Law v. National Collegiate Athletic Ass'n
1998 U.S. App. LEXIS 940, 1998 Colo. J. C.A.R. 609, 134 F.3d 1010 (1998)
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Rule of Law:
The 'quick look' rule of reason applies to horizontal price-fixing agreements in industries like intercollegiate athletics where some horizontal restraints are necessary for the product's existence, but mere cost-cutting or other non-competition-enhancing justifications are insufficient to validate such restraints under Section 1 of the Sherman Antitrust Act.
Facts:
- The NCAA is a voluntary, unincorporated association of approximately 1,100 educational institutions that coordinates intercollegiate athletic programs, including Division I basketball.
- During the 1980s, the NCAA became concerned about steadily rising costs of maintaining competitive athletic programs, with a 1985 'Raiborn Report' indicating that 42% of Division I schools reported overall athletic budget deficits.
- Many Division I schools employed part-time assistant coaches who often earned $60,000-$70,000 per year by circumventing existing compensation limits through lucrative summer jobs or other institutional positions.
- In January 1989, the NCAA established a Cost Reduction Committee to consider means for reducing intercollegiate athletic costs without disturbing competitive balance.
- The Committee proposed Bylaw 11.6.4, limiting Division I basketball coaching staffs to four members: one head coach, two assistant coaches, and one 'restricted-earnings coach'.
- The Committee also proposed Bylaw 11.02.3 (the 'REC Rule'), which restricted the total compensation of restricted-earnings coaches in Division I sports (other than football) to $12,000 for the academic year and $4,000 for the summer months, totaling $16,000 per year.
- The REC Rule allowed restricted-earnings coaches to receive additional compensation for performing duties for another department of the institution, provided certain proportionality and qualification criteria were met.
- The NCAA adopted the proposed rules, including the REC Rule, by majority vote in January 1991, with an effective date of August 1, 1992, binding all Division I members who compete for coaching services.
- Norman Law, Andrew Greer, Peter Herrmann, Michael Jarvis, Jr., and Charles M. Rieb were restricted-earnings men's basketball coaches at NCAA Division I institutions during the 1992-93 academic year.
Procedural Posture:
- Norman Law and other restricted-earnings men's basketball coaches filed a class action against the NCAA in the United States District Court for the District of Kansas.
- The plaintiffs challenged the REC Rule's compensation limitation under Section 1 of the Sherman Antitrust Act.
- The district court granted summary judgment on the issue of liability to the coaches, finding the NCAA liable for violating Section 1.
- Following this ruling, an administrative committee of the NCAA rescinded the compensation limits, subject to ratification by NCAA members at a future meeting.
- Prior to the ratification meeting, a new rule was proposed that would have eliminated the restricted-earnings coach position and replaced it with a position having similar compensation restrictions.
- The district court, on January 5, 1996, issued a permanent injunction, pursuant to 15 U.S.C. § 26, restraining the NCAA from enforcing or attempting to enforce any restricted-earnings coach salary limitations against the named plaintiffs and from reenacting similar compensation limitations.
- The NCAA, as defendant-appellant, appealed this permanent injunction to the United States Court of Appeals for the Tenth Circuit.
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Issue:
Does a National Collegiate Athletic Association (NCAA) rule that caps the annual compensation of entry-level Division I basketball coaches at $16,000 constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act, when the NCAA asserts justifications of retaining entry-level positions, reducing costs, and maintaining competitive equity?
Opinions:
Majority - Ebel
Yes, the NCAA's REC Rule, which caps the annual compensation of entry-level Division I basketball coaches, constitutes an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act because, while horizontal restraints are necessary for college sports, the rule's justifications of retaining entry-level positions, reducing costs, and maintaining competitive equity do not demonstrate procompetitive benefits sufficient to outweigh its anticompetitive effects. The court applied a 'quick look' rule of reason analysis, acknowledging that horizontal restraints, including price-fixing, are essential for the 'product' of competitive intercollegiate sports to exist, as established in NCAA v. Board of Regents. However, the plaintiffs successfully established an anticompetitive effect by showing that the REC Rule was a naked, effective horizontal price restraint that artificially lowered coaching salaries. The burden then shifted to the NCAA to demonstrate procompetitive virtues that genuinely enhance competition. The NCAA's three main justifications were rejected: 1) The claim of retaining entry-level positions lacked evidence that the rule actually placed entry-level coaches in those roles or truly balanced competition, especially given the ability to supplement salaries. 2) The justification of cost reduction was deemed illegitimate because cost-cutting alone is not a valid procompetitive rationale under the Sherman Act, which favors competition over lower prices achieved by cartel behavior. 3) The argument for maintaining competitive equity was unsupported, as the NCAA only presented evidence that the rule would 'maintain without significantly altering' competitive balance, not that it would actively enhance competition or reduce inequities. Since the NCAA failed to present sufficient evidence of procompetitive benefits, the court concluded that the REC Rule was an unreasonable restraint of trade.
Analysis:
This case significantly refines the application of antitrust law to collegiate athletics, particularly regarding price-fixing on inputs. It reaffirms the 'quick look' rule of reason for unique industries like the NCAA but critically narrows the scope of acceptable procompetitive justifications. By explicitly rejecting mere cost reduction as a defense for horizontal price restraints, the Tenth Circuit sends a strong message that the Sherman Act prioritizes competition over institutional profitability. The decision implies that NCAA rules must demonstrate a direct and proven nexus to enhancing the competitive 'product' itself (e.g., amateurism, fair play, fan interest) to withstand antitrust scrutiny, rather than simply preserving the financial health of member institutions. Future challenges to NCAA compensation rules or other input restraints will likely need to meet this higher bar for procompetitive justification, shifting the burden more definitively onto the NCAA to prove its rules actually foster, rather than restrict, competition.
