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.
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.
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.
[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.
The European Commission this week published its proposed Artificial Intelligence Regulation, setting out new rules for “artificial intelligence systems” used within the European Union. The regulation—the commission’s attempt to limit pernicious uses of AI without discouraging its adoption in beneficial cases—casts a wide net in defining AI to include essentially any software developed using machine learning. As a result, a host of software may fall under the regulation’s purview.
The regulation categorizes AIs by the kind and extent of risk they may pose to health, safety, and fundamental rights, with the overarching goal to:
Prohibit “unacceptable risk” AIs outright;
Place strict restrictions on “high-risk” AIs;
Place minor restrictions on “limited-risk” AIs;
Create voluntary “codes of conduct” for “minimal-risk” AIs;
Establish a regulatory sandbox regime for AI systems;
Set up a European Artificial Intelligence Board to oversee regulatory implementation; and
Set fines for noncompliance at up to 30 million euros, or 6% of worldwide turnover, whichever is greater.
AIs That Are Prohibited Outright
The regulation prohibits AI that are used to exploit people’s vulnerabilities or that use subliminal techniques to distort behavior in a way likely to cause physical or psychological harm. Also prohibited are AIs used by public authorities to give people a trustworthiness score, if that score would then be used to treat a person unfavorably in a separate context or in a way that is disproportionate. The regulation also bans the use of “real-time” remote biometric identification (such as facial-recognition technology) in public spaces by law enforcement, with exceptions for specific and limited uses, such as searching for a missing child.
The first prohibition raises some interesting questions. The regulation says that an “exploited vulnerability” must relate to age or disability. In its announcement, the commission says this is targeted toward AIs such as toys that might induce a child to engage in dangerous behavior.
The ban on AIs using “subliminal techniques” is more opaque. The regulation doesn’t give a clear definition of what constitutes a “subliminal technique,” other than that it must be something “beyond a person’s consciousness.” Would this include TikTok’s algorithm, which imperceptibly adjusts the videos shown to the user to keep them engaged on the platform? The notion that this might cause harm is not fanciful, but it’s unclear whether the provision would be interpreted to be that expansive, whatever the commission’s intent might be. There is at least a risk that this provision would discourage innovative new uses of AI, causing businesses to err on the side of caution to avoid the huge penalties that breaking the rules would incur.
The prohibition on AIs used for social scoring is limited to public authorities. That leaves space for socially useful expansions of scoring systems, such as consumers using their Uber rating to show a record of previous good behavior to a potential Airbnb host. The ban is clearly oriented toward more expansive and dystopian uses of social credit systems, which some fear may be used to arbitrarily lock people out of society.
The ban on remote biometric identification AI is similarly limited to its use by law enforcement in public spaces. The limited exceptions (preventing an imminent terrorist attack, searching for a missing child, etc.) would be subject to judicial authorization except in cases of emergency, where ex-post authorization can be sought. The prohibition leaves room for private enterprises to innovate, but all non-prohibited uses of remote biometric identification would be subject to the requirements for high-risk AIs.
Restrictions on ‘High-Risk’ AIs
Some AI uses are not prohibited outright, but instead categorized as “high-risk” and subject to strict rules before they can be used or put to market. AI systems considered to be high-risk include those used for:
Safety components for certain types of products;
Remote biometric identification, except those uses that are banned outright;
Safety components in the management and operation of critical infrastructure, such as gas and electricity networks;
Dispatching emergency services;
Educational admissions and assessments;
Employment, workers management, and access to self-employment;
Evaluating credit-worthiness;
Assessing eligibility to receive social security benefits or services;
A range of law-enforcement purposes (e.g., detecting deepfakes or predicting the occurrence of criminal offenses);
Migration, asylum, and border-control management; and
Administration of justice.
While the commission considers these AIs to be those most likely to cause individual or social harm, it may not have appropriately balanced those perceived harms with the onerous regulatory burdens placed upon their use.
As Mikołaj Barczentewicz at the Surrey Law and Technology Hub has pointed out, the regulation would discourage even simple uses of logic or machine-learning systems in such settings as education or workplaces. This would mean that any workplace that develops machine-learning tools to enhance productivity—through, for example, monitoring or task allocation—would be subject to stringent requirements. These include requirements to have risk-management systems in place, to use only “high quality” datasets, and to allow human oversight of the AI, as well as other requirements around transparency and documentation.
The obligations would apply to any companies or government agencies that develop an AI (or for whom an AI is developed) with a view toward marketing it or putting it into service under their own name. The obligations could even attach to distributors, importers, users, or other third parties if they make a “substantial modification” to the high-risk AI, market it under their own name, or change its intended purpose—all of which could potentially discourage adaptive use.
