A full review of the O’Bannon v. NCAA judgment

Published 21 August 2014 | Authored by: John Wolohan
In this article, Professor John Wolohan gives a complete analysis of the recent O’Bannon v. NCAA judgment, and reflects on how it affects the parties moving forward.

BACKGROUND

Messersmith and McNally

In 1975, Peter Seitz, the arbitrator in the Andy Messersmith and Dave McNally case, ruled that Major League Baseball clubs did not own their players in perpetuity as they claimed under the league’s reserve clause.

In ruling that the reserve clause only granted the teams the right to automatically renew a player’s contract for one additional year, Seitz ruled that Messersmith and McNally were free agents and could now sign a new contract with any team they wanted. After the players won free agency, a number of people in the sport began to complain that the decision was the death knell for the sport and that there was no way the league could survive.

As history has shown, however, instead of killing the sport, free agency has not only seen player salaries rise to all time high, but league and team profits as well.

 

Present day – O’Bannon v. NCAA

On Friday, August 8, 2014, those same shouts of gloom and doom were being heard for college athletes by the National Collegiate Athletic Association (NCAA), conference commissioners and college athletic administrators after Federal District Court Judge Claudia Wilken ruled that the NCAA’s rules prohibiting athletes from being paid for use of their names, images and likeness were an unreasonable restraint of trade in violation of the Antitrust laws.

 

Facts of the O’Bannon case

The facts of the case are set out in detail in my previous LawInSport article: Update on O’Bannon.1 In brief, however: the plaintiffs in the case are a group of 20 current and former college student-athletes, all of whom play or played for an FBS football or Division I men's basketball team between 1956 and the present.

They brought this antitrust class action against the NCAA to challenge the association's rules restricting compensation for elite men's football and basketball players. In particular, the plaintiffs allege that the NCAA's rules and bylaws operate as an unreasonable restraint of trade because they preclude FBS football players and Division I men's basketball players from receiving any compensation, beyond the value of their athletic scholarships, for the use of their names, images, and likenesses in video games, live game telecasts, re-broadcasts, and archival game footage.

The NCAA, the national organization regulating college sports in the United States, argued on the other hand that its restrictions on student-athlete compensation are reasonable because they are necessary to preserve its tradition of amateurism, maintain competitive balance among FBS football and Division I basketball teams, promote the integration of academics and athletics, and increase the total output of its product.

The next section analyses the court’s findings. A full copy of the judgment can be found here.2

 

THE JUDGMENT - WHAT DID THE COURT FIND?

Section 1 of the Sherman Act

In examining the case under Section 1 of the Sherman Act (American Antitrust Statute)3, which makes it illegal to form any "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." The court ruled that to prevail on a claim, the plaintiff must show:
  1. that there was a contract, combination, or conspiracy;
  2. that the agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and
  3. that the restraint affected interstate commerce.


Rule of Reason Analysis

Since the Sherman Act only prohibits unreasonable restraints, the court examined the challenged restraints under the rule of reason analysis. Under the rule of reason, a restraint violates the Sherman Act if the restraint's harm to competition outweighs its pro-competitive effects.

Courts typically rely on a burden-shifting framework to conduct this balancing. Under that framework, the plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects' within a relevant market. If the plaintiff satisfies this initial burden, the burden shifts to the defendant to show that the restraint has a pro-competitive effects.

Finally, if the defendant meets this burden, the plaintiff must show that 'any legitimate objectives can be achieved in a substantially less restrictive manner'.

 

Do the Restraints Produce a Significant Anticompetitive Effects' within Relevant Market?

In finding that the plaintiffs met the initial burden of showing that the restraint produces significant anticompetitive effects' within a relevant market, the court found that the challenged restraint causes anticompetitive effects in two related national markets:

  1. the "college education market," in which colleges and universities compete to recruit student-athletes to play FBS football or Division I basketball; and
  2. the "group licensing market," in which video game developers, television networks, and others compete for group licenses to use the names, images, and likenesses of FBS football and Division I men's basketball players in video games, telecasts, and clips.

Having established two related national markets, the plaintiffs had to show that the NCAA’s rules produced significant anticompetitive effects.

In ruling that the NCAA’s rules produced significant anticompetitive effects, the court noted that FBS football and Division I basketball schools are the only suppliers in the “college education market,” and that they have the power, when acting in concert through the NCAA and its conferences, to fix the price of their product.

They use that power by forming an agreement to charge every recruit the same price for the bundle of educational and athletic opportunities that they offer: to wit, the recruit's athletic services along with the use of his name, image, and likeness while he is in school. This price-fixing agreement constitutes a restraint of trade.

