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Update: NCAA Loses in Suit Challenging Student-Athlete Compensation and Benefit Limits, Prepares for Appeal

Last year we wrote about the summary judgment decision in an MDL class action then pending in the U.S. District Court for the Central District of California, In re NCAA Athletic Grant-In-Aid Cap Antitrust Litigation.  The suit against the National Collegiate Athletic Association and eleven member athletic conferences is a challenge by the plaintiffs (men’s football, men’s basketball, and women’s basketball student-athletes) to the NCAA’s student athlete compensation-cap rules as a violation of Section One of the Sherman Antitrust Act.  In that decision, the court rejected several of the NCAA’s defenses and permitted the case to proceed to a bench trial, which was held last September.  On March 8, the court issued its decision (Part 1 and Part 2), siding against the defendants and holding that the challenged rules were unlawful.

As a reminder, this case was brought by the plaintiffs as a challenge to NCAA rules imposing player benefit and compensation caps at the “cost of attendance,” i.e., the total amount of students’ tuition and housing costs in addition to related expenses such as school supplies and transportation, and otherwise restricting compensation.  There was no dispute that the rules were an “agreement,” and under binding precedent the plaintiffs’ claims were subject to the rule of reason.  Accordingly, the central dispute was whether any procompetitive benefits the rules might yield outweigh the anticompetitive burdens they impose.  On summary judgment, the court rebuffed two defenses, preclusion and stare decisis, which relied on an earlier case, O’Bannon v. NCAA, similarly involving a challenge by players to then-existing compensation cap rulesIn O’Bannon, the court had recognized that capping compensation at the full cost of attendance was a less restrictive alternative than capping it at “core” expenses, and the defendants unsuccessfully argued that the earlier decision compelled acceptance of its procompetitive defenses in this case.  The defendants also failed to persuade the court that O’Bannon required it to reject two of the plaintiffs’ proposed less restrictive alternatives. 

Anticompetitive Effects

In its March 8 decision finding for the plaintiffs, the district court first found that the rules had “significant anticompetitive effects,” namely “artificially compressing and capping student-athlete compensation and reducing competition for student-athlete recruits by limiting the compensation offered in exchange for their athletic services.”  The district court concluded that expert and other trial testimony established that defendants’ “monopsony power to restrain student-athlete compensation in any way and at any time they wish, without any meaningful risk of diminishing their market dominance,” meant that elite student athletes are “forced to accept, to the extent they want to attend college and play sports at an elite level after high school, whatever compensation is offered to them by Division I schools, regardless of whether any such compensation is an accurate reflection of the competitive value of their athletic services.”  The court further found that compensation caps meant that the value that Division I schools derive from the students—value “reflected in the extraordinary revenues that Defendants derive from these sports”—is untethered to the benefits the students receive.

Procompetitive Effects

The defendants advanced two purported procompetitive effects of the rules, which they asserted sufficed to justify the anticompetitive harms.  First, they argued that the rules promoted the “principle of amateurism,” which they argued is valued by consumers and increases demand.  Noting that the defendants failed to offer a definition of “amateurism” either in the rules or at trial, however, the court observed that defendants’ argument is undercut by NCAA rules allowing for additional payments, such as performance awards, scholarships, and payments by outside entities.  Evidence offered by the plaintiffs also indicated that past compensation increases have not reduced consumer demand.  The court found that the evidence offered by the defendants sufficed only to show that consumer demand may be linked to the distinction between professional and college athletics—and this only implied that “rules that prevent unlimited payments such as those observed in professional sports leagues . . . are procompetitive when compared to having no such restrictions.”  The challenged rules, it found, went far beyond such limits, and could not solely be justified by an interest in “amateurism”.

Second, the defendants argued that the rules promote the “integration of student-athletes with their educational communities.”  The court agreed that “student-athletes benefit in various ways from the college education they receive,” but found that “Defendants have not shown that such benefits arise out of the challenged compensation limits” and were, rather, promoted by other rules and policies unrelated to compensation.  It further observed that student-athletes’ educational experiences were not diminished by previous compensation increases, and found that the theory that compensation drives a “wedge” between athletes and other students—which had been recognized in O’Bannon—was weakly supported in O’Bannon and contradicted by new evidence before it.  Accordingly, while some compensation rules could have procompetitive benefits, the court held that the challenged compensation rules lacked those justifications.

Less Restrictive Alternatives

In keeping with the rule of reason, plaintiffs proposed three “less restrictive alternatives” that they argued would confer substantially equivalent procompetitive benefits.  First, they proposed a broad rule prohibiting the NCAA from imposing any limits on compensation.  Second, they proposed permitting the NCAA to impose limits on athletics compensation or benefits, except for “benefits that are related to education” and seventeen “benefits incidental to athletics participation” that the NCAA rules enumerate, such as performance awards and family travel expenses.  Finally, they proposed a rule imposing no limits on compensation and benefits related to education.  The court rejected the first two alternatives as insufficient to assure the benefits of student-athlete compensation borne out by the evidence.  The first would mean “at least some conferences [c]ould allow their schools to offer student-athletes unlimited cash payments that are unrelated to education . . . akin to those observed in professional sports leagues,” and the second that “conferences could suddenly decide to allow the award of any sum of cash to some or all student-athletes.”

But the court accepted, as modified, the plaintiffs’ third alternative: to “enjoin NCAA limits on most compensation and benefits that are related to education,” but “allow it to limit education-related academic or graduation awards and incentives, as long as the limits are not lower than its limits on athletic performance awards now or in the future.”  In other words, it can no longer limit compensation and benefits for education—like graduate school scholarships and expenses for purchasing a school computer—that exceed the cost of attendance.  Education-related awards and incentives may be limited, but only if that amount is not less than the amount the rules permit for non-educational performance awards.  Such rules, it concluded, would be adequate to preserve the distinction between college and professional athletics by minimizing the possibility of unlimited cash payments or awards in the guise of education-related benefits, while still “ameliorat[ing] [the challenged rules’] anticompetitive effects” and potentially “provid[ing] some of the compensation student-athletes would have received absent Defendants’ agreement to restrain trade.”

On March 27, 2019, the defendants filed their appeal before the Ninth Circuit.  We’ll continue to monitor and report on further developments.