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LMU NCAA v Board of Regents of The University of Oklahoma Case Study

LMU NCAA v Board of Regents of The University of Oklahoma Case Study

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I’m working on a case studies Case Study and need an explanation to help me study.

Case Study 10.6


468 U.S. 85 (1984)

The University of Oklahoma and the University of Georgia contend that the National Collegiate Athletic Association has unreasonably restrained trade in the televising of college football games. After an extended trial, the district court found that the NCAA had violated § 1 of the Sherman Act and granted injunctive relief. The court of appeals agreed that the statute had been violated but modified the remedy in some respects. We granted certiorari and now affirm.

Since its inception in 1905, the NCAA has played an important role in the regulation of amateur collegiate sports. It has adopted and promulgated playing rules, standards of amateurism, standards for academic eligibility, regulations concerning recruitment of athletes, rules governing the size of athletic squads and coaching staffs, and conducted national tournaments in some sports. With the exception of football, the NCAA has not undertaken any regulation of the televising of athletic events.

The NCAA has approximately 850 voting members. The regular members are classified into separate divisions to reflect differences in size and scope of their athletic programs. Division I includes 276 colleges with major athletic programs; in this group only 187 play intercollegiate football. Divisions II and III include approximately 500 colleges with less extensive athletic programs. Division I has been subdivided into Divisions I-A and I-AA for football.

Some years ago, five major conferences together with major football-playing independent institutions organized the College Football Association (CFA). The original purpose of the CFA was to promote the interests of major football-playing schools within the NCAA structure. The Universities of Oklahoma and Georgia, respondents in this court, are members of the CFA.

On January 11, 1951, a three-person “Television Committee,” appointed during the preceding year, delivered a report to the NCAA’s annual convention in Dallas. Based on their report and additional input from the National Opinion Research Center (NORC), a television committee was appointed to develop an NCAA television plan for 1951.

The committee’s 1951 plan provided that only one game a week could be telecast in each area, with a total blackout on three of the 10 Saturdays during the season. A team could appear on television only twice during a season. The plan received the virtually unanimous support of the NCAA membership.

During each of the succeeding five seasons, studies were made that tended to indicate that television had an adverse effect on attendance at college football games. During those years the NCAA continued to exercise complete control over the number of games that could be televised.

From 1952 through 1977, the NCAA television committee followed essentially the same procedure for developing its television plans. It would first circulate a questionnaire to the membership and then use the responses as a basis for formulating a plan for the ensuing season. Once approved, the plan formed the basis for NCAA’s negotiations with the networks. Throughout this period the plans retained the essential purposes of the original plan. Until 1977 the contracts were all for either 1- or 2-year terms. In 1977, the NCAA adopted principles of negotiation for the future and discontinued the practice of submitting each plan for membership approval. Then the NCAA also entered into its first 4-year contract granting exclusive rights to the American Broadcasting Co. (ABC) for the 1978-1981 seasons. ABC had held the exclusive rights to network telecasts of NCAA football games since 1965.

The plan adopted in 1981 for the 1982-85 seasons is at issue in this case. This plan, like each of its predecessors, recites that it is intended to reduce, insofar as possible, the adverse effects of live television on football game attendance. It provides that all forms of television of the football games of NCAA member institutions during the plan control periods shall be in accordance with this plan. The plan recites that the television committee has awarded rights to negotiate and contract for the telecasting of college football games of members of the NCAA to two carrying networks. In addition to the principal award of rights to the carrying networks, the plan also describes rights for a supplementary series that had been awarded for the 1982 and 1983 seasons, as well as a procedure for permitting specific exception telecasts.

In separate agreements with each of the carrying networks, ABC and the Columbia Broadcasting System (CBS), the NCAA granted each the right to telecast the 14 live exposures described in the plan, in accordance with the ground rules set forth therein. Each of the networks agreed to pay a specified minimum aggregate compensation to the participating NCAA member institutions during the 4-year period in an amount that totaled $131,750,000. In essence the agreement authorized each network to negotiate directly with member schools for the right to televise their games. The agreement itself does not describe the method of computing the compensation for each game, but the practice that has developed over the years and that the district court found would be followed under the current agreement involved the setting of a recommended fee by a representative of the NCAA for different types of telecasts, with national telecasts being the most valuable, regional telecasts being less valuable, and Division II or Division III games commanding a still lower price. The aggregate of all these payments presumably equals the total minimum aggregate compensation set forth in the basic agreement. Except for differences in payment between national and regional telecasts, and with respect to Division II and Division III games, the amount that any team receives does not change with the size of the viewing audience, the number of markets in which the game is telecast, or the particular characteristic of the game or the participating teams. Instead, the ground rules provide that the carrying networks make alternate selections of those games they wish to televise, and thereby obtain the exclusive right to submit a bid at an essentially fixed price to the institutions involved.

