Wednesday, October 26, 2016

What the NCAA's letter to UNC Means for Its Fraud Case and the Implications for Ongoing Antitrust Issues

After the publication of the communications between the NCAA and UNC regarding the Committee on Infractions (COI) procedural hearing scheduled for October 28, 2016, a number of questions have sprung up, specifically, the questions a) what does this mean?, b) is the NCAA going to "do the right thing" and punish UNC, c) why such a strongly-worded letter from the NCAA after what can be best described as almost a "get out of jail free" card in the form of the Amended Notice of Allegations?  When attempting to answer these questions, one needs to keep in mind that the UNC fraud case is only part of a larger consideration, namely the ongoing antitrust challenge to the NCAA's restraint on trade in the form of the "amateur model."  The UNC case has enormous implications for these cases.  So, keeping this in mind, I'll try to answer these questions from an economic viewpoint.

Let's tackle the questions sequentially, starting with "Will the NCAA do the right thing?"  The answer to this question is complicated by the incongruity between doing the right thing as an economic matter versus doing the right thing ethically or morally.  When people ask this question, there is some sort of moral code implied, namely that cheating is anathema as an ethical matter (i.e., an honor code exists) and should be punished as to disincentivize those who would engage in such behavior in the future.  This may be true, but it's also irrelevant, because such ethical constraints are peripheral to the NCAA's mission.  Simply put, if anything, the NCAA has shown little, if any, interest in "ethical" or "moral" considerations.  If the NCAA punishes UNC it won't be for ethical reasons. It will be because UNC has placed the entire existence of the NCAA cartel at risk and threatened at least one of the two pillars remaining in its antitrust defense.

The NCAA is a cartel, or, if you prefer its expert's euphemism in the O'Bannon case, a "joint venture".  The semantic difference is irrelevant, as what matters is function over form.  As with any cartel, NCAA  polices the behavior of its members, the schools, to ensure no cheating occurs.  But what is cheating?  Cheating in a price-fixing cartel, for example, means that one member lowers its price from the fixed supra-competitive price and thus takes sales from everyone.  Or, in OPEC's case, cheating means that one member decides to increase output beyond the cartel's set production limits.  In both cases, consumers benefit from the lower prices or increased output, but the cartel suffers as a whole.  If one member cheats, then others have the incentive to cheat and match the price/output, and eventually the cartel falls apart.

But, this brings us to the major difference between the normal cheating in a price-fixing cartel and the type of cheating in which UNC engaged.  If a cartel member, in say, OPEC or another price-fixing cartel, cheats by lowering its prices or increasing its output, the consumer benefits, as mentioned above.  But, academic fraud benefits nobody other than the athletic department of the cheating member, because the athletic department's teams gain an unfair advantage over other competitors.  While athletes at other schools have to attend class (a requirement specified in the Regents decision), the cheating member of the cartel removes this "obligation" from its athletes, giving them more time to spend on sport.  The "student-athletes", under the NCAA's academic-athletic integration justification don't benefit, because their education suffers.  Thus, if the egregious behavior at UNC becomes ubiquitous, it spells the end of the NCAA.


To answer this question, let's look at what both the Ninth Circuit and the District Court found in O'Bannon.  The Plaintiffs successfully argued that the NCAA's amateurism restraint is subject to the Rule of Reason and has anticompetitive effects.  The NCAA responded with 4 "pro-competitive justifications."  The District Court rejected two outright, but retained two: a) some benefit from the "core value of amateurism", and b) the integration of academics and athletics.  If these two pillars fall, there is no defense for the NCAA's restraint on amateurism (ergo, antitrust injury exists), meaning that college athletes will finally be paid for their work, and the NCAA will be potentially liable for significant sums in damages.  Long story short, there is a lot of money at stake, and the UNC case has placed this all at risk by undermining the "integration of athletics and academics" argument.

The NCAA argued that athletes are better off because they get an education, which means better outcomes.  In my upcoming article in the Antitrust Bulletin journal, I discuss the NCAA's defenses and their lack of merit in more detail, but suffice it to say, the UNC case and the accompanying documents produced, eviscerate the NCAA's already tenuous (at best) factual basis for its position.  If UNC escapes any substantive punishment, the NCAA's defense of the athletic/academic model will be exposed for the Potemkin village it already is.  The UNC case is the albatross around the NCAA's neck, and the NCAA needs a way to remove it without substantially injuring itself in the process.

So, if the NCAA punishes UNC it won't be because it cares about the academic or the overall well-being of the students.  The NCAA is a commercial venture, and, as such, its concern is profit-maximization.  UNC's long-standing fraud has threatened the cash flow that the cartel enjoys.  That is really the wrongdoing as far as the NCAA is concerned, not defrauding students of an education.

So, now what does this all mean and why the strongly-worded letter from the NCAA, which looks so out of place when juxtaposed against the ANOA? I am not privy to the inner workings of this investigation, and I claim no "insider knowledge."  I can only draw conclusions based on observed behavior.

The NCAA has been attempting to thread the needle and obtain its best possible outcome,  At the end of this, the NCAA would like to say that a) it has no jurisdiction over academic quality, but b) the system it uses to ensure students get an education works and there is an academic benefit to the "student-athletes". The best way to achieve that end in the UNC case, is a limited notice of allegations that avoids academic entanglements, but one that also results in a stern punishment from the COI.  That is, as I see it, why the NCAA's ANOA amounted to largely a wrist-slap, but the NCAA also argues that the COI should consider the Wainstein Report and the original NOA.  The COI is not bound by the limits of the ANOA, thus its punishment can extend beyond their scope.  The limits of the ANOA serve only to buttress the NCAA's "hands off academics" position, while the COI's greater leeway serves to shore up the NCAA's "integration of academics and athletics" antitrust defense.  Simply put, if UNC escapes any substantive punishment in this case, to borrow from Yeats, "things fall apart."  I believe the NCAA cartel will fall apart eventually, anyway, but a UNC escape may accelerate that outcome significantly.

That said, for those more interested in this topic:

The first 2017 issue of the Antitrust Bulletin, of which I am the guest editor, is a special symposium on the antitrust issues facing the NCAA.  We will have contributions from some truly outstanding authors and academics, including Roger Blair, Rodney Fort, Rich Sheehan, Drake Group members Andy Zimbalist and Jayma Meyer, Matt Mitten, Andy Schwarz, Keith Leffler, Cristian Santesteban, Joe Whitman, Keith Trahan, and an introduction by Patrick Hruby.  My own article in this issue will have a significant discussion of the implications of the UNC fraud case for the NCAA's antitrust cases as well as a calculation of the damages athletes have incurred as a result of the NCAA's restraint on trade.

As always, comments, disagreements, suggestions are welcome.

1 comment:

  1. This is an interesting legal existence debate that likely has been going on within the NCAA. It also brings up an interesting philosophical debate over whether doing the right thing is really doing the right thing if the motives aren't altruistic but instead money related - even if the result is a good and right thing. Like if a high school junior volunteers at a senor center only because they need the experience for their college applications, but bringing much joy to the seniors there. Did the high schooler do the right thing? Discuss.