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The U.S. Supreme Court will hear a challenge next month to the 9th U.S. Circuit Court of Appeals’ 2020 decision in NCAA v. Alston. Alston affirmed a district court decision that enjoined the National Collegiate Athletic Association (NCAA) from enforcing rules that restrict the education-related benefits its member institutions may offer students who play Football Bowl Subdivision football and Division I basketball.

This will be the first Supreme Court review of NCAA practices since NCAA v. Board of Regents in 1984, which applied the antitrust rule of reason in striking down the NCAA’s “artificial limit” on the quantity of televised college football games, but also recognized that “this case involves an industry in which horizontal restraints on competition are essential if the product [intercollegiate athletic contests] is to be available at all.” Significantly, in commenting on the nature of appropriate, competition-enhancing NCAA restrictions, the court in Board of Regents stated that:

[I]n order to preserve the character and quality of the [NCAA] ‘product,’ athletes must not be paid, must be required to attend class, and the like. And the integrity of the ‘product’ cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice – not only the choices available to sports fans but also those available to athletes – and hence can be viewed as procompetitive. [footnote citation omitted]

One’s view of the Alston case may be shaped by one’s priors regarding the true nature of the NCAA. Is the NCAA a benevolent Dr. Jekyll, which seeks to promote amateurism and fairness in college sports to the benefit of student athletes and the general public?  Or is its benevolent façade a charade?  Although perhaps a force for good in its early years, has the NCAA transformed itself into an evil Mr. Hyde, using restrictive rules to maintain welfare-inimical monopoly power as a seller cartel of athletic events and a monopsony employer cartel that suppresses athletes’ wages? I will return to this question—and its bearing on the appropriate resolution of this legal dispute—after addressing key contentions by both sides in Alston.

Summarizing the Arguments in NCAA v Alston

The Alston class-action case followed in the wake of the 9th Circuit’s decision in O’Bannon v. NCAA (2015). O’Bannon affirmed in large part a district court’s ruling that the NCAA illegally restrained trade, in violation of Section 1 of the Sherman Act, by preventing football and men’s basketball players from receiving compensation for the use of their names, images, and likenesses. It also affirmed the district court’s injunction insofar as it required the NCAA to implement the less restrictive alternative of permitting athletic scholarships for the full cost of attendance. (I commented approvingly on the 9th Circuit’s decision in a previous TOTM post.) 

Subsequent antitrust actions by student-athletes were consolidated in the district court. After a bench trial, the district court entered judgment for the student-athletes, concluding in part that NCAA limits on education-related benefits were unreasonable restraints of trade. It enjoined those limits but declined to hold that other NCAA limits on compensation unrelated to education likewise violated Section 1.

In May 2020, a 9th Circuit panel held that the district court properly applied the three-step Sherman Act Section 1 rule of reason analysis in determining that the enjoined rules were unlawful restraints of trade.

First, the panel concluded that the student-athletes carried their burden at step one by showing that the restraints produced significant anticompetitive effects within the relevant market for student-athletes’ labor.

At step two, the NCAA was required to come forward with evidence of the restraints’ procompetitive effects. The panel endorsed the district court’s conclusion that only some of the challenged NCAA rules served the procompetitive purpose of preserving amateurism and thus improving consumer choice by maintaining a distinction between college and professional sports. Those rules were limits on above-cost-of-attendance payments unrelated to education, the cost-of-attendance cap on athletic scholarships, and certain restrictions on cash academic or graduation awards and incentives. The panel affirmed the district court’s conclusion that the remaining rules—restricting non-cash education-related benefits—did nothing to foster or preserve consumer demand. The panel held that the record amply supported the findings of the district court, which relied on demand analysis, survey evidence, and NCAA testimony.

The panel also affirmed the district court’s conclusion that, at step three, the student-athletes showed that any legitimate objectives could be achieved in a substantially less restrictive manner. The district court identified a less restrictive alternative of prohibiting the NCAA from capping certain education-related benefits and limiting academic or graduation awards or incentives below the maximum amount that an individual athlete may receive in athletic participation awards, while permitting individual conferences to set limits on education-related benefits. The panel held that the district court did not clearly err in determining that this alternative would be virtually as effective in serving the procompetitive purposes of the NCAA’s current rules and could be implemented without significantly increased cost.

Finally, the panel held that the district court’s injunction was not impermissibly vague and did not usurp the NCAA’s role as the superintendent of college sports. The panel also declined to broaden the injunction to include all NCAA compensation limits, including those on payments untethered to education. The panel concluded that the district court struck the right balance in crafting a remedy that both prevented anticompetitive harm to student-athletes while serving the procompetitive purpose of preserving the popularity of college sports.

The NCAA appealed to the Supreme Court, which granted the NCAA’s petition for certiorari Dec. 16, 2020. The NCAA contends that under Board of Regents, the NCAA rules regarding student-athlete compensation are reasonably related to preserving amateurism in college sports, are procompetitive, and should have been upheld after a short deferential review, rather than the full three-step rule of reason. According to the NCAA’s petition for certiorari, even under the detailed rule of reason, the 9th Circuit’s decision was defective. Specifically:

The Ninth Circuit … relieved plaintiffs of their burden to prove that the challenged rules unreasonably restrain trade, instead placing a “heavy burden” on the NCAA … to prove that each category of its rules is procompetitive and that an alternative compensation regime created by the district court could not preserve the procompetitive distinction between college and professional sports. That alternative regime—under which the NCAA must permit student-athletes to receive unlimited “education-related benefits,” including post-eligibility internships that pay unlimited amounts in cash and can be used for recruiting or retention—will vitiate the distinction between college and professional sports. And via the permanent injunction the Ninth Circuit upheld, the alternative regime will also effectively make a single judge in California the superintendent of a significant component of college sports. The Ninth Circuit’s approval of this judicial micromanagement of the NCAA denies the NCAA the latitude this Court has said it needs, and endorses unduly stringent scrutiny of agreements that define the central features of sports leagues’ and other joint ventures’ products. The decision thus twists the rule of reason into a tool to punish (and thereby deter) procompetitive activity.

Two amicus briefs support the NCAA’s position. One, filed on behalf of “antitrust law and business school professors,” stresses that the 9th Circuit’s decision misapplied the third step of the rule of reason by requiring defendants to show that their conduct was the least restrictive means available (instead of requiring plaintiff to prove the existence of an equally effective but less restrictive rule). More broadly:

[This approach] permits antitrust plaintiffs to commandeer the judiciary and use it to regulate and modify routine business conduct, so long as that conduct is not the least restrictive conduct imaginable by a plaintiff’s attorney or district judge. In turn, the risk that procompetitive ventures may be deemed unlawful and subject to treble damages liability simply because they could have operated in a marginally less restrictive manner is likely to chill beneficial business conduct.

