Scott Wallsten:
Hi, and welcome back to Two Think Minimum, the Technology Policy Institute’s podcast. It’s Monday, June 28th, 2021. I’m your host, Scott Wallsten, President and Senior Fellow at TPI. I’m joined by my co-host, TPI Senior Fellow, Sarah Oh.
Today we’re delighted to have with us, Roger Noll. Roger is Professor Emeritus of Economics at Stanford University, a Senior Fellow at the Stanford Institute for Economics & Policy Research. Prior to coming to Stanford, he has been a Senior Economist at the President’s Council of Economic Advisors, a Senior Fellow at the Brookings Institution, Institute Professor of Social Science and Chair of the Division of Humanities and Social Science at the California Institute of Technology. He’s been a member of the advisory boards of the Department of Energy, Jet Propulsion Laboratory, NASA, the National Renewable Energy Labs, and the National Science Foundation. He holds a PhD in Economics from Harvard University, a BS in Mathematics from Cal Tech, and he is the author or co-author of 15 books and over 300 articles on many subjects of particular interest for today’s discussion.
For much of his career, he’s been involved in antitrust and the economics of sports, separately and their intersection. And then about 25 years ago, he went and forever stained his record by being my PhD advisor and inflicting me on the policy and economics world. Roger, thanks for joining us today.
Roger Noll:
My pleasure, Scott. Good to see you and Sarah.
Scott Wallsten:
Yeah, thanks. So, the big news is the Supreme Court’s ruling almost entirely against the NCAA last week. So, to start off, tell us what the economics issues are, the situation prior to the ruling, and how the NCAA ever managed to create such a goldmine for itself by exploiting players.
Not that I have a prior opinion.
Roger Noll:
Well, this has been a very slow train wreck. The NCAA was formed in the early 20th century as a mechanism to make football and basketball less dangerous. In the last year before it was formed, 18 college football players died, and not as many died playing basketball, but a lot got smashed-in faces because their rules were so lax. So, the NCAA, when it came into existence, pronounced that sports should be “amateur,” by which they meant not only that the players wouldn’t be paid, but that the coaches wouldn’t be paid. They wanted everything to be clubs, and that’s because, of course, the entities that made these initial rules were schools like Harvard and Princeton and Yale, where sort of upper middle class to rich people wanted to make the rules clubby. They wanted to sort of look like the kind of social clubs that they grew up with.
Scott Wallsten:
Are these sort of like what has become intramurals at schools?
Roger Noll:
Well, no, because they were intercollegiate…
Scott Wallsten:
Oh, so they were still intercollegiate.
Roger Noll:
Yeah. And this was a reaction to the fact that college sports not only football and basketball, but also baseball, had become professionalized in the late 19th century. In fact, one of the best deals at Yale was one recruit every year, as part of the recruiting package, was given the rights to sell concessions at Yale football games. So, it was a highly professionalized activity, and all the revenue taken in from games, after costs were paid, were then divided among the players, and so it was a straightforwardly professional activity.
For 50 years, the NCAA tried to put an end to paying players, but it never enforced any of its rules. So as a result, the college football powers of the twenties and thirties were de-facto semi-pro teams, and it wasn’t until the 1950s that the NCAA finally got the votes for the membership to make it an enforceable rule, to put a cap on how much an athletic scholarship could be.
Initially, they tried to ban athletic scholarships, but schools ignored the rule. So, in the late 50s, they began to define what an athletic scholarship was, and then over a period of about 15 years, the rules got tighter and tighter and tighter. In the mid-sixties, they, for example, for the first-time banned appearance money, what we now call names, images, and likenesses or NILs. That was perfectly legal up until the mid 1960s.
Alright, so that is the background, and then the timing was exquisite. About the time they had finally nailed the coffin on all the benefits for athletes, television came along, and the revenues just exploded. So, you had an explosion of revenues against capped costs, and that’s when football coaches and basketball coaches and athletic directors started to make tons of money, and then we fast forward into the 2000s where many football and basketball coaches are paid more than the sum of the value of the scholarships of all the athletes in the school.
