A PYMNTS Company

The Economics Of Amateurism: Breaking Down The Latest Lawsuit Against The NCAA

 |  September 11, 2018

Posted by Forbes

The Economics Of Amateurism: Breaking Down The Latest Lawsuit Against The NCAA

By Thomas Baker

In what could prove to be a battle of economic experts, the NCAA is back in court and must once again defend its amateurism regulations from its own student-athletes. The current case is In Re: Grant-in-Aid Cap Antitrust Litigation and was initiated in the United States District Court for the Northern District of California by former NCAA student-athletes Shawne Alston and Justine Hartman.

The plaintiffs seek a declaratory judgment from the court that the NCAA’s rules that limit their compensation to the cost-of-attendance for their respective institutions violate the Sherman Antitrust Act. To do this, they will have to overcome a presumption that the NCAA’s amateurism rules are needed to maintain consumer demand in college sports. This is where the economic experts come into play and for the plaintiffs to prevail the court will have to place more credibility in their witnesses than the NCAA’s experts. The plaintiffs bring to the case two economists in Dr. Roger Noll and Dr. Daniel Rascher. To counter, the NCAA has retained their own accomplished economists in Dr. James Heckman and Dr. Kennith Elzinga.

Legal Background

Before the economic arguments from each side are broken down, a brief discussion of the relevant aspects of antitrust law and how they apply to this case is necessary. The Sherman Antitrust Act is a consumer welfare provision that exists to promote competition within markets. When competitors work together to manipulate costs within a product market their anti-competitive behavior is typically illegal and no further examination is needed. Yet, if competitors work together in the creation of a new product (a joint venture) their conduct is not automatically illegal and must be examined further to make sure that their cooperation is reasonable, meaning that it produces a net pro-competitive effect. The creation of a new product that widens consumer choice is the type of pro-competitive effect that a reviewing court may tolerate.

The NCAA’s Argument

The gist of the NCAA’s primary economic argument is that its rules do not violate antitrust law because they are essential to the creation of college sports. Specifically, the NCAA asserts that its caps on student-athlete compensation provide consumers with amateur sport options for sport consumption. The NCAA also asserts a second pro-competitive advantage with its contention that the caps on compensation allow student-athletes to integrate into their academic communities. The second argument doesn’t seem to make sense because it posits that the NCAA is protecting athletes from having to complicate their lives with more money. The “mo money, mo problems” argument made famous by the Notorious B.I.G. may hold up on radio play, but it shouldn’t convince a court to deviate from the law in an antitrust case.

The strongest arrow in the NCAA’s antitrust quiver is the product creation argument and it centers on a presumption that consumers will lose interest in college sports if student-athletes are paid any amount of money that is not “tethered” to educational costs. This presumption dates back to an analogy made by Justice John Paul Stevens in NCAA v. Board of Regents of the University of Oklahoma, a Supreme Court decision from 1984 that stripped the NCAA of cartel control over college football telecasts. The regulation of student-athlete compensation wasn’t before the court in Board of Regents but Justice Stevens brought up the caps as an example of the type of cooperation from competing institutions that is needed to make the NCAA’s sport products. Justice Stevens believed that amateurism was what made college football special for consumers and what kept it from being perceived as a minor league sport. Keep in mind that two decades ago college football had yet to balloon into the multi-billion dollar industry that it is today. Also, since the NCAA’s amateurism rules were not at controversy in Board of Regents, the NCAA did not need to defend them with market-based evidence. In the current case, the burden should be on the NCAA and its economic experts to demonstrate the need for its compensation caps with market-based evidence that consumers will lose interest if the rules are removed.

The Student-Athletes’ Argument

The plaintiffs assert that the NCAA is unable to establish that its compensation limits are absolutely essential to the creation of college sports. They argue that the NCAA’s experts provide only speculation rather than market-based evidence that consumers will lose interest if the limits are lifted. In addition, the plaintiffs proffer up their own economic studies that demonstrate a lack of consumer-demand effect from previous changes to student-athlete compensation. The most notable change in the NCAA’s regulation of student-athlete compensation came in 2015, when the NCAA first permitted its member institutions to compensate student-athletes up to the cost-of-attendance.

Student-athletes are presently permitted by the NCAA to receive amounts that cover their tuition, fees, room and board and an amount through stipend payments that covers the remaining costs associated with attendance. The cost-of-attendance stipends are payments to student-athletes that cover all indirect costs associated with attending a specific school. One problem for the NCAA is that its cost-of-attendance stipends are un-tethered to education. While the cost-of-attendance is an amount that schools set to inform would-be students of what they should expect to spend at their respective schools, each school sets that amount to cover various costs that are not directly linked to education (e.g. cell phone bills or the occasional slice of pizza). Additionally, there is no requirement that student-athletes spend what is given to them through the stipends on education-related purchases. Perhaps that is why the NCAA initially opposed a cost-of-attendance adjustment in White v. NCAA, a case the NCAA ultimately settled out of court in 2008. Student-athletes have been permitted to receive cost-of-attendance stipends for several years now and consumer interest in college sports has not decreased over that period of time.

Continue reading…