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Was the Trial Court’s Ruling in the NCAA Athletic Grant-In-Aid Cap Antitrust Litigation a Slam Dunk for College-Athletes?

Related Lawyers: Jeanette Bayoumi
Related Practice Areas: Antitrust / Competition
Authors: Jeanette Bayoumi*

The legal brawl between college-athletes and the National Collegiate Athletic Association (“NCAA”) over the NCAA’s rules capping compensation for athletes continues. On one side sits a class of college-athlete plaintiffs challenging the compensation cap rules on the ground that they violate Section 1 of the Sherman Act. On the other side sit defendants NCAA and its eleven conferences (jointly “the NCAA”), fighting to maintain their current rules capping compensation for college athletes.

The Federal District Court for the Northern District of California last year denied pre-trial summary judgment to the NCAA, and the case proceeded to a bench trial last September.[1] On March 8, the court issued its final decision, holding against the NCAA, finding that the challenged rules were unlawful.

Background and Summary Judgment

By way of background, this case was brought by college-athletes challenging NCAA rules that cap compensation of athletes at “cost of attendance,” meaning cost of tuition, housing, and other education-related expenses such as books and some transportation costs. Compensation otherwise under the rules is generally prohibited.

In its summary judgment decision, the court underscored that the existence of an NCAA agreement restraining trade was “undisputed in this case.”[2] The court concluded that the challenged rules limit compensation that athletes receive in return for the athletic services they provide their respective universities.[3] In arriving at this conclusion, the court cast off defenses put forth by the NCAA, which relied on a preceding case, O’Bannon v. NCAA, in which athletes had also challenged the NCAA’s compensation cap rules as to the use of college-athletes’ names, images, and likenesses.

In O’Bannon – the first major recent challenge to the NCAA’s “amateurism” model – a group of Division-I (“D-I”) male basketball and FBS football college-athletes had challenged rules preventing college athletes from being paid for licenses to their names, images, and/or likenesses.[4] The Northern District of California, in a landmark decision that was affirmed by the Ninth Circuit Court of Appeals as to liability (and partially as to the remedy), ruled that the NCAA’s restrictions on athlete compensation are subject to the antitrust laws.[5] The Court of Appeals in O’Bannon recognized that limiting compensation to the cost of attendance was a less restrictive alternative to capping compensation to tuition and educational expenses, which it noted was “patently and inexplicably stricter than necessary,” because college-athletes will remain “amateurs” as long as money distributed to them covers “legitimate educational expenses." [6]

The Ninth Circuit’s ruling in O’Bannon was prominent given that the NCAA has relied on its “amateurism rules” to dodge challenges to its business model since the early 1980s, when the Universities of Oklahoma and Georgia challenged NCAA rules capping the total number of games that could be broadcast on television each year by any particular university.[7] It thus comes as no surprise that historically, the NCAA has veered towards a restrictive policy regarding caps on athletic scholarships, justifying these restrictions vis-à-vis its chameleon principle of amateurism.[8] Indeed, from 1976 until the adoption of new rules in 2014, NCAA rules prevented universities from awarding grants-in-aid that covered anything more than the cost of tuition and educational expenses (room and board, books, and meals incidental to athletics). After the district court’s ruling in O’Bannon, the NCAA in August 2014 adopted what it deemed to be a “full grant-in-aid” award, permitting schools to cover an athlete’s “cost of attendance”– meaning tuition and fees, room and board, books and other expenses related to attendance at the institution.[9]

Defendants argued in the current case that the result in O’Bannon required the court to accept defendants’ procompetitive justifications, an argument that the court at summary judgment shot down based on the fact that the new post-O’Bannon rules painted a factually different landscape. In particular, the court determined that the plaintiffs here “raise[d] new antitrust challenges to conduct, in a different time period, relating to rules that are not the same as those challenged in O’Bannon,” and accordingly, were not precluded from presenting their claims. Further, the court concluded that plaintiffs presented evidence supporting two less restrictive alternatives that were not presented in O’Bannon,[10] and thus, raised a genuine issue of material fact as to whether they had met their burden in proving that these alternatives would be as effective as the challenged rules, permitting the case to proceed to trial.[11]

The Court’s March 8th Post-Trial Ruling

At the outset of its analysis in its March 8 trial decision, the district court acknowledged that while horizontal price-fixing among competitors is typically a per se antitrust violation, it would apply the antitrust rule of reason because “a certain degree of cooperation” is needed to “market athletics competition.”[12] Under the first step in the court’s rule of reason analysis, it adopted the market definition crafted in O’Bannon: a market for college education combined with athletics, or alternatively, the market for college-athletes’ athletic services.[13] At trial, plaintiffs chose to proceed under a buyers’ cartel, monopsony theory.[14] The court found that not only did defendants, through the NCAA, have monopsony power, but the NCAA’s D-I athletics constituted the market, with no viable alternative, for elite basketball and football at the college-level.[15]

Anticompetitive Effects

In its March 8 decision, the court determined that the challenged NCAA rules primarily had two “significant anticompetitive effects.” First, the court found that the challenged rules artificially cap athletes’ compensation and reduce competition for recruits by restricting how much compensation may be offered in exchange for athletic services.