Without going into unnecessary detail regarding each requirement, some are likely to have competition- and innovation-distorting effects that are worth discussing.
The rule that data used to train, validate, or test a high-risk AI has to be high quality (“relevant, representative, and free of errors”) assumes that perfect, error-free data sets exist, or can easily be detected. Not only is this not necessarily the case, but the requirement could impose an impossible standard on some activities. Given this high bar, high-risk AIs that use data of merely “good” quality could be precluded. It also would cut against the frontiers of research in artificial intelligence, where sometimes only small and lower-quality datasets are available to train AI. A predictable effect is that the rule would benefit large companies that are more likely to have access to large, high-quality datasets, while rules like the GDPR make it difficult for smaller companies to acquire that data.
High-risk AIs also must submit technical and user documentation that detail voluminous information about the AI system, including descriptions of the AI’s elements, its development, monitoring, functioning, and control. These must demonstrate the AI complies with all the requirements for high-risk AIs, in addition to documenting its characteristics, capabilities, and limitations. The requirement to produce vast amounts of information represents another potentially significant compliance cost that will be particularly felt by startups and other small and medium-sized enterprises (SMEs). This could further discourage AI adoption within the EU, as European enterprises already consider liability for potential damages and regulatory obstacles as impediments to AI adoption.
The requirement that the AI be subject to human oversight entails that the AI can be overseen and understood by a human being and that the AI can never override a human user. While it may be important that an AI used in, say, the criminal justice system must be understood by humans, this requirement could inhibit sophisticated uses beyond the reasoning of a human brain, such as how to safely operate a national electricity grid. Providers of high-risk AI systems also must establish a post-market monitoring system to evaluate continuous compliance with the regulation, representing another potentially significant ongoing cost for the use of high-risk AIs.
The regulation also places certain restrictions on “limited-risk” AIs, notably deepfakes and chatbots. Such AIs must be labeled to make a user aware they are looking at or listening to manipulated images, video, or audio. AIs must also be labeled to ensure humans are aware when they are speaking to an artificial intelligence, where this is not already obvious.
Taken together, these regulatory burdens may be greater than the benefits they generate, and could chill innovation and competition. The impact on smaller EU firms, which already are likely to struggle to compete with the American and Chinese tech giants, could prompt them to move outside the European jurisdiction altogether.
Regulatory Support for Innovation and Competition
To reduce the costs of these rules, the regulation also includes a new regulatory “sandbox” scheme. The sandboxes would putatively offer environments to develop and test AIs under the supervision of competent authorities, although exposure to liability would remain for harms caused to third parties and AIs would still have to comply with the requirements of the regulation.
SMEs and startups would have priority access to the regulatory sandboxes, although they must meet the same eligibility conditions as larger competitors. There would also be awareness-raising activities to help SMEs and startups to understand the rules; a “support channel” for SMEs within the national regulator; and adjusted fees for SMEs and startups to establish that their AIs conform with requirements.
These measures are intended to prevent the sort of chilling effect that was seen as a result of the GDPR, which led to a 17% increase in market concentration after it was introduced. But it’s unclear that they would accomplish this goal. (Notably, the GDPR contained similar provisions offering awareness-raising activities and derogations from specific duties for SMEs.) Firms operating in the “sandboxes” would still be exposed to liability, and the only significant difference to market conditions appears to be the “supervision” of competent authorities. It remains to be seen how this arrangement would sufficiently promote innovation as to overcome the burdens placed on AI by the significant new regulatory and compliance costs.
Governance and Enforcement
Each EU member state would be expected to appoint a “national competent authority” to implement and apply the regulation, as well as bodies to ensure high-risk systems conform with rules that require third party-assessments, such as remote biometric identification AIs.
The regulation establishes the European Artificial Intelligence Board to act as the union-wide regulatory body for AI. The board would be responsible for sharing best practices with member states, harmonizing practices among them, and issuing opinions on matters related to implementation.
As mentioned earlier, maximum penalties for marketing or using a prohibited AI (as well as for failing to use high-quality datasets) would be a steep 30 million euros or 6% of worldwide turnover, whichever is greater. Breaking other requirements for high-risk AIs carries maximum penalties of 20 million euros or 4% of worldwide turnover, while maximums of 10 million euros or 2% of worldwide turnover would be imposed for supplying incorrect, incomplete, or misleading information to the nationally appointed regulator.
Is the Commission Overplaying its Hand?
