In The O'Bannon Decision, Truth Wins Out Over Rhetoric

Let me start by apologizing. Because of my own involvement in the Ed O'Bannon case, and because of past situations in which the NCAA has misquoted my own personal statements as if they represent the official opinions of the plaintiffs in the case, I can't be quite as analytical here as I might like, especially since the NCAA has already announced it will appeal the decision. But I think a few thoughts are in order.

Factually, the opinion handed down Friday strikes a blow against the primary defenses on which the NCAA has relied for decades. The first is that the public would stop watching college football and basketball if athletes were to be paid more than the current scholarship maximum—or, as the NCAA has begun to accept in the last decade, the slightly higher full cost of attendance—for their athletic skill. U.S. District Judge Claudia Wilken understood the problems in the survey on which the NCAA relied and agreed that other than that, all the NCAA had offered up were assertions by witnesses that were contradicted when those same witnesses explained that fans love the game, the pageantry, the affiliation with their alma mater, winning, etc:

Thus, the Court finds that the NCAA's restrictions on student-athlete compensation are not the driving force behind consumer demand for FBS football and Division I basketball-related products. Rather, the evidence presented at trial suggests that consumers are interested in college sports for other reasons.

This is a powerful rejection of the core (and never tested) NCAA assertion that "amateurism" drives public demand. This ruling, if it stands, says that "amateurism" as a philosophy is simply price fixing with better PR.

Second, Judge Wilken also rejected the competitive-balance defense, an argument the folks at the NCAA have repeatedly failed to make successfully. They tried in Board of Regents v. NCAA and got shot down; they tried in Law v. NCAA and got shot down; and they tried here and got shot down. Unlike those other cases, here the NCAA had to make a full case for their claim, and they foundered on the fact that for decades, economists have searched in vain for a competitive-balance benefit from the NCAA's price-fixing. It's hard to prove something is true in the face of a (rare) scholarly consensus that it is false.

Judge Wilken's opinion cut through a lot of empty rhetoric. Under the current system, the wealthiest programs receive the lion's share of revenue. If the commitment to competitive balance were so important to the people running the NCAA, the judge wondered, why hadn't they shown a much firmer commitment to leveling the playing field through revenue sharing, sending more money from the power conferences to the smaller schools? Judge Wilken seems to have found that disconnect telling:

The Court notes, however, that the NCAA could easily adopt several less restrictive rules if it wished to increase competitive balance or output. With respect to competitive balance, for instance, the NCAA could adopt a more equal revenue distribution formula. As noted above, its current formula primarily rewards the schools that already have the largest athletic budgets. This uneven distribution of revenues runs counter to the association's stated goal of promoting competitive balance.

Third, the NCAA argued that schools would flee Division I if their commitment to amateurism were put to the test. The other day, I suggested we all adopt the hashtag #MTBSW ("money talks and b.s. walks") to flag whenever a pious but ultimately false argument involving money falls by the wayside. If the injunction goes into effect, and schools cannot collude to prevent payments to athletes (albeit on a deferred basis) above and beyond the cost of attendance, then several of the witnesses' testimony will be put to the test.

Judge Wilken made clear what she thinks that test will show:

The real difference between schools in Division I and schools in other divisions and athletics associations, as explained above, is the amount of resources that Division I schools commit to athletics.

Thus, while there may be tangible differences between Division I schools and other schools that participate in intercollegiate sports, these differences are financial, not philosophical. For this reason, the NCAA's assertion that schools would leave FBS and Division I for financial reasons if the challenged restraints were removed is not credible. The testimony of Dr. Emmert and various other athletics administrators that most Division I athletic programs operate at a loss and would not remain in Division I if the challenged rules were removed conflicts with the clear weight of the evidence.

As one example, Jim Delany asserted that alumni bases would recoil at the thought of paying more than the cost of attendance and would exit Division I. Seeing him and other power brokers within college sports walk that back will be a classic case of #MTBSW.

On the fourth of the NCAA's arguments, it was more of a mixed bag. Judge Wilken almost tossed this claim in its entirety, but in the end she accepted the idea that athletes having too much money their pockets might somehow harm their educations. She mentioned how the absence of rules against the children of wealth having money was inconsistent, as was the general practice of paying other students for on-campus jobs, but she ultimately gave enough credence to this idea that it got the NCAA over an important legal hump, and required the plaintiffs to prove up less restrictive alternatives. She wrote:

It is not clear that any of the potential problems identified by the NCAA's witnesses would be unique to student-athletes. In fact, when the Court asked Dr. Emmert whether other wealthy students — such as those who come from rich families or start successful businesses during school — raise all of the same problems for campus relations, he replied that they did. ... It is also not clear why paying student-athletes would be any more problematic for campus relations than paying other students who provide services to the university, such as members of the student government or school newspaper.

Nonetheless, the Court finds that certain limited restrictions on student-athlete compensation may help to integrate student-athletes into the academic communities of their schools, which may in turn improve the schools' college education product.

Had she not bought into this argument, she might have issued a much broader injunction. Is the last bolded sentence quoted above true? I'll leave it to you to draw your own conclusions, but I will say that generally the primary reason students leave school before graduation is due to a lack of money.

Judge Wilken also attached some credence to the idea that while there's no factual basis to the claim that the current cap on payment is a driver of consumer demand, SOME level of payment could, in theory, decrease demand:

Thus, while consumer preferences might justify certain limited restraints on student-athlete compensation, they do not justify the rigid restrictions challenged in this case.

