NCAA Agrees to Pay $228 Million to Settle Class Action Antitrust Lawsuit Filed by Former Student-Athletes
By Robert L. Clayton and Alyson J. Guyan*
In February 2006, former football players from Stanford and UCLA and former basketball players from the University San Francisco and Texas-El Paso filed a class action lawsuit against the NCAA alleging that the restriction in scholarship money to the cost of tuition, books, housing and meals was an unlawful restraint of trade, in violation of antitrust laws. The class action case was scheduled to go to trial in January 2008 in federal court in California. On January 28, 2008, the NCAA agreed to pay up to $228 million to settle the case. This settlement agreement is subject to approval by the court.
The settlement agreement could have negative financial implications on colleges and universities. Under the terms of the settlement, money previously designated to assist universities to hire tutors, build academic facilities for student-athletes and assist needy students will go directly to individual student-athletes to compensate them for out-of-pocket expenses. As a result, athletic departments could be confronted with new costs. Departments will have to find additional funds to cover year-round comprehensive health insurance for their student-athletes and money to extend scholarships beyond five years and guarantee multiyear scholarships, should such legislation pass. Additionally, while the assistance money is available to Division I schools through the 2012-2013 academic year from the $6 billion television contract with CBS for the NCAA tournament, this cost might be transferred to universities in 2013.
Factual Background
The Plaintiffs filed a class action complaint on February 17, 2006, on behalf of a class comprised of all student-athletes who received athletic grant-in-aids participating in major Division I football and men’s basketball programs between February 17, 2002 and the date of judgment in the case. The Plaintiffs alleged that the class has been, are or will be damaged by the alleged “GIA gap” on athletic-based financial aid to student-athletes. After the court granted the NCAA’s Motion to Dismiss, in part, with leave to amend, the Plaintiffs filed their First Amended Complaint on June 30, 2006. After the court issued an Order denying the NCAA’s Motion to Dismiss, the Plaintiffs filed a Second Amended Complaint on behalf of all individuals who received an athletic grant-in-aid from
any of the (1) football programs sponsored by colleges and universities included in NCAA Division I-A (“Major College Football”) or (2) men’s basketball programs sponsored by colleges or universities in the ACC, Big East, Big 10, Big 12, Pac-10, SEC, Mountain West, WAC, Atlantic 10, Conference USA, Mid-American, Sun Belt, West Coast, Horizon League, Colonial Athletic Association, or Missouri Valley conferences (“Major College Basketball”), at any time between February 17, 2002 and the date of judgment in this matter. 1
The Second Amended Complaint alleged that by adopting and enforcing an agreement among the NCAA and its member institutions which imposes an artificial cap on the amount of financial aid any student-athlete may receive as an athletic scholarship, the NCAA deprives student-athletes of millions of dollars in additional financial aid each year. On October 19, 2006, the court certified the Class.
The Plaintiffs claim that the NCAA and its member institutions in the relevant markets of the colleges and universities that compete in Major College Football and Major College Basketball have restrained competition in violation of Section 1 of the Sherman Act, 15 U.S.C. §1, by engaging in a contract, combination and conspiracy to fix the amount of financial assistance available to student-athletes. The Plaintiffs allege that the combination and conspiracy organized through the NCAA has produced, and will continue to produce, anti-competitive effects. These anti-competitive effects include: (1) unreasonably restricting and artificially eliminating competition in the amount, terms and conditions of financial assistance to student-athletes; and (2) depriving student-athletes of the benefits of competition as to the amount, terms and conditions of financial assistance from NCAA member institutions.
The Settlement
On January 28, 2008, the NCAA and the Plaintiffs have executed a Stipulation and Agreement of Settlement. While the NCAA continues to deny that it has committed, or threatened or attempted to commit, any wrongful act or violation of law or duty, it entered into the Settlement to avoid the substantial, expense, inconvenience and distraction of continued litigation. In settlement of the claims against it, the NCAA agreed to provide the following consideration:
(1) For the academic years 2007-08 through 2012-13, the NCAA will make available a total of $218 million to NCAA Division I member institutions to use for the benefit of their student-athletes for purposes allowed under the guidelines for the Student-Athlete Opportunity Fund.