And so, this huge disparity, as you can well imagine from a little application of F1, if it’s the coaches who are the ones who are succeeding or failing in recruiting athletes who are five or six times as valuable as the amount you have to pay them, competition among schools for coaches who can do that causes the value of the athletes to be transferred to the coaches. So, now we have $10 million coaches, $3 million assistant coaches in a world where it used to be the case, coaches were paid roughly what an assistant professor would be paid.
And now they’re paid four or five times as much as the university president gets paid. That’s where we got where we are, is that this attempt to control costs before the explosion in revenues, and then the explosion of revenues, which is what caused all the pressure on the system and led to all this litigation.
Scott Wallsten:
So, before we, talk about the litigation and the outcomes, is it the case then that we may be going back to the way college sports were before the NCAA or at least during the early days of the NCAA?
Roger Noll:
It’s possible, but I don’t think that’s the most likely path, but I think that the right way to characterize it is we are now entering a world of great uncertainty about what the future will hold, because if it were the case that an unrestricted market for college football and basketball players came about and star quarterbacks and star point guards started getting paid one or two or $3 million a year to play for Siwash State, that could break the whole system apart. It would cause, you know, lots of universities to say, is this really what we wanted to do? Did we really want to be in the entertainment business?
And if we do, why aren’t we making movies and television programs? So, I don’t think that colleges will evolve permanently in that direction, but I don’t know. I think we are entering an era of uncertainty. The NCAA will try to preserve itself because the case didn’t actually kill it off, like it could have. And there are going to be other attempts to bring new rules to bear on how to control payments to athletes. And we’ll see if they produce a system that A) colleges are happy with, and B) the courts agree does not violate the law.
Scott Wallsten:
Okay. So, how did this case start, and how did it end up at the Supreme Court?
Roger Noll:
Okay. The case is one of a series of court cases that have been filed over the past 20 years. There really are three important cases.
The first was Jason White v. NCAA. That was an attempt to eliminate the NCAA’s role in capping athletic scholarships. That was settled prior to going to trial by the NCAA increasing the benefits available to students. The attorneys in that case actually did a mock trial and lost in front of their hand selected jury. And so they thought that there was a good chance that they couldn’t get a jury to vote to kill off the NCAA rules. So, they settled for a reasonably large amount of additional money going to students, but it still retained the basic structure of the NCAA rules.
Then the next set of cases were those that had to do with names, images, and likenesses, where the O’Bannon case is the poster child, and that one was not a direct hit on the NCAA rules about scholarships. It was an attack on the rules prohibiting appearance money and endorsement income, and prohibiting students from earning advertising money from their podcasts.
Scott Wallsten:
Those pennies just roll right in.
Roger Noll:
And of course, again, O’Bannon sort of won, but the relief in that case wasn’t really directly related to the complaint. The complaint was we should be allowed to make endorsement income and other kinds of income by exploiting our names, images, and likenesses, but the relief was, and therefore we’ll increase the value of your scholarship, but you still can’t do that. So, it was sort of a non-sequitur and almost, you know, I was surprised frankly, when the Supreme Court did not take the appeal to the Ninth Circuit’s O’Bannon decision, which, you know, imposed this new set of rules on the NCAA that weren’t directly related to the complaint. So, that was a bit of a weird thing, and then the next set of cases was the one that ended up as Alston. But again, there were about 20 of these that were consolidated together in the same court that heard the O’Bannon case.
And these cases were actually a direct frontal assault on the scholarship limit, the compensation limit, and the decision by the lower court is really interesting to read. It’s the kind of thing I would assign in an undergraduate course in antitrust and regulation, because it goes on for a hundred pages, and I would say ninety-eight of those hundred pages are just absolutely negative about the NCAA. They sort of read just like the Supreme Court opinion in this case, but there was one little hook, which is that the judge bought the argument, despite saying there was no evidence to support it other than testimony by NCAA officials, that they believed it. There was evidence that the demand for college sports would be less if players earned a salary that was related to performance. And so, she came in through the back door with her injunction, which is the NCAA can do whatever he wants to do regulating compensation to athletes relating to their athletic performance, but they can’t regulate compensation for academic performance.
They can’t control education-related benefits with one exception. It can cap cash awards for academic performance, but at no less than the amount that it caps athletic performance. That has subsequently been decided to say that you can do something like “If you stay eligible this year, Mr. Athlete. You get a cash award at $6,000.”
