A full review of the O’Bannon v. NCAA judgment

In this article, Professor John Wolohan gives a complete analysis of the recent O’Bannon v. NCAA judgment, and reflects on how it affects the parties moving forward.

BACKGROUND

Messersmith and McNally

In 1975, Peter Seitz, the arbitrator in the Andy Messersmith and Dave McNally case, ruled that Major League Baseball clubs did not own their players in perpetuity as they claimed under the league’s reserve clause.

In ruling that the reserve clause only granted the teams the right to automatically renew a player’s contract for one additional year, Seitz ruled that Messersmith and McNally were free agents and could now sign a new contract with any team they wanted. After the players won free agency, a number of people in the sport began to complain that the decision was the death knell for the sport and that there was no way the league could survive.

As history has shown, however, instead of killing the sport, free agency has not only seen player salaries rise to all time high, but league and team profits as well.

 

Present day – O’Bannon v. NCAA

On Friday, August 8, 2014, those same shouts of gloom and doom were being heard for college athletes by the National Collegiate Athletic Association (NCAA), conference commissioners and college athletic administrators after Federal District Court Judge Claudia Wilken ruled that the NCAA’s rules prohibiting athletes from being paid for use of their names, images and likeness were an unreasonable restraint of trade in violation of the Antitrust laws.

 

Facts of the O’Bannon case

The facts of the case are set out in detail in my previous LawInSport article: Update on O’Bannon.¹ In brief, however: the plaintiffs in the case are a group of 20 current and former college student-athletes, all of whom play or played for an FBS football or Division I men's basketball team between 1956 and the present.

They brought this antitrust class action against the NCAA to challenge the association's rules restricting compensation for elite men's football and basketball players. In particular, the plaintiffs allege that the NCAA's rules and bylaws operate as an unreasonable restraint of trade because they preclude FBS football players and Division I men's basketball players from receiving any compensation, beyond the value of their athletic scholarships, for the use of their names, images, and likenesses in video games, live game telecasts, re-broadcasts, and archival game footage.

The NCAA, the national organization regulating college sports in the United States, argued on the other hand that its restrictions on student-athlete compensation are reasonable because they are necessary to preserve its tradition of amateurism, maintain competitive balance among FBS football and Division I basketball teams, promote the integration of academics and athletics, and increase the total output of its product.

The next section analyses the court’s findings. A full copy of the judgment can be found here.²

 

THE JUDGMENT - WHAT DID THE COURT FIND?

Section 1 of the Sherman Act

1. that there was a contract, combination, or conspiracy;
2. that the agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and
3. that the restraint affected interstate commerce.

Rule of Reason Analysis

Since the Sherman Act only prohibits unreasonable restraints, the court examined the challenged restraints under the rule of reason analysis. Under the rule of reason, a restraint violates the Sherman Act if the restraint's harm to competition outweighs its pro-competitive effects.

Courts typically rely on a burden-shifting framework to conduct this balancing. Under that framework, the plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects' within a relevant market. If the plaintiff satisfies this initial burden, the burden shifts to the defendant to show that the restraint has a pro-competitive effects.

Finally, if the defendant meets this burden, the plaintiff must show that 'any legitimate objectives can be achieved in a substantially less restrictive manner'.

 

Do the Restraints Produce a Significant Anticompetitive Effects' within Relevant Market?

In finding that the plaintiffs met the initial burden of showing that the restraint produces significant anticompetitive effects' within a relevant market, the court found that the challenged restraint causes anticompetitive effects in two related national markets:

1. the "college education market," in which colleges and universities compete to recruit student-athletes to play FBS football or Division I basketball; and
2. the "group licensing market," in which video game developers, television networks, and others compete for group licenses to use the names, images, and likenesses of FBS football and Division I men's basketball players in video games, telecasts, and clips.

Having established two related national markets, the plaintiffs had to show that the NCAA’s rules produced significant anticompetitive effects.

In ruling that the NCAA’s rules produced significant anticompetitive effects, the court noted that FBS football and Division I basketball schools are the only suppliers in the “college education market,” and that they have the power, when acting in concert through the NCAA and its conferences, to fix the price of their product.

They use that power by forming an agreement to charge every recruit the same price for the bundle of educational and athletic opportunities that they offer: to wit, the recruit's athletic services along with the use of his name, image, and likeness while he is in school. This price-fixing agreement constitutes a restraint of trade.