Everyone likes a good sports story, and so let us consider the question of how the Supreme Court's May 24 decision concerning the National Football League might affect health care joint ventures.

The question before the Court in American Needle, Inc. v. National Football League was a very narrow one: When the National Football League is licensing team merchandise, should it be treated as a single entity, or as a combination of 32 independent teams. The lower courts lined up behind the NFL as a single entity. The Supreme Court reversed. The score was 9-0.

Background

Each NFL team owns its own "intellectual property," such as its name, logo, trademarks, and team colors. In 1963, the NFL teams formed an enterprise called National Football League Properties (NFLP), through which the teams collectively license manufacturers to make, among other things, jerseys, sweatshirts, hats, and other apparel bearing the names and colors of the various teams. In other words, NFLP acts as the agent of the individual teams to exploit their respective intellectual property. NFLP handles essentially all of the marketing and distribution of NFL team items as well, so that each individual team does not have to make its own arrangements to promote and distribute its merchandise nationally. Through NFLP, the teams share, on an equal basis, almost all of the revenue earned from team merchandise.

American Needle is a company that for many years was licensed by NFLP to make team-logo caps and hats. In 2000, however, NFLP awarded an exclusive contract to Reebok to make all headwear for all 32 teams and terminated American Needle's license. American Needle filed an antitrust lawsuit against the NFL, alleging that the exclusive contract violated both Sections 1 and 2 of the Sherman Act.

The question that ended up before the Supreme Court was whether the NFL could be sued under Section 1 at all. Section 1 prohibits certain restraints of trade that are undertaken through a "contract, combination ..., or conspiracy" – in other words through an agreement or other act by a plurality of actors. In contrast, Section 2 prohibits unilateral conduct (action by a single actor) that creates, sustains, or threatens to create a monopoly.

The distinction matters because the standard for liability under Section 1 is much lower than the standard under Section 2, and that difference would be highly relevant in determining the legality of the NFL's exclusive contract with Reebok. Thus, the NFL defended American Needle's lawsuit by taking the position that the NFL actually functions as a single economic entity and not as a mere combination of its member teams.

For some purposes, the NFL's argument is clearly true. For example, the NFL can only create a football season and establish the rules of play by acting as one entity. No individual team can create the competition of a football season absent the participation of the other teams. And competition would not work if each team made up its own rules. In other words, although the teams compete on the football field, they are not competitors when it comes to creating the mode of competition itself.

But it is equally clear that the NFL teams are not a single entity for all purposes. The most obvious example is the competition between the teams for playing and coaching talent. And in fact courts have long recognized that professional sports leagues cannot escape Section 1 scrutiny when it comes to labor matters.

And so the question that the Supreme Court addressed was whether the NFL teams have (or could have) competing economic interests when it comes to licensing team merchandise. The NFL argued that the teams acted as one in this regard because the relevant objective was promoting professional football as a form of entertainment that competes with numerous other forms of entertainment. American Needle argued that individual teams do – or certainly could – compete with each other to sell teamwear, noting that because some franchises enjoy much greater fan support and loyalty than others, they have a more valuable product to sell.

The Supreme Court's Decision

The Court's decision in large measure involved further interpretation of its 1984 Copperweld decision. Copperweld holds that a parent corporation and its wholly-owned subsidiary are incapable of conspiring to violate Section 1. In that decision, the Court explained that a parent and wholly-owned subsidiary always have a "unity of interest" that prevents them from pursuing divergent economic objectives. In other words, a parent and its wholly-owned subsidiary are not independent actors in an economic sense.

Since Copperweld was decided, lower courts have applied its principles to other fact situations, including partially-owned subsidiaries, joint ventures, and sports leagues. American Needle is the first commentary on those principles from the Supreme Court in 25 years.

In holding that the NFL's joint licensing arrangement was not "categorically" beyond the reach of Section 1, the court emphasized that the relevant inquiry is whether the conduct in question involves "separate economic actors pursuing separate economic interests" such that their concerted activity "deprives the marketplace of independent centers of decisionmaking" on which competition depends. The Court concluded that NFL teams do compete in the market to license their intellectual property. That is, each team's interest in licensing its separately owned trademarks is independent of interests of the league as a whole and not necessarily aligned with those of any other team. To a company like American Needle, a license to make New Orleans Saints hats might have an entirely different value than a license to make Detroit Lions hats – and those values may go up and down as the teams' fortunes change.

The Court went on to note that holding the NFLP licensing activities to be within the reach of Section 1 is not the same as determining the legality of such activities under Section 1. Indeed, the Court observed that the NFL may have good reasons for establishing and maintaining a joint licensing program and those considerations would be relevant in a rule-of-reason analysis. But that question was beyond the issue presented to the Court and will be considered instead by the trial court on remand.

What American Needle Means to Health Care Joint Ventures

There are two perspectives from which to view the decision. First, American Needle confirms that the mere fact that parties enter into a joint venture for a particular purpose does not mean that they are insulated from Section 1 scrutiny of every joint activity that may be undertaken through the joint venture. Agreements between competitors are judged by their effects, rather than their form. This is a well-understood, and therefore, unremarkable legal principle – but it bears emphasis nonetheless. Health care providers that enter into a joint venture must continue to act as competitors outside of the joint venture and should have continuing legal advice concerning the scope and nature of their joint conduct.

From another perspective, health care providers also are concerned with the vertical ("parent-subsidiary") relationships in joint ventures. For example, if a hospital and a physician group create an ambulatory surgery center joint venture, one of the most common questions (if not the most common question) is whether the hospital and the ASC can be treated as a single entity, and thereby escape Section 1 liability, if they engage in joint payor contracting.

Even though American Needle is not about a parent-subsidiary relationship per se, the Court's emphasis on the functional analysis of Copperweld is critically important to the analysis of parent-subsidiary relationships. The Court made clear that economic substance matters, and that if two entities are to be treated as one, it must be evident that they are not, in any material sense, "separate actors pursuing separate economic interests." This has always been a fact-based challenge for providers and their legal counsel. If a joint venture partner is potentially both an owner and competitor of a joint venture, it should seek legal advice before acting in concert with the joint venture.

So, after American Needle it's probably second and 10, not fourth and long for joint ventures. American Needle does not impose any significant new roadblocks to health care joint ventures. But it does make clear that the substance of a relationship, not the name given to it, will determine whether it can be reached by Section 1, and health care providers should continue to carefully monitor the antitrust posture of their joint ventures and similar business relationships.

American Needle, Inc. v. National Football League, et al., No. 08-661 (U.S. May 24, 2010).

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).

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