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O'Bannon v. National Collegiate Athletic Association

United States Court of Appeals, Ninth Circuit

September 30, 2015

EDWARD C. O'BANNON, JR., On Behalf of Himself and All Others Similarly Situated, Plaintiff-Appellee,
v.
NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, AKA the NCAA, Defendant-Appellant, and ELECTRONIC ARTS, INC.; COLLEGIATE LICENSING COMPANY, AKA CLC, Defendants

Argued and Submitted, San Francisco, California: March 17, 2015.

Appeal from the United States District Court for the Northern District of California. D.C. No. 4:09-cv-03329-CW. Claudia Wilken, Senior District Judge, Presiding.

SUMMARY[**]

Antitrust

The panel affirmed in part and reversed in part the district court's judgment after a bench trial in an antitrust suit regarding the National Collegiate Athletic Association's rules prohibiting student-athletes from being paid for the use of their names, images, and likenesses.

The district court held that the NCAA's amateurism rules were an unlawful restraint of trade in violation of Section 1 of the Sherman Antitrust Act. The district court permanently enjoined the NCAA from prohibiting its member schools from giving student-athletes scholarships up to the full cost of attendance at their respective schools and up to $5,000 per year in deferred compensation, to be held in trust for student-athletes after they leave college.

The panel held that it was not precluded from reaching the merits of plaintiffs' Sherman Act claim because: (1) the Supreme Court did not hold in National Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 85, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984), that the NCAA's amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA's rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.

The panel held that even though many of the NCAA's rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason. Applying the Rule of Reason, the panel held that the NCAA's rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the " price" that recruits pay to attend college. The record supported the district court's finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA's product by promoting its current understanding of amateurism. The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules-- i.e., allowing NCAA member to give scholarships up to the full cost of attendance--but the district court's other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. The panel vacated the district court's judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.

Chief Judge Thomas concurred in part and dissented in part. He disagreed with the majority's conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes' full cost of attendance.

Seth P. Waxman (argued), Leon B. Greenfield, Daniel S. Volchok, David M. Lehn, Weili J. Shaw, Matthew J. Tokson, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; Glenn D. Pomerantz, Kelly M. Klaus, Luis Li, Rohit K. Singla, Carolyn H. Luedtke, Thane Rehn, Justin P. Raphael, Jeslyn A. Miller, Munger, Tolles, & Olson LLP, San Francisco, California; Gregory L. Curtner, Robert J. Wierenga, Kimberly K. Kefalas, Suzanne L. Wahl, Schiff Hardin LLP, Ann Arbor, Michigan, for Defendant-Appellant.

Michael D. Hausfeld (argued), Hilary K. Scherrer, Sathya S. Gosselin, Swathi Bojedla, Hausfeld LLP, Washington, D.C.; Michael P. Lehmann, Bruce Wecker, Hausfeld LLP, San Francisco, California; Jonathan Massey, Massey & Gail LLP, Washington, D.C., for Plaintiffs-Appellees.

Jonathan M. Jacobson, Daniel P. Weick, Wilson Sonsini Goodrich & Rosati Professional Corporation, New York, New York, for Amici Curiae Antitrust Scholars.

Allen P. Grunes, Maurice E. Stucke, The Konkurrenz Group, Washington, D.C., for Amici Curiae Law and Economics and Antitrust Scholars.

Nathan Siegel, Patrick Kabat, Levine Sullivan Koch & Schulz, LLP, Washington, D.C., for Amici Curiae A& E Television Networks, LLC, ABC, Inc., CBS Corporation, Discovery Communications, LLC, Fox Broadcasting Company, National Public Radio, Inc., NBCUniversal Media, LLC, The Reporter's Committee for Freedom of the Press, and Turner Broadcasting System, Inc.

Martin Michaelson, William L. Monts III, Joel D. Buckman, Hogan Lovells U.S. LLP, Washington, D.C.; Ada Meloy, General Counsel, American Council on Education, Washington, D.C., for Amici Curiae American Council on Education, Association of Governing Boards of Universities and Colleges, and National Association of Independent Colleges and Universities.

Duncan W. Crabtree-Ireland, Danielle S. Van Lier, Screen Actors Guild-American Federation of Television and Radio Artists, Los Angeles, California; Jonathan Faber, Luminary Group LLC, Shelbyville, Indiana, for Amici Curiae Screen Actors Guild-American Federation of Television & Radio Artists and Luminary Group LLC.

