Can the National Collegiate Athletic Association (“NCAA”) continue to prohibit member schools from offering direct compensation to student-athletes? The answer, at least for now, is a qualified “no.” On August 8, 2014, the Honorable Claudia Wilken, judge for the U.S. District for the Northern District of California, issued a ruling in O’Bannon, et al. v. Nat’l Collegiate Athletic Ass’n, et al., Case No. 4:09-cv-3329, 2014 U.S. Dist. LEXIS 110336 (N.D. Cal. Aug. 8, 2014), that was limited in scope, yet promises to forever alter the multi-billion dollar university athletics industry. A class of current and former NCAA student-athletes led by Ed O’Bannon challenged the NCAA bylaws prevent student-athletes from receiving scholarships greater than the cost of attendance as defined by the school. O’Bannon, slip op., p. 20. The plaintiff class challenged “the set of rules that bar student-athletes from receiving a share of the revenue that the NCAA and its member schools earn from the sale of licenses to use the student-athletes’ names, images, and likenesses [(‘NIL’)] in videogames, live game telecasts, and other footage. Plaintiffs contend[ed] that these rules violate the Sherman Antitrust Act [‘Act’].” Id. at 1, citing 15 U.S.C. § 1 et seq.
The three-week trial focused on two relevant markets. The first was the college education market. Id. at 7. Judge Wilken found that universities that sponsor Division I basketball and/or Division I Football Bowl Subdivision football “are the only suppliers of the unique bundles of goods and services” (id. at 8) offered to Plaintiffs as part of the recruitment process. The second was the group licensing market. Plaintiffs argued that, absent NCAA payment restrictions, major college athletes would be able to sell license teams’ NIL rights to schools, broadcasters, or licensing companies. Id. at 13. Judge Wilken found that NCAA schools agree to value Plaintiffs’ NIL “at zero by agreeing not to compete with each other to credit any other value to the recruit in the exchange. . . .Thus, because Plaintiffs’ college education market is essentially a mirror image of the market for recruits’ athletic services and licensing rights, the Court finds that the NCAA exercises market power, fixes prices, and restrains competition in both markets.” Id. at 22-23. Judge Wilken found that Plaintiffs had proved an injury to competition in the college education market (id. at 66), and that the injury to competition violated the Act. Id. at 94. However, Judge Wilken rejected Plaintiffs’ argument that restrictions on compensation injured competition in the group licensing market. Id. at 73, 76-78.
Having determined that the NCAA was restraining trade, Judge Wilken went on to reject most of the NCAA’s arguments “that the challenged restrictions on student-athletic compensation are reasonable because they are necessary.” Id. at 23. However, she did find that the NCAA met its burden under the rule of reason that some restrictions could yield two precompetitive benefits: lack of payments increases consumer demand for product, and it enhances schools’ efforts to integrate student-athletes into the overall academic community. Id. at 49, 89-90.
Thus, the burden shifted to Plaintiffs to show how the NCAA’s “procompetitive goals can be achieved . . . through ‘less restrictive alternatives.'” Id. at 90 (quoting Bhan v. NME Hospitals, Inc., 929 F.2d 1404, 1410 n.4 (9th Cir. 1991). In evaluating Plaintiffs’ proposed modifications to the NCAA’s amateurism rules, Judge Wilken found that using NIL revenue to raise the current cap on scholarship amounts to cover full cost of attendance, or to hold NIL revenue in trust until after athletes are finished with school were less restrictive alternatives to achieve the NCAA’s goal of integrating academics and athletics by not isolating student-athletes from the rest of the university community. Id. at 44-46. Consequently, the court’s order enjoined the NCAA from enforcing bylaws that prohibited schools from doing either. Id. at 96. However, she rejected Plaintiffs’ proposal “allowing student athletes to receive money for endorsements” (id. at 47) as not “offer[ing] the NCAA a viable means of achieving its stated goals.” Id. at 48. She also allowed the NCAA to maintain any bylaws that would “ensur[e] that no school may offer a recruit a greater share of [NIL] revenue than it offers any other recruit in the same class on the same team.” Id. at 97.
Judge Wilken’s ruling did not create an open market for schools to bid on the services of players with direct cash payments. It also did not grant the players or individual teams the right to negotiate directly with television broadcasters for the value of their NIL. Moreover, the NCAA has also announced it will appeal the ruling to the Court of Appeals for the Ninth Circuit. Nonetheless, the decision provides major athletic universities the unprecedented opportunity to offer deferred compensation as part of their efforts to entice top high school seniors to come to their schools beginning in 2016-17. While no school is required to make these payments, O’Bannon, slip op. at 89, the NCAA or member schools would face treble damages if they engaged in any collusive efforts to restrain individual schools from offering such payments. 15 U.S.C. § 15(a). Thus, absent a reversal by the Ninth Circuit, it seems almost certain that, in two years, at least some schools will begin offering athletes cash payments (albeit deferred payments) for the first time. How these payments alter the intercollegiate athletics industry for universities, student-athletes, and fans will be one of the most important topics in sports and antitrust law in the coming years.