Scott Wallsten:
Why is it the case that reducing demand for college sports would be an argument to uphold what the NCAA does? Why is that an economic argument at all?
Roger Noll:
That is actually the single most important question. And interestingly enough, that issue was not appealed, but it should have been. Okay, the basic issue is as follows. There’s an anti-competitive act that not only did the judge find the NCAA rules were anti-competitive and harmed athletes, the NCAA didn’t even appeal that. So, we start the appeals court and the Supreme Court hearing where the NCAA not appealing the fact that they impose anti-competitive harm on athletes.
The NCAA is defense is “Ah! There’s a pro-competitive benefit to consumers because they like college sports more if we exploit the athletes, alright.” Imagine if you will. “Well, we don’t think you should get rid of slavery because our customers like to be served by slaves, right?” And it’s just a completely strange argument, and antitrust jurisprudence generally holds that benefits in another market cannot be used to offset harm in the market where the conduct occurred. There was actually a colloquy in the oral argument before the Supreme Court, where they asked the Solicitor General, who was appearing as an Amicus for the United States. They didn’t ask the attorneys for the other two sides that were there. They said, “Shall we go after this?” You know, as it was Amy Coney Barrett was the one who asked the question.
She said, “But the benefits are accruing to consumers, and they’re not in the same market as the athletes. Why should we even consider this?”
And the Solicitor General said, “Well, nobody briefed it. So, I suggest you just ignore it.” Alright. So, the whole case hinges one market benefit offsetting harms in another market, and that is contrary to antitrust jurisprudence, and it should have been a valid basis for appeal, but the plaintiffs chose not to appeal it because they wanted to have zero chance of losing the benefits that they had already acquired, which are considerable. I think that the Supreme Court decision, it’s probably worth 10 grand a piece to every college basketball and football player, and over the long run, it may be worth it 50 grand a piece.
Scott Wallsten:
How do you expect that that’s going to be distributed?
Roger Noll:
Oh, most of it, I think it’s going to be assistance, and across the board improvement, because the nature of the injunction doesn’t change the system that everybody gets paid the same. All right. The only way you can have heterogeneity in payments to students now, is there’s something called a Student Assistance Fund. There’s a $100 million kitty that is created by the NCAA from its various sources of income and distributed among the schools, where your schools can give individual grants to athletes to deal with special circumstances, and the most famous example in the trial of this was Miles Bridges, who was an All-American basketball player at Michigan State. In order to induce him not to be a one and done, to stay in school a second year, Michigan state bought him a loss of value insurance policy that cost Michigan State over $50,000. So, basically Miles Bridges was paid $50,000 above his scholarship to play one more year. Alright. So, that others, like for example, one school paid for a new suit for a player to attend the Heisman Trophy Awards, and other similar things like individual benefits that are worth in the thousands of dollars were given to specific athletes for specific reasons.
Scott Wallsten:
So, this is all prior to the ruling.
Roger Noll:
Yes, this was all evidence in the Alston case about how people are already getting paid above the scholarship limit on an individual basis. Therefore, they couldn’t possibly harm it if more students were allowed to earn things in this way, and if there weren’t a big budget cap, you know, a hundred million dollars sounds like a lot of money, but when you divide it by 350 Division I schools, it’s not a lot of money. So, that means a handful of athletes were getting this stuff per year, and they were the stars, right? So that… but nonetheless, that’s good evidence against the [argument that] consumers care. Because if Miles Bridges got an extra 50 grand and Michigan State still sold out all his games and his fans still loved them, that’s good evidence that that demand effect is not there.
Sarah Oh:
I had a question too, about the size of the market and how the money is being spread around. So, in the opinion, it said, you know, TV rights for March Madness are over a billion dollars a year.
Roger Noll:
Yes.
