December 16, 2015

O'Bannon v. NCAA—College Athletes Get a Lump of Coal

In August 2014, a federal judge ruled in O'Bannon v. NCAA that the NCAA's amateurism rules were an unlawful restraint of trade in violation of the Sherman Antitrust Act because colleges improperly prevented their athletes from being compensated for the use of their names, images, and likenesses (NILs). The judge entered an order requiring the NCAA to place some portion of the money colleges earned from athletics—up to $5,000 per athlete per year—into a trust fund which athletes could access once their collegiate careers had concluded. Not surprisingly, the NCAA appealed.

In September, a three-judge panel of the Ninth Circuit Court of Appeals issued an opinion largely affirming the district court's determination that the NCAA violated antitrust law by restricting compensation paid to college athletes to the cost of attending school (tuition, room and board, books, and fees). The panel, however, limited the athletes' relief to expanding athletic scholarships to the full cost of attendance, but struck the district court's order to establish an athlete trust fund. Today, the full Ninth Circuit denied the athletes' petition for rehearing en banc, leaving the panel's appeal decision as the final ruling in the case, barring an improbable appeal to the United States Supreme Court.

Although the O'Bannon decision has been rightly hailed as significant blow to the NCAA's claim of general exemption from federal antitrust law, the Ninth Circuit's opinion is actually a major loss for college athletes. Surprised? Let's take a closer look.

In applying what is known as the "Rule of Reason" analysis to the NCAA's amateurism rules, the district court and appellate court each agreed that the NIL rules actually provided a pro-competitive effect which was beneficial to the schools and athletes by creating special market conditions for college athletics. Both courts agreed that the benefits of the NIL rules included “preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism” and “integrating academics and athletics.”

Of these supposed benefits of the NCAA's NIL rules, the more important was the public appeal of amateurism. Citing a U.S. Supreme Court decision, the Ninth Circuit noted that paying college athletes would potentially damage the NCAA product by transforming amateur college athletes into poorly paid minor league athletes. In other words, college athletics exists as a lucrative product in large part because athletes are not paid, so requiring athletes to be paid might destroy the very market upon which college athletics depends (italics in original):
"We cannot agree that a rule permitting schools to pay students pure cash compensation and a rule forbidding them from paying NIL compensation are both equally effective in promoting amateurism and preserving consumer demand. Both we and the district court agree that the NCAA’s amateurism rule has procompetitive benefits. But in 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.

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. Or, to borrow the Supreme Court’s analogy, the market for college football is distinct from other sports markets and must be 'differentiate[d]' from professional sports lest it become 'minor league [football].'"
Denying college athletes any share in the mountains of cash they earn for the NCAA and its member schools, in the court's view, is a feature, not a bug in the collegiate sports business model. Now the Ninth Circuit grudgingly acknowledged that the meager NIL payments ordered by the district court would likely not cause significant harm to the concept of amateurism for the sports-consuming public. Yet, the Ninth Circuit noted that payments of any kind would inevitably lead to slippery slope demands for greater payments to college athletes:
"The difference between offering student-athletes education-related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point; we have little doubt that plaintiffs will continue to challenge the arbitrary limit imposed by the district court until they have captured the full value of their NIL. At that point the NCAA will have surrendered its amateurism principles entirely and transitioned from its 'particular brand of football' to minor league status."
The upshot of the Ninth Circuit decision is a bright line determination that any payment in excess of the costs of attending college is substantively compensation for play, and athletes are instantly transformed from amateur to professional. Because the court determined that preservation of the amateur athletic paradigm is a pro-competitive purpose for the NCAA's business model, the Ninth Circuit has given the NCAA a green light to enforce a hard line rule against any NIL payments in excess of the cost of attending school. Essentially, while paying lip service to antitrust law, the O'Bannon decision actually provides the NCAA and its members schools a virtually unassailable get-out-of-jail-free card—"protection of amateurism"—which effectively trumps antitrust law and prevents athletes from obtaining any meaningful monetary compensation.

With O'Bannon in its hip pocket, the NCAA and its member schools are essentially free to continue to rake in billions of dollars of revenue (and in many cases, still run large deficits) without paying its labor force anything remotely close to their fair market value for their work. The relief the O'Bannon decision affirmed—increasing scholarships to the full cost of attendance—is a hollow victory, as major conferences had already adopted these minor scholarship enhancements. The O'Bannon decision also likely guts other pending athlete compensation class action cases; if modest compensation of $5,000 per year is out of bounds for athletes as a threat to amateurism, how can a court award the even greater unlimited "market value" compensation sought in these pending cases? Throw in the recent National Labor Relations Board decision to deny college athletes the ability to form labor unions, and it's pretty much business as usual for the NCAA.

So, as you sit back to enjoy the upcoming college football bowl games this holiday season, rest easy that America's colleges will take on the terrible burden of divvying up a half a billion dollars in revenue so that their athletes remain true amateurs. It's all about the integrity of the game.

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