Reversing Field

(Published in the August 2010 issue of Wearables magazine.)

Embroiderer American Needle took the NFL all the way to the Supreme Court – and won. The result of “the most important case in sports history” may forever change the nature of sports apparel licensing.

By Daniel Walsh

Jeff Carey never planned to initiate what Sports Illustrated called “the most important case in sports history.”

To Carey, American Needle v. National Football League seemed a simple, straightforward lawsuit. In 2000, the NFL eliminated the practice of contracting with multiple companies to sell a particular type of merchandise, such as the hats with NFL team logos that American Needle had produced, embroidered and sold for decades.

With the stroke of a pen, Reebok became the NFL’s exclusive hat producer, and American Needle lost a quarter of its business, worth millions of dollars.

The NFL’s rationale for the move was an increase in efficiency and uniformity of product quality. All American Needle saw were 32 separate businesses conspiring to remove competition, in violation of the Sherman Anti-Trust Act. So Carey did what any smart lawyer would do: He sued. “What you had was the prices going down because there was a lot of competition,” says Carey, American Needle’s in-house counsel. “So the NFL had to stabilize the prices, and to do that, you had to eliminate the competition. That’s what the NFL did.”

In the end, American Needle won. Now, a single headwear manufacturer could open the door for thousands of smaller apparel distributors and suppliers to secure pro sports licensing – a goal line defense that, up to now, seemed impenetrable.

Taking Down a Giant

The NFL’s deal with Reebok was a massive blow to American Needle, but you wouldn’t be able to tell today. In the lobby of the company’s Buffalo Grove, IL, headquarters – so innocuous that it has no sign outside identifying its occupant – one can still see silver footballs mounted on plaques from the NFL recognizing the company’s excellence. Inside the building, American Needle is rearranging its warehouse to account for Red Jacket and other apparel lines it launched after losing the NFL contract; shirts, after all, require a different shelving system than hats. It’s all part of the reinvention the embroiderer underwent to avoid collapse and regain revenue that it had lost.

The lawsuit that Carey and notoriously publicity-shy CEO Robert Kronenberger filed in 2004 wasn’t an immediate winner. Judges ruled against American Needle in the northern Illinois district court and later the 7th Circuit Court of Appeals, supporting the NFL’s argument that its 32 teams comprised a single entity, and a single entity logically couldn’t conspire with itself. Left there, the case would have been closed.

But then a funny thing happened. American Needle appealed to the Supreme Court, and the NFL supported it. While American Needle was focused on righting a perceived wrong that cost it millions of dollars, NFL leadership was seeking something bigger. Quite simply, a ruling by the highest court that the NFL was a single entity would stop any future antitrust suit against the league. The domino effect would have hit other major leagues that don’t have blanket antitrust exemptions (Major League Baseball is the only one that does), potentially revamping the landscape of American professional sports. The National Basketball Association, the National Hockey League, Major League Soccer and the world’s two major professional tennis organizations filed amicus curiae briefs to support the NFL, underscoring the case’s wide-ranging impact.

“This is something that the NFL has wanted for decades,” says Michael McCann, a sports law professor at Vermont Law School and occasional columnist for Sports Illustrated. “They finally had a case.”

The collateral effect, of course, was that American Needle’s case remained alive. Carey brought on Washington D.C. attorney Glen Nager to help with arguments before the high court, and they went to work leading up to the Jan. 13, 2010 oral arguments before the Supreme Court. The Obama Administration stepped in, also filing an amicus brief in support of American Needle and arguing that the Court should reject the NFL’s single entity argument and send the case back to the lower courts for reconsideration under the premise that the NFL comprised 32 separate companies.

That’s exactly what the high court did. In May, the nine Supreme Court justices returned a stunning verdict: 9-0 against the NFL. David had knocked out Goliath with his slingshot again.

The NFL, for one, sees much ado about nothing. “The Supreme Court decision doesn’t change anything,” NFL spokesman Greg Aiello says. “It just puts it back where it was.” And that is true – for now. The case goes back to the lower courts. This time, the NFL can’t argue that it’s a single entity. The entire premise of the NFL’s winning argument is now out the window. Plus, a new judge will hear the case because the original case judge died last year. This judge will take into account the so-called “rule of reason” – basically a cost-benefit analysis – to determine whether the NFL’s exclusive licensing creates anti-competitive or pro-competitive effects.

If the judge finds it’s pro-competitive, the NFL wins. If not, then an American Needle victory could preclude exclusive professional sports licensing by leagues, and open up new markets – with possibly 32 professional football clubs as separate entities – for smaller distributors and embroiderers to compete with Reebok and other giants of the sports apparel world.

Sports and Fashion

To understand the business implications of the American Needle case, one must first understand the playing field that predates it.

Professional sports’ infancy didn’t include jerseys, hats or other official team merchandise for retail sale. It wasn’t until 1946 that the late Bruce Kronenberger, father of current American Needle’s current chief executive, approached the Chicago Cubs about the prospect of his company selling replica Cubs hats. Under such a partnership, the team would get royalties on all sales. The Wrigley family, which owned the Cubs, initially scoffed at the idea, thinking no one would want the hats, according to American Needle lore.

