Rock and the Class v. NCAA: Does the NCAA Violate Antitrust Law by Capping Scholarships?

The following article is a guest contribution by Benjamin Haynes, Esq.   Haynes is a former Division 1 Basketball Player at Oral Roberts University and currently practices law in the State of Florida.

On July 25, 2012, former Gardner-Webb quarterback, John Rock, by and through counsel, filed a class action complaint against the NCAA. This complaint alleges that the NCAA is in violation of Section 1 of the Sherman Act.  John Rock decided to attend Gardner-Webb University in 2008. Rock claims that he chose the school based on the pledge of the head coach that his athletics scholarship would be renewed annually so long as he did well academically and remained eligible for NCAA competition. However, going into his junior season, Gardner-Webb obtained a new head football coach. Later that summer, the new football coach informed Rock that they would not be renewing his scholarship. Rock then had to pay for the remainder of his college education out of his own pocket. This lawsuit followed.

The Plaintiff alleges that the NCAA and NCAA member institutions have entered into an unlawful agreement, combination, and conspiracy in restraint of trade. Specifically, the Plaintiff alleges that the NCAA and NCAA member institutions have unlawfully agreed to artificially fix or reduce the amount of athletics-based scholarships to be awarded to class members, in exchange for the student-athletes’ labor, by agreeing amongst themselves not to offer multiyear athletics-based scholarships and by agreeing among themselves to artificially limit the overall supply of athletics-based scholarships.

If this topic on limitation of scholarships seems familiar, that’s because a lawsuit on this issue was filed and ruled upon not too long ago.

Agnew v. NCAA:  On October 25, 2010, two former NCAA athletes, Joseph Agnew and Patrick Courtney, filed a class action against the NCAA in the Northern District of California. Both athletes had suffered career ending football injuries during their college tenures. The athletic scholarships for both players were good for only one year, and were not renewed at the end of their seasons. The plaintiffs in that case claimed that two NCAA regulations, the cap on the number of scholarships given per team and the prohibition of multi-year scholarships, prevented them from obtaining scholarships that covered the entire cost of their college education. The cause of action brought in the Agnew v. NCAA complaint was the alleged violation of Section 1 of the Sherman Act.

In the Agnew case, the NCAA filed a motion to dismiss and motion to transfer. The case was transferred from California to Indiana. The plaintiffs then filed an amended complaint alleging that the Bylaws of the NCAA resulted in a horizontal agreement to fix prices and reduce output. The NCAA responded with a motion to dismiss complaint, stating three main reasons: 1) plaintiff failed to identify a relevant market, a necessity for a valid Sherman Act claim; 2) plaintiff failed to allege facts sufficient to show that the NCAA injured competition in a relevant market; and 3) the plaintiff failed to allege facts sufficient to show an injury as a result of anticompetitive acts committed by the NCAA.  On September 1, 2011, the district court granted the NCAA’s motion to dismiss. The plaintiffs then appealed the district court’s decision. The court of appeals affirmed the district court’s decision.

Antitrust law can be extremely tricky, so before we jump into the court’s reasoning for dismissing Agnew’s case, let’s discuss the basics of Section 1 of the Sherman Act and what it exactly means.

Section 1 of the Sherman Act:

The purpose of the Sherman Act is to protect consumers from injury that results from diminished competition. Banks v. NCAA, 977 F.2d 1081, 1087 (7th Cir. 1992). Thus, the plaintiff must allege not only an injury to himself, but an injury to the market as well. Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir. 1984). Specifically, Section 1 of the Sherman Act states that, “Every contract, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” This is implicated when someone, or more than one person, is restraining trade or the ability for someone to compete in a free market or to earn a certain wage. To establish a cause of action under Section 1 of the Sherman Act, all three of the following criteria must be met:

1) A contract, combination, or conspiracy;

2) which results in an unreasonable restraint of trade in a relevant market; and

3) an accompanying injury. Denny’s Marina, Inc. V. Renfro Prods., Inc., 8 F.3d 1217, 1220 (7th Cir. 1993).

Further, the standard rule that is used in order to determine whether there has been a violation of Section 1 of the Sherman Act, is called “The Rule of Reason”.  Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).  The Rule of Reason requires a determination of whether the activity unreasonably restrains competition as demonstrated by actual harm in a relevant market. This will be determined by weighing pro-competitive effects of the rule against the anti-competitive effects of the rule.  Further, courts will look at the restraint imposed and determine whether or not the restraint is justified by a legitimate purpose, which is no more restrictive than necessary.

