Article
American Needle and the Future of the Single Entity Defense under Section One of the Sherman Act
by Nathaniel Grow
Article’s
Purpose
The article explains the single entity
defense that has evolved in response to the Sherman Antitrust Act and the
effect it has had in antitrust court cases. Numerous court cases and their
rulings are examined. The article is
written in 3 parts: the evolution of the single entity defense, the history and
outcome of the American Needle litigation,
and criticisms and implications of the ruling in that case. I will follow a similar outline in this
review of the article.
The
Sherman Antitrust Act
There are two sections of the SAA. Section One’s concern is concerted action, or two or more companies acting in the restraint
of trade. Section Two covers independent action and regulates
monopolization. As stated in the article,
§ 2 cases generally lose; the conflict of
opinion resides in the §1 verbiage dealing
with what constitutes concerted action and restraints of trade.
Origin
and Evolution of the Single Entity Defense
Historically courts ruled using the Intra-Enterprise Conspiracy Doctrine;
effectively meaning that separate legal entities are always subject to §1, even when one is a wholly-owned subsidiary
of the other. As the article states,
this did not provide the protection for which SAA was meant. Courts increasingly began avoiding its
application.
In the 1984 Copperweld case, the Supreme Court conveniently rejected the
doctrine and ruled that a parent and wholly-owned subsidiary are a single
entity and outside the scope of §1. However, as pointed out in the article, this
ruling did not provide a solid substantive measure for lower courts to
determine what constitutes a single entity.
Different interpretations of the case led to the lower courts
implementing their own measure; with inconsistent rulings of what constitutes a
single entity and thus immunity to §1:
- Parent companies and less than wholly-owned subsidiaries. (As low as 51% parent ownership)
- Commonly owned and controlled companies. (E.g. Sister subsidiaries, franchises)
- Members of trade and professional associations.
- Parties acting on the basis of contractual agreements.
The article next addresses joint ventures.
Courts have ruled more uniformly concerning joints ventures, deciding that they
were either competitors or potential competitors and thus the Copperweld single entity defense did not
apply. The Supreme Court, however,
reversed this in the Dagher case. Dagher was a joint venture of Shell and
Texaco. The two companies agreed to
consolidate operations, set a price, and end competition in the western U.S. with
equal shares of profits and losses under the joint venture (They still competed
in other markets). Relying on their interpretation
of the verbiage of§1, the Supreme Court
ruled that in the case of Dagher, a
single entity existed and it therefore could not possibly act in restraint of
trade.
As explained in more detail in the article, these
two Supreme Court cases, Copperweld
and Dagher, have led to a lot of
confusion amongst lower courts as to what the actual definition of a single
entity is or should be. With confusion already surrounding the interpretation
of §1, the verbiage of
the Supreme Court rulings do very little in clearing it up.
History
and Final Decision of American Needle
The American
Needle case was brought by a hat manufacturer suing the NFL when NFL
Properties decided to grant Reebok exclusive access to its trademarks
concerning the 32 NFL franchises. The NFL
teams, or franchises, gave the power to use the trademarks to NFL Properties,
whom was owned equally and jointly by all 32 NFL teams. A defense for the NFL is that, even though
all the teams are separate entities, they are dependent on each other to
produce one product, the sport, and because NFL Properties had the sole power
to use the trademarks, the NFL franchises are effectively a single entity.
Even though the argument for the NFL makes
sense, the Supreme Court, ruled that the franchises lack the capacity to
operate as a single decisive unit. Again,
the Supreme Court seems to have added to the confusion regarding what is and
isn’t a single entity in the verbiage of their ruling. The article explains in depth how this case
could have cleared up both the Copperweld
and Dagher rulings, yet failed to do
so.
Criticisms
and Implications of the American Needle
Decision
This section of the article provides some
very rational criticisms of American
Needle and the implications of the decision on the sports industry and past
and future rulings. It seems as if American Needle only added to the
confusion and future rulings can be deemed unpredictable. The wording of §1
and the exact details of the inter-organizational setup are central in the
Supreme Courts’ rulings.
Implications
of the Article
Perhaps foreshadowed in the author’s assessment of the
implications, management should carefully determine the exact detail of how
they organize their inter-organizational business dealings. This is especially true if the company runs a
potential risk of having an antitrust case brought against them and they wish
to use the single entity defense.
Grow, Nathaniel. “American Needle And The
Future Of The Single Entity Defense Under Section One Of The Sherman Act.” American Business Law Journal 48.3
(2011): 449-501. Business Source Complete.
