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In what could prove to be a battle of economic experts, the NCAA is back in court, and it must once again defend its amateurism regulations against its own student-athletes. The current case is In Re: Grant-in-Aid Cap Antitrust Litigation and was initiated in the United States District Court for the Northern District of California by former NCAA student-athletes Shawne Alston and Justine Hartman.
The plaintiffs seek a declaratory judgment from the court that the NCAA’s rules that limit their compensation to the cost of attendance at their respective institutions violate the Sherman Antitrust Act. To do this, they will have to overcome a presumption that the NCAA’s amateurism rules are needed to maintain consumer demand in college sports. This is where the economic experts come into play, and for the plaintiffs to prevail, the court will have to find their witnesses more more credible than the NCAA's experts.
The plaintiffs bring to the case two economists in Dr. Roger Noll and Dr. Daniel Rascher. To counter, the NCAA has retained its own accomplished economists in Dr. James Heckman and Dr. Kennith Elzinga.
Legal Background
Before the economic arguments from each side are broken down, a brief discussion of the relevant aspects of antitrust law and how they apply to this case is necessary. The Sherman Antitrust Act is a consumer welfare provision that exists to promote competition within markets. When competitors work together to manipulate costs within a product market, their anti-competitive behavior is typically illegal, and no further examination is needed. Yet if competitors work together in the creation of a new product (a joint venture), their conduct is not automatically illegal and must be examined further to make sure that their cooperation is reasonable, meaning that it produces a net pro-competitive effect. The creation of a new product that widens consumer choice is the type of pro-competitive effect that a reviewing court may tolerate.
The NCAA’s Argument
The gist of the NCAA’s primary economic argument is that its rules do not violate antitrust law because they are essential to the creation of college sports. Specifically, the NCAA asserts that its caps on student-athlete compensation provide consumers with amateur sport options for sport consumption.
The NCAA also asserts a second pro-competitive advantage with its contention that the caps on compensation allow student-athletes to integrate into their academic communities. The second argument doesn't seem to make sense, though, because it posits that the NCAA is protecting athletes from having to complicate their lives with more money. The "mo money, mo problems" argument made famous by the Notorious B.I.G. may hold up on the radio, but it shouldn't convince a court to deviate from the law in an antitrust case.
The strongest arrow in the NCAA's antitrust quiver is the product creation argument, and it centers on a presumption that consumers will lose interest in college sports if student-athletes are paid any amount of money that is not “tethered” to educational costs. This presumption dates back to an analogy made by Justice John Paul Stevens in NCAA v. Board of Regents of the University of Oklahoma, a Supreme Court decision from 1984 that stripped the NCAA of cartel control over college football telecasts.
The regulation of student-athlete compensation wasn’t before the court in Board of Regents, but Justice Stevens brought up the caps as an example of the type of cooperation from competing institutions that is needed to make the NCAA’s sport products. Justice Stevens believed that amateurism was what made college football special for consumers and what kept it from being perceived as a minor league sport.
Keep in mind that two decades ago college football had yet to balloon into the multibillion-dollar industry that it is today. Also, since the NCAA's amateurism rules were not at controversy in Board of Regents, the NCAA did not need to defend them with market-based evidence. In the current case, the burden should be on the NCAA and its economic experts to demonstrate the need for its compensation caps with market-based evidence that consumers will lose interest if the rules are removed.
The Student-Athletes’ Argument
The plaintiffs assert that the NCAA is unable to establish that its compensation limits are absolutely essential to the creation of college sports. They argue that the NCAA’s experts provide only speculation rather than market-based evidence that consumers will lose interest if the limits are lifted.
In addition, the plaintiffs proffer up their own economic studies that demonstrate a lack of consumer-demand effect from previous changes to student-athlete compensation. The most notable change in the NCAA’s regulation of student-athlete compensation came in 2015, when the NCAA first permitted its member institutions to compensate student-athletes up to the cost of attendance.
Student-athletes are presently permitted by the NCAA to receive amounts that cover their tuition, fees, room and board, and an amount through stipend payments that covers the remaining costs associated with attendance. The cost-of-attendance stipends are payments to student-athletes that cover all indirect costs associated with attending a specific school.
