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IP/Entertainment Case Law Updates

O’Bannon v. NCAA

Ninth Circuit affirms in part and reverses in part district court’s judgment that NCAA rule on student-athlete compensation was unlawful restraint on trade, holding that member schools were permitted to raise cap on compensation to full cost of attending college, but not to pay student-athletes portion of licensing revenues as deferred cash compensation.

Former UCLA basketball player Edward O’Bannon Jr. brought a putative class action against the National Collegiate Athletic Association and the Collegiate Licensing Co., which licenses the NCAA’s trademarks. O’Bannon alleged that the NCAA’s amateurism rules preventing student-athletes from being compensated for the use of their names, images and likenesses constituted an illegal restraint of trade under the Sherman Act. Around the same time, Sam Keller, a former quarterback at Arizona State University and the University of Nebraska, sued the NCAA, CLC and video game producer Electronic Arts, alleging, among other things, that the use of student-athletes’ names, images and likenesses in sports video games violated certain state right-of-publicity statutes. At the time those two complaints were filed, the NCAA’s rules permitted member schools to offer student-athletes scholarships only up to a “grant in aid” (i.e., tuition and fees, room and board, and required course books).

The two cases were consolidated for pretrial purposes, and all but the antitrust claims against the NCAA were resolved. The remaining claims proceeded to a bench trial in California federal district court. The district court ruled that the NCAA compensation rules were an unlawful restraint of trade and enjoined the NCAA from prohibiting its member schools from granting scholarships up to the full “cost of attendance” (which includes optional books and supplies, and transportation and other expenses related to attendance, typically a few thousand dollars above the grant in aid). The district court also prohibited the payment of up to $5,000 per year per student-athlete in licensing revenue as deferred cash compensation for the use of their names, images and likenesses. The NCAA appealed, and the Ninth Circuit affirmed in part and reversed in part.

Addressing three threshold issues raised by the NCAA, the panel held that it could properly consider the merits of plaintiffs’ Sherman Act claims. First, it pointed out that the U.S. Supreme Court did not declare in its 1984 decision in NCAA v. Bd. of Regents of the Univ. of Okla. that the NCAA’s amateurism rules are presumptively valid. Disagreeing with the Seventh Circuit, the panel interpreted Bd. of Regents as holding that NCAA rules are subject to a Rule of Reason analysis. Second, the panel held that the NCAA’s rules are not mere eligibility restrictions, but rather substantively regulate commercial activity and are therefore subject to the Sherman Act. Third, the panel found that the plaintiffs had standing because they suffered an injury in fact because, absent the NCAA’s rules, video game makers would negotiate directly with and pay student-athletes for the right to use their names, images and likenesses. (The panel declined to answer the thorny question of whether the Copyright Act pre-empts right-of-publicity claims arising out of the use of student-athletes’ names, images and likenesses in video games, saying the issue was inappropriate for resolution in an antitrust suit to which a video game company was no longer a party.)

Applying the Rule of Reason analysis, the panel found support in the record for the district court’s finding that the NCAA’s compensation rules have significant anticompetitive effects within the “college education market.” In this market, colleges compete for the services of athletic recruits by offering scholarships, coaching, facilities and other amenities. The panel agreed that if the NCAA’s compensation rules did not exist, colleges would compete to offer recruits compensation for their NILs. It pointed out that the compensation rules have a significant anticompetitive effect on that market because they fix an aspect of the “price” that recruits pay to attend college (or, alternatively, an aspect of the price that colleges pay to secure recruits’ services). The panel further agreed that the NCAA’s compensation rules have certain pro-competitive effects, chief among them preserving the popularity of the NCAA’s product by promoting the “amateur” nature of collegiate sports.  

According to the Ninth Circuit, the district court identified one proper, less restrictive alternative to the current NCAA compensation rules:  Allowing member schools to grant scholarships up to the full cost of attendance. The panel determined, however, that the lower court clearly erred in deciding that permitting student-athletes to be paid cash compensation for use of their NILs was also a viable alternative, and vacated that portion of the injunction. The district court’s finding that paying student-athletes cash consideration would achieve the pro-competitive effect of promoting amateurism and consumer demand as effectively as not paying them overlooked the fact that nonpayment is precisely what makes student-athletes amateurs, the panel said.  

Having found that “amateurism” is integral to the NCAA’s market, the district court could not plausibly conclude that paying student-athletes even a modest sum for the use of their NILs is “virtually as effective” for that market as having them remain amateurs, concluded the panel. The difference between offering education-related expenses and offering cash consideration untethered to educational expenses was a “quantum leap” that, once made, would likely lead to incremental increases in the district court’s “arbitrary” $5,000 annual limit and eventual evisceration of the rule of amateurism altogether, the panel held.  

Chief Judge Sidney R. Thomas concurred in part, but dissented from the majority’s reversal of the district court’s cash compensation holding, which he viewed as supported by ample expert testimony in the record.

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