A second brief, filed on behalf of “antitrust economists,” emphasizes that the NCAA has adapted the rules governing design of its product (college amateur sports) over time to meet consumer demand and to prevent colleges from pursuing their own interests (such as “pay to  play”) in ways that would conflict with the overall procompetitive aims of the collaboration. While acknowledging that antitrust courts are free to scrutinize collaborations’ rules that go beyond the design of the product itself (such as the NCAA’s broadcast restrictions), the brief cites key Supreme Court decisions (NCAA v. Board of Regents and Texaco Inc. v. Dagher), for the proposition that courts should stay out of restrictions on the core activity of the joint venture itself. It then summarizes the policy justification for such judicial non-interference:

Permitting judges and juries to apply the Sherman Act to such decisions [regarding core joint venture activity] will inevitably create uncertainty that undermines innovation and investment incentives across any number of industries and collaborative ventures. In these circumstances, antitrust courts would be making public policy regarding the desirability of a product with particular features, as opposed to ferreting out agreements or unilateral conduct that restricts output, raises prices, or reduces innovation to the detriment of consumers.

In their brief opposing certiorari, counsel for Alston take the position that, in reality, the NCAA is seeking a special antitrust exemption for its competitively restrictive conduct—an issue that should be determined by Congress, not courts. Their brief notes that the concept of “amateurism” has changed over the years and that some increases in athletes’ compensation have been allowed over time. Thus, in the context of big-time college football and basketball:

[A]mateurism is little more than a pretext. It is certainly not a Sherman Act concept, much less a get-out-of-jail-free card that insulates any particular set of NCAA restraints from scrutiny.

Who Has the Better Case?

The NCAA’s position is a strong one. Association rules touching on compensation for college athletes are part of the core nature of the NCAA’s “amateur sports” product, as the Supreme Court stated (albeit in dictum) in Board of Regents. Furthermore, subsequent Supreme Court jurisprudence (see 2010’s American Needle Inc. v. NFL) has eschewed second-guessing of joint-venture product design decisions—which, in the case of the NCAA, involve formulating the restrictions (such as whether and how to compensate athletes) that are deemed key to defining amateurism.

The Alston amicus curiae briefs ably set forth the strong policy considerations that support this approach, centered on preserving incentives for the development of efficient welfare-generating joint ventures. Requiring joint venturers to provide “least restrictive means” justifications for design decisions discourages innovative activity and generates costly uncertainty for joint-venture planners, to the detriment of producers and consumers (who benefit from joint-venture innovations) alike. Claims by defendant Alston that the NCAA is in effect seeking to obtain a judicial antitrust exemption miss the mark; rather, the NCAA merely appears to be arguing that antitrust should be limited to evaluating restrictions that fall outside the scope of the association’s core mission. Significantly, as discussed in the NCAA’s brief petitioning for certiorari, other federal courts of appeals decisions in the 3rd, 5th, and 7th Circuits have treated NCAA bylaws going to the definition of amateurism in college sports as presumptively procompetitive and not subject to close scrutiny. Thus, based on the arguments set forth by litigants, a Supreme Court victory for the NCAA in Alston would appear sound as a matter of law and economics.

There may, however, be a catch. Some popular commentary has portrayed the NCAA as a malign organization that benefits affluent universities (and their well-compensated coaches) while allowing member colleges to exploit athletes by denying them fair pay—in effect, an institutional Mr. Hyde.

What’s more, consistent with the Mr. Hyde story, a number of major free-market economists (including, among others, Nobel laureate Gary Becker) have portrayed the NCAA as an anticompetitive monopsony employer cartel that has suppressed the labor market demand for student athletes, thereby limiting their wages, fringe benefits, and employment opportunities. (In a similar vein, the NCAA is seen as a monopolist seller cartel in the market for athletic events.) Consistent with this perspective, promoting the public good of amateurism (the Dr. Jekyll story) is merely a pretextual façade (a cover story, if you will) for welfare-inimical naked cartel conduct. If one buys this alternative story, all core product restrictions adopted by the NCAA should be fair game for close antitrust scrutiny—and thus, the 9th Circuit’s decision in Alston merits affirmation as a matter of antitrust policy.

There is, however, a persuasive response to the cartel story, set forth in Richard McKenzie and Dwight Lee’s essay “The NCAA:  A Case Study of the Misuse of the Monopsony and Monopoly Models” (Chapter 8 of their 2008 book “In Defense of Monopoly:  How Market Power Fosters Creative Production”). McKenzie and Lee examine the evidence bearing on economists’ monopsony cartel assertions (and, in particular, the evidence presented in a 1992 study by Arthur Fleischer, Brian Goff, and Richard Tollison) and find it wanting:

Our analysis leads inexorably to the conclusion that the conventional economic wisdom regarding the intent and consequences of NCAA restrictions is hardly as solid, on conceptual grounds, as the NCAA critics assert, often without citing relevant court cases. We have argued that the conventional wisdom is wrong in suggesting that, as a general proposition,

• college athletes are materially “underpaid” and are “exploited”;

• cheating on NCAA rules is prima facie evidence of a cartel intending to restrict employment and suppress athletes’ wages;

• NCAA rules violate conventional antitrust doctrine;          

• barriers to entry ensure the continuance of the NCAA’s monopsony powers over athletes.

No such entry barriers (other than normal organizational costs, which need to be covered to meet any known efficiency test for new entrants) exist. In addition, the Supreme Court’s decision in NCAA indicates that the NCAA would be unable to prevent through the courts the emergence of competing athletic associations. The actual existence of other athletic associations indicates that entry would be not only possible but also practical if athletes’ wages were materially suppressed.

Conventional economic analysis of NCAA rules that we have challenged also is misleading in suggesting that collegiate sports would necessarily be improved if the NCAA were denied the authority to regulate the payment of athletes. Given the absence of legal barriers to entry into the athletic association market, it appears that if athletes’ wages were materially suppressed (or as grossly suppressed as the critics claim), alternative sports associations would form or expand, and the NCAA would be unable to maintain its presumed monopsony market position. The incentive for colleges and universities to break with the NCAA would be overwhelming.

From our interpretation of NCAA rules, it does not follow necessarily that athletes should not receive any more compensation than they do currently. Clearly, market conditions change, and NCAA rules often must be adjusted to accommodate those changes. In the absence of entry barriers, we can expect the NCAA to adjust, as it has adjusted, in a competitive manner its rules of play, recruitment, and retention of athletes. Our central point is that contrary to the proponents of the monopsony thesis, the collegiate athletic market is subject to the self-correcting mechanism of market pressures. We have reason to believe that the proposed extension of the antitrust enforcement to the NCAA rules or proposed changes in sports law explicitly or implicitly recommended by the proponents of the cartel thesis would be not only unnecessary but also counterproductive.