James B. Speta, Chicago, Illinois; Ernest A. Young, Apex, North Carolina, for Amici Curiae Intellectual Property and First Amendment Scholars.

Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, Washington; Jeff D. Friedman, Jon T. King, Hagens Berman Sobol Shapiro LLP, Berkeley, California, for Amicus Curiae Alston Kindler Group.

Jeffrey L. Kessler, David G. Feher, David L. Greenspan, Timothy M. Nevius, Joseph A. Litman, Winston & Strawn LLP, New York, New York; Steffen N. Johnson, Winston & Strawn LLP, Washington, D.C.; Derek J. Sarafa, Winston & Strawn LLP, Chicago, Illinois, for Amici Curiae Martin Jenkins, Nigel Hayes, and Alec James.

Steven N. Williams, Adam J. Zapala, Cotchett, Pitre & McCarthy, LLP, Burlingame, California, for Amici Curiae Economists and Professors of Sports Management.

Richard G. Johnson, Richard G. Johnson Co., L.P.A., Cleveland, Ohio, for Amicus Curiae Andrew A. Oliver.

Michael J. Boni, Joshua D. Snyder, John E. Sindoni, Boni & Zack LLC, Bala Cynwyd, Pennsylvania, for Amici Curiae Sports Management Professors.

David Martinez, Robins Kaplan LLP, Los Angeles, California, for Amici Curiae Twenty-Six Scholars of Antitrust and Sports Law.

Before: Sidney R. Thomas, Chief Judge, Jay S. Bybee, Circuit Judge and Gordon J. Quist,[*] Senior District Judge. Opinion by Judge Bybee; Partial Concurrence and Partial Dissent by Chief Judge Thomas.

OPINION

BYBEE, Circuit Judge:

Section 1 of the Sherman Antitrust Act of 1890, 15 U.S.C. § 1, prohibits " [e]very contract, combination . .., or conspiracy, in restraint of trade or commerce." For more than a century, the National Collegiate Athletic Association (NCAA) has prescribed rules governing the eligibility of athletes at its more than 1,000 member colleges and universities. Those rules prohibit student-athletes from being paid for the use of their names, images, and likenesses (NILs). The question presented in this momentous case is whether the NCAA's rules are subject to the antitrust laws and, if so, whether they are an unlawful restraint of trade.

After a bench trial and in a thorough opinion, the district court concluded that the NCAA's compensation rules were an unlawful restraint of trade. It then enjoined the NCAA from prohibiting its member schools from giving student-athletes scholarships up to the full cost of attendance at their respective schools and up to $5,000 per year in deferred compensation, to be held in trust for student-athletes until after they leave college. As far as we are aware, the district court's decision is the first by any federal court to hold that any aspect of the NCAA's amateurism rules violate the antitrust laws, let alone to mandate by injunction that the NCAA change its practices.

We conclude that the district court's decision was largely correct. Although we agree with the Supreme Court and our sister circuits that many of the NCAA's amateurism rules are likely to be procompetitive, we hold that those rules are not exempt from antitrust scrutiny; rather, they must be analyzed under the Rule of Reason. Applying the Rule of Reason, we conclude that the district court correctly identified one proper alternative to the current NCAA compensation rules-- i.e., allowing NCAA members to give scholarships up to the full cost of attendance--but that the district court's other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. We therefore affirm in part and reverse in part.

I

A. The NCAA

American colleges and universities have been competing in sports for nearly 150 years: the era of intercollegiate athletics began, by most accounts, on November 6, 1869, when Rutgers and Princeton met in the first college football game in American history--a game more akin to soccer than to modern American football, played with " 25 men to a side." Joseph N. Crowley, In the Arena: The NCAA's First Century 2 (2006), available at https://www.ncaapublications.com/p-4039-in-the-arena-the-ncaas-first-century.aspx. College football quickly grew in popularity over the next few decades.

Fin de siècle college football was a rough game. Serious injuries were common, and it was not unheard of for players to be killed during games. Schools were also free to hire nonstudent ringers to compete on their teams or to purchase players away from other schools. By 1905, these and other problems had brought college football to a moment of crisis, and President Theodore Roosevelt convened a conference at the White House to address the issue of injuries in college football. Later that year, the presidents of 62 colleges and universities founded the Intercollegiate Athletic Association to create uniform rules for college football. In 1910, the IAA changed its name to the National Collegiate Athletic Association (NCAA), and it has kept that name to this day.

