A further anti-trust challenge to the NCAA’s athlete compensation cap (In Re: NCAA Athletic Grant-in-Aid Cap..)

Published 11 April 2019 By: John Wolohan

College Sport

Drip… Drip... Drip. That is the sound of the National Collegiate Athletic Association (NCAA) slowly losing its’ battle to keep the current college sports model. In the last few years, there have been a growing number of legal challenges to the NCAA’s antiquated amateur model in which it has suffered a series of small loses. While the courts have refused calls to strike down the NCAA’s current system completely, the legal challenges have forced the NCAA to incrementally provide athletes with more and more benefits, albeit without directly paying them.

This article examines the latest attack on the NCAA’s amateur sports model, focusing on a Federal district court’s decision in In re NCAA Athletic Grant-In-Aid Cap Antitrust Litigation.1

Background

Based on the Ninth Circuit Court’s decision in O'Bannon v. NCAA2, upholding the ruling of the District Court3 that the NCAA’s restrictions on college athletes violated federal antitrust law, a group of current and former athletes who played men's Division I Football Bowl Subdivision (FBS) football4 and men's and women's Division I basketball challenged the NCAA’s rules limiting compensation. In challenging the NCAA’s limits on compensation, a class composed of students who competed at the highest level of college athletics claimed that the NCAA’s rules violated federal antitrust law, since it illegally capped the amount of compensation that athletes can receive in exchange for their athletic services. In particular, the athletes noted that there is a great disparity between the extraordinary amounts of revenue generated by NCAA Division I basketball and FBS football, and the modest benefits that the athletes who play the games receive.

In support of this position, the athletes argued that the NCAA generates approximately one billion dollars in revenues each year.5 Most of this revenue is derived from the Division I men's basketball post-season tournament known as March Madness, and the media and marketing rights relating to it which are worth $19.6 billion.6 In addition, the FBS conferences, the top-echelon for college football, conferences have a multi-year media contract with ESPN for the College Football Playoff, the total value of which is $5.64 billion. Adding to the revenue stream is the fact that the five conferences with the largest revenues, known as the Power Five Conferences, each generate hundreds of millions of dollars in revenues per year,7 which are distributed to the respective schools in those conferences.

With the NCAA, the power conferences and the respective schools making all this money, the athletes asked the court to lift all NCAA caps on compensation and strike down all rules prohibiting schools from giving athletes in revenue-generating sports more financial incentives for competing. The goal of the athletes’ case, therefore, is to create a free market, where conferences can individually set rules for compensating athletes.

In defense of its rules, the NCAA and the conferences that participate in FBS football and Division I basketball, claim that the limits on athletes are necessary and have a procompetitive on college sports for two reasons. First, they argue that the limits help preserve the demand for college sports because consumers value amateurism. Second, the NCAA claims that the rules promote integration of student-athletes into their academic communities, which in turn improves the college education they receive in exchange for their services.”8

Decision

In reviewing the athletes’ antitrust claim, the district court in San Francisco, in a ruling penned by Judge Claudio Wilkin, began by applying a Rule of Reason analysis. In antitrust cases, the courts use the rule of reason analysis to review "agreements whose competitive effect can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed."9 The rule of reason uses a burden-shifting scheme, whereby the plaintiff must first establish the relevant market to be analyzed and then show that the defendant plays a big enough role in that market to impair competition significantly.10

If the plaintiff is able to meet this burden, the burden then shifts to the defendants to provide evidence that the challenged behavior provides a legitimate procompetitive effect. If the defendants is able to show such a procompetitive effect, the burden once again shifts back to the plaintiffs to demonstrate that there are less restrictive alternatives to the challenged conduct. If the plaintiff is unable to meet their burden of demonstrating a less restrictive alternatives, the court must then balance the harms and benefits of the challenged conduct to determine whether it is reasonable.11 Applying this burden shifting analysis, the court first found that the NCAA and its’ member schools have near complete dominance of, and exercise monopsony power, in the relevant market of college age athletes. The courts will find monopsony power in a market when there is only one buyer. For example, since NBA and NFL rules prohibit students from going to those leagues right out of high school, the NCAA schools are the only buyers of those athletes’ services. As a result, just like a monopoly, in which there is only one seller, a monopsony is an imperfect market that allows the buyer to control the market conditions and price.