Although a closer examination of the McKenzie and Lee’s critique of the economists’ cartel story is beyond the scope of this comment, I find it compelling.

Conclusion

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing. It is to be hoped that the Supreme Court will do the right thing and strongly reaffirm the NCAA’s authority to design and reformulate its core athletic amateurism product as it sees fit.

In its June 21 opinion in NCAA v. Alston, a unanimous U.S. Supreme Court affirmed the 9th U.S. Circuit Court of Appeals and thereby upheld a district court injunction finding unlawful certain National Collegiate Athletic Association (NCAA) rules limiting the education-related benefits schools may make available to student athletes. The decision will come as no surprise to antitrust lawyers who heard the oral argument; the NCAA was portrayed as a monopsony cartel whose rules undermined competition by restricting compensation paid to athletes.

Alas, however, Alston demonstrates that seemingly “good facts” (including an apparently Scrooge-like defendant) can make very bad law. While superficially appearing to be a relatively straightforward application of Sherman Act rule of reason principles, the decision fails to come to grips with the relationship of the restraints before it to the successful provision of the NCAA’s joint venture product – amateur intercollegiate sports. What’s worse, Associate Justice Brett Kavanaugh’s concurring opinion further muddies the court’s murky jurisprudential waters by signaling his view that the NCAA’s remaining compensation rules are anticompetitive and could be struck down in an appropriate case (“it is not clear how the NCAA can defend its remaining compensation rules”). Prospective plaintiffs may be expected to take the hint.

The Court’s Flawed Analysis

I previously commented on this then-pending case a few months ago:

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing.

Unfortunately, my concerns about a Supreme Court affirmance of the 9th Circuit were realized. Associate Justice Neil Gorsuch’s opinion for the court in Alston manifests a blinkered approach to the NCAA “monopsony” joint venture. To be sure, it cites and briefly discusses key Supreme Court joint venture holdings, including 2006’s Texaco v. Dagher. Nonetheless, it gives short shrift to the efficiency-based considerations that counsel presumptive deference to joint venture design rules that are key to the nature of a joint venture’s product.  

As a legal matter, the court felt obliged to defer to key district court findings not contested by the NCAA—including that the NCAA enjoys “monopsony power” in the student athlete labor market, and that the NCAA’s restrictions in fact decrease student athlete compensation “below the competitive level.”

However, even conceding these points, the court could have, but did not, take note of and assess the role of the restrictions under review in helping engender the enormous consumer benefits the NCAA confers upon consumers of its collegiate sports product. There is good reason to view those restrictions as an effort by the NCAA to address a negative externality that could diminish the attractiveness of the NCAA’s product for ultimate consumers, a result that would in turn reduce inter-brand competition.

As the amicus brief by antitrust economists (“Antitrust Economists Brief”) pointed out:

[T]he NCAA’s consistent and growing popularity reflects a product—”amateur sports” played by students and identified with the academic tradition—that continues to generate enormous consumer interest. Moreover, it appears without dispute that the NCAA, while in control of the design of its own athletic products, has preserved their integrity as amateur sports, notwithstanding the commercial success of some of them, particularly Division I basketball and Football Subdivision football. . . . Over many years, the NCAA has continually adjusted its eligibility and participation rules to prevent colleges from pursuing their own interests—which certainly can involve “pay to play”—in ways that would conflict with the procompetitive aims of the collaboration. In this sense, the NCAA’s amateurism rules are a classic example of addressing negative externalities and free riding that often are inherent or arise in the collaboration context.

The use of contractual restrictions (vertical restraints) to counteract free riding and other negative externalities generated in manufacturer-distributor interactions are well-recognized by antitrust courts. Although the restraints at issue in NCAA (and many other joint venture situations) are horizontal in nature, not vertical, they may be just as important as other nonstandard contracts in aligning the incentives of member institutions to best satisfy ultimate consumers. Satisfying consumers, in turn, enhances inter-brand competition between the NCAA’s product and other rival forms of entertainment, including professional sports offerings.

Alan Meese made a similar point in a recent paper (discussing a possible analytical framework for the court’s then-imminent Alston analysis):

[U]nchecked bidding for the services of student athletes could result in a market failure and suboptimal product quality, proof that the restraint reduces student athlete compensation below what an unbridled market would produce should not itself establish a prima facie case. Such evidence would instead be equally consistent with a conclusion that the restraint eliminates this market failure and restores compensation to optimal levels.

The court’s failure to address the externality justification was compounded by its handling of the rule of reason. First, in rejecting a truncated rule of reason with an initial presumption that the NCAA’s restraints involving student compensation are procompetitive, the court accepted that the NCAA’s monopsony power showed that its restraints “can (and in fact do) harm competition.” This assertion ignored the efficiency justification discussed above. As the Antitrust Economists’ Brief emphasized: 

[A]cting more like regulators, the lower courts treated the NCAA’s basic product design as inherently anticompetitive [so did the Supreme Court], pushing forward with a full rule of reason that sent the parties into a morass of inquiries that were not (and were never intended to be) structured to scrutinize basic product design decisions and their hypothetical alternatives. Because that inquiry was unrestrained and untethered to any input or output restraint, the application of the rule of reason in this case necessarily devolved into a quasi-regulatory inquiry, which antitrust law eschews.

Having decided that a “full” rule of reason analysis is appropriate, the Supreme Court, in effect, imposed a “least restrictive means” test on the restrictions under review, while purporting not to do so. (“We agree with the NCAA’s premise that antitrust law does not require businesses to use anything like the least restrictive means of achieving legitimate business purposes.”) The court concluded that “it was only after finding the NCAA’s restraints ‘patently and inexplicably stricter than is necessary’ to achieve the procompetitive benefits the league had demonstrated that the district court proceeded to declare a violation of the Sherman Act.” Effectively, however, this statement deferred to the lower court’s second-guessing of the means employed by the NCAA to preserve consumer demand, which the lower court did without any empirical basis.

The Supreme Court also approved the district court’s rejection of the NCAA’s view of what amateurism requires. It stressed the district court’s findings that “the NCAA’s rules and restrictions on compensation have shifted markedly over time” (seemingly a reasonable reaction to changes in market conditions) and that the NCAA developed the restrictions at issue without any reference to “considerations of consumer demand” (a de facto regulatory mandate directed at the NCAA). The Supreme Court inexplicably dubbed these lower court actions “a straightforward application of the rule of reason.” These actions seem more like blind deference to rather arbitrary judicial second-guessing of the expert party with the greatest interest in satisfying consumer demand.

