NCAA Found To Violate Antitrust Laws In Preventing Schools From Sharing Licensing Revenue With Student Athletes

Legal Issues

from the antitrust dept

It’s long been recognized that the NCAA sports setup is a bit of a scam, in which “student” athletes make various colleges a ridiculous amount of money — none of which actually makes it to the athletes themselves. In many cases, these are barely actually “students” at all. And while some of the athletes may later cash in by going pro, many do not. A few years ago, we wrote about a class action lawsuit brought by basketball player Ed O’Bannon over the fact that his likeness was appearing in an EA video game, and that the NCAA had basically violated antitrust laws in effectively forcing him (and all NCAA athletes) to sign away all such rights for no compensation. The case has gone back and forth over the years, but on Friday Judge Claudia Wilken sided strongly with the players, finding the NCAA had clearly violated antitrust laws.

The NCAA was done in by a variety of factors, but it appears that its own economic expert did not help matters. While he argued that the NCAA’s activities were “legal” he also more or less helped make the case that they were violating antitrust laws:

Dr. Noll?s opinions are consistent with the opinions of the NCAA?s own economic expert, Dr. Daniel Rubinfeld, who testified that the NCAA operates as a ?joint venture which imposes restraints? on trade…. Dr. Rubinfeld specifically acknowledged that ?the NCAA does impose a restraint, the restraint we have been discussing in this case.? Id. 2921:8-:9. Although he opined that this restraint was lawful because it serves procompetitive purposes, he never denied that the NCAA restricts competition among its members for recruits. In fact, his own economics textbook specifically refers to the NCAA as a ?cartel,? which he defined during his testimony as ?a group of firms that impose a restraint.? … Although the NCAA?s other economic expert, Dr. Lauren Stiroh, testified that the NCAA does not restrain competition in any market, her opinions were based on the theory that anticompetitive effects cannot arise unless consumers in a ?downstream market? are harmed…. In this case, those consumers would be people who watch or attend college football and basketball games or purchase goods using the names, images, and likenesses of student-athletes. The Court rejects Dr. Stiroh?s theory that Plaintiffs cannot show any anticompetitive effects caused by the alleged restraint without demonstrating some harm to these consumers. The evidence cited above demonstrates that student-athletes themselves are harmed by the price-fixing agreement among FBS football and Division I basketball schools. In the complex exchange represented by a recruit?s decision to attend and play for a particular school, the school provides tuition, room and board, fees, and book expenses, often at little or no cost to the school. The recruit provides his athletic performance and the use of his name, image, and likeness. However, the schools agree to value the latter at zero by agreeing not to compete with each other to credit any other value to the recruit in the exchange. This is an anticompetitive effect. Thus, the Court finds that the NCAA has the power — and exercises that power — to fix prices and restrain competition in the college education market that Plaintiffs have identified.

The court goes further, in noting that the NCAA’s restrictions on student athlete compensation aren’t justified, going through the long history of how the NCAA’s views have changed over time:

The Court finds that the NCAA’s current restrictions on student-athlete compensation, which cap athletics-based financial aid below the cost of attendance, are not justified by the definition of amateurism set forth in its current bylaws.

The court also completely rejects the claims by the NCAA that it’s popularity is based on the fact that athletes aren’t compensated.

Other historical evidence suggests that the NCAA?s restrictions on student-athlete compensation have not contributed significantly to the popularity of FBS football and Division I basketball. The NCAA?s former president, the late Walter Byers, testified during his 2007 deposition, for instance, that the NCAA?s decision to remove incidental expenses from the grant-in-aid coverage in 1975 was not motivated by a desire to increase consumer demand for its product…. In fact, he specifically noted that NCAA sports experienced a tremendous growth in popularity during the period between 1956 and 1975 when grants-in-aid still covered the full cost of attendance.

In the end, it becomes clear that the NCAA is acting in a manner that pretty clearly violates antitrust law:

Because FBS football and Division I basketball schools are the only suppliers in the relevant market, they have the power, when acting in concert through the NCAA and its conferences, to fix the price of their product. They have chosen to exercise this power by forming an agreement to charge every recruit the same price for the bundle of educational and athletic opportunities that they offer: to wit, the recruit?s athletic services along with the use of his name, image, and likeness while he is in school. If any school seeks to lower this fixed price — by offering any recruit a cash rebate, deferred payment, or other form of direct compensation — that school may be subject to sanctions by the NCAA.

This price-fixing agreement constitutes a restraint of trade. The evidence presented at trial makes clear that, in the absence of this agreement, certain schools would compete for recruits by offering them a lower price for the opportunity to play FBS football or Division I basketball while they attend college. Indeed, the NCAA?s own expert, Dr. Rubinfeld, acknowledged that the NCAA operates as a cartel that imposes a restraint on trade in this market.

The court rejects the idea that free tuition is a reasonable exchange, noting that the licensing rights the student athletes give up is clearly worth much, much more.

While the court does find antitrust problems, it’s interesting to note that it does not find harm done to the video game licensing market. After saying that such a market would likely exist without the NCAA’s rules, that doesn’t mean there’s anti-competitive harm:

Nevertheless, Plaintiffs have not identified any injury to competition within this submarket. Just as in the live telecasting submarket, the ultimate buyers in this submarket — videogame developers — would need to acquire group licenses from a specific set of teams in order to create their product. This set might include all of the teams within Division I, all of the teams within the major conferences, or some other set of teams that the videogame developer believed would be necessary to produce a marketable product. Regardless of which teams were included within that set, those teams would not compete against each other as sellers of group licenses, even in the absence of the challenged rules, because they would all share an interest in ensuring that the videogame developer acquired each of the group licenses required to create its product. These teams would also not compete against any teams outside of the set because the videogame developer determined that those other teams? group licenses were not required to produce the videogame. Indeed, competition between teams (or conferences) is even less likely in the videogame submarket than the live telecasting submarket because videogame developers — unlike television networks — are not constrained by the number of group licenses that they could use to produce their product. The evidence presented at trial demonstrates that videogame companies could, and often did, feature nearly every FBS football and Division I basketball team in their videogames. Under these circumstances, competition among individual teams and conferences to sell group licenses is extremely unlikely. And, to the extent that it happens (or would happen), it is not restrained by the challenged NCAA restrictions on student-athlete compensation. Thus, just as with the live telecasting submarket, the challenged rules do not suppress competition in this submarket.

Either way, the NCAA is going to appeal this decision — but if it stands, it will likely have a pretty big impact on the nature of college sports going forward, changing the ways in which student athletes are compensated in general. The NCAA is ordered to allow colleges to offer to share licensing revenue with students (and refuses to have the ruling stayed, though it doesn’t go into effect just yet anyway — and it’s possible that the appeals court would grant a stay also).

Filed Under: antitrust, college sports, ed o'bannon, licensing
Companies: ncaa