Antitrust Laws and the National Collegiate Athletic Association

4310 words (17 pages) Essay in Business Law

30/07/19 Business Law Reference this

Last modified: 30/07/19 Author: Law student

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Abstract

This Research Paper will describe United States antitrust laws and how they pertain to the National Collegiate Athletic Association (NCAA). Through analyzing four cases (NCAA v. Board of Regents of University of Oklahoma, Agnew v. NCAA, O’Bannon v. NCAA, and Jenkins v. NCAA) involving the NCAA and their alleged antitrust violations, the reader will gain a better understanding of what constitutes an antitrust violation and how the Rule of Reason is applied to determine such a violation. While each case revolves around possible antitrust violations, each case presents a unique allegation to which the Court must implement the Rule of Reason to determine whether the filed complaint is valid.

From the late 1870s through the 1920s, the United States experienced an economic boom known as the Second Industrial Revolution, or the Technological Revolution, where multiple businesses merged to form a conglomerate to gain an edge against their competition. One such conglomerate was The Standard Oil Company owned by John D. Rockefeller. While Standard Oil already owned a majority market share, Rockefeller wanted total control. He began using economic threats against his competitors to force them into a buy-out or going out of business. Realizing that conglomerates such as Standard Oil Company could gain excessive economic power, the United States Government enacted laws that collectively became known as the Antitrust Laws. Antitrust law refers to “legislation enacted by the federal and various state governments to regulate trade and commerce by preventing unlawful restraints, price-fixing, and monopolies; to promote competition; and to encourage the production of quality goods and services at the lowest prices, with the primary goal of safeguarding public welfare by ensuring that consumer demands will be met by the manufacture and sale of goods at reasonable prices” (Antitrust Law, 2010).  At the core of these laws is the Sherman Antitrust Act which prohibits anticompetitive agreements and the formation of monopolies. Since the introduction of antitrust laws, many conglomerates such as Standard Oil have been broken up due to its monopolistic nature. And one organization, the National Collegiate Athletic Association (NCAA), has been under scrutiny of violating antitrust laws for several decades. The NCAA is a non-profit organization that regulates laws as it pertains to student-athletes who attend their membered colleges and universities. With the increase in popularity of college athletics and the associated revenues that college sports, specifically FBS football and D-1 men’s basketball, have generated the past several decades, the NCAA has been accused of violating antitrust laws. In the on-going debate of whether certain NCAA rules violate antitrust laws we shall examine four cases in further detail.

NCAA v. Regents of University of Oklahoma (1984)

In 1979, members of the College Football Association (CFA), who were also a part of the NCAA, decided they wanted more input into how the NCAA formulated its television contract policies. Instead of relying on the NCAA and its rules, regulations, and restrictions, the College Football Association reached an agreement with NBC that did not limit when or how many games they could televise. As a result, the CFA could potentially earn higher revenues than would be possible under the agreement put forth by the NCAA. The NCAA threatened to take action against any institution it deemed had violated its rules by reaching an independent agreement without its consent. The CFA sued, “the case was taken to the United States District Court for the Western District of Oklahoma, and a preliminary injunction was granted preventing the NCAA from initiating disciplinary proceedings or interfering with the CFA’s efforts to carry out the agreements set forth in its contract with NBC” (NCAA v. Regents of University of Oklahoma, 1984).

The District Court ruled that the NCAA violated the Sherman Antitrust Act in its new contract due to the considerable constraints set forth in it. The Court called the NCAA a “classic cartel” because the NCAA attempted to assert total control over whom, how, and when college football could be televised. “They had an artificially high price, applied limits on production, and had means to punish other cartel members who do not abide with any consideration as to the quality of its offerings and what games viewers want to see” (NCAA v. Regents of University of Oklahoma, 1984).

According to the District Court, live college football was the relevant market and was restrained by the NCAAA in the following ways:

  1. The NCAA had fixed prices for certain broadcasts.
  2. Its contracts were no different to a group boycott of all other potential broadcasters and its sanctions constituted a threatened boycott of potential competitors.
  3. The plan placed an unreasonable limit on how the games were produced.

In its defense, the NCAA claimed that they wanted to protect the gate attendance, which they felt would be impacted by events that were televised without being under its control. It also sought to keep the competitive nature of college football amongst the schools. However, the District Court failed to accept these arguments. There was no available evidence to support the claims of how televised games could affect actual attendance and how the plan it offered helped to maintain a competitive balance. The NCAA subsequently appealed.