The Supreme Court ended its misbegotten commentary on “less restrictive alternatives” by first claiming that it agreed that “antitrust courts must give wide berth to business judgments before finding liability.” The court asserted that the district court honored this and other principles of judicial humility because it enjoined restraints on education-related benefits “only after finding that relaxing these restrictions would not blur the distinction between college and professional sports and thus impair demand – and only finding that this course represented a significantly (not marginally) less restrictive means of achieving the same procompetitive benefits as the NCAA’s current rules.” This lower court finding once again was not based on an empirical analysis of procompetitive benefits under different sets of rules. It was little more than the personal opinion of a judge, who lacked the NCAA’s knowledge of relevant markets and expertise. That the Supreme Court accepted it as an exercise in restrained judicial analysis is well nigh inexplicable.

The Antitrust Economists’ Brief, unlike the Supreme Court, enunciated the correct approach to judicial rewriting of core NCAA joint venture rules:

The institutions that are members of the NCAA want to offer a particular type of athletic product—an amateur athletic product that they believe is consonant with their primary academic missions. By doing so, as th[e] [Supreme] Court has [previously] recognized [in its 1984 NCAA v. Board of Regents decision], they create a differentiated offering that widens consumer choice and enhances opportunities for student-athletes. NCAA, 468 U.S. at 102. These same institutions have drawn lines that they believe balance their desire to foster intercollegiate athletic competition with their overarching academic missions. Both the district court and the Ninth Circuit have now said that they may not do so, unless they draw those lines differently. Yet neither the district court nor the Ninth Circuit determined that the lines drawn reduce the output of intercollegiate athletics or ascertained whether their judicially-created lines would expand that output. That is not the function of antitrust courts, but of legislatures.                                                                                                   

Other Harms the Court Failed to Consider                    

Finally, the court failed to consider other harms that stem from a presumptive suspicion of NCAA restrictions on athletic compensation in general. The elimination of compensation rules should favor large well-funded athletic programs over others, potentially undermining “competitive balance” among schools. (Think of an NCAA March Madness tournament where “Cinderella stories” are eliminated, as virtually all the talented players have been snapped up by big name schools.) It could also, through the reallocation of income to “big name big sports” athletes who command a bidding premium, potentially reduce funding support for “minor college sports” that provide opportunities to a wide variety of student-athletes. This would disadvantage those athletes, undermine the future of “minor” sports, and quite possibly contribute to consumer disillusionment and unhappiness (think of the millions of parents of “minor sports” athletes).

What’s more, the existing rules allow many promising but non-superstar athletes to develop their skills over time, enhancing their ability to eventually compete at the professional level. (This may even be the case for some superstars, who may obtain greater long-term financial rewards by refining their talents and showcasing their skills for a year or two in college.) In addition, the current rules climate allows many student athletes who do not turn professional to develop personal connections that serve them well in their professional and personal lives, including connections derived from the “brand” of their university. (Think of wealthy and well-connected alumni who are ardent fans of their colleges’ athletic programs.) In a world without NCAA amateurism rules, the value of these experiences and connections could wither, to the detriment of athletes and consumers alike. (Consistent with my conclusion, economists Richard McKenzie and Dwight Lee have argued against the proposition that “college athletes are materially ‘underpaid’ and are ‘exploited’”.)   

This “parade of horribles” might appear unlikely in the short term. Nevertheless, in the course of time, the inability of the NCAA to control the attributes of its product, due to a changed legal climate, make it all too real. This is especially the case in light of Justice Kavanaugh’s strong warning that other NCAA compensation restrictions are likely indefensible. (As he bluntly put it, venerable college sports “traditions alone cannot justify the NCAA’s decision to build a massive money-raising enterprise on the backs of student athletes who are not fairly compensated. . . . The NCAA is not above the law.”)

Conclusion

The Supreme Court’s misguided Alston decision fails to weigh the powerful efficiency justifications for the NCAA’s amateurism rules. This holding virtually invites other lower courts to ignore efficiencies and to second guess decisions that go to the heart of the NCAA’s joint venture product offering. The end result is likely to reduce consumer welfare and, quite possibly, the welfare of many student athletes as well. One would hope that Congress, if it chooses to address NCAA rules, will keep these dangers well in mind. A statutory change not directed solely at the NCAA, creating a rebuttable presumption of legality for restraints that go to the heart of a lawful joint venture, may merit serious consideration.   

From Sen. Elizabeth Warren (D-Mass.) to Sen. Josh Hawley (R-Mo.), populist calls to “fix” our antitrust laws and the underlying Consumer Welfare Standard have found a foothold on Capitol Hill. At the same time, there are calls to “fix” the Supreme Court by packing it with new justices. The court’s unanimous decision in NCAA v. Alston demonstrates that neither needs repair. To the contrary, clearly anti-competitive conduct—like the NCAA’s compensation rules—is proscribed under the Consumer Welfare Standard, and every justice from Samuel Alito to Sonia Sotomayor can agree on that.

In 1984, the court in NCAA v. Board of Regents suggested that “courts should take care when assessing the NCAA’s restraints on student-athlete compensation.” After all, joint ventures like sports leagues are entitled to rule-of-reason treatment. But while times change, the Consumer Welfare Standard is sufficiently flexible to meet those changes.

Where a competitive restraint exists primarily to ensure that “enormous sums of money flow to seemingly everyone except the student athletes,” the court rightly calls it out for what it is. As Associate Justice Brett Kavanaugh wrote in his concurrence:

Nowhere else in America can businesses get away with agreeing not to pay their workers a fair market rate on the theory that their product is defined by not paying their workers a fair market rate.  And under ordinary principles of antitrust law, it is not evident why college sports should be any different.  The NCAA is not above the law.

Disturbing these “ordinary principles”—whether through legislation, administrative rulemaking, or the common law—is simply unnecessary. For example, the Open Markets Institute filed an amicus brief arguing that the rule of reason should be “bounded” and willfully blind to the pro-competitive benefits some joint ventures can create (an argument that has been used, unsuccessfully, to attack ridesharing services like Uber and Lyft). Sen. Amy Klobuchar (D-Minn.) has proposed shifting the burden of proof so that merging parties are guilty until proven innocent. Sen. Warren would go further, deeming Amazon’s acquisition of Whole Foods anti-competitive simply because the company is “big,” and ignoring the merger’s myriad pro-competitive benefits. Sen. Hawley has gone further still: calling on Amazon to be investigated criminally for the crime of being innovative and successful.

Several of the current proposals, including those from Sens. Klobuchar and Hawley (and those recently introduced in the House that essentially single out firms for disfavored treatment), would replace the Consumer Welfare Standard that has underpinned antitrust law for decades with a policy that effectively punishes firms for being politically unpopular.

