Joint Venture's Exclusive Licensing of Intellectual Property Is Not Exempt From Scrutiny Under §1 of The Sherman Act

If there was any doubt before, there is none now. On May 24, 2010, the Supreme Court made it clear that competitors cannot avoid potential liability under §1 of the Sherman Act merely by acting through a joint venture for the licensing of their intellectual property. In a unanimous opinion delivered by Justice John Paul Stevens, the Court held that the 32 members of the National Football League do not function as a single entity when licensing their separately owned intellectual property. Rather, the licensing activity is concerted action and therefore not exempt from scrutiny under §1 for conspiring to restrain trade. American Needle Inc. v. National Football League, et al.1 impacts not only professional sports leagues, but joint ventures generally.

Background. The NFL formed the National Football League Properties (“NFLP”) in 1963 to manage all of the teams’ intellectual property. In 2000, the NFLP entered into a ten year exclusive license with Reebok International Ltd. to produce and sell hats bearing all of the teams’ respective logos and trademarks. American Needle Inc., a former licensee, brought suit against the NFL and Reebok, alleging that defendants’ exclusive licensing agreement violated §1 of the Sherman Act. Section 1 prohibits any “contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade.” The NFL countered that it was a “single economic enterprise, at least with respect to the conduct challenged,” incapable of conspiring with itself, and thus could not be held liable under §1. The district court granted summary judgment in favor of the NFL, and the Seventh Circuit affirmed.

Supreme Court Analysis. Relying on long standing precedent, the Supreme Court reversed and remanded, emphasizing that “substance, not form” determines whether an entity is capable of conspiring within the meaning of §1. The Court identified the “relevant inquiry” as:

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’ and thus of actual or potential competition.2

The Court explained that teams in the NFL compete against each other in the market for intellectual property. Therefore, when licensing their separately owned trademarks through the NFLP, each team is not “pursuing the ‘common interests of the whole’” league but is instead pursuing interests of each ‘corporation itself.’” The Court, accordingly, cautioned that “it is not dispositive that the teams have organized and own a legally separate entity that centralizes the management of their intellectual property.” The Court concluded that teams in the NFL – each of which is “a substantial, independently owned, and independently managed business” – do not have “either the unitary decisionmaking quality or the single aggregation of economic power characteristic of independent action” that precludes a finding of concerted action under §1.

The case now returns to the lower court for application of the “rule of reason” analysis to weigh the anticompetitive effects of the NFL’s exclusive licensing deal against any pro-competitive justifications.

Conclusion and Application. American Needle instructs that essentially all joint ventures satisfy the concerted action requirement of §1 and therefore are not automatically exempt from liability. Intellectual property licensing agreements by joint ventures – such as patent pools – are at risk of rigorous scrutiny under the rule of reason. When determining if a joint venture’s activity unreasonably restrains trade, courts will evaluate a number of factors such as whether the restraint is “ancillary” (i.e., necessary) to the legitimate purpose of the joint venture, market conditions, the process of decision making within the joint venture, and the nature of the challenged conduct.

Since the Court did not declare the NFL’s joint venture licensing arrangement with Reebok unlawful, the game is not over yet. Following remand, the NFL will likely claim there is no evidence of harm to competition in the relevant market. American Needle will likely claim the NFL’s joint license was horizontally implemented by its 32 members, thereby eliminating American Needle from the market. An exclusive license concertedly granted by a group of intellectual property owners could be characterized as a per se unlawful group boycott. Hence, the final outcome will likely turn on whether the court and jury on remand conclude that it was essential to the lawful objectives of the joint venture.

In order to reduce the risk of an antitrust violation, companies should exercise caution when structuring a joint venture to pool their intellectual property to license to others. Indeed, companies that may be harmed by the licensing of intellectual property through a joint venture potentially have a remedy under §1.