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The NCAA’s Very Bad Day

The NCAA’s Very Bad Day

Spoiler Alert: For much of my professional career, I have been involved in the application of antitrust policy to the sports industry as both a scholar and a consultant. My position has consistently been that vigorous pro-competitive policies are good for athletes and consumers. This history includes testifying for plaintiffs in the case that was decided on June 21, NCAA v. Alston, as well as several prior antitrust cases against the NCAA. Thus, I am far from a detached observer. For what it is worth, here is my take on the most recent decision.

On June 21, 2021, the U.S. Supreme Court dealt the National Collegiate Athletic Association (NCAA) a significant setback in its policy to severely restrict the amount that college athletes can be compensated.  College sports – mainly Division I (D1) basketball and football – generate billions of dollars for the NCAA and its member conferences and schools, nearly all of which accrue to coaches, universities, and the NCAA itself.  But in this landmark decision, the Court voted 9-0 that restricting “education-related benefits” for college athletes violated antitrust law.

The immediate effect of the ruling is that college athletes are going to be far better off, although nowhere near as well off as they would be if they were paid market-determined wages.  First, many big-time college sports programs are likely immediately to add new education-related benefits to an athletic scholarship that are worth $10,000 or more per year.  Second, in response to the strongly worded opinion in this case, the NCAA has, for the present, essentially abdicated playing a lead role in implementing newly enacted state laws requiring that athletes be permitted to earn money from commercial use of their names, images and likenesses (NILs).  In principle, Congress could pass legislation bailing out the NCAA, but this seems unlikely.

More broadly, this case is likely to be the principal guide to future litigation in college sports and to serve as a widely cited precedent for litigating future rule-of-reason antitrust cases.  Moreover, contrary to the fears of many lawyers, economists, and others who advocate robust antitrust policy, the newly appointed Supreme Court members resisted whatever temptation they might have had to use this case to move antitrust law in favor of antitrust defendants.

Of course, Alston rests in an area of antitrust in which liberals and conservatives historically have mostly agreed: price-fixing cartels are bad!  So other cases must be heard before we can safely rule out the possibility of a major curtailment of antitrust by the current Supreme Court.

The Outcome in Lower Courts

Before arriving at the Supreme Court, the U.S. District Court in Oakland and the 9th Circuit Court of Appeals issued decisions finding that the NCAA and its member institutions had engaged in anticompetitive conduct that caused harm to athletes who participate in FBS football and D1 men’s and women’s basketball.  The lower court also issued (and the appeals court upheld) an injunction against the NCAA that had three components.

First, the NCAA cannot limit in-kind education-related benefits to athletes.  Examples that the injunction cites are computers and musical instruments when required in courses, participation in study abroad programs, financial aid to complete undergraduate and graduate degrees after the expiration of a student’s athletic eligibility, and paid education-related internships.

Second, the NCAA cannot cap cash awards for academic performance, such as bonuses related to grade point average or on-time graduation, to less than the cap on cash awards for athletic performance.  Examples of compensation for athletic performance are awards for participating in conference championship games, the Bowl Championship Series, and the basketball Final Four.  Currently the cap on these awards is slightly less than $6,000.

Third, future NCAA rules that define and regulate allowable education-related benefits and any new rules that reduce other benefits must obtain prior approval from the district court.  This provision prevents the NCAA from paying for new education-related benefits by cutting other benefits that it presently allows.

The lower court’s injunction is limited in scope.  It explicitly upheld NCAA rules that prohibit compensation that resembles individually negotiated professional salaries that are based on athletic performance.

Unusual Aspects of the Lower Court Proceedings

The handling of this case in the District Court was unusual in several respects.

