Amateurism and Antitrust: The 9th Circuit Gets It Right

Alden Abbott —  6 October 2015

On September 30, in O’Bannon v. NCAA, the U.S. Court of Appeals for the 9th Circuit held that the National Collegiate Athletic Association’s (NCAA) rules that prohibited student athletes from being paid for the use of their names, images, and likenesses are subject to the antitrust laws and constitute an unlawful restraint of trade, under the antitrust rule of reason.  This landmark holding represents the first federal appellate condemnation of NCAA limitations on compensating student athletes.  (In two previous Truth on the Market posts I discussed this lawsuit and later explained that I agreed with the federal district court’s decision striking down these NCAA rules.)  The gist of the 9th Circuit’s opinion is summarized by the Court’s staff:

“The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs’ Sherman Act claim because:  (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA’s amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA’s rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.

The panel held that even though many of the NCAA’s rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason.  Applying the Rule of Reason, the panel held that the NCAA’s rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the “price” that recruits pay to attend college.  The record supported the district court’s finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism.  The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court’s other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous.  The panel vacated the district court’s judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.

Chief Judge Thomas concurred in part and dissented in part. He  disagreed with the [two judge panel] majority’s conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes’ full cost of attendance.”

The key point of the 9th Circuit’s decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of “amateurism,” is clearly correct, and in line with modern antitrust jurisprudence.  The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby “enhance” the quality of legal aid representation), are fully subject to antitrust review.  Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association’s agreement to deny insurers’ request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation.  In light of those teachings, the NCAA’s claim (based on a clear misreading of the Supreme Court’s NCAA v. Board of Regents (1984) decision) that its highly restrictive “amateurism” rules should be exempt from antitrust review is patently absurd.

Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers.  The NCAA is a monopsony cartel, representing the institutions (America’s colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers.  Moreover, the NCAA’s rules regarding student athletes greatly limit competition, artificially limit athletes’ compensation, and are in severe tension with the “scholar-athlete” ideal that the NCAA claims it promotes.  In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:

“[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players.  NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work.  The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.

It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players.  The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. .

A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .

[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.

Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout.  The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams.  Schools usually forget about athletes when they stop competing.  An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes.  They could have used these additional assets to help them finish school, or to get a better start if they dropped out.”

Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker’s views regarding NCAA student competition rules and noted the NCAA’s history of avoiding antitrust problems:

“The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes.  Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged.  The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.

As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their “employers,” the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.”

In sum, the 9th Circuit O’Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA’s student athlete rules, irrespective of whether one agrees with the specific holding in the case.  The antitrust laws are a “consumer welfare prescription” that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to the claim by any institution that it should be antitrust-exempt based on the alleged “virtue” or “public-spiritedness” of its actions.  (This reasoning also supports the lifting of baseball’s antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence.  But that is a matter for another day.)

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

6 responses to Amateurism and Antitrust: The 9th Circuit Gets It Right

  1. 

    Well, Alden, I must say that your mighty attempt to explain the antitrust rationale for this legal action is quite a stretch to say the least! I’ll have to let other readers of this wonderful blog decide whether increasing the supply of collegiate players ( and potentially enhancing the quality of sports from a consumer perspective) is: 1. what all of this antitrust interference is all about and 2. whether it’s all worth it or not. My read is that it’s all about income redistribution, not efficiency, but I could be wrong.

    • 

      Thanks again, Don. No doubt income redistribution has something to do with it. Indeed, income redistribution is a key aspect of almost all antitrust cases, including cartel cases (although combating allocative inefficiency is, of course, the economist’s traditional justification for going after cartel price fixing). That is not inconsistent, however, with the notion that broad exemptions to antitrust scrutiny (such as one based on “amateurism”) should be disfavored.

  2. 

