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From Antitrust Law Daily, August 11, 2014

NCAA rules limiting compensation to student- athletes unreasonably restrain trade

By Linda O’Brien, J.D., LL.M.

In an action by current and former college athletes against the National Collegiate Athletic Association, the federal district court in Oakland, California has enjoined the NCAA from enforcing its prohibition on student-athlete compensation for the use of their names, images, and likenesses in television broadcasts and video games (O’Bannon v. National Collegiate Athletic Association, August 8, 2014, Wilken, C.).

A group of current and former student-athletes who played on men’s football or basketball teams at Division I member schools and conferences filed suit against the National Collegiate Athletic Association (NCAA), alleging that the NCAA violated federal antitrust law by conspiring with licensing companies, Electronic Arts Inc. and Collegiate Licensing Company, to restrain competition in two related national markets—the college education market and the group licensing market—for the commercial use of their names, images, and likenesses in television broadcasts and NCAA brand video games. In particular, the plaintiffs challenged NCAA rules that bar student-athletes from receiving a share of the revenue the NCAA and member schools earn from the sale of those licenses. In April 2014, the court granted the plaintiffs’ motion for summary judgment on their antitrust claims against the NCAA and set their damages claims for a bench trial. In June 2014, the plaintiffs agreed to dismiss their individual damages in a stipulation and proceeded with their claims for declaratory and injunctive relief.

National markets. The court determined that the plaintiffs produced sufficient evidence at trial to show that existence of a national market in which NCAA Division I schools compete to offer top recruits the opportunity to earn a higher education while playing for Division I football or basketball teams. In rejecting the NCAA’s argument that the rules do not restrain competition in the market because Division I schools must compete with other schools in other divisions and college athletic associations in supplying educational and athletic opportunities to top recruits, the court noted that the product Division I schools offer is unique and schools outside Division I differ significantly in both price and quality. Non-Division 1 schools typically offer inferior training facilities, lower paid coaches, and fewer opportunities to play in front of large crowds and on television. The plaintiffs presented expert testimony that recruits who receive scholarship offers to play Division I football or basketball rarely decline those offers. Moreover, the NCAA’s evidence demonstrated that Division I football and basketball command significantly larger domestic television audiences that virtually every other football or basketball league. Thus, the qualitative differences between opportunities offered by Division I schools and other schools and leagues illustrated that Division I schools operate in a distinct market and there were no adequate economic substitutes.

Restraint of trade. Because Division 1 schools are the only suppliers in the relevant market, they have the power, when acting in concert through the NCAA and its conferences, to fix the price of their product, according to the court. Their price-fixing agreement constitutes a restraint of trade since it was clear from the evidence at trial that certain schools would compete for recruits absent this agreement. The NCAA’s contention that its rules do not amount to price fixing because most college athletes actually pay at or close to zero due to their athletic scholarships was rejected. The court noted that, while student-athletes do not pay for tuition, room, or board in a traditional sense, they provide the schools with the significant value of their athletic services and rights to use their names, images, and likenesses while they are enrolled. The fact that the price-fixing agreement operated to undervalue the value that recruits provide to the schools did not preclude antitrust liability.

Monopsony theory. The court found that the plaintiffs presented sufficient evidence at trial to support their monopsony theory. The plaintiffs asserted in the alternative that the NCAA member schools were buyers in a market for recruits’ athletic services and licensing rights and the restraint was their agreement not to offer any recruit more than the value of a full grant-in-aid. The court noted that, in the absence of the NCAA’s restrictions on student-athlete compensation, student-athletes in Division I schools would be able to sell group licenses for the use of their names, images, and likenesses to television networks and videogame developers, directly or through some intermediary. However, the plaintiffs failed to identify any harm or hindrance to competition in the group licensing market among any potential buyers or sellers of group licenses, the court determined.

Pro-competitive justifications. Although the evidence could justify certain limited restrictions on student-athlete compensation, it did not justify the NCAA’s sweeping prohibition on football and basketball players receiving any compensation for the use of their names, images, and likenesses, according to the court. Finding the NCAA’s argument that the restrictions on college athlete compensation were necessary to preserve amateurism unpersuasive, the court noted the record showed that the NCAA revised its rules governing student-athlete compensation numerous times over the years and did not consistently adhere to a single definition of amateurism.

Additionally, the NCAA did not present sufficient evidence that its restrictions actually had any effect on the competitive balance among its football and basketball teams or that consumer demand would decrease if its teams were less competitively balanced. Although its goal of integrating student-athletes into the academic communities at their schools to improve the quality of educational services was a legitimate pro-competitive justification, the NCAA did not show that the restrictions were necessary to achieve those benefits.

The plaintiffs identified less restrictive alternatives for both preserving the popularity of the NCAA’s product by promoting amateurism and improving the quality of educational opportunities for student-athletes by integrating academics and athletics, according to the court. The alternatives included (1) allowing Division I schools to award stipends to college athletes up to the full cost of attendance to make up for any shortfall in its grants-in-aid and (2) permitting schools to hold in trust limited and equal shares of its licensing revenue to be distributed to the college athletes upon graduation or when their eligibility expires.

Thus, the court found that the NCAA was enjoined from enforcing rules that prohibit its member schools and conferences from (1) offering Division I football and basketball recruits a limited share of the revenues generated from the use of their names, images, and likenesses in addition to a grant-in-aid; (2) offering to deposit that share in trust payable when the recruit leaves school or eligibility expires; and (3) setting a cap of less than five thousand dollars annually on the amount of money held in trust. The injunction, which would not be stayed pending appeal, would not preclude the NCAA from enforcing other existing rules designed to achieve legitimate pro-competitive goals, such as the prohibition against endorsing commercial products, setting academic eligibility requirements, the creation of athlete-only dorms, limits on practice hours, and limits on the number of scholarships awarded.

NCAA reaction. In an August 10 statement, the NCAA maintained that it did not violate the antitrust laws and expressed an intention to appeal the ruling and to seek clarification from the district court on some details of the ruling.

“It should be noted that the Court supported several of the NCAA’s positions, and we share a commitment to better support student-athletes,” said NCAA chief legal officer Donald Remy. “For more than three years, we’ve been working to improve the college experience for the more than 460,000 student-athletes across all three divisions. On Thursday, the Division I Board of Directors passed a new governance model allowing schools to better support student-athletes, including the full cost of attendance, one of the central components of the injunction. The Court also agreed that the integration of academics and athletics is important and supported by NCAA rules.”

The district court rejected the plaintiffs’ claims that the NCAA licensed student-athletes’ names, images, and likenesses, as well as the proposed model in which athletes could directly market their names, images, and likenesses while in college, Remy asserted.

“We look forward to presenting our arguments on appeal, and in the meantime we will continue to champion student-athlete success on the field and in the classroom,” he concluded.

The case is No. 09-cv-3329-CW.

Attorneys: Christopher L. Lebsock (Hausfeld LLP) for Edward C. O'Bannon, Jr. Glenn Douglas Pomerantz (Munger Tolles & Olson), and Robert James Wierenga (Schiff Hardin LLP) for Nat’l Collegiate Athletic Association. Gennaro August Filice (Filice Brown Eassa & McLeod LLP) for Collegiate Licensing Co. Robert James Slaughter (Keker & Van Nest LLP) for Electronic Arts Inc.

Companies: National Collegiate Athletic Association; Electronic Arts Inc.; Collegiate Licensing Company

MainStory: TopStory Antitrust CaliforniaNews

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