In support of this finding the court concluded that in the absence of this agreement, certain schools would compete for recruits by offering them a lower price for the opportunity to play FBS football or Division I basketball while they attend college. The NCAA, the court held, exercises market power, fixes prices, and restrains competition in both markets.

 

Do the restraints have a pro-competitive effect?

Since the plaintiffs were able to present evidence to show that the NCAA's rules impose a restraint on competition in the college education market, the court next examined whether the restraints imposed were reasonable.

In making this determination, the court held it must balance the anticompetitive aspects of the NCAA rules to see if it outweighs the rules procompetitive effects vs its anticompetitive effect.

The NCAA asserted four procompetitive justifications for its rules barring student-athletes from receiving compensation for the use of their names, images, and likenesses: (1) the preservation of amateurism in college sports; (2) promoting competitive balance among FBS football and Division I basketball teams; (3) the integration of academics and athletics; and (4) the ability to generate greater output in the relevant markets.


1. preservation of amateurism in college sports

In rejecting the NCAA assertion that its restrictions on student-athlete compensation are necessary to preserve the amateur tradition and identity of college sports, the court ruled that while the NCAA's restrictions on student-athlete compensation might play a limited role in driving consumer demand for FBS football and Division I basketball-related products and might justify a restriction on large payments to student-athletes while in school, they did not justify the rigid prohibition on compensating student-athletes, in the present or in the future, with any share of licensing revenue generated from the use of their names, images, and likenesses.


2. promoting competitive balance among FBS football and Division I basketball teams

Next, the court examined the NCAA claim that its challenged rules are justified by the need to maintain the current level of competitive balance among its FBS football and Division I basketball teams in order to maintain their popularity.

While the court recognized that a sports league's efforts to achieve the optimal competitive balance among its teams may serve a pro-competitive purpose if promoting such competitive balance increases demand for the league's product, it also found that the NCAA had not presented any evidence to show that its restrictions on student-athlete compensation actually has any effect on competitive balance, let alone produce an optimal level of competitive balance.


3. integration of academics and athletics

As for NCAA’s claim that its rules help educate student-athletes and integrate them into their schools' academic communities, which it claimed served to improve the quality of educational services provided to student-athletes. While recognizing that the goal of improving product quality may be a legitimate procompetitive justification, the court found that the specific restraints challenged in this case were necessary to achieve these benefits.

In particular, the court found that student-athletes would receive many of the same educational benefits regardless of whether or not the NCAA permitted them to receive compensation for the use of their names, images, and likenesses.


4. ability to generate greater output in the relevant markets

The NCAA’s final claim was that the challenged restraint increases the output or the number of opportunities for schools and student-athletes to participate in Division I sports, which ultimately increases the number of FBS football and Division I basketball games played of its product. While recognized by the court as a legitimate procompetitive justification, the court found that the NCAA's argument that the current rules enable some schools to participate in Division I that otherwise could not afford to do so were unsupported by the evidence.

In support of this finding, the court noted that any cost savings schools achieve by not paying their student-athletes are not being used to fund additional teams or scholarships but are going to the salaries of coaches and facilities.

Based on the high salaries and rapidly increasing spending on training facilities at many schools, the court concluded that it was clear that many schools could afford to offer their student-athletes a limited share of the licensing revenue generated from their use of the student-athletes' own names, images, and likenesses.

Are there Substantially Less Restrictive Alternatives?

A trust payment system

Assuming that some of the NCAA restrictions on student-athlete compensation may yield procompetitive benefits, the court next examined whether the plaintiffs could show that the NCAA’s procompetitive goals could be achieved through less restrictive alternatives.

To show that there were less restrictive alternatives to achieve the NCAA's stated procompetitive goals, the plaintiffs argued that the NCAA could permit FBS football and Division I basketball schools to award stipends to student-athletes up to the full cost of attendance, as that term is defined in the NCAA's bylaws, to make up for any shortfall in its grants-in-aid.

In addition, the plaintiffs argued that the NCAA could permit its schools to hold in trust limited and equal shares of its licensing revenue to be distributed to its student-athletes after they leave college or their eligibility expires.

The court’s decision and reasoning

Since the court heard no persuasive explanation as to why the NCAA could not implement a trust payment system like the one the plaintiffs’ proposed, it concluded that a narrowly tailored trust payment system -- which would allow schools to offer their FBS football and Division I basketball recruits a limited and equal share of the licensing revenue generated from the use of their names, images, and likenesses -- constitutes a less restrictive means of achieving the NCAA's stated procompetitive goals.