The NCAA has grown to include some 1,100 member schools, organized into three divisions: Division I, Division II, and Division III. Division I schools are those with the largest athletic programs--schools must sponsor at least fourteen varsity sports teams to qualify for Division I--and they provide the most financial aid to student-athletes. Division I has about 350 members.

For football competition only, Division I's membership is divided into two subdivisions: the Football Bowl Subdivision (FBS) and the Football Championship Subdivision (FCS). FBS schools are permitted to offer more full scholarships to their football players and, as a result, the level of competition is generally higher in FBS than in FCS. FBS consists of about 120 of the nation's premier college football schools.

B. The Amateurism Rules

One of the NCAA's earliest reforms of intercollegiate sports was a requirement that the participants be amateurs. President C.A. Richmond of Union College commented in 1921 that the competition among colleges to acquire the best players had come to resemble " the contest in dreadnoughts" that had led to World War I,[1] and the NCAA sought to curb this problem by restricting eligibility for college sports to athletes who received no compensation whatsoever.[2] But the NCAA, still a voluntary organization, lacked the ability to enforce this requirement effectively, and schools continued to pay their athletes under the table in a variety of creative ways; a 1929 study found that 81 out of 112 schools surveyed provided some sort of improper inducement to their athletes.

The NCAA began to strengthen its enforcement capabilities in 1948, when it adopted what became known as the " Sanity Code" --a set of rules that prohibited schools from giving athletes financial aid that was based on athletic ability and not available to ordinary students. See Daniel E. Lazaroff, The NCAA in Its Second Century: Defender of Amateurism or Antitrust Recidivist ?, 86 Or. L.Rev. 329, 333 (2007). The Sanity Code also created a new " compliance mechanism" to enforce the NCAA's rules--" a Compliance Committee that could terminate an institution's NCAA membership." Id.

In 1956, the NCAA departed from the Sanity Code's approach to financial aid by changing its rules to permit its members, for the first time, to give student-athletes scholarships based on athletic ability. These scholarships were capped at the amount of a full " grant in aid," defined as the total cost of " tuition and fees, room and board, and required course-related books." Student-athletes were prohibited from receiving any " financial aid based on athletics ability" in excess of the value of a grant-in-aid, on pain of losing their eligibility for collegiate athletics. Student-athletes could seek additional financial aid not related to their athletic skills; if they chose to do this, the total amount of athletic and nonathletic financial aid they received could not exceed the " cost of attendance" at their respective schools.[3]

In August 2014, the NCAA announced it would allow athletic conferences to authorize their member schools to increase scholarships up to the full cost of attendance. The 80 member schools of the five largest athletic conferences in the country voted in January 2015 to take that step, and the scholarship cap at those schools is now at the full cost of attendance. Marc Tracy, Top Conferences to Allow Aid for Athletes' Full Bills, N.Y. Times, Jan. 18, 2015, at SP8.

In addition to its financial aid rules, the NCAA has adopted numerous other amateurism rules that limit student-athletes' compensation and their interactions with professional sports leagues. An athlete can lose his amateur status, for example, if he signs a contract with a professional team, enters a professional league's player draft, or hires an agent. And, most importantly, an athlete is prohibited--with few exceptions--from receiving any " pay" based on his athletic ability, whether from boosters, companies seeking endorsements, or would-be licensors of the athlete's name, image, and likeness (NIL).

C. The O'Bannon and Keller Litigation

In 2008, Ed O'Bannon, a former All-American basketball player at UCLA, visited a friend's house, where his friend's son told O'Bannon that he was depicted in a college basketball video game produced by Electronic Arts (EA), a software company that produced video games based on college football and men's basketball from the late 1990s until around 2013. The friend's son turned on the video game, and O'Bannon saw an avatar of himself--a virtual player who visually resembled O'Bannon, played for UCLA, and wore O'Bannon's jersey number, 31. O'Bannon had never consented to the use of his likeness in the video game, and he had not been compensated for it.

In 2009, O'Bannon sued the NCAA and the Collegiate Licensing Company (CLC), the entity which licenses the trademarks of the NCAA and a number of its member schools for commercial use, in federal court. The gravamen of O'Bannon's complaint was that the NCAA's amateurism rules, insofar as they prevented student-athletes from being compensated for the use of their NILs, were an illegal restraint of trade under Section 1 of the Sherman Act, 15 U.S.C. § 1.

Around the same time, Sam Keller, the former starting quarterback for the Arizona State University and University of Nebraska football teams, separately brought suit against the NCAA, CLC, and EA. Keller alleged that EA had impermissibly used student-athletes' NILs in its video games and that the NCAA and CLC had wrongfully turned a blind eye to EA's misappropriation of these NILs. The complaint stated a claim under Indiana's and California's right of publicity statutes, as well as a number of common-law claims.

