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From Antitrust Law Daily, June 6, 2013

Pennsylvania Governor’s Antitrust Claims Fail Against NCAA over Penn State Sanctions

By Tobias J. Gillett, J.D., LL.M.

The Governor of Pennsylvania failed to state antitrust claims against the National Collegiate Athletic Association (NCAA) over the NCAA’s sanctions imposed on Pennsylvania State University following the conviction of assistant football coach Gerald A. Sandusky on child sexual abuse charges, the federal district court in Scranton, Pennsylvania has ruled (Commonwealth of Pennsylvania, Thomas W. Corbett, Jr., Governor v. National Collegiate Athletic Association, June 6, 2013, Kane, Y.). The NCAA’s sanctions did not constitute commercial activity for purposes of the Sherman Act, the NCAA’s conduct did not violate the Sherman Act, and the Governor did not allege an antitrust injury, in the court’s view.

In 2012, Pennsylvania State University accepted responsibility for its administration’s failure to protect Sandusky’s victims, following Sandusky’s conviction and the release of a report by the law firm Freeh, Sporkin & Sullivan LLP, concluding that the incident revealed “numerous individual failings” and “weaknesses of the university’s culture governance, administration, compliance policies and procedures for protecting children.”

In the wake of the Freeh report, the NCAA initiated sanctions against Penn State. The NCAA, at the behest of its President Dr. Mark Emmert, bypassed its ordinary disciplinary procedures and referred the matter to its Executive Committee and Division I Board of Directors. Emmert, along with the Executive Committee and Board of Directors, threatened Penn State that the NCAA would impose the “death penalty” on Penn State football for four years unless Penn State accepted a proposed consent decree imposing a range of sanctions. Penn State President Rodney Erickson accepted the terms, “and waived any claim to further process or appeal under NCAA rules and any judicial process related to the subject matter of the decree.”

Pennsylvania Governor Tom Corbett brought suit on behalf of the Commonwealth of Pennsylvania, claiming that Emmert, the Executive Committee, and the Division I Board of Directors had engaged in an unlawful anticompetitive conspiracy to eliminate Penn State as an athletic competitor, resulting in economic harm throughout Pennsylvania. The NCAA filed a motion to dismiss.

Application of the Sherman Act. The court first concluded that the Sherman Act did not apply to the Governor’s claims. The court explained that “Section 1 of the Sherman Act only applies to conspiracies which restrain ‘trade or commerce.’” The court cited the Third Circuit’s holding in Smith v. NCAA, 139 F.3d 180 (1998), in which the court found that the NCAA’s “enforcement of its bylaw restricting postgraduate athletic participation did not implicate Section 1 of the Sherman Act.” The court noted that the appellate court’s logic would likely extend “to any NCAA regulation that ‘primarily seek[s] to ensure fair competition in intercollegiate athletics.” Here, the court declined to consider the NCAA’s consent decree to be “just as focused on the promotion of amateurism and fair play as its rules on recruiting eligibility,” because “the factual allegations of conspiracy and state-wide economic fall-out” put the claims outside of those examples of non-commercial activities.

The court also rejected the Governor’s argument that scholarship limits in the sanctions constituted commercial activity. The argument relied on the Seventh Circuit’s opinion in Agnew v. NCAA, 683 F.3d 328 (2012), that the Sherman Act “applies generally” to the NCAA’s actions, which was not the law in the Third Circuit.

Nor did the court accept the Governor’s argument that the consent decree was commercial because it would cause Penn State’s revenue to decline. In Smith, the Third Circuit had determined that derivative effects of the NCAA’s conduct were irrelevant to the “commercial nature” inquiry. Moreover, the Governor was suing as parens patriae, and could not advance a claim on behalf of Penn State over its injury.

Finally, the court rebuffed the Governor’s argument that the NCAA’s conduct was commercial because it had “failed to give the school sufficient due process and had not previously sanctioned any other university for violating its institutional principles outlining honesty and ethical conduct.” The Governor’s “conclusory allegations” that the NCAA imposed the sanctions to “enhanc[e] their own public image” and “severely cripple a major competitor” did not, without more, satisfy the federal pleading requirements. Moreover, the Governor’s complaint was “fundamentally lacking in allegations that [the NCAA’s] ulterior motive hid a commercial purpose.”

Sherman Act, Section 1. Even if the NCAA’s actions did constitute commercial activity subject to the Sherman Act, the court concluded that the Governor did not state a Sherman Act, Section 1 claim. The court explained that Section 1 required “some form of concerted action” involving “a meeting of the minds in an unlawful arrangement.” The Governor did not allege facts that would satisfy this requirement, according to the court. The Governor’s allegation that Emmert “’took the matter to unidentified members on the Executive Committee and Division I Board of Directors, who then ‘seized the opportunity’ to impose sanctions on Penn State” did not adequately support a claim of concerted action. The Governor did not allege facts demonstrating an agreement “to punish Penn State in an effort to achieve an unlawful purpose forbidden by the antitrust laws,” in the court’s view.

