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With NCAA Ruling, Supreme Court Opens the Door to Significant Judicial Oversight of Joint Ventures and Standard-Setting Activities

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In a unanimous ruling issued yesterday, the Supreme Court sided with a class of college athletes and against the NCAA, holding that rules capping educational benefits offered to student-athletes are illegal under the antitrust laws. National Collegiate Athletic Association (“NCAA”) v. Alston, 594 U. S. ____ (2021), Slip Op. at 1. A federal district court previously enjoined NCAA limits on practices such as scholarships for graduate or vocational school, payments for academic tutoring, or paid post-eligibility internships, and the Ninth Circuit affirmed. Id. at 12. The opinion authored by Justice Gorsuch also signaled skepticism about the broader range of NCAA-mandated restrictions on student-athlete compensation. Those issues were not presented on appeal, but that did not stop Justice Kavanaugh from issuing a concurrence that invited additional litigants to use the Court’s reasoning to challenge those broader restrictions and which cited an amicus brief joined by two Baker Botts antitrust attorneys in support of such an invitation.

While the implications for athletes and labor markets are obvious, the decision is also notable because it is one of the few from the Supreme Court in recent decades to expand substantive prohibitions under the antitrust laws. It could have important implications for how courts analyze joint ventures and standard-setting activities that set limits on the types of products that competitors bring to the market. We outline some key takeaways from the opinion below:

The Rule of Reason Applies in Full Force to Organizations That Define Product Markets

The class of student-athlete plaintiffs challenged the NCAA’s restrictions on the basis that they violated Section 1 of the Sherman Act, 15 U.S.C. § 1, which prohibits “undue” agreements in restraint of trade. Id. at 9. Plaintiffs alleged that the restrictions on compensation constituted an undue agreement among horizontal competitor member schools to suppress the price paid for labor. The Court applied a rule of reason analysis, meaning that it required an evidentiary showing to determine the effect of the agreement, and whether it unduly restrained trade.

The Court applied the typical three-step burden-shifting framework for rule of reason cases: a plaintiff must first show a given restraint had anticompetitive effects in a relevant product market, then the burden shifts to the defendant to justify the restraint by pointing to its procompetitive effects. Id. at 24–25. In the final step of the framework, the plaintiff will prevail if it shows the procompetitive justification could be “reasonably achieved through less anticompetitive means.” Id. (internal quotation marks omitted).

Importantly, the Court held the NCAA to a high bar in meeting its second-step burden. The Justices were not persuaded by the NCAA’s argument that it should be subject to a more lenient standard because collaboration among the its members is necessary for student athletics to exist at all. Id. at 15–19. The NCAA pressed a reading of the Court’s previous opinion in NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 104 (1984), that many have interpreted to rubber-stamp the activities of joint ventures or standard-setting organizations that bring a new product into existence. But the Supreme Court rejected that approach and required a much more searching inquiry to justify each aspect of an organization’s requirements that define the contours of a product.

Of course, plaintiffs usually face a high burden themselves. The resounding win for the student-athletes here may be due in part to the fact that many of the typically difficult hurdles were not present in this appeal. For instance, the NCAA did not contest that it has monopsony power in the student athletics labor market, nor did it contest that its rules decrease both price, (i.e., compensation paid to student-athletes) and quantity (i.e., and the number of participants in student athletics) in the labor market. On the other hand, though, the student-athlete plaintiffs did not contest that the NCAA could seek to justify its restraints in the market for student-athletes’ labor by showing procompetitive benefits in the output market (i.e. the consumption market for student athletics), even though the harm they alleged was in the input market for labor. Id. at 14. These unaddressed issues will surely be fodder for follow-on cases.

A “Societally Important” Objective Is No Justification

Non-profits outside of the education sector should also take note of the Court’s treatment of the NCAA. The Justices easily dismissed the NCAA’s argument that it should apply a more lenient standard in assessing the NCAA’s product-defining restraints because its member schools are not “commercial enterprises” or because the goal of the organization is “societally important.” Id. at 22.

“This Court has regularly refused materially identical requests from litigants seeking special dispensation from the Sherman Act on the ground that their restraints of trade serve uniquely important social objectives beyond enhancing competition,” Justice Gorsush wrote. Id.

Do Consumers Really Care About the Restrictions Imposed?

Nor was the Court particularly receptive to the NCAA’s position that antitrust courts should not meddle in the particulars of rules that have the overall effect of increasing consumer demand. Id. at 29-36. It was not enough for the NCAA to show that consumers like the end-product of college athletics as distinct from professional athletics. Rather, the Court required defendants to provide evidence that the restrictions on education-related compensation were important to consumer demand. Id. at 27-28. In the final balancing, the Court explained, the plaintiff may suggest and the Court may order less restrictive rules for recruiting student-athletes if there is no evidence that consumer demand would suffer as a result. Id.

This affirmance of the district court’s approach should serve as a warning for all joint ventures and standard-setting organizations: plaintiffs and courts can take an active role in defining hypothetical alternatives to the rules and products that organizations design or certify. Defendants will not meet their burden if they show only that their jointly produced or standardized product is popular: they may need evidence of how the specific restraints affect consumer demand as compared to less restrictive alternatives.

What’s Next?

We are likely to see continued litigation testing the limits on the NCAA’s compensation restrictions. Though the opinion for the Court expressed a note of warning that judicial decrees should not “micromanage” the NCAA’s business, Id. at 30-31, Justice Kavanaugh’s concurrence suggests that much more judicial intervention could be appropriate. At least in cases where an agreement by a powerful force in the market so clearly limits competition for inputs, courts are likely to take permission from this opinion to redefine the parameters set by even the most beneficial of enterprises.

 

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