each other for purposes of §1).
The Court noted that §1 has never been given a purely literal reading, and, citing Copperweld, explained that “the meaning of the term ‘every contract, combination…, or conspiracy’ is informed by the ‘basic distinction’ in the Sherman Act ‘between concerted and independent action,'” and that §1 applies only to concerted action. This distinction deters anticompetitive conduct without chilling vigorous competition though ordinary business operations, and also avoids judicial scrutiny of routine, internal business decisions. Quoting Copperweld, the Court explained that concerted action is treated more strictly than independent action because it “inherently is fraught with anticompetitive risk” to the extent it “deprives the marketplace of independent centers of decision-making that competition assumes and demands.”
The Court next observed that it has “long held that concerted action under §1 does not turn simply on whether the parties involved are legally distinct entities.” The Court has rejected “formalistic distinctions” and instead favors a “functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” It cited several decisions in which it was found that “members of a legally single entity violated §1 when the entity was controlled by a group of competitors and served, in essence, as a vehicle for ongoing concerted activity.”
Conversely, the Court pointed out that “there is not necessarily concerted action simply because more than one legally distinct entity is involved.” For this proposition, the Court recounted the rise and fall of the “now-defunct” intraenterprise conspiracy doctrine, finally overruled in Copperweld.
Citing Copperweld, the Court explained that treatment of cooperation between legally separate entities turns on “substance, not form” and asks “whether the alleged conspirators are a single entity.” The answer depends not on whether the parties involved are part of a legally single entity, share a single name, or “seem” like one or multiple firms in the “metaphysical” sense. Rather, the question is whether the challenged agreement joins together “separate economic actors pursuing separate economic interests” such that it “deprives the marketplace of independent centers of decision-making,” and therefore of “diversity of entrepreneurial interests” and thus of actual or potential competition.
Turning its attention to the NFL teams, the Court found that they “do not possess either the unitary decision-making quality or the single aggregation of economic power characteristic of independent action.” Observing that the teams compete with one another for fans, gate receipts, and contracts with managerial and playing personnel, the Court found that each is a “substantial, independently owned, and independently managed business, each with a “separate corporate consciousness.” Although the teams may have common interests such as promoting the NFL brand, that common interest only “partially unit[es] the economic interests of the parent firms,” who are separate, profit-maximizing entities with “interests in licensing team trademarks [that] are not necessarily aligned.” The Court found that the teams compete in the market for intellectual property, therefore decisions by the teams to license their separately owned trademarks collectively and to only one vendor are decisions that deprive the marketplace of actual or potential competition. “To a firm making hats, [two different NFL teams] are two potentially competing suppliers of valuable trademarks.”
Nor was the Court persuaded the teams constitute a single entity because without their cooperation, there would be no NFL football. “The justification for cooperation is not relevant to whether that cooperation is concerted or independent action.” “[A] nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to §1 analysis.”
While deeming it a “closer” question, the Court held that even though NFLP is a separate corporation with its own management, sharing revenues among the teams on an equal basis, its actions were covered under §1 because its licensing decisions “are made by the 32 potential competitors, and each of them actually owns its share of the jointly managed assets.” Apart from their agreement to cooperate, there would be nothing preventing each team from making its own trademark licensing decisions. The Court found that the 32 teams “operated independently through the vehicle of the NFLP” rather than like “components of a single firm” because the teams remain “separately controlled, potential competitors with economic interests that are distinct from NFLP’s financial well-being.” Therefore, at least with respect to the relevant licensing decision, NFLP is “an instrumentality” of the teams.
The Court cautioned that competitors could not end-run antitrust liability simply by acting through a third-party intermediary or joint venture. Nor does profit and loss sharing from a venture mean that the venture is immune from §1, since “then any cartel ‘could evade the antitrust law simply by creating a ‘joint venture’ to serve as the exclusive seller of their competing products.'”
