In its recent decision in American Needle v. National Football League, the U.S. Supreme Court held that a separate corporation ("NFLP") established by the 32 NFL teams to issue licenses for the teams' trademarks involved collective action of all the teams and, therefore, was vulnerable to a claim based on Section 1 of the Sherman Act.
The decision reversed the district court and the Seventh Circuit and raises questions in light of the Court's own 2006 decision in Dagher, which held that a joint venture corporation set up by Texaco and Shell was a "single entity," not vulnerable to Section 1 claims. In short, American Needle presents a key issue: the antitrust exposure of joint ventures. The opinion was the last in a long line of antitrust opinions by Justice Stevens and the first in almost twenty years to weigh in on the plaintiff's side in an antitrust case.
The 32 NFL teams are separately owned. Until 1963, they had individually licensed their trademarked names, colors and logos to producers of caps and jerseys. NFLP granted non-exclusive licenses to these trademarks after 1963 but in 2000, after being authorized to do so by the teams, it granted an exclusive license to Reebok for use on headwear. American Needle brought the case since the exclusive Reebok license prevented it from producing headwear bearing the NFL team trademarks.
The only question before the Court was whether NFLP acted as a "single entity" in granting the exclusive license to Reebok or was "joint action" of the 32 teams that created it. That question is significant because Section 1 of the Sherman Act, in banning contracts, combinations and conspiracies in restraint of trade, "applies only to concerted action that restrains trade." Single firm conduct cannot be reached by Section 1 and can be challenged under Section 2 only if it constitutes monopolization or an attempt to monopolize.
American Needle wanted Section 1 to apply because the Sherman Act "treat[s] concerted behavior more strictly than unilateral behavior," banning anticompetitive conduct even before it threatens to produce a monopoly.
Looking to its earlier decisions, however, the Court faced a varied pattern: one major decision in 1984 (Copperweld) where two related corporations were found not to be capable of conspiring with each other since one was a parent company and the other its wholly-owned subsidiary, and other decisions (Sealy, Topco and others) where a single corporation was found to be capable of conspiring since it was merely "an instrumentality" of the competitors who formed and owned it. Then there was the Court's most recent joint venture decision (in 2006), Texaco v. Dagher, in which the Court held that Equilon was a completely integrated JV entity formed by Texaco and Shell and that "price fixing" in violation of Section 1 of the Sherman Act did not occur when Equilon took over gasoline retailing for both companies in the western U.S. and set a single price for both brands of gasoline.
The Court held that where competitors set up a JV in which they share the risks of losses and profits, such JVs are "regarded as a single firm competing with other sellers in the market" and that a JV, "like any other firm, must have the discretion to determine the prices of the products it sells." Dagher, however, was barely mentioned in American Needle.
Faced with these disparate precedents, the Court announced that it had "long held" that the decision turns not on "whether the parties involved are legally distinct entities" but on a functional analysis, which asks the question applied in Copperweld, "whether the agreement joins together 'independent centers of decision-making.'"
Finding that the NFL teams "compete in the market for intellectual property" and that they could decide at any time to license their own trademarks, the Court held that the joint licensing through NFLP "'deprived the marketplace of independent centers of decision-making.'" It held that NFLP was merely "a formalistic shell for ongoing concerted action" and that "'[j]oint ventures have no immunity from antitrust laws.'" The Court reversed the Seventh Circuit and remanded the case instructing the lower courts to use the rule of reason to decide whether the NFLP licensing activity adversely affected competition.
After American Needle, formation of joint ventures by parent firms that are competitors should include careful antitrust review. In its amicus brief in American Needle, the Justice Department asserted that single-firm treatment should be allowed only, as in Dagher, when the parent firms use the JV effectively to merge certain parts of their businesses and where the JV does not act to affect adversely competition in other respects. Otherwise, firms participating in a JV will not have single entity status and the question will be whether the JV, either in its principal activity or as a result of any ancillary restraints, has had an adverse effect on market competition.