First, Alston was tried as a “rule-of-reason” case, which rarely happens when the alleged anticompetitive conduct is price fixing.  Plaintiffs alleged that the NCAA and its members engage in a price-fixing conspiracy against athletes who receive athletic scholarships to play football in FBS or D1 men’s and women’s basketball.  In virtually any industry, even an unsuccessful attempt to engage in a price-fixing conspiracy is presumptively illegal and can even lead to criminal charges against the conspirators.  But in antitrust cases involving sports, Supreme Court precedent requires that price-fixing conspiracies that target athletes must be tried under the rule of reason because of the possibility that suppressing the pay of athletes might be beneficial to consumers by somehow making the game more attractive.

Another unusual feature of Alston is that few of the disputed issues were argued at trial.  Instead, most issues were decided by the District Court in summary judgment.  In ruling against either party at this stage, the court must find that the losing side presented no credible evidence that created a factual dispute to be resolved at trial.  Antitrust plaintiffs winning most of the issues in summary judgment is almost unheard of.

Normally in a rule-of-reason antitrust case, a trial begins with plaintiffs attempting to prove liability: that it is more likely than not that defendants’ conduct caused anticompetitve harm.  In a monopsony case – a buyer engages in anticompetitive behavior against its suppliers – this anticompetitve harm is some combination of lower prices, different quality, and reduced output than would arise if the market were competitive.

The standard procedure to prove liability is for plaintiffs to define the relevant markets in which the conduct occurred, to establish that defendants possess market power (the power to control prices or to exclude competitors), and then to show that defendants used this power to cause anticompetitive harm.  In Alston, plaintiffs undertook these standard steps.  Plaintiffs offered expert testimony that the acquisition of athletes to play in FBS football and D1 basketball are relevant antitrust markets in which the NCAA and the schools in FBS (football) and D1 (basketball) collectively enjoy monopoly power because they face no significant competitors in acquiring the best athletes.  They then argued that defendants caused anticompetitive harm by suppressing compensation of college athletes in these sports (lower prices) and thereby causing some athletes to decline offers to play in college (lower quality).

The NCAA offered little defense against these liability arguments.  The NCAA presented expert testimony that the relevant market is a “platform” that includes at least all athletes, other students, faculty and staff of colleges, alumni and other fans, and broadcasters because the presence of each enhances the value of college sports for all of the other groups.  Moreover, this market should include thousands of other colleges that have intercollegiate sports programs.

In addition, the NCAA argued that defendants could not cause anticompetitive harm through their actions in the markets for athletes for two reasons.  First, scholarship athletes are not exploited because they obtain the opportunity to receive a college education that in many cases they otherwise could not afford and that is far more valuable than the pay that they could earn as athletes.  Second, as non-profit institutions, colleges cannot possibly cause anticompetitive harm in the form of higher profits since their profits are, by definition, zero.  In summary judgment, the District Court ruled in favor of plaintiffs on these issues, meaning that the trial of the case began with liability already having been decided.

The NCAA’s principal defense was that its restrictive compensation rules delivered nine pro-competitive benefits.  Among these were subsidies for other sports (including women’s sports) and the academic enterprise, reduction of disparities in playing quality among teams in college sports, maintenance of amateurism (defined as no pay of any kind other than what the NCAA decides is allowable), and integration of athletes into the campus community by making athletes more like other students.

The summary judgment opinion ruled against the NCAA on all but two of its procompetitive justifications.  First, if college athletes received higher compensation, they would shift effort from academics to athletics.  Second, if college athletes earned unrestricted individually negotiated salaries (e.g., were paid in the same fashion as athletes in professional basketball and football), consumers would become less interested in college sports.  Thus, all that was left of the NCAA’s case to be decided at trial was the validity of these justifications.

After the trial, the District Court ruled against the NCAA on its claims that restricting pay to athletes was necessary to prevent them from shirking their studies.  But the District Court did rule in favor of the NCAA on its claim that some limits on compensation were necessary to maintain consumer demand.  The District Court acknowledged that the only evidence that the NCAA presented on this issue was testimony by college and NCAA officials that they believed it was true.  Thus, the single thread by which the NCAA avoided a complete, disastrous loss at the District Court was the fear expressed by NCAA and college officials, with no supporting empirical evidence, that increasing pay that is related to athletic performance would reduce the demand for college sports.