The plan also contains appearance requirements and appearance limitations that pertain to each of the 2-year periods that the plan is in effect. The basic requirement imposed on each of the two networks is that it must schedule appearances for at least 82 different member institutions during each 2-year period. Under the appearance limitations no member institution is eligible to appear on television more than a total of six times and more than four times nationally, with the appearances to be divided equally between the two carrying networks. The number of exposures specified in the contracts also sets an absolute maximum on the number of games that can be broadcast.

Thus, although the current plan is more elaborate than any of its predecessors, it retains the essential features of each of them. It limits the total amount of televised intercollegiate football and the number of games that any one team may televise. No member is permitted to make any sale of television rights except in accordance with the basic plan.

Beginning in 1979, CFA members began to advocate that colleges with major football programs should have a greater voice in the formulation of football television policy than they had in the NCAA. CFA therefore investigated the possibility of negotiating a television agreement of its own, developed an independent plan, and obtained a contract offer from the National Broadcasting Co. (NBC). This contract, which it signed in August 1981, would have allowed a more liberal number of appearances for each institution and would have increased the overall revenues realized by CFA members.

In response, the NCAA publicly announced that it would take disciplinary action against any CFA member that complied with the CFA-NBC contract. The NCAA made it clear that sanctions would not be limited to the football programs of CFA members, but would apply to other sports as well. On September 8, 1981, respondents commenced this action in the United States District Court for the Western District of Oklahoma and obtained a preliminary injunction preventing the NCAA from initiating disciplinary proceedings or otherwise interfering with CFA’s efforts to perform its agreement with NBC.

There can be no doubt that the challenged practices of the NCAA constitute “a restraint of trade” in the sense that they limit members’ freedom to negotiate and enter into their own television contracts. In that sense, however, every contract is a restraint of trade, and as we have repeatedly recognized, the Sherman Act was intended to prohibit only unreasonable restraints of trade. It is also undeniable that these practices share characteristics of restraints we have previously held unreasonable. The NCAA is an association of schools that compete against each other to attract television revenues, not to mention fans and athletes. As the district court found, the policies of the NCAA with respect to television rights are ultimately controlled by the vote of member institutions. By participating in an association that prevents member institutions from competing against each other on the basis of price or kind of television rights that can be offered to broadcasters, the NCAA member institutions have created a horizontal restraint—an agreement among competitors on the way in which they will compete with one another. A restraint of this type has often been held to be unreasonable as a matter of law. Because it places a ceiling on the number of games member institutions may televise, the horizontal agreement places an artificial limit on the quantity of televised football that is available to broadcasters and consumers. By restraining the quantity of television rights available for sale, the challenged practices create a limitation on output; our cases have held that such limitations are unreasonable restraints of trade. Moreover, the district court found that the minimum aggregate price in fact operates to preclude any price negotiation between broadcasters and institutions, thereby constituting horizontal price fixing, perhaps the paradigm of an unreasonable restraint of trade.

Horizontal price fixing and output limitation are ordinarily condemned as a matter of law under an “illegal per se” approach because the probability that these practices are anticompetitive is so high; a per se rule is applied “when the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output.” Broadcast Music, Inc. v. Columbia Broadcasting Sys., Inc., 441 U.S. 1, 19-20 (1979). In such circumstances a restraint is presumed unreasonable without inquiry into the particular market context in which it is found. Nevertheless, we have decided that it would be inappropriate to apply a per se rule to this case. This decision is not based on a lack of judicial experience with this type of arrangement, on the fact that the NCAA is organized as a nonprofit entity, or on our respect for the NCAA’s historic role in the preservation and encouragement of intercollegiate amateur athletics. Rather, what is critical is that this case involves an industry in which horizontal restraints on competition are essential if the product is to be available at all.

