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O’Bannon v NCAA: Reducing the rule of reason analysis to quantitative and commercial benefits

In O'Bannon v NCAA, the Ninth Circuit reviewed the National Collegiate Athletic Association's rules relating to student-athletes' scholarships and compensation.2 At issue were policies that limited the scholarships that individual schools could provide athletes to an amount below the full cost of attendance and that prohibited any and all compensation from professional teams, boosters, or would-be licensors of a player's Name, Image, and Likeness (NIL) rights.3 The court affirmed that all rules were commercial restraints subject to the Rule of Reason, that the NCAA could not prevent schools from compensating athletes up to the full cost of attendance, and that the NCAA could prohibit schools from compensating students for their NIL rights.

O'Bannon came to the Ninth Circuit on appeal from the Northern District of California, which found that the NCAA's restraints had anticompetitive effects in the "college education market,"4 a market in which "schools compete to offer recruits the opportunity to earn a higher education while playing for an FBS football or Division 1 men's basketball team." "In exchange, the recruits who accept these offers provide their schools with their athletic services and acquiesce in the schools' use of their names, images, and likenesses while they are enrolled. The recruits must also pay for any other costs of attendance not covered by their grants-in-aid."5

The district court found that, as sellers, the schools "fixed the price of their product by agreeing not to offer any recruit a share of the licensing revenues derived from the use of his name, image, and likeness."6 Alternatively, the district court concluded that the schools could be viewed as buyers forming a monopsony in the college education market, agreeing on the maximum amount payable for student services.7

The NCAA argued that the restraints were simply "eligibility rules" and that, as such, the rules did not regulate "commercial activity" and were not subject to the Sherman Act.8 In its brief, the NCAA asserted that its rules "define(d) who may participate in the activities it sponsors" and compared itself, in having such rules, to "advocacy groups, religious institutions, clubs of all sorts, Little League, and high school athletic conferences."9 The rules for the NCAA and other organizations may "have economic consequences, but they are typically motivated by, and define, non-commercial considerations, such as the organization's organizing principles and mission."10 In this instance, according to the NCAA's brief, "the challenged rules serve the NCAA's mission of encouraging athletic endeavors as an integral component of a broader college educational experience, in the face of sometimes significant commercial pressures that could undermine those athletic and educational experiences."11

The Ninth Circuit dismissed the NCAA's position that its challenged rules were not regulations of commercial activity, declaring the argument "not credible."12 The opinion adopted a wide definition of commerce that includes "almost every activity from which the actor anticipates economic gain."13 According to the court, "both parties"–the school and the student–"anticipate economic gain" from the exchange of athletic services for scholarships and access to athletic facilities.14 The court characterized the NCAA's styling of the restraints as eligibility rules as "but a sleight of hand" and remarked "(t)here is real money at issue here."15 The court did not address, however, the relation of the rules to the larger educational mission of the NCAA and its member schools in connection with its liability determination, as described below.

The court, having found the restraints to be commercial, proceeded to apply the Rule of Reason in a manner that was limited to quantitative and commercial parameters. After finding that the restraints had anticompetitive effects in that they fixed "the price of one component of the exchange between school and recruit,"16 the court considered whether the NCAA had provided sufficient evidence of procompetitive effects. While the Ninth Circuit accepted the district court's conclusion that the rules "play a limited role in integrating student-athletes with their academic communities," that justification did not materially affect the Ninth Circuit's holdings.17 Instead, the Ninth Circuit found that the most "concrete procompetitive effect" of the rules was their role in preserving "amateurism" and assessed that effect only in commercial and quantitative terms–the impact on viewership of NCAA sports events.18

The NCAA attempted to argue that its amateurism rules provided procompetitive benefits to the athletes as well. The NCAA asserted that it offered "the only opportunity that young men and women have to obtain a college education while playing competitive sports as students."19 Although the Ninth Circuit acknowledged that student-athletes may be attracted to playing sports in a collegiate setting by "the opportunity to earn a higher education,"20 the court found that such an "opportunity would still be available to student-athletes if they were paid some compensation in addition to their athletic scholarships."21 According to the court, "(n)othing in the plaintiffs' prayer for compensation would make student-athletes something other than students."22

The Ninth Circuit focused instead on the district court's finding that "the amateur nature of collegiate sports increases their appeal to consumers."23 Amateur collegiate sports, as distinguished from professional football and basketball, constituted a "product . . . which might otherwise be unavailable,"24 and rules protecting amateurism were procompetitive only insofar as they bolstered "the popularity of the NCAA's product."25

In light of the "concrete procompetitive effect" of enhancing the viewership of college sports, the majority opinion turned to whether "substantially less restrictive alternatives" to the rules would preserve the commercial popularity of college sports.26 It found no error with the district court's conclusion that "allowing NCAA member schools to award grants-in-aid up to their full cost of attendance would be a substantially less restrictive alternative to the current compensation rules."27 That alternative, the court affirmed, would have "virtually no impact on amateurism" or the viewership of college sports.28

The court did not agree, however, that allowing schools to set aside up to $5,000 in trust per year for student-athletes for their NIL rights was a less restrictive alternative to the current NCAA prohibition that did not improperly undermine the justification of amateurism. The evidence suggested, according to the court, only that small payments would be "less harmful to the market" than large payments, not that providing small payments "is virtually as effective in promoting amateurism as not paying them."29

