By David Hamilton, Jason Hicks, and Amanda Norris Ames, of Womble Carlyle
Since Judge Claudia Wilken’s recent ruling in O’Bannon et al. v. NCAA et al., Case No. 4:09-cv-03329 (N.D.Ca.), in which the judge called the NCAA a “cartel” that restrains the college athletics market, many commentators have forecasted the end of the NCAA. But, despite the broad language of the opinion, the impact of the injunction awarded against the NCAA may be rather limited. As written, the injunction can be seen as a small victory for the NCAA, temporarily holding off the full impact of the decision and allowing the NCAA to reexamine its policies before any further erosion of the considerable power it has amassed by marketing and promoting the college athletes that now form the class of plaintiffs in the action. As detailed below, the full economic and legal impact may not be ascertained for years, when the Court’s ruling — if it stands — will have been implemented at major college athletic scholarship programs.
In this class action suit, a group of current and former college men’s basketball and football players, led by former UCLA basketball player Ed O’Bannon, sued the NCAA, alleging that the NCAA’s rules barring athletes from receiving a share of the revenues that the NCAA earns from licensing athletes’ names, images, and likenesses violates the Sherman Antitrust Act. The players originally sought both a permanent injunction, enjoining the NCAA from enforcing the player compensation ban, and damages; however, in May (less than a month before trial), the players decided to forego their damage claims and pursue only the injunction. Besides removing the individual damages claims, which many thought were weaker and which would have been decided by a jury, the plaintiffs’ decision to pursue only injunctive relief also ensured that the claims would only be heard by the judge, who had seemed skeptical of the NCAA’s defenses from the outset.
The case went to trial over three weeks in June, where numerous experts, athletes, and school administrators testified regarding the anti-competitive harm alleged by the players and the NCAA’s justifications for maintaining “amateurism” in college sports. In a key moment for the players, the NCAA’s own preeminent antitrust expert agreed that he had called the NCAA a “cartel” in a prior publication. This concession and the Court’s subsequent finding on the cartel issue left the NCAA with defenses that seemed deflated in Judge Wilken’s ruling.
On August 8, the Court issued a 99-page ruling in the case, finding that the “challenged NCAA rules unreasonably restrain trade in the market for certain educational and athletic opportunities offered by NCAA Division 1 schools” and ruling in favor of the plaintiffs. First, the Court found that the players had properly alleged two relevant national markets, the “college education market” and the “group licensing market,” impacted by the NCAA’s athlete compensation ban. The Court then found that the NCAA’s rules restrained trade in these markets, acting as both a “sellers’ cartel” and, alternatively, a “buyers’ cartel.”[1] The Court also rejected each of the NCAA’s pro-competitive justifications for its rules. The NCAA had argued that the compensation ban was procompetitive because it (1) preserved amateurism in college sports, (2) promoted competitive balance among teams, (3) helped integrate academics and athletics,[2] and (4) generated greater output by increasing opportunities for schools and student-athletes to participate in Division 1 sports. The Court analyzed and rejected each of these justifications in striking terms, finding that the NCAA’s overly restrictive compensation ban played a limited role in driving consumer demand for Division 1 football and basketball. Instead, the Court agreed with the plaintiffs’ argument that the NCAA could adopt less restrictive rules that limited the anticompetitive effects while allowing the NCAA to pursue its stated objectives. Specifically, Judge Wilken found that that the plaintiffs showed “that the NCAA could permit FBS football and Division 1 basketball schools to use the licensing revenue . . . to fund stipends covering the cost of attendance” and could “permit schools to hold limited and equal shares of that licensing revenue in trust for the student-athletes” (emphasis added). The word “limited” is important: while the Court held that a complete ban on compensation to football and basketball players was anticompetitive, it recognized that the NCAA still could impose significant limitations on such compensation, essentially setting a floor of $5,000 per year.
After completing its analysis, the Court issued a separate permanent injunction, which by its terms only applies to men’s basketball and football players enrolled after July 1, 2016. It enjoins the NCAA from prohibiting “deferred compensation in an amount of $5,000 per year or less” for the licensing of athletes’ names, images, and likenesses through a trust fund payable upon expiration of athletic eligibility or graduation.” The injunction also prevents the NCAA from prohibiting the inclusion of compensation up to the full cost of attending college. (The NCAA’s rules had previously capped scholarship awards to an amount below the full cost of attendance.) In response to a motion for clarification filed by the NCAA, the Court clarified that the injunction would apply to “prospective and current student-athletes for the 2016-2017 season and beyond.” The NCAA recently filed its notice that it planned to appeal the decision to the Ninth Circuit.
