Ninth Circuit Disallows Additional Compensation for College Athletes

by Patterson Belknap Webb & Tyler LLP

Yesterday, the Ninth Circuit ruled in the long awaited O’Bannon v. NCAA case, which challenged NCAA rules that bar student-athletes from “being paid for the use of their names, images, and likenesses” (NILs) – part of the so-called “amateurism rules.”  The Court upheld the district court’s decision finding the NCAA amateurism rules to be an unlawful restraint of trade in violation of the Sherman Act and upheld part of the district court’s remedy which permanently enjoined the NCAA from prohibiting its member schools from giving student-athletes scholarships up to the full cost of attendance at their respective schools.  The Ninth Circuit struck down, however, the district court’s second remedy which would have permanently enjoined the NCAA from prohibiting its member schools from giving student-athletes up to $5,000 per year in deferred compensation.

In so holding, the Ninth Circuit first found that it was not precluded from reaching the merits of plaintiffs’ Sherman Act claim because, contrary to the NCAA’s argument, the Supreme Court did not hold in NCAA v. Board of Regents of the University of Oklahoma that the NCAA’s amateurism rules are valid as a matter of law.  The panel further held that even though many of the NCAA’s rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the rule of reason.  In its rule of reason analysis, the Ninth Circuit rejected the NCAA’s primary argument that the “amateurism rules” do not reduce output and thus are not anticompetitive.  The Ninth Circuit was unpersuaded, primarily because it found that a reduction in output is not the only measure of anticompetitive effects.  Rather, the panel found that the NCAA’s rules had significant anticompetitive effects within the college education market in that the NCAA fixed the prices with respect to “one component of the exchange between school and recruit, thereby precluding competition among schools with respect to that component.”

Next, the Court reviewed the four procompetitive justifications offered by the NCAA in defense of the challenged rules: “(1) promoting amateurism, (2) promoting competitive balance among NCAA schools, (3) integrating student-athletes with their schools’ academic community, and (4) increasing output in the college education market.”  Like the district court, the Ninth Circuit concluded that only the first and third had any weight.

Finally, the Court turned to the third step in the rule of reason analysis: “whether there are substantially less restrictive alternatives to the NCAA’s current rules.”  The focus of this part of the decision (and the dissent) rested on the first procompetitive justification, that of “promoting amateurism,” and whether the two injunctions the district court granted qualified as “less restrictive alternatives.”  First, however, the Court had to define the parameters of the procompetitive benefit.  The majority concluded – as did the court below – that the NCAA’s compensation rules are procompetitive because they “preserv[e] the popularity of the NCAA’s product by promoting its current understanding of amateurism.”  The gravamen of the dispute between the majority and dissenting opinions, however, was whether the procompetitive benefit to be preserved is the NCAA’s understanding of amateurism or the popularity of the NCAA’s product—college sports.  The majority believed that the benefit to be preserved was the former and thus concluded that, although the district court’s injunction with respect to scholarships could be upheld as a “less restrictive means” of preserving amateurism, one could not “plausibly conclude that being a poorly-paid professional collegiate athlete is ‘virtually as effective’ for that market as being as [sic] amateur.”  Thus, the majority struck down part of the district court’s remedy which granted student-athletes $5,000 per year in deferred compensation.

The dissent, however, would have upheld both parts of the district court’s remedy.  Chief Judge Thomas argued that the Court should have made a different inquiry: “whether allowing student-athletes to be compensated for their NILs is ‘virtually as effective’ in preserving popular demand for college sports as not allowing compensation.”  The NCAA’s amateurism rules, the dissent reasoned, are only the means used to achieve the procompetitive benefits: namely, the popularity of college sports.  Because several experts testified in the court below that small compensation amounts – up to $5,000 – would have little to no effect on the popularity of college sports, Chief Judge Thomas concluded that the district court did not clearly err and thus the decision below should have been affirmed in full.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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