The path to antitrust success against the NCAA is more limited than you think.

Author:Starr, Keith
Position:National Collegiate Athletic Ass'n
 
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  1. INTRODUCTION

    The National Collegiate Athletic Association ("NCAA") has recently run into a bit of an antitrust problem. Although the NCAA has been challenged by parties claiming antitrust injury in the past, it has never before seen the onslaught of antitrust attacks currently pending against it. Further complicating the matter is that applying the federal antitrust laws to the NCAA's more restrictive rules and regulations is judicially-uncharted territory. In Part II, this Law Summary provides a brief background on the federal antitrust laws and how they have previously applied to the NCAA. In Part III, this Summary discusses some of the more important antitrust challenges currently pending against the NCAA. Lastly, in Part IV, this Summary recommends at least one potential change that the NCAA can undertake to address some of the antitrust issues caused by the restrictive nature of its rules and regulations.

  2. LEGAL BACKGROUND

    The law of antitrust is founded in the statutory language of the United States Code, but the law as applied is mostly judge-made common law. (1) This is because the law is simply written and broadly applicable. The letter of the law contains a number of absolutisms which, if read literally, would produce an absurd result. (2) Over time, judges have read the common law of restraints into the antitrust statutes. (3) Accordingly, courts have tended to apply the law in a way that would be economically reasonable, producing a result that would promote competition between individual economic entities. (4)

    This Summary focuses specifically on how the Sherman Antitrust Act (5) the bedrock of federal antitrust law in the United States--has been used to challenge the NCAA's governance of non-professional athletes and how the Sherman Act may be used against the NCAA in the immediate future. (6) However, as a preliminary matter, this Summary walks through a quick history of the Sherman Act in order to lay the foundation for the law's application to the NCAA.

    1. The Sherman Antitrust Act

      The Sherman Act, enacted in 1890, was designed to protect and promote economic competition. (7) The law is founded on the basic economic concept of supply and demand. (8) The law assumes that an increase in economic competition will create market efficiencies and benefit consumers by protecting them from the evils of diminished competition. (9)

      Initially, the law's true purpose was overshadowed by the Supreme Court's strict adherence to the letter of the law. (10) This should not have been unexpected, as the law clearly states, "Every contract ... in restraint of trade or commerce ... is declared to be illegal." (11) Thus, the Court, at first, simply read and applied what the law literally said. (12) For example, in United States v. Trans-Missouri Freight Association, the Court read the Sherman Act as "prohibit[ing] all agreements and combinations in restraint of trade ... regardless of ... whether such agreements were reasonable or the reverse." (13) Essentially, for a brief time after its enactment, the Sherman Act was read to prohibit almost every contract that restrained interstate trade. (14) However, everything changed in 1898 when William Howard Taft, then federal circuit judge, decided United States v. Addyston Pipe & Steel Company. (15)

    2. The Journey to Reasonable Restraints

      In Addyston Pipe, Taft and the Court of Appeals for the Sixth Circuit incorporated the common law of restraints to determine that the Sherman Act should only prohibit agreements whose main purpose was to restrain competition. (16) In other words, if the restraint was merely ancillary to some other reasonably beneficial and procompetitive purpose it should be upheld. (17) However, if the "sole object ... in making the contract ... [was] merely to restrain competition, and enhance or maintain prices," then it should be prohibited. (18) Addyston Pipe, later affirmed by the Supreme Court, was instrumental in establishing the modern doctrinal foundations of federal antitrust law: (1) the per se violation and (2) the rule of reason inquiry. (19)

      Generally, conduct that amounts to a "naked" restraint of trade is deemed to be per se illegal. (20) A "naked" restraint is a restraint that serves no justifiable business purpose other than the depression of competition. (21) Courts will not inquire into the reasonableness of a "naked" restraint because often there is no need to inquire: the type of restraint at issue is often blatantly anticompetitive. (22)

      On the other hand, a rule of reason inquiry is made when a restraint is ancillary to a larger agreement and can arguably serve an alternative procompetitive motive. (23) For example, courts will inquire into the reasonableness of a restraint that may create a new product (24) or lower transaction costs. (25) However, applying the rule of reason is judicially taxing: the reasonableness of a trade restraint can only be determined by analyzing the restraint's economic impact in the relevant market. In other words, courts must look to a number of technical and often theoretical economic factors in order to determine if an agreement is procompetitive (and legal) or anticompetitive (and illegal). (26)