The broad and lengthy findings in the Court’s opinion are interesting when compared with the limited and somewhat arbitrary relief awarded in the injunction. While the NCAA is appealing the ruling, the injunction could arguably be seen as a win for the NCAA, creating a minimal “salary cap,” rather than opening up the market for six-figure student athlete salaries. Yet, that minor victory may be temporary, as the opinion raises a world of new questions as the NCAA and its member schools begin to imagine a drastically different college sports environment.
First, it’s possible that the O’Bannon injunction, as it is currently written, will actually apply to few student athletes. The injunction itself only applies to men’s basketball and football players playing in the 2016-2017 season or later, most of whom were not eligible members of the class of plaintiffs. Future players, currently in high school and likely uncertain of their future in college athletics, cannot conceivably be bound by the Court’s ruling. If a star quarterback entering college in 2016 wanted to sue the NCAA to receive more than the currently allowed $5,000 yearly trust fund payment or to prevent the money from being placed in a trust at all, he could do so.
Despite the potentially limited injunction, the Court’s sweeping holding — if it survives the NCAA’s appeal — could have broad implications for college sports in the future, beyond those contemplated in the opinion. The Court’s finding that it operates as a “cartel” could haunt the NCAA in subsequent actions, even if the current suit has little practical import. If baseball or women’s basketball gain in popularity and begin generating revenues for the NCAA or its member schools, the NCAA would have difficulty arguing that O’Bannon opinion did not contemplate compensation to those players as well, despite a technically, narrow class in the O’Bannon case. In addition, while O’Bannon class members chose not to pursue their damages claims, it is possible that non-class-member basketball and football players could seek individual damages based on the NCAA’s decades-long practice of licensing players’ name, image, and likeness. The “limited” restraint allowed by the injunction — such as the somewhat arbitrary $5,000 cap on compensation, the fact that players on the same team must be compensated equally, and the fact that all compensation must be held in a trust until graduation — could also be challenged in future lawsuits. These limitations, minimally justified in the opinion (if discussed at all), are arguably inconsistent with the Court’s sweeping findings and may be the next to fall.
In many ways, the NCAA is a victim of its own success in turning college athletics into a big business. Many people object to college athletics being viewed as a business, but given the NCAA’s tremendous success in marketing itself, its member schools, and their football and basketball teams, it is hard to argue that college athletics is not a business — in fact, a very big business. Antitrust law is specifically designed to ensure competition and therefore, plaintiffs bring cases, they say, to regulate big business, break up cartels, and ensure a competitive free market economy. Antitrust law, with its focus on economic theory, is not particularly well designed to protect amateurism, cherished traditions, or academic integrity. In this case, the NCAA was forced to defend its compensation ban in terms of procompetitive business justifications, but the real justification for the compensation ban is not rooted in economic theory but in a self-protective view of amateurism in college athletics. There may be very good policy reasons why college athletics should not be governed by the same competitive free market principles that govern other businesses but, absent some action by Congress, the NCAA, ironically, must play by the rules (of antitrust law). The limitations in Judge Wilkin’s injunction — allowing the NCAA to impose a $5,000 salary cap, deferred compensation, and equal pay to athletes — have been criticized as arbitrary. Indeed, these rules are the type of line-drawing and policy decisions that are usually made by legislators — not judges. Despite the NCAA’s loss, those limitations likely will mean that college athletics will not change very much as a result of the injunction issued in this case. The question remains, however, whether this case has opened the door to broader challenges and more pervasive changes to college athletics in the future.
David Hamilton is the managing partner of the Baltimore office of Womble Carlyle and practices in the antitrust and business litigation practice groups.
Jason Hicks is a business litigator and partner in the antitrust practice group at Womble Carlyle in Washington, D.C.
Amanda Norris Ames is a business litigator and associate in the antitrust practice group at Womble Carlyle in Washington, D.C.
[1] The Court’s finding that the NCAA’s practices amounted to a monopsony, or an agreement to fix prices among buyers rather than sellers, is significant, as the outcome of the case may have been predetermined on this finding.
[2] As an editorial matter, one could quarrel with the Court’s adoption of testimony and the position that the commitment required of scholarship athletes impeded academic achievement. Many students achieve academically while balancing school with other work and family obligations, some of which exceed the athlete’s commitment.