These examples demonstrate we should be wary when those in power assert that things are so irreparably broken that they need a complete overhaul. The “solutions” peddled usually increase politicians’ power by enabling them to pick winners and losers through top-down approaches that stifle the bottom-up innovations that make consumers’ lives better.

Are antitrust law and the Supreme Court perfect? Hardly. But in a 9-0 decision, the court proved this week that there’s nothing broken about either.

I am delighted to announce that Alden Abbott has returned to TOTM as a regular blogger following his recent stint as General Counsel of the FTC. You can find his first post since his return, on the NCAA v. Alston case, here.

Regular readers know Alden well, of course. Not only has he long been one of the most prolific and insightful thinkers on the antitrust scene, but from 2014 until his departure when he (re)joined the FTC in 2018, he had done some of his most prolific and insightful thinking here at TOTM.

As I wrote when Alden joined TOTM in 2014:

Alden has been at the center of the US antitrust universe for most of his career. When he retired from the FTC in 2012, he had served as Deputy Director of the Office of International Affairs for three years. Before that he was Director of Policy and Coordination, FTC Bureau of Competition; Acting General Counsel, Department of Commerce; Chief Counsel, National Telecommunications and Information Administration; Senior Counsel, Office of Legal Counsel, DOJ; and Special Assistant to the Assistant Attorney General for Antitrust, DOJ.

For those who may not know, Alden left the FTC earlier this year and is now a Senior Research Fellow at the Mercatus Center.

Welcome back, Alden!

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.)

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 any institution that claims 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.)

In a June 12, 2014 TOTM post, I discussed the private antitrust challenge to NCAA rules that barred NCAA member universities from compensating athletes for use of their images and names in television broadcasts and video games.

On August 8 a federal district judge held that the NCAA had violated the antitrust laws and enjoined the NCAA from enforcing those rules, effective 2016.  The judge’s 99-page opinion, which discusses NCAA price-fixing agreements, is worth a read.  It confronts and debunks the NCAA’s efficiency justifications for their cartel-like restrictions on athletic scholarships.  If the decision withstands appeal, it will allow  NCAA member schools to offer prospective football and basketball recruits trust funds that could be accessed after graduation (subject to certain limitations), granting those athletes a share of the billions of dollars in revenues they generate for NCAA member universities.

A large number of NCAA rules undoubtedly generate substantial efficiencies that benefit NCAA  member institutions, college sports fans, and college athletes.  But the beneficial nature of those rules does not justify separate monopsony price fixing arrangements that disadvantage athletic recruits – arrangements that cannot legitimately be tied to the NCAA’s welfare-enhancing interest in promoting intercollegiate athletics.  Stay tuned.

The National Collegiate Athletic Association’s (NCAA’s) longstanding cartel-like arrangements once again are facing serious legal scrutiny.  On June 9 a federal antitrust trial opened in Oakland featuring college athletes’ attempt to enjoin the NCAA from exploiting the athletes’ names, images, and likenesses (“rights of publicity”) for profitRights of publicity are a well-recognized form of intellectual property.  Although the factual details concerning the means by which NCAA institutions may have extracted those rights (for example, from signed waivers that may have been required as a condition for receipt of athletic scholarships) remain to be developed, a concerted NCAA effort to exploit the athletes’ IP, if proven, would be highly anticompetitive.  Consistent with the TOTM tradition of highlighting challenges to NCAA competitive arrangements, let’s look at what’s at stake.

The NCAA is involved in major sports-related revenue-producing projects with its corporate partners, such as Electronic Arts (EA), a $4 billion company that produces video games.  The money is big – EA’s NCAA Football game alone is reported to bring in over $200 million a year in gross revenues.  Although the NCAA has denied using player likenesses in video games, the creators of the NCAA Football series have indicated that actual athletes’ jersey numbers and attributes are used, a fact apparently known to NCAA executives.  Moreover, recent separate $20 million and $40 million settlements agreed to by the NCAA and EA in suits brought by college athletes provide additional indications that the NCAA may be aware that it has exploited college players’ rights of publicity.

So what is the antitrust angle?  In dealing with student athletes, the NCAA, which represents the interests of its member colleges, acts like a monopsony cartel, as Judge Posner has noted, and as Blair and Harrison have explained in detail.  Anticompetitive monopsony buyer agreements have long been struck down by the courts as Sherman Act violations, as in Mandeville Farms and in National Macaroni Manufacturers v. FTC, and occasionally have been the subject of criminal prosecution.

This does not necessarily mean, however, that all restrictions the NCAA places on student athletes run afoul of the antitrust laws.  As the Supreme Court made clear in the 1984 NCAA case, the federal antitrust laws apply to the NCAA, but competitive restraints may pass muster if they are justifiable means of fostering competition among amateur athletic teams, such as uniform rules defining the conditions of a sports contest, the eligibility of participants, or the sharing of responsibilities and benefits integral to the NCAA’s joint venture.

Like the anticompetitive restrictions on member colleges’ separate television contracts struck down by the Supreme Court in NCAA, however, the NCAA’s profiting from student athletes’ rights of publicity is not vital to the preservation of balanced collegiate amateur competition.   Likewise, it is not needed to avoid the payment of student salaries that some might argue smacks of disfavored “professionalism” (although others would argue it promotes healthy competition and avoids exploitation of athletes).  In contrast, a policy of vindicating athletes’ right of publicity enables them to capture the value of the intellectual property generated by their accomplishments, and thus incentivizes outstanding athletic achievements, consistent with the legitimate ends of NCAA competitions.  Proof of a concerted effort by the NCAA to deny this benefit to student athletes and instead to share the IP-generated proceeds only with member institutions would, if shown, appear to lack any cognizable efficiency justification, and thus be ripe for antitrust condemnation.

Whatever the outcome of the current rights of publicity litigation, the NCAA may expect to face antitrust scrutiny on a number of fronts.  This is as it should be.  While the organization clearly yields efficiencies that benefit consumers (such as establishing and overseeing rules and standards for many collegiate sports), its inherent temptation to act as a classic cartel for the financial benefit of its members will not disappear.  Indeed, its incentive to seek monopoly profits may rise, as the money generated by organized athletics and related entertainment offshoots continues to grow.  Accordingly, antitrust enforcers should remain vigilant, and efforts to obtain NCAA-specific statutory antitrust exemptions, even if well-meaning, should be resisted.

