Ninth Circuit: NCAA Not Required to Allow its Member Schools to Pay Student Athletes $5,000 per Year | Practical Law

Ninth Circuit: NCAA Not Required to Allow its Member Schools to Pay Student Athletes $5,000 per Year | Practical Law

The US Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a district court order enjoining the NCAA from prohibiting its member schools from providing student-athletes with scholarships for the full cost of attendance and up to $5,000 a year in deferred compensation. The Ninth Circuit held that the district court was not permitted to require the schools to pay student-athletes the deferred compensation and vacated the injunction as it related to the payment requirement.

Ninth Circuit: NCAA Not Required to Allow its Member Schools to Pay Student Athletes $5,000 per Year

by Practical Law Antitrust
Published on 01 Oct 2015 • USA (National/Federal)
The US Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a district court order enjoining the NCAA from prohibiting its member schools from providing student-athletes with scholarships for the full cost of attendance and up to $5,000 a year in deferred compensation. The Ninth Circuit held that the district court was not permitted to require the schools to pay student-athletes the deferred compensation and vacated the injunction as it related to the payment requirement.
On September 30, 2015, the US Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the US District Court for the Northern District of California's judgment and injunction regarding the NCAA's amateurism rules. In its ruling, the court:
  • Affirmed the district court's determination that the NCAA rules violated Section 1 and upheld the court's injunction against the NCAA prohibiting its member schools from providing student-athletes with scholarships to cover the full cost of attendance. The court affirmed that full cost of attendance scholarships are a valid, less restrictive alternative to the NCAA's challenged compensation rules.
  • Reversed the district court's determination that paying student-athletes $5,000 per year in deferred compensation was a valid, less restrictive alternative, and reversed the portion of the injunction that required the NCAA to allow such payments.
(O'Bannon v. NCAA, No. 14-16601 (9th Cir. Sept. 30, 2015)).

Background

In August 2014, the district court held that the NCAA's restrictions 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.
Plaintiffs, a group of current and former college athletes, alleged that their colleges gain substantial revenues from licensing the plaintiffs' names, images and likenesses (NILs). Under NCAA rules, the colleges are not allowed to share this revenue with student-athletes.
Plaintiffs argued that the NCAA restrictions fixed and artificially depressed the price paid to student-athletes for use of their NILs. In the absence of the restraints, plaintiffs alleged that schools would compete to offer more compensation to recruits.
Plaintiffs alleged that the NCAA's restrictions 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.
For a full summary of the district court opinion, see Legal Update, District Court Holds that NCAA Restriction on Student-athlete Pay Harms Competition.

NCAA Appeal

On appeal, in addition to arguing that the plaintiffs' Sherman Act claim failed on the merits, the NCAA argued that the court was precluded from reviewing the Sherman Act claim because:
The court of appeals held that the NCAA's arguments were not persuasive.

NCAA's Amateurism Rules Not Valid as a Matter of Law

The court stated that NCAA v. Board of Regents did not give blanket validity to the NCAA's amateurism rules. Instead, the court explained that Regents held that because college sports depend on certain horizontal agreements in order to exist, those agreements should be analyzed under the rule of reason rather than being held per se illegal.
The court explained that though Regents recognized that amateurism rules are procompetitive, that does not mean those rules are not subject to antitrust scrutiny.

The NCAA's Compensation Rules Regulate Commercial Activity

The court found that the NCAA's compensation rules fall under the broad, modern definition of commerce and are therefore subject to the Sherman Act. The court reasoned that a transaction between a student-athlete and school where the athlete exchanges his labor and licensing rights for a DI scholarship is an exchange for economic gain, and therefore commerce. The court rejected the NCAA's argument that the rules were merely eligibility rules, reasoning that it is the substance, not the style, of the rules that matter.

The Compensation Rules Cause Plaintiffs Antitrust Injury

The court held that plaintiffs proved they were injured as a result of NCAA's compensation rules, as the rules foreclose the market for the student-athletes' NILs in video games. The court reasoned that:
  • Absent the compensation rules, the athletes would negotiate directly with video game makers for the right to use their NILs.
  • Contrary to the NCAA's argument, the Copyright Act would not preempt the athletes' right-of-publicity claims arising from their NILs used in video games. (The court also noted that the NCAA's Copyright Act argument was irrelevant to the issue of standing.)
Therefore, the court held that plaintiffs sufficiently proved injury in fact and, by extension, antitrust injury.