Second, the court ruled that the NCAA had the ability to artificially cap athletes’ compensation because it had monopsony power in the relevant market.[16] It concluded that expert and other testimony presented at trial paved the conclusion that defendants’ “monopsony power to restrain [college]-athlete compensation in any way and at any time they wish, without meaningful risk of diminishing their market dominance” forced athletes “to accept whatever compensation is offered to them by Division I schools, regardless of whether any such compensation is an accurate reflection of the competitive value of their athletic services.”[17]

The court further found that the NCAA’s compensation caps result in a highly unbalanced scale of value; that is, universities receive “extraordinary revenues” from college-athletes completely disproportionate to the small slice of benefits that athletes receive in comparison.

Defendants’ Procompetitive Justifications

In the second rule of reason step, the NCAA put forth two professed procompetitive effects of the compensation caps – amateurism and integration – which allegedly justified the anticompetitive effects. First, the NCAA contended that consumers would cease watching college sports, and school revenues would drop if consumers perceived college-athletes were not “amateurs”. Relying on its professed “principle” of amateurism – for which, the court noted, the NCAA failed to offer a definition – the NCAA argued that amateurism drives consumer demand and paying athletes would undermine this principle. But, as the court noted, this theory is belied by the fact that athletes currently receive compensation in the form of scholarships, performance awards, and payments from outside entities.[18] Further, the court accepted evidence offered by plaintiffs that past compensation increases not only had no reduction on consumer demand, but “school revenues from Division I basketball and FBS football have increased since 2015.”[19]

The court did credit the evidence presented by the NCAA insofar as it showed that consumer demand is connected to the difference between college sports and professional sports, but added that “rules that prevent unlimited payments such as those observed in professional sports leagues . . . are procompetitive when compared to having no restrictions.”[20] The court also stated that the challenged rules prohibiting non-cash education related compensation went beyond the NCAA’s interest in amateurism.

Second, the NCAA argued that the compensation caps serve the purpose of ensuring that athletes are integrated into their academic communities while also incentivizing academics. The court responded that athletes do “benefit in various ways from the college education they receive,” but found that the NCAA had failed to show that those benefits “arise out of” the challenged rules capping compensation.[21] More accurately, those benefits are derived from “other rules and polices” such as eligibility standards, tutoring, and academic support – none of which “drive” integration. The court additionally found that increases in compensation since O’Bannon had not lessened athletes’ educational experiences, and thus, the NCAA’s theory that increased payments for athletes would drive a “wedge” between athletes and students on campus was even weaker now than when the same theory was presented in O’Bannon. Accordingly, the court held that while at least some compensation rules may have procompetitive justifications, the challenged rules did not.

Less Restrictive Alternatives

In the last step of the rule of reason, plaintiffs proposed three less restrictive alternatives to the challenged rules. First, they suggested a comprehensive rule that would prohibit the NCAA from setting any limits on compensation or benefits. Second, they proposed a rule that would permit the NCAA to continue capping compensation and benefits except for benefits related to education and “seventeen benefits incidental to athletics participation that the NCAA currently allows and caps.”[22] Lastly, plaintiffs proposed a rule that would impose no limits on compensation or benefits connected to education.

The court rejected plaintiffs’ first two proposed alternatives. The first, it said, leaves the door open for conferences to allow their schools to offer students unlimited cash payments akin to professional sports leagues. Likewise, the court concluded that the second alternative could also lead to schools offering some or all college-athletes unlimited sums of cash.

The third proposal, however, seemed to fit the bill, and the court accepted a modified version of that proposal. It would allow the NCAA to continue to limit grants-in-aid not less than the cost of attendance, and to continue to limit compensation and benefits unrelated to education, but it would “enjoin NCAA limits on most compensation and benefits that are related to education,” allowing the NCAA “to limit education-related academic or graduation awards and incentives, as long as the limits are not lower than its limits on athletic performance awards now or in the future.”[23] Put simply, under this ruling the NCAA could not limit compensation and benefits for education, such as graduate school scholarships and equipment for classes that exceed the cost of attendance. But education-related awards and benefits may be limited, only to the extent that the limitation is not less than the amount of compensation an athlete could receive for non-educational performance awards. Circling back to its concern with unlimited cash payments, the court noted that this limitation on education-related expenses would preserve the distinction between college athletes and professional athletes by preventing unlimited awards or cash payments disguised as education-related incentives. The court concluded that this third rule would “help ameliorate the anticompetitive effects” of compensation caps while also “provid[ing] some of the compensation [college]-athletes would have received absent Defendants’ agreement to restrain trade.”[24]

Both sides have filed appeals to the Ninth Circuit.