While the regulation only restricts AIs seen as creating risk to society, it defines that risk so broadly and vaguely that benign applications of AI may be included in its scope, intentionally or unintentionally. Moreover, the commission also proposes voluntary codes of conduct that would apply similar requirements to “minimal” risk AIs. These codes—optional for now—may signal the commission’s intent eventually to further broaden the regulation’s scope and application.
The commission clearly hopes it can rely on the “Brussels Effect” to steer the rest of the world toward tighter AI regulation, but it is also possible that other countries will seek to attract AI startups and investment by introducing less stringent regimes.
For the EU itself, more regulation must be balanced against the need to foster AI innovation. Without European tech giants of its own, the commission must be careful not to stifle the SMEs that form the backbone of the European market, particularly if global competitors are able to innovate more freely in the American or Chinese markets. If the commission has got the balance wrong, it may find that AI development simply goes elsewhere, with the EU fighting the battle for the future of AI with one hand tied behind its back.
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;
• 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.
Paul Fain has an interesting update today on the issue of two-tier pricing for California’s community college system. Santa Monica College rocked the boat in March when it announced plans to start using a two-tier pricing schedule that would charge higher tuition rates for high-demand courses.
Santa Monica–and most all community colleges in California apparently–have been slammed with would-be students looking to take classes that would help prepare them for better jobs or for further education and training (that would prepare them for better jobs). The problem is that state funding for community colleges has been drastically reduced, thereby limiting the number of course offerings schools can offer at the subsidized tuition rate of $36 per credit hour. Santa Monica had the radical idea (well, radical for anyone that fails to understand economics, perhaps) of offering additional sections of high-demand courses, but at full-cost tuition rates (closer to $200 per credit hour).
Students protested. Faculty at other community colleges complained. Santa Monica College relented. So students don’t have to worry about paying more for courses they will not be able to take and faculty at other colleges don’t have to worry about the possibility of more students wanting to go to their schools because the overflow tuition at Santa Monica drives students to find substitutes. Well, that, and no more worries for those faculty at schools who charge even more than $200 for students to get those core courses that they cannot get into at their community college. It didn’t matter much anyhow, since most agreed that Santa Monica College’s proposal would have violated the law.
Now there is a proposal before the California legislature that would allow schools to implement two-tier pricing, but only for technical trade courses, not for high-demand general education-type courses.
Aside from complaints that “the state should be giving away education–even if they are not” (which are the most inane because they have nothing to do with the issue at hand), there are a few other arguments or positions offered that just cause one to scratch one’s head in wonder:
1) Fain reports that Michelle Pilati, president of the Academic Senate of California Community Colleges, asserted that “two-tiered tuition is unfair to lower-income students because it would open up classes to students who have the means to pay much more.” Apparently, Ms. Pilati would prefer all students have equal access to no education than to open up more spaces (to lower-income students) by opening up more spaces to higher-income students at higher prices. Gotcha.
2) The Board of Trustees at San Diego Community College seems to agree, having passed a resolution opposing the proposed legislation because it “would limit or exclude student access based solely on cost, causing inequities in the treatment of students”. Apparently the inequity of some students getting an education and some not is more noble because explicit out-of-pocket costs are not involved and other forms of rationing are used. And yet…
3) According to Fain, Nancy Shulock, director of the Institute for Higher Education Leadership and Policy at California State University at Sacramento, asserts “wealthier students have a leg up when registering for courses. She said research has found that higher-income students generally have more ‘college knowledge’ that helps them navigate often-complex registration processes. That means wealthier students could more quickly snag spots in classes, getting the normal price, while their lower-income peers would be more likely to pay the higher rates under a two-tiered system.”
So, community colleges have created overly complex registration systems that disadvantage lower-income students. Yet, all that suggests is that the current system already punishes lower-income students because wealthier students can more easily “snag” the limited number of subsidized sections. Perhaps community colleges could make their enrollment processes less complex?
Regardless the fate of the “two-tier pricing” legislation, there is already a two-tier system in place; only the current two-tier plan prevents people from getting educations at any price.
I was invited to attend the Financial Times Global Conference “The View From the Top: The Future of America” and since I was in New York anyway I thought it would be fun. I don’t hang around with macro types much, and even less with liberal macro types. I will not summarize the entire conference, but a few observations:
Reinhart-Rogoff was a hit, mentioned several times. Aside from the merits of the book, I think people were trying to give Obama cover for no recovery. R-R apparently says it takes an average of 7 years to get out of a financial crisis.
The first speaker (Gene Sperling) was late and the Gillian Tett of the FT, the moderator, took some informal polls of the audience (mainly business journalists.) Pretty pessimistic: Thought that there would be a double-dip, the EU would lose at least one member, and yields would not increase.