According to the Appellate Court, the restraints by the NCAA were considered illegal per se due to its price-fixing nature. It rejected arguments by the NCAA justifying its plan as being procompetitive. The NCAA made several arguments to the Court that were ruled to have no justification. First, the Court failed to see how the plan promoted an increase in live attendance. Second, it found no reason for the plan to compete with other programs since it was already illegal per se. They remanded the case back to the District Court, so it could modify the terms of its injunctive decree.

According to Justice Stevens, the NCAA’s actions led to a restraint of trade. “In that sense, however, every contract is a restraint of trade, and the Sherman Antitrust Act was intended to prohibit unreasonable restraints of trade” (NCAA v Regents of University of Oklahoma, 1984). Judge Bork put forth that “some activities can only be carried out jointly. The NCAA and its members market competition in and of itself, and it needs certain rules and regulations that all must abide by to maintain its long-held traditions and maintain the competitiveness. The NCAA is marketing live college football, which is different than professional sports. Having a relevant market is essential to file an antitrust suit. To preserve the competitiveness, those who participate in sports need to attend class regularly and should not be given pay.” (NCAA v Regents of University of Oklahoma, 1984).

The Supreme Court affirmed that the restraints were a form of horizontal fixing, and therefore violated the Sherman Antitrust Act. The NCAA essentially limited the output of live games that could be broadcasted and raised the prices to broadcast them. They also had total control over how the games were televised, which effectively created a monopoly for the live college football market. However, the Court determined that the NCAA rules were not illegal per se because they did allow for other sports to be competitive.

Agnew v. NCAA    

Joseph Agnew attended Rice University in 2006 on a one-year football scholarship.  During his sophomore year he sustained an injury and was unable to continue to play football.  Because of his injury, Agnew’s football scholarship was not renewed his junior year at Rice University. Since his scholarship was not renewed Agnew decided to appeal the decision of the University and won.  Agnew’s scholarship was once again revoked his senior year and Agnew was forced to pay for his tuition out-of-pocket.

Agnew soon filed a lawsuit that began in the United States District Court for the North District of California but was requested to be transferred by the NCAA to the United States District Court for the Southern District of Indiana. The plaintiffs filed an amended complaint with the NCAA’s consent and argued a violation of Section 1 of the Sherman Antitrust Act.  The amended complaint was formatted as a class action lawsuit and the plaintiffs challenged two of the NCAA’s bylaws.  The first bylaw prohibits any NCAA member institutions from granting any multi- year scholarships and sets the limit to a one-year scholarship for student-athletes’ student-athletes (NCAA Bylaw 15.3.3.1).  This bylaw demonstrates a form of fixed pricing and doesn’t protect the students against any potential financial hardships that can prevent them from finishing their degree if injured. The second bylaw challenged was the cap on the number of athletic-based scholarships that a school could offer per sport each school year.  If there is a cap of athletic scholarships it would fail to create competition.

To determine if the NCAA’s rules violated the Sherman Antitrust Act, the Court followed the three-step framework of the Rule of Reason:

  1. “Does the plaintiff bear burden of showing the restraint produces significant anticompetitive effects within a relative market?
  2. If plaintiff bears burden, then defendant must show evidence of the restraint’s procompetitive effects.
  3. The plaintiff must then show that legitimate objectives can be achieved in a substantially less restrictive manner” (O’Bannon v NCAA, 2014).

In its motion to dispose the claim, the NCAA disputed that the claim should be dismissed under the Rule of Reason for the following:

  1. Failure to identify an admissible market, which is necessary to prove for a creditable Sherman Antitrust Act claim;
  2. Failure to identify enough facts to demonstrate that the NCAA hurt any competition in an admissible market; as well as
  3. Failure to identify facts which would demonstrate an injury because the NCAA committed acts that were anticompetitive. 

The plaintiffs’ suit pursued statutory provisions that can be found in the Clayton Act of 1914 as well as the Sherman Antitrust Act.  A claim that would demonstrate a violation under the Sherman Act would require as stated in Section 1 “a contract, combination of trust, or conspiracy, in trade or commerce… is declared illegal” (15 U.S.C. § 1).  The plaintiffs also found that the Clayton Act states, “anything forbidden in the antitrust laws may sue…and shall recover threefold damages” (15 U.S.C. § 15).  Plaintiffs claimed that the bylaws set forth by the NCAA set a restraint in the labor market particularly for student athletes and a product market which produces bachelor’s degrees.  Setting these restraints, the NCAA would clearly violate the rights of the plaintiffs under the Sherman Antitrust Act. The NCAA argues that plaintiffs’ complaint failed to identify a market in which the bylaws control trade.