Having identified the relevant market, the court next held that the NCAA and its member schools have monopsony power to restrain the athletes’ compensation in any way and at any time they wish, without any meaningful risk of diminishing their market dominance.12 The court found that the NCAA and its schools have such power because they are essentially the only market for elite college football and basketball. If they want to attend college and play sports at an elite level, therefore, the athletes must accept the NCAA’s compensation rules, regardless of whether any such compensation is an accurate reflection of the competitive value of their athletic services. 13

Having shown that the NCAA’s rules produce a significant anticompetitive effect “that is intended to, and does, limit student-athlete compensation in the relevant market,14 the court shifted the burden to the NCAA to show that the challenged conduct actually has a procompetitive effect in order to justify it under the antitrust laws.15 The NCAA argued that such restraints were justified as procompetitive because "amateurism is a key part of demand for college sports" and "consumers value amateurism."16 In particular, the NCAA argued that if consumers did not believe that student-athletes were amateurs, they would watch fewer games and revenues would decrease as a result.17 In support of the procompetitive effect of their rules, the NCAA argued that consumers enjoy college sports because of the difference between college sports and professional sports. In particular, the NCAA argued that one of the differences between college and professional sports are the amounts and types of compensation players receive.

The court, however, found that a distinction between college and professional sports could not be based solely on compensation, since whatever understanding consumers have of amateurism, college athletes are already "being paid to play."18 The court held that the distinction between the college and professional sports is that college athletes do not receive unlimited cash payments, especially those unrelated to education, like those seen in professional sports leagues.

The court therefore concluded that some of the challenged compensation rules may have a procompetitive effect on preserving consumer demand for college sports as distinct from professional sports to the extent that they prevent unlimited cash payments unrelated to education such as those seen in professional sports leagues.19 For example, the court held that the challenged compensation limits can be divided into three categories:

  1. the limit on the grant-in-aid at not less than the cost of attendance;

  2. compensation and benefits unrelated to education paid on top of a grant-in-aid; and

  3. compensation and benefits related to education provided on top of a grant-in-aid.20

The grant-in-aid or athletic scholarships provided by colleges to athletes can include the full cost of tuition, fees, room, board and required textbooks. In addition, after the Ninth Circuit Court’s decision in O'Bannon v. NCAA,21 grant-in-aid also includes extra money up to the actual cost of attendance at the school. Not every athlete, however, receives a full athletic scholarship. In non-revenue sports, those outside basketball and football, partial scholarships, some as small as a few hundred dollars, are the norm.

The court found that the challenged limits in the first and second categories have a procompetitive effect relative to having no limits, to the extent that they help maintain consumer demand for college sports as a distinct product by preventing unlimited cash payments unrelated to education. 22 As for the third category, the court found that the NCAA’s limits on benefits related to education, such as those that limit tutoring, graduate school tuition, and paid internships do not have an effect on enhancing consumer demand for college sports.23 In support of this conclusion, the court found that the limits on educational benefits are distinct from professional-level compensation because they have a connection to education and are provided in kind, not in cash.24

Having shown that some aspects of its’ challenged rules provide a legitimate procompetitive effect, the burden once again shifted to the plaintiffs to show that there was a substantially less restrictive alternative that would achieve the same procompetitive effect as the challenged set of rules. To be viable, a less restrictive alternative must be "virtually as effective" in serving the established procompetitive effect of the challenged restraints, and its implementation must be achieved "without significantly increased cost."25