Once the District Court determined that the NCAA’s rules capping the compensation of college athletes had this pro-competitive benefit, the rule-of-reason process shifts the burden of proof to plaintiffs to show that this benefit could have been achieved by less restrictive rules – in this case, more relaxed rules for compensating college athletes.  Plaintiffs argued that one such less restrictive alternative was to allow conferences independently to adopt rules about the compensation of athletes.  Plaintiffs also argued that the procompetitive benefit offered by the NCAA at best justified caps on compensation that is related to athletic performance, but not to compensation that is related to educational activities.  The District Court rejected the first alternative as posing risks to college sports, but accepted the second.

The Court of Appeals and the Supreme Court

Both plaintiffs and defendants appealed the District Court decisions to the Court of Appeals.  Plaintiffs argued that the District Court should not have accepted the NCAA’s procompetitive justification, and in any case should have accepted giving conferences jurisdiction for compensation rules.  Plaintiffs also argued that the conclusion that the cap on compensation related to academic performance was unjustified.  Defendants chose not to appeal any of the summary judgment opinions on liability.  But defendants argued on appeal that the District Court should have accepted that amateurism was a defining characteristic of college sports and that courts should not attempt to second-guess the NCAA on how amateurism is defined.  The Appeals Court rejected all appeals and let the opinions and injunction of the District Court stand.

Plaintiffs chose not to appeal any Aspect of the Appeals Court decision to the Supreme Court.  In essence, plaintiffs chose to defend what they had won.  As a result, a Supreme Court decision more favorable to plaintiffs than the District Court’s original decision would have gone beyond the case that the parties presented to the Supreme Court.  Usually the Supreme Court resists the temptation to make rulings on issues that the parties to the case have not brought before it.

The NCAA also did not appeal any element of the case that led to the finding that its restrictions on compensation of athletes caused anticompetitive harm to college athletes.  Instead, the NCAA appealed the decision that its restrictions on athlete compensation should be subject to antitrust rules, offering two reasons why this should not be the case.

First, the NCAA repeated its assertion that an essential feature of college sports is that the participants must be amateurs (i.e., not paid, which is not the same requiring that they must be students).  According to the NCAA, courts have no valid role in second-guessing how the NCAA preserves the amateur character of college sports. The NCAA fought especially hard against unlimited graduate fellowships, more than token awards for academic achievement (like a significant cash award for graduating on time), and unregulated paid internships. From the perspective of the NCAA, all of these payments represent a substantial increase in the cap for an athletic scholarship, which the NCAA contended undermines amateurism.

Second, according to the NCAA, college sports are a joint venture among its members in that the product called D1 college sports cannot be produced unless the NCAA’s members agree to form a cooperative enterprise to produce it.  As a joint venture, the NCAA cannot violate antitrust law because members of a joint venture are not obligated to compete with each other.

The Supreme Court rejected both of these arguments rather resoundingly.  Both essentially rest on a circular argument:  that the act of forming a collusive cartel transforms an industry’s product into one that can only be produced if the cartel is allowed to continue.  For both arguments, advocates of robust antitrust policy were concerned that the current Supreme Court would use Alston as a vehicle for significantly expanding the arsenal of defenses available to defendants in antitrust cases.  But no Supreme Court justice took this bait.

The Effect of the Decision on the NCAA and College Athletes

The Supreme Court ruled against the NCAA on every issue that was put before it, and did so in language that often ridiculed the NCAA’s positions.

