Antitrust Law Daily NCAA limits on education-related benefits are unreasonable restraint on trade
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Tuesday, May 19, 2020

NCAA limits on education-related benefits are unreasonable restraint on trade

By Nicole D. Prysby, J.D.

NCAA limits on education-related benefits serve no procompetitive purpose and were properly enjoined; limits on non-education benefits serve the procompetitive end of distinguishing college from professional sports.

The National Collegiate Athletic Association (NCAA) limits on education-related benefits for student-athletes failed the rule of reason test and were properly enjoined by the federal district court in Oakland, the U.S. Court of Appeals in San Francisco has decided. Student-athletes sued the NCAA and 11 conferences, alleging that they engaged in a horizontal price-fixing scheme o limit the compensation paid to football and basketball players in exchange for their athletic services. The district court agreed, as to the limits on education-related benefits. The NCAA argued that a procompetitive justification exists for the challenged rules: the rules preserve "amateurism," which widens consumers choice by maintaining a distinction between college and professional sports. The Ninth Circuit affirmed the lower court’s decision, holding that it correctly concluded that caps on non-cash, education-related benefits have no demand-preserving effect and, therefore, lack a procompetitive justification. The Ninth Circuit also rejected the student-athletes’ argument that all NCAA compensation limits should be enjoined. Although all of the challenged rules have an anticompetitive effect, the NCAA demonstrated that rules preventing unlimited payments unrelated to education serve the procompetitive end of distinguishing college from professional sports (In re National Collegiate Athletic Association Athletic Grant-In-Aid Cap Antitrust Litigation, May 18, 2020, Thomas, S.).

Current and former student-athletes who played Division 1 football and basketball sued the NCAA and 11 conferences for violations of the Sherman Act. They alleged that the NCAA and the conferences engaged in a horizontal price-fixing scheme, enforced by their monopsony power, to limit the compensation the athletes would have received in the absence of the artificial limits. The district court found the NCAA and conferences guilty of an unreasonable restraint of trade in violation of Section 1 of the Sherman Act. The court concluded that NCAA limits on education-related benefits are unreasonable restraints of trade, and accordingly enjoined those limits; however, the court declined to hold that NCAA limits on compensation unrelated to education likewise violate Section 1. The court’s remedy largely left the current rules intact, with the only change being a removal of any cap on non-cash, education-related benefits. To keep its product distinct from professional sport, the NCAA may continue to (1) limit grant-in-aid scholarships to the cost of attendance, (2) limit cash and non-cash compensation and benefits unrelated to education, and (3) limit cash payments for benefits related to education. The NCAA appealed and the student-athletes cross-appealed the injunction.

District court properly applied rule of reason. After confirming that the district court correctly concluded that O’Bannon did not foreclose the litigation as a matter of stare decisis and res judicata, the Ninth Circuit found that the lower court properly granted judgment on the Sherman Act Section 1 claim. The NCAA argued that a procompetitive justification exists for the challenged rules: the rules preserve "amateurism," which widens consumers choice by maintaining a distinction between college and professional sports. The court rejected this argument, as only some of the challenged rules serve that procompetitive purpose (such as the cap on athletic scholarships). The caps on non-cash, education-related benefits have no demand-preserving effect and, therefore, lack a procompetitive justification.

The evidence demonstrated that the NCAA loosened its restrictions on above-cost of attendance, education-related benefits since O’Bannon without adversely affecting consumer demand and that the NCAA set limits on education-related benefits without consulting any demand studies. The NCAA’s survey evidence showed, at most, a consumer preference for "amateurism," but did not capture the effects (if any) that the tested compensation scenarios would have on consumer behavior. In addition, the survey’s use of the phrase "amateurs and/or not paid" made its responses hopelessly ambiguous. Thus, the district court fairly found that NCAA compensation limits preserve demand to the extent they prevent unlimited cash payments akin to professional salaries, but not insofar as they restrict certain education-related benefits. And the district court reasonably concluded that uncapping certain education-related benefits would preserve consumer demand for college athletics just as well as the challenged rules do. Such benefits were easily distinguishable from professional salaries, as they are connected to education, their value is inherently limited to their actual costs, and they can be provided in kind, not in cash.

The court rejected the NCAA’s argument that the district court’s injunction would allow payments that are virtually indistinguishable from a professional’s salary. The district court envisioned "non-cash education-related benefits" for "legitimate education-related costs," not, for example, luxury cars or expensive musical instruments for students who are not studying music. The district court also did not err in finding that its alternative would not result in significantly increased costs.

Record supported injunction. The student-athletes argued that the district court should have enjoined all NCAA compensation limits, including those on payments untethered to education. But the Ninth Circuit held that the lower court determined that NCAA limits on education-related compensation were the only challenged rules that failed the rule of reason test, and crafted an injunction in light of that finding. Although all of the challenged rules have an anticompetitive effect, the NCAA demonstrated that rules preventing unlimited payments unrelated to education serve the procompetitive end of distinguishing college from professional sports.

Concurrence. Judge Smith concurred in the opinion, but expressed concern that the state of antitrust law reflects an unwitting expansion of the rule of reason inquiry in a way that deprives the student-athletes of the fundamental protections that antitrust laws were meant to provide. In this case, the district court accepted the relevant market as that for student-athletes’ labor in the form of athletic services. But at step two, the court did not limit its consideration to the procompetitive effects of the compensation limits in the market for student-athletes’ athletic services. The court found that limiting student-athletes’ pay in the market for their services was justified because that restraint drove demand for the distinct product of college sports in the consumer market for sports entertainment. If the purpose of the rule of reason is to determine whether a restraint is net procompetitive or net anticompetitive, accepting procompetitive effects in a collateral market disrupts that balancing.

This case is No. 19-15566.

Attorneys: Steve Berman (Hagens Berman Sobol Shapiro LLP) for Shawne Alston. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for National Collegiate Athletic Association, the NCAA and the Big Ten Conference, Inc.

Companies: National Collegiate Athletic Association, the NCAA; the Big Ten Conference, Inc.

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