Ninth Circuit Holds That NCAA’s Amateurism Rules Violate Section 1 of the Sherman Act

by Sheppard Mullin Richter & Hampton LLP

In a decision handed down on September 30th, the Ninth Circuit affirmed in part and reversed in part the District Court’s ruling that the NCAA’s “amateurism” rules unlawfully restrained trade in the market for certain educational and athletic opportunities offered by the NCAA member schools in violation of Section 1 of the Sherman Act. O’Bannon v. NCAA, Case No. 14-16601, 2015 WL 5712106 (9th Cir. Sep. 30 2015).  While affirming most of the District Court’s rulings, the Appeals Court reversed the portion of the District Court’s ruling that enjoined the NCAA from prohibiting its member schools from offering deferred cash payments to student-athletes.

The NCAA Amateurism Rules Prohibiting NIL Compensation to Student-Athletes

For decades, the NCAA amateurism rules prohibited student-athletes from being paid for the use of their names, images and likenesses (“NILs”) either directly through actual licensing compensation, or indirectly through scholarships that covered certain costs of attending an institution, although the specific restrictions had changed over the years. Initially, the NCAA prohibited schools from giving student-athletes any financial aid based on their athletic ability. Id. at *2.  Later, it permitted schools to provide scholarship based on athletic ability up to the amount of a full “grant-in aid” which included the cost of tuition and fees, room and board, and required course-related books. Id.   This amount often fell short of the “full cost of attendance” by a few thousand dollars. Id. at *2-3 & n.3.  In 2014, while the case was still pending, the NCAA announced that it would allow scholarships up to the full cost of attendance. Id. at *3.

The District Court’s Opinion

The lawsuits below were filed after some students discovered that their NILs were being used in content, such as video games, without the students’ permission.[1]  A class was certified and the cases proceeded to a bench trial.  The District Court found that there is a specific “college education market” in which FBS football and Division I basketball schools compete to recruit the best high school players by offering them “unique bundles of goods and services” including scholarships, coaching, athletic facilities, and unique competitive opportunities. Id. at *4.  The court found that hardly any athlete sufficiently talented to play FBS football or Division I basketball chooses not to attend a school that offers such collegiate opportunity, or to compete in minor or foreign professional sports leagues. Id. The athletes also cannot join either the NFL or the NBA directly from high school. Id. Accordingly, the court found a relevant market specifically for FBS football and Division I basketball scholarships due to the absence of viable substitutes for the unique bundles of goods and services offered by FBS football and Division I basketball schools.

The court also defined the following three “group licensing” submarkets for the use of FBS football and Division I basketball student athletes’ NILs: (1) live game telecasts, (2) sports video games, and (3) game rebroadcasts, advertisements, and other archival footage. Id. at *5.  The court found that, but for the NCAA’s amateurism rules, student athletes would be able to sell group licenses for the use of their NILs. Id. at *3, *5.

Although the court found no anticompetitive restraint in the group licensing submarkets, it found that the challenged rules amounted to an anticompetitive agreement among the schools to “fix an aspect of the ‘price’ that recruits pay to attend college (or alternatively, an aspect of the price that schools pay to secure recruits’ services).” Id. at *18.  In other words, the “recruits pay for the bundles of services provided by colleges with their labor and their NILs, but the ‘sellers’ of these bundles—the  colleges—collectively ‘agree to value [NILs] at zero.’” Id. at *5 (citation omitted).  Thus, the court reasoned, the rules restrained competition among member schools in offering recruits compensation for their NILs in the form of “scholarships and various amenities, such as coaching and facilities” for their athletic services and thereby had a significant anticompetitive effect on the college education market.

Having found significant anticompetitive effects in a relevant market, the District Court analyzed the NCAA’s proffered procompetitive justifications, and in part accepted two – that the amateurism rules (1) help preserve consumer demand for college sports, and (2) integrate academics and athletics by removing a “social ‘wedge’ between student-athletes and the rest of the student body.” Id. at *6-*8.  However, the court found less restrictive means served those procompetitive goals, and thus permanently enjoined the NCAA from prohibiting its member schools from giving student athletes scholarships up to the full cost of attendance, and “up to $5,000 per year in deferred compensation” to be distributed after the student-athletes leave school. Id. at *9.