Sperling (Director of the National Economic Council) spent a lot of time talking about how bad unemployment is and arguing for the President’s Jobs plan (which the Senate has already rejected.) Not much new to propose.
Peter Orszagh (former OMB Director, now with CITI) made a few interesting points. He said that the Administration got the original forecast wrong, and did not realize that the recession was “L” and not “V” shaped. He also predicted that middle class incomes will not return to their original level and that policy should not fool people into thinking they would.
Several speakers (Laura Tyson of Berkeley and former CEA Chair; Steve Case , AOL founder) argued for better immigration laws (no quarrel there: the Republicans have got themselves into a terrible position on immigration). Tyson in particular argued for more STEM (science, technology, engineering, mathematics) education. I asked her if she thought the increasing gender imbalance in colleges (now about 2 women per man) was responsible for the STEM problem and she indicated that it might be part of the problem. Really something worth further examination and some policy analysis. Of course the immigration mess makes this problem worse since it is harder to import engineers from abroad.
Someone (I think Steve Rattner, former Auto Czar) made the point that while the American economy is doing badly and unemployment is a real problem, American companies are doing very well, in part because of foreign earnings. There were also several inconclusive discussions of a tax holiday for repatriation of foreign earnings. Some said that this would be “unfair” but others understood that future effects, not past fairness, was what was relevant. Not clear what the effects would be, however.
A few mentions of Sarbanes-Oxley and Dodd-Frank, but mostly the role of regulation was ignored. Health care was mentioned but not, I believe, Obamacare. Everyone agreed that businesses were “afraid” to spend money but little discussion of the source of the fear.
Most were not worried about conflict with China. I asked about Chinese demographics (aging population, gender imbalance with too many males.) Whenever I hear discussions of China I raise this issue since people seem to ignore it and it is a serious issue. Michael Spence (Nobel Laureate, now at NYU) said that China was in a position to establish a viable retirement program (no details) but that the gender issue was not one that was being dealt with. There seemed to be almost envy of the ability of the Chinese to do what they wanted independent of the desires of the people.
Laurence Fink of BlackRock made the interesting point that the current situation seems a lot like the 1970s, including the widespread pessimism. Martin Wolf, Chief Economics Commentator of the FT, agreed. But the lesson he drew was that we need more and wiser regulation. I spoke with him briefly and indicated that I was in the Reagan Administration, and that last time we got in a pessimistic mess like this deregulation al la Reagan was the solution. He rejected this approach. But I am hopeful.
My first economics professor, P.J. Hill, is retiring tomorrow after forty or so years of teaching at Wheaton College. I wanted to take a few minutes to publicly thank him for all he did for me and for the thousands of other students who had the great fortune to sit at his feet in Wheaton’s Blanchard Hall.
I stumbled into P.J.’s Principles of Microeconomics class as a sophomore philosophy major looking to check off my gen-ed social science requirement. From the first class session, I was hooked. P.J.’s “economic way of thinking” (which was also the name of our terrific textbook, to which I still regularly refer) made so much sense to me. And P.J. made sure we really understood the material. I still remember some of the “Microthemes” he had us write. One was a response to a kid who was embarrassed because his commodities trader father, unlike his friends’ dads, didn’t “make” anything. I was happy to reassure the kid that his father did, in fact, make something quite important: information. I thought about that Microtheme when I drafted this blog post.
I also remember the day P.J. curiously began to eat a ripe, juicy apple in the middle of his lecture. I and the other students in the front row were a little put off when he sprayed us with apple juice and blew bits of pulp on our desks. We settled down, though, when he finally got around to the day’s topic: negative externalities. We left class with a pretty good understanding of the concept.
The other two courses I took from P.J. — Environmental Economics and Public Choice — were similarly terrific. In the former, I learned how an absence of property rights can create environmental degradation, while the existence of clearly defined, enforceable and transferable property rights helps accommodate both conservation and appropriate resource exploitation. Again, the object lessons stick out — like the time P.J. had four students “fish” for paper clips (by picking them up off the floor). The paper clips, which were redeemable for ten cents each, would be worth a quarter each in 30 seconds. Sadly, one student figured he’d do best to jump the gun and swoop up the “fish” before they could mature. His competitors dove to the floor after him, and the fish were quickly “caught.” We got a different outcome when P.J. made an X on the floor with masking tape and gave each fisherman a property right to the fish in his or her quadrant. That time around, everyone waited for the fish to mature. Tragedy of the Commons, anyone?
