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The Great Escape: The NCAA Receives a Tremendous Ruling for Now and The Future in The O’Bannon Appeal Decision

On Wednesday, September 30, 2015, the Ninth Circuit Court of Appeals issued an opinion written by Judge Jay Bybee on the NCAA’s appeal of Judge Claudia Wilken’s opinion on of O’Bannon vs. NCAA.  The Ninth Circuit affirmed in part and reversed in part.[i]

The decision was a massive win for the NCAA, and for a number of reasons, the decision was a massive defeat for proponents seeking increased compensation for student athletes.  While the court in the O’Bannon appeal stripped the NCAA of its blanket reliance on some dicta from the Board of Regents case as an alleged shield to antitrust scrutiny, Judge Bybee took many of the best parts of Board of Regents and applied them to a case directly on point with regards to athlete payment restrictions, most notably: (1) NCAA restrictions on payment are subject to rule of reason analysis; and (2) Amateurism in and of itself is a procompetitive benefit of many NCAA restrictions.

Many have suggested that the O’Bannon Plaintiffs “won” the case because certain NCAA restrictions were shut down. While, technically true, this sentiment is akin to saying Donald Trump “won” his antitrust lawsuit versus the NFL[ii] or that King Pyrrhus won the battle of Heraclea.  Others have suggested that this is a “momentous” occasion for student-athletes since now NCAA rules and regulations are subject to antitrust scrutiny.  The problem with this view is that this was always the case as will be described in more detail below.

At the end of the day, the Ninth Circuit ruled that the NCAA is prohibited from capping athletics grant in aid (including grant in aid for Name, Image, or Likeness rights (collectively “NILs”)) below the total cost of attendance.  It should be noted that the NCAA had already allowed for this to happen.[iii]

I won’t rehash the district court decision by Claudia Wilken.  For a refresher on the initial decision, please see our article from August of 2014 here.

The Ninth Circuits Ruling

The Ninth Circuit affirmed in part and reversed in part Judge Wilken’s decision.  The Ninth Circuit affirmed the ruling that any NCAA rule capping student-athlete scholarships or grants in aid below the full cost of attendance was a violation of Section 1 of the Sherman Act, and that the NCAA shall be enjoined from enforcing any such rule.[iv]  However, the Ninth Circuit reversed the part of Judge Wilken’s ruling stating that the NCAA would violate Section 1 of the Sherman Act by capping deferred payments to student-athletes below $5,000 per year.[v]  The court explained the difference between the two concepts stating:

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; . . .At that point the NCAA will have surrendered amateurism principles entirely and transitioned from its ‘particular brand of football’ to minor league status.[vi]

In order to more fully understand this opinion, an understanding of the burden shifting mechanisms of an antitrust case (Specifically a Section 1 restraint of trade case) is appropriate.  Section 1of the Sherman Act states that “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal”[vii] When a restraint is challenged in court, the first decision a court will make is whether it is a naked restraint on trade subject to “per se” scrutiny, or whether the restraint serves some procompetitive purpose.[viii]  Per se scrutiny covers things with no redeeming competitive value; blatant price fixing, group boycotts, and sometimes your garden variety vertical integration.  Other less obvious agreements which may restrain trade are subject to “rule of reason” scrutiny.[ix]  The Plaintiff bears the initial burden of showing that the challenged restriction does restrain trade.  After this showing, the defendant must assert some procompetitive justification for the restraint.  Finally, the court will look at whether there is a less restrictive alternative for the restraint which will accomplish the same procompetitive benefits.[x]

As in Judge Wilken’s decision, the Ninth Circuit found that the challenged restraints in this case did indeed restrain competition.[xi]  The NCAA had asserted four procompetitive benefits for its restraints: preserving amateurism in college sports; promoting competitive balance in college sports; integrating academics and athletics; and increasing output.[xii]  When analyzing these specific asserted pro competitive benefits, the Ninth Circuit also agreed with Judge Wilken that the NCAA squeaks by because there are some limited benefits to preserving amateurism and integrating academics and athletics, “[T]he district court found, and the record supports that there is a concrete procompetitive benefit in the NCAA’s commitment to amateurism: namely, that the amateur nature of collegiate sports increases their appeal to consumers.”[xiii]

