Antitrust law - Seventh Circuit sees through facade, exposes NCAA scholarship limits to Sherman antitrust scrutiny.

AuthorHannan, Justin M.
PositionNational Collegiate Athletic Ass'n - Case note

The Sherman Antitrust Act prohibits business agreements that unreasonably restrain competition in the marketplace. (1) Courts have inconsistently applied the Act in its dealings with the National Collegiate Athletic Association ("NCAA"). (2) In Agnew v. NCAA, (3) the Seventh Circuit considered whether the Sherman Act regulates the relationship between NCAA member institutions and student-athletes. (4) The Seventh Circuit recognized that the exchange of tuition scholarships for student-athlete services signifies an economic transaction that takes place in a cognizable market under the Sherman Act. (5)

In exchange for athletic scholarships to play college football, plaintiffs James Agnew ("Agnew") and Patrick Courtney ("Courtney") enrolled at Rice University and North Carolina Agricultural and Technical State University ("North Carolina A&T"), respectively. (6) Once enrolled, both Agnew and Courtney sustained football-related injuries, and neither school elected to renew their annual scholarships. (7) Both plaintiffs paid for the remainder of their college tuition out-of-pocket. (8)

Agnew and Courtney (hereinafter "Plaintiffs") filed suit against the NCAA, alleging that the NCAA bylaw that caps the number of student-athlete scholarships a member school can offer per sport each year violates section one of the Sherman Antitrust Act. (9) The NCAA argued that the case should be dismissed due to a failure to allege a relevant market in the Plaintiffs' complaint. (10) The Plaintiffs argued that the amended complaint identified two markets: the market for the sale of bachelor's degrees and the labor market for student-athlete services. (11)

At the trial court level, the United States District Court for the Southern District of Indiana granted the NCAA's motion to dismiss, ruling that Agnew failed to identify a relevant market in his complaint. (12) Furthermore, the court explained that granting the motion to dismiss would still have been proper even if Agnew identified a market because the markets for bachelor's degrees or for student-athletes are not cognizable under Sherman Act analysis. (13) The Seventh Circuit affirmed the dismissal because Agnew failed to identify a relevant labor market in his complaint. (14) However, the Seventh Circuit rejected the district court's reasoning that Agnew could not have identified a relevant labor market. (15) Instead, the appeals court concluded that the labor market for student athletes is a cognizable market; therefore, if properly alleged, the plaintiff's burden to identify a market could potentially be met under Sherman Act analysis. (16)

The NCAA describes itself as an organization that was founded to protect student-athletes. (17) The NCAA believes that maintaining amateur status is necessary to protect student-athletes from being exploited by professional and commercial enterprises. (18) Although most NCAA bylaws focus on amateurism and competition, in 1976 the NCAA proposed hundreds of amendments aimed at cutting costs for member organizations. (19) One of these amendments was a scholarship cap that limits the amount of scholarship aid that colleges can award to student-athletes. (20)

The Sherman Act protects markets from diminished competition by prohibiting unreasonable trade restraints. (21) To determine whether an action is unreasonably restraining trade, courts focus on the anticompetitive effects the restraint has upon a relevant market. (22) Unless a restraint is "entirely void of redeeming competitive rationales"--which renders the activity illegal-per-se--the court will resort to "rule of reason" analysis to investigate the practice's anticompetitive and procompetitive impact on the market. (23) The rule-of-reason standard imposes a burden on the plaintiff to first show that the defendant has market power, and second, that the defendant is abusing their market power by implementing a restraint that has anticompetitive effects on the relevant market. (24) If this burden is met, the defendant must provide procompetitive justifications for their anticompetitive behavior that outweighs the detrimental effect on the market. (25) Nevertheless, in instances of blatant anticompetitive behavior, courts may opt to apply a "quick look rule of reason analysis," which bypasses the market-analysis stage entirely and proceeds to the aforementioned balance of procompetitive and anticompetitive values embedded in the conduct. (26)