P.J.’s Public Choice course helped me understand that individuals don’t cease to be rational self-interest maximizers when they enter “public service.” That implies that a market failure is not a sufficient condition for a government fix. One must always ask whether the governmental solution, limited by the planners’ imperfect knowledge and tendency to act self-interestedly, is likely to improve things. You can see the influence of P.J.’s Public Choice course in theseposts.
In all of his classes, P.J. peppered lectures with examples and insights from his own research. He is a first-rate economic historian, and his written extensively, often with Terry Anderson (and once with Nobel laureate Douglass North), on the evolution of property rights. We students would hang onto every word as he would describe, say, how the Wild West was tamer than you’d think or how the advent of barbed wire transformed property rights in the West.
In addition to teaching me lots of stuff, P.J. helped set me on the path I now tread. The weekend of my college graduation, he told me about a research position at the Center for the Study of American Business (now the Murray Weidenbaum Center) at Washington University in St. Louis. When I expressed interest, he recommended me to Murray Weidenbaum, CSAB’s director and the former chairman of President Reagan’s Council of Economic Advisers. I ended up getting the job.
At Wash U, I met some law professors who seemed to have pretty enviable jobs. I also had the opportunity to delve into environmental policy and test the waters of academia. P.J. had me out to Bozeman, Montana to give a presentation at the Political Economy Research Center (now Property and Environment Research Center), with which he is affiliated. The research I presented was the basis for a couple of articles, one in The Public Interest and the other in the Yale Journal on Regulation. Publishing those articles helped get me into law school, and into a clerkship, and into law teaching. So, were it not for P.J., I would not be doing what I’m doing.
More importantly, though, I would not be who I am. P.J.’s courses turned me on to the economic way of thinking. His passion for learning lit a scholarly fire within me. The clarity with which he communicated sophisticated ideas disabused me of the notion that “rigorous” means “inscrutable.” The way he wove his own scholarship into classroom presentations — sort of inviting students to join him on his own intellectual journey — helped me see that there’s no dichotomy between teaching and scholarship, that the best teachers are scholars, and the best scholars, teachers. His integration of his Christian faith with his teaching and scholarship helped me view teaching as a divine calling, a perspective that makes a sweet profession that much sweeter. I am, in short, a product of P.J. Hill. And I am grateful.
I’ve been in a blue funk since last Tuesday, when my home institution, the University of Missouri Law School, fell into the third tier in the U.S. News & World Report annual ranking of law schools. Since the rankings began, Missouri has pretty consistently ranked in the 50s and 60s. Last year, we fell to 93. This year, to 107. That’s pretty demoralizing.
It’s completely ridiculous, of course. On the metrics that really matter (academic reputation, student quality, bar passage, etc.), we do pretty well — near the top of tier 2 (schools 50-100). With respect to scholarly productivity, our faculty ranks sixth among law schools outside the top fifty. We do less well with employment, but that’s largely because (1) we don’t manipulate the numbers, as many schools do, and (2) many of our graduates go into prosecution and public defense, where hiring decisions are not made until after the bar examination. Where we really get beat up is on expenditures per “full-time equivalent” student. Last year, we ranked 173 out of 190 on that measure. In my view, that means we’re efficient — we get a heck of a lot out of our financial resources. According to U.S. News, though, the fact that we spend less money educating our students means that the quality of our educational offering must be sub-par. Non sequitur, anyone?
Despite the stupidity of the U.S. News rankings, they matter. We will have a harder time attracting top students next year. In the past, we’ve been able to attract sharp students that were accepted at, say, Iowa, Illinois, or Washington University because our tuition (especially in-state tuition) is much, much lower. Given all this talk of highereducation bubbles and the widespread questioning of whether law school is really worth the steep price, this should be an ideal time for Missouri to exploit its low tuition. Unfortunately, that’s tougher to do when you’ve fallen into the U.S. News third tier and prospective students, who don’t yet realize the insanity of the rankings metrics, wrongly perceive that you’re selling a shoddy product. We may also have a harder time attracting high-quality faculty, though this fall’s outstanding class of entrants (two John Roberts clerks, a Jose Cabranes clerk, and an outstanding Virginia J.D./Ph.D) will surely help on that front. We Missouri professors may even have a harder time placing our scholarship, given that the third-year law students who select articles for publication tend to evaluate scholarship, in part, on the basis of the author’s “prestige” as measured by the ranking of her home institution.