Preliminary Challenges to the Sherman Act’s Application

On appeal, the Ninth Circuit initially dispensed with several arguments that it was precluded from reaching the merits of the Sherman Act claims altogether. First, it held that in NCAA v. Bd. of Regents of Univ. of Oklahoma, 468 U.S. 85 (1984), the Supreme Court did not validate the NCAA’s amateurism rules “as a matter of law” so as to make them immune from antitrust scrutiny, finding much of the Court’s discussion of those rules to be dicta and at most supporting the notion that the rules served a procompetitive goal. Id. *9-*13 (“The amateurism rules’ validity must be proved, not presumed.”).  Next, the court rebuffed arguments that, because they were merely “eligibility rules,” amateurism rules did not involve “commercial activity” subject to the Sherman Act. Id. at *13-*15.  Noting that the current legal definition of “commerce” includes “almost every activity from which the actor anticipates economic gain,” the court concluded this definition “surely encompasses the transaction in which an athletic recruit exchanges his labor and NIL rights for a scholarship at a Division I school because it is undeniable that both parties to that exchange anticipate economic gain from it.” Id. at *13 (internal quotation marks and citation omitted).  Finally, the court concluded that the student athletes had proven sufficient injury-in-fact. Id. at *15-*18.

The Appeals Court’s Sherman Act Merits Analysis

As with the District Court, the Ninth Circuit analyzed the NCAA’s rules under the Rule of Reason. In the first step, the court found “substantial support in the record” that the challenged rules produced significant anticompetitive effects in the college education market even, in the absence of any output reduction. Id. at *18 (it is sufficient to show “the student athletes themselves are harmed by the price-fixing agreement among [the] schools” to value the athletes’ NILs at zero).  The court found the amount of the harm suffered by the student-athletes irrelevant to this inquiry. Id. at *19 (noting that Supreme Court has rejected this “too small to matter” argument).  In the second step, the Ninth Circuit accepted (as had the District Court) that the NCAA’s commitment to amateurism produced concrete procompetitive benefits by increasing the consumer appeal of collegiate sports. Id. at *20-*22.  In the third and final step, the court addressed whether plaintiffs produced sufficient evidence that this procompetitive goal could be achieved by less restrictive alternatives.  Here, the court cautioned, that “to be viable under the Rule of Reason, an alternative must be ‘virtually as effective’ in serving the procompetitive purposes of the NCAA’s current rules, and ‘without significantly increased cost.’” Id. at *22 (citation omitted).  The court also warned that plaintiffs bear a strong evidentiary burden at this stage, particularly in light of the Supreme Court’s admonition to “afford the NCAA ‘ample latitude’ to superintend college athletics. Id. (citing Bd. of Regents, 468 U.S. at 120).

The court concluded that capping the permissible amount of scholarships below the full cost of attendance had no relation to the procompetitive justification of advancing amateurism. By NCAA’s own standards, “student-athletes remain amateurs as long as any money paid to them goes to cover legitimate educational expenses.” Id. at *23.  The Ninth Circuit thus upheld the District Court’s injunction insofar as it related to permitting schools to set the compensation cap at the full cost of attendance, finding this to be “a substantially less restrictive alternative means of accomplishing the NCAA’s legitimate procompetitive purposes.” Id. at *24.  Not so with the second alternative the District Court identified, which would result in NIL cash payments to students “untethered to their education expenses.” Id. According to the Ninth Circuit, “Aside from the self-evident fact that paying students for their NIL rights will vitiate their amateur status as collegiate athletes, the [district] court relied on threadbare evidence in finding that small payments of cash compensation will preserve amateurism as well as the NCAA’s rule forbidding such payments.” Id. Accordingly, the Ninth Circuit reversed this aspect of the District Court’s order.

[1] It appears that content providers entered into license agreements with, and made payments to, the NCAA and members schools for using their intellectual property, including their marks, in content. O’Bannon v. NCAA, 7 F.Supp.3d 955, 965 (N.D. Cal. 2014)

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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