Thoughts to Consider

While it may be undeniable that more reform work is needed to enable college-athletes to receive the market value of their services and their NILs, the district court’s ruling provides a symbolic decision against the NCAA’s business model and is a significant victory for college-athletes. It remains unclear, however, what compensation for athletes will look like under this new decision, particularly since the ruling itself does not force universities or conferences to take action in changing their own rules. Rather, it prevents the NCAA from banning compensation and benefits related to education.

Further, although the ruling is a step in the right direction, the court, in its attempt to curb unlimited caps for education-related expenses, may have given insufficient credence to the realities at play – that the D-I “student-athlete” of today spends more time on the court or football field than in the classroom. Accordingly, as NCAA compensation rules for athletes (slowly) evolves, continuing to limit compensation to education-related activities may prevent athletes from receiving compensation that more accurately reflects the “extraordinary” value of their athletic services in a competitive market.

This article was published as part of Hausfeld’s Spring Competition Bulletin and in Lexology in May 2019.

Footnotes

[1] In re Nat'l Collegiate Athletic Ass'n Athletic Grant-in-Aid Cap Antitrust Litig., No. 14-CV-02758-CW, 2018 WL 1524005, at *7 (N.D. Cal. Mar. 28, 2018).

[2] Id.

[3] Id.

[4] Hausfeld LLP represented Ed O’Bannon and the certified class in that case.

[5] The Ninth Circuit affirmed this determination. See O’Bannon, 802 F.3d 1049, 1079 (9th Cir. 2014) (“NCAA regulations are subject to antitrust scrutiny and must be tested in the crucible of the rule of reason.”).

[6] Id. at 1075 (emphasis in original).

[7] See NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984).

[8] In 1948, the NCAA adopted the “Sanity Code” which prohibited universities from providing athletes with financial aid based on an athlete’s athletic ability. O’Bannon, 802 F.3d at 1054. Just eight years later, the NCAA enacted a new set of rules allowing universities to award athletic scholarships (“grants-in-aid”), which included educational expenses up to the full “grant-in-aid”, and it permitted students to seek financial aid “not related to their athletic skills” – i.e., expenses incidental to attendance, such as transportation, laundry, and supplies; however, the combined amount could not exceed the “cost of attendance”. Id. But this “less” restrictive era lasted for only twenty years, and in 1976 cash for incidental expenses was prohibited. NCAA Grant-In-Aid Cap, 2018 WL 1524005, at *2.

[9] Id. at *6.

[10] In O’Bannon the plaintiffs proposed principally three less restrictive alternatives: (1) increasing the grant-in-aid limit to permit schools to award stipends to athletes, stipends based on specified sources of licensing revenue; (2) allowing universities to deposit portions of licensing revenue into a trust fund to be made available to athletes post-graduation; and (3) allowing athletes to receive some compensation from third-party endorsements approved by their schools. See O’Bannon v. Nat’l Collegiate Athletic Ass’n, 7 F. Supp. 3d 955, 982 (N.D. Cal. 2014).

[11] Plaintiffs in the current case on summary judgment proposed two less restrictive alternatives: (1) allowing D-I conferences to set rules regulating education and athletic participation expenses that member universities may provide and (2) enjoining all NCAA rules that prohibit or limit payments or benefits tethered to educational expenses. See NCAA Grant-in-Aid Cap, 2018 WL 1524005, at *14.

[12] In re Nat'l Collegiate Athletic Ass'n Athletic Grant-in-Aid Cap Antitrust Litig., No. 14-MD-02541 CW, 2019 WL 1747780, at *5 (N.D. Cal. Mar. 8, 2019) (citing O’Bannon, 802 F.3d at 1069).

[13] Id. at *6.

[14] Id.

[15] Id. at *8.

[16] Id. at *7.

[17] Id. at *8.

[18] Since 2015, for example, international college-athletes have been permitted to receive unlimited payment from their national Olympic governing body in return for their athletic performance at certain international competitions. Id. at *11. Athletes may also receive money from their universities, from grants provided by the NCAA each year through the conferences via the Student Assistance Fund and the Academic Enhancement Fund, in addition to the full cost of attendance grant-in-aid. Id. at *10.

[19] Id. at *13.

[20] Id. at *19.

[21] Id. at *35.

[22] Id. at *21.

[23]Id. at *22.

[24] Id. at *41.

*Jeanette Bayoumi is an associate in the New York office.