Agnew v. NCAA Court Reasoning:

In Agnew v. NCAA, the district court granted the NCAA’s motion to dismiss and held that the “plaintiffs failed to identify a cognizable market in which trade was improperly restrained, and that even if plaintiffs did adequately allege that there is a product market for bachelor’s degrees or a labor market for student-athletes, as plaintiffs contended during oral argument, those markets are not cognizable in the context of the Sherman Act.” Id. The plaintiffs appealed and the appellate court found that in order for the plaintiffs to succeed in their challenge of the district court’s dismissal, they must prove:

1) That there is a cognizable market on which the NCAA’s actions could have had anticompetitive effects; and

2) That plaintiff’s did, in fact, identify that market in their complaint. Id.

The appellate court found that there was a market in this case. Specifically, “a transaction clearly occurs between a student athlete and a university: the student athlete uses his athletic abilities on behalf of the university in exchange for an athletic and academic education, room, and board.” Id. However, the Sherman Act only applies to commercial transactions. Therefore, the appellate court then had to determine whether or not the Sherman Act applied to the NCAA and its member schools in relation to their interaction with student-athletes. Id. In White, the court found that “transactions between NCAA schools and student-athletes are, to some degree, commercial in nature, and therefore take place in a relevant market with respect to the Sherman Act. See White v. NCAA, CV 06-999-RGK (C.D. Cal. Sept 20, 2006).

The court further looked at the NCAA Bylaws and whether they were procompetitive on their face or not. The court found that “these Bylaws, a one-year limit to scholarships and a limit on scholarships per team, are not inherently or obviously necessary for the preservation of amateurism, the student-athlete, or the general product of college football.” Id. Further, the appellate court stated “In any event, the claim is too great a leap to make without evidentiary proof at the full Rule of Reason stage.” Id. However, the court elaborated by stating that “the lack of a procompetitive presumption in favor of the two Bylaws under consideration does not equal a finding that they are anticompetitive; it simply means that they cannot be deemed procompetitive at the motion to dismiss stage.” Id.

Therefore, the court held that “as we have made clear, we disagree that plaintiff could not have alleged a relevant cognizable market, but we ultimately conclude that plaintiffs did not identify such a market in their complaint, and that the district court’s dismissal was justified.” Id.

The biggest issue the court of appeals had with the Agnew complaint was that the plaintiffs did not include anything in their amended complaint even “resembling a discussion of a relevant market for student-athlete labor.” Id. Further, the court alludes to the fact that the plaintiffs had forgone the decision to identify a specific relevant market, which is essential in bringing a Sherman Act lawsuit.

Rock Case:

Finally, we can discuss how the Rock case is different from the Agnew case. Rock seems to have filled in the holes that the Agnew case so blatantly missed. While the appellate court in the Agnew case stated that no relevant market was pled in the complaint, Rock has alleged a relevant market exists. Specifically, in paragraph 21 of Rock’s complaint, plaintiff states, “the relevant market is the nationwide market for the labor of student athletes. In this labor market, student athletes compete for sport on athletic teams of NCAA member institutions and NCAA member institutions compete for the best collegiate student athletes by paying in-kind benefits, namely, athletics-based scholarships, academic programs, access to training facilities, and instruction from premier coaches.” Id. Therefore, Rock states a market with extreme particularity.

Further, the Rock complaint makes reference to the Agnew appellate decision in several instances and discusses the fact that there is a cognizable market for student athletes under the Sherman Act.

One thing that is very interesting since the filing of the initial Agnew lawsuit, the NCAA has since abandoned the restrictions of only allowing an institution to offer a one year scholarship. Now, the NCAA allows member institutions to award multiyear scholarships. The Rock complaint sarcastically adds, “Contrary to the dire warnings of the NCAA’s counsel in the prior litigation, the abandonment of the rule has not affected the amateur nature of intercollegiate athletic completion or created competitive imbalances.” Id.

We will now wait to see how the NCAA responds. Undoubtedly, the Agnew litigation has helped scope the strategy of the current Rock lawsuit. The attorneys for John Rock have reviewed the Agnew decision thoroughly and have tried to plug in the pieces that were missing according to the appellate court’s ruling. If the district court finds that a relevant market has been sufficiently identified in the complaint, then an NCAA motion to dismiss will most likely be denied based on the holding in the Agnew case. Is there a possibility that the NCAA’s rule, limiting the total number of scholarships a member institution can offer, will be deemed unlawful under the Sherman Act? We will find out, soon enough.