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O’Bannon v. NCAA: Summarizing the District Court’s Opinion

On August 8, 2014, the Honorable Claudia Wilken issued an opinion finding “the challenged NCAA rules unreasonably restrain trade in the market for certain educational and athletic opportunities offered by NCAA Division I schools.” The following will address the Court’s analysis of the pertinent points of the case.

1. Relevant Market

The Court found that plaintiffs established an adequate market in the “college education market.” It was established that colleges and universities compete to recruit the top football and men’s basketball student-athletes. In exchange for providing athletic services and their names, images, and likenesses, student-athletes are granted athletic scholarships, tutoring, school supplies, academic support, superior coaching, and access to fantastic athletic facilities. The Court did not believe that other academic and athletic opportunities offered by NCAA Division I member institutions had reasonable alternatives including the opportunities offered by the NBA Development League, the Arena Football League, foreign leagues, and other intercollegiate athletic associations.

In finding that NCAA Division I institutions are the only suppliers in the “college education market,” the Court turned to the price fixing restraint of trade as it relates to the undervaluing of student-athletes’ names, images, and likenesses. The agreement among NCAA member institutions to refrain from offering student-athletes a share of licensing revenue constitutes fixing of prices indirectly. Initially, the plaintiffs argued NCAA member institutions were characterized as sellers in the antitrust review; however, they changed course and set forth arguments that NCAA member institutions are buyers of student-athlete services. This distinction is relevant because the plaintiffs’ claims constitute monopsony behavior rather than monopolistic behavior. Although the distinction is relevant, price-fixing among buyers is just as violative of Section 1 of the Sherman Act as price-fixing among sellers. Ultimately, the Court concluded the plaintiffs submitted sufficient evidence to support a monopsony theory during trial.

In turning to the “group licensing market,” the Court analyzed whether the plaintiffs established a relevant market after having identified three submarkets including 1) “a submarket for group licenses to use student-athletes’ names, images, and likenesses in live football and basketball game telecasts;” 2) “a submarket for group licenses to use student-athletes’ names, images, and likenesses in videogames;” and 3) “a submarket for group licenses to use student-athletes’ names, images, and likenesses in game re-broadcasts, advertisements, and other archival footage.” The plaintiffs contended they would be afforded the opportunity to sell group licenses for the use of their names, images, and likenesses to NCAA member institutions and third-parties but for NCAA restrictions. The Court concluded that absent NCAA rules, markets would exist for student-athletes to group license their names, images, and likenesses for game telecasts, videogames, and other third-party endeavors.

However, the Court found the plaintiffs failed to present evidence establishing there would be increased competition for student-athlete services if the restraint was not in place. In the “group licensing market,” the Court indicated the evidence strongly suggested there would not be greater competition for student-athlete group licenses. Although the plaintiffs adequately showed they were injured by the NCAA’s restraint on group licenses for the sale of student-athlete names, images, and likenesses, the plaintiffs did not show an injury to competition. Accordingly, the “group licensing market” was not adequately established.

2. Procompetitive Justifications

The Court found the plaintiffs adequately established the “college education market” and the NCAA restrained trade in that market. The Court applied the rule of reason test to determine whether the defendant could offer procompetitive justifications for the restraints at issue. The NCAA offered four procompetitive justifications for the restraint on the “college education market,” which were 1) preservation of amateurism; 2) competitive balance; 3) integration of academics and athletics; and 4) increased outputs.

a. Preservation of Amateurism

The NCAA argued the challenged restraints promote consumer demand by preserving the time honored tradition of amateurism. In an effort to show amateurism is supported by consumer demand, the NCAA offered surveys and testimony provided by Dr. J. Michael Dennis, which showed consumer demand would wane if student-athletes were compensated. The Court, however, noted Dr. Dennis’ surveys were flawed for failure to ask consumers whether there was opposition to compensation of student-athletes for the use of their names, images, and likenesses.

The Court indicated NCAA amateurism bylaws and the policies associated with amateurism have changed substantially and have not been consistent. Further, there was no link between the restrictions at issue and increasing consumer demand. Chris Plonsky, the women’s athletics director and associate athletics director at the University of Texas, testified University of Texas fans will cheer for anything associated with the university. Accordingly, the Court concluded the evidence demonstrated consumers are interested in intercollegiate athletics for reasons other than amateurism. In fact, the Court stated the “current restrictions on student-athlete compensation, which cap athletics-based financial aid below the cost of attendance, are not justified by the definition of amateurism set forth in its current bylaws.”

The NCAA again argued NCAA v. Board of Regents supports the proposition that student-athletes must not be compensated. As previously indicated in earlier orders, the Court rejected the NCAA’s argument and noted the NCAA’s counsel articulated “the NCAA was not relying on amateurism as a procompetitive justification and ‘might be able to get more viewers and so on if it had semi-professional clubs rather than amateur clubs.’” Ultimately, the Court concluded that NCAA v. Board of Regents was not applicable to the present matter.

