A federal appeals court has ruled that colleges are violating antitrust laws by profiting from student-athletes’ names and likenesses while these same students are forbidden from receiving any money. However, the same appeals panel struck down the lower court’s plan that would have allowed NCAA member schools to pay certain athletes up to $5,000 a year in deferred compensation.
Last year, in a 2009 lawsuit filed by former UCLA basketball player Ed O’Bannon, a U.S. District Court determined that the NCAA’s prohibition against student-athletes being paid for anything related to their sport is an unlawful restraint of trade in violation of Section 1 of the Sherman Antitrust Act.
At the time, the judge said the NCAA could not stop schools from compensating students who played FBS football and Division I men’s basketball for the use of their likenesses through scholarships that cover the full cost of attending that college and through deferred payments of up to $5,000 per year that would be held in trust for student-athletes for after they leave college.
The NCAA appealed this ruling and this morning won a partial victory from the 9th Circuit, which agreed with the lower court that the NCAA’s rules forbidding compensation “have an anticompetitive effect on the college education market. Were it not for those rules… schools would compete with each other by offering recruits compensation exceeding the cost of attendance, which would ‘effectively lower the price that the recruits must pay for the combination of educational and athletic opportunities that the schools provide.'”
According to the court, student-athletes pay for college and its associated services through their labor and by allowing the schools to use their names, images, and likeness. However, by barring students from earning anything from these same very personal assets, the colleges have collectively agreed to put a price of “zero” on them.
Viewed through this lens, writes the court, “colleges and universities behave as a cartel — a group of sellers who have colluded to fix the price of their product.”
In appealing its case, the NCAA argued that the 1984 U.S. Supreme Court ruling in NCAA v Board of Regents declared the organization’s amateurism rules “valid as a matter of law.”
But the appeals panel says the the Supreme Court ruling in the Board of Regents case, which involved television rights for NCAA made no such determination.
“The Board of Regents Court certainly discussed the NCAA’s amateurism rules at great length, but it did not do so in order to pass upon the rules’ merits, given that they were not before the Court,” reads today’s opinion.
The Supreme Court’s intention in even bringing up the amateurism rules, notes the appeals court, was to show ‘why NCAA rules should be analyzed under the Rule of Reason, rather than held to be illegal per se.”
In other words, SCOTUS “did not approve the NCAA’s amateurism rules as categorically consistent with the Sherman Act. Rather, it held that, because many NCAA rules (among them, the amateurism rules) are part of the ‘character and quality of the [NCAA’s] ‘product,’’ no NCAA rule should be invalidated without a Rule of Reason analysis.”
The NCAA’s second bone of contention in its appeal was that the Sherman Act doesn’t apply to the NCAA rules because the rules don’t regulate commercial activity.
Again, the appeals panel disagreed, saying that “This argument is not credible” and point out that the modern legal understanding of “commerce” is broad, “including almost every activity from which the actor anticipates economic gain.”
“That definition surely encompasses the transaction in which an athletic recruit exchanges his labor and [naming, image, likeness] rights for a scholarship at a Division I school because it is undeniable that both parties to that exchange anticipate economic gain from it,” concludes the opinion.
The NCAA had tried to characterize the amateurism requirement as mere “eligibility rules” that don’t restrain any sort of commerce, but just because they are presented as eligibility guidelines doesn’t mean the rules aren’t subject to antitrust consideration, says the court.
“True enough, the compensation rules are written in the form of eligibility rules,” acknowledges the opinion. “The mere fact that a rule can be characterized as an ‘eligibility rule,’ however, does not mean the rule is not a restraint of trade; were the law otherwise, the NCAA could insulate its member schools’ relationships with student-athletes from antitrust scrutiny by renaming every rule governing student-athletes an ‘eligibility rule.’ The antitrust laws are not to be avoided by such ‘clever manipulation of words.'”
It’s the substance of the rules that matters to the court, explains the panel.
“And in substance, the rules clearly regulate the terms of commercial transactions between athletic recruits and their chosen schools: a school may not give a recruit compensation beyond a grant-in-aid, and the recruit may not accept compensation beyond that limit, lest the recruit be disqualified and the transaction vitiated,” reads the opinion, which says the NCAA is trying to perform some “sleight of hand” by cloaking the rules as eligibility requirements. “There is real money at issue here.”
The one important area in which the appeals panel differed from the lower court was the plan to allow for deferred cash payments to student-athletes.
The lower court identified that there were at least two pro-competitive justifications for the amateurism rule — preserving the NCAA’s popularity, and integrating athletics and academics — and ruled that deferred cash payments would have zero net effect on these positive aspects.
The appeals court determined that this ruling was made in error.
“[I]n finding that paying students cash compensation would promote amateurism as effectively as not paying them, the district court ignored that not paying student-athletes is precisely what makes them amateurs,” reads the opinion. “Having found that amateurism is integral to the NCAA’s market, the district court cannot plausibly conclude that being a poorly-paid professional collegiate athlete is ‘virtually as effective’ for that market as being as amateur.”
Instead of the cash payments, the appeals court determined that scholarships covering the full cost of an education would suffice as compensation for the use of players’ names and likenesses.
