Legislation enacted by the federal and various state governments to regulate trade and commerce by preventing unlawful restraints, price-fixing, and monopolies, to promote competition, and to encourage the production of quality goods and services at the lowest prices, with the primary goal of safeguarding public welfare by ensuring that consumer demands will be met by the manufacture and sale of goods at reasonable prices.
Ninth Circuit Rules the NCAA Violated Federal Antitrust Law
The National Collegiate Athletic Association (NCAA) prescribes rules that govern the eligibility of athletes at its more than 1,000 member COLLEGES AND UNIVERSITIES. The organization has focused many of these rules on maintaining the amateur status of student-athletes. However, a group of former student-athletes sued the NCAA and a video game company for using their names, images, and likenesses (NILs) without paying them. The video game company settled with the plaintiffs, but the NCAA contested the plaintiffs’ contention that it violated Section 1 of the Sherman Antitrust Act of 1890. The Ninth Circuit Court of Appeals, in O'Bannon v. NCAA, 802 F.3d 1049 (9th Cir. 2015), ruled that the NCAA was subject to federal antitrust laws and that the rules prohibiting payments to student-athletes was an unlawful restraint of trade. In addition, NCAA members were allowed to give student-athletes scholarships up to the full cost of attendance at their respective schools. However, it struck down the lower court's ruling that the NCAA pay up to $5,000 per year in deferred compensation to student-athletes for the use of their NILs.
In 2008, Ed O'Bannon, a former All-American basketball player at UCLA, discovered that he was depicted in a college basketball video game produced by Electronic Arts (EA). EA produced video games based on college football and basketball from the late 1990s until 2013. In 2009, O'Bannon sued the NCAA and the Collegiate Licensing Company (CLC), the entity that licenses the TRADEMARKS of the NCAA and a number of its member schools. O'Bannon argued that the NCAA's amateurism rules prevented student-athletes from being compensated for the use of their NILs. This was an unlawful RESTRAINT OF TRADE under Section 1 of the Sherman Act. Around the same time, a former Arizona State University quarterback brought a separate suit against the NCAA, CLC, and EA for using his NIL without permission and compensation. The two cases were consolidated, and the federal court certified the processing as a class action for all current and former student-athletes who compete or competed on a Division 1 college or university men's basketball or football team. (Division 1 has 350 of the 1,000 member schools; these schools have the largest athletic programs and generate millions of dollars from television contracts and other sources.) Following this action, the plaintiffs dismissed their damages claims and settled their claims with EA and CLC.
The antitrust claims against the NCAA went to trial before the district court. After a 14-day bench trial (the judge heard the evidence with no jury present), the court ruled in favor of the plaintiffs, finding that the NCAA's rules prohibiting student-athletes from receiving compensation violated Section 1 of the Sherman Act. They ruled that colleges and universities could pay up to the full cost of attendance for student-athletes. The “cost of attendance” includes the “grant in aid” (the cost of tuition, room and board, and required course-related books) plus nonrequired books and supplies, transportation, and other expenses related to attendance at the school. The difference between the grant in aid and the cost of attendance is a few thousand dollars at most schools. The judge also ruled that Division 1 schools were allowed to pay their football and basketball players up to $5,000 per year in deferred compensation for the use of their NILs. The money would be deposited in trust funds that would be distributable after the players left school. The NCAA then appealed to the Ninth Circuit Court of Appeals.
The Ninth Circuit, in a 2–1 decision, upheld the district court's ruling that the NCAA Page 17 | Top of Articleviolated the Sherman Act. It also agreed that schools could pay up to the full cost of attendance. However, it threw out the $5,000 per year compensation holding. Judge Jay Bybee, writing for the majority, traced the history of the NCAA and its increasing emphasis on promoting amateurism. The NCAA argued that it was settled law that its amateurism rules were valid and that the Sherman Act did not cover the compensation rules at issue because they did not regulate commercial activity. Judge Bybee rejected the NCAA's claim that a 1984 SUPREME COURT case upheld its rules, finding that the Court merely discussed the amateurism to determine how to make its antitrust analysis. The rules in that case were different from those in the current proceeding. The appeals court was not bound by the 1984 decision “to conclude that every NCAA rule that somehow relates to amateurism is automatically valid.” The court also rejected the contention that the NCAA was not regulating commercial activity. The modern reading of Section 1 was broad, “including almost every activity from which the actor anticipates economic gain.” That definition captured the transaction between an athletic recruit where the athlete exchanges his labor and NIL rights for a scholarship at a Division 1 school.
Judge Bybee then followed a three-step process known in federal antitrust law as the Rule of Reason. He first examined whether the plaintiffs showed that the NCAA rules produced significant anticompetitive effects within this market. Agreeing with the district court, Judge Bybee found that a “college market” existed where schools compete for the services of athletic recruits by offering them scholarships, coaching, and facilities. If the NCAA's NIL compensation rules did not exist, member schools would compete to offer recruits compensation for their NILS. Therefore, the compensation rules had a significant anticompetitive effect on the college education market, as they fix an aspect of the “price” that recruits pay to attend college.
Because the plaintiffs made their case on this point, the NCAA was required to provide evidence that the compensation rules had procompetitive effects. The NCAA contended promoting amateurism was a procompetitive effect. Judge Bybee found little merit in this justification. The limits on compensation did not make “college sports more attractive to recruits” or give recruits a wider “spectrum of choices.”