The number of individuals in the market for bachelor’s degree includes a variety of people not just individuals with scholarships for athletics.  The impact that the NCAA bylaws have affect a very small amount of the market since there is only a small number of athletes that do not have their scholarships renewed.   The District Court also demonstrated a flaw in the alleged market for bachelor’s degrees which is degrees are not automatically given upon paying tuition nor are the degrees guaranteed.   The fact remains that the NCAA must operate in an anticompetitive way to be able to justify any procompetitive intention.   It is widely known that many schools compete with one another by offering recruits incentives and benefits.  These incentives are set to be part of a competitive intention to lure athletes into a school that can result in financial gain for the school.

The District Court granted the NCAA’s motion to dismiss on September 1, 2011.   It was determined that the plaintiffs failed to identify a market in which “trade was improperly restrained”, even if the plaintiffs identified that there was some type of product market for bachelor’s degrees or a labor market for student-athletes it simply would just not been enough.  In the framework of the Sherman Antitrust act it would have been found that those markets are not identified.

O’Bannon v. NCAA

Ed O’Bannon was a star basketball player for UCLA and led his team to a national title in 1995. Years after he had graduated, he noticed that a video game contained images and the likeness of him and his fellow teammates from the UCLA national title team without obtaining his or his teammate’s consent. In 2009, O’Bannon agreed to be the lead plaintiff for a class action lawsuit against the NCAA and the Collegiate Licensing Company alleging violations of the Sherman Antitrust Act and his right to publicity. O’Bannon alleges that NCAA’s amateurism rules violated antitrust laws by restricting trade and price-fixing. To demonstrate that NCAA’s rules put a restraint on trade, the District Court identified two markets: the college education market and the group licensing market.

In the college education market, colleges compete against one another for the best players by offering them athletic scholarships as well as other non-monetary incentives unique to the school such as athletic facilities, high-level coaches, and quality athletic competition. The District Court reasoned that “since very few athletes who are talented enough to play in FBS football or D-1 basketball opt not to attend an FBS/D-1 school; choose to attend D-2 or D-3 school or compete in minor or foreign leagues; and cannot join pro leagues directly from high school, the Court concluded that NCAA’s FBS football and D-1 basketball violate antitrust laws because there are no professional or college football or basketball leagues capable of supplying a substitute for the bundle of goods and services that FBS football and D-1 basketball schools provide” (O’Bannon v. NCAA, 2014).

With respect to the group licensing market, the Court ruled that the “NCAA licensed rights to use names, images, and likeness (NIL) of their FBS football players and D-1 basketball players for a profit. Live game telecasts, sports video games, game rebroadcasts, advertisements, and other archival footage all used players NILs with all profits going to the NCAA and its membered schools” (O’Bannon v. NCAA, 2014).

Through the Rule of Reason, the District Court found that the NCAA’s rules have an anticompetitive effect in the college education market but not in the group licensing market. It also concluded that the rules serve procompetitive purposes. However, it determined that the procompetitive purposes of the rules could be achieved by less restrictive, alternative restraints and that the rules were therefore unlawful.

Absent NCAA’s rules, colleges would compete for recruits by offering the student-athletes compensation that would exceed the athletic scholarships offered by the colleges, thereby “effectively lowering the price that the recruits must pay for the combination of educational and athletic opportunities that the schools provide” (O’Bannon v. NCAA, 2014).

Rules prohibiting compensation for the use of student-athletes’ NILs are a price-fixing agreement. “Recruits pay for their “scholarship” with their labor and their NILs, but the “sellers” (or colleges) collectively agree to value NILs at zero dollars. Under this theory, colleges and universities behave as a cartel – a group of sellers who have colluded to fix the price of their product.” (Miller, 2014)

Although the NCAA forbids its member schools to pay student-athletes anything beyond a fixed scholarship, it allows schools to spend as much as they like on other aspects of their athletic programs, such as hiring top-of-the-line coaches and building “recruiting palaces” that rival and sometimes exceed, professional facilities, which “negates whatever equalizing effect the NCAA’s restraints on student-athlete compensation might have once had”(O’Bannon v NCAA, 2014).