Sarah Oh:
[Inaudible]… other TV rights, I guess, for football were like $500 million a year. So, if consumer demand for March Madness continues to grow and players get paid. I mean, if it grows faster than what players are getting paid… Do the benefits accrue to the coaches and the stadiums and the…Roger Noll:
That’s exactly right. You’re a good economist. No, that’s exactly what’s happened. Between 2000 and 2020, Mike Krzyzewski’s salary as the coach of the Duke basketball team went from $300,000 to $8 million. All right. The percentage rate of growth and coaching salaries in general, not only the head coach, but the assistant coaches and the trainers have grown faster than revenues. And indeed, one of the pro-competitive benefits that the NCAA offered in the case where they lost on summary judgment was that the revenues from the revenue sports have a pro-competitive benefit. They subsidize A) other sports and B) other academic activities. But in fact, the reason they lost this on summary judgment is the data don’t show that at all, that most schools lose money on their football and basketball programs because the competition among them just transfers. Instead of paying the players, you pay more to the coaches and the trainers and all that.
And in addition to that, you build more elaborate facilities because that’s a recruiting tool. In a real business, you’d build a facility based upon its ability to generate revenue directly. Like, you know, you have a team of given quality and the bigger the stadium, the more tickets you sell and you keep expanding the stadium or the arena up to the point where the incremental revenue from an incremental seat justifies its cost. Well, not in college sports, because one way you recruit these star athletes is, “Isn’t this a fancy facility? And you get to play and live in this wonderful facility.” One of the, there’s a wonderful video of the University of Alabama’s football training facility, which has a room in it that’s called the game room and all around it are these huge television sets where they have sports events going on.
They have a foosball game in the middle of the room made out of Brazilian teak. And the five-minute video is a recruiting video to show how great life is for an Alabama football or basketball player by showing the facilities, showing the arena and the stadium that the players play in, showing the dorms where the athletes live, and so this becomes a domain of competition, and hence, you overspend on them. You know, if you said to an Alabama football player, would you rather have a Brazilian teak foosball game or an extra $5,000 in your scholarship? Guess which one he would pick?
Scott Wallsten:
You said that there’s a lot of uncertainty what’s going to happen, what the markets will look like now, but [where do the rents come from]? I mean, there’s value in Duke, the Duke name. There’s value in Krzyzewski. There was, and then there’s value in some of the stars, and it’s been prevented from really going to any of the stars so far, until now. You know, if there were such a thing as a competitive market here…
Roger Noll:
There are actually, interestingly enough, there have been quite a few academic articles, published, academic research, been published on this very question. What is the marginal revenue product, and hence, the best estimate of the competitive wage of a college athlete? It’s hard to do because of the fuzziness of the data, but the results come up. Basically, remember there are roster limits, all right, there’s limits to the number of scholarships, and these limits are binding because they only were imposed in the 1970s and 1980s. Before these rules came into effect, many schools had more than a hundred football scholarships a year, and as many as 17 or 18 basketball scholarships. Now it is a binding constraint at 85 for football and 13 for men’s basketball, 15 for women’s basketball. So, because it’s a binding to stray, it’s perfectly plausible that literally everybody is exploited. It wouldn’t be that way. If there were no such constraint, because you just keep recruiting athletes till the margin revenue product equal the scholarship value. So, the literature attempts to address this question. Probably the best article, there’s a lot of good articles on it, but the one I think is best because it’s based on the best data was by Janet Ness and her colleagues at Applicon, which is an economic consulting firm.
They used to operate out of the University of Michigan. Now, since they moved to Berkeley, it operates out of Berkeley. But Janet’s estimate was basically that the worst player on a team is probably worth three or four times as much as the scholarship. And of course the best players are worth a million or so, or 2 million. And the, the finding here is important because it does, from purposes of antitrust litigation, allow you to have class action, right? Because everybody is exploited. It allows you not to have a case that isn’t just Miles Bridges trying to get extra money. It’s all of his teammates trying to get extra money as well. So, the answer to your question in a very convoluted way is it’s probably the case that when you’re recruiting somebody ex-ante, you don’t know for sure how good they’re going to be. So, there’s some probability that Scott Wallsten is actually going to be the next All-American running back.
Scott Wallsten:
It’s always been low.
Roger Noll:
And so that probability times that value means you offer Scott a hundred thousand dollars a year instead of the $40,000 a year that the average scholarship was currently worth.
Scott Wallsten:
I mean, that’s pretty significant because this is not just the stars. This is a real wage for the median player.