The Ninth Circuit next analyzed the two less restrictive alternatives that Judge Wilken found: (1) raising the grant in aid to the full cost of attendance; and (2) allowing limited deferred compensation to student-athletes for their NILs while in school.[xiv]  The NCAA argued that the first less restrictive alternative was invalid because courts should not micromanage private organizations’ rules, and that to approve that alternative would “open the floodgates” to waves of litigation in an attempt to tweak many other NCAA rules.[xv]  The Ninth Circuit disagreed.  While noting that not everyone agrees on a precise definition of amateur the court relied on testimony from Neal Pilson given in the district court trial stating simply “if you’re paid for performance, you’re not an amateur.”[xvi]

The Ninth Circuit ruled that payments for the full cost of attendance were not payments for performance and that a restriction of payments below the full cost attendance is “patently and inexplicably stricter than is necessary to accomplish all of its procompetitive benefits.”[xvii]  In addressing the second less restrictive alternative, the Ninth Circuit disagreed with Judge Wilken stating “In our judgment, however, the district court clearly erred in finding it a viable alternative to allow students to receive NIL cash payments untethered to their education expenses . . . 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.”.[xviii]  Interestingly enough, the court noted but did not address that a less restrictive alternative must not significantly increase costs to implement.[xix]  However, the court did not analyze that issue because with regards to less restrictive alternative 2, the Ninth Circuit struck that ruling on the other grounds discussed above.  This could be a valuable argument for the NCAA in other antitrust litigation it faces.

Thus, as a result, the majority opinion, affirmed the district court in part but reversed on less restrictive alternative number 2.

Dicta and Confusion in the Majority Opinion

While the basic mechanics of the appeal decision are described above, the opinion and the dissent are fascinating and warrant discussion of several other key points (including the main tension between the majority and the dissent).

The NCAA had long clung to dicta from the Board of Regents case as a shield as to why all of its amateurism rules should be per se legal.  This is the famous language stating “In order to preserve the character and quality of this product, athletes must not be paid, must be required to attend class, and the like.”[xx]  However, as Judge Wilken ruled, and the Ninth Circuit explained, this language does not justify all NCAA restraints. “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.  Rather, the Court discussed the amateurism rules for a different and particular purpose: to explain why NCAA rules should be analyzed under the Rule of Reason rather than held to be illegal per se.  The point was a significant one . . .The Court’s long encomium to amateurism though impressive-sounding, was therefore dicta.”[xxi]  Moreover, the Ninth Circuit noted that even if it was bound by Board of Regents, the NCAA’s argument that their restrictions are per se legal wouldn’t follow.  “The Court’s opinion supports the proposition that the preservation of amateurism is a legitimate procompetitive purpose for the NCAA to pursue” however, “To say that the NCAA’s amateurism rules are procompetitive, as Board of Regents did, is not to say that they are automatically lawful.”[xxii]  All in all the majority reasoned that Board of Regents may be “informative with respect to procompetitive purposes” served by amateurism rules, such rules’ validity must still be proved.[xxiii]