In making her ruling, the court seemingly accepted the NCAA’s procompetitive argument that a totally free market would mostly benefit the richest colleges, to the detriment of smaller schools who could not compete with the larger schools for players. Thus gaining a major recruitment advantage and impacting the competitive balance of the sports. Having found that the plaintiffs satisfied their burden under the rule of reason, the court concluded that the NCAA's challenged rules unreasonably restrain trade in violation of § 1 of the Sherman Act.

Specifically, the association's rules prohibiting student-athletes from receiving any compensation for the use of their names, images, and likenesses restrains price competition among FBS football and Division I basketball schools as suppliers of the unique combination of educational and athletic opportunities that elite football and basketball recruits seek. Alternatively, the rules restrain trade in the market where these schools compete to acquire recruits' athletic services and licensing rights.

The challenged rules do not promote competitive balance among FBS football and Division I basketball teams, let alone produce a level of competitive balance necessary to sustain existing consumer demand for the NCAA's FBS football and Division I basketball-related products. Nor do the rules serve to increase the NCAA's output of Division I schools, student-athletes, or football and basketball games. Although the rules do yield some limited procompetitive benefits by marginally increasing consumer demand for the NCAA's product and improving the educational services provided to student-athletes, Plaintiffs have identified less restrictive ways of achieving these benefits.

In particular, the court found that the plaintiffs had shown that the NCAA could permit FBS football and Division I basketball schools to use the licensing revenue generated from the use of their student-athletes' names, images, and likenesses to fund stipends covering the cost of attendance for those student-athletes. It could also permit schools to hold limited and equal shares of that licensing revenue in trust for the student-athletes until they leave school. Neither of these practices would undermine consumer demand for the NCAA's products nor hinder its member schools' efforts to educate student-athletes.

INJUNCTION AGAINST THE NCAA

Consistent with the less restrictive alternatives found, the Court issued an injunction against the NCAA from enforcing any rules or bylaws that would prohibit its member schools and conferences from offering their FBS football or Division I basketball recruits a limited share of the revenues generated from the use of their names, images, and likenesses in addition to a full grant-in-aid.

The injunction will not preclude the NCAA from implementing rules capping the amount of compensation that may be paid to student-athletes while they are enrolled in school; however, the NCAA will not be permitted to set this cap below the cost of attendance, as the term is defined in its current bylaws.

The injunction will also prohibit the NCAA from enforcing any rules to prevent its member schools and conferences from offering to deposit a limited share of licensing revenue in trust for their FBS football and Division I basketball recruits, payable when they leave school or their eligibility expires. However, the injunction will permit the NCAA to set a cap on the amount of money that may be held in trust, it will prohibit the NCAA from setting a cap of less than five thousand dollars (in 2014 dollars) for every year that the student-athlete remains academically eligible to compete.

Finally, nothing in the injunction precludes the NCAA from continuing to enforce all of its other existing rules which are designed to achieve its legitimate pro-competitive goals. This includes its rules prohibiting student-athletes from endorsing commercial products, setting academic eligibility requirements, prohibiting schools from creating athlete-only dorms, and setting limits on practice hours.

CONCLUSION

A blow to NCAA

While not a total victory for the athletes - since the decision still prevents a free-market for the athletes’ services, and denies them the right to sign endorsement deals - the decision is nonetheless a major blow to the NCAA and those who run college athletics in the United States.

For the first time, a court has soundly rejected the NCAA’s amateurism justification that the athletes are at the school for academics first and foremost, and participate in athletes as an extracurricular activity. As the court noted, the athletes spend so much time practicing and playing games – generating millions of dollars for some schools and billions for the NCAA - that they do not have time to be real students.

So, even though the decision dose not sound the death knell of the NCAA, it does require the NCAA and Division I schools to pay athletes, via a trust fund payable after the players graduate or leave school.

In addition, now that a court has found 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 NCAA will face a much harder time defending its rules in the antitrust lawsuit currently making its way through the courts seeking a free market for the athletes.

Looking forward

As for the next step, the NCAA has already stated that they will appeal the decision. In addition, there is some discussion by members of petitioning the United States Congress for an antitrust exemption.

While petitioning Congress seems like a long shot, neither that nor the appeal will prevent the court’s order from going into effect for the 2015–16 school year and changing college sports forever.

The NCAA and its school therefore need to adjust to the new rules. In particular, the NCAA and its member schools will need to set up and administer the trust fund; determine how the new rules apply to sports outside FBS football and Division I basketball; and work out how the new rules will impact women’s sports teams, especially under Title IX, the law that bans sex discrimination at educational institutions.

Therefore one thing that is clear from the decision is that the NCAA must change, and change quickly.

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About the 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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