In sum, the Court noted the NCAA does not adhere to a consistent definition of amateurism and often provides for exceptions allow certain student-athletes to receive compensation for athletic competition. The evidence further established amateurism is not the driving force behind athletics; therefore, the Court concluded restrictions on student-athlete compensation “play a limited role” in driving consumer demand. The Court found that there was limited evidence showing a cap on compensation may serve to increase consumer demand.

b. Competitive Balance

Next, the NCAA argued the challenged restraints was procompetitive because the restraints promote competitive balance. The United States Supreme Court has concluded the optimal competitive balance among competitors is a procompetitive justification if competitive balance increases demand for the athletic product. The evidence adduced at trial showed the restraints at issue do not promote competitive balance in large part because the restrictions on student-athlete compensation lead NCAA member institutions to spend greater amounts on coaches, facilities, and other budgetary items. The NCAA did not produce evidence indicating how the restraints at issue promote competitive equity. In fact, the NCAA failed to identify the level of competition necessary to sustain the present consumer demand. Accordingly, the Court concluded the NCAA failed to set forth sufficient evidence to show the restraint at issue created a level playing field in NCAA Division I competition that helped maximize consumer demand for the product.

c. Integration of Academics and Athletics

The NCAA argued that “the integration of academics and athletics increases the quality of the educational services its member schools provide to student-athletes.” Improving product quality may be a procompetitive justification; however, the justification must be more than a mere social justification. The NCAA produced and relied on evidence showing the benefits received by student-athletes in both the short and long-term, which included graduation rates. Additionally, the NCAA submitted testimony from athletics administrators indicating paying student-athletes may “create a wedge” between student-athletes and other students on campus. To the contrary, the Court noted the purported benefits do not specifically derive from restrictions on student-athlete compensation. In fact, the Court indicated student-athletes would receive similar education benefits even if the NCAA permitted student-athletes to receive compensation for the use of their names, images, and likenesses. However, the Court indicated certain “limited restrictions” on student-athlete compensation may help integrate student-athletes in the academic community, but the restraints at issue do not enhance academic outcomes. Although the Court indicated limited restrictions may provide a narrow procompetitive justification, the Court ultimately concluded “sweeping” restrictions on student-athlete compensation do not justify the prohibition on licensing revenue derived from the sale of student-athletes’ names, images, and likenesses. Nonetheless, the Court found there was some evidence to establish integration of student-athletes in the academic community improved the quality of education services.

d. Increased Output

The NCAA argued its challenged regulations relating to student-athlete compensation are procompetitive because they increase the number of participation opportunities (i.e., games played and student-athlete competitors) available to NCAA member institutions and student-athletes. The evidence adduced at trial showed major Division I football and men’s basketball have steadily increased over time and continue to increase. The NCAA argued this increase was as a result of institutions’ increased commitment to amateurism. The Court found this argument “implausible” because there is no evidence to support that Division I institutions joined the NCAA because of the principles of amateurism or the rules associated therewith.

Additionally, the NCAA argued Division I institutions would flee from Division I for financial reasons if the restraints at issue were removed. However, the NCAA’s own witnesses provided testimony contrary to these assertions and acknowledged that most institutions competing at the NCAA Division I level would continue to compete at the same level and offer football and men’s basketball teams. The Court concluded NCAA Division I institutions are unlikely to exit this level of competition if they were permitted to pay student-athletes a “limited amount of compensation beyond the value of their scholarships.” In conclusion, the Court found the challenged restrictions do not increase the number of participation opportunities for NCAA member institutions or student-athletes.

3. Less Restrictive Alternatives

After reviewing the procompetitive justifications as set forth by the NCAA, the Court found the NCAA produced some evidence indicating there are procompetitive benefits to cap student-athlete compensation. Specifically, the Court found the NCAA produced evidence showing 1) there is some basis that capping compensation may serve to increase consumer demand for the amateur product; and 2) there is some evidence showing student-athlete integration into academic communities improves the quality of education services. Accordingly, the rule of reason burden used in antitrust cases shifted to the plaintiffs to establish less restrictive alternatives.

The plaintiffs offered three less restrictive alternatives to the challenged restraints: 1) “raise the grant-in-aid limit to allow schools to award stipends, derived from specified sources of licensing revenue, to student-athletes;” 2) “allow schools to deposit a share of licensing revenue into a trust fund for student-athletes which could be paid after the student-athletes graduate or leave school for other reasons;” and 3) “permit student-athletes to receive limited compensation for third-party endorsements approved by their schools.” The Court was supportive of the plaintiffs first and second proposed less restrictive alternatives. First, the Court concluded allowing student-athletes to receive stipends above the current grant-in-aid legislation would limit anticompetitive effects because the stipend would be capped at the cost of attendance and such funds would be used to “only cover educational expenses.” Second, the Court concluded holding funds in trust is an acceptable less restrictive alternative as long as the compensation “was limited and distributed equally among team members.” The Court specifically addressed testimony elicited by the NCAA in which its witnesses indicated they were concerned about “six figure[], seven figure[]” payments made to student-athletes, but would not be “troubled” if student-athletes were permitted to receive $5,000.00. According to the Court, a narrowly tailored trust payment system “would not erect any new barriers to schools’ efforts to educate student-athletes or integrate them into their schools’ academic communities.” Third, the Court did not find endorsement opportunities for student-athletes to be an appropriate less restrictive alternative because such a policy would undermine the NCAA’s efforts to curb “commercial exploitation” of student-athletes.

4. Conclusion

The Court found in favor of the plaintiffs and enjoined the NCAA “from enforcing any rules or bylaws that would prohibit its member schools and conference from offering their FBS or Division I basketball recruits a limited share of the revenues generated from the use of their names, images, and likenesses in addition to a full grant-in-aid.” Additionally, the Court enjoined the NCAA from “enforcing any rules to prevent its member schools and conferences from offering to deposit a limited share of licensing revenue in trust for their FBS football and Division I basketball recruits, payable when they leave school or their eligibility expires.” However, the Court was careful to not restrict the NCAA’s authority to implement legislation to place a cap on the amount of compensation to be paid to student-athletes as long as the cap is not set below the cost of attendance and the cap placed on the amounts deposited in trust is not less than $5,000.00 for each year of eligibility. The Court also made it clear the NCAA is permitted to continue to enforce legislation prohibiting student-athletes from endorsing commercial products among other restrictions.

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