What the NCAA and its member institutions market in this case is competition itself—contests between competing institutions. Of course, this would be completely ineffective if there were no rules on which the competitors agreed to create and define the competition to be marketed. A myriad of rules affecting such matters as the size of the field, the number of players on a team, and the extent to which physical violence is to be encouraged or proscribed, all must be agreed upon, and all restrain the manner in which institutions compete. Moreover, the NCAA seeks to market a particular brand of football—college football. The identification of this product with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable, such as, for example, minor league baseball. In order to preserve the character and quality of the product, athletes must not be paid, must be required to attend class, and the like. And the integrity of the product cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed that might otherwise be unavailable. In performing this role, its actions widen consumer choice—not only the choices available to sports fans but also those available to athletes—and hence can be viewed as procompetitive.

Respondents concede that the great majority of the NCAA regulations enhance competition among member institutions. Thus, despite the fact that this case involves restraints on the ability of member institutions to compete in terms of price and output, a fair evaluation of their competitive character requires consideration of the NCAA’s justifications for the restraints.

Our analysis of this case under the rule of reason, of course, does not change the ultimate focus of our inquiry. Both per se rules and the rule of reason are employed to form a judgment about the competitive significance of the restraint. A conclusion that a restraint of trade is unreasonable may be based either (1) on the nature or character of the contracts, or (2) on surrounding circumstances giving rise to the inference or presumption that they were intended to restrain trade and enhance prices. Under either branch of the test, the inquiry is confined to a consideration of impact on competitive conditions.

Per se rules are invoked when surrounding circumstances make the likelihood of anticompetitive conduct so great as to render unjustified further examination of the challenged conduct. But whether the ultimate finding is the product of a presumption or actual market analysis, the essential inquiry remains the same—whether or not the challenged restraint enhances competition. Under the Sherman Act the criterion to be used in judging the validity of a restraint on trade is its impact on competition.

Because it restrains price and output, the NCAA television plan has a significant potential for anticompetitive effects. The findings of the district court indicate that this potential has been realized. The district court found that if member institutions were free to sell television rights, many more games would be shown on television, and that the NCAA’s output restriction has the effect of raising the price the networks pay for television rights. Moreover, the court found that by fixing a price for television rights to all games, the NCAA creates a price structure that is unresponsive to viewer demand and unrelated to the prices that would prevail in a competitive market. And, of course, since as a practical matter all member institutions need NCAA approval, members have no real choice but to adhere to the NCAA’s television controls.

The anticompetitive consequences of this arrangement are apparent. Individual competitors lose their freedom to compete. Price is higher and output lower than they would otherwise be, and both are unresponsive to consumer preference. This latter point is perhaps the most significant, since Congress designed the Sherman Act as a consumer welfare prescription. A restraint that has the effect of reducing the importance of consumer preference in setting price and output is not consistent with this fundamental goal of antitrust law. Restrictions on price and output are the paradigmatic examples of restraints of trade that the Sherman Act was intended to prohibit. At the same time, the television plan eliminates competitors from the market, since only those broadcasters able to bid on television rights covering the entire NCAA can compete. Thus, as the district court found, many telecasts that would occur in a competitive market are foreclosed by the NCAA plan.

Petitioner argues, however, that its television plan can have no significant anticompetitive effect since the record indicates that it has no market power—no ability to alter the interaction of supply and demand in the market. We must reject this argument for two reasons, one legal, one factual.

As a matter of law, the absence of proof of market power does not justify a naked restriction on price or output. To the contrary, when there is an agreement not to compete in terms of price or output, no elaborate industry analysis is required to demonstrate the anticompetitive character of such an agreement. Petitioner does not quarrel with the district court’s finding that price and output are not responsive to demand. Thus the plan is inconsistent with the Sherman Act’s command that price and supply be responsive to consumer preference. We have never required proof of market power in such a case. This naked restraint on price and output requires some competitive justification even in the absence of a detailed market analysis.