While Judge Bybee, certainly hurt the NCAA’s ability to rely on Board of Regents, he went out of his way to give the NCAA a half dozen instances or restatements of dicta in his own opinion that the NCAA will surely cling to like a remora to a shark.  Judge Bybee reaffirmed that amateurism restrictions are not per se illegal “we are persuaded – as was the Supreme Court in Board of Regents and the district court here – that the appropriate rule is the Rule of Reason.  As the Supreme Court observed, the NCAA ‘markets a particular brand . . .that makes it more popular than professional sports to which it might otherwise be comparable” and “Because the integrity of the ‘product’ cannot be preserved except by mutual agreement,” “restraints on competition are essential if the product is to be available at all.”[xxiv]  While here Bybee is just restating Board of Regents, he is doing so in a way that makes the language directly applicable to the NCAA’s current arguments.  In other words, the Board of Regents dicta, prior to this case, arguable didn’t really apply at all to the NCAA’s current litigation, however, Bybee has made certain parts of that decision clearly applicable, albeit in a limited way, now.  Bybee went on to state that “there is a concrete procompetitive benefit to amateurism: namely, that the amateur nature of collegiate sports increases their appeal to consumers.[xxv]  Additionally, in addressing less restrictive alternatives in the realm of college sports, Bybee noted several other cases stating “the Supreme Court has admonished that we must generally afford the NCAA ample latitude to superintend college athletics” and that “Courts should afford the NCAA plenty of room under the antitrust laws to preserve the amateur character of intercollegiate athletics” and “sports-related organizations should have the right to determine for themselves the set of rules that they believe best advance their respective sport.”[xxvi]

Tension With the Dissent

Turning to the dissent, the main point of the disagreement between the dissent and the majority turns on the precise question of what is the procompetitive benefit of the NCAA’s restriction that there can be no payments to student-athletes for NILs.  The NCAA and the majority believe that commitment to or preservation of amateurism, in and of itself, is a procompetitive benefit, because amateurism increases consumer demand for collegiate sports.  The dissent believes that increased demand for collegiate sports is the pro competitive benefit.  In other words the dissent believe that amateurism is only procompetitive when it is seeking to increase consumer demand.  The majority disagrees, and states in a footnote, “this ignores that the district court found that the NCAA’s ‘current understanding of amateurism’ helps ‘preserve the popularity of the NCAA’s product’.  Amateurism is not divorced from the procompetitive benefit identified by the court; it is its core element.”[xxvii]  This footnote is in my opinion the most crucial language in the entire opinion.

The NCAA now has the Ninth Circuit Court of Appeals on the record ruling that any restriction which promotes amateurism (in its entirety, and in whatever nebulous definition a court may apply to it) is procompetitive, and that any proposed less restrictive alternative which involves payment for performance cannot be less restrictive since it undermines the fundamental procompetitive benefit.  In a bit of snark, the Ninth Circuit noted, “the district court cannot plausibly conclude that being a poorly-paid professional collegiate athlete is ‘virtually as effective’ for that market as being an amateur.  Or to borrow the Supreme Court’s analogy, the market for college football is distinct from other sports markets and must be ‘differentiated’ from professional sports lest it become ‘minor league football.’”[xxviii]

This tension boils down to the Ninth Circuit majority taking a broad view on what the restriction challenged is.  The dissent and Judge Wilken view the challenged restraint as the cap in the value of grant in aid that can be assigned for NIL rights.  The Ninth Circuit majority views the challenged restraint (perhaps improperly) as the NCAA’s amateurism rules, “Both we and the district court agree that the NCAA’s amateurism rule has procompetitive benefits.”[xxix]  Thus Judge Wilken and the Dissent see a less restrictive alternative to a price cap as a slightly higher price cap. The Ninth Circuit majority sees anything over full cost of attendance as fundamentally undermining the procompetitive benefit of the restriction in the first place.

I think there is a good argument that the majority has gone too far here and taken too broad a view of the challenged restraint.  While few would argue that “pay for performance” is a pretty clear line of amateur vs. professional, the NCAA’s current understanding of amateurism is far more complex.  The most recent NCAA manual involves sixteen pages of rules and regulations regarding amateurism, as well as a tome of a few hundred clarifying interpretations and educational columns, needed to describe what the majority here does in a couple sentences.  The majority has done the NCAA a great favor by boiling all of that down to “payments untethered to educational costs” when defining or viewing amateurism as it relates to the NCAA.[xxx]  Thus, even if a commitment to amateurism is a procompetitive benefit in and of itself, I do not think it is necessarily clear that any payments not related to educational costs are a clear undermining of amateurism.

