NCAA rules limiting payments to college athletes may violate antitrust laws

October 01, 2015 - by: HR Hero Alerts 0 COMMENTS

by Nancy Williams

Certain NCAA rules designed to ensure “amateur status” of student athletes may violate federal antitrust laws, according to a decision of the U.S. 9th Circuit Court of Appeals.

The ruling came in a case filed by Ed O’Bannon, a former All-American basketball player at UCLA. O’Bannon discovered that his name, likeness, and identity were being used in a college basketball video game without his having given permission or receiving compensation. He filed a lawsuit against the NCAA claiming that its rules barring compensation for student athletes amounted to an unlawful restraint of trade and thus violated antitrust laws.

Although the NCAA argued that the U.S. Supreme Court had already given its compensation rules a stamp of approval, a federal trial court in California disagreed. Following a trial of the matter, the trial court concluded the NCAA’s goal of maintaining amateurism could be achieved with less restrictive limitations.

The resulting ruling required the NCAA to (1) permit its member schools to provide athletes with financial aid covering the full cost of attendance (rather than just the costs of tuition and fees, room and board, and books) and (2) allow schools to offer deferred payments of up to $5,000 to athletes for the licensing of their identities and likenesses for commercial purposes. The NCAA appealed.

The 9th Circuit largely agreed with the trial court, noting that “the labor of student-athletes is an integral and essential component of the NCAA’s ‘product,’ and a rule setting the price of that labor goes to the heart of the NCAA’s business.” Although college athletes are required to be amateurs, they provide “labor for in-kind compensation[,] . . . a quintessentially commercial transaction.” Thus, the NCAA rules were subject to review under a “Rule of Reason” applicable to antitrust claims.

The Rule of Reason analyzes procompetitive and anticompetitive factors behind any restraint. If this analysis supports some degree of restriction, the focus then turns to identifying the least restrictive mechanism for achieving the legitimate interest.

The 9th Circuit, in applying the Rule of Reason, recognized that the value of maintaining the amateur status of college athletics justified some limitations. For example, even a modest deferred payment to athletes for use of their identities would undercut the “unpaid” character of their services. For that reason, the court overturned that portion of the trial judge’s ruling. But the 9th Circuit approved the portion requiring that the NCAA permit schools to compensate athletes for the full cost of attendance. Such payments would not detract from their status as student amateurs.

As the court noted, the NCAA rules “fix the price of one component of the exchange between school and recruit, thereby precluding competition among schools with respect to that component.” The rules are lawful only to the extent they withstand scrutiny under the Rule of Reason.

Nancy Williams is a partner at Perkins Coie in Seattle, Washington, and a contributor to Washington Employment Law Letter. She can be contacted at nwilliams@perkinscoie.com.

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