      Further complicating the matter is the fact that these doctrines are frequently applied arbitrarily. (27) Judicial familiarity with the particular type of restraint is important in deciding which doctrine to apply, (28) but typically courts will inquire into the restraint only as much as necessary to decide the case at bar. The applied doctrine in any given case is often merely a post hoc label and does not necessarily reflect the nature of the inquiry undertaken. (29)

    3. The Basics of a Sherman Act Section 1 Claim

      Antitrust claims against the NCAA have typically failed at the motion to dismiss stage. (30) Although reasonableness is essential as to the question of whether a claim is ultimately successful on the merits, there are certain elements a plaintiff must show to state a viable Sherman Act Section 1 claim. (31)

      The first element that needs to be shown is an agreement between independent economic entities in the form of a contract, combination, or conspiracy, (32) Although an agreement can be expressed (i.e. orally or in writing), it is often inferred by conscious parallel conduct. (33) If separate economic entities have consciously engaged in similar conduct and if the challenged conduct would not make business sense absent an unexpressed agreement, then a court will likely determine that an agreement exists. (34) Thus, evidence of an agreement is often circumstantial. (35)

      The second element requires a showing that the agreement has resulted in an unreasonable restraint of trade in a relevant market. (36) As a threshold matter, the alleged behavior must restrain a commercial market. (37) This is because antitrust exists solely for the protection of commerce. Therefore, if the alleged behavior affects some noncommercial activity then the law will be inapplicable. (38) As previously mentioned, once a commercial market has been identified, any naked restraint is typically found to be per se unreasonable and illegal. (39) A restraint that arguably serves a procompetitive purpose, however, will be analyzed in depth to determine whether the restraint actually protects and promotes competition in the relevant commercial market at is sue. (40)

      The last element a plaintiff must prove is that the agreement has resulted in an antitrust injury implicating interstate commerce. (41) An antitrust injury is an injury caused by the type of behavior that the antitrust laws seek to avert: anticompetitive commercial practices. (42) The alleged injury cannot be the result of increased market competition, such as the loss of profits caused by the entry of a new firm into the relevant market. (43) However, engaging in behavior such as horizontal price-fixing (44) is a textbook example of the type of behavior that may cause an antitrust injury. (45) Furthermore, courts routinely find that an antitrust injury has affected interstate commerce. (46) This is especially true when the alleged injury has occurred in a substantial economic market. (47) Yet, the substantiality of the market, for interstate commerce purposes, is often a non-issue in Section 1 cases. (48)

      Finally, in order to bring a cause of action for an alleged violation of the antitrust laws, a claimant must have antitrust standing, (49) Because anticompetitive behaviors often cause injuries that ripple throughout the economy, the standing requirement serves to limit the number of people who can sue. (50) Factors that bear on whether a claimant has antitrust standing include the existence of a more direct victim and the potential difficulty in allocating damages. (51) There are, however, a number of other factors that weigh on whether a claimant will have standing to bring an action under Section 1 of the Sherman Act. (52)

      Antitrust law presents many hurdles that must be thoughtfully navigated before challenging the NCAA under the Sherman Act. In the past, the NCAA has stood up to most every antitrust challenge it has faced. (53) The history of antitrust suits against the NCAA, however, is instructive as to how antitrust law will be applied to NCAA rules and regulations in the future.

    4. The Application of Section 1 to the NCAA

      The NCAA, a not-for-profit organization, is the most powerful force in collegiate sports in the United States. (54) The NCAA governs the way in which hundreds of collegiate athletic programs are operated by setting the rules of the games and determining the eligibility of the athletes. (55) The NCAA also exercises some control over what athletes do when not competing. (56) Not surprisingly, since the NCAA influences the way in which hundreds of colleges (57) and collegiate athletic programs are operated, the organization has been challenged under the federal antitrust laws on numerous occasions. (58)

      In NCAA v. Board of...

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