So what should we do? If I were dean, I believe I would simply opt out of U.S. News. I’m serious. We know the rankings are a joke, and they’re actually hurting us. I would simply refuse to fill out the magazine’s survey form and then take out explanatory ads, on the day the 2012 rankings were released, in the New York Times and Wall Street Journal. Reed College has taken this sort of principled stand in the U.S. News college rankings and has gotten loads of favorable media attention. I believe its stance has actually boosted its excellent reputation.
Of course, if a school fails to fill out the U.S. News form, the magazine will simply incorporate a somewhat punitive “estimate” of the uncooperative school’s data, so its ranking may be artificially depressed. But at this point, what do we at Missouri have to lose? We’re already down to 107! Anyone who does the slightest bit of investigation will see that Missouri Law — one of the oldest law schools west of the Mississippi River, the flagship public law school in a fairly populous state with two significant legal markets, the home of a productive faculty that also cares deeply about teaching — is not what participants on the Princeton Review’s old message board used to call a “Third Tier Toilet.” If we opt out of the rankings (a decision U.S. News will have to note), readers will surmise that our low ranking results from our decision not to play with U.S. News. Right now, they think there’s something wrong with Missouri, not with the screwy rankings system. Our opt-out would at least draw attention to the stupidity of the ranking metrics.
Of course, this move would entail significant risk. As it did with Reed College, U.S. News would likely adopt punitive estimates of the data we refused to provide, causing us to fall further in the rankings. Readers might not notice the disclaimer that we refused to return our survey and that our ranking is therefore based on estimated data. The media (mainstream and other) might not draw as much attention to our bold stand as I expect they would. While I think it would take a perfect storm for an opt-out strategy to tarnish our reputation even further, such storms do occasionally occur.
We could reduce the riskiness of our strategy if we could persuade some other law schools — perhaps other low-tuition, efficient schools that find themselves similarly disadvantaged by the rankings’ inapposite focus on expenditures per student — to withhold data from U.S. News. This would require U.S. News to include more “based on estimated data” asterisks, which would reveal the punitive nature of the magazine’s estimates and undermine confidence in the flawed ranking system.
But would this sort of concerted strategy run afoul of the antitrust laws? Initially, I thought it might. After all, what I’m contemplating is essentially an agreement among competitors to withhold information from a publication that tends to enhance competition among those very rivals. Moreover, the cooperating rivals would be withholding this information precisely because they think the competition stimulated by the publication is, to use the old fashioned term, “ruinous.” It smells pretty fishy.
The more I think about it, though, the less troubling I find this strategy. The fact is, the methodology underlying the U.S. News rankings is so unsound that the rankings themselves are misleading. And the misrepresentations they convey actually hurt a number of schools like Missouri. I believe we who are unfairly disadvantaged by the U.S. News methodology could, without impunity, bind together in an attempt to undermine the flawed rankings. Indeed, it is in our individualcompetitiveinterests to do so.
So how would a court evaluate a boycott of U.S. News by a group of law schools that perceive themselves to be disadvantaged by the magazine’s ranking methodology (say, less expensive, more efficient law schools with low per-student expenditures)?
First, the court would likely determine that the agreement not to participate in the ranking survey is ancillary, not naked. As Herb Hovenkamp has explained, “[a] serviceable definition of a naked restraint is one whose profitability depends on the exercise of market power” (i.e., on a constriction of output aimed at artificially raising prices so as to enhance profits). The agreement I’m contemplating makes perfect business sense apart from any exercise of market power. Each law school that would participate in the agreement is personally injured by the screwy rankings scheme, and each has an independent incentive — regardless of what other schools do — to refrain from participation. The participating law schools, it is true, would prefer to have others join them, but that is not because they are seeking to exercise market power; rather, they realize that the message their non-participation will convey (i.e., that U.S. News’s rankings methodology is nonsense) will be stronger if more schools join the boycott.
Since the restraint I contemplate is ancillary, not naked, it would be evaluated under the rule of reason. Indeed, any court that sought to utilize a less probing analysis (per se or quick look) would have to confront the Supreme Court’s California Dental decision, which held that a pretty doggone naked restraint among competing dentists was entitled to a full rule of reason analysis because it could enhance competition by reducing fraudulent advertising.
Under the rule of reason, the arrangement I’m contemplating would likely pass muster. Because widespread misinformation among consumers reduces the competitiveness of a market, an effort to reduce such misinformation, even a concerted effort, is pro-, not anti-, competitive. Because the “agreement” aspect of my contemplated restraint increases the degree to which the arrangement undermines the misleading, competition-impairing U.S. News rankings, it enhances the restraint’s procompetitive effect.
