Contemporary athletics is a big business, and perhaps no area of the law has impacted sports more in recent years than antitrust. As discussed below, three recent federal court rulings—all by the Northern District of California—demonstrate that sports continue to be the subject of antitrust scrutiny, especially when competitors on the field are also collaborators in the boardroom.

First, on October 11, the court dismissed San José’s antitrust claims against Major League Baseball (MLB), thereby affirming baseball’s so-called “antitrust exemption,” but allowed the city to pursue allegations of contract interference arising from the stalled relocation of the Oakland Athletics.1

Then, on October 25, in separate litigation, the court denied a motion by the National Collegiate Athletic Association (NCAA) to dismiss the O’Bannon case—an action brought by a group of current and former players, including former UCLA star Ed O’Bannon, seeking compensation for commercial use of their names and likenesses—and thus let stand a major challenge to the economic model of college sports.2

Most recently, on November 8, the court issued a class certification order in the O’Bannon case that rejected a proposed class of athletes that would have exposed the NCAA to huge monetary damages but approved a class that may result in the creation of a trade association that would transform the amateur model of college sports.

MLB’s Antitrust Exemption is a Home Run

San José filed antitrust claims that challenged the validity of MLB’s territorial rule granting the San Francisco Giants the exclusive right to Santa Clara County. According to the complaint: “For years, MLB has unlawfully conspired to control the location and relocation of [teams] under the guise of an ‘antitrust exemption’ applied to the business of baseball.”

This “antitrust exemption” is what legal historian Stuart Banner calls “[o]ne of the strangest doctrines in our legal system . . . [and] one of our oldest.”3 It also was the lead argument in MLB’s motion to dismiss San José’s complaint. U.S. District Judge Ronald Whyte accepted MLB’s arguments and dismissed the antitrust claims.

After first noting that the exemption “makes little sense,” Judge Whyte observed that “the court is still bound by the Supreme Court’s holdings.” As a result, the court prevented San José from evading a doctrine grounded in three Supreme Court decisions.4

Turning to the substance of the exemption, Judge Whyte then rejected the city’s narrow definition of what constitutes “the business of baseball.” Instead, applying the broader approach urged by MLB, the court concluded that the exemption extends to franchise relocations.

At the same time, Judge Whyte held that the complaint sufficiently alleges a claim that MLB interfered with an option contract the Athletics have to buy land in San José to build a new stadium. Therefore, the city may proceed with its tortious interference claim despite dismissal of the antitrust counts.

The remaining claim exposes MLB to monetary damages but it does not provide a means for San José to compel relocation of the franchise. To obtain that relief, which is the real goal of the litigation, the city will need to appeal to the Ninth Circuit Court of Appeals and, perhaps, the Supreme Court.

NCAA’s Antitrust Exemption Strikes Out

In the O’Bannon case, the plaintiffs allege that the NCAA and its members have conspired with others—including a leading video game manufacturer, Electronic Arts (EA), and the NCAA’s marketing arm, Collegiate Licensing Co. (CLC)—to prevent student-athletes from negotiating license deals.

Earlier this year, the athletes settled their claims with EA and the CLC. According to reports, EA has proposed a $40 million settlement—a per-player payout of approximately $300—for the lifespan of its NCAA Football and NCAA Basketball series. Recently, however, the NCAA filed suit in Georgia state court to stop the settlement, which would leave it the sole defendant in a case that could alter the shape of collegiate athletics.

Much like MLB, the NCAA filed a motion to dismiss the O’Bannon case. The NCAA’s motion contended that the antitrust claims are “nothing more than a challenge to the NCAA’s rules on amateurism” and therefore should be dismissed under the 1984 Supreme Court decision in Board of Regents.5

In Board of Regents, the Supreme Court addressed an antitrust challenge to an NCAA rule capping the total number of football games that schools were allowed to televise each season. The decision observed that the NCAA marketed a “particular brand” of competition distinguished by its “academic tradition.” And, in this context, the Supreme Court made the following observation upon which the NCAA grounded its motion:

“In order to preserve the character and quality of the [NCAA’s] ‘product,’ athletes must not be paid, must be required to attend class, and the like.” 

(Emphasis added.)

District Judge Claudia Wilken rejected the NCAA’s motion.  Her central conclusion was that Board of Regents, as quoted above,“does not stand for the sweeping proposition that student-athletes must be barred, both during their college years and forever thereafter, from receiving any monetary compensation for the commercial use of their names, images, and likenesses.” 

Accordingly, Judge Wilken let stand the plaintiffs’ contention that the NCAA unlawfully restrains competition by forbidding schools from offering money to recruits for their labor or for the commercial use of their names and likenesses.  “These allegations are sufficient to state a Sherman Act claim,” the court wrote.

A New College Class

Although a complaint may allege a class action, a class action does not exist until a court determines that the case is appropriate for class treatment and certifies the class. As a result, a motion for class certification is often a “make it or break it” moment in antitrust litigation.

Following denial of the NCAA’s motion to dismiss, therefore, the class certification ruling was the next important milestone in the O’Bannon case. The plaintiffs sought to certify two classes: (1) an injunctive relief class to bar the NCAA from prohibiting athletes from entering for their names, images, and likenesses and (2) a damages class to seek redress for prior use of names and likenesses.

Judge Wilken found that O’Bannon met the threshold requirements for class certification under Rule 23(a) of the Federal Rules of Civil Procedure for both the injunctive relief class and the damages class, but failed to satisfy the manageability requirement of Rule 23(b)(3). In so holding, Judge Wilken emphasized the “substitution effect” resulting from early entrance to the professional leagues. She concluded it would be virtually impossible to identify who would have stayed in school had the rules been different and who would therefore have not received a scholarship.

In sum, the court’s ruling leaves open the possibility of injunctive relief that prohibits the NCAA from enforcing its amateurism rules, but foreclosed monetary damages.

On balance, this result is a win for the NCAA because hundreds of millions of dollars in revenue are off the table. Going forward, however, the amateur model for college sports remains uncertain. Judge Wilken’s ruling increases the likelihood that the lasting legacy of this litigaation will be the formation of a trade association for college athletes that negotiates the type of group licening deals common in professional sports.

Conclusion

The final word in the antitrust claims against MLB and the NCAA has yet to be written.  San José may still appeal and the O’Bannon case is scheduled for trial next June. Regardless of the ultimate outcome of these cases, the debate over antitrust scrutiny of sports will continue.