By William Kolasky

In my view, the Second Circuit’s decision in Apple e-Books, if not reversed by the Supreme Court, threatens to undo a half century of progress in reforming antitrust doctrine. In decision after decision, from White Motors through Leegin and Actavis, the Supreme Court has repeatedly held—in cases involving both horizontal and vertical restraints—that the only test for whether an agreement can be found per se unlawful under Section 1 is whether it is “a naked [restraint] of trade with no purpose except stifling competition,” or whether it is instead “ancillary to the legitimate and competitive purposes” of a business association. Dagher. The cases in which the Court has consistently applied this test read like a litany of antitrust decisions we all now study in law school: White Motors, Topco, GTE Sylvania, Professional Engineers, BMI, Maricopa, NCAA, Business Electronics, ARCO, California Dental, Dagher, Leegin, American Needle, and, most recently, Actavis. Significantly, more than two-thirds of these cases involved horizontal, not vertical restraints.

In these decisions, the Court has also repeatedly warned that this test cannot be applied by simply asking whether the defendants “have literally ‘fixed’ a ‘price,” or otherwise agreed not to compete. Warning that “[l]iteralness is overly simplistic and often overbroad,” the Court insisted in BMI that courts instead focus on “the effect and, because it tends to show effect…, on the purpose of the practice” to determine whether “the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output… or instead one designed to ‘increase economic efficiency and render markets more, rather than less, competitive.”

In applying this test the Court has also repeatedly emphasized that a court should classify an alleged restraint—whether horizontal or vertical—as per se unlawful “only after considerable experience” with the particular restraint at issue. In addition, the Court has repeatedly emphasized that all that is necessary for a restraint to escape per se illegality is that there be a “plausible” procompetitive purpose behind it. See, e.g., Cal Dental; Business Electronics; Northwest Wholesale Stationers.

By focusing so much attention in their cert. papers on whether the agreements between Apple and the publishers should be characterized as “vertical” or “horizontal,” both Apple and the DOJ seem to have lost sight of the fundamental teachings of this long line of Supreme Court decisions—namely, that even if an agreement is horizontal, it can be found to be per se unlawful only if it is a naked agreement that, on its face, serves no purpose other than to restrict competition and restrain output. This is particularly important where, as in this case, the alleged agreements have both horizontal and vertical elements. In such cases, the right question is not whether the agreements can be labeled a “hub-and-spoke conspiracy,” but instead what the nature and purpose of those agreements were.

In this case, the nature of the arrangement between Apple and the publishers by which they all appointed Apple as their common sales agent is not fundamentally different from the an agreement among a group of competitors to appoint a joint sales agent. While such an arrangement can, in some circumstances, be used to facilitate cartel behavior, it can also serve legitimate pro-competitive purposes by enabling those competitors to market their goods or services more efficiently. The courts and antitrust enforcement agencies have, therefore, recognized—ever since the Supreme Court’s decision in Appalachian Coals—that these joint sales arrangements must generally be evaluated under the rule of reason and cannot in all instances be condemned as per se unlawful. See, e.g., FTC/DOJ, Competitor Collaboration Guidelines(For those of you who remember the criticisms that used to be directed at that decision by your antitrust professor in law school, I urge you to read Sheldon Kimmel’s excellent revisionist article, How and Why the Per Se Rule Against Price Fixing Went Wrong, showing that the Court’s holding was perfectly consistent with its more recent rulings in BMI and its progeny.

Viewing this as an agreement among the publishers to appoint Apple as their common sales agent might have helped the lower courts to have focused on what should have been the key issues in the case. The first is whether the agency arrangement was a “naked” agreement to “restrict competition and decrease output,” or could “plausibly” have been intended to serve other legitimate pro-competitive business purposes. The second is whether, if so, the restraints that were part of this arrangement—such as price caps and most-favored nation clauses—were ancillary to those legitimate purposes.

Based on the record as I read it, it appears to me that the answers to these two questions are obvious, and that they compel the conclusion that this common sales agent arrangement could not be classified as per se unlawful, but would need to be evaluated under a full-blown rule of reason analysis. Let me address each issue in turn.

Was the common sales agent arrangement between Apple and the five publishers a naked agreement to fix prices and restrict output?

Neither the lower courts nor the parties in their cert papers address this key issue in any detail, choosing instead to spend page after page debating whether the agreement between Apple and the publishers was horizontal or vertical. Fortunately, the amicus briefs that were filed in support of Apple’s cert. petition by ICLE and by a group of antitrust economists do address the issue at considerable length.

Those briefs make a convincing argument that the common sale agent arrangements between the publishers and Apple were designed to serve at least two pro-competitive purposes. The first was to introduce greater competition into the downstream market for the distribution of e-books by ending Amazon’s below-cost pricing of e-books at the retail level. The second was to give the publishers greater control over the downstream pricing of their e-books in order to prevent below-cost pricing of e-books from cannibalizing the sales of their print books.

The common sale agent arrangement served to introduce more competition into the downstream market for the distribution of e-books

This one is easy. No one disputes that before Apple entered, Amazon dominated the downstream market for e-books with a 90% market share, giving it a virtual monopoly. Hopefully, few, if any, would dispute that Amazon’s loss-leader strategy of selling e-books at well below cost served to entrench its near monopoly position in that market. It is easy to understand why publishers of e-books would not want to allow Amazon’s monopoly to continue, leaving them with only a sole distributor for their products.

The record below makes it clear that Apple did not believe it could profitably enter the e-book market so long as Amazon continued to maintain its first-mover advantage by selling e-books below cost. Apple and the publishers therefore had a common interest in moving from the existing wholesale model of e-book distribution to a new agency model under which the publishers, not Amazon, would control the retail pricing of e-books and could set those prices at a level that would enable other competitors, such as Apple, to enter. That seems pro-competitive to me.

The record also makes it clear that this objective could not be accomplished through a simple vertical agency agreement between Apple and one or two individual publishers. In order to enter successfully, Apple needed a critical mass of titles, which it could have only by securing the agreement of most of the leading publishers to appoint it as their common sale agent. Apple, therefore, had a legitimate pro-competitive business reason to facilitate—or, as the Second Circuit charged, “orchestrate” —agreements among the publishers to switch to an agency model and to appoint Apple as their common non-exclusive agent for the sale of their e-books.

The common sales agent arrangement gave the publishers control over the retail prices of e-books, protecting them from harms to their businesses that could otherwise be caused by below-cost pricing by a single dominant retailer.

The Second Circuit and DOJ both make much of the fact that the publishers wanted to control the retail prices of e-books in order to raise those prices above the level set by Amazon’s loss-leader pricing strategy. They both seem to believe that this alone is enough to characterize their conduct as a “naked price fixing scheme.” But it is not. As the Supreme Court held in Leegin, resale price maintenance can be pro-competitive even if it leads to higher prices if it is designed promote competition by creating a more efficient and competitive distribution system.