So what do others think? Am I underestimating the antitrust risk of this strategy? The business risk? My TOTM colleagues from Illinois and George Mason, both of which do quite well under the U.S. News formula, probably have little personal interest in these musings. But I suspect others do. What do you think?
David Leonhart points out the new Dale & Krueger study on the value of an elite undergraduate education. His punchline:
A decade ago, two economists — Stacy Dale and Alan Krueger — published a research paper arguing that elite colleges did not seem to give most graduates an earnings boost. As you might expect, the paper received a ton of attention. Ms. Dale and Mr. Krueger have just finished a new version of the study — with vastly more and better data, covering people into their 40s and 50s, as well as looking at a set of more recent college graduates — and the new version comes to the same conclusion.
Indeed, check out the Dale & Krueger abstract:
When we adjust for unobserved student ability by controlling for the average SAT score of the colleges that students applied to, our estimates of the return to college selectivity fall substantially and are generally indistinguishable from zero. There were notable exceptions for certain subgroups, [namley] for black and Hispanic students and for students who come from less-educated families.
So — college prestige doesn’t matter much. Right? Not so fast my friend…
The devil is in the details. Or in this case, the regression tables. And the real story is that college prestige matters quite a bit for men, but not women. Robin Hanson is on the case (the study itself is in italics):
To find the truth, you have to study Table 4 carefully, and note footnote 13:
For both men and women, the coefficient was zero (and sometimes even negative) [in] the self-revelation model.13 …
[footnote:] 13 This lower return to college selectivity for women is consistent with other literature. Results from Hoekstra (2009), Black and Smith (2004) and Long (2008) all suggest that the effect of college selectivity on earnings is lower for women than for men.
Table 4 shows that attending a college with higher SAT scores clearly lowered the wages of women 17-26 years after starting college (in 1976) — a school with a 100-point higher average SAT score reduced earnings by about 6-7%! The two estimates there are significant at ~0.01% level! (The other three, for other periods after starting college, are significant at the 5% level.)
One obvious explanation is that women at more elite colleges married richer classmate men, and so felt less need to earn money themselves. Why don’t the study’s authors want us to hear about that?
I find it interesting that many on the left, so intent on maintaining their anti-market narratives, distort reality so badly that black is white and up is down–and “government” is “corporations.”
I’ve highlighted this before when discussing the misdirected criticisms (and solutions) of self-described privacy advocates who point the finger at Google when really they should be concerned about the government.
Now comes Brian Leiter referring us to an article on “Corporate Attacks on Law School Clinics.” That’s the title of his post which contains nothing more than a heated admonition to read a linked article, so the title says it all: Corporations are attacking law school clinics (and this is a huge problem that should concern everyone). And I have no doubt many corporations are upset with many law school clinics. But what’s so fascinating is how, when you click through to the article, you discover that the actual attacks on law school clinics are, in every single example adduced in the story, actually emanating from governments. It’s pretty amazing. Here are the relevant snippets from each example in the article, but I recommend reading the whole thing:
In spring 2010, a law-clinic lawsuit against a $4 billion poultry company triggered a legislative effort to withhold state funds from the University of Maryland unless its law school provided the legislature with sensitive information about clinic clients and case activities.
The attack plan included the introduction of legislation that would forfeit all state funding if a university offered certain types of law-clinic courses.
The first occurred in 1968 at the University of Mississippi, where the appointments of two untenured professors were terminated following complaints that their new clinical program participated in a desegregation lawsuit.
In efforts to terminate the program, clinic opponents sponsored a bill in the legislature to withdraw state funding for the entire law school.
In 1993, then-governor Edwin Edwards was so upset at statements the clinic’s director made that the governor threatened to deny financial assistance to state residents attending the university and to prohibit Tulane medical students from working in any state hospital unless the director was fired.
A few years later, the clinic’s success in representing a low-income, minority community opposed to a proposed chemical plant led then-governor Mike Foster and business interests to threaten to revoke Tulane’s tax-exempt status and deny it access to state education trust-fund money, to organize an economic boycott of Tulane, and to refuse to hire its graduates.
When the university still refused to terminate the course, clinic opponents successfully persuaded the Louisiana Supreme Court to impose restrictions on whom law school clinics can assist and what kinds of representation students can provide.
When state legislators expressed disapproval of a law school clinic’s representation of citizens concerned about a proposed highway, university officials began charging the clinic for the university’s overhead costs, prevented it from approaching funders unless it agreed to avoid certain cases that might upset legislators, and pressed it to separate from the school and move off campus.
