• Eastern District Of Tennessee Says NCAA’s Rules Prohibiting Use Of Name, Image, And Likeness Agreements In Recruiting Student Athletes May Violate Sherman Act

  03/26/2024

  On February 23, 2024, Judge Clifton L. Corker of the Eastern District of Tennessee enjoined the National Collegiate Athletic Association (“NCAA”) from enforcing rules that prohibited third parties from entering into compensation agreements with student-athletes during the recruiting and transfer process as a potential violation of Section 1 of the Sherman Act. State of Tennessee and Commonwealth of Virginia v. National Collegiate Athletic Association, Case No. 3:24-cv-00033, 2024 WL 755528 (E.D. Tenn. Feb. 23, 2024).

  Historically, the NCAA’s amateurism rules allowed colleges and universities to provide student-athletes with scholarships and cash for incidental expenses, but expressly prohibited student-athletes from “receiving any pay … whether from boosters [or] companies seeking endorsements.” Id. at 2. However, in 2021, the NCAA implemented new rules that allowed student-athletes to earn compensation for their name, image, and likeness (“NIL”). Id. at 1. To take advantage of these new rules, individuals and organizations associated with specific colleges and universities created “collectives” to enter into compensation agreements with student-athletes. Id. at 2-3. The NCAA responded in turn, classifying these collectives as “boosters” who were “prohibited from engaging in recruiting activities … on behalf of a school” or “guaranteeing or promising student-athletes a NIL agreement contingent on enrolling at a particular institution” (the “NIL Recruiting Rules”). Id. at 3. In other words, collectives could only offer NIL deals once a student-athlete committed to a particular college or university.

  The State of Tennessee and Commonwealth of Virginia sued in a parens patriae action on behalf of the student-athletes in their jurisdictions. Plaintiffs alleged that the NCAA’s NIL Recruiting Rules violated Section 1 of the Sherman Act as an “illegal agreement to restrain or suppress competition” within the labor market of Division 1 athletics. Id. Plaintiffs moved for a preliminary injunction prohibiting the NCAA from enforcing the NIL Recruiting Rules.

  In the preliminary injunction analysis, the Court first analyzed plaintiffs’ likelihood of success on the merits by applying the Rule of Reason’s “three-step burden-shifting framework” to determine the reasonableness of the NCAA’s NIL Recruiting Rules. Id. at 6 (citing Nat’l Collegiate Athletic Ass’n v. Alston, 594 U.S. 69, 77 (2021)). The Court determined that plaintiffs met their burden to show that the NIL Recruiting Rules have a substantial anticompetitive effect for two reasons. Id. First, the NCAA has market power over Division 1 athletics. Id. Second, the NIL Recruiting Rules were “an agreement among competitors to refuse to discuss prices with [recruits] until after negotiations have resulted in the initial selection of [a school].” Id. (quoting Nat’l Soc. of Pro. Eng’rs v. United States, 435 U.S. 679, 692 (1978)).

  Next, the Court held that the NCAA had failed to provide a persuasive procompetitive rationale for the NIL Recruiting Rules. Id. at 7. The NCAA argued that collectives’ ability to use NIL agreements to induce potential student-athletes would “eviscerate the distinction between the collegiate structure and professional sports and undermine the unique balance of academics and athletics” at colleges and universities. Id.  The Court disagreed, holding that the NCAA failed to show how the NIL Recruiting Rule—which controlled the “timing of when a student-athlete enters an [NIL] agreement”—preserves amateurism. Id.  It also determined there were less restrictive means to promote amateurism, such as separate rules that prohibit college and universities from directly compensating student-athletes. Id. The Court next rejected the NCAA’s argument that the NIL Recruiting Rules preserve the competitive balance between affluent and less affluent schools (id. at 7-8), determining that the NCAA’s justification was “not devoid of logic” but nonetheless that “spreading competition evenly across the member institutions by restraining trade is precisely the type of anticompetitive conduct the Sherman Act seeks to prevent.” Id. at 8 (citing Alston, 594 U.S. at 95). Finally, the Court considered the NCAA’s argument that the NIL Recruiting Rules protect student-athletes from abusive and unfair agreements. Id.  The Court again disagreed with the NCAA, holding that “social justifications for a restraint of trade do not make it any less unlawful,” FTC v. Superior Ct. Trial Laws. Ass’n, 493 U.S. 411, 424 (1990), and that the NIL Recruiting Rules “likely foster economic exploitation of student-athletes by suppressing their negotiating leverage.” Id. at 8. The Court ultimately determined that Plaintiffs had demonstrated a likelihood of success on their Sherman Act claim.

  The Court next evaluated whether plaintiffs could show irreparable harm. After determining that plaintiffs’ proffered theories of harm to Tennessee and Virginia were “theoretical and chimerical,” it held that student-athletes would suffer irreparable harm because the NIL Recruiting Rules suppressed “negotiating leverage and the consequential lack of knowledge” about each student-athlete’s market value. Id. at 10-11. The Court also noted that student-athletes would suffer irreparable harm if no preliminary injunction was entered because “prospective student-athletes have certain, [finite] windows of time to commit to a school,” which would be impossible to recreate later. Id. at 11. The Court finished its preliminary injunction analysis by finding that there would be no substantial harm to the NCAA and that the public interest would be served through injunctive relief that prevents anticompetitive conduct. Id. at 12-13. The Court enjoined the NCAA from enforcing its NIL Recruiting Rules.

  This decision serves as useful guidance to the application of Rule of Reason analysis, especially in evaluating proffered procompetitive justifications. As this case shows, procompetitive benefits that rely on social justifications (such as protecting contracting parties) or attempts to determine how various parties should compete (e.g., by spreading the competitive balance) are unlikely to prevail. Instead, parties may be better off arguing that restraints are “increasing output, creating operating efficiencies, making a new product available, enhancing product or service quality, and widening consumer choice.” Law v. NCAA, 134 F.3d 1010, 1023 (10th Cir. 1998).

  CATEGORIES: Preliminary Injuction, Sherman Act § 1
  

LINKS & DOWNLOADS

• State of Tennessee and Commonwealth of Virginia v. National Collegiate Athletic Association