Roger Noll:
Exactly. And then when you get back to Sarah’s question about the billions of dollars, if this becomes like the pros, then 50% of the revenues goes to player salaries instead of the current 10% or so. Alright. So, you know, you just imagine the March Madness story, right? If a single year of March Madness is really worth a billion dollars, what does that mean about the players in the Final Four? How much are they worth? It’s a lot of money.
Scott Wallsten:
I would also think that would make it more interesting to people who are watching it. I’d want to know… I’d be invested in who wins that.
Roger Noll:
The thing that’s interesting about it. The compensation system for March Madness already has a feature to it that most people do not realize, but there was an article in one of the… I think it was Sports Illustrated about the first million-dollar free throw. And it was a game that was played in an early round where there was an upset and with less than a second left in the game, a player at an underdog made two free throws that caused his team to win by one point, and that was the first game in which getting to the next round was worth a million dollars to the team in question. And that was like 10 years ago. Alright. So, now it’s more like 2 million that every game you play in the tournament is an extra million dollars in cash benefits to your conference.
Scott Wallsten:
Right, but not to the player.
Roger Noll:
But not to the players, but guess who would get half of that? *Laughter* If there were a market for players.
Scott Wallsten:
One thing that we haven’t talked about explicitly in all of this is the role of antitrust and the NCAA’s interaction with it, and lack of accountability to it. So, how does that play in?
Roger Noll:
Well, the interesting feature… The NCAA, I think we should cast it at somewhat more broadly. In general, there has been great judicial deference shown throughout most of history to sports governing bodies. But there has been so much bad publicity about sports governing bodies in the past 30 years that this deference is going away. It’s not just the NCAA where people at the central office are paid salaries of hundreds of thousands of dollars a year to go hammer on poor kids because they receive an extra $2 they shouldn’t have received. Alright. It’s not just that. It’s also the way that coaches treat players and the injuries and heart attacks even, and the deaths by making them play when it’s a hundred degrees outside and then getting heat stroke, and then more broadly, the scandals involving gymnastics coaches for sexual abuse. You know, the Penn State scandal.
Scott Wallsten:
The IOC…
Roger Noll:
The FIFA corruption in where they locate the World Cup. There’s been so much bad stuff about sports governing bodies that this deference has pretty much gone away. It used to be, people were willing to say, these guys are sort of doing it in the public interest. And even though there’s no statutory antitrust exemption, even though there’s no law that really sets them up to have all this power that they have, we’re going to give them the benefit of the doubt.
That’s pretty much gone. And it’s gone in part because of the scandals, and in part, because of the obvious disparities that have opened up. Such as, that between how much a coach has paid and how much a player has paid. So, that has created an environment, which go back to the story I told earlier, in the Jason White case, where the attorneys were afraid they’d lose. They would not be afraid they’d lose now.
And that’s only a dozen years later. Alright, and that’s because the public attitude, and judges are a part of the public, about sports governing bodies in general, and the NCAA in particular, have become much more negative, and so it’s much more credible for a lawyer in court or an economist testifying to attack these bodies as just cartel managers that exploit people. It’s a much more credible argument now than it would have been 15, 20 years ago.
Scott Wallsten:
So what’s the, what’s the point of the NCAA now? You know, what role does it have to play? Why not just a scheduling app?
Roger Noll:
Yeah. The interesting thing about all sports governing bodies is they start with a completely legitimate purpose, which is that they’re basically standards organizations, right? That’s what they are. They’re the IEEE, right? They say, “Okay, here’s how you play intercollegiate football. Here are the rules. And here’s how many games we’re going to play. And here’s how we’re going to decide a national championship.”
All these things are beneficial. It’s a good thing that there is some degree of standards being set. The anecdote that is compelling about this is the very first college football game. The first college football game was actually supposed to be a series of three games between Princeton and Rutgers. Game number one was at Rutgers, game number two was at Princeton, and game number three, if necessary was going to be at a site to be named later. The rule was the home team gets to make up the rules. So, when the game was at Rutgers, they made up the rules as being basically soccer, and Rutgers won. When it was at Princeton, they made it up as basically rugby, and Princeton won. The third game was never played because they couldn’t agree on what the rules were.
So that’s always, that’s a classic example of a public good that’s being provided by a private organization, namely, a standards organization. Where the NCAA got in trouble… and that’s why, how it got started. Remember people were getting killed playing college football.