The plaintiffs were not seeking to REQUIRE that all schools pay their student-athletes; rather, they sought an injunction permitting schools to do so. Schools that could not afford to pay their student-athletes would not have any financial obligation beyond the athletic scholarship, but if the university or college school is generating revenue using the student-athletes’ NILs, then they could share some of the profits with their student-athletes. Judge Wilkens found in favor of O’Bannon and allowed universities and colleges, to pay their student-athletes up to $5,000 per year, which would be placed in a trust until the student-athlete leaves the school or is no longer eligible to play collegiate sports.

Jenkins v. NCAA

In Jenkins v. NCAA, the Court asks, does the NCAA violate antitrust laws by capping financial obligations to their student-athletes at the value of the cost-of-attendance (COA)? In 2016, the Business Insider released a graph showing that FBS football programs in the NCAA generate a combined annual average revenue of $29,635,946 (Gaines, 2016).  Student-athletes make up the school’s football team that lures the fans, who spend money at games which generates the revenue for the schools. Therefore, a large portion of money that funds these colleges and universities are generated from student-athletes playing their sports. When comparing the revenue generated from FBS football and D-1 basketball for colleges with the value of athletic scholarships the colleges provide for their student-athletes, the colleges are making a huge profit. Martin Jenkins, along with other FBS football players and D-1 basketball players, filed a class action lawsuit with the United States District Court for the District of New Jersey against the NCAA for violating Federal antitrust laws. They allege that the NCAA violates the Sherman Antitrust Act by capping the grant-in-aid, or GIA, that the athletes receive or “prohibit, cap, or otherwise limit the remuneration that players in each of those markets may receive for their athletic services” (Ingels, 2017). The D-I athletes claim that the NCAA restricts trade by capping the GIA, thereby eliminating competition in the recruiting process. The plaintiffs are seeking an injunction to bar NCAA’s membered schools from capping the GIA of student-athletes.

When these complaints were filed, the GIA was capped at the value of tuition, fees, room and board and required course books; but after the plaintiffs filed their lawsuit, the NCAA allowed their membered institutions to increase their GIA compensation up to the cost-of-attendance (COA) of that school.

“Judge Claudia Wilken of the U.S. District Court for the Northern District of California ruled that a class of college football and men’s basketball players may proceed to trial in their antitrust challenge against the NCAA’s current no-pay rules” (Edelmen, 2018). The plaintiffs argued that by capping the GIAs, the NCAA eliminated competition by inflicting an unreasonable constraint of trade under Section I of the Sherman Antitrust Act amongst schools recruiting a specific athlete. Therefore, the plaintiffs are asking for an injunction against the NCAA’s GIA cap. Along with the injunction, the plaintiffs are asking for additional compensation for the difference between the GIAs that have been awarded and the actual cost-of-attendance (COA).

The ruling in O’Bannon v NCAA is being used as precedent for the Jenkins case. However, the NCAA is also using the ruling of the O’Bannon case as a part of their defense by arguing that when the Court of Appeals for the Ninth Circuit reversed the ruling on permanent injunction in relation to deferred compensation, they eliminated the challenge presented by the plaintiffs on the current rules in the NCAA because, ‘”offering [student-athletes] cash sums untethered to educational expenses” was not a less restrictive alternative to the NCAA’s current rules under the rule of reason” (Jenkins v. NCAA, 2016).

The NCAA filed a motion for judgement on the previous ruling of the Ninth Circuit in the case of O’Bannon v. NCAA claiming that the judgement established that the schools the athletes have chosen to attend, are not required to pay athletes more than the COA. However, this request was unsuccessful, and the parties are set to meet for trial in December of 2018.

Virtually every business, big or small, from the past, the present, and the future falls within the scope of Federal antitrust regulations. As businesses gain more economic power, they will also experience more scrutiny from not only the Federal government, but also the general public. Many major corporations such as Microsoft, AT&T, Apple, and as discussed, the NCAA, have gone through litigation under the scrutiny of possible antitrust violations. And as businesses continue to shift towards E-commerce such as Amazon, amendments to the current antitrust laws will most likely occur to protect consumers from online businesses. However, what constitutes a violation of antitrust laws can sometimes be difficult to determine. As Ayn Rand states, “Under the antitrust laws, a man becomes a criminal from the moment he goes into business, no matter what he does. If he complies with one of these laws, he faces criminal prosecution under several others. For instance, if he charges prices which some bureaucrats judge as too high, he can be prosecuted for monopoly or for a successful ‘intent to monopolize’; if he charges prices lower than those of his competitors, he can be prosecuted for ‘unfair competition’ or ‘restraint of trade’; and if he charges the same prices as his competitors, he can be prosecuted for ‘collusion’ or ‘conspiracy.'”

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