Initial Reactions and Future Impact

Some have hailed this decision as a big win or big moment for student-athletes for a couple of reasons.  One is that the plaintiffs nominally “won,” however as addressed above this decision is far more beneficial to the NCAA.  The other reason is that many have noted as a result of this decision NCAA amateurism rules are only now subject to antitrust scrutiny.  My reaction to these people would be to quote former Daily Show host Jon Stewart “Bullshit is Everywhere.” For example this quote from the legal blog Above the Law:

“The NCAA is no longer above antitrust laws and courts can now require the NCAA to play by the Sherman Act’s rules. . . An antitrust exemption is like having a pot of gold for an organization like the NCAA. Just ask Major League Baseball. Now, however, the NCAA is subject to the Sherman Act.”[xxxi]

This is actually just false.  The NCAA was never above the antitrust laws.  The language the NCAA frequently relied on from Board of Regents, in many failed attempts to avoid scrutiny, was from an Antitrust case THAT THE NCAA LOST, which also held that the NCAA rules were subject to rule of reason analysis.  The NCAA has never been exempt from the Sherman Act and was always required to “play by its rules.”  If you read the rest of the article, you will see a litany of excerpts from the opinion purporting to tear down an alleged antitrust defense that never actually existed.

Or look at this analysis from noted non-attorney Sonny Vaccaro.

The NCAA never hid behind the Antitrust laws; they’ve spent the better part of a decade running from them or petulantly making bad arguments trying to fight them. A more accurate statement is one from Sports Illustrated college football columnist Stewart Mandell who stated:

To summarize, the Sherman Act applies to all agreements in restraints of trade with limited exceptions.  There are few, limited exceptions to the Sherman Act such as the non-statutory labor exception (for collectively bargained policies), the statutory labor exception, and for some continually confounding reason the baseball exemption.  Just because the NCAA’s amateurism rules had escaped challenge under the antitrust laws, doesn’t mean they weren’t always subject to them.[xxxii]  Finally, it should be noted that this opinion will carry particular weight in the future, since much of the coming litigation challenging the NCAA’s rules (like Jeffrey Kessler’s Jenkins case) is not only in the Ninth Circuit but in Judge Wilken’s court as well.[xxxiii]  While Wilken found for the plaintiffs at the district court level in this case, she will now possibly have Bybee’s ruling to follow in her future decisions.  That could be a huge blow for future plaintiff’s fighting the NCAA, especially in the Ninth Circuit.  Anyone who tells you this ruling does anything other than benefit the NCAA (and its entirely possible the NCAA might tell you this as well) simply did not read the opinion closely or think about its implications.

Finally, many have noted that because this opinion expressly states NCAA amateurism rules are subject to rule of reason analysis, there may be many more future lawsuits challenging other rules less central to the “concept of amateurism”, for example the no agent rule, or transfer rules.  I think this is possible but ultimately unlikely.  Antitrust litigation is some of the longest and most expensive litigation (Hey, Jeffrey Kessler has to eat too right?).  For a case like O’Bannon, or Jenkins, the reward of winning for student-athletes could be a large chunk of the NCAA’s (and its member institutions’) mammoth revenues justifying the high cost of the litigation.  I’m not sure a challenge to the no agent rule, or other minor perceived inequities, would bear the same cost/benefit profile

All in all this was a tremendous win for the NCAA.  Their reliance on Board of Regents may have been cut down, but they now have this new, far more on point, far more recent, and far more helpful decision to rely on.  Despite being nominally the loser, I believe it would be a huge mistake for the NCAA to further appeal this decision, and I expect the O’Bannon plaintiff’s to petition for cert to the Supreme Court.

