Monday, February 6, 2017

Evaluating the NCAA's Motion to Dismiss in the Vassar v. NCAA Case

An Economics-Based Assessment of the NCAA's Arguments in the Vassar v. NCAA Case


The NCAA recently filed its motion-to-dismiss (MTD) in the Vassar v. NCAA case, which deals with the transfer-eligibility rule.  A MTD was not surprising, as this is a similar case to the Pugh v. NCAA case where the NCAA received a favorable dismissal.   In this case, Vassar challenges NCAA Division I Bylaw (year-in-residence bylaw), claiming it violates Section I of the Sherman Antitrust Act. The referenced bylaw states: General Rule. A transfer student from a four-year institution shall not be eligible for intercollegiate competition at a member institution until the student has fulfilled a residence requirement of one full academic year (two full semesters or three full quarters) at the certifying institution.
Specifically, Vassar alleged that, through the aforementioned bylaw, "The NCAA and member schools unlawfully agreed to restrain trade or commerce through anticompetitive restrictions on Division I basketball players' ability to transfer." Vassar v. NCAA Complaint at i.

I won't reiterate the arguments made in the Complaint, because my intent is only to respond to specific  arguments the NCAA makes in its motion to dismiss.  As I am not a lawyer, but rather an economist with a background in antitrust, I'll focus on the economics rather than the law, with an occasional mention of often-referenced cases such as Twombly.

In its motion to dismiss (MTD), the NCAA makes three counter-arguments:
  1. The year-in-residence bylaw is "presumptively procompetitive" because the NCAA considers it an eligibility rule.
  2. The bylaw is non-commercial, therefore the Sherman Act does not apply.
  3. Vassar has not alleged sufficient facts to demonstrate the rule has an anticompetitive effect in a relevant market.  
 Let's examine each of these in turn.

1.  The year-in -residence is presumptively procompetitive because it is an eligibility rule necessary to the creation of NCAA intercollegiate athletics.

The NCAA's chief argument is that the key question is whether the NCAA regulations at issue "have been blessed by the Supreme Court, making them presumptively procompetitive," citing specifically to NCAA v. Board of Regents, 468 U.S. 85, 118, 120 (1984). Further, the NCAA claims that "Eligibility rules are necessary to the creation and survival of all joint ventures that produce athletic competition, as every sports league must be able to decide which athletes are eligible to participate in order to preserve the character of its product."  The NCAA's use of "joint venture" to describe itself is by design, as this is the description it proferred in O'Bannon, despite the fact that its expert, Daniel Rubinfeld, had referred to the NCAA as a cartel in his textbook.  The NCAA's use of "joint-venture" is not surprising as one must keep in mind that the NCAA will likely argue for a statutory antitrust exemption at some point.  Cartels do not receive antitrust exemptions.  Joint ventures might.

The NCAA's logic on this issue employs the first form of deductive reasoning: the law of detachment. It begins with a conditional, follows with a hypothesis, then ends with a conclusory statement deduced from the first two steps.  Specifically,
  1. If a rule is an eligibility rule, it is presumptively procompetitive, because the 3rd, 5th, and 7th Circuits have all held that NCAA eligibility rules are presumptively procompetitive.
  2. The transfer rule is an eligibility rule because it is located in the "Eligibility" section of NCAA bylaws.
  3. Therefore, the transfer rule is presumptively procompetitive.
From an economic standpoint, the key to deconstructing this line of reasoning lies in the 2nd statement.  The legal response would likely take issue with #1 as well, but this is beyond my scope so I will focus on #2.

The NCAA argues that:
"The NCAA clearly considers it an eligibility rule, as it is located in Article 14 of the NCAA manual (entitled “Eligibility”) and proscribes circumstances under which a student athlete will be deemed ineligible to compete in Division I intercollegiate sports.
 Further, it claims that:
"Rules, like the year-in-residence rule, that govern who can (and cannot) participate in NCAA athletic competitions are obviously necessary to the creation and preservation of NCAA sponsored intercollegiate athletics."
 Notice again, that this is another application of the law of detachment.
  1. Eligibility rules are necessary for the NCAA product to exist.
  2. The transfer rule is an eligibility rule.
  3. Therefore, the transfer rule is required for the NCAA product to exist.

And, here we have the breakdown in the NCAA's logic. If a definitive property of eligibility rules is that they are singularly and wholly required for the NCAA product to exist, as it claims, then it follows that the transfer eligibility rule must be a sine qua non (with apologies to H.L. Mencken and George Orwell) of the NCAA's collegiate model.  But this is not the case at all.  Consider that the NCAA also has a graduate transfer rule, Bylaw 14.6.1, that also falls within the same Eligibility Rules bylaw section. In fact, it is part of the same Bylaw 14.  This bylaw was only instituted in 2006, over half a century since Walter Byers, the NCAA's first executive chairman took office.  The NCAA's collegiate model existed for decades before this bylaw, despite the NCAA's claims that transfer eligibility rules are necessary for the preservation of the collegiate model. Further, the graduate transfer rule does not require a year-in-residence.  An athlete can graduate from one university and immediately play for another school during the subsequent season, as former Duke player Rasheed Sulaimon did when he transferred to the University of Maryland.  Moreover, over time, the NCAA has modified its eligibility rules and the cornerstone of its collegiate model, "amateurism" has undertaken various definitions.  Yet, its product continues to thrive.  As such, the evidence indicates that the transfer-eligibility rule is not required for the NCAA collegiate model to exist.