The two cases were consolidated during pretrial proceedings. The defendants moved to dismiss Keller's right-of-publicity claims on First Amendment grounds. The district court denied the motion to dismiss, and we affirmed that decision, holding that " [u]nder California's transformative use defense, EA's use of the likenesses of college athletes like Samuel Keller in its video games is not, as a matter of law, protected by the First Amendment." Keller v. Elec. Arts Inc. (In re NCAA Student-Athlete Name & Likeness Licensing Litig.), 724 F.3d 1268, 1284 (9th Cir. 2013).

In November 2013, the district court granted the plaintiffs' motion for class certification. The court held that certification of a damages class under Rule 23(b)(3) was inappropriate, but it certified the following class under Rule 23(b)(2) for injunctive and declaratory relief:

All current and former student-athletes residing in the United States who compete on, or competed on, an NCAA Division I (formerly known as " University Division" before 1973) college or university men's basketball team or on an NCAA Football Bowl Subdivision (formerly known as Division I-A until 2006) men's football team and whose images, likenesses and/or names may be, or have been, included or could have been included (by virtue of their appearance in a team roster) in game footage or in videogames licensed or sold by Defendants, their co-conspirators, or their licensees.[4]

After class certification was granted, the plaintiffs voluntarily dismissed their damages claims with prejudice. The plaintiffs also settled their claims against EA and CLC, and the district court preliminarily approved the settlement. O'Bannon and Keller were deconsolidated, and in June 2014, the antitrust claims against the NCAA at issue in O'Bannon went to a bench trial before the district court.

D. The District Court's Decision

After a fourteen-day bench trial, the district court entered judgment for the plaintiffs, concluding that the NCAA's rules prohibiting student-athletes from receiving compensation for their NILs violate Section 1 of the Sherman Act. O'Bannon v. NCAA, 7 F.Supp.3d 955 (N.D. Cal. 2014).

1. The Markets

The court began by identifying the markets in which the NCAA allegedly restrained trade. It identified two markets that were potentially affected by the challenged NCAA rules.

a. The college education market

First, the court found that there is a " college education market" in which FBS football and Division I basketball schools compete to recruit the best high school players by offering them " unique bundles of goods and services" that include not only scholarships but also coaching, athletic facilities, and the opportunity to face high-quality athletic competition. Id. at 965-66. The court found that very few athletes talented enough to play FBS football or Division I basketball opt not to attend an FBS/Division I school; hardly any choose to attend an FCS, Division II, or Division III school or to compete in minor or foreign professional sports leagues, and athletes are not allowed to join either the NFL or the NBA directly from high school.[5] Id. at 966. Thus, the court concluded, the market specifically for FBS football and Division I basketball scholarships is cognizable under the antitrust laws because " there are no professional [or college] football or basketball leagues capable of supplying a substitute for the bundle of goods and services that FBS football and Division I basketball schools provide." Id. at 968.

b. The group licensing market

The second market identified by the district court was a " group licensing market" in which, but for the NCAA's compensation rules, college football and basketball athletes would be able to sell group licenses for the use of their NILs. Id. The court broke this " group licensing market" down into three submarkets in which players' NILs could be profitably licensed: (1) live game telecasts, (2) sports video games, and (3) game rebroadcasts, advertisements, and other archival footage.[6] Id. With respect to live game telecasts, the court noted that the TV networks that broadcast live college football and basketball games " often seek to acquire the rights to use" the players' NILs, which the court concluded " demonstrate[s] that there is a demand for these rights" on the networks' part. Id. at 968-69. With respect to video games, the court found that the use of NILs increased the attractiveness of college sports video games to consumers, creating a demand for players' NILs.[7] Id. at 970. And with respect to archival footage, the court noted that the NCAA had licensed footage of student-athletes--including current athletes--to a third-party licensing company, T3Media, proving that there is demand for such footage. Id. at 970-71.

2. The Rule of Reason

Having concluded that the NCAA's compensation rules potentially restrained competition in these two markets, the court proceeded to analyze the legality of the challenged NCAA rules with respect to those markets, applying the Rule of Reason. Id. at 984-1009. The district court found that the NCAA's rules have an anticompetitive effect in the college education market but not in the group licensing market. It then concluded that the rules serve procompetitive purposes. Finally, it determined that the procompetitive ...


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