The clinical program at Rutgers University is defending itself against a lawsuit brought by a developer, who was defeated in a clinic case and is now seeking to use the state’s public records law to gain access to internal clinic case files that would otherwise be beyond the reach of a party to a lawsuit
A dispute in Michigan this past winter demonstrates that attacks also can occur when students get in the way of powerful government interests. The district attorney in Detroit, upset with the efforts of a University of Michigan innocence clinic to exonerate a man it alleged was wrongfully imprisoned for ten years, sought to force the students to testify at trial against their client, an unprecedented effort to interfere in the students’ attorneyclient relationship.
Perdue persuaded legislators to attach a rider to the university’s appropriations that conditioned $750,000 in funding on submission of a report detailing clinic cases, clients, expenditures, and funding, much of which is confidential information.
An even harsher attack occurred in Louisiana this past spring, where the Louisiana Chemical Association (LCA) pushed for legislation, subject to narrow exceptions, that would forfeit all state funds going to any university, public or private, whose clinics brought or defended a lawsuit against a government agency, represented anyone seeking monetary damages, or raised state constitutional claims. The bill also would have made clinic courses at the state’s four law schools subject to oversight by legislative commerce committees.
This isn’t cherry-picking. Unless I made a mistake, this is every single example of “attacks on law school clinics” in the article. And every single one involves government actions or the threat of government actions. Wow. How on earth could anyone read this article and feel comfortable calling this a problem of corporations? Don’t get me wrong–I understand that there are often corporate interests behind these actions, spurring them on. But to call this a “corporate” problem rather than a “government” problem–with the implicit call for government to do something about the problem–is to fail so utterly to understand the problems of government power that it boggles the mind.
Like Brian Leiter, I find this list troubling. I am appalled at how much inappropriate government interference this represents. But it is simply delusional to call this a problem of corporations. You want to fix the problem? Rein in the ability of governments to interfere to thoroughly with private life that special interests don’t have access to such a powerful and, often, invincible bludgeon.
I have recently joined my colleague Bruce Johnsen as a co director of the Robert A. Levy Fellowship in Law and Liberty at GMU Law. It is a very generous fellowship for economists who have their PhD’s or “ABD” status to come to law school on our dime along with a stipend of roughly $27,000 annually. Several Levy Fellows have successfully ventured into the legal academic market over the past few years, and we continue to look for economists and economists-in-training with an interest in the economic analysis of law and legal institutions. Levy Fellow alumni include Jonathan Klick, now at the University of Pennsylvania School of Law. If the opportunity is of interest — please contact me via email, or check out the details in the advertisement below, as well as the website with further details on the application process.
GMU Law is a great place to do law and economics. The Law and Economics Center, with a new and ambitious research agenda under Henry Butler, is a wonderful asset for a law and economics scholar in the making, and the law and economics faculty here are interested in a wide range of legal topics and play an integral part in the Levy Fellow program. The program isn’t for everybody. We’re looking for economists who are interested in understanding legal institutions and plan on entering the academic job market. Experimental economists interested in the special opportunities available at the Interdisciplinary Center for Economic Science and Center for the Study of Neuroeconomics might also find the program especially attractive.
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Intel Chairman and CEO Paul Otellini recently gave the keynote address at the Technology Policy Institute’s Aspen Forum on the US regulation environment and its effect of innovation and economic growth (HT: CNET, WSJ). The speech got some play in the media because of its overall depressing tone for the US, and its frank criticism of the current state of US regulatory affairs. Here’s CNET’s description of the speech:
Otellini’s remarks during dinner at the Technology Policy Institute’s Aspen Forum here amounted to a warning to the administration officials and assorted Capitol Hill aides in the audience: unless government policies are altered, he predicted, “the next big thing will not be invented here. Jobs will not be created here.” Intel CEO Paul Otellini, who warned this week that the U.S. faces a huge tech decline. The U.S. legal environment has become so hostile to business, Otellini said, that there is likely to be “an inevitable erosion and shift of wealth, much like we’re seeing today in Europe–this is the bitter truth.” Not long ago, Otellini said, “our research centers were without peer. No country was more attractive for start-up capital…We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case.”
I watched largely to see if Otellini discussed the recent, and controversial, FTC antitrust and consumer protection settlement. It didn’t say much about antitrust — though there is much about education, the National Broadband Plan, and corporate taxes — other than one might stretch to find an implicit reference in Otellini’s remark that “we must resist the urge to pick winners and losers.” But the speech is a good one overall, despite being as worrisome as advertised, and is available on webcast here (fast forward to the 4:45 mark). Stick around for the Q&A (around the 28 minute mark), including Otellini’s take that regulatory uncertainty is creating significant drag on the economy.
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