The simple fact that a rule is located in the eligibility section of the NCAA bylaws, does not, as a matter of deductive logic, immediately grant it presumptively procompetitive status, thus shielding it from judicial scrutiny.  If this were true, then the NCAA could simply expand its eligibility rule section to encompass all bylaws, thus shielding its entire collegiate model from any antitrust challenges.  As we observed in O'Bannon, the NCAA's model has already been ruled to be subject to antitrust scrutiny under the rule of reason.  Thus, the NCAA's rule cannot be simply regarded as an eligibility rule on the basis of its form.  What matters is the substance of the rule, leaving us to follow Marcus Aurelius' advice and ask:
This thing, what is it in itself, in its own constitution? What is its substance and material? And what is its causal nature [or form]? And what is it doing in the world? And how long does it subsist?  Meditations of Marcus Aurelius, VIII.
The attempt to answer this question takes us to the NCAA's second argument.

2.  The challenged bylaw is not a commercial restraint and is not subject to the attack under the Sherman Act. 

So, the questions are: what is the true nature of the transfer eligibility rule and why does it exist?  Does it restrain commerce?  Its true nature, the NCAA claims, is academics-based, namely that it permits a student to acclimate to the environment of the school to which the athlete transferred.  But, if this were the case, why is it necessary to maintain the existence of the collegiate model, an enterprise that the NCAA admits is commercial in nature?  Why would the entire model collapse without it?  And, why has the model not collapsed because the same rule does not apply to graduate students, where the academic environment is arguably far more rigorous?   In short, the NCAA's simultaneous claims that the rule is not commercial, yet it is required to maintain the existence of a commercial enterprise are internally inconsistent.

Further, no rules exist to preclude students focused on music, acting, science,or any of a myriad of other interests from transferring and pursuing those interests immediately at other universities.  But this point delves into another area of litigation, namely whether athletes are employees.  That topic is largely beyond the scope of this discussion, so I won't go into detail on that issue here. 

Given the commercial nature of the NCAA, it is only reasonable to examine the economic nature of the transfer eligibility rule and its mandated year-in-residence. For all intents and purposes, the NCAA's transfer-eligibility rule is a one year non-compete clause, also referred to as a "covenant not to compete" or a "restrictive covenant".  Having presented on this very issue to the Utah Bar Association and testified on such matters in court, I'll attest that these types of agreements are generally commercial in nature, where one party (usually an employer) requires another party (usually the employee), upon leaving the employer, to forego competing with the employer for a given period of time.  The reason for this is generally as a protective measure by the employer to secure its trade secrets and its commercial position and allow it to adjust to a new competitor.

The evidence Plaintiffs have presented in their complaint, namely that coaches do not want players leaving and taking the playbook to another competitor, is the very reason why non-compete agreements exist and precisely why the transfer-eligibility rule is nothing more than a commercial non-compete agreement masquerading as an "eligibility" rule.  As such, whether such a rule is procompetitive is not a matter of presumption, but a question subject to rigorous antitrust analysis under the rule of reason.

Whether the players themselves are employees is irrelevant, and the NCAA's argument that the rule does not affect the NCAA's commercial activities fails.  The players, again, for all intents and purposes, function as employees and are bound by the covenant not to compete (the bylaw).  Were they to compete, then, as coaches have pointed out, they would risk losing potential trade secrets to competitors (particularly in-conference opponents), meaning the school could risk losing additional games and the incremental revenue associated with additional wins and potential post-season success.  Thus, the rule affects players in the same way as if they were considered employees, and the bylaw has a commercial impact.

An additional reason for having the transfer-eligibility rule is because removing it would underscore the fact that many athletes, contrary to the NCAA's claim that athletics is merely an "avocation", are there at the university because a) they have to be there by nature of the NCAA's monopsony status, and b) are there primarily to further their athletic careers, with marginal interest in the academic product (whose worth, evidence shows, is questionable).  The evidence of this is overwhelming, and I discuss a good amount of it in my Antitrust Bulletin article, which is part of the soon-to-be-published Symposium: "Amateurism and Antitrust: Economic and Legal Perspectives on the Antitrust Issues Facing the NCAA’s Collegiate Model" of which I am the guest editor.

Removing the transfer rule would likely further expose primacy of athletic success as a motivating factor for NCAA athletes when choosing their schools.  As it stands, there are sufficiently few graduate transfers to create this exposure.  However, if the transfer rule were removed and athletes could transfer schools and be able to play the following season, I expect significantly more movement would occur.  A likely result would be greater competition among schools, as top athletes who may be languishing on the benches of P5 conference basketball blue-bloods like Kentucky, Duke, etc. would have the option to transfer and immediately gain playing exposure the following season.  The same would apply to other sports.

And this brings us back to the NCAA's claim that the rule is non-commercial because it does not affect financial aid.  That point is irrelevant.  Whether the athlete receives financial aid or not has no bearing on the simple fact that the transfer-eligibility rule is an economic restraint on one's ability to pursue one's commercial best interests.  Athletes have a limited window in which to gain exposure and secure financial remuneration for their skills and talents.  A premium is placed on age, as can be seen by the existence of the "senior stigma" in the NBA draft.  Thus, removing an entire year of exposure would almost certainly have an impact on an athlete's commercial success.

3.  Vassar failed "to sufficiently allege facts of an anticompetitive effect."

I won't address this point too much, other than to note that this is a very common defense based on the Twombly and Iqbal cases.  The defense under these case precendents is that the Plaintiff has not pleaded sufficient facts to grant plausibility, not just possibility, of entitlement to relief.  Frankly, given the extraordinary amount of evidence to challenge the antitrust standing of the NCAA's collegiate model and its bylaws, I am still surprised to see this defense arise.  It suggests that cases challenging the NCAA still appear long on assertions but short on facts, despite the availability of mountains of facts that can be leveraged.

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