Northern District of California Rules That Student-Athletes’ Challenge to NCAA Compensation Rules Will Proceed to Trial

Harrison (Buzz) Frahn, Michael R. Morey, Wyatt A. Honse

Simpson Thatcher & Bartlett LLP

On March 28, 2018, the U.S. District Court for the Northern District of California partially granted and denied cross-motions for summary judgment in In re: NCAA Grant-in-Aid Cap Antitrust Litigation, No. 4:14-md-02541-CW, 2018 WL 1524005 (N.D. Cal. Mar. 28, 2018) (the “Grant-in-Aid Litigation”).The Grant-in-Aid Litigation is a multidistrict class action antitrust suit brought by current and former Division I student-athletes against the NCAA and eleven of its member conferences for fixing the amounts of financial aid and other benefits that colleges may offer student-athletes to compete for their recruitment.

In the March ruling, Judge Claudia Wilken held that: (1) the Ninth Circuit’s 2015 opinion in O’Bannon v. NCAA did not bar the plaintiffs’ claims under the doctrines of claim or issue preclusion, and (2) the NCAA’s current student-athlete compensation system has significant anticompetitive effects.Whether procompetitive benefits justify the current system and whether less restrictive alternatives to it exist will be argued at trial in December 2018.

Background

The Grant-in-Aid Litigation lies in the wake of the Ninth Circuit’s opinion in O’Bannon v. NCAA, which enjoined the NCAA from prohibiting its member schools from offering student-athletes limited shares of royalties derived from licenses to use their names, images, and likenesses (“NILs”) in addition to traditional “grant-in-aid” scholarships covering the costs of tuition, housing, and required books.  802 F.3d 1049, 1078-79 (9th Cir. 2015).  However, the Ninth Circuit permitted the NCAA to cap the total amount of student-athlete compensation at the “cost of attendance,” a figure that included other education-related expenses in addition to the costs of traditional “grant-in-aid.”Id.  The crux of the Grant-in-Aid Litigation is whether the NCAA’s post-O’Bannon student-athlete compensation system that caps student-athlete scholarships at the cost of attendance is an unreasonable restraint on trade in violation of Section 1 of the Sherman Act.

O’Bannon v. NCAA

In 2009, Division I student-athletes brought an antitrust class action in the U.S. District Court for the Northern District of California challenging the NCAA’s rules that prevented men’s football and basketball players from being paid, either by their school or outside sources, for the sale of licenses to use their NILs in videogames, live game telecasts, and other footage.O’Bannon v. NCAA, 7 F. Supp. 3d 955, 963 (N.D. Cal. 2014).These rules (the “NIL Rules”) fixed the value of student-athletes’ NILs at zero and capped the amount of financial aid that student-athletes can receive for their athletic abilities at “full grant-in-aid,” defined as “financial aid that consists of tuition and fees, room and board, and required course-related books.”Id. at 971.The “full grant-in-aid” cap excluded additional costs related to college attendance, such as supplies and transportation, which makeup a larger, school-specific figure called “cost of attendance” that corresponds to the full price of attending the college.Id.The O’Bannonplaintiffs asserted that the NIL Rules were an unreasonable restraint on trade in violation of Section 1 of the Sherman Act.

On August 8, 2014, Judge Claudia Wilken, who now presides over the Grant-in-Aid Litigation, held that the NIL Rules amounted to an anticompetitive price-fixing agreement among the NCAA and its member schools to fix the amount of compensation that schools could offer to student-athletes to compete for their recruitment.Judge Wilken further found that the purported procompetitive effects of the NIL Rules identified by the NCAA—namely, preserving amateurism in college sports, driving consumer demand for college sports products, and integrating college academics and athletics—did not outweigh the NIL Rules’ anticompetitive effects.Judge Wilken determined that the NIL Rules violated Section 1 of the Sherman Act because at least two less restrictive alternatives to the NIL Rules could achieve the NCAA’s goals of preserving amateurism in college sports and driving consumer demand for college games and products.One less restrictive alternative would raise the “full grant-in-aid” cap on athletics-based scholarships by allowing schools to award stipends, derived from NIL licensing revenue, to student-athletes up to the “cost of attendance.”Id. at 982-83.Another less restrictive alternative would allow schools to deposit limited shares of NIL licensing revenue above the cost of attendance into a trust fund payable to student-athletes after they left school.Id. 983.Judge Wilken then enjoined the NCAA and its member schools from prohibiting these two less restrictive alternatives to the NIL Rules.Id. at 1007-08.

The NCAA appealed to the Ninth Circuit, which largely affirmed the district court’s ruling on September 30, 2015.O’Bannon, 802 F.3d at 1079.The Ninth Circuit determined that the “full grant-in-aid” cap “ha[d] no relation whatsoever to the procompetitive purposes of the NCAA,” and affirmed Judge Wilken’s injunction directing the NCAA to increase the “full grant-in-aid” student-athlete compensation cap by allowing its member schools to compensate student-athletes up to the “cost of attendance.”Id. at 1075.The Ninth Circuit, however, rejected Judge Wilken’s findings and injunction related to the deferred compensation less restrictive alternative, reasoning that allowing “students to receive NIL cash payments untethered to their education expenses” after they left school would not promote the NCAA’s procompetitive benefits of preserving amateurism in collegiate sports.Id. at 1076.

Thus, O’Bannon permitted the NCAA to allow its member schools to offer student-athlete recruits compensation up to the “cost of attendance.”Following O’Bannon, the NCAA and its member schools implemented rules that capped student-athlete compensation at the cost of attendance and also fixed the prices of additional benefits that student-athletes can receive that fall outside the scope of the cost of attendance, such as benefits that relate to education (e.g., reimbursements for computers, science equipment, and musical instruments) or that are incidental to athletic participation (e.g.,reimbursements for meals and travel expenses).

The Grant-in-Aid Litigation

The Grant-in-Aid Litigationbegan in 2014 and 2015, when Division I student-athletes (collectively, “Plaintiffs”) filed several lawsuits against the NCAA and eleven of its member conferences (collectively, “Defendants”) throughout the country challenging the post-O’Bannon “cost of attendance” cap on student-athlete compensation as an unreasonable restraint on trade in violation of Section 1 of the Sherman Act.Grant-in-Aid Litigation, 2018 WL 1524005, at *3.The actions were consolidated in the Northern District of California before Judge Wilken.Id.Because Defendants settled with respect to all claims for damages, only claims for injunctive relief remain in the case.Id.

In 2017, the parties filed cross-motions for summary judgment.Plaintiffs asserted, inter alia, that the NCAA’s post-O’Bannon system capping student-athlete compensation at the “cost of attendance” had substantial anticompetitive effects, and that a trial was necessary to determine whether less restrictive alternatives exist to accomplish the purported procompetitive benefits of the NCAA’s post-O’Bannon system.Id. at *7.Defendants moved for summary judgment on the bases that O’Bannon precluded Plaintiffs’ claims under the doctrines of claim and/or issue preclusion, or in the alternative, that stare decisis barred all of Plaintiffs’ claims in light of the Ninth Circuit’s and the district court’s opinions in O’Bannon.Id.