The Court enjoined all of the NCAA’s rules that restrict compensation for education-related activities (except that cap of about $6,000 on awards for academic achievement). The ruling is likely to make it very difficult for the NCAA to prevent college athletes from earning income from exploiting their NILs.  Many states have passed laws prohibiting colleges from preventing their athletes from earning income from videos, posts on social media, product endorsements, and personal appearances. The NCAA has announced that it will not enforce its existing rules against exploiting NILs and has thus far failed to convince Congress to pre-empt state laws by granting the NCAA an antitrust exemption to adopt whatever NIL rules it wants.  College athletes are now free to exploit their NILs for financial gain.

Still, the decision does not mean college players will negotiate their salaries or otherwise capture substantial new benefits that are based on athletic performance.  All NCAA rules regarding compensation for participation in athletics – cost of attendance scholarships, limited awards for athletic success, additional health benefits, travel for family to championship events, “shopping sprees” for athletes whose teams play in conference championships, the BCS championship, or the Final Four – remain in place, although the NCAA cannot reduce these benefits without prior approval by the District Court.  The NCAA could increase these benefits, but given that these might be used to justify further increases in compensation for academic achievement, the NCAA is unlikely to do so.

The District Court is also highly likely to allow the NCAA to regulate paid internships and to maintain rules that prevent athletes from sharing in licensing income that is earned by colleges, conferences, and the NCAA itself.  Given the highly critical wording of the Supreme Court’s decision, these restrictions are likely to be the next target for antitrust plaintiffs.

The end result is that college athletes will emerge from this case financially far better off than they are now, but their earnings will fall far short of what they could earn if there were no NCAA restrictions.  And, because the NCAA can find no comprehensive, substantive defense of its compensation rules in any of the court decisions in Alston, more litigation seeking to gut what remains of the compensation rules is almost certain to be coming soon.

The Implications of the Case for Antitrust Policy

The case raised the possibility that the Court would produce a decision that fundamentally changed how antitrust cases are litigated in ways that would benefit defendants. Indeed, these concerns are still being voiced by some who are worried that some of the language in the decision is an invitation for lower courts to make winning an antitrust case more difficult.

For example, the NCAA’s appeal raised important issues about how one demonstrates that otherwise anticompetitive conduct is offset by procompetitive benefits. The NCAA argued that the harm to athletes from restrictions on their compensation was offset by the benefits to consumers arising from the preservation of amateurism. The NCAA, however, had no coherent definition of amateurism, and prior changes in NCAA rules that had increased compensation in ways that the NCAA had resisted did not reduce the popularity of college sports, meaning that the only available evidence contradicted the NCAA’s argument. The Supreme Court swatted down this argument, rightly ridiculing the NCAA’s position.

But even if the NCAA’s argument had been true, it framed the issue as one in which harm in one market could be offset by benefits in another market, a proposition that is generally not accepted in antitrust.  Several entities submitted amicus (“friend of the court”) briefs urging the Supreme Court to reject the NCAA’s argument on the ground that the NCAA’s procompetitive benefit (enhancing demand for college sports) arises in a different market, and accrues to different people, than the anticompetitive harm (exploitation of college athletes).  According to this argument, it is up to Congress, not the courts, to decide whether an industry should have an antitrust exemption because of the benefits that are derived by third parties from its monopolist exploitation of participants in the relevant antitrust market.  Once again, none of the justices on the Supreme Court succumbed to the temptation to rule on this issue, but the opinion makes clear that the justices understand that this controversy is important and probably should be resolved when an appropriate case is presented to them.  Some fear that they lean towards allowing procompetitive benefits to arise in markets other than the one suffering anticompetitive harm.

The Supreme Court decided NCAA v. Alston in favor of college athletes, to the benefit of student athletes present and future.  Although the case was about the narrow question of education-related benefits to college athletes, the decision nevertheless is important because it was unanimous and contains discussions of other important issues pertaining to both antitrust policy in general and the NCAA in particular.  Parties in future litigation are certain to cite the strong wording in parts of this opinion in addressing the many questions that were not briefed by the parties in this case but on which a unanimous court seems ready to rule if only the right argument is presented to it.

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