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Antitrust 7, NFL 0

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05/24/2010

On his way out the door, Supreme Court Justice John Paul Stevens produced a unanimous opinion today answering a question we’ve all been asking: If the National Football League a single entity or 32 competing entities? Stevens and his colleagues went with the latter — at least when we’re talking about the licensing of intellectual property.

As reported previously, a disgruntled apparel manufacturer sued the NFL, claiming the league’s decision to license team logos to another apparel manufacturer constituted an illegal “restraint of trade” under federal antitrust law. The trial court and the Seventh Circuit Court of Appeals said that since NFL teams licensed their intellectual property collectively, they were effectively a single actor for antitrust purposes and thus exempt from the Sherman Act, which only applies to collusion between independent competitors. Today the Supreme Court reversed that holding and said that on the narrow question of licensing IP, there was “concerted action” that was not categorically exempt from antitrust scrutiny; however, the Court added that any antitrust review must be conducted under the “Rule of Reason,” and that most concerted action by sports leagues would be “permissible.”

Thankfully, this was a unanimous decision with no dissenting or concurring opinions to muddy the waters. Justice Stevens’s opinion is about as clear as one can be when dealing with antitrust — which isn’t saying much. Let’s begin with Stevens’s restatement of core antitrust theology:

Taken literally, the applicability of §1 [of the Sherman Act] to “every contract, combination . . . or conspiracy” could be understood to cover every conceivable agreement, whether it be a group of competing firms fixing prices or a single firm’s chief executive telling her subordinate how to price their company’s product. But even though, “read literally,” §1 would address “the entire body of private contract,” that is not what the statute means.

Antitrust is one of those areas where “living Constitution” and “strict constructionist” justices unite in declining to read an act of Congress literally; the fact that such a reading would likely end all commerce in the United States is no doubt a factor. But it’s a testament to the power of statist thinking that the justices have never endeavored to ask why the Sherman Act is constitutional at all if it cannot be enforced as written.

The meaning of the term “contract, combination . . . orconspiracy” is informed by the “‘basic distinction’” in the Sherman Act “‘between concerted and independent action’” that distinguishes §1 of the Sherman Act from §2. Section 1 applies only to concerted action that restrains trade. Section 2, by contrast, covers both concerted and independent action, but only if that action “monopolize[s],”15 U. S. C. §2, or “threatens actual monopolization,” a category that is narrower than restraint of trade. Monopoly power may be equally harmful whether it is the product of joint action or individual action.

Congress used this distinction between concerted and independent action to deter anticompetitive conduct and compensate its victims, without chilling vigorous competition through ordinary business operations. The distinction also avoids judicial scrutiny of routine, internal business decisions.

First off, I’d say a Supreme Court case about the decision to award a hat contract to Reebok over American Needle constitutes “judicial scrutiny of routine, internal business decisions,” but that’s neither here nor there. Regarding Section 1 — which is the relevant issue in this case — this notion that you can distinguish concerted action that restrains trade from concerted action that constitutes trade is ridiculous. If your economic system is grounded in property rights — and I’m not saying the United States has such a system — then there’s no difference between voluntary individual and concerted action. It doesn’t matter whether 32 teams individually decided to award their hat contract to Reebok versus the same teams voluntarily delegating that decision to the NFL.

And how does one distinguish individual “entities” — i.e., teams and leagues — anyhow. The Court answers:

We have long held that concerted action under §1 does not turn simply on whether the parties involved are legally distinct entities. Instead, we have eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.

As a result, we have repeatedly found instances inwhich members of a legally single entity violated §1 when the entity was controlled by a group of competitors andserved, in essence, as a vehicle for ongoing concerted activity. In United States v. Sealy, Inc., 388 U. S. 350 (1967), for example, a group of mattress manufacturers operated and controlled Sealy, Inc., a company that licensed the Sealy trademark to the manufacturers, and dictated that each operate within a specific geographic area. … [the Court] held that Sealy was not a “separate entity, but . . . an instrumentality of the individual manufacturers.”

I don’t disagree with the Court on this point. Defining an “entity” isn’t simply a matter of legal declaration. The problem is that all legal entities are metaphorical expressions of the individuals who comprise the entity. Is a football “team” the legal corporate entity recognized by the state or the combination of individual players, coaches, owners, and staff? (For that matter, is the Supreme Court a single entity or nine “competing” justices?)

The Court says that “corporate interrelationships. . . are not determinitive of the applicability of the Sherman Act because the Act is aimed at substance rather than form.” That’s fine, but the “form” is itself a creation of the state. It seems unfair for the state to define a corporation as a single entity for normal liability purposes while leaving open the possibility of declaring it one or more separate entities for antitrust purposes. That’s a recipe for legal schizophrenia.

The Court tries to downplay this by confining its analysis to decision-makers rather then formal entities:

…[T]he question 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.”