The NCAA's rapid ascension into a billion-dollar enterprise eventually subjected its activity to Sherman Act scrutiny. (27) However, courts have held the NCAA to a lighter antitrust standard on the grounds that their product cannot survive without engaging in typically forbidden horizontal restrictions on competition. 28 As a result, only two court decisions--Board of Regents and Law--have ever held the NCAA in violation of the Sherman Act. (29) In Board of Regents, the Supreme Court presumed certain NCAA regulations were procompetitive under Sherman Act analysis because the regulations were deemed necessary for the NCAA's survival. (30) However, Board of Regents only listed a few specific examples of presumptively procompetitive behavior, making it unclear whether NCAA regulations like scholarship limits can violate the Sherman Act. (31) Critics argue that the courts have enabled the NCAA to exploit this lack of clarity behind the shield of procompetitiveness to the detriment of the student-athlete. (32)

In Agnew v. NCAA, the Seventh Circuit considered whether the NCAA's demand for student-athlete labor constitutes a cognizable market that implicates the Sherman Act. (33) The court determined that the Sherman Act applies generally to the NCAA's bylaws because member schools anticipate economic gain, and that both schools and athletes specifically weigh economic factors when contemplating scholarship offers. 34 The Seventh Circuit then adhered to the procompetitive presumptions set forth in Board of Regents, but made it a point to focus on the context surrounding the Supreme Court's logic when making such presumptions. (35) The Seventh Circuit narrowly interpreted the Supreme Court's "blessing" of presumptively procompetitive regulations in Board of Regents, finding the at-issue scholarship regulations "not inherently or obviously necessary for the preservation of amateurism, the student-athlete, or the general product of college football." 36 In doing so, the Seventh Circuit adopted its dissenting opinion in Banks v. NCAA, finding a relevant market for student-athlete labor and requiring a more searching analysis of procompetitive justifications. (37) The court reasoned that Banks failed to recognize that in-kind benefits are simply roundabout forms of student-athlete compensation that reach the same recruiting pool. (38)

In NCAA v. Agnew, the Seventh Circuit correctly identified the market for student-athlete labor as a cognizable market with respect to the Sherman Act. (39) Abandoning the majority dicta from Banks was appropriate, as Agnew chose to perceive the NCAA through a modern lens in its attempt to categorize the complicated relationship between student-athlete and school. (40) The Agnew court gracefully deviated from Seventh Circuit precedent while conforming to that of the Supreme Court set forth in Board of Regents. (41) The Agnew court rightfully conceded that eligibility rules fall within the procompetitive presumption--the term was explicitly mentioned by the Board of Regents Court--but the Seventh Circuit narrowly defined the term "eligibility" under the impression that the Supreme Court did not intend to protect all eligibility bylaws, rather only those that relate directly to the preservation of amateurism or other elements key to the NCAA's survival. (42)

Despite a troubling history of failed student-athlete lawsuits under the Sherman Act, the Seventh Circuit's narrow interpretation of Board of Regents and its procompetitive presumptions paves the way for future litigants that wish to challenge NCAA scholarship bylaws. (43) Student-athlete plaintiffs that follow the Agnew blueprint and allege a relevant market have a strong chance to find themselves in unchartered territory: awaiting a procompetitive justification from the NCAA that falls outside those enumerated by Board of Regents. (44) Plaintiffs have struggled to satisfy the market-analysis phase under Sherman Act scrutiny, but Agnew acknowledged the existence of market presence and moved the discussion to procompetitive versus anticompetitive justifications for the bylaw, a state that few litigants have been able to reach. (45)

This result sets the stage for future student-athlete challenges of NCAA bylaws that do not appear to facially preserve the NCAA's amateur product. (46) If future litigants can adequately identify the labor market for student-athletes and the NCAA fails to introduce a sufficient procompetitive explanation, the scholarship cap bylaw will almost certainly be amended or revoked. (47) Based on recent favorable litigation and increased public awareness, Agnew may very well influence other circuits to reexamine their treatment of the NCAA. (48) Without the shield of amateurism as a defense, the NCAA will struggle to find a procompetitive justification for this bylaw, and perhaps many other bylaws to come (.49)

In Agnew v. NCAA, the Seventh Circuit considered whether the market for student-athlete labor was a cognizable market with respect to the Sherman Act. Sifting through decades of decisions that overwhelmingly favor the NCAA, the Agnew court sent a message that the landscape of collegiate athletics has changed, and that the court will no longer enable the NCAA to broadly regulate a billion-dollar market under the pretense of protecting the student-athlete. The court held that the market for student-athlete labor is a cognizable market with respect to the Sherman Act, and the NCAA will not be able to rely upon the procompetitive...

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