(2) The NCAA will make available, over a three year period, a total of $10 million to be distributed to qualifying former student-athletes (who are members of the class) to reimburse them for bona fide educational expenses required for course of instruction, subject to the following limits: (a) a single one-time payment from the NCAA of up to $500 to cover career development expenses 2; and (b) up to $2,500 per year for a maximum of three years to reimburse bona fide educational expenses 3.
(3) NCAA Division I member schools can provide basic accident insurance coverage for injuries sustained by student-athletes while participating in college athletics.
(4) The NCAA Division I Board of Directors has approved adoption of a rule permitting Division I member schools to provide year round, comprehensive health insurance to student-athletes.
(5) Examination by the NCAA membership to allow its institutions to provide multiyear scholarships to student-athletes who no longer qualify for athletic aid.
(6) Examination by the NCAA membership the question of allowing member schools to provide multi-year scholarships to student-athletes.
The settlement agreement is subject to approval by a U.S. District Court in Los Angeles. The hearing to provide final approval is scheduled for June 23, 2008.
Settlement Implications
Over the years, the NCAA has defended its members’ right to enact its own rules, but has been vulnerable to federal antitrust challenges. In Law v. NCAA, the plaintiff class of college coaches sued the NCAA under federal antitrust laws based on a conspiracy to restrain coaches’ salaries by adopting a rule that limited the number of coaches in Division I sports and required the designation of certain coaches as “restricted earnings coaches” with a salary cap. 4 The Plaintiffs obtained an injunction and a jury award of over $22 million, which was automatically trebled to $67 million under the antitrust laws. The Tenth Circuit Court of Appeals, by affirming the District Court’s injunction and determination of liability, found that the NCAA had failed to prove that the salary restrictions enhanced competition, leveled an uneven playing field or reduced coaching inequities. Additionally, the NCAA could not prove that these goals could not be pursued by less anticompetitive means. The NCAA paid over $54 million in 1999 to settle this lawsuit.
In prior cases, the NCAA has argued that it needs the scholarship restriction to sustain the amateur nature of college sports. The courts have found this argument persuasive when defending against rules that might otherwise be seen as limiting competition or individual rights. Courts have used the rule of reason to find that some horizontal restraints serve the procompetitive purpose of making college sports available. 5 However, as big-time college athletics has become an enormous commercial enterprise that generates billions of dollars in revenue every year, many believe that student-athletes should gain a share of the revenues. This latest attempt, relying on federal antitrust law, will certainly pave the way for future antitrust court challenges.
*Robert L. Clayton, Shareholder, Littler Mendelson, Washington, DC (rclayton@littler.com)
Alyson J. Guyan, Associate, Littler Mendelson, Washington, DC (aguyan@littler.com)
1. Second Amended Complaint for Violation of Section 1 of the Sherman Act, 15 U.S.C. §1 at 8, White v. NCAA (CD Cal. 2006) (Case No. CV 06-0999 RGK (MANx).
2. These expenses include resume preparation, career counseling, or job placement services.
3. These expenses must be incurred in connection with a program at an accredited institution leading to a two or four year undergraduate degree or an accredited professional, graduate, or post-graduate degree or professional certificate.
4. 134 F.3d 1010 (10th Cir. 1998).
5. Id. at 1018 (citing Hairston v. Pacific 10 Conference, 101 F. 3d 1315, 1318-19 (9th Cir. 1996) (finding that imposing sanctions for violations of NCAA rules did not violate section 1 of the Sherman Act); Banks v. NCAA, 977 F. 2d 1081, 1088-94 (7th Cir. 1992) (upholding the no-draft and no-agent eligibility rules for student-athletes); Justice v. NCAA, 577 F. Supp. 356, 379-82 (D. Ariz. 1983) (finding no violation of antitrust laws for sanctioning member institutions for violations of NCAA rule barring compensation of student-athletes)).