One problem for the NCAA is that its cost-of-attendance stipends are un-tethered to education. While the cost of attendance is an amount that schools set to inform would-be students of what they should expect to spend at their respective schools, each school sets that amount to cover various costs that are not directly linked to education (e.g. cellphone bills or the occasional slice of pizza). Additionally, there is no requirement that student-athletes spend what is given to them through the stipends on education-related purchases. Perhaps that is why the NCAA initially opposed a cost-of-attendance adjustment in White v. NCAA, a case the NCAA ultimately settled out of court in 2008.
Student-athletes have been permitted to receive cost-of-attendance stipends for several years now and consumer interest in college sports has not decreased over that period of time.
What Will Likely Happen
In the past, federal courts have been receptive to NCAA fear-mongering and have repeatedly demonstrated a reluctance to subject the NCAA to the same antitrust scrutiny that would apply to most professional sports (baseball is exempt). Decisions from the Third, Fifth, Sixth and Seventh Circuits all cited Justice Stevens’ presumption in opinions that insulated from antitrust law the NCAA’s ability to “preserve the revered tradition of amateurism.”
That is why the safe play by the court in In Re: Grant-in-Aid Cap Antitrust Litigation is to find some foothold within the NCAA’s economic analysis that justifies continuation of the status quo. Perhaps the court will buy into the fear pushed by the NCAA's experts that the current situation is far more economically efficient than destabilizing college sports by leaving it to the member institutions or conferences to self-regulate student-athlete compensation. The court could also latch onto a secondary argument that lifting the limits on compensation would result in differential treatment for student-athletes who play sports that generate revenue.
The judge in In Re: Grant-in-Aid Cap Antitrust Litigation is the Honorable Claudia Wilken. She also heard O'Bannon v. NCAA, the last antitrust action involving the NCAA, and in that case she expressed skepticism concerning consumer interest in amateurism. On appeal, the Ninth Circuit did not adopt her skeptical view on amateurism and instead found that she did not provide the concept with the deference it deserved.
If Judge Wilken sides with the plaintiffs, the Ninth Circuit could still reject her reasoning, and if it doesn’t, the U.S. Supreme Court likely will. If the Ninth Circuit fundamentally alters college sports with its ruling in this case, the more conservative Roberts Court will almost definitely grant certiorari. Bank on it.
What Should Happen
The NCAA should have a very difficult burden to meet because there really is no proof that consumers will lose interest in college sports if athletes are paid more than they are now. To the contrary, consumer interest in college sports has not dipped over the years despite the existence of numerous NCAA violations (too many to mention) at various institutions that all involved impermissible payments made to student-athletes.
In addition, it's been almost a year since the Department of Justice dropped its bombshell of an investigation into college basketball corruption with a report alleging the use of bribes to steer high school players to NCAA schools. Despite this investigation and its findings, consumers haven't stopped following college basketball. It seems like the black market for student-athletes is the only market created by the NCAA's compensation limits.
The reason for this black market is that the fight for student-athlete services has never been more competitive than it is now. This is particularly true for men's basketball and football. The problem is that the caps keep competitors (the schools) from increasing what they spend directly on student-athlete compensation. They are, however, permitted to spend ridiculous amounts of money on other things in order to attract the top talent to campus. Examples of this indirect spending include excessive splurging on coach and athletic director salaries as well as the construction of lavish facilities for student-athletes to use. Think about this: When was the last time an NFL or NBA free agent mentioned the team's facilities as a primary reason for why they chose to play for that team?
The current case represents an opportunity for the court to put an end to the manipulated market for student-athlete services, even if doing so means disrupting the way the NCAA currently does business.
What will happen to college sports if the court in In Re: Grant-in-Aid Cap Antitrust Litigation finds that the caps on student-athlete compensation violate antitrust law? That remains to be seen. Whatever follows in the wake of such a decision will be a reaction to actual market demand rather than presumed market demand. Additionally, there is legitimate reason to reject the NCAA’s fear-mongering that interest in its products will wither without student-athlete compensation caps.
Instead, the court should place confidence in the resilience of a multibillion-dollar college sport industry that is built on more than 100 years of consumer loyalty.