Moreover, the court declined to find that the NCAA’s actions constituted an unreasonable restraint of trade. The court rejected the Governor’s claim that it should apply per se review because the NCAA members had engaged in a group boycott, observing that it had previously found that the Governor’s “allegations f[e]ll short of ‘concerted action.’”

“Quick look” review also did not apply, because the Governor’s complaint did not “allege a restraint of the type whose anticompetitive effects are so obvious that even an onlooker with a ‘rudimentary understanding of economics’ could conclude that the sanctions suffered by Penn State would have an ‘anticompetitive effect on customers and markets.’”

Under rule of reason analysis, the court observed that the Governor had alleged that the NCAA’s decision had caused anticompetitive effects in the markets for (1) post-secondary education, (2) Division I football players, and (3) the sale of college football-related apparel and memorabilia. The court noted that the Governor only addressed the post-secondary education and Division I football player markets in its brief opposing the motion to dismiss.

The court rejected the Governor’s claims under the rule of reason as to both markets. Even if Penn State would have difficulty competing for Division I football players as a result of the sanctions, those allegations did not support the claim that the reduction in scholarships that Penn State could offer would have a “market-wide anticompetitive effect, such that the ‘nation’s top scholastic football players’ would be unable to obtain a scholarship in the nationwide market for Division I football players.” The contentions that Penn State’s payment of a $60 million fine would result in decreased quality of Penn State’s programs to the extent that competition would be harmed in the nationwide market for post-secondary education and that the sanctions would cause Penn State to raise its tuition and reduce its investment in programs and facilities, thus decreasing the incentive of its competitors to do so, were also “not plausible.”

Standing. Finally, the court addressed the question of whether the Governor had standing to bring his claims. The court initially noted that the Governor had alleged that the NCAA’s conduct had “harmed and will continue to harm the natural citizens of Pennsylvania, as well as the Commonwealth’s economy,” and therefore had Article III standing.

However, the court noted that, while the federal antitrust laws permitted parens patriae lawsuits, the Governor still had to demonstrate that the residents of the state would have a cause of action under those laws, adequately allege an antitrust injury, and show that he had antitrust standing. “[A]n antitrust injury must stem from a competition-reducing aspect of the defendant’s behavior,” the court explained.

Here, the Governor alleged injuries to the Commonwealth from (1) harm to Pennsylvania residents depending on Penn State football for their livelihoods, (2) harm to the state revenue base, (3) harm caused by payment of the $60 million fine, and (4) “harm to Penn State students from the diminished value of the Penn State educational and community experience.” The court observed that these allegations all referred to “derivative injury to Pennsylvania citizens as the result of Penn State’s football program becoming less competitive, not to lessened competition in the relevant markets.” The complaint did not link the alleged injuries “to reduced competition in the relevant markets for post-secondary education, Division I football players, and college football-related memorabilia.” Therefore, the Governor did not make out an antitrust injury, in the court’s view.

“In another forum the complaint’s appeal to equity and common sense may win the day, but in the antitrust world these arguments fail to advance the ball,” the court concluded. “Plaintiff’s complaint fails on all prongs: it fails to allege commercial activity subject to the Sherman Act; it fails to allege that Defendant’s activity constituted a violation of Section 1 of the Sherman Act; and, it fails to allege that Plaintiff suffered an antitrust injury.”

Governor’s response. The Pennsylvania Office of the Governor issued a press release expressing Governor Corbett’s disappointment with the court’s decision.

“I am disappointed with the court’s decision and believe that the sanctions have harmed the citizens, students, athletes, alumni and taxpayers of Pennsylvania,” Corbett stated. “Countless individuals and small businesses throughout the state will continue to suffer because of the NCAA’s actions. I feel strongly that the claims we raised in this lawsuit were compelling and these issues deserved a complete and thorough review by the court. I will continue to analyze the ruling with my legal team and review our options.’’

NCAA reaction. The NCAA, on the other hand, issued a statement in support of the court’s ruling.

“We are exceedingly pleased with the court’s thorough analysis and thoughtful opinion dismissing Governor Corbett’s entire complaint,” said Donald Remy, the NCAA’s Chief Legal Officer. “The court found the allegations made by the governor to be implausible and outside the reach of federal antitrust law. Our hope is that this decision not only will end this case but also serve as a beginning of the end of the divide among those who, like Penn State, want to move forward to put the horror of the Sandusky crimes behind the university and those who want to prolong the fight and with it the pain for all involved.”

The case is No. 1:13-cv-00006.

Attorneys: James D. Schultz, Governor's Office of General Counsel, for Commonwealth of Pennsylvania, Thomas W. Corbett, Jr., Governor. Everett C. Johnson (Latham & Watkins LLP) for National Collegiate Athletic Association.

Companies: National Collegiate Athletic Association

MainStory: TopStory Antitrust PennsylvaniaNews

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