August 13, 2014

NCAA’s Loss In O’Bannon Trial May Be Only A Partial Victory For Competition

By Jeffrey Shinder and David Scupp

Although competition scored a win on Friday in the student athletes’ antitrust suit led by former UCLA basketball player Ed O’Bannon against the NCAA, it wasn’t a complete blowout.

Judge Claudia Wilken of the U.S. District Court for the Northern District of California issued a 99-page decision that permanently enjoins the NCAA from enforcing its blanket restriction on FBS football and Division I basketball collegiate athletes receiving any portion of the licensing revenue generated from the use of the players’ names, images, and likenesses.

The decision, rendered after trial in In re Student Athlete Name & Likeness Licensing Litigation, held that the NCAA’s restrictions violated antitrust law. The decision is significant: it marks the first time that a court has heard a challenge to the NCAA’s “amateurism” principles, it cuts through the NCAA’s rhetoric, and it rules largely in favor of the plaintiffs. But, while a significant victory for plaintiffs, the relief obtained was limited in ways that may unnecessarily restrict competition.

Let’s start with the groundbreaking portion of the opinion. Following a detailed and thorough “Rule of Reason” analysis, Judge Wilken held that the plaintiffs had demonstrated that NCAA’s rule barring schools from paying collegiate athletes any portion of licensing rights imposes a restraint on competition in two markets, which are essentially mirror images of each other: (1) the college education market, in which FBS football and D-I basketball schools compete to sell a unique bundle of services to elite football and basketball recruits; and (2) the market for the sale of college athletic services in which FBS football and D-I basketball schools compete as buyers for the collegiate athletes that enable the schools and conferences to profit so handsomely from big-time college sports.

In reaching these conclusions, Judge Wilken engaged in an impressively detailed dissection of the NCAA’s proffered justifications for its policies. As expected, the NCAA’s lead justification was that its “amateurism” rules increase consumer interest in college sports. Judge Wilken found the NCAA’s evidence in support of this argument – primarily, a “flaw[ed]” consumer survey – “unpersuasive.”

The NCAA’s second proffered justification was that the restrictions promote competitive balance. Judge Wilken disagreed, holding that the NCAA’s actions show quite the opposite. Although high revenue schools continue to pour money into stadiums, coaches’ salaries, training facilities, and recruiting, the NCAA has shown no interest in curbing any of these competitive advantages. The NCAA also distributes revenue unequally in a manner that rewards the schools and conferences that already have the largest athletics budgets.

Third, the NCAA argued that the restrictions are necessary to promote the integration of academics and athletics. Judge Wilken held, however, that the restrictions generally do not serve to enhance academic outcomes for college athletes. Rather, students benefit academically from benefits such as increased access to financial aid, tutoring, academic support, mentorship, structured schedules, and other educational services that are unrelated to the NCAA’s challenged restrictions.

Finally, the NCAA claimed that the restrictions increase output; i.e., the number of opportunities available to schools and athletes to participate in FBS football and D-I basketball. Judge Wilken held, however, that it was “implausible” that the increase in the number of schools participating in FBS football and D-I basketball was a result of the “amateurism” rules. Evidence showed that schools would not leave FBS or D-I if the restrictions were lifted. Schools that cannot afford to re-allocate any portion of their athletic budget to athlete compensation would not be forced to do so.

This brings us to the portion of the opinion where the court stopped short of unequivocally endorsing competition in this industry. Even though Judge Wilken clearly recognized that big-time college sports is a big business in which market principles should generally prevail, and even though she rather effectively dismantled the NCAA’s arguments, she pivoted at the end of the decision and credited its argument that some restraints on competition are warranted under the unique circumstances of college sports.

Specifically, Judge Wilken held that the NCAA presented evidence showing that some limited restrictions on collegiate athlete compensation may yield procompetitive benefits. According to the court, these restrictions (1) may serve to increase consumer demand for the NCAA’s product; and (2) may facilitate NCAA member schools’ efforts to integrate athletes into the academic community. The burden thus shifted to plaintiffs to show that these goals can be achieved through less restrictive alternatives.

Plaintiffs argued that there are three less restrictive approaches. The first proposed alternative would be to allow schools to award athletes a stipend up to the full cost of attendance. Judge Wilken held that this would be consistent with the NCAA’s stated purposes, and would not even violate the NCAA’s own definition of amateurism.

The second would be to allow schools to hold payments in trust for collegiate athletes until after the athletes’ collegiate playing careers end. Judge Wilken held that this would enable the NCAA to achieve its goals in a less restrictive manner, provided that the compensation was limited and distributed equally among team members.

Judge Wilken held, however, that plaintiffs’ third proposed alternative – allowing collegiate athletes to receive money from endorsements – does not offer a less restrictive way for the NCAA to achieve its procompetitive purposes because it would undermine the efforts of the NCAA and its member schools to protect against the “commercial exploitation” of student athletes.

Based on these findings, the court enjoined the NCAA from enforcing any rules that prohibit any FBS football or Division I basketball schools from offering their athletes a limited share of the revenue generated from the use of their names, images, and likeness.

The decision, however, is, at best a limited victory for collegiate athletes. The injunction allows the NCAA to cap the amount of compensation that a school or conference may pay to athletes, while they are enrolled in school, at the cost of attendance. Although the injunction allows schools and conferences to hold athletes’ shares of licensing revenues in trust, it permits the NCAA to cap the amount of money that may be held in trust for an individual athlete at $5,000 per year. The injunction also permits the NCAA to enact rules ensuring that no school may offer a recruit a greater share of licensing revenue than it offers any other recruit in the same class on the same team. Finally, the decision upholds the NCAA’s prohibition on collegiate athletes independently accessing the free market for endorsements.

In sum, what makes this decision only a limited victory for the student athletes is that rather than trusting the marketplace, the court is attempting to cure the NCAA’s restraints on competition with other, supposedly less restrictive, restraints on competition. While the injunction provides some new benefits to big-time college athletes going forward, it still arbitrarily caps the potential competition for their services, and unnecessarily levels the playing field between the top athletes, who should command more in a competitive market, and their less talented peers.

In our view, the court could have easily configured an injunction that would have avoided these issues. The most credible, but still largely pretextual, justification the NCAA proffered is that the restraints in question are necessary to enable the integration of student-athletes into college life. To the extent one credits that argument, there is a less restrictive approach that would have been more faithful to competition – allow unrestricted competition and put the proceeds in trust for the athletes.

At the end of the day, Judge Wilken should be applauded for taking on the NCAA’s cynical justifications for its brazenly exploitative and anticompetitive policies. But unfortunately, the court’s opinion pulled its punches in reaching the bottom line. While this is a start, we hope future courts finish the job.

Edited by Gary J. Malone

Categories: Antitrust Litigation

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