Plaintiffs' Section 1 Claim

After rejecting the NCAA's preliminary arguments, the court examined the merits of the plaintiffs' Section 1 claim.
The court held that plaintiffs established that the NCAA's compensation rules were more restrictive than necessary to achieve their procompetitive purpose, in violation of Sherman Act Section 1. Like the district court, the court evaluated the NCAA's rule under the rule of reason and required:
  • Plaintiffs to show significant anticompetitive effects.
  • The NCAA to present procompetitive effects.
  • Plaintiffs to show that a substantially less restrictive alternative exists to achieve the NCAA's legitimate objectives.

Anticompetitive Effects

The NCAA argued that plaintiffs failed to show any anticompetitive effects, including by failure to show:
  • The compensation rules reduce college education output.
  • That schools would pay athletes for their NIL rights whether there was a rule against it or not because those rights are worth nothing.
  • That even if there were payments, those payments would be substantial.
The court disagreed. The court found that the NCAA's arguments were not persuasive, because:
  • Reduced output is not the only indicator of anticompetitive effects.
  • Plaintiffs showed that the compensation rules have the effect of price-fixing. For instance, 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.
  • The court already address and rejected the argument that NIL rights were worth nothing in its antitrust injury analysis.
  • The size of the potential payment is inconsequential. The removal of a form of competition, not the size of the payments, is the true anticompetitive effect.
Therefore, the court held that plaintiffs established the compensation rules had anticompetitive effects.

Procompetitive Effects

The court next considered the NCAA's stated procompetitive effect, that the compensation rules promoted amateurism. Though the district court accepted that as a procompetitive justification, the NCAA argued that the district court failed to give it full consideration by:
  • Ignoring that amateurism increases student-athlete choice by giving student-athletes the only opportunity to get a college education and play sports as students.
  • Expressing skepticism over the NCAA's historical commitment to amateurism.
The court found both arguments to be unpersuasive. The court noted that while amateurism does promote student-athlete choice, compensating the athletes would not decrease that choice. Further, the court noted that while the district court may have been overly skeptical of the NCAA's historical commitment to amateurism, that has no procompetitive effect and is irrelevant.
Instead, the court found that the NCAA's compensation rules were procompetitive under two justifications identified by the district court:
  • Integrating academics and athletics.
  • Preserving the NCAA's popularity by promoting amateurism as it is currently understood.
Therefore, the court held that the NCAA established procompetitive effects.

Substantially Less Restrictive Alternatives

The court noted that the plaintiffs identified, and the district court approved, two substantially less restrictive alternatives to the NCAA's compensation rules:
  • Providing student-athletes with scholarships to cover the full cost of attendance.
  • Paying student-athletes $5,000 per year in deferred compensation.
The court held that while the district court's first less restrictive alternative was valid, it clearly erred in identifying the second less restrictive alternative to be virtually as effective as the current compensation rules.

Scholarships

The court noted that while antitrust law should not be used to micromanage organizational rules, setting a scholarship cap at the full cost of attendance is appropriate in this case as it is a substantially less restrictive alternative to the compensation rules. The court therefore upheld the district court's:
  • Holding that the compensation rules violate Section 1.
  • Injunction requiring the NCAA to allow its schools to offer those scholarships.

Deferred Compensation

The court held that the district court clearly erred in finding that providing student-athletes with $5,000 per year as deferred compensation was a less restrictive alternative to the NCAA's compensation rules. The court reasoned that:
  • By definition, an amateur athlete is unpaid, and there is no evidence to show that paying the student-athletes would preserve amateurism.
  • Paying the student-athletes would directly contradict the NCAA's amateruism rules instead of providing a less restrictive alternative to them.
The court further stated that the $5,000 amount was arbitrary, and if approved could be challenged and raised in perpetuity.
The court therefore vacated the district court's order and injunction's requirement that the NCAA allow its schools to pay its student-athletes deferred compensation.

Dissent

In a dissent, Chief Judge Thomas argued that the district court had sufficient factual support for both of its less restrictive alternatives and that the entirety of the district court's holding should have been affirmed.