Friday, December 5, 2014

O'Bannon, the Rule of Reason, and the Less Restrictive Alternative Test

Applied Reason to College Athletics

Earlier this year, in O'Bannon et al. v. NCAA, the U.S. District Court for the Northern District of California invalidated the NCAA's policy governing compensation that colleges and universities may provide football and basketball players. (Here is a link to the decision.)  That policy allowed schools to provide players a full grant-in-aid, namely, full tuition, fees, room and board, and the cost of textbooks.  Moreover, the policy also allows schools to provide additional compensation to the neediest student athletes --- those who qualify for federal Pell grants.   

Ordinarily, agreements between rivals regarding the compensation paid to input suppliers are unlawful per se.  Ditto for agreements that govern non-price aspects of the relationship between rivals and input suppliers.  If Ford, Toyota, Honda and General Motors agreed on the salaries or working conditions provided their engineers, for instance, courts would rightly declare the arrangement a buyers' cartel and condemn it as unlawful per se under the Sherman Act.  Ditto if, say, several silicon valley firms or an academic trade association agreed not to hire or "poach" individuals employed by rivals

In NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), the Supreme Court rejected the analogy between the NCAA's policy on player compensation and the sort of buyers' cartel just described.  As explained in much greater detail here, the Court, in an opinion by Justice John Paul Stevens (pictured above), recognized that, unlike buyer cartels, the NCAA is a legitimate joint venture, the existence of which is necessary to produce a product, college football, that many consumers find attractive.  The Court also recognized that unbridled rivalry between colleges and universities for student-athletes would transform college athletics into semi-pro athletics, thereby undermining consumer demand for the joint venture product.  Thus, the Court expressly noted that, in order to protect the integrity of this product, members of the NCAA must collectively set limits on player compensation.  In so doing, the Court rejected the "cartel" label for such restraints.  (For additional discussion of the NCAA decision by this blogger, go here.) According to the Court:

"The identification of this 'product' with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable such as, for example, minor league baseball.  In order to preserve the character and quality of the 'product,' athletes must not be paid, must be required to attend class, and the like.  And the integrity of the 'product' cannot be preserved except by mutual agreement: if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the field of play might soon be destroyed.  Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as result enables a product to be marketed which might otherwise be unavailable.  In performing this role, its actions widen consumer choice --- not only the choices available to sports fans but also those available to athletes -- and hence can be viewed as procompetitive."

See NCAA, 468 U.S. at 101-102 (emphasis supplied).  

More technically, the Court essentially held that unbridled competition between NCAA member schools to attract and retain student athletes would result in a market failure and reduce economic welfare, including the welfare of consumers.  Such rivalry, one suspects, could result in six figure salaries for some players at some schools, over and above a full grant-in-aid.  The prospect of such a market failure, the Court believed, distinguished the NCAA's limits on player compensation from otherwise analogous forms of collective wage setting such as the hypothetical agreements between automobile manufacturers mentioned above.  (See this essay by this blogger explaining the role of the market failure paradigm in the antitrust jurisprudence of Justice Stevens, including his opinion in NCAA.) 

The NCAA court did not hold that agreements governing student-athlete compensation are lawful per se.  Instead, such agreements are to be analyzed under Standard Oil's Rule of Reason. After conducting this analysis, the district court in O'Bannon agreed with the NCAA (and the Supreme Court) that the NCAA's limits on student-athlete compensation produce significant procompetitive benefits by, for instance, enhancing consumer demand for college football and basketball.  These benefits, the court apparently assumed, would suffice to justify the restraints.   Nonetheless, the court invalidated the limits, holding that a "less restrictive alternative" would achieve the same benefits.  In particular, the court held that increasing the limit to "cost of attendance" (which includes grant-in-aid plus transportation and supplies), plus $5,000 per year, to be derived from "licensing revenue generated from the use of their names, images, and likenesses during college[,]" would be "less restrictive of competition, while at the same time achieving the same admitted benefits as the current policy.

This blogger has joined a brief amicus curiae by fifteen antitrust scholars taking issue with the district court's application of the less restrictive alternative test.  (Here is a link to the brief.  See here for a story about the brief on ) The brief does not question the role that a properly-applied less restrictive alternative analysis can play in rule of reason analysis.  At the same time, the brief contends that the district court misapplied this test.

Ordinarily the less restrictive alternative test involves identification of a different type of agreement, actually existing somewhere in the marketplace, that produces the same benefits as the agreement under scrutiny.  Thus, in the context of product distribution, courts evaluating vertically-imposed exclusive territories could conceivably conclude that so-called "location clauses" are less restrictive of competition and produce the same benefits in a particular setting as exclusive territories.  Cf. Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (describing location clause and holding that courts should evaluate such restraints under the rule of reason).  However, the O'Bannon court did not identify any such categorically different alternative actually existing in the marketplace.  Instead,  the court simply amended somewhat (upward) the level of compensation that players can potentially receive, without questioning the need for a collectively-set limit on such compensation.

Not surprisingly, then, the brief argues that the district court improperly treated the less restrictive alternative test as a license to substitute its own judgement about appropriate compensation for the judgment of market participants who adopted policies that, according to the court's own findings, produced significant economic benefits. Thus, the district court's approach empowers judges to function as regulatory commissions, recalibrating otherwise reasonable levels of compensation.  Such quasi-regulators would displace beneficial agreements that produce significant economic benefits, simply because the judge believes that a hypothetical variant of the agreement, in this case one involving somewhat higher compensation for some players, would produce marginally greater net benefits than the agreement the parties actually adopted.  However, as Judge Frank Easterbrook --who argued NCAA for the defendants -- once explained when applying the rule of reason in a subsequent case: "the antitrust laws do not deputize district judges as one-man regulatory agencies."   See Chicago Professional Sports Ltd. Partnership and WGN v. National Basketball Association, 95 F.3d 593, 597 (7th Cir. 1996).  Instead, courts must simply ask whether a restraint is "reasonably necessary" to produce the benefits in question.   Hopefully the Ninth Circuit will agree with Judge Easterbrook and properly apply the rule of reason that has, thanks to NCAA and Justice Stevens, been applicable to such restraints for the past three decades.