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Patterns of Value

January 7, 2010

Later this month, the U.S. Supreme Court will hear arguments in American Needle, Inc. v. National Football League, which presents the question of whether a professional sports league is a “single entity” for purposes of federal antitrust law rather than a collection of independent, competing businesses. The underlying dispute involves American Needle, a disgruntled apparel manufacturer that sued the NFL when it didn’t win a contract to produce hats with NFL team logos. ANI said it was illegal, under the Sherman Act, for the NFL to grant an “exclusive license” to rival apparel manufacturer Reebok. (No doubt it would have been legal to grant such a license to ANI, however.)I’ll address the antitrust issues in a later post. Here, I’d like to examine the “intellectual property” aspects of the case. The NFL’s merits brief provides an excellent summary (I’ve omitted citations and internal references):

The intellectual property of the NFL and its member clubs, which is regulated by the Constitution and Bylaws of the League itself, is an integral part of NFL Football. For example, the competition on the field features the clubs’ names, the logos that adorn the players’ uniforms, the uniform designs, and each club’s official colors. Production of NFL Football requires the collective deployment of this intellectual property; no club alone could supply the intellectual property necessary to produce a single NFL game.

The clubs’ intellectual property derives its value from the production of NFL Football. Consumers buy hats, shirts, and other goods bearing club marks — e.g., a blue star on a silver background (the Dallas Cowboys), the letter G in a green oval (the Green Bay Packers), a turquoise dolphin wearing a football helmet (the Miami Dolphins) — not because those symbols have intrinsic value or independent appeal, but rather because they represent affiliation with an NFL team. As [American Needle's] president testified by declaration, fans purchase these products to “express their support for, or affinity with, a particular [t]eam.” Standing alone, a logo consisting of a silver background and a blue star would have no material value.

To protect and deploy its jointly generated value, the League (sometimes acting through NFL Properties, as described below) controls the use of this intellectual property. For example, the League assigns the member clubs official colors, takes the lead in developing and registering the marks of any new member club, and must approve any changes in a club’s name, marks, or logos. Thus, when the club that had previously played in Cleveland moved to Baltimore, it was required to leave behind the Cleveland Browns “name, logo, trademarks, heritage, history and memorabilia” for use by a new club, to be created jointly by the then-existing member clubs, that was to begin play in Cleveland several years later.

League and club marks and logos are necessary not only for the production of NFL Football but also for its promotion. Reflecting the League’s judgment that coordinated, nationwide promotion of every member club is necessary for the success of NFL Football, almost every aspect of League and club operations relating to intellectual property — including licensing of marks for use on apparel — is integrated and collectively pursued. The NFL member clubs “may not separately license identifying marks for use on apparel products.” Instead, the League sells only a “complete package” of marks and “requires each apparel licensee to manufacture, distribute and sell on a national basis product lines bearing, in the aggregate, the marks identifying all member clubs.”

Recognizing that their intellectual property derives its value from and serves to promote NFL Football, the clubs share equally in the revenues and costs associated with those licensing efforts. Even though each club formally owns its own marks, royalties from products bearing the mark of a single club are shared equally among all thirty-two. The clubs thus share, for example, the rewards of increased demand for licensed products associated with the Super Bowl champion and the risks of diminished demand for products associated with teams that fail to make the playoffs.

For nearly fifty years, the League’s centralized licensing efforts have been conducted by NFL Properties, an entity owned and controlled by the member clubs on an equal basis. NFL Properties’ purpose is to promote NFL Football — to “enhance the ability of the NFL to compete with other entertainment providers by increasing the visibility of NFL Football, promoting loyalties, and fostering rivalries that are integral to the success of that product.” That purpose is reflected in NFL Properties’ Articles of Incorporation, which expressly define its function: “to conduct and engage in advertising campaigns and promotional ventures on behalf of the NFL and the member teams.”

To fulfill its purpose, NFL Properties undertakes activities, including marketing and trademark protection efforts, that serve to “enhance overall fan interest in NFL Football across the nation.”These activities include serving since its formation as the exclusive representative of the League and its member clubs in licensing their marks and logos (with limited exceptions for local advertising and local sponsorships). Through these activities, NFL Properties has “contributed to the success, popularity, and growth of NFL Football over the past 40 years.”

There are two basic ideas that appear to create a circular definition: “Production of NFL Football requires…intellectual property,” and “intellectual property derives its value from the production of NFL Football.” Lest this isn’t clear, try restating the argument as, “NFL football requires football players, and football players derive their value from the production of NFL football.” The term “NFL football” is itself a tautology; any firm is responsible for the production of its own product.

(Tautological market definitions are, of course, ubiquitous in antitrust. Regulators and attorneys often try to exclude all competitors until the market is defined as the specific product of a single firm, i.e., “premium natural and organic supermarkets” in the Whole Foods case.)