Having decided that §1 applied, the Court provided general guidance regarding Rule of Reason review. Remarking that “[f]ootball teams that need to cooperate are not trapped by antitrust law,” the Court noted the “special characteristics” of the industry (e.g., common interest in making the entire league successful, cooperation in the production and scheduling of games, etc.), may provide justification for many kinds of agreements and collective decisions. The Court explained that where “restraints on competition are essential if the product is to be available at all,” the per se rule is inapplicable and the restraint is “likely to survive” the “flexible” Rule of Reason. The Court further remarked that depending on the concerted activity in question, “the Rule of Reason may not require a detailed analysis; it ‘can sometimes be applied in the twinkling of an eye.'” The NFL teams’ shared interest in “maintaining a competitive balance” among athletic teams is “legitimate and important” and may justify a “variety” of collective decisions made by the teams. However, it does not justify treating them as a single entity for §1 purposes with respect to the marketing of their individually owned intellectual property.
The Court’s legal analysis in American Needle remains essentially faithful to its prior decision and reasoning in Copperweld. As such, there is no compelling reason for the lower courts to embark on any fundamentally new or different approach to defining “concerted action” or to depart from settled precedent in the area of joint ventures and other multi-party business organizations. The guiding principle remains whether the agreement in question joins together “separate economic actors pursuing separate economic interests” such that it “deprives the marketplace of independent centers of decision-making,” and therefore of “diversity of entrepreneurial interests” and thus of actual or potential competition. Nonetheless, some basic issues remain open and the lower courts will now have to parse American Needle for its implications. In some cases, this may spark closer antitrust scrutiny of the relationships between, and decisions made by, participants in joint ventures and other non-unitary business enterprises. We briefly discuss below some of the possible ramifications of the decision.
Fully Integrated Joint Ventures. In American Needle, the Court found “no need to pass upon” the position (urged by the Government) that §1 is inapplicable to certain decisions of fully integrated joint ventures since it held that NFLP was not such a venture. The Government had argued that the Court had already implicitly ruled on the question in Texaco Inc. v. Dagher, 547 U.S. 1 (2006), which addressed price-setting by a fully integrated joint venture formed by two oil companies that had “end[ed] competition between [them] in the domestic refining and marketing of gasoline.” 547 U.S. at 4. The formation of that venture had been approved by federal and state regulators, there was no contention that it was a sham, and the Court “presume[d]” for purposes of its decision that it was “a lawful joint venture.” Id. at 6 n.1. Once formed, the venturers acted “in their role as investors, not competitors.” Id. at 6. The Court in Dagher explained that “[w]hen ‘persons who would otherwise be 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.'” Id. (quoting from Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 356 (1982)). While the Dagher opinion held only that it would be wrong “to condemn the internal pricing decisions of a legitimate joint venture as per se unlawful,” and found it unnecessary to address the alternative argument that §1 is “inapplicable to joint ventures,” id. at 7 & n.2, its use of “single firm” language to describe the joint venture implied, as the Government argued in its American Needle amicus brief, “a natural extension of Copperweld.” In American Needle, however, the Court did not reach out to embrace this extension of Copperweld to fully integrated joint ventures (as noted, it did not deem NFLP to be such a venture). The only substantive proposition for which Dagher was cited in American Needle was the long-established principle that the Rule of Reason applies to restraints of trade that are “essential if the product is to be available at all.” The issue of fully integrated joint ventures thus remains formally open for resolution in a later case.
