The Intersection of Trademark and Antitrust: Why Centralized Licensing Agreements Protect Consumers

By Luke MacDowall

The case of American Needle, Inc. v. NFL, presently before the Supreme Court, primarily challenges the use of centralized licensing agreements under antitrust law, but it also raise important questions about the function of trademark law as means to protect consumers.  The move to centralized licensing agreements between sports leagues and the vendors of their merchandise raise two legal concerns: (1) the balance of trademark owners’ free licensing rights of their trademark property against antitrust challenges by vendors and (2) increasing customer certainty about the source of the products bearing the distinct marks. Although the arguments in American Needle focus on the antitrust concerns of allowing trademark owners within a sports league to jointly contract with vendors, this side of the story only reveals the first of the two legal concerns in the case. In contrast, this post looks at how the second concern is a legitimate goal that should be remembered in these cases.

Licensing agreements give rise to an inherent tension with trademark law by allowing the owners of trademarks to freely license out the mark without also licensing the products upon which these marks rest – presumably allowing products from numerous different producers to bear the coveted trademarks without consideration for consumer interests. Arguments in support of these agreements focus on the view that trademarks are the property rights of the owner of the mark. This view gives rise to this tension by placing owners’ rights above public (i.e. customer) interest. Recent cases challenging centralized licensing agreements have been decided upon antitrust legal grounds, rather than trademark law. Both the view that trademarks are property and antitrust law ignore the fact that trademark law is firmly rooted in protecting consumers, not just merchants, and the decisions about licensing agreements affect this goal. In fact, the current trend towards centralized licensing agreements reinforces trademark law’s aim of protecting consumers from confusion about trademarked products.

I suggest that a trademark argument based on the underlying goal of consumer protection could be used in support of leagues seeking to justify centralized licensing agreements, which aligns with the arguments already being used against antitrust challenges and in support of the contention that trademarks are property.

In American Needle, the Seventh Circuit considered yet another case from a string of relatively recent cases brought against organized sports leagues for their use of centralized licensing agreements of trademarks owned by teams within the league. Am. Needle, Inc. v. NFL, 538 F.3d 736 (7th Cir. 2008). In 1963, the NFL teams formed NFL Properties as a separate corporate entity charged with developing, licensing, and marketing the intellectual property the teams owned, such as their trademarks. As part of this authority, NFL Properties could grant licenses to vendors to manufacture consumer goods. One of these vendors, American Needle, held a license to manufacture headgear for the past 20 years. But in 2000, after the NFL teams authorized NFL Properties to solicit bids for an exclusive license, Reebok won an exclusive contract to use NFL trademarks. American Needle filed suit arguing that this licensing agreement violated § 1 of the Sherman Antitrust Act because individual teams separately owned their trademarks and the collective agreement to authorize an exclusive license was a conspiracy to restrict other vendors’ ability to obtain licenses.

The question currently before the Supreme Court focuses on whether the NFL may operate as a single entity without violating the Sherman Act. In settling the issue, the Supreme Court is confronted with a number of arguments made by the NFL, and leagues to explain away the antitrust concerns. Although an in depth view is beyond the scope of this post, the leagues advance three arguments: (1) joint conduct is necessary to match competitors because vendors need centralized support of the entire league rather than individual teams; (2) an anti-competitive licensing agreement among vendors achieves a competitive balance for the consumer market by making sure the more popular teams do not free-ride on the popularity of the league as a whole while less popular teams would be left without vendor interest; and (3) centralized licensing increases both demand from vendors and therefore supply to consumers. All of these arguments against antitrust regulation of league licensing agreements rest on the simple principle that competition is good for the economy and some anti-competitive agreements spur competition in other markets.

On the other hand, trademark protection has historically been based on two rationales. First, to prevent consumer confusion, trademarks must be protected to preserve the integrity of product markings and the knowledge they convey to consumers relying on these markings to choose among competing products. Second, to protect merchants who expend resources to make a better product than the next merchant, trademarks must be protected to prevent free-riders from hijacking the goodwill and reputation of other merchants. Although these rationales are not being used to support the NFL’s position, there is certainly room to argue that centralized licensing agreements prevent customer confusion better than decentralized contracts supported by the Plaintiff in American Needle.