The plaintiffs proposed an alternative that would allow the NCAA to continue to limit the compensation and benefits given in exchange for athletic services, but would not allow NCAA limits on compensation and benefits related to education.26 In finding this alternative less restrictive to the current set of challenged NCAA limits, the court held that allowing for additional compensation and benefits related to education would be less harmful to competition in the relevant market. 27 In particular, the court held that the types of educational benefits that should not be capped by the NCAA include items like computers, science equipment, musical instruments and other items not currently included in the cost of attendance calculation but nonetheless related to the pursuit of various academic studies. Also included would be post-eligibility scholarships to complete undergraduate or graduate degrees at any school; scholarships to attend vocational school; expenses for pre- and post-eligibility tutoring; expenses related to studying abroad that are not covered by the cost of attendance; and paid post-eligibility internships.28

The court found that these alternative rules would expand education-related compensation and benefits only, without resulting in unlimited cash payments, untethered to education, similar to those observed in professional sports.29 In addition, the court found that this alternative would also not require significant new costs to implement, because by eliminating caps on education-related benefits the NCAA will eliminate the need to expend resources on compliance and enforcement in connection with such caps. 30 Finally, the court found no evidence that allowing limited academic awards would negatively affect consumers' interest in Division I basketball or FBS football.31

Under these less restrictive rules, the NCAA would retain the right to define these education-related benefits and to regulate how schools provide them to student-athletes. For example, the NCAA could require schools to pay the cost of such benefits directly to the educational institution or provider from which the student-athletes will obtain the benefits. In the case of education-related supplies, such as computers and science equipment.32

With the plaintiffs having meet their burden of showing a less restrictive alternative to the challenged rules, the Court ruled that it could imposed its remedy without weighing the anticompetitive effects of the challenged restraints against their procompetitive benefits as a final balancing consideration.

Comment

While the plaintiff’s (the athletes) technically won the case, most people are calling the court’s decision a victory for the NCAA since the decision still prevents a free-market for the athletes services. However, before the NCAA gets too excited it should be noted that the decision once again upholds the court’s findings in O’Bannon v. NCAA that the NCAA’s rules governing the grant in aid or scholarships that schools offer athletes constitutes an illegal price-fixing agreement in restraint of trade. The court’s decision therefore reinforces the conclusion that the NCAA’s model of amateurism illegally restraints the benefits that schools can provide athletes. However, even though the court noted that the athletes generate tens of millions of dollars for some schools and billions for the NCAA,33 the court was only willing to require the schools to award athletes more scholarship money to pursue postgraduate degrees, finish undergraduate degrees or study abroad or schools providing athletes items that could be considered school supplies such as computers, science equipment or musical instruments.

As for the next step, even though the decision can be seen as a victory since it did not require NCAA schools to actually paid athletes a fair market value, the NCAA has already appealed the decision.34 The NCAA claims that the ruling is inconsistent with the decision in O’Bannon, which they claim found that the rules governing college athletics would be better developed outside the courtroom, including rules around the education-related support that schools provide. On appeal, the NCAA is asking the Ninth Circuit to declare that either college athletics are exempt from the antitrust laws or that the courts should stay out of the business of college sports and leave the regulation of athletes to the NCAA and its member schools.

No matter which side claims victory, it is undeniable that all of these court challenges are starting to get the attention of politicians in Washington. In same week, that the NCAA announced it would appeal the court’s decision, Senator Chis Murphy of Connecticut released a report calling the current NCAA model “broken” and that athletes should be compensated for their efforts. In addition to Murphy, Representative Mark Walker of North Carolina has presented a bill in Congress that would allow athletes to profit off their likeness through sponsorships.35 While these efforts in Congress are not likely to become law anytime soon, the fact that politicians are raising the issue in public is just another front on the NCAA’s battle to protect its outdated amateur sports model.

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Author

John Wolohan

John Wolohan

John Wolohan is an Attorney and Professor of Sports Law in the Syracuse University Sport Management program and an Adjunct Professor in the Syracuse University College of Law. In addition to being one of the lead editors of the book "Law for Recreation and Sport Managers" by Cotten and Wolohan, John has been teaching and working in the fields of doping, antitrust, gaming law, and sports media rights for over 25 years.

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