I’m not sure how one can “deprive” the market of “independent centers of decisionmaking.” (Nor do I see where such a right comes from.) Delegation is itself a form of decisionmaking. If the 32 clubs delegate their licensing rights to the NFL, they are exercising independent decisionmaking; the delegation is not unalterable or irrevocable.

It’s also unclear what the Court means by “pursuing separate economic interests.” Only individuals can have or pursue economic interests. That’s praxeology 101. That individuals frequently pursue their economic interests as part of a group does not convert the individual interests into some “group” interest; that would violate economic law.

Come to think of it, by the Court’s reasoning, most NFL teams could not be defined as single entities. After all, teams frequently have players and coaches pursuing separate economic interests from those of the club as a whole. Does every NFL wide receiver now qualify as a distinct market for federal antitrust purposes?

Turning now to the particulars of this case, the Court tries to distinguish good competition from bad competition:

The NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic action. Each of the teams is a substantial, independently owned, and independently managed business. … The teams compete with one another, not only on the playing field, but to attract fans, for gate receipts and forcontracts with managerial and playing personnel.

Directly relevant to this case, the teams compete in the market for intellectual property. To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licenses its intellectual property, it is not pursuing the “common interests of the whole” league but is instead pursuing interests of each “corporation itself.”

[ . . . ]

Decisions by NFL teams tolicense their separately owned trademarks collectively and to only one vendor are decisions that “depriv[e] the marketplace of independent centers of decisionmaking,” and therefore of actual or potential competition.

Setting aside for a moment the IP question, it’s impossible to see how any NFL action doesn’t “deprive the marketplace of independent centers of decisionmaking.” The league’s television contracts, for example, award exclusive broadcasting rights to every single game. Even the league’s schedule arises from a single decision-maker. Consistent application of antitrust principles would subject every single sports league action to federal judicial review.

It’s especially troubling here, because the licensing of NFL IP is done through a single entity, NFL Properties, which is jointly owned by the 32 teams. The Court simply ignores all evidence of NFLP’s separate existence:

[D]ecisions by the NFLP regarding the teams’ separately owned intellectual property constitute concerted action. Thirty-two teams operating independently through the vehicle of the NFLP are not like the components of a single firm that act to maximize the firm’s profits. The teams remain separately controlled, potential competitors with economic interests that are distinct from NFLP’s financial well-being. Unlike typical decisions by corporate shareholders, NFLP licensing decisions effectively require the assent of more than a mere majority of shareholders. And each team’s decision reflects not onlyan interest in NFLP’s profits but also an interest in the team’s individual profits. The 32 teams capture individual economic benefits separate and apart from NFLP profits as a result of the decisions they make for the NFLP. NFLP’s decisions thus affect each team’s profits from licensing its own intellectual property.

This highlights yet another comical flaw of antitrust theology. If the 32 teams had fully merged their IP into a single entity, the Court would probably have said it was exempt from antitrust review; but because there was only partial merger, antitrust applies. Which makes no sense. If the goal of antitrust is to promote competition, it should promote partial mergers — which can be undone relatively easy — over complete mergers.

Having gone to great lengths to explain why antitrust applies to the awarding of a hat contract, the Court then has to walk itself back and explain why all league decisions — as I noted above — aren’t subject to the same antitrust scrutiny:

The fact that NFL teams share an interest in making the entire league successful and profitable, and that they must cooperate in the production and scheduling of games, provides a perfectly sensible justification for making a host of collective decisions. But the conduct at issue in this case is still concerted activity under the Sherman Act that is subject to §1 analysis.

There’s no exception for “perfectly sensible justifications” in the Sherman Act, so we’re forced to conclude the Court is just making up the rules as it goes along. Which is highly convenient if not illogical. The Court is saying it’s okay to collude on scheduling, rules, and a host of other subjects — but not the licensing of team logos. The antitrust laws consider that sacred activity.

In applying the “Rule of Reason” — antitrust-speak for “we make it up as we go along” — the Court strongly suggests it really doesn’t think the antitrust laws should condemn a simple hat contract, even if the justices can’t bring themselves to say so outright:

Other features of the NFL may also save agreements amongst the teams. We have recognized, for example,“that the interest in maintaining a competitive balance” among “athletic teams is legitimate and important,” While that same interest applies to the teams in the NFL, it does not justify treating themas a single entity for §1 purposes when it comes to the marketing of the teams’ individually owned intellectual property. It is, however, unquestionably an interest that may well justify a variety of collective decisions made by the teams. What role it properly plays in applying the Rule of Reason to the allegations in this case is a matter to be considered on remand.

As with most antitrust decisions, the principal consequence of today’s ruling will be to generate even more antitrust litigation. Not just the NFL, but all sports leagues will be compelled to devote more resources to antitrust counsel who can “advise” them on which league decisions will be treated as exempt “single” action and which must be defended under the “Rule of Reason” from Section 1 review. Such additional costs tend to be reflected in consumer prices; luckily, the NFL has an armada of taxpayer-funded stadiums to help absorb the blow.

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