On September 30, 2015, the Ninth Circuit Court of Appeals affirmed, in part, a district court’s ruling that some of the National Collegiate Athletic Association’s (NCAA) compensation rules were unlawful restraints on trade in violation of the Sherman Antitrust Act. Section 1 of the Sherman Act prohibits “[e]very contract, combination…, or conspiracy, in restraint of trade or commerce.” The NCAA prohibits student-athletes from being compensated for the use of their “names, images, and likenesses” (NILs). After a bench trial, the district court concluded that these compensation rules were an unlawful restraint on trade and enjoined the NCAA from prohibiting its member schools from giving student-athletes scholarships or grants up to the full cost of attendance (as opposed to only the full cost of tuition) at their respective schools, and up to $5,000 annually in deferred compensation, to be held in a trust for the student-athlete until after they leave school.
On appeal, the Ninth Circuit determined that the district court’s decision was largely correct, but overturned the district court’s finding that the NCAA member schools could provide up to $5,000 annually in deferred compensation. In affirming the district court’s determination that the NCAA compensation rules were an unlawful restraint on trade and enjoining the NCAA from prohibiting schools from giving student-athletes scholarships or grants up to the full cost of attendance, the Ninth Circuit rejected all of the NCAA’s legal arguments and applied the Rule of Reason. Under the Rule of Reason, the Ninth Circuit applied the following analysis: (1) the plaintiffs, who were former NCAA athletes, must show that the restraint produces significant anticompetitive effects within the relevant market; (2) if the athletes met that burden, the NCAA must then provide evidence of the restraint’s pro-competitive effects; and (3) the burden then shifts back to the athletes to show that any legitimate objectives can be achieved in a substantially less restrictive manner.
The Ninth Circuit agreed that the plaintiff athletes demonstrated that: (1) there was a “college education market” where colleges compete for the services of athletic recruits by offering them scholarships, amenities and facilities; (2) without the NCAA’s compensation rules, the schools would compete to offer student-athletes compensation for their NILs; and (3) therefore, the compensation rules had a significant anticompetitive effect on the college education market because they fix an aspect of the “price” that student-athletes pay to attend college.
The Ninth Circuit also agreed that the NCAA demonstrated that there were procompetitive justifications for its compensation rules—chief among them that its rules promoted amateurism and integration with the schools’ academic community.
Turning to whether the NCAA’s legitimate objectives of promoting amateurism and integrating student-athletes could be achieved in a less restrictive manner, the Ninth Circuit noted that, in order for an alternative option to be viable under the Rule of Reason, it must be “virtually as effective” in serving the procompetitive purpose without significantly increasing the costs. The Ninth Circuit held that the alternative promulgated by the plaintiff athletes of allowing the schools to give “grants-in-aid” to cover the full cost of attendance was a viable option. However, in a split decision, the Ninth Circuit found that allowing the member schools to pay student-athletes $5,000 a year in deferred compensation for the use of their NILs was not a viable option. The Ninth Circuit simply could not ignore the fact that not paying student-athletes was exactly what made them amateurs, which was the procompetitive basis for the NCAA’s compensation rules in the first instance. Therefore, the portion of the district court’s ruling that provided for deferred compensation as a viable alternative to the NCAA’s compensation rules was vacated.
The Ninth Circuit noted that it was a “self-evident fact that paying students for their NIL rights [would] vitiate their amateur status as collegiate athletes.” The difference between providing student-athletes with all education-related expenses and providing them with cash sums “untethered to educational expenses” was not minor; it was a quantum leap that would put an end to the rule of amateurism and open the flood gates to plaintiffs challenging the alleged arbitrary NCAA limits until the athletes are able to capture what they believes to be the full value of their NILs.
While the Ninth Circuit made it clear that cash payments to student-athletes for their likenesses was not a viable alternative, it opened the door to allowing schools to provide an even greater economic benefit to student-athletes than what other students would otherwise be eligible to receive. The Ninth Circuit did not define grants-in-aid to cover “the full cost of attendance” at a particular school. At a minimum, the “full cost of attendance” could be expected to include housing, books, and meals, but the possibilities of what can arguably be included are almost limitless. For example, does it include clothing, a car, groceries, computers, cellphones, dues for sororities and fraternities, or other extra-curricular organizations? Where the line is drawn will no doubt be the subject of additional NCAA rules and regulations, but in the meantime, the door remains open for wealthier schools to rely onO’Bannon to offer the best student-athlete prospects hefty “grants-in-aid” to entice the student-athletes to attend their schools over all others.