Reforming College Sports

• Author: Jayma Meyer,Andrew Zimbalist
• Published date: 01 March 2017
• Date: 01 March 2017
• DOI: http://doi.org/10.1177/0003603X16688829

Article

Reforming College Sports:

The Case for a Limited and

Conditional Antitrust Exemption

Jayma Meyer* and Andrew Zimbalist**

Abstract

College sports has been undergoing rapid commercialization and reorganization. This transformation

has led to sharpening inequality among schools within and between divisions, unstable and unsus-

tainable economics, and burgeoning legal challenges. It is not an exaggeration to state that inter-

collegiate athletics is at an economic and legal tipping point. This article first discusses the economic

issues confronting college sports. It then turns to consider the plethora of litigation facing the National

Collegiate Athletic Association (NCAA) and argues that antitrust and labor laws are inadequate means

to respond effectively to the economic and legal challenges surrounding college sports. Finally, the

article makes the case for a limited and conditional antitrust exemption for the NCAA that would

promote the primacy of academics and the fair treatment of athletes.

Keywords

antitrust exemption, rule of reason, O’Bannon, college athletic department operating deficits,

intercollegiate health and safety, intercollegiate academic and fairness reforms

I. Introduction

College sports has been undergoing rapid commercialization and reorganization. This transformation

has led to sharpening inequality among schools within and between divisions, unstable and unsustain-

able economics, and burgeoning legal challenges. It is not an exaggeration to state that intercollegiate

athletics is at an economic and legal tipping point. This article first discusses the economic issues

confronting college sports. It then turns to consider the plethora of litigation facing the National

Collegiate Athletic Association (NCAA) and argues that antitrust and labor laws are inadequate means

to respond effectively to the economic and legal challenges surrounding college sports. Finally, the

article makes the case for a limited and conditional antitrust exemption for the NCAA that would

promote the primacy of academics and the fair treatment of athletes.

* Counsel, Simpson Thacher & Bartlett LLP; and Visiting Clinical Professor of Sports Law, SPEA, Indiana University, Bloomington,

IN, USA

** Robert A. Woods Professor of Economics, Smith College, Northampton, MA, USA

Corresponding Author:

Andrew Zimbalist, Robert A. Woods Professor of Economics, Smith College, Northampton, MA 01063, USA.

Email: azimbali@smith.edu

The Antitrust Bulletin

2017, Vol. 62(1) 31-61

ªThe Author(s) 2017

Reprints and permission:

sagepub.com/journalsPermissions.nav

DOI: 10.1177/0003603X16688829

journals.sagepub.com/home/abx

II. The Economic Environment

A. Background

To many, it may seem that big-time college sports is running on a treadmill. Every year more money

pours in—whether through new media contracts with national networks, regional sports networks,

corporate sponsorships, the Football Championship Playoff (FCP), fatter donations, or new ticketing

strategies—but the number of the 350-plus Division I or 128 Football Bowl Subdivision (FBS)

programs reporting an operating surplus has stagnated around twenty.

1

Moreover, according to the

biannual NCAA Revenues and Expenses Report, the size of the median program operating deficit in

FBS has been steadily growing in recent years, from $5.9 million in 2004, to $9.5 million in 2010,

$12.3 million in 2012, and $14.7 million in 2014.

2

It is important to understand what these operating deficits mean. They do not include (most) capital

expenses, such as the debt service on stadiums, arenas, training facilities, or tutoring centers.

3

Indeed,

the 2005 study commissioned by the NCAA estimated that the median capital costs of FBS athletic

programs exceeded $20 million annually.

They also tend to exclude an array of indirect costs, such as a share of a university president’s compen-

sation, office rental and supplies, and staff.

4

Part of the problem is that there are no established counting

conventions, so despite instructions from the NCAA, each school uses its own interpretation of the proper

accounting methodology. The point is that the reported operating deficits tend to be considerably smaller

than actual fully accounted deficits. Some of the financial shortfalls may be offset by increased appropria-

tions from state legislatures, increased student fees, or an uptick in donations to successful programs. This

funding, however, is neither robust nor dependable. It applies in a positive way, if at all, to competitively

successful programs, and applies in a negative way to unsuccessful programs.

Of course, to be a competitively successful program, schools need to commit to providing abundant

resources in the areas of hiring big-name coaches, creating world-class facilities, recruiting aggres-

sively, providing extensive academic tutoring, and so on. That is, with salary payments to athletes

prohibited, the most effective way to recruit the best athletes is by providing successful coaches, lavish

facilities, and effective support systems. Note that in professional sports in the United States, athlete

1. We define operating surplus as the NCAA does in its biannual Revenues and Expenditures report. That is, it refers to

generated revenues (including donations) minus ope rating costs, where operating costs exclude most c apital expenses.

See NCAA, REVENUES &EXPENSES: 2004-2014 NCAA DIVISION IINTERCOLLEGIATE ATHLETICS PROGRAM S REPORT 11, 24

(complied by Daniel L. Fulks, Ph.D., CPA, 2015), http://www.ncaa.org/sites/default/files/2015%20Division%

20I%20RE%20report.pdf [hereinafter NCAA, REVENUES &EXPENSES 2015].

2. Note that these figures represent net generated revenue for the FBS athletic programs in each cited fiscal year. Id. at 24.

3. There are no set accounting conventions for college athletic departments, and although the NCAA has been encouraging

uniformity, there is still substantial variability among departments in their treatment of capital expenses. The most common

practice appears to be that when debt service on facility loans are paid directly by the athletic department, they are included in

operating costs. In contrast, when the debt service is paid by the university or the state, they tend not to be included.

4. Donations to the athletics program are included on the revenue side. It is also important to point out that the expense side can

be overstated when student-athletes on scholarship cannot be replaced by full-paying students. In such a case, the tuition

expense is overstated because it does not represent the out-of-pocket cost to the school. Two caveats to this observation are in

order. First, while the marginal out-of-pocket cost of adding a football player to a classroom of a few dozen students may be

close to zero, it is not close to zero if the alternative is for the school to drop from FBS, the top level of college football, to

FCS, in which case there are twenty-five scholarship athletes affected or if the alternative is to drop to Division III or to drop

football altogether, in which cases there are eighty-five scholarship athletes affected. For larger groups of students, extra

classrooms, materials, teachers, and tutors are required, presenting substantially augmented costs. Second, if the alternative to

enrolling an academically underprepared athlete is to bring in an intellectually gifted minority student from the inner city,

then, although there is full scholarship in both cases, there is certainly an indirect cost in terms of the quality of the student

body, the eventual productivity of the student when he or she joins the workforce, the intellectua l environment in the

classroom, and the reputation of the school.

32 The Antitrust Bulletin 62(1)