On Judicial Review Rebound, Court Finds NCAA Compensation Rules Challenge May Proceed

by Patterson Belknap Webb & Tyler LLP

In late March, a district court in the Northern District of California partially granted and partially denied dueling summary judgment motions in an MDL class action—In re NCAA Athletic Grant-In-Aid Cap Antitrust Litigationchallenging the National Collegiate Basketball Association’s student athlete compensation-cap rules as a violation of Section One of the Sherman Antitrust Act.  Defendants—the NCAA and eleven member athletic conferences—previously reached a $208 million settlement with the consolidated plaintiffs, which the court approved in December 2017.  Claims for injunctive relief remain pending, however—and, as a result of the District Court’s ruling, will proceed to a bench trial currently scheduled for December 2018.  (Defendants have asked to postpone the trial until mid-2019; the court will hear argument on that motion later this month.) 

The Court’s Previous Decision in O’Bannon v. NCAA

In 2009, a class of plaintiffs challenged the NCAA’s then-existing rules barring men’s football and basketball players from receiving compensation for the sale of licenses to use their names, images, or likenesses in video games or other media.  The plaintiffs’ claims in that case, O’Bannon v. NCAA, also encompassed ancillary rules capping the maximum amount of financial aid—the so-called “grant-in-aid”—at the value of core expenses such as tuition and fees and housing, and not the full “cost of attendance,” which incorporates additional expenses such as school supplies and transportation.  Reviewing the challenged rules under the rule of reason, the court held that the NCAA rules fixed likeness-license prices, but that there were limited procompetitive benefits to the challenged rules—namely driving consumer demand for college athletics products and potentially “facilitat[ing] the integration of academics and athletics” by “preventing student-athletes from being cut off from the broader campus community.”  Nonetheless, the court found that there were less restrictive alternatives to promote defendants’ asserted procompetitive benefits.  The court approved two of plaintiffs’ proposals—raising the grant-in-aid limit to allow stipends from licensing revenue, and allowing schools to deposit shares of licensing revenue in a trust fund for student-athletes—and entered an injunction against enforcement of any rules prohibiting schools from adopting them.  Importantly, however, the court allowed the NCAA to implement rules imposing compensation caps at the “cost of attendance.”  On appeal, the Ninth Circuit vacated the judgment as to the trust funds, but affirmed as to raising the compensation cap, which it agreed was “a substantially less restrictive alternative.”

The Current Decision

Plaintiffs (men’s football, men’s basketball, and women’s basketball student-athletes) filed the cases at issue in the current decision in 2014 and 2015, challenging NCAA rules imposing payment and benefit caps at the cost of attendance.  Defendants have attempted to use O’Bannon as a shield from the claims, arguing that the suit is barred wholesale by res judicata or collateral estoppel and that, in any event, stare decisis binds the court to conclude that the cost-of-attendance caps survive scrutiny under the rule of reason.  The court disagreed.

Preclusion:  Rejecting Defendants’ preclusion arguments, the court first noted that both res judicata and collateral estoppel require either identity or privity between parties to the past and present actions; student-athletes recruited after O’Bannon and female student-athletes, however, were not party to that earlier suit.  While “in certain limited circumstances” the privity requirement may be waived when a nonparty was “adequately represented by someone with the same interests” who was party to a prior suit, the court explained, the measure of adequate representation is coextensive with the adequacy of class representation, and therefore only extends as far as “the definition of the O’Bannon class.” 

More broadly, the court invoked “the general rule . . . that ‘the continuation of conduct under attack in a prior antitrust action’ gives rise to a new action,” which requires a court to “consider ‘the conduct of parties since the first action’ and other factual matters in the new cause of action.”  The court concluded that Plaintiffs’ “new antitrust challenges to conduct, in a different time period, relating to [different] rules” were not precluded by O’Bannon.

Stare Decisis:  Defendants also challenged the claims as defeated by stare decisis, arguing that O’Bannon ratified their procompetitive justifications and foreclosed Plaintiffs’ less restrictive alternatives.  The court was skeptical, as a general matter, because “[i]n the area of antitrust law . . . another interest competes with the doctrine of stare decisis”—namely “an interest ‘in recognizing and adapting to changed circumstances and the lessons of accumulated experience.’”  The rule of reason, which “evolves with new circumstances and new wisdom,” demands thoughtful, “case-by-case” evaluation of each alleged anticompetitive restraint. 

Applying that principle here, the court rejected the argument that O’Bannon “established as a matter of law” the procompetitive benefits recognized in that case because, while “the restraints challenged . . . overlap[ped] with those in O’Bannon, the specific rules at issue are not the same.”  Further, it dismissed the “contention that merely because the then-existing NCAA Bylaws were part of the record in O’Bannon, the court necessarily adjudicated in Defendants’ favor all possible challenges to any of those rules” because “the validity of the specific rules ‘must be proved, not presumed.’”

Defendants also argued that O’Bannon foreclosed two of the less restrictive alternatives Plaintiffs propose in this case: permitting athletic conferences (rather than the NCAA) to set compensation rules, and enjoining any rules that prohibit or limit payments or benefits.  As to the former, Defendants argued that the proposal was considered and rejected in O’Bannon.  The court found that alternative was discussed only briefly in expert testimony and closing argument, and explained that a “hypothetical that is not determined” in a case cannot be “binding under the doctrine of stare decisis.”  As to the latter, Defendants contended that an injunction erasing all limits on payments “cannot be squared with O’Bannon’s holding that limiting payments to [athletes’] legitimate costs to attend school is consistent with antitrust law.”  In other words, Defendants argued that because the Ninth Circuit held that the rule of reason required “the NCAA [to] permit its schools to provide up to the cost of attendance” and “does not require more” (emphasis added), then “stare decisis limits the less restrictive alternatives that the Court may consider to the relief that was provided” in that case.  The court disagreed, effectively cabining the Ninth Circuit’s conclusion to the facts of O’Bannon: “A ruling on less restrictive alternatives to certain NCAA rules in one case does not bar consideration of different less restrictive alternatives to a different, if overlapping set of rules challenged in a different case.” 

We’ll continue to monitor this case as it moves towards trial.

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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