Last year one of the biggest legal decisions in sports was made in American Needle, Inc. v. National Football League. (You can read about the decision in these two pieces I wrote for Forbes: Why NFL’s Supreme Court Loss Isn’t Much of a Loss(5.24.10) and American Needle vs. NFL: Looking Forward (5.26.10))

Earlier this month, cease and desist letters were sent to Collegiate Licensing Company, the nation’s top collegiate marketing and licensing company, and 27 FBS schools demanding that they stop their so-called collective effort to limit the production of merchandise with collegiate logos.

Quite a few of you have asked me about the situation, so I’ve asked my friend Beth Hutchens (Twitter: @HutchensLaw) of Hutchens Law Offices, who specializes in Intellectual Property law, to help me explain.

The real question here is whether the decision from the American Needle case applies in this situation. So, Ms. Hutchens will start with an explanation of that case and move to the situation at hand. I’ll let her take it away:

About 10 years ago, the National Football League Players’ Association (“NFLPA”) decided that they wanted Reebok (and only Reebok) to make hats with the teams’ logos on them.  American Needle, Inc., a competitor of Reebok, had been making these types of hats for the National Football League (“NFL”) for some time and, as a result of the NFLPA’s deal with Reebok, lost its contract to make said hats.  American Needle, Inc. did not have much of a sense of humor about this and sued the NFL under antitrust principles.  Long story short, American Needle Inc. argued that the NFL violated antitrust law because all 32 NFL teams worked together to freeze it out of the NFL-licensed-brand-hat-making business when they gave that exclusive right to Reebok for ten years.  The NFL asked for broad antitrust protection and argued that it was a single entity comprised of 32 different teams united under a common umbrella, hence the license wasn’t anticompetitive.   American Needle Inc. disagreed and argued that since each team retained ownership and control of its trademarks they were independent entities acting in concert.  Hilarity ensued all the way to the United States Supreme Court.

The Needle Court had to decide if the NFL was a single entity as opposed to a collection of separate entities  because §1 of the Sherman Act (the antitrust law at issue here) forbids conspiracies to restrain trade.  One cannot conspire with oneself, such as a parent and a subsidiary (the NFL’s argument), but two separate entities can, such as two competitors (American Needle, Inc.’s argument).  The relevant question, then, is if the 32 teams agreeing to grant an exclusive license for use of their independently owned marks “join[ed] together independent centers of decision making”.  This is why the NFL argued that the teams were under a single umbrella and most definitely were not separate entities.  The Supreme Court didn’t buy it and said:

Justice Stevens, writing for a unanimous Court, noted that even though there may be some cases where it is necessary for cooperation among (football) teams, in terms of their licensing agreements, they are not a single entity.  But the Court didn’t resolve the issue as to whether the agreement among the NFL teams actually did violate competition laws, which is important in our CLC analysis.  The Court kicked Needle back to the 7^th Circuit to analyze American Needle Inc.’s claims under   the “rule of reason” and determine whether the NFL’s licensing practices actually do harm competition.  Under this rule, the actions of the NFL teams would be illegal only if they unreasonably restrain trade.    The 7^th Circuit has not decided the case yet.

Dechert plainly thinks Needle should apply to collegiate athletics.  Its letter alleges that CLC is “promoting, organizing, and implementing a concerted effort…to restrict the number of licensees” and accuses CLC licensors of “acting in concert to suppress competition in markets for licensed goods (similar to American Needle, Inc.’s position).  CLC disagrees, calling the accusations “outrageous and unfounded” and “absolutely unsustainable”.  CLC’s position is that the restriction represents “good, sound business practices”.  We have no precedent to tell us which is the better argument, or if we can even analyze college sports licensing under Needle.   

 A glaring difference between the facts of Needle and the current issue is that, arguably, Needle only addressed a particular licensing scheme to one entity in one type of professional sport.  The CLC license merely restricts the number (which is presumably greater than one) and involves all college athletics, not just football.  Another important difference is that collegiate sports, by definition, are not professional.  Unlike professional athletes, college athletes are not compensated.  Yes, they receive scholarships and other sorts of aid that has some monetary value, but, technically, they are not paid to play the game.  It stands to reason, then, that even though college athletics is a huge revenue generator, the teams’ existence is incident to, not independent of, the affiliated university, thus any separate entity argument could fail. 

Speaking of money issues, and in furtherance of the single-entity argument, at least some of the revenues generated by college sports go toward the academic institution and not a professional payroll. This may have major implications in applying antitrust principles to colleges because, at least in theory, one could argue that collegiate sports teams are in fact, under the umbrella of the university system.  So one could say that, at least on some level, competing college teams cannot possibly be viewed as having separate interests where the goal is to improve the academic institution.   Will these issues be enough for a court to refuse to apply Needle to Dechert’s claims?  They might, but I honestly don’t know.   These are important issues that require a very lengthy and drawn out analysis that I can’t expand on today.  So, just for the sake of argument, let’s pretend that Needle does apply and Dechert can actually challenge the CLC’s activities under antitrust principles.