    I fully agree that the highest-valued use of antitrust would be to combat government-imposed competitive restraints, bu the ability of antitrust enforcers to do that is somewhat limited by the “state action” and “petitioning” doctrines developed by the Supreme Court. (However, there are some recent signs that the Supreme Court is narrowing its state action exemption.) As to the consumer welfare point, it would appear that the narrowing of NCAA rules (I do not call for full elimination, since that arguably would totally eliminate “amateurism”) that limit competition among colleges for student athletes would tend to raise returns to participating in intercollegiate sports, thereby raising the supply of players into intercollegiate sports and at least potentially enhancing the perceived quality in consumers’ eyes of the affected sports competitions.

  3. 

    Some academics are convinced that the antitrust laws are a “consumer welfare prescription” (as you put it) but almost nothing in antitrust history (Congressional debates, case history, ect.) convinces me that this has ever been the predominant focus of antitrust enforcement. Second, very little in this NCAA ruling concerns itself with “consumers” let alone their welfare. The focus is to argue that (poor) students would be better off absent some NCAA restrictions on earnings while in college. Wow, that’s news! But what does any of that have to do with consumer welfare? Third, NCAA rules that restrain “competition” may not be perfect (whatever that means) but increased government regulation (and antitrust is regulation) to terminate private rules that seek, presumably, to maintain some sort of a competitive balance in college sports, strikes me as an example of “fatal conceit.” Ending the “reserve clause” in baseball increased player salaries; did it increase consumer welfare? Baseball (and college sport) is surely a business but, to my knowledge, their “cartel” status is unsupported by State power. Antitrust would have plenty to do if it just concerned itself with ending State restrictions on entry into markets…and left private contract “restraints” alone.

    • 

      Thanks, Professor Armentano, I fully agree that if one, as a matter of philosophy, believes that the antitrust laws should be repealed, the NCAA’s conduct should not be assessed. However, I proceed from the premise that the antitrust laws exist and will not be repealed, and, thus, that they should be applied in a manner that is consistent with welfare maximization, as Bork uses the term. I further believe that antitrust should condemn particular private rules only if they are likely to undermine the competitive process, applying a decision-theoretic approach. In that light, most private restrictions do not even merit a look — I believe that the screens Frank Easterbrook developed (in “The Limits of Antitrust”) are pertinent in that regard. (Note that serious and distinguished market-oriented scholars, including Becker and Hayek, also found a legitimate role for antitrust, properly cabined.) However, that does not mean that rules of a particular organization, which represents effectively all competitors in a particular industry (college sports), should be given a pass, merely because they are said to promote “amateurism.” That is no more justifiable than saying that all of major league baseball’s rules are “antitrust exempt” because baseball is “the national pastime,” or that rules that prohibit competition for contracts among professional engineer should be exempt merely because it is asserted (without any support) that they promote “public safety.” Most NCAA regulations (such as those setting “rules of the game”) do not merit antitrust scrutiny — only those that have the potential to undermine efficiency or limit output should be carefully assessed. With regard to the latter category, antitrust courts should be most respectful of efficiency justifications. The problem is that the NCAA did not, in my opinion, provide colorable efficiency-related justifications for the restraints at issue in O’Bannon. The 9th Circuit was entirely justified in scrutinizing the restraint at issue, whether one agrees or not (and I tend to agree) that it should have been struck down under the rule of reason. (As I wrote, “irrespective of one agrees with the specific holding in this case,” antitrust scrutiny was justified.)

      • 

        Thanks for your summary of the NCAA case and your comments. Actually I tried to keep my “philosophy” out of the discussion above. Even accepting the existence of antitrust law, I simply suggested that those resources might best be applied to State restrictions on entry (into markets) and competition. Private restraints (absent government support) are, in my judgment, far less harmful to the general welfare than State prohibitions of competition or misapplied antitrust enforcement in areas previously exempt. (I would, for instance, NOT apply the antitrust laws to labor union activity). But even accepting your (mainstream) framework for applying a rule of reason and making judgments concerning efficiency, what “outputs” are we talking about that get restrained by NCAA rules, and what “prices” are we focusing on here in terms of consumer welfare? It was suggested in the case comments that (some) students would likely earn more absent NCAA restrictions. So what does that have to do with consumer welfare? Perhaps I’m missing something.