Now, the question is, “What is intellectual property” in this context? The NFL defines it here as individual team logos, i.e., the Cowboys’ blue star on a silver background. But these are patterns, not property. The NFL admits that there’s nothing inherently unique (or scarce) about these patterns. Mere patterns “have no material value.”

The NFL claims that by “deploying” these patterns in connection with professional football contests, however, the patterns now have value that the league must retain exclusive control over. The patterns are wholly integrated into the football product and cannot be severed. There’s certainly a superficial logic to this argument.

But here’s the fallacy: There are any number of patterns – and intangible elements – integrated into the product of “NFL football” that are not labelled “intellectual property.” There’s the gridiron field itself, which is nearly identical to the fields used in college and high school football; the alignment of teams into conferences and divisions; the nomenclature used for specific roster positions; and so on. What makes a blue star on a silver background so special as to warrant the title “intellectual property”?

The NFL’s answer is simple: We can make money selling merchandise with that pattern. Fair enough. Nobody begrudges the NFL’s right to exploit patterns for profit. The question is, Why should the NFL be allowed to prevent other firms – such as American Needle – from exploiting the same patterns?

There are two possible answers. The first is that the patterns are, in fact, “property,” and as such the NFL, as the owner, must have exclusive use and control. The second is that while patterns may reflect an expression of value, value itself is an abstract concept that cannot be owned.

What’s notable here is that the NFL tries to offer a third answer: Patterns are an expression of value, but we have the right to own value. The passage above consistently refers to value as a tangible quantity:

  • The clubs’ intellectual property derives its value from the production of NFL Football…
  • …not because those symbols have intrinsic value or independent appeal, but rather because they represent affiliation with an NFL team.
  • …a logo consisting of a silver background and a blue star would have no material value.
  • To protect and deploy its jointly generated value…
  • Recognizing that their intellectual property derives its value from and serves to promote NFL Football…

In defending “intellectual property,” the act of creation is said to justify the right; just as a person can mix labor with an unowned resource to homestead tangible property, an inventor can mix his labor with a previously unowned “idea” to homestead intangible property. But this doesn’t address the question of where “value,” under either concept of “property,” derives from.

The NFL answered the question when it noted, “Consumers buy hats, shirts, and other goods bearing club marks…because they represent affiliation with an NFL team.” The NFL created the “affiliation” – the pattern – but the consumers created the value by purchasing the products. The marketplace creates value, not individual “creators.”

In its brief, the NFL outlines a series of contractual relationships among its member clubs governing the distribution of revenues from the sale of logo-bearing merchandise. This is a business model, not “intellectual property.” The NFL has no “right” to the value that may be generated by a particular business model; that is for the marketplace to decide.

Keep in mind, there is substantial “value” generated by the product of NFL football that is not subject to the league’s control: Billions of dollars are wagered (legally and illegally) on NFL games, millions play fantasy football in leagues organized privately or through commercial firms, fans organize their own websites and forums to discuss their favorite teams, etc. If we applied “intellectual property” consistently, all of these activities should be subject to the NFL’s direct use and control, lest they dilute the “value” of the core product.

The truth is that “value” is a product of mutual exchange, and it’s ludicrous for one side to claim exclusivity. Consider an example cited in the NFL’s own brief. When the Cleveland Browns relocated to Baltimore in 1995 – really, the State of Maryland provided a taxpayer bailout of the Browns’ failing ownership – the former Browns were “required to leave behind the Cleveland Browns” name, logo, “heritage,” etc. (How does one own “heritage”?) The NFL then recreated the Browns in 1999 as an expansion club.

Ironically, Baltimore had lost its original NFL team in 1983, when the Baltimore Colts relocated to Indianapolis – but that franchise retained its name, logo, heritage, history, et al., just in a new city. Yet the NFL continued to simultaneously claim “intellectual property” rights in the Baltimore Colts. In 1994, the Canadian Football League launched an ill-fated expansion into the United States, creating a new “Baltimore Colts” franchise. The NFL sued, and a court banned the CFL team from using the “Colts” name. (The CFL team moved to Montreal after the Cleveland Browns’ relocation to Baltimore was announced.)

The NFL claimed it had the right to prevent “confusion” between the CFL Baltimore Colts and the NFL Indianapolis Colts. But there was no confusion. The NFL wanted to prevent a rival league from exploiting the value of the Colts name in Baltimore – a value that continued to exist even after the NFL moved the team to another city. The value existed because of consumer demand, not the NFL’s assertion of “intellectual property” rights. The NFL tacitly acknowledged this a decade later when it “retained” the Cleveland Browns’ identity for that city’s customer base.

Having said all this, the current antitrust controversy does not turn on the legitimacy of intellectual property. Antitrust does not presume a distinction between tangible property and intellectual property. Antitrust views both with equal contempt. Property, under any definition, is an impediment to the establishment of a hypothetical marketplace where lawyers and regulators substitute their judgment for that of property owners. So whether or not one agrees with the NFL’s definition and assertion of intellectual property here should not direct one’s conclusions about the superseding antitrust case, which I’ll address shortly.

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