Web. 30 June 2012
Not being familiar with this issue, I had to go back and read up on single entity defense. It seems (if I'm reading correctly) that to be called a single entity, you have to have some element of control, have complete unity of interest, and that you must be wholly owned 100% and unable to "conspire" with other parts of the company or other companies within your parent organization. Aren't NFL teams separately owned and operated, even though they all represent pro football? I think it's a stretch to call the NFL a single entity since each organization within it is not 100% wholly owned by the NFL. The unity of interest part could be argued and defended to some extent but the conspiracy between some of the teams could certainly happen. I'm just not sure how the Supreme Court figured this. I think they are just as confused as everybody else. But then I'm not a lawyer or judge, and I'm certainly not well-versed in legal-ese. So maybe I'm way off track here. Maybe someone else has other, clearer ideas on this.
ReplyDeleteYes, that seems to be the pure business definition of a single entity. The idea is just to prove that, as far as of restraining trade, does a company act as a 'single entity'. In other words, does the relationship pose a risk that it could possibly "deprive the market place of independent centers of decision making that competition assumes and demands?"
DeleteIn the Supreme Court's Dagher ruling, Shell and Texaco were obviously separately owned entities, but they ruled that because the joint venture was "fully integrated" (Ceasing competition, sharing profits/losses, etc.), it can be viewed as a 'single entity' in the eyes of the SAA. However, the point the author is making is that the verbiage and limited scope of the Supreme Court's rulings makes it hard to tell exactly what led to their decisions -- hard to tell if it was the "fully integrated" bit alone. It's out of this confusion that lower courts are granting the single entity defense to other cases (The bullet points above).
At first I would have completely agreed with you (Opinions seem to be split here). I have almost no knowledge of sports so I had to research how they are actually structured. My first thought was to agree with the Supreme Court ruling, that the NFL franchises should not be considered a single entity. I even followed the Supreme Court's logic and agreed with that as well -- until I read the author's criticisms of the case. He presents a very good argument and it is very well versed. I wouldn't be able to convincingly present his arguments nor counterpoints if I tried. They are located near the end of the article.
Regardless of opinions, the author proposes that after the confusion of Copperweld and Dagher, why did the Supreme Court not clear up the confusion with American Needle, when it was clearly warranted?
Forgot to add this: I do agree that management must be extremely cautious and thoroughly assess their strategies and dealings with other partner companies to avoid future problems if they have the bad luck to be involved in an anti-trust case.
ReplyDeleteThat was my take-away. With today's sue-happy society, it would be wise to take all the defenses you can get.
DeleteThis is a very interesting topic. I can't say I'm surprised by the confusion created by the courts, and their failure to clear up the case. Having said that, I agree with Ehric's point about each NFL franchise being a seperate entity. When the Houston Oilers left Houston for Nashville, that was the choice of their owner, Bud Adams, and not the decision of the NFL. Similarly, if the Texans draft J.J. Watt and then decide what to pay him, that's the decision of their franchise, not the decision of the NFL. Although they are similiar, each franchise has duties and responsibilities relating to their franchise, all 32 of them. I don't see how the NFL can honestly say that collectively they are all just a single entity. However, I do agree with your assessment that regardless of their decision, the Supreme Court should have taken the opportunity to clear up confusion surrounding the SAA.
ReplyDeleteYes, every NFL franchise is a separate entity. They have to be because of the nature of the sport. If they were all owned by the same person or group, how would you know the games weren't rigged? They can all make their own decisions, but theoretically I think they would exist in a 'gray-area' that is closer to being a single entity rather than completely separate. It's due to the nature of the sports industry, which is really unlike any other industry. As proposed by the author, here are 2 of the arguments as to why (Many more in the article):
ReplyDeleteThe different franchises are completely dependent on their competitors for their own survival. If there were no competitors to a franchise then it would ultimately cease to exist. A team cannot play a game by itself, and the Super Bowl would never culminate without each game being played and all 32 franchises participating. In other industries you are not completely dependent on your competitors in such a way. The Supreme Court argued that this situation is not isolated, giving the example of a nut manufacturer and bolt manufacturer. They stated the two could be competitors and completely dependent on one another for their own existence. As the author states, this is not the same, the bolt manufacturer could, for one, start producing nuts in house.
The franchises are limited in their competition for revenue and market share. Fans, or customers, don't follow a franchise because of the reasons you would typically see in business. They are customers because of where they live, because they follow players, etc.; mostly causing conventional economic competition to fail in terms of revenues (Ticket, merchandise, etc.). Brand loyalty may exist to some extent in other industries, but not nearly at this level. The author provides more examples and a better explanation, but as he states, the amount of revenue the franchises can actually economically compete for is a very small percentage of their total revenues.