Shutting the back door: using American Needle to cure the problem of improper product definition.

• Author: Schwartz, Daniel A.

Section 1 of the Sherman Act is designed to protect competition by making illegal any agreement that has the effect of limiting consumer choice. To make this determination, courts first define the product at issue and then consider the challenged restraint's impact on the market in which that product competes. When considering [section] 1 allegations against sports leagues, courts have tended to define products according to the structure of the leagues. The result of this tendency is that harm to competition between the leagues' teams is not properly accounted for in the courts' analyses. This, in turn, grants leagues a form of immunity to which they are not entitled under any statutory or doctrinal rule.

In reaching this conclusion, this Note reviews the business structure of sports leagues and explains why they present such a difficult challenge for courts. It then examines a number of cases in which courts, struggling with those challenges, improperly defined the product according to league structure. For each case, the Note explains the mistake that was made and how that mistake granted leagues de facto immunity. This Note concludes by arguing that the Supreme Court's recent decision in American Needle can serve as the impetus for correcting this mistake if courts broadly interpret the meaning of the case by looking to the logic that animates it.

TABLE OF CONTENTS INTRODUCTION I. THE SHERMAN ACT AND ANTITRUST POLICY A. The Sherman Act B. The Rule of Reason C. Joint Ventures and the Single-Entity Defense II. THE PROBLEM WITH IMPROPER PRODUCT DEFINITION IN THE SPORTING CONTEXT A. The Business of Sports B. National Collegiate Athletic Ass'n v. Board of Regents C. The Problem of Improper Product Definition 1. Bulls II 2. Major League Baseball Properties, Inc. v. Salvino, Inc. 3. The New York Rangers Cases 4. American Needle in the Lower Courts III. AMERICAN NEEDLE AND THE SOLUTION TO THE PRODUCT DEFINITION PROBLEM A. The Supreme Court's Decision: American Needle, Inc. v. National Football League B. The Legacy of American Needle CONCLUSION INTRODUCTION

In his opinion in American Needle, Inc. v. National Football League, Judge Michael Kanne commented that asserting that a single football team could produce a football game is "less of a legal argument than it is a Zen riddle: Who wins when a football team plays itself?" (1) Judge Kanne's observation succinctly presents one of the difficulties that courts face when analyzing antitrust claims against a sports league? Leagues cannot possibly exist as consumers know and want them to without some degree of cooperation between competitors. Courts must therefore take into account the need for some coordination when they contemplate the applicability of antitrust laws to sports leagues. At the same time, there are very real questions about how permissive courts should be when considering sports league policies. While the need to collaborate for the purposes of making schedules and creating rules of the game is clear, can that same justification incorporate the passage of rules regarding apparel sales? Television rights? Intellectual property licensing?

Judge Kanne's words reveal the courts' worrisome tendency to dismiss as ethereal questions that have practical consequences for consumers--for example, how to define what it is that leagues sell to consumers. Though the way in which leagues are structured can make it difficult to determine when they compete economically only with other leagues and when the league members also compete against each other, one thing is certain: after the National Football League ("NFL") entered into the exclusive licensing agreement challenged in American Needle, the price of NFL apparel jumped substantially? The view that league members do not compete internally has been articulated by numerous defendants in the form of the "single-entity argument," (4) which posits that leagues act as a single entity in certain elements of their businesses and are consequently categorically immune from the antitrust laws. (5) The Supreme Court rejected this argument in American Needle, but the tendency of courts to define products from an industry perspective rather than from a consumer perspective often creates an effective immunity regardless of single-entity status.

This Note focuses on this problem of league-centric product definition. It argues that defining products according to league structure rather than from a consumer's perspective guarantees that courts will rule any league restraint reasonable without accurately analyzing the restraint's true effects on competition. Part I provides background information on antitrust law and observes the unique issues presented by sports leagues sued under [section] 1. Part II traces the manner in which numerous courts have defined the products at issue in sports-antitrust cases and explains how the overly broad and formulaic nature of their definitions has prevented a genuine analysis of competition. Part III addresses the Supreme Court's decision in American Needle and concludes that the logic underlying the Court's decision can serve to refocus courts in the way in which they define products.

1. THE SHERMAN ACT AND ANTITRUST POLICY

   This Part provides relevant background information on the purposes and substantive elements of antitrust law. Section I.A lays out the background of the Sherman Act and describes the questions that a court analyzing a [section] 1 claim must answer. Section I.B elaborates on the Rule of Reason and argues that, just as courts define markets from the perspective of the consumer, they should also define the products relevant to an antitrust inquiry from the consumer's point of view. Section I.C notes how the Rule of Reason accounts for the competitive benefits created by joint ventures and explains the single-entity argument, which league defendants contend should provide categorical immunity from the antitrust laws.

   1. The Sherman Act

      The spine of federal antitrust law is the Sherman Act, (6) passed in 1890 to "curb abusive and monopolistic actions in restraint of trade." (7) Sherman Act jurisprudence has developed along two essentially parallel lines. The first line, and the one that is central to this Note's analysis, originates in [section] 1's declaration that "[e]very contract, combination ... or conspiracy, in restraint of trade or commerce ... is declared to be illegal." (8) It is axiomatic that this proclamation is not to be taken literally. (9) Instead, it should be understood to ask "whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition." (10) This question--does the restraint help or hurt competition?--is the key question when courts review [section] 1 claims. (11)

      In most industries, this question is at least theoretically straightforward. In the conventionally structured market, competitors are distinct entities that are fully capable of continuing to exist and pursuing their business interests if their competitors ceased to exist. In fact, this battle for market share is the very thing that antitrust laws exist to protect. Through the promotion of competition, the best and most efficient competitors thrive, consumers accrue the greatest possible benefits, and those competitors who are less capable of competing adequately either improve or fail. (12) In this context, an agreement between two ordinary competitors not to compete--whether through the standardization of price, quality, features, or some other agreement--will likely violate the Sherman Act, (13) because the agreement will deny consumers the full benefits of competition by creating a less efficient market in which producers have less incentive to compete vigorously for market shares.

   2. The Rule of Reason

      While the questions asked by [section] 1 may be conceptually simple, many restraints challenged under the Sherman Act require a nuanced analysis to determine their competitive effect. Courts have developed two primary vehicles for analyzing claims of illegal collusive behavior: the per se rule and the Rule of Reason. (14) The Rule of Reason, which requires courts to conduct an analysis of the totality of circumstances surrounding a challenged restraint in order to determine whether it promotes or destroys competition, (15) has been universally held to be the proper tool for analyzing [section] 1 claims brought against sports leagues. (16)

      In practice, the Rule of Reason involves a market analysis and an analysis of the competitive effects of the restraint in controversy. (17) The purpose of the market analysis is to determine both the universe in which the accused companies operate and the competitive pressures that govern their ability to impose their will on the market through changes in prices or production levels)s When defining the relevant market, courts generally look to the consumer's view on the "substitutability" of alternative products for the one in question. (19) Markets are thus largely defined by the way in which the court defines the product at issue. (20)

      This focus on the consumer's perception of the product market is vital. For example, while it may appear that college football and professional football are so qualitatively similar that they would be natural substitutes, the Supreme Court has held that they occupy distinct markets because they attract distinct audiences that conceive of the products as distinct entities. (21) They thus fail the substitutability test because the consumers of one product would not readily move to the other. (22) This focus on the consumer is particularly relevant in the sports-antitrust context because the lower courts tend to define products from the supply side. (23) This tendency has led courts that consider what competes in a market to focus on what the leagues claim to produce (professional sports) rather than on what the public...