The Ninth Circuit insisted that "not paying student-athletes is precisely what makes them amateurs."30 Any payment beyond the cost of attendance and styled as compensation, rather than a scholarship, would represent a "quantum leap," beyond which there would be "no basis for returning to a rule of amateurism and no defined stopping point."31 Because cash payments would lead to the NCAA's "surrender(ing) its amateurism principles entirely," and because the court found insufficient evidence that such a surrender would not undermine viewership, the court reversed the portion of the district court opinion that permitted $5,000 in deferred compensation per year for student-athletes.32

Even though the district court and Ninth Circuit defined the relevant market as the "college education market," both courts applied the Rule of Reason by examining almost exclusively the commercial and quantitative impact that the rules had on the viewership of college sports. The Ninth Circuit did not consider under the Rule of Reason the NCAA's position that the restraints "encourage(ed) athletic endeavors as an integral component of a broader college educational experience" by insulating the athletes from "sometimes significant commercial pressures that could undermine (their) athletic and educational experiences."33 Even the NCAA chose to present its educational mission primarily in support of an argument that its restraints were not commercial activity subject to the Sherman Act, rather than as a justification for its restraints on the merits of the Rule of Reason analysis.

The dissenting opinion to the Ninth Circuit's decision adopted a framework to assess the NCAA's rules that was perhaps even more narrow than that of the majority. It argued that the court's "inquiry" should be limited to "whether allowing student-athletes to be compensated for their NILs is 'virtually as effective' in preserving popular demand for college sports as not allowing compensation"34 and that amateurism should be considered "relevant only insofar as it relates to consumer interest."35 The dissent would have affirmed the district court opinion "in all respects."36

In contrast to the O'Bannon opinions, other courts have found that qualitative benefits resulting from a restraint of trade are cognizable justifications under the Rule of Reason. For example, the Third Circuit's United States v Brown University decision held that qualitative justifications such as "achiev(ing) equality of educational access and opportunity in order that more people enjoy the benefits of a worthy higher education" were relevant under the Sherman Act and must be considered in a full Rule of Reason analysis.37 The Third Circuit in Brown thereby adopted a more expansive view of cognizable justifications than O'Bannon. Indeed, the Third Circuit remanded Brown and required the district court to consider under the Rule of Reason such factors as the value of education as a common good to society.38

A crucial question for future courts may be whether and, if so, how qualitative justifications for a restraint of trade are to be addressed under the Rule of Reason.

  1. William H. Rooney is a partner of Willkie Farr & Gallagher LLP and the Chair of the firm’s U.S. Antitrust Practice.  Jennifer C. Guest is a second-year litigation associate at Willkie Farr & Gallagher LLP, and Timothy G. Fleming is a first-year litigation law clerk at Willkie Farr & Gallagher LLP.  This article represents the tentative thoughts of the authors and should not be construed as the position of any other person or entity, including Willkie Farr & Gallagher LLP or any of its clients.  This article is provided for news and informational purposes only and does not take into account the qualifications, exceptions, and other considerations that may be relevant to particular situations.  Nothing contained herein constitutes, or is to be considered, the rendering of legal advice, generally or as to a specific matter, or a warranty of any kind.  Readers are responsible for obtaining legal advice from their own legal counsel.  The authors cannot be held liable for any errors in, or any reliance upon, this information.
  2. 802 F.3d 1049 (9th Cir. 2015).
  3. Id. at 1054-55.
  4. O’Bannon v. NCAA, 7 F. Supp. 3d 955, 986 (N.D. Cal. 2014)(internal quotations omitted).
  5. Id.
  6. Id. at 989.
  7. Id. at 991. 
  8. O’Bannon, 802 F.3d at 1064-65.
  9. Brief for the National Collegiate Athletic Association at 32, O’Bannon v. NCAA, Nos. 14-16601, 14-17068 (9th Cir. Nov. 14, 2014) [hereinafter O’Bannon Brief].
  10. Id.
  11. Id. at 33.
  12. O’Bannon, 802 F.3d at 1065. 
  13. Id. (internal citation omitted). 
  14. Id.
  15. Id.
  16. Id. at 1070-71. 
  17. Id. at 1072. 
  18. Id. at 1073. 
  19. O’Bannon Brief at 51 (emphasis in original). 
  20. O’Bannon, 802 F.3d at 1073 (internal quotation omitted).
  21. Id. at 1073.
  22. Id.
  23. Id. (emphasis added).
  24. Id. at 1074 (quoting NCAA v. Bd. of Regents of the University of Oklahoma, 468 U.S. 85, 102 (1984). 
  25. Id. at 1073 (quotation marks and citation omitted).
  26. Id. at 1073-74.
  27. Id. at 1074.
  28. Id. at 1075. 
  29. Id. at 1077. 
  30. Id. at 1076 (emphasis in original). 
  31. Id. at 1078.
  32. Id. at 1079. 
  33. O’Bannon Brief at 33. 
  34. O’Bannon, 802 F.3d at 1081 (Thomas, J. dissenting) (emphasis in original).
  35. Id. (emphasis added). 
  36. Id. at 1083.
  37. 5 F. 3d 658, 678 (1993). 
  38. Id