As Areeda and Hovenkamp teach in their treatise, Fundamentals of Antitrust Law, the same principle applies to agreements among a group of horizontal competitors to appoint a single sales agent. Those competitors will frequently “have to agree with each other that they will not accept less than a certain minimum price, or sometimes may even have to agree on the entire price schedule,” and these prices may sometimes be higher than the prices at which they were previously selling the products individually. See Areeda & Hovenkamp (2015 Supp.), at 19:31-32. But even if these agreements result in an increase in price, they argue that it should not be found illegal if the effect on output is positive. Their argument is supported by the language in BMI, in which the Court focused on the effect of a restraint on output, not price, in describing what was necessary to classify an alleged restraint as a per se illegal naked price-fixing agreement.

Here, although the district court found that prices went up and output went down in the short run after the publishers switched from their wholesale model to an agency model, these immediate, short-term effects do not necessarily show that the switch to the new agency model might not, over the long-term, have resulted in an increase in output. DOJ concedes that since Apple’s entry, e-book sales have grown exponentially, but speculates that this growth might have occurred even if Amazon had continued to maintain its monopoly position in the retail sale of e-books. As someone who reads e-books on my iPad, I doubt that, but this is the type of issue that can only be resolved through a full rule-of-reason analysis, not through the application of a conclusive presumption of illegality under the per se doctrine.

Here, as the amicus briefs argue, there are several ways Amazon’s loss-leader pricing strategy could have depressed the output of both e-book and print books long-term. First, of course, once its monopoly was fully entrenched, Amazon could have sought to recoup its losses by raising its e-book prices above a competitive level. Second, if instead Amazon continued to cannibalize print sales through below-cost e-book pricing, publishers might have been forced to reduce the royalties they pay authors, giving those authors less reason to continue writing, thus reducing the output of all books. Again, these are the types of issues that require a full rule of reason analysis, not summary condemnation under the per se doctrine.

Were the price caps and most-favored nation clauses ancillary restraints that may have been reasonably necessary to the legitimate pro-competitive purposes of the common sales agent arrangement?

The ancillary nature of the terms that were included in Apple’s agency agreements with the publishers, and which the publishers may have agreed among themselves to accept, is equally easy to show.

The price caps on which Apple insisted were obviously designed to protect it from opportunistic behavior by the publishers in charging higher prices for their e-books than what Apple felt the market would accept, thereby preventing it from selling a sufficient volume of e-books to make its entry successful. Such opportunistic behavior by the publishers could also have made it harder to convince consumers to buy Apple’s new iPad, the success of which was critical to its future.

The most favored nation clauses on which Apple insisted, and which the publishers may also have agreed among themselves to accept, were likewise arguably necessary to protect Apple from the risk of having to compete against an established competitor offering lower prices than it could, thereby impeding its successful entry and damaging its goodwill with consumers.

In both cases, these are classic and legitimate reasons for ancillary restraints. Whether or not these particular restraints were reasonably necessary to Apple’s successful entry is a question that could only be decided on the basis of a full rule of reason analysis. All that is needed to avoid per se condemnation is that there be a plausible argument that they were, and that, again, should be something that no one could dispute.

* * *

Given the way the case was litigated, I recognize that it may be difficult to introduce at the Supreme Court level a whole new way of looking at the facts of the case. But if the Court does grant cert., I would hope that Apple and the amici supporting it would try to refocus the Court’s attention away from a sterile argument over whether the restraints in question were vertical or horizontal, and to focus it instead on whether they were a “naked” attempt to fix prices and restrict output or were instead ancillary to a pro-competitive business relationship.

 

 

 

 

 

 

 

Michael McCann (Vermont, CNNSI) has a very interesting column on developments in Ed O’Bannon’s lawsuit against the NCAA.   O’Bannon is challenging the NCAA’s licensing of the names, images and likenesses of former Division I college athletes for commercial purposes without compensation or consent.  McCann discusses the implications of O’Bannon’s motion to expand the class to include current players:

The prospect of O’Bannon v. NCAA radically reshaping college sports is real. If O’Bannon ultimately prevails, “student-athletes” and “amateurism” would take on new meanings in the context of D-I sports. While college athletes would still not obtain compensation for their labor, they would be compensated for the licensing of their identity. If O’Bannon instead extracts a favorable settlement from the NCAA, these athletes would likely be compensated as well.

Still, it’s early in the litigation process and, besides, the NCAA has a good record in court. The NCAA is sure to raise concerns about the new world of D-I college sports as envisioned by O’Bannon. For one, how a fund for current student-athletes is distributed and how former student-athletes are compensated will spark questions. Should star players get more? Would Title IX be implicated if male student-athletes receive more licensing revenue because they might generate more revenue than female student-athletes? Also expect some colleges and universities to bemoan that they cannot afford to contribute to player trusts unless they eliminate most of their teams and give pay cuts to coaches and staff. Along those lines, schools with large endowments or those with high revenue-generating teams may only become “richer” in a college sports world where certain schools have the financial wherewithal to compensate student-athletes while others do not.

Go read the whole thing.

 

 

Meese on Bork (and the AALS)

Thom Lambert —  22 December 2012

William & Mary’s Alan Meese has posted a terrific tribute to Robert Bork, who passed away this week.  Most of the major obituaries, Alan observes, have largely ignored the key role
Bork played in rationalizing antitrust, a body of law that veered sharply off course in the middle of the last century.  Indeed, Bork began his 1978 book, The Antitrust Paradox, by comparing the then-prevailing antitrust regime to the sheriff of a frontier town:  “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.”  Bork went on to explain how antitrust, if focused on consumer welfare (which equated with allocative efficiency), could be reconceived in a coherent fashion.

It is difficult to overstate the significance of Bork’s book and his earlier writings on which it was based.  Chastened by Bork’s observations, the Supreme Court began correcting its antitrust mistakes in the mid-1970s.  The trend began with the 1977 Sylvania decision, which overruled a precedent making it per se illegal for manufacturers to restrict the territories in which their dealers could operate.  (Manufacturers seeking to enhance sales of their brand may wish to give dealers exclusive sales territories to protect them against “free-riding” on their demand-enhancing customer services; pre-Sylvania precedent made it hard for manufacturers to do this.)  Sylvania was followed by:

  • Professional Engineers (1978), which helpfully clarified that antitrust’s theretofore unwieldy “Rule of Reason” must be focused exclusively on competition;
  • Broadcast Music, Inc. (1979), which held that competitors’ price-tampering arrangements that reduce costs and enhance output may be legal;
  • NCAA (1984), which recognized that trade restraints among competitors may be necessary to create new products and services and thereby made it easier for competitors to enter into output-enhancing joint ventures;
  • Khan (1997), which abolished the ludicrous per se rule against maximum resale price maintenance;
  • Trinko (2004), which recognized that some monopoly pricing may aid consumers in the long run (by enhancing the incentive to innovate) and narrowly circumscribed the situations in which a firm has a duty to assist its rivals; and
  • Leegin (2007), which overruled a 96 year-old precedent declaring minimum resale price maintenance–a practice with numerous potential procompetitive benefits–to be per se illegal.