As a factual matter, it is evident that petitioner does possess market power. The district court employed the correct test for determining whether college football broadcasts constitute a separate market—whether there are other products that are reasonably substitutable for televised NCAA football games. Petitioner’s argument that it cannot obtain supracompetitive prices from broadcasters since advertisers, and hence broadcasters, can switch from college football to other types of programming simply ignores the findings of the district court. It found that intercollegiate football telecasts generate an audience uniquely attractive to advertisers and that competitors are unable to offer programming that can attract a similar audience. These findings amply support its conclusion that the NCAA possesses market power. Indeed, the district court’s subsidiary finding that advertisers will pay a premium price per viewer to reach audiences watching college football because of their demographic characteristics is vivid evidence of the uniqueness of this product. Thus, respondents have demonstrated that there is a separate market for telecasts of college football that rests on generic qualities differentiating viewers. It inexorably follows that if college football broadcasts be defined as a separate market—and we are convinced they are—then the NCAA’s complete control over those broadcasts provides a solid basis for the district court’s conclusion that the NCAA possesses market power with respect to those broadcasts. When a product is controlled by one interest, without substitutes available in the market, there is monopoly power.

Thus, the NCAA television plan on its face constitutes a restraint on the operation of a free market, and the findings of the district court establish that it has operated to raise prices and reduce output. Under the rule of reason, these hallmarks of anticompetitive behavior place on petitioner a heavy burden of establishing an affirmative defense that competitively justifies this apparent deviation from the operations of a free market. We turn now to the NCAA’s proffered justifications.

Petitioner argues that its television plan constitutes a cooperative joint venture that assists in the marketing of broadcast rights and hence is procompetitive. While joint ventures have no immunity from the antitrust laws, a joint selling arrangement may make possible a new product by reaping otherwise unattainable efficiencies. The essential contribution made by the NCAA’s arrangement is to define the number of games that may be televised, to establish the price for each exposure, and to define the basic terms of each contract between the network and a home team. The NCAA does not, however, act as a selling agent for any school or for any conference of schools. The selection of individual games and the negotiation of particular agreements are matters left to the networks and the individual schools. Thus, the effect of the network plan is not to eliminate individual sales of broadcasts, since these still occur, albeit subject to fixed prices and output limitations. Here the same rights are still sold on an individual basis, only in a noncompetitive market.

The district court did not find that the NCAA television plan produced any procompetitive efficiencies that enhanced the competitiveness of college football television rights; to the contrary, it concluded that NCAA football could be marketed just as effectively without the television plan. There is therefore no predicate in the findings for petitioner’s efficiency justification. Indeed, petitioner’s argument is refuted by the district court’s finding concerning price and output. If the NCAA television plan produced procompetitive efficiencies, the plan would increase output and reduce the price of televised games. The district court’s contrary findings accordingly undermine petitioner’s position. In light of these findings, it cannot be said that the agreement on price is necessary to market the product at all. Here production has been limited, not enhanced. No individual school is free to televise its own games without restraint. The NCAA’s efficiency justification is not supported by the record.

Neither is the NCAA television plan necessary to enable the NCAA to penetrate the market through an attractive package sale. Since broadcasting rights to college football constitute a unique product for which there is no ready substitute, there is no need for collective action in order to enable the product to compete against its nonexistent competitors. This is borne out by the district court’s finding that the NCAA television plan reduces the volume of television rights sold.

Throughout the history of its regulation of intercollegiate football telecasts, the NCAA has indicated its concern with protecting live attendance. This concern, it should be noted, is not with protecting live attendance at games that are shown on television; that type of interest is not at issue in this case. Rather, the concern is that fan interest in a televised game may adversely affect ticket sales for games that will not appear on television.

Although the NORC studies in the 1950s provided some support for the thesis that live attendance would suffer if unlimited television were permitted, the district court found that there was no evidence to support that theory in today’s market. Moreover, as the district court found, the television plan has evolved in a manner inconsistent with its original design to protect gate attendance. Under the current plan, games are shown on television during all hours that college football games are played. The plan simply does not protect live attendance by ensuring that games will not be shown on television at the same time as live events.

There is, however, a more fundamental reason for rejecting this defense. The NCAA’s argument that its television plan is necessary to protect live attendance is not based on a desire to maintain the integrity of college football as a distinct and attractive product, but rather on a fear that the product will not prove sufficiently attractive to draw live attendance when faced with competition from televised games. At bottom, the NCAA’s position is that ticket sales for most college games are unable to compete in a free market. The television plan protects ticket sales by limiting output—just as any monopolist increases revenues by reducing output. By seeking to insulate live ticket sales from the full spectrum of competition because of its assumption that the product itself is insufficiently attractive to consumers, petitioner forwards a justification that is inconsistent with the basic policy of the Sherman Act. The rule of reason does not support a defense based on the assumption that competition itself is unreasonable.