Athletes are attracted to college sports rather than professional sports because they can obtain higher education opportunities. This opportunity would still apply if they were “paid some compensation in addition to their athletic scholarships.” Compensation would not “impair their ability to become student-athletes.”
The third step of the Rule of Reason looks at whether there are substantially less restrictive alternatives to the NCAA's current rules. Judge Bybee agreed with the district court that NCAA schools should be allowed to give student athletes a grant in aid that covers the full cost of attendance. Raising this cap would be a substantially less restrictive alternative. However, the appeals court concluded that the lower court's $5,000 per year compensation for NILS would not be as effective as the NCAA's current amateur-status rules. Under these rules, not paying student-athletes was “precisely what makes them amateurs.”
Second Circuit Upholds Apple eBook Antitrust Settlement
The U.S. DEPARTMENT OF JUSTICE, along with a number of state attorneys general, sued Apple, Inc., and the six largest book publishers in the United States, alleging that they had violated the Sherman Antitrust Act by conspiring to fix the price of electronic books, now commonly referred to as ebooks. The federal district court found that Apple and the publishers were liable for antitrust violations, and the Second Circuit Court of Appeals upheld this ruling. The district court scheduled a trial on damages while the Second Circuit decision was pending, but five weeks from the start of the trial, Apple agreed to enter into a class-action settlement. A lawyer challenged the fairness of the settlement, but the court rejected his action. The Second Circuit, in In Re: Electronic Books Antitrust Litigation, 539 Fed. Appx. 724 (2nd Cir. 2016), ruled that the settlement agreement was fair and that the lawyer was a “professional objector” who filed stock objections in hopes of receiving a fee for settling his objections.
In 2009, Apple wanted to enter the ebook market by creating an “iBookstore” for its iPad tablet computer. Amazon had introduced the Kindle, a portable ebook reading device, in 2007. Amazon offered popular books for $9.99, selling them at a loss as a means to encourage consumers to buy Kindles. The six largest U.S. publishers were unhappy with this approach and were amenable to signing contracts with Apple that forced Amazon to abandon its cutthroat Page 18 | Top of Articlepricing. Accordingly, the publishers were able to raise ebook prices. After the U.S. Department of Justice and a group of state attorneys general filed an antitrust action against Apple and the publishers, the publishers agreed to settle. They agreed not to restrict the ability of ebook retailers to set, alter, or reduce the retail price for 24 months. They also agreed to pay damages to consumers who had purchased their ebooks. Apple refused to settle. Following a bench trial, the federal district court found that Apple had violated antitrust laws by fixing the price of ebooks.
Apple appealed this decision, but the Second Circuit upheld the liability of the corporation. While the case was on appeal, the district court set a date for a trial on the amount of damages Apple would have to pay. Five weeks before the trial, but before the Second Circuit released its liability decision, Apple agreed to a class-action settlement. The payments Apple agreed to make under the settlement depended on the outcome of the liability appeal. If the appeals court upheld the district court, the settlement required Apple to pay $400 million in damages to consumers, plus $50 million in attorney's fees. If the liability ruling was reversed and remanded for further district court proceedings, Apple would pay much less: $59 million to consumers and $20 million in attorney's fees. Finally, if the liability appeal was reversed without the possibility of a government plaintiff's victory, Apple would not have to make any payments. After the district court approved the settlement, John Bradley, a lawyer, filed an objection with the court, challenging the fairness, reasonableness, and adequacy of the settlement. The court denied his objections, and Bradley appealed to the Second Circuit.
A three-judge panel issued a summary order, denying Bradley's objections. The appeals court noted that under the Federal Rules of Civil Procedure a district court may approve a classaction settlement only if the settlement is “fair, reasonable, and adequate.” The Second Circuit also relied on precedents in analyzing whether a class settlement met this standard. Moreover, the appeals court would not disturb the lower court's determination that the settlement met this standard unless the court abused its discretion.
The appellate court pointed out that the district court had relied on three factors in approving the settlement. First, the court found that the case was complex, it involved a number of parties, and that, absent settlement, Apple would try to prolong the LITIGATION. The second factor was that the class implicitly approved the settlement. The district court observed that there had been “under the circumstances few exclusions and few objections.” The third and most important factor was that Apple's promised payments to consumers were reasonable in light of its assessment of their best possible recovery after trial. An expert witness for the plaintiffs estimated that if they prevailed on the liability appeal, consumers would recover 200 percent of their estimated losses (Apple's payments and the payments received from the six publishers). If the plaintiffs lost the liability appeal, they would still recover 77 percent of their estimated losses.
Bradley argued that the district court's approval of the settlement was premature because the settlement's actual payout would depend on the outcome of the liability appeal. The appeals panel rejected this argument because Bradley had not raised it in the district court. However, the panel concluded that it would reject Bradley's argument even if Bradley had not waived the argument. The district court had all the information it needed to make an informed decision. Bradley also argued that the settlement was not ripe for a judicial decision. The panel concluded that Bradley had confused the “ripeness” doctrine, which deals with a “threshold criteria for the exercise of a federal court's decision,” with the discretion exercised by the district court in adjudicating the case.
The Second Circuit panel also noted that the district court had labeled Bradley a “professional objector,” who did not have a “stake in the enterprise in a way that class members would.” In the class-action settlement context, “professional objectors” are lawyers who “file stock objections to class action settlements” that are usually without merit, in hopes they will receive an award to settle their objection. The panel found that Bradley's appeal had “done nothing to cast any doubt on the district court's characterization.”