Partially Owned Entities. Because NFLP was owned and controlled by 32 teams, the Court in American Needle did not specifically address the question of when and under what circumstances a single parent corporation may be liable for “conspiring” with an affiliate it does not completely own, an issue expressly reserved in Copperweld, 467 U.S. at 767. Lower federal courts that have previously addressed the issue have generally held that “a parent and a subsidiary over which the parent has legal control cannot conspire to restrain trade.” Bell Atl. Bus. Sys. Servs. v. Hitachi Data Sys. Corp., 849 F. Supp. 702, 705-07 (N.D. Cal. 1994); see also, e.g., Rohlfing v. Manor Care, 172 F.R.D. 330, 343-45 (N.D. Ill. 1997). Courts have generally, though not unanimously, held that a majority ownership interest by a parent of its subsidiary is enough to defeat the possibility of conspiracy between them. See, e.g., Novatel Communications v. Cellular Telephone Supply, 1986-2 Trade Cas. (CCH) ¶ 62,172-73 (N.D. Ga. 1986); Direct Media Corp. v. Camden Tel. & Tel., 989 F. Supp. 1211, 1217 (S.D. Ga. 1997); but see Aspen Title & Escrow, Inc. v. Jeld-Wen, Inc., 677 F. Supp. 1477, 1486 (D. Or. 1987) (holding that “only corporations which are owned 100% in common, or a de minimis amount less than 100%, are covered by the Copperweld rule”). These cases would seem to be consistent with American Needle‘s “presumption that the components of the firm will act to maximize the firm’s profits” absent separate and independent economic interests (particularly given the Court’s emphasis on the fact that assent of “a mere majority of shareholders” is the “typical” requirement for corporate decisions).
Separate Interests Within The Firm. American Needle holds that “agreements within a single firm” are concerted action subject to §1 “when the parties to the agreement act on interests separate from those of the firm itself.” In this regard, the Court deemed NFLP to be a mere “instrumentality” of its 32 teams, each of which has a separate interest in the team’s individual profits (and more than a mere majority of which effectively had to assent to NFLP licensing decisions, “[u]nlike typical decisions by corporate shareholders”). The Court cautioned that intrafirm concerted action will be the “rare case,” citing several lower court decisions illuminating this scenario, including cases where employees or agents had “independent” personal stakes in the conduct at issue. See, e.g., Bolt v. Halifax Hospital Medical Center, 891 F. 2d 810, 819 (11th. Cir. 1990) (where each member of hospital medical staff was a “separate economic entity potentially in competition with other physicians,” the hospital and the members of its medical staff were “legally separate entities” and all “legally capable of conspiring with one another”); Motive Parts Warehouse v. Facet Enterprises, 774 F. 2d 380, 387-388 (10th Cir. 1985) (“employees are capable of combining with their corporate employer where they have an ‘independent personal stake’ and thus stand to benefit from conspiring with the corporation to restrain trade”); Victorian House, Inc. v. Fisher Camuto Corp., 769 F. 2d 466, 469 (8th Cir. 1985) (corporation and agent who “was acting in furtherance of his personal interests” were capable of conspiring).
Broad Applications of Copperweld. The precedential value of various lower court decisions that have resulted in broad applications of Copperweld may potentially be revisited to assess if the decisions are consistent with American Needle. For example, some lower courts have applied Copperweld‘s reasoning and holding to agreements between franchisors and their franchisees, and patent holders and their exclusive licensees. See, e.g., Williams v. Nevada, 794 F. Supp. 1026, 1030-32 (D. Nev. 1992) (commonality of interest and degree of control inherent in franchisor-franchisee relationship precluded conspiracy), aff’d, 999 F.2d 445 (9th Cir. 1993) (“evidence…clearly demonstrates that the [franchisor] and [franchisee] comprise a ‘common enterprise'”); Levi Case Co. v. ATS Prods., 788 F. Supp. 428, 432 (N.D. Cal. 1992) (no agreement between patent holder and exclusive licensee could deprive marketplace of “independent sources of economic power previously pursuing separate interests,” thus the parties could not “conspire” under §1).
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, any member of the firm’s Antitrust and Trade Regulation Practice Group, or any of the following:
Robert E. Cooper (213-229-7179, [email protected])
Steven E. Sletten (213-229-7505, [email protected])
Daniel G. Swanson (213-229-7430, [email protected])
Rod J. Stone (213-229-7256, [email protected])
Samuel G. Liversidge (213-229-7420, [email protected])
Gary R. Spratling (415-393-8222, [email protected])
Joel S. Sanders (415-393-8268, [email protected])
Trey Nicoud (415-393-8308, [email protected])
Rachel S. Brass (415-393-8293, [email protected])
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