District Court Holds that NCAA Restriction on Student-athlete Pay Harms Competition | Practical Law

District Court Holds that NCAA Restriction on Student-athlete Pay Harms Competition | Practical Law

The US District Court for the Northern District of California held that the NCAA's restriction on student-athlete pay is an unreasonable restraint of trade in violation of Section 1 of the Sherman Act.

District Court Holds that NCAA Restriction on Student-athlete Pay Harms Competition

Practical Law Legal Update 1-578-1365 (Approx. 4 pages)

District Court Holds that NCAA Restriction on Student-athlete Pay Harms Competition

by Practical Law Antitrust
Published on 13 Aug 2014 • USA (National/Federal)
The US District Court for the Northern District of California held that the NCAA's restriction on student-athlete pay is an unreasonable restraint of trade in violation of Section 1 of the Sherman Act.
On August 8, 2014, Judge Claudia Wilken of the US District Court for the Northern District of California held in O'Bannon v. NCAA that the NCAA's restriction on compensating student-athletes beyond scholarships and grant money was an unreasonable restraint of trade in violation of Section 1 of the Sherman Act (No. C 09-3329 (N.D. Cal. Aug. 8, 2014)). The case involved the NCAA's Football Bowl Subdivision (FBS) football players and Division I (DI) basketball players.
In O'Bannon, plaintiffs, a group of current and former college athletes, alleged that their colleges gain substantial revenues from licensing the plaintiffs' names, likenesses and images. Under NCAA rules, the colleges are not allowed to share this revenue with student-athletes. Plaintiffs argued that the NCAA restriction fixed and artificially depressed the price paid to student-athletes for use of their names, likenesses and images. In the absence of the restraint, plaintiffs alleged that schools would compete to offer more compensation to recruits.
Plaintiffs alleged that the NCAA's restriction on how much FBS and DI schools could offer recruits had anticompetitive effects in the:
  • College education market, in which FBS and DI schools compete to attract the best recruits.
  • Group licensing market, as the players could otherwise negotiate payment for use of their names, images and likenesses in three sub-markets, including:
    • video games;
    • live game telecasts; and
    • game re-broadcasts and archival footage.
Because the NCAA's restriction was concerted action by a joint venture, the court evaluated the restriction under the rule of reason.

College Education Market

The court held that FBS and DI schools engage in price-fixing in the market for FBS and DI recruits in restraint of trade. The court reasoned that because FBS and DI schools are the only suppliers in the market for high-level college sports and act as a joint venture through the NCAA, they have the power to fix what schools offer their recruits because:
  • Their product (college-level competition, high-quality coaching and related amenities) is unique.
  • Recruits rarely turn down FBS and DI scholarship offers.
  • If one school attempts to offer more compensation to a recruit, it could be sanctioned by the NCAA.
  • In the absence of the challenged restriction, certain schools may offer more compensation to recruits for their services, essentially charging the recruits a lower price for school attendance.
Therefore, the court held that plaintiffs alleged cognizable competitive harm under the rule of reason.

Group Licensing Market

The court held that plaintiffs did not establish an unreasonable restraint of trade in the group licensing market. As to the first two group license sub-markets, live game telecasts and video games (Group Licensees), the court reasoned that the NCAA restriction does not harm competition in the sub-markets because, due to the nature of group licenses, individual license sellers do not compete against each other to sell to Group Licensees.
As to the third sub-market, game re-broadcasts and archival footage, the court held that plaintiffs failed to show a restraint of trade or consequent injury to competition. A third-party agent designated by the NCAA to negotiate and manage all archival footage is expressly prohibited from licensing any footage featuring current student-athletes. Therefore, the NCAA restriction has no effect on the third sub-market.

Procompetitive Justifications

Because plaintiffs were able to show an unreasonable restraint of trade that harmed competition in the college education market, the burden of proof shifted to defendants to provide a procompetitive justification for that restraint.
The NCAA argued that the restriction had four procompetitive justifications, including that it:
  • Promoted the amateurism of NCAA sports.
  • Maintained competitive balance among the schools.
  • Helped to integrate athletics and academics.
  • Increased game output.
The court found the first and third procompetitive justifications to be persuasive. The court reasoned that limited restrictions on student-athlete compensation may be necessary to:
  • Maintain the amateurism of FBS and DI, which promotes popularity among consumers.
  • Encourage academic and athletic integration, which prevents student-athletes from being cut off from the campus community.
Because the court found two of defendants' procompetitive justifications to be persuasive, the court shifted the burden to plaintiffs to show less restrictive alternatives.

Less Restrictive Alternatives

Plaintiffs submitted two alternatives that they alleged would be less restrictive than the current NCAA rule, including that:
  • The student-athletes receive stipends to cover the full cost of attendance.
  • The student-athletes' schools hold a portion of licensing revenue in trust to be distributed to the student-athletes upon graduation or when their eligibility expires.
The court concluded that both alternatives are legitimate, less restrictive means of achieving the NCAA's procompetitive goals.

Remedy

In its order, the court enjoined the NCAA from:
  • Enforcing any rules that prevent FBS and DI schools from offering recruits a share of revenues generated from licensing their names, images and likenesses.
  • Enacting any laws prohibiting schools from offering to create trusts for their student-athletes.
  • If the schools do create trusts, setting a trust contribution cap of less than $5,000 for every year the student-athlete is academically able to compete.
The order does allow for the NCAA to enact a rule stating that schools must offer the same trust compensation package to all recruits of the same class.