Scott Wallsten:
You said safety was a….
Roger Noll:
But they tried to convert that into being a cartel. And that’s because that’s the incentive. Once the organization is up there and they can make mandatory rules, why don’t we just get together and collude? And so, we can get richer, and that’s the slippery slope. And in some organizations like FIFA and the Olympics, the purpose of the cartel becomes to enrich the people who run the organization. But in the case of the NCAA, just like in some professional sports leagues, the purpose became to enrich the people who run the teams at the expense of the players.
Scott Wallsten:
Where does that leave the NCAA now? I mean, what is, again, still now? What is the purpose of the NCAA? I guess there’s still a reason to have rules a standards body, but beyond that?
Roger Noll:
Well, and you know, the other thing, there’s another issue about pro-competitive benefits, which was agreed to in every single one of these cases by the plaintiffs. Which is, it probably is true that consumer demand for college sports hinges on the players actually being students. If you ask, why would somebody pay 50 bucks to see a college football game instead of a pro football game, the fact that the college game has students in it is an attraction for alums and students at that college. So, that probably is true. So, having rules about what does it mean to say they have to be students? Again, we can go back to the great example of Fielding Yost, a great football player of the 19th century, who technically was a student at West Virginia, but he rented himself out on weekends.
One week, he played for Lafayette. One week, he played for Princeton…
Scott Wallsten:
A mercenary…
Roger Noll:
And occasionally for West Virginia. So, there are reasons to believe that the NCAA has some role in restricting access to college sports to people who are students. We can have it… I think there are going to be people who would disagree with me on that. But the point is, that’s at least an interesting debate, whether the NCAA has that role. Do they have a role, however, in limiting, in deciding who gets paid how much? The answer is no, they shouldn’t have that rule. That should be [inaudible] of schools.
Scott Wallsten:
I mean, you said we can have a disagreement about whether that’s a reason why people want to make sure that [players are] students, that it’s important to the alums and so on, but is that where the money comes from for this? Are the billion-dollar TV deals because there’s so many alums who watch it on TV?
Roger Noll:
There are survey data that say that is a crucial element of college. It doesn’t mean it’s the only element, but that it is a crucial element. It’s not that it would be zero revenue, but it would be all that you need is for it to be a substantial fraction of the revenue. And it will be very hard to prove that is de minimis, it’s fairly easy to show that limiting college athletic scholarships to cost of attendance is not significant in determining what the demand for college sports is. That’s fairly easy.
Scott Wallsten:
Is it possible that the value of sports that comes from people who are not affiliated with the university in one way or another, is the difference in value between D-I and D-III. I mean, in D-III the only value is to the people who go to the school and those alums, but you never see those on TV.
Roger Noll:
Interestingly enough, that used to be true of D-III, but you’re showing your age. In some of the minor sports, there really is commercial value in D-III. But I think your point is well taken in that what you’re asking is a really deep question. Why do the US and Canada alone among all countries in the world have this highly commercialized thing called college sports? Why would even Harvard and Stanford and Yale and Princeton care about having football and basketball teams that are important nationally? Why would they have minor sports that have no interest? And the answer to that has to be in the student part, the competition for students. People attend even Stanford… or they will pick Stanford over Harvard because of the athletic program.
Alright. So, competition among these schools has led to athletic programs, and that value doesn’t hinge on the interest of the people who have no affiliation. That is value that comes from the students and the alums and the faculty and the staff who are there as from the university community, and that probably explains why we have this. Now, would all those people be willing to continue to have it in a world in which it became really the NFL? One of the proposals about how to reform college athletes is to have universities essentially license professional teams to use their name and play in their stadium. I think that would kill it off. I don’t think that would work, but I could be wrong. And I don’t know of any way to generate any evidence before the fact that would predict that accurately. But my instinct is that won’t work. That this “studentness,” this relationship of athletics to campus life in American colleges, is real.
And the only reason it doesn’t happen in Europe is because in the 19th century, community-based sports arose from neighborhood clubs as opposed to either high schools or colleges. And so there never was a vacuum to be filled by colleges for creating local community-based athletics, because it already existed through other kinds of organizations. Labor unions in Europe used to have athletic teams, and a lot of the English premier league clubs have their origins in 19th century labor union teams.
