The NFL As A Single Firm?

Michael Sykuta —  13 January 2010

When I first read Josh’s post of antitrust links below, I thought “Drew Brees? Surely not THAT Drew Brees.”  Turns out, it IS that Drew Brees. I was very interested to read the QB’s take on American Needle and his plead for the Supreme Court to reject the NFL’s petition to be deemed “a single entity.”  However, of even more interest to me was Brees’ comment that the NFL is petitioning for a “single entity” designation that would, according to Brees, apply “for pretty much everything the league does.”

I wrote a paper (here) with Ken Lehn several years ago examining the issue of antitrust and franchise relocation in the NFL in the wake of L.A. Memorial Colisuem Commission v. National Football League, et al. (1984), more commonly referred to as the Oakland Raiders case.  This antitrust case resulted from the NFL’s refusal to permit the Oakland Raiders franchise to move from Oakland to LA. The key finding in the Court’s decision against the NFL was that the NFL was not a single entity.  The NFL had argued that it was a single entity and therefore incapable of “conspiracy;” the same logic used by the courts to reject an antitrust claim against the National Hockey League in one of its own franchise relocation disputes (San Francisco Seals, 1974).

Ken and I took issue with both the Raiders finding concerning the single entity argument and the court’s understanding (or misunderstanding) of the consumer welfare effects of the NFL’s territorial restrictions.  Drawing on the organizational economics literature concerning incentives and franchises, we made several arguments concerning the important incentives such territorial restrictions provide when revenues are shared but (local) costs are not. We then provided empirical evidence to demonstrate that both the Raiders and the LA Rams did in fact seem to underinvest in quality of their respective franchises after the Raiders moved to LA, ultimately resulting in no NFL team in one of the largest media markets in the US.

So I would have to suggest that, at least for franchise relocation decisions, the NFL should in fact be considered a single entity and some of its other restraining practices are actually pro-competitive (or certainly welfare enhancing). As for American Needle, I haven’t yet read all the facts, but I suspect there are compelling economic reasons for a single-entity decision there as well, particularly given the revenue sharing rules that govern the NFL.

Regardless, I would suggest Mr. Brees use a little more caution in his arguments. Something about pots calling kettles black, and all that. Having reviewed at least one (publicly available) licensing agreement in the CORI K-Base between the National Football League Players Association and one of the popular sports memorabilia companies, a good case could be made using Mr. Brees’ reasoning that the NFLPA is violating antitrust law both in its Group Licensing Rights program and its restrictions against licensees negotiating contracts with any NFL players, or even potential NFL players, who are not (yet) part of the NFLPA’s group license.  I don’t know how far the NFLPA’s antitrust immunity as a labor union may extend beyond the labor market for football players.

4 responses to The NFL As A Single Firm?

  1. 

    The transcript of the American Needle argument from earlier this week is essential reading to any discussion of the case. Here’s the link: http://www.supremecourtus.gov/oral_arguments/argument_transcripts/08-661.pdf

    The bulk of the argument does not concern an economic analysis of single vs. multiple economic actors at all, but is about the “crazy aunt in the attic” – the rule of reason. The case can be usefully analogized to cases like Monsanto and Business Electronics, where the Court elevated the standard of proof of conspiracy in order to calibrate for the harshness of the per se rule against RPM.

    The NFL really didn’t seem to get much traction with its argument that joint licensing of the trademarks of all of its 32 teams should be viewed as the act of a “single entity.” The real rationale for its view, and the focus of many of the questions, was whether the rule of reason is so uncertain and hence so costly to implement that we need to use the concerted action requirement as some kind of screen to protect legitimate joint venture activity. The NFL’s lawyer and the SG both had genuine difficulty trying to disguise their efforts to differentiate reasonable from unreasonable restraints as if some could be viewed as concerted and others as unilateral — and the Court seemed to recognize that.

    But even as a number of the justices seemed very uncomfortable with the invitation to calibrate the concerted action requirement to account for the rule of reason (which would require some distortion of the concerted action requirement), as in cases like Trinko and Twombly they also seemed empathetic to the possibility that the rule of reason is infirm — that it cannot be administered quickly and cheaply enough to filter out reasonable restraints.

    The problem the Court now has is that this case does not really present a live controversy as to the rule of reason. The plaintiffs were never permitted to conduct discovery on the restraint of trade issue and cert was only granted on the faux “single entity” issue. So the Court could narrowly reverse, holding that the NFL teams’ decision to license their trademarks was concerted action, and then either (1) save the rule of reason problem for another day, or (2) try to provide some guidance about how the rule of reason inquiry should be handled on remand — and there’s the possible irony: a case that looked like it was about Copperweld is really about the workability of Standard Oil, Chicago Board of Trade, BMI, and Dagher. And the only news here is that the Court finally seemed to be acknowledging the doctrinal problems of openly manipulating one Sherman Act element as a mechanism for avoiding confronting its true concerns about the other.

  2. 

    I’m not aware that the NFL is legally sanctioned, whether labelled a cartel or not. The AFL-NFL merger was given a special exemption, and the sports broadcasting act exists, but the NFL as a league is not exempt from the antitrust laws on its face but rather because a rule of reason analysis has been applied to its joint activities.

    But the question remains–what is the justification for the revenue sharing of IP rights in the first place? I can certainly understand why once they are sharing revenue pooling the rights for sale is useful, as free-rider problems are rampant. But I don’t see how one can bootstrap the free-rider problems into justifying the revenue sharing in the first instance.

    (This differs from the television revenue sharing, which is a result of a league-wide contract and also can be explained for purposes of competitive balance necessary to make an attractive television product.)

  3. 

    On its face, No. First of all, a cartel would be illegal so whatever they agree to do would be illegal. The NFL isn’t a cartel, strictly speaking.

    Second, assuming the cartel is legally sanctioned, a rule of reason analysis would be appropriate. It would depend on the reason or need for the revenue sharing and whether there are economic efficiencies associated with the revenue sharing itself that would redeem any anti-competitive effects the sharing agreement might have. That would involve, among other things, analyzing the nature of incentives associated with a/the given transactional relationship, the costs created by any mal-behaviors associated with the incentives, and the costs of monitoring and enforcing the agreement against those mal-behaviors.

  4. 

    Can the revenue-sharing rules be taken as a “given” to justify the pooling of the IP rights licensed (now) only to Reebok?

    Wouldn’t that mean a cartel that decided to pool revenue could thereby justify territorial allocations or even price fixing?