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Fitting Cloned Horses Through the Eye of American Needle – Fifth Circuit Raises Doubts About Organizations Capable of Conspiring With Their Members

In American Needle, Inc. v. National Football League,1  the Supreme Court addressed whether a sports organization is capable of conspiring with its members to restrain trade within the meaning of Section 1 of the Sherman Act. The case involved a clothing manufacturer who sued the National Football League (NFL) and its members for allegedly conspiring to constrain sales of official team merchandise. According to the plaintiff, the NFL and its members formed National Football League Properties (NFLP), through which they granted exclusive licenses to Reebok to manufacture and sell trademarked headwear for all 32 teams. The district court found that NFLP and its members were, “in the jargon of antitrust law, acting as a single entity,” and therefore could not contract, combine, or conspire with themselves within the meaning of Section 1.2  The Seventh Circuit affirmed.

The Supreme Court reversed the Seventh Circuit, concluding that the NFL defendants’ activities “constitute concerted action that is not categorically beyond the coverage of § 1.” As the Court explained:

The meaning of the term “contract, combination . . . or conspiracy” is informed by the basic distinction in the Sherman Act between concerted and independent action that distinguishes § 1 of the Sherman Act from § 2. Section 1 applies only to concerted action that restrains trade. Section 2, by contrast, covers both concerted and independent action, but only if that action “monopolizes” or “threatens actual monopolization,” a category that is narrower than restraint of trade.3

The Court emphasized that determining whether an organization is capable of “concerted action under § 1 does not turn simply on whether the parties involved are legally distinct entities.” The Court noted that various business organizations, professional organizations, and trade groups—all of which can be legally “single entities”—were previously found to violate Section 1 when the entity was “controlled by a group of competitors and served, in essence, as a vehicle for ongoing concerted activity.”4

Thus, American Needle’s analysis emphasizes substance over form to determine whether an organization and its members can be considered a single entity for purposes of Section 1, or are capable of conspiring with each other—looking to the competitive relationship between members rather than the business structure of the organization. In considering the facts of that case, the Supreme Court concluded that the individual NFL teams were actual or potential competitors for the market and sale of their trademarked merchandise, and thus NFLP was merely a vehicle through which these organizations could arguably achieve concerted effort to restrain trade and subject to Section 1 of the Sherman Act.

However, in Abraham & Veneklasen Joint Venture, the Fifth circuit recently analyzed a different sport organization’s ability to conspire with its members and nearly reached the opposite result.5  The organization involved was the American Quarter Horse Association (AQHA), “a non-profit association with a general membership of more than 280,000 worldwide that was organized . . . to collect and register the pedigrees and protect the breed of the American Quarter Horse.” The plaintiffs alleged that AQHA adopted a rule to ban cloned horses from its registry in order to constrain the market for “elite Quarter Horses” eligible to participate in various races. The jury returned a verdict in favor of plaintiffs and the trial court issued an injunction requiring AQHA to change the relevant rules to allow cloned horses to register with the association. The Fifth Circuit reversed and rendered judgment in favor of the AQHA.

In its analysis, the Fifth Circuit noted that based on the structure of the AQHA and the composition of its membership, it was unclear whether AQHA was capable of concerted action. Unlike the 32 members of the NFL, AQHA had over 280,000 members, a board of directors that ranged from 280-340 individuals, and “a variety of standing committees that report to the general membership and the Board… AQHA is more than a sports league,” the court explained, “and its quarter million members are involved in ranching, horse training, pleasure riding and many other activities besides the ‘elite Quarter Horse’ market.” Borrowing a phrase from American Needle, the Fifth Circuit found it “difficult to draw the conclusion that because a tiny number of economic actors within AQHA may ‘pursue their separate economic interests,’ the organization has conspired with the minority.” After expressing its doubts about American Needle’s applicability, however, the Fifth Circuit “assume[d] arguendo that AQHA was legally capable of conspiring with members . . . in violation of Section 1.”6  The court then analyzed whether the plaintiffs had presented sufficient evidence of an actual conspiracy and, finding that such evidence was lacking, reversed the district court’s judgment.

Although the Fifth Circuit stopped short of concluding that AQHA was incapable of concerted action, the distinctions it drew between AQHA and the NFL foreshadow issues that courts may face in determining whether a single organization can violate Section 1 of the Sherman Act. Clearly, the difference in governing an organization with 280,000 members as opposed to 32 teams makes conspiracy more difficult, but total membership cannot be the guiding principle. After all, professional organizations and trade groups often have as many if not more members than AQHA, but courts have found that these organizations are capable of concerted action with their memberships.

Rather, the significant distinction between AQHA and the NFL appears to be the economic interest, or lack thereof, that the majority of members have in their organization’s complained-of activity. The Fifth Circuit discredited the argument that the minority of AQHA members who had actual financial interests in the registration of Quarter Horses could taint the association’s overall purpose of preserving and enhancing the breed’s characteristics. This is in stark contrast to the NFL teams in American Needle, all of whom had both competing and collaborative interests in the promotion of members’ products, making it more likely that the teams could use NFLP to stymie competition.

The question remains, how many members with competing financial interests are enough to potentially make an organization a vehicle for concerted activity? Is it a question of the ratio of financially interested members to disinterested members, or does the relative influence of interested members come into play? There was evidence that although the vast majority of AQHA members did not have a significant financial interest in the registration of elite Quarter Horses, those that did were prominent figures within the horse-breeding community and provided significant financial support to the association.7  The Fifth Circuit’s analysis indicated that even these prominent and outspoken financially-interested members are not enough to taint an otherwise generally financially-disinterested group.

The facts of American Needle and Abraham & Vaneklasen Joint Venture may present opposite extremes of organizations that may or may not facilitate anti-competitive collusion. Going forward, courts remain left to determine whether a particular organization’s conduct is so intertwined with its members’ individual financial interests that, for purposes of the Section 1 of the Sherman Act, the members of the single entity can effectively conspire to restrain trade.

 1 560 U.S. 183, 189-90 (2010). up
 2 Am. Needle, Inc. v. New Orleans La. Saints, 496 F.Supp.2d 941, 943 (N.D. Ill. 2007). up
 3 Am. Needle, 560 U.S. at 190 (internal quotations omitted). up
4 Conversely, the Court noted, legally distinct entities that effectively function as a single actor—particularly a parent corporation and its wholly owned subsidiary—are incapable of concerted action within the meaning of Section 1 “insofar as use of separate corporations had [no] economic significance.” Id. at 193 (internal citations omitted). up
 5 Abraham & Vaneklasen Joint Venture v. Am. Quarter Horse Ass’n, __ F.3d__, 2015 WL 178989 (5th Cir. Jan. 14, 2015). up
 6 Id. at *6. up
 7 Specifically, there was testimony that one prominent member of AQHA warned the other members that he would “not allow this technology [cloning] to move forward. . . . And I have put millions of dollars in this industry, and if this is approved, I will take every dime out of it.” See id. at *7. up