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From Antitrust Law Daily, March 11, 2019

NCAA found to be guilty of a Sherman Act price-fixing scheme but the remedy leaves the rules mostly in place

By Robert B. Barnett Jr., J.D.

After a California federal court found that the NCAA used a horizontal price-fixing agreement enforced with monopsony power to violate Section 1 of the Sherman Act, it crafted a remedy leaving the current rules largely unchanged, requiring only that the NCAA remove the limit on non-cash, education-related benefits provided to college football and basketball players.

The federal district court in Oakland, California, has found the National Collegiate Athletic Association (NCAA) and 11 of its 32 conferences guilty of an unreasonable restraint of trade in violation of Section 1 of the Sherman Act for engaging in a horizontal price-fixing scheme to limit the compensation paid to football and basketball players in exchange for their athletic services. The court’s remedy, however, largely left the current rules intact, with the only change being a removal of any cap on non-cash, education-related benefits. To keep its product distinct from professional sport, the NCAA may continue to (1) limit grant-in-aid scholarships to the cost of attendance, (2) limit cash and non-cash compensation and benefits unrelated to education, and (3) limit cash payments for benefits related to education (In re National Collegiate Athletic Association Athletes Grant-in-Aid Cap Antitrust Litigation, March 8, 2019, Wilken, C.).

Current and former student-athletes who played Division 1 football, Division 1 men’s basketball, and Division 1 women’s basketball sued the NCAA and 11 conferences for violations of the Sherman Act. Because this suit involved women’s basketball, did not involve rights to online images, and was filed under conditions that had changed in recent years, the issues raised in this suit were different from the ones originally raised in O’Bannon v. NCAA. In essence, the athletes alleged that the NCAA and the conferences engaged in a horizontal price-fixing scheme, enforced by their monopsony power, to limit the compensation the athletes would have received in the absence of the artificial limits. Certain issues were resolved on summary judgment, such as the existence of an agreement that restrained trade, and the court conducted a non-jury trial on the remaining issues.

Rule of reason. Although horizontal price-fixing is usually a per se violation of the antitrust rules, where, as here, a certain degree of cooperation is understood as necessary, a Rule of Reason is applied to determine if an antitrust violation occurred. Applying the Rule of Reason, the court first defined the market as the market for the student-athletes’ athletic services, with the student-athletes as the sellers and the schools as the buyers. The next analysis was the anticompetitive effects in the relevant market, which the court found without too much trouble. The elite athletes have no other market in which to sell their services other than the Division I schools (professional leagues cannot hire them and the lower NCAA divisions do not provide equal opportunities). Although the NCAA enacted changes to loosen some rules (largely in response to the Bannon decision), the benefits and competition were still capped. The court concluded, therefore, that the NCAA had monopsony power (buyers’ power) to restrain student-athlete compensation in any way and at any time they wish, without any meaningful risk of diminishing their market dominance.

The next part of the Rule of Reason analysis was to examine the NCAA’s justification for the challenged restraints. The NCAA offered two: consumer demand for amateurism and integration, neither of which the court was buying. As for the consumer demand for amateurism, the NCAA was never even able to establish a working definition of amateurism beyond "not for pay." As the court pointed out, as the permissible benefit levels have risen in recent years in response to Bannon, the popularity of college football and basketball has only grown. If that is true, the court asked, how can anyone really claim that the reduced amateurism (they were, after all, being paid more) was adversely affecting consumer demand? In examining consumer demand, the court noted that the NCAA has begun allowing a number of payments to athletes above the cost of the basic grant-in-aid, without affecting the athlete’s amateur standing. Athletes, for example, are permitted to receive cash stipends to cover expenses in excess of tuition, room, board, and books, which can total several thousand dollars for some athletes. Schools can provide full grants-in-aid to students who otherwise qualify for a full ride on a Pell grant. Schools are permitted to award two post-eligibility graduate school scholarships per year of $10,000 each. Athletes are permitted to receive money from outside entities, such as their national Olympic governing body. Family members can be paid to attend certain football and basketball games. All of these benefits are now being paid without any apparent loss of consumer demand.

Amid the doubt about the NCAA’s evidence, the court did credit one argument that was offered by lay witnesses as a sort of off-shoot of the consumer demand argument: that the NCAA’s ability to maintain demand for its product depends in part on maintaining a distinction between college sports and professional sports. That distinction, the court said, was based on the difference between sports played by students who actually attended the school and sports played by athletes who received large salaries. As a result, the court was convinced that some of the limits the NCAA placed on benefits and compensation played a role in preserving the distinction between the two. The integration argument involved the NCAA’s claim that higher compensation to the athletes would further drive a wedge between the students and the athletes. The NCAA had no evidence to support its contention. In any event, the court noted, if any wedge has been driven between students and athletes, it comes from the schools’ spending on separate facilities for the athletes, not from some student believing that the athletes are overpaid.

Remedies. The court concluded that the NCAA had met its burden of establishing a justification for its rules, at least to the extent of maintaining the distinction between college and pro. The court also determined, however, that the NCAA’s rules were more restrictive than necessary. The analysis, therefore, turned to possible alternative restraints that might be less restrictive than the one the NCAA was using. The athletes offered three alternatives: (1) remove all limits, (2) allow the NCAA to limit the benefits given for athletic services except for benefits related to education and the 17 incidental benefits currently allowed, and (3) allow the NCAA to limit the benefits given for athletic services but not for education-related compensation and benefits. The court immediately rejected the first two on the ground that they would allow a potentially huge influx of cash that would tarnish if not eliminate the distinction between college and pro.

The court, therefore, chose a modified version of the third alternative. The court suggested thinking of the compensation and benefits as being in three categories: (1) the basic grant-in-aid that included tuition, room and board, fees, etc., (2) education-related compensation and benefits above the grant-in-aid amount, and (3) non-education-related compensation and benefits above the grant-in-aid amount. Once again concerned about the influx of unregulated cash if the caps were removed, the court chose to leave all caps in place except for one part of the third category—non-cash benefits for education-related expenses—believing that that category was more in keeping with the original goal of providing the student-athlete with educational opportunities. The court also felt that this change could be enacted with minimal additional costs by the parties involved. Interestingly, the court forbade the NCAA from placing a cap but it gave the schools the right to place whatever caps they wanted. The different treatment was because the antitrust concerns at the Division I level would not exist in competition among the schools. If a student-athlete did not like a cap at a certain school, he or she was free to go to a different Division I school.

The court, therefore, entered judgment in favor of the student-athletes.

This case is No. 4:14-md-02541-CW.

Attorneys: Jon T. King (Law Offices of Jon T. King) for Shawne Alston. Bart Harper Williams (Proskauer Rose LLP) for Pacific 12 Conference. Christopher John Kelly (Mayer Brown LLP) for The Big Ten Conference, Inc. Nathan Clifton Chase, Jr. (Robinson Bradshaw & Hinson) for Southeastern Conference. Charles Lagrange Coleman, III (Holland & Knight LLP) for Atlantic Coast Conference. Wesley Douglas Hurst (Polsinelli LLP) for The Big Twelve Conference, Inc. Beth Wilkinson (Wilkinson Walsh + Eskovitz LLP) for National Collegiate Athletic Association. Benjamin C. Block (Covington and Burling LLP) for American Athletic Conference.

Companies: The Big Ten Conference, Inc.; The Big Twelve Conference, Inc.; National Collegiate Athletic Association

MainStory: TopStory Antitrust CaliforniaNews

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