Scott Wallsten:
Hm. So, I guess there could be two types of implications from this. One is, I mean, maybe this will have effects on other sports governing bodies. Like you said, sort of the general public’s feelings towards these bodies have had a big effect. And then the other is broadly in antitrust, does this decision mean anything?
Roger Noll:
It could have meant something, but I don’t think it did. Okay. So let, let me deal with the first. It will be very hard because there’ve been so many bad news stories about sports governing bodies in the last 20 years, it’s going to be very hard to say this was the straw that broke the back, but it seems to me that we are right in the middle of a reformation of how sports are governed, and sports governing bodies are not going to be able to continue to be defenders of abusive behavior. And corrupt organizations where being on their board of directors is worth a million dollars a year, that era is probably over, and I don’t think… this case adds to the burden on them, but I don’t think it’s determinative. Onto the broader antitrust question, this case actually did raise three really significant antitrust jurisprudence issues.
And on all three, the court did not make a decision. The first one was the one we talked about before, which is cross-market benefits and costs of the anti-competitive conduct. The many Amicus groups, including the Solicitor General, including the American Antitrust Institute, including an Amicus brief from some antitrust lawyers and other Amicus briefs from antitrust economists raise the issue about the illegitimacy of cross-market comparisons, but in the end, because the parties didn’t brief it, the Supreme Court did not address it. That has to be addressed sometime in the fairly near future. And the reason for it is, defendants in antitrust cases are going to reference this case as if it legitimizes cross-market comparisons, even though it didn’t, alright. And that’s because they’d refused to throw out the NCAA case on this ground.
Scott Wallsten:
So is that, the filing from Apple. Is that an example of this?
Roger Noll:
Yes, that’s a good example. The Epic v. Apple one is another one, because the issue there about the pro-competitive benefit of throwing somebody off their site has to do with some other aspect of the site selling other Apple products. So yes, now I don’t think this is going to work because I think the Supreme Court was, and Gorsuch’s view explicitly says, “We don’t have to go there to make a decision in this case, because even if we, whether we accepted or rejected at the end result is the same.”
That’s what the key decision actually says. But then there are two others. The other, I think important issue is, this case was litigated under a completely crazy Ninth Circuit rule about rule of reason antitrust, which is that once anti-competitive conduct has been shown, then the defendant has the burden of showing there’s a pro-competitive benefit.
And then there’s a third step, which is plaintiffs then have to present a less restrictive alternative that preserves the pro-competitive benefit while adding more competition. This is really bad because it says any pro-competitive benefit, however tiny must be preserved, even if attaining it causes an anti-competitive harm that’s huge. There’s no balancing, there’s no benefit cost tests.
Scott Wallsten:
You can’t take anything away, no matter how small.
Roger Noll:
Yeah. You can’t take anything away, no matter how small it is, unless you can invent an institution that preserves it. And in this case, that’s what causes this, you know, extraordinary, cumbersome set of arguments about how can we give more stuff to the athletes without having any risks to, even tiny risks, to the demand for college sports, because we’ve already gone through that argument about what a squirrely argument it is.
And we laugh about this squirrely argument that this benefit even exists. But the judge said, “Oh, I think, or some chance that it does exist.” And she even said, at one point, “Plaintiff’s economists argue that if the conferences were in charge, they wouldn’t consciously make rules that destroyed them. And plaintiff’s economist may be right, but I just can’t risk it.” So, that’s how squirrely this decision is.
So, now we have this sort of squirrely, maybe ephemeral, certainly not terribly important benefit. That must be preserved. And again, some of the Amicus briefs raise this issue, but it was not addressed in the decision. So right now, this Ninth Circuit test is about coming up with a less restrictive alternative that preserves all the pro-competitive benefits is still sitting there intact.
And then the third one is the first few pages of Gorsuch’s decision is essentially a pay on to traditional rule of reason analysis, and it starts off with defining the product market, showing that the defendant has market power in that product market. This seems to say we can’t do direct effects analysis. That is to say direct effects analysis is where you skip defining what the market is and showing power. You just demonstrate that there was anti-competitive effect on the people who were the object of the conduct. Alright.