Bork’s fingerprints are all over these decisions.  Alan’s terrific post discusses several of them and provides further detail on Bork’s influence.

And while you’re checking out Alan’s Bork tribute, take a look at his recent post discussing my musings on the AALS hiring cartel.  Alan observes that AALS’s collusive tendencies reach beyond the lateral hiring context.  Who’d have guessed?

The NCAA recently denied Todd O’Brien’s appeal to make use of the Grad Student Transfer Exception — which would allow O’Brien, who graduated St. Joseph’s with a degree in economics, to continue playing basketball while pursuing a graduate degree in Public Administration at University of Alabama-Birmingham.  St. Joe’s, apparently at the behest of a college basketball coach who appears to have has lost sight the purpose of college athletics, refused to allow O’Brien the exemption.  Its permission is required (and has apparently never been withheld in these circumstances).

O’Brien tells his story in a recent column at CNN-Sports Illustrated:

My name is Todd O’Brien. I’m 22 years old. In 2007, I became the first person from Garden Spot High (located in Lancaster County in New Holland, Pa.) to earn a Division I basketball scholarship. I attended Bucknell University from 2007 to 2008, where I made the Patriot League All-Rookie team. After the season, I decided the school and its basketball program weren’t the right fit for me. I wanted to follow the footsteps of my uncle Bruce Frank, a former Penn player, and play in the Big 5. I transferred and was given a full scholarship to play basketball at St. Joe’s for coach Phil Martelli. After sitting out in 2008-2009, I earned the starting center spot for the 2009-2010 season. Though our team struggled, I was able to start 28 games and led the team in rebounding. I also was the recipient of the team’s Academic Achievement award for my work in the classroom.

Entering the next season, I had aspirations of keeping my starting role, increasing my productivity on the court, and most importantly — winning more games. Off the court my goal was to continue getting good grades and to position myself to earn my degree studying Economics.

Things didn’t work out that way for O’Brien as the team struggled and St. Joe’s Coach Martelli opted to play younger players.  O’Brien increased his focus on academics, including graduate school options:
As the season went on things did not improve much, but on a brighter note I entered my last semester as an undergrad. On top of my regular classes, I had picked up an independent study internship at the Delaware County Municipal Building, where the focus of my study was on local economics.Though I still needed to pass three summer courses to officially earn my degree, I was allowed to walk in graduation that May. At the urging of my parents, my Economics advisor and other family friends, I began looking at graduate programs for the fall semester.

O’Brien ultimately decided he would take the summer courses, graduate early, and find a suitable graduate program.  Here is where things get ugly, according to O’Brien’s account:
I met with Coach Martelli to inform him that I would not be returning. I had hoped he would be understanding; just a few weeks before, we had stood next to each other at graduation as my parents snapped photo. Unfortunately, he did not take it well. After calling me a few choice words, he informed me that he would make some calls so that I would be dropped from my summer class and would no longer graduate. He also said that he was going to sue me. When he asked if I still planned on leaving, I was at a loss for words. He calmed down a bit and said we should think this over then meet again in a few days. I left his office angry and worried he would make me drop the classes.
A few days later I again met with Coach Martelli. This time I stopped by athletic director Don DiJulia’s office beforehand to inform him of my decision. I told him I would be applying to grad schools elsewhere. He was very nice and understanding. He wished me the best of luck and said to keep in touch. Relieved that Mr. DiJulia had taken the news well, I went to Coach Martelli’s office. I told him that my mind had not changed, and that I planned on enrolling in grad school elsewhere. I recall his words vividly: “Regardless of what the rule is I’ll never release you. If you’re not playing basketball at St. Joe’s next year, you won’t be playing anywhere.”
St. Joe’s never agreed to sign the release.  O’Brien appealed to the NCAA.  Here is his account:

With no movement on Saint Joseph’s end, my faith was left in the hands of a five-member NCAA committee. I pleaded my case, stating how St Joe’s was acting in a vindictive manner and how the NCAA must protect its student-athletes. When it was my turn to speak, I talked about how much it would hurt to lose my final season of college basketball, not just for me but for my parents, sisters and all of my relatives who take pride in watching me play. To work so hard for something, waking up at 6 a.m. to run miles on a track, spending countless hours spent in the gym shooting, and to have it all taken away because a head coach felt disrespected that I left in order to further pursue academics? It’s just not right.

Later that day the NCAA contacted UAB to inform the school that my waiver had been denied. The rules state that I needed my release from St. Joe’s, and I didn’t have it. I am the first person to be denied this waiver based on a school’s refusal. I was crestfallen. The NCAA has done a lot for me in life — I’ve gotten a free education, I’ve traveled the country playing basketball, and for all of this I am thankful. But in this instance I think they really dropped the ball. To deny a grad student eligibility to play based on the bitter opinion of a coach? You can’t be afraid to set precedent if it means doing the right thing.

My lawyer continues to plead to St Joe’s to release me, but the school no longer will discuss the issue. When my parents try to contact Coach Martelli, Don Dijulia, or President Smithson, they hide behind their legal counsel. When we try to contact the legal counsel, they hide behind the NCAA. A simple e-mail from any one of them saying they no longer object to me playing would have me suited up in uniform tomorrow, yet they refuse.

So here I am, several states away from home, practicing with the team every day, working hard on the court, in the weight room and in the classroom. I keep the faith that one day (soon, I hope) somebody from St. Joe’s will step up and do the right thing, so if that day comes I’ll be ready. I just finished my first semester of grad classes, and I enjoy it a lot. When somebody asked if I would be leaving to try to play overseas now that I’ve been denied the ability to play here, I said no. I said it before and I’m sticking to it — I’m here to get a graduate degree.

Whenever I get frustrated about the situation, I think back to something my mother told me on the phone one day. “This isn’t the end of basketball. Basketball ends when you want it to, whether that’s next year, in five years, or in 50 years. You control your relationship with the game, and nobody, not St. Joe’s, not the NCAA, can take that away from you.”

But right now, they sure are trying to.

If O’Brien’s account is even close to accurate, St. Joe’s — and especially Coach Martelli — should be ashamed of themselves.  As should the NCAA. The latter is nothing new.  But Coach Martelli and St. Joe’s has the opportunity to correct this — and they should.
Good luck to O’Brien.