So what exactly is Dechert talking about?  The letter makes mention of a “Sideline + 1” initiative.  This initiative is apparently an endeavor to limit the number of manufacturers allowed to make collegiate branded apparel sold at certain types of retail outlets.  Dechert believes this limitation is an “anti-competitive restraint of trade”.  Dechert alleges that “[b]y severely reducing the number of licensees and eliminating competition from the excluded suppliers, the restraint will allow CLC and the universities to garner increased royalty revenues…both through higher royalty rates and through higher prices… which will rise as competition will fall”.  I remain unconvinced that limiting the number of licensees immediately triggers antitrust concerns, especially where trademarks are involved.  As IMG College spokesman Andrew Giangola points out “More sophisticated strategic brand management benefits schools, best-in-class licensees, and consumers.  We are confident each school can and should continue to make its own decision about how to best manage its brands.”  

Mr. Giangola makes a good point.   Each university should be able to “choose best-in-class licensees and to work with experts that can help evaluate the myriad of licensing alternatives that the school may wish to consider.”  This necessarily includes deciding who will be permitted to affix a school’s logo on merchandise.  Even if that “who” is a very small subset of manufacturers.  Further, CLC assists its members in managing, developing, and protecting their brands, and specifically provides that licensing assures only quality products are associated with member institutions.  There is a colorable argument that the licensing initiative Dechert is complaining about is actually a way to maintain brand integrity by only giving licenses to companies with a long history of providing top-notch products. Just because that list is limited to only a few companies does not mean the initiative is anticompetitive, especially where trademarks are concerned.  Here’s why. 

A trademark owner has a vested interest in saying who can and cannot use the brand of their merchandise.  This is because one of the first things a responsible trademark owner must do is see to it that their brand maintains its level of quality.  A way to accomplish and maintain this quality is to be highly selective about when, how, and if a company will be permitted to use the mark on its products.   The idea is that if a licensee puts a known mark on shoddy products, the consuming public will incorrectly attribute the poor quality to the brand, not the licensed product, and the brand’s value will be diminished.   CLC members have an interest in making sure that their logos are only affixed to high quality products and choosing to do business with only certain companies is a way to ensure that. 

As it appears on their website, CLC’s current licensing information provides that there are more than 2500 companies licensed to produce a variety of assorted sundries, including apparel.  I do not have a clue as to what number the alleged “Sideline plus 1” initiative proposes to limit that number to, but reports are  that  CLC members are being asked to restrict their licensing to either Adidas, Nike or Under Armour.  A drastic reduction, to be sure.  Is this a way to control the quality of the product bearing the team’s logo thereby maintaining the brand image or a dastardly ploy to squeeze smaller companies who cannot afford royalties out of the marketplace to charge astronomical prices?  Or both?   Make your own assumptions, but I do have a question mark above my head about the stakeholders’ motives as it appears that the end result of their endeavors would be to, at least in theory, require CLC members to contract with entities they otherwise would not negotiate with.  

Here’s the rub.  Needle was an argument about all of the NFL teams agreeing to allow one and only one manufacturer make their hats and the USSC wouldn’t decide if even that violated the rule of reason.  Even if we can say without a doubt Needle should apply to collegiate sports, the question here is whether granting a fewer number licenses to select manufacturers for a certain subset of merchandise amounts to an unreasonable restraint on trade.  I won’t speak for the 7^th Circuit or the Supreme Court, but I am uneasy about the marked increase in antitrust allegations and am hesitant to slap an anticompetitive label on an agreement willy-nilly.  This one must be decided with caution. 

Remember this.  At the end of the day, antitrust laws are only meant to punish businesses that intentionally dominate the market through misconduct.  Intent is the pivotal question, not success, and intent is really really REALLY hard to prove.  Plus, Justice Stevens pointed out that “joint licensing activities…may be necessary to make the product of NFL Football available to the public.”  So a decision that is intended to maintain a competitive balance or maintain brand quality among the teams would probably be OK, at least as far as the Needle Court is concerned, and I’d be surprised if college athletics in general, or even CLC’s initiative, would be held to a different or stricter standard.  The Supreme Court also noted that NFL teams “share an interest in making the entire league successful and profitable,” and in pursuing that they may need to make “a host of collective decisions” that would be beyond antitrust challenge.  Arguably, colleges and universities share that same interest at least on some level, perhaps even more so.  So even though a group-granted exclusive license to a single manufacturer may be subject to antitrust scrutiny, such a license is not necessarily a violation of the Sherman Act.   

 Alas, this rant is pure conjecture and even if Needle does apply to college athletics, it doesn’t mean the initiative is toast.  Besides, we actually won’t know for some time if even the NFL licensing agreement violates the rule of reason, so the CLC issue is a looooong way off.  I think we can file this one in the “Hmmm, we’ll see” file.  For the record, though, my Magic 8 Ball says the NFL licensing scheme will violate antitrust laws “without a doubt.”    But then, my Magic 8 Ball is also 0-4 in the prediction department, so there that is for you.

This article offers the personal observations of Beth Hutchens, and does not represent the views of her law firm or its clients.  This article does not represent the views of Kristi Dosh, her law firm or its clients. Any information contained herein does not constitute legal advice. Consult your own attorney for legal advice on these matters.