And direct effects analysis is used extensively in the Federal Trade Commission, and indeed, it’s used in the reverse payment antitrust cases for drugs, you know, the way the settlement of patent infringement cases in the drug industry. So, Gorsuch goes through and says, “Here’s what they did. And isn’t the rule of reason wonderful? They define the market,” and neither the plaintiffs nor the defendant appeal to anything about market definition or market power or anything.
All of these ancillary steps, why he did that… At the time I first read it, I was saying, “Oh my God, he’s going to throw out direct effects analysis as a legitimate alternative,” but he didn’t, this section of the repeating just doesn’t go anywhere, but it will be quoted by defense attorneys as, “Ah! Supreme Court no longer accepts direct effects analysis.”
Scott Wallsten:
And what will be the real effect of that? I mean, will the court have to reconsider it?
Roger Noll:
Eventually, the court’s going to have to consider whether it really wants to reverse precedent about direct effect. There are Supreme Court decisions in the past, going back 30 or 40 years that do bless direct effects analysis, and now there is fear among, you know, a bunch of plaintiffs-oriented antitrust attorneys. There’s fear that this case is going to be used as an entering wedge by the current Supreme Court to eliminate and to reverse the precedent that honors direct effects analysis as a legitimate approach to a rule of reason case.
Scott Wallsten:
We’re really running out of time. And I hate to ask this last question, because it’s a whole other topic, but we’ve talked about governance boards and lots of different types of governance boards, or governance boards over different areas. And it seems like…sports governing boards had the tendency to become corrupt, have become corrupted over time. Almost all of them we can think of have been. Except, you know, maybe a Little League. And even there, I’m not so sure…
But IEEE hasn’t, even though something like Wi-Fi is hugely valuable, right? That they could have, maybe. ICANN maybe somewhere in between, right? It’s accumulating this big monopoly of control. You know, what accounts for, I mean, it’s an impossible question to answer in just a couple minutes, but what accounts for why some become corrupted in particular areas, and others don’t?
Roger Noll:
This is your friend Bill Leher’s PhD thesis.
Scott Wallsten:
It’s true. I need to get him on here.
Roger Noll:
No, and the answer is very simple. Due to antitrust constraints, standards bodies have unanimity requirements, and they have open to everybody requirements, alright.
So, that means customers get to be part of the standards setting process, and they can veto something that’s purely anti-competitive conduct. Of course, in the bad old days when the telecommunications industry was AT&T. AT&T would have loved to use the standard setting process to trump antitrust constraints on its behavior. But it had to deal with equipment suppliers and customers who were independent, who were allowed a seat at the table, and they just would veto anything that was an attempt to use a standards to create an anti-competitive advantage. Now, having said that they still have problems, and FRAND is a good example, the Fair and Reasonable Royalty Rates for Standard Essential Patents. That’s a good example of an area of where despite all the protections, there’s, I would call it, chaotic. The law with respect to how you set royalties for standard essential patents is pretty much in chaos because it’s a really difficult problem.
How, you know, you don’t want to have a system where all the people who will use a technology get to gang up and become a cartel to set the rate of a royalty for an innovation. On the other hand, many standards essential patents are one of 17 ways you can connect to devices, and they don’t have any special advantage over the other, other than ones adopted, and the others aren’t, and giving them a lot of monopoly profits is probably a stupid idea.
And so now we know we have a problem and it’s as of yet, the law hasn’t solved it. But so not withstanding this example, in general, the legal requirements for standards organization, in terms of openness and unanimity, protect to a large measure against things like what the NCAA has done or what FIFA has done, or the US Olympic Committee has done, or the US Gymnastic Association has done.
These entities are not subject, historically have not been subject, to the same kinds of rules. And hence, there is really nothing out there other than very long time duration, litigation processes and legal processes to fix them. But that’s where we’re going right now, cause you you’re absolutely right. This power is corrupting and it has gone unchecked for several decades now, and it is only now finally beginning to be attacked.
Scott Wallsten:
So, that I think, is a good place to leave it. Thank you, Roger, so much for being with us.
Roger Noll:
I really enjoyed it. It was fun.
Scott Wallsten:
Great. Thanks so much. Talk to you soon.
Roger Noll:
Bye-Bye.