Petitioner argues that the interest in maintaining a competitive balance among amateur athletic teams is legitimate and important and that it justifies the regulations challenged in this case. We agree with the first part of the argument but not the second.

Our decision not to apply a per se rule to this case rests in large part on our recognition that a certain degree of cooperation is necessary if the type of competition that petitioner and its member institutions seek to market is to be preserved. It is reasonable to assume that most of the regulatory controls of the NCAA are justifiable means of fostering competition among amateur athletic teams and therefore procompetitive because they enhance public interest in intercollegiate athletics. The specific restraints on football telecasts that are challenged in this case do not, however, fit into the same mold as do rules defining the conditions of the contest, the eligibility of participants, or the manner in which members of a joint enterprise shall share the responsibilities and the benefits of the total venture.

The NCAA does not claim that its television plan has equalized or is intended to equalize competition within any one league. The plan is nationwide in scope and there is no single league or tournament in which all college football teams compete. There is no evidence of any intent to equalize the strength of teams in Division I-A with those in Division II or Division III, and not even a colorable basis for giving colleges that have no football program at all a voice in the management of the revenues generated by the football programs at other schools. The interest in maintaining a competitive balance that is asserted by the NCAA as a justification for regulating all television of intercollegiate football is not related to any neutral standard or to any readily identifiable group of competitors.

The television plan is not even arguably tailored to serve such an interest. It does not regulate the amount of money that any college may spend on its football program, nor the way in which the colleges may use the revenues that are generated by their football programs, whether derived from the sale of television rights, the sale of tickets, or the sale of concessions or program advertising. The plan simply imposes a restriction on one source of revenue that is more important to some colleges than to others. There is no evidence that this restriction produces any greater measure of equality throughout the NCAA than would a restriction on alumni donations, tuition rates, or any other revenue-producing activity. At the same time, as the district court found, the NCAA imposes a variety of other restrictions designed to preserve amateurism that are much better tailored to the goal of competitive balance than is the television plan, and that are clearly sufficient to preserve competitive balance to the extent it is within the NCAA’s power to do so. And much more than speculation supported the district court’s findings on this score. No other NCAA sport employs a similar plan, and in particular the court found that in the most closely analogous sport, college basketball, competitive balance has been maintained without resort to a restrictive television plan.

Perhaps the most important reason for rejecting the argument that the interest in competitive balance is served by the television plan is the district court’s unambiguous and well-supported finding that many more games would be televised in a free market than under the NCAA plan. The hypothesis that legitimates the maintenance of competitive balance as a procompetitive justification under the rule of reason is that equal competition will maximize consumer demand for the product. The finding that consumption will materially increase if the controls are removed is a compelling demonstration that they do not in fact serve any such legitimate purpose.

The NCAA plays a critical role in the maintenance of a revered tradition of amateurism in college sports. There can be no question but that it needs ample latitude to play that role, or that the preservation of the student athlete in higher education adds richness and diversity to intercollegiate athletics and is entirely consistent with the goals of the Sherman Act. But consistent with the Sherman Act, the role of the NCAA must be to preserve a tradition that might otherwise die; rules that restrict output are hardly consistent with this role. Today we hold only that the record supports the district court’s conclusion that by curtailing output and blunting the ability of member institutions to respond to consumer preference, the NCAA has restricted rather than enhanced the place of intercollegiate athletics in the nation’s life.

Accordingly, the judgment of the court of appeals is affirmed.

Case Study 10.6 Review Questions

National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma

1. State the names of the plaintiff and defendant, the volume number, page number and name of the reporter, and the court that decided the case.

2. Describe the facts of the case.

3. What was the cause of action?

4. What was the court’s disposition of the case?

5. Under what approach are horizontal price fixing and output limitation condemned?

6. What rule is applied when competition is restricted and output is decreased?

7. Under what two tests was it conclusory that a restraint of trade was unreasonable?

8. When are per se rules invoked? Explain.

9. As a matter of law, does the absence of proof of market power justify a restriction on price or output?

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