NCAA’s Limits on Student Athletes’ Compensation Violates Antitrust Laws

By Jesse C. Ferrantella, © Olgetree Deakins Sep 25, 2014
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The National Collegiate Athletic Association’s (NCAA) fundamental beliefs about the role of student-athletes and its economic model received a partial rebuke from the courts. On Aug. 8, 2014, a federal judge ruled that the NCAA’s rule prohibiting student-athletes from being compensated for the use of their names, images and likenesses violated federal antitrust laws.

The case was brought in 2009 by Ed O’Bannon, a former basketball star at the University of California, Los Angeles (UCLA), and several other current and former student-athletes. Specifically, the athletes challenged the NCAA’s rule preventing Division I men’s basketball and football athletes from receiving a share of the revenue that the NCAA and its schools earn from licensing agreements to use the athletes’ names, images, and likenesses in video games, telecasts, and other footage. The athletes argued that the NCAA’s rules violated the Sherman Antitrust Act as an unreasonable restraint of trade.

After a three-week bench trial, Judge Claudia Wilken of the Northern District of California issued a ruling finding that the NCAA’s regulations violated the antitrust act. Focusing on two markets—the college education market and the group licensing market—Judge Wilken noted that the NCAA’s practices restrained competition. She entered a permanent injunction prohibiting the NCAA from enforcing these rules.

Restraint on Competition Rejected

Judge Wilken rejected the reasons the NCAA offered for its restraint of competition, dealing a partial rebuke to its arguments justifying its athletic model. The NCAA relied primarily on the argument that limiting compensation of its athletes would preserve the time-honored tradition of amateurism in college athletics. It tried to defend the unique character of collegiate sports in the amateur model. Judge Wilken rejected this argument. Instead, she found that the NCAA failed to show that demand for its product would decrease if student-athletes were allowed to receive a limited share of the revenue generated from the use of their names and likenesses.

The NCAA also argued that these rules were necessary to prevent schools from undermining the unique “competitive balance” in collegiate athletics, and from gaining a competitive advantage against one another. The court rejected this argument as well, finding that the restraints on compensation were not necessary to maintain “competitive balance” in college athletics or to promote integration of student-athletes into the school’s academic communities.

The court accepted two of the student-athletes’ counter-proposals. It ruled that:

Allowing the universities to award stipends to student-athletes for the use of their names and likenesses, in amounts not to exceed the “cost of attendance,” would be acceptable.

The NCAA’s members could hold a portion of the licensing payments in a trust to be distributed equally to student-athletes at the end of their athletic eligibility.

The court made clear that the schools “would not be forced” to compensate their student-athletes in this fashion. It also clarified that the amount held in trust could be capped by the NCAA at an amount not less than $5,000 per student per year of athletic eligibility. To achieve these changes, the court entered a permanent injunction prohibiting the NCAA from enforcing any rules preventing its member institutions from offering their Division I basketball or football recruits a limited share of the revenues generated from the use of their names or images according to these terms. The injunction will take effect in the next football and basketball recruiting cycle.

Use of Athletes' Names and Likenesses

The order also limited athletes’ compensation for the use of their names and likenesses. Specifically, the court would not allow NCAA athletes to earn any additional money from personally endorsing products. The court held that any endorsement income beyond these specific provisions would undermine the NCAA’s efforts to protect against the “commercial exploitation” of student-athletes. The NCAA believes the decision was wrongly decided and is appealing the ruling to the Ninth Circuit Court of Appeals.

On Aug. 11, 2014, the NCAA filed a brief to the U.S. District Court seeking clarification of Judge Wilken’s decision. On Aug. 19, 2014, the court clarified the scope of the injunction. The injunction will not take effect until Aug. 1, 2015, the date on which written offer letters can first be sent to student-athletes enrolling in college after July 1, 2016.

The court further clarified that the injunction will not affect the application of NCAA rules to current and prospective student-athletes until Aug. 1, 2015, at which point it will take effect with respect to benefits offered to prospective and current student-athletes for the 2016-2017 season and beyond. The injunction will not affect the application of NCAA rules for benefits received by student-athletes prior to July 1, 2016.

Jesse C. Ferrantella is an associate in the San Diego office of Ogletree Deakins. © 2014 Ogletree Deakins. All rights reserved. Reposted with permission.

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