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Out of Cost Control

The NCAA's restricted-earnings strategy blew up in its collective face

In 1989, the NCAA established a Cost Reduction Committee, whose "Restricted Earnings Coach Rule" (NCAA Bylaw 11.02.3), adopted in 1991 by a roughly 85 to 15 percent margin, may have accomplished the opposite of what the committee intended. In losing a class-action suit filed or joined by 1,900 restricted-earnings coaches in several sports, the NCAA in May was ordered to pay damages of $11.2 million to basketball coaches, $1.6 million to baseball coaches and $9.5 million to coaches in other sports. While the NCAA had argued that just 59 coaches were injured, and that their damages came to less than $900,000, the $22.3 million total - automatically trebled under antitrust law - is now a $67 million millstone around the association's neck.

Some activities are condemned as a matter of law without inquiry as to their reasonableness. This "per se" approach was the road taken by the coaches, who argued that the restricted-earnings rule - which limited the earnings of coaches so designated to $12,000 during the academic year and $4,000 during the summer months - could be struck down as an illegal price-fixing scheme without inquiry into its reasonableness. The NCAA argued that even though such an analysis would normally apply in a case of horizontal price-fixing, Supreme Court precedent foreclosed application of the "per se" approach in this context. Eventually, the district court settled on a rule-of-reason analysis, noting the precedent of NCAA v. Board of Regents of the University of Oklahoma, in which the Supreme Court said that because of the NCAA's unique position in the marketplace of college sports, a fair evaluation of the competitive or anticompetitive character of the restraints required consideration of the NCAA's justifications for adopting them.

The true test of legality is whether the restraint imposed merely regulates (and perhaps thereby promotes) competition, or whether it may suppress or even destroy competition. The NCAA argued that the rule was not anticompetitive because restricted-earnings coaches could avoid the restraining effect of the rule by obtaining coaching positions at high schools or non-NCAA college teams. The NCAA seemed to be saying that restricted-earnings coaches represented such a small portion of the market that the restraint would have no adverse competitive impact, because of the limited market power of the NCAA in this area.

The court rejected this argument, determining that the absence of proof of market power does not foreclose a finding of anticompetitive behavior under the Sherman Act. The NCAA then argued that the rule could even be pro-competitive - that is, if the NCAA did not collapse because of skyrocketing costs, it would be able to continue providing college athletics and there would be a continuance of jobs in the marketplace. However, the court did not find any compelling evidence that NCAA institutions were on the brink of financial disaster, or that reducing salaries of the lowest-paid member of each school's coaching staff would pull them from the abyss.

The NCAA also claimed that by adopting the rule it was maintaining an entry-level position for young or inexperienced coaches. However, the NCAA offered no evidence that its method was effective in making more opportunities available for younger, less-experienced coaches. Nor was there evidence to support the NCAA's second justification - that it was maintaining the principles of a level playing field and the spirit of amateurism though cost-cutting.

The court of appeals, like the district court, applied a rule-of-reason analysis under which the NCAA's rationale - that the restricted-earnings rule was necessary to produce competitive intercollegiate sports - was considered. The NCAA's three justifications for the rule were that it helped retain entry-level coaching positions, reduce costs and maintain competitive equity. The NCAA failed on the first because the position could also be filled by experienced people, while cost reduction by itself was not deemed a valid pro-competitive justification. (Additionally, the NCAA produced no evidence that restraining coaches' salaries would successfully reduce deficits and "save" college sports.) Maintaining competitiveness also failed because nowhere did the NCAA prove that the salary restrictions enhanced competition, leveled an uneven playing field or reduced coaching inequities.

As this is written, an appeal on the jury decision on damages was expected to be formally filed sometime in June or July. The NCAA will also petition the U.S. Supreme Court on the issue of whether the restricted-earnings rule violated federal antitrust laws. In all, it may be two years or more before the appellate process is exhausted, plenty of time for interest on the damages to accumulate and attorneys' fees to mount.

The decision, if upheld, has potentially significant ramifications financially, structurally and operationally for the NCAA and its member institutions. One issue to be determined is the payment of the award. Several suggestions have been made including: across-theboard cuts, reduction of future basketball tournament revenues payout; payment by schools who voted in favor of the rule; reduction of NCAA services; and by a determination of the number of restricted-earnings coaches at each institution, with those institutions paying on a per-coach basis. If the acrossthe-board method were used, each Division I school would pay between $200,000 and $300,000, a significant amount of money but not the death knell some have suggested. The impact could be lessened by having the NCAA borrow money (thereby spreading the impact over several years) or restructure its lease agreement on its new Indianapolis headquarters.

With respect to the legality of the restricted-earnings rule, it should be noted that case precedent has been split relative to the applicability of antitrust law to the NCAA. In the previously mentioned Oklahoma case, antitrust law was applied to the NCAA. However, in cases involving the number of football coaches allowed by the NCAA and certain eligibility rules, antitrust challenges were not successful.

The NCAA could attempt to settle the case. (Some have questioned whether the NCAA should have settled earlier. The association claims that at one point it authorized a mediator to go as high as $18 million.) If it does, the precedent of the federal appeals-court decision stands, and the NCAA can expect future antitrust challenges to rules involving eligibility, its letter-of-intent program, the number of coaches, scholarship amounts and more.

It should also be noted that the lower-court decisions do not necessarily mean that the NCAA will lose in the Supreme Court. In at least three important cases, the NCAA prevailed at the Supreme Court level after losing lower-court decisions.

Finally, if the NCAA loses its appeals, a super conference of 40 to 50 schools (as suggested by Ohio State University AD Andy Geiger and others) may be given more serious consideration. A super conference, of course, would also be subject to antitrust scrutiny. However, such a conference, to withstand legal challenges, could separate the athletic department from the university, eliminate many eligibility rules, pay athletes, allow athletes to unionize and then negotiate a collective-bargaining agreement with them. This would create a labor exemption to antitrust laws. It would also create an enterprise much like professional sports leagues.

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