In her article Trademark ‘Coexistence’ Agreements: Legitimate Contracts or Tools of Consumer Deception?, Marianna Moss fleshes out the continuing debate about whether we should view trademarks as property of the owner or not. 18 LOY. CONSUMER L. REV. 197 (2005). At the center of this distinction is the case of the transferable trademark that occurs in the context of licensing agreements, specifically in the sports arena. Those who adopt the view of trademarks as property often point to the fact that the owners are allowed to transfer the right to use the trademark without also licensing the product identified by that mark. This is a rather exceptional enforcement of trademark rights because to allow free transferability of the mark without the product would undermine the purpose of trademark protection (i.e. allowing customers to recognize a source of a product by its distinct marking). The view that trademarks are property of their owners posits that individual property rights of the owner trump the public’s right, and thus the potential conflict with the trademark goal of protecting consumers makes this view of trademarks as property consistently in tension with overall trademark law.

Both coexistence agreements and the decentralized licensing agreements supported by American Needle produce this resulting customer confusion about product identity that Moss indicates arises when owners of trademarks begin licensing their marks without the underlying products. Moss points to the countervailing effect that coexistence agreements have on the central purposes of trademark protection. Coexistence agreements allow similar marks to exist on the market with the users of these marks agreeing to refrain from resorting to legal action. As she argues, the existence of these agreements undermines the “original purpose of trademark law—consumer protection” These agreements do so in a few ways. First, we recognize that trademark protection reduces consumer search costs by enabling consumers to associate knowledge about product quality quickly through the trademark that represents this quality. Second, because merchants know that consumers are associating judgments about product quality with the marks they see, trademarks encourage manufacturers to invest in and maintain a quality product.

However, in the context of licensed trademarks, these economic truths do not hold nearly as tightly. When a trademark owner licenses that mark to a vendor to create a product bearing that mark, consumers lose the distinct connection the mark has with the product source because while the team owns the mark and invests in its value, the vendor does not. In short, owners end up licensing “its use to others without conveying its goodwill and other assets.”

Thus, licensing agreements are sort of an anomaly in trademark law. If the law allows free transferability of the mark without linking it to the source of the item, it denies the consumer a straight connection between the mark and the company making the product that the consumer has come to trust for quality. Furthermore, as more overlapping licenses are awarded to vendors, trademark protection for consumers becomes less effective. In fact, a free-rider problem would arise in which some vendor could pass off a lower-quality product for another’s high quality product by duping consumers into believing in the quality of all products bearing the trademark even though not all products are of equal quality. See William M. Landes & Richard A. Posner, Trademark Law: An Economic Perspective, 30 J.L. & ECON. 265.

Because these coexistence agreements and non-centralized licensing agreements undermine consumer certainty, centralized licensing may benefit consumers who want to know that goods purchased under a given trademark will be consistent and reliable. When the NFL, for example, decides to license only to one vendor to create the products bearing the marks, the more likely it is that consumers of NFL merchandise will come to know the quality of the products the NFL mark represents. One vendor making the type of product a consumer wants, bearing the mark the consumer recognizes, decreases any confusion that might result from a consumer purchasing two separate products from separate vendors of separate quality with the same marking.

A recent contract involving baseball cards bears this out. Richard Sandomir, Topps Gets Exclusive Deal with Baseball, Landing a Blow to Upper Deck, N.Y. TIMES, Aug. 6, 2009. Recently, Topps and the MLB struck a deal granting Topps exclusive privilege to print trading cards. This type of centralized licensing agreement, invited by the American Needle decision in the Seventh Circuit, presents an economic time-travel back to the days when Topps held the exclusive market before Fleer and others decided to join. Before these other competitors entered the market, Topps became associated with memorabilia dealers as the exclusive and legitimate card maker. After competition took hold, lots of the cards lost value because they suddenly became non-exclusive and consumers walking into stores could not tell the difference between the cards suddenly available from multiple vendors. Therefore, the centralized licensing agreement between Topps and MLB furthers the trademark goal of decreasing customer confusion by restoring to the market of sports memorabilia a sense of product certainty. Similarly, a centralized licensing agreement from the NFL could have a similar positive effect on the consistency of quality and value of merchandise available to consumers.