These two factual findings—that there might be some harm to athletes if they have too much money while they are students and that if the payments to athletes rose too high, demand for the product might suffer—appear to be the foundation of the narrow injunction Judge Wilken ordered. While she has not set a cap on payments (and don't listen to anyone who tells you she did), she has expressly said that her injunction allows the NCAA to continue to make its own caps. What's different is that the new cap on in-school payments cannot be lower than the full cost of attendance (as opposed to the full grant-in-aid, which is $2,000 to $5,000 lower) and that the cap on additional payments above this level offered before/during eligibility but paid after eligibility cannot be lower than $5,000 per year (as opposed to the current zero).

So: the benefits of amateurism qua amateurism (in its current form as a collective ban on payment of any sort beyond a scholarship) is no longer a valid defense for price-fixing. The process of all of Division 1 coming together and fixing prices below the limits stated above is illegal. If this ruling stands, we will certainly see the most popular schools paying as much as they are allowed to pay (if/when the NCAA imposes a new cap consistent with Judge Wilken's ruling) without harm to their fans' demand for the product. "Fans only watch because athletes aren't paid" will be proven false in the marketplace. But it may be replaced with a new but related non-empirical assertion: "Fans only watch because the payments are reasonable."

Economically, my view is that if there is actually some level of pay above which demand will decline, pay won't tend to stay at that excessive level, even in absence of a cap. Firms pay talent reluctantly; if schools pay, it will be because they believe the revenue benefits of having that athlete on the team exceed the cost. It would be a strange team that would choose to shell out more money knowing it was driving demand DOWN rather than up. In my view, to the extent that there is a point after which compensation drives down demand, we would see a market equilibrium emerge in which prices rise to that level, but not beyond. If a school went beyond it and experienced both higher costs AND lower revenue, they would quickly retreat back to the more profitable, lower-pay level. The market would set the cap without the need for an NCAA-imposed one.

Nevertheless, under Judge Wilken's ruling, without violating her injunction, the NCAA will be able to cap payments at full cost of attendance while an athlete is in school and no more than $5,000 per year on a deferred basis. Interestingly, I don't think her ruling means that the new, higher cap wouldn't also violate the antitrust laws—that question is left for a later day, because her focus was on the restraints that exist now. But in Judge Wilken's ruling, with the evidence before her, she did conclude there was enough evidence—mostly from former CBS Sport president Neil Pilson and survey expert J. Michael Dennis—to support the idea that $5,000 had the possibility of a pro-competitive justification sufficient to withstand the current challenge.

A rich irony is that if this ruling stands, all of the years of committee meetings past, present, and future involving the NCAA's efforts to reform its compensation levels, including this week's so-called "autonomy" vote, will be completely mooted (at least for FBS football and D-I basketball). Judge Wilken ruled that the NCAA and its conferences are forbidden from fixing prices below cost of attendance. The Power 5 can meet and make rules all they want, but if the injunction holds, they've been legally banned from enforcing any rule limiting scholarships below full cost of attendance, period. In fact, all D-I schools, even in small conferences, are now enjoined from capping their men's basketball scholarships at the current maximum. Even the process by which the schools overrode the stipend rule in early 2011 and re-capped scholarships below the full cost of attendance—a collective vote to cap pay below there—is now itself enjoined.

All day Sunday, I was on the road and listened to a lot of college sports talk radio. The hosts, callers, and even the guests coming from the world of college sports seemed to treat the "autonomy" vote as still being a driving force for how big-time college football will look in the future. I would imagine that's wrong. If Judge Wilken's decision stands, no group of NCAA members can set any cap on scholarships below a given school's cost of attendance. So when I heard Baylor AD Ian McCaw suggest on Sirius XM's college sports channel that the Big 12 might pick some middle-ground stipend payment that splits the difference between high-cost and low-costs schools, it's clear the impact of the Wilken decision hasn't quite sunk in yet. No school, whether part of Power 5 or not, can collude with another school to fix prices below the full cost of attendance. Emphasis on FULL.

The ruling also offers up other rulings of interest to the antitrust community. After finding that the markets for athletes' names, images, and likeness were real for each of the products in suit (live TV, rebroadcast TV, and video games), Judge Wilken then concluded that there was no anti-competitive harm in those markets. I don't think this conclusion is consistent with the economic evidence, but the impact of this conclusion was pretty much mooted by her finding that there was anti-competitive harm in the other market proven by the plaintiffs.

In the end, though, the NCAA's long-standing price-fixing was found by a federal judge to have violated the antitrust laws. This is an important win for the forces of competition. We will get to see the college sports world pull a collective "We have always been at war with Eastasia" when they say that this new world of Full Cost of Attendance plus $5,000 per year in deferred payments is entirely consistent with the bedrock principles of amateurism that the NCAA has maintained since its founding. I hope that the public will see how little its love of college sports changes under this system, and that as a result, a still freer—and thus fairer—market than required by the injunction will soon follow. The days of a Fear of a Black Wallet may be ending.

The liability finding was a winning day for Team Market, but the injunction itself will hardly displease Team Reform. Things got better Friday for athletes, for competition, and for America. The only question left to be answered is just how much better.

Andy Schwarz is an antitrust economist and partner at OSKR, an economic consulting firm specializing in expert witness testimony. Follow him on Twitter, @andyhre.

Photo via Getty