[i] All citations to the O’Bannon Appeal refer to the PDF posted in the Resources Section, Cases and Complaints at www.thesportsesquires.com

[ii] He did, but, he was awarded $1 trebled plus interest for a total of about $3

[iii] The difference now is that before this case, the NCAA could theoretically have later lowered the grant in aid cap, and now they cannot.

[iv] O’Bannon Appeal Page 63

[v] O’Bannon Appeal Page 63

[vi] O’Bannon Appeal Page 62

[vii] 15 U.S.C.§1

[viii] See E.G. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 9 (1979)

[ix] Id.

[x] This “less restrictive alternative” analysis, while not initially developed in, was classically fleshed out in the Addyston Pipe case (Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1898)  and has been a popular adoption as a test by most if not all circuits.  However, the only rule of reason test adopted by the Supreme Court was initially developed in the Chicago Board of Trade case (Bd. Of Trade of Chi. V. United States, 246 U.S. 231, 238 (1918) and analyzes whether the procompetitive benefits of the restraint, outweigh its anticompetive effects.  While these two tests may seem similar, they differ crucially in that the Addyston Pipe test requires a restraint on trade to be optimally procompetitive whereas the Chicago Board of Trade test requires a restraint to be “net” procompetitive.

[xi] O’Bannon Appeal Page 48

[xii] Id.

[xiii] The Ninth Circuit also noted the challenged restraints play a limited pro competitive role in integrating student-athletes into the academic community. O’Bannon Appeal Page 51.

[xiv] O’Bannon Appeal Page 53

[xv] O’Bannon Appeal Page 54-55

[xvi] O’Bannon Appeal Page 57, Footnote 20

[xvii] O’Bannon Appeal Page 55.

[xviii] O’Bannon Appeal Page 57.

[xix] O’Bannon Appeal Page 57, Footnote 19

[xx] O’Bannon Appeal Page 27, citing NCAA v. Board of Regents of the University of Oklahoma, 468, US 85, at 100-101 (1984).

[xxi] O’Bannon Appeal Page 29

[xxii] O’Bannon Appeal Page 31

[xxiii] Id. at 32

[xxiv] O’Bannon Appeal Page 43 citing Board of Regents

[xxv] O’Bannon Appeal Page 51

[xxvi] O’Bannon Appeal Pages 52-53

[xxvii] O’Bannon Appeal Page 57, Footnote 20

[xxviii] O’Bannon Appeal Page 58

[xxix] O’Bannon Appeal Page 57

[xxx] The district court had looked to the Olympics which did not suffer a loss of demand when professional athletes were allowed to play, however Judge Bybee disagreed that the comparison was relevant to the case at hand.  O’Bannon Appeal Page 59.

[xxxi] http://www.atlredline.com/ncaa-defeated-by-rule-of-reason-in-obannon-lawsuit-1733800261

[xxxii] Yes the NCAA argued that Board of Regents exempted their amateurism rules from scrutiny, but this was a legal hail mary, akin to the NFL arguing it was a single entity for all purposes.  Board of Regents clearly never stood for that proposition.

[xxxiii] In her district court opinion Judge Wilken expressed significant reservations as to whether or not antitrust lawsuits were the appropriate way to instigate change in the NCAA.

About Jeremy Jarrett

Jeremy lives in Phoenix and works as in-house counsel, specializing in mergers and acquisitions, for a private management company with holdings in the oilfield services, refrigerated trucking, industrial fabrication and construction industries. Prior to that, he spent six years working for various sports agencies representing NBA, MLB and NFL players where he worked extensively on salary cap and collective bargaining issues. Additionally Jeremy has worked in the legal department of the New Orleans Pelicans, and with the NCAA Enforcement Office. Jeremy graduated Tulane University School of Law in 2012 with a certificate in Sports Law and graduated cum laude from the University of Pennsylvania in 2009 with a degree in Philosophy, Politics, and Economics.

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