The first run of hats sold out in a day. So did the second run.

A new industry had begun.

Seventeen years later, visionary NFL commissioner Pete Rozelle oversaw the creation of NFL Properties to oversee league-sanctioned merchandise such as apparel, one of many ways the late Rozelle would revolutionize professional sports. The idea was to have teams work together to breed a league’s success and sustainability by making franchises equally competitive, both financially and on the field.

Still, NFL-licensed apparel for years was just a small part of the pursuit of parity. Then came the 1980s and a fashion explosion. Sports caps and jerseys became hugely popular, thanks to fashion tastes and the rise of sports on cable television. “It just became a major, major thing,” Carey says. “Sales went through the roof. We grew accordingly.”

So did others. New businesses jumped into the mix, and the sports leagues gave out licenses to more and more producers. Licensed merchandise flooded the market. The increased supply and competition drove down prices. In turn, that decreased NFL royalties from the sales, Carey says.

It also created “chaos,” according to Matt Powell, an analyst with SportsOneSource, which follows the sporting goods industry. Different firms would make products of varying quality, some better than others, Powell says. “The league really realized that this was a failed business concept,” he says. “Let’s put aside the legal side for a moment. This just wasn’t working, and the league had to do something about it.”

NFL owners voted in 2000 to move toward exclusive licenses, an increasingly common trend in licensing. Among the exclusive licensees was Reebok, which claimed the hat contract at American Needle’s expense After that  move, NFL hat prices rose $10. “I remember American Needle had this huge catalog in like 2000,” says Dave Weintraub, chief operating officer of Pinnacle Promotions in Atlanta. “It was just beautiful. It was like 150 pages. Then they just fell off the map.”

License to Succeed?

Licensing is often the first and last word when it comes to professional sports merchandise. “You’re in with a license situation, or you’re not,” says Bob DeMasse, co-owner of Colorado-based APC , which once held exclusive promotional product licenses for the NBA’s Denver Nuggets, NHL’s Colorado Avalanche and Colorado Rapids of Major League Soccer. “You’re obviously a major player if you’re in, but if you’re not, there obviously are no options.”

But, while licensing may seem like a golden ticket for a few lucky distributors, it can also be a millstone. For one, some leagues offer preferred-bidder status to companies that make up-front payments. Preferred status allows distributors, for example, to be 5% higher than the next closest bid and still win the contract. The problem is those up-front fees can run into the tens or hundreds of thousands of dollars, depending on the size of the contract being pursued. These fees and licenses can outweigh almost everything else.

Tim Lavin thought his NFL ties would help secure business for his company, Mad Dog Promotional Products. The former University of Southern California starting fullback had handled security for the NFL’s San Francisco 49ers and Oakland Raiders, as well as the Golden State Warriors of the National Basketball Association, so he had the contacts. As it turns out, it wasn’t enough.

“The tricky part is, even if you had $200,000 to shell out, I find with so many people involved, there’s heavy bidding,” Lavin says. “Your profit margin is so low to begin with that we’d be lucky to get a 10% to 15% markup. Then if you’re paying 8% to 9% to the NFL, the profit margin is very low.”

Bill Burkett worked as a statistician for the NFL’s Jacksonville Jaguars and later cut a number of promotional products deals with NBA and NHL teams on behalf of a company called GlobalWide. Once he began questioning GlobalWide’s finances, he realized he needed to cut ties with the company, which subsequently went under. “They collapsed because they were trying to create sponsorships with these teams,” Burkett says. “To pay a $50,000 sponsorship, and you only make $10,000 once a year, you’re not going to last long.”

Pinnacle Promotions is one of many companies that avoid dealing with officially licensed sports apparel, despite being one of the largest sports apparel firms in a pro-sports mecca.

Weintraub, a lawyer by training, has avoided such pitfalls with his company by passing on most contracts that require licenses, despite the demand. For example, businesses would request that Pinnacle Promotions produce shirts with logos of the requesting business and the BellSouth Classic, once a major golf tournament in the Atlanta area. Pinnacle couldn’t do it, due to the licenses.

That said, now he’s watching to see if the American Needle case changes all that. Says Weintraub: “If it turns out that they can seek out other vendors because of this American Needle ruling, then we definitely would be interested. This ruling definitely opens the door for some companies to go after this business.”

Then again, it might not, if American Needle loses its case in the lower courts. The NFL remains confident it will prevail, says Aiello. Many in the legal community agree. “Ninety-nine percent of cases that go to final determination by a judge have been ruled in favor of the defendant, so it’s still going to be an uphill battle that American Needle is fighting,” says Marc Edelman, a professor at Barry University’s Dwayne O.
Andreas School of Law.

American Needle isn’t afraid to try. “I never read that statistic,” Carey says. “I hope it’s not true. I think we fit into the 1%.”