Money Madness
California Lawyer

Money Madness

by Pamela A. MacLean

March 2013


Lois Bernstein/Associated Press

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Feet pound down the court in pursuit, but not fast enough to catch the flying young man as he floats, suspended momentarily above the basket's rim, then slams a ferocious dunk.

Cheers erupt from the crowd at San Jose's Archbishop Mitty High School. "That was just nasty," shouts an admiring fan, as Mitty clobbers San Francisco's St. Ignatius in a 71-43 rout.

Aaron Gordon, the 6-foot, 8-inch forward who made the flashy play for the Mitty Monarchs, is the seventh-ranked high school recruit in the country. Wooed by college coaches and hounded by reporters, his future shines as golden as the Nike swoosh emblazoned on the shoes he wears for every game. He's likely to have a scholarship to a college basketball powerhouse, a potential spot in a future "March Madness" tournament, and - if he stays healthy - maybe a shot at the NBA.

But even before this 17-year-old gets factored into next year's handicapping, rights to the commercial use of his name and his image as a college player have been sold by the National Collegiate Athletic Association (NCAA), along with those of hundreds of other athletes like him, for many millions of dollars.

Just ask All-American Ed O'Bannon, another 6-foot, 8-inch forward, whose magical playing in 1995 powered the UCLA Bruins to a national title, defeating the University of Arkansas 89-78 in the championship game. O'Bannon's 30 points and 17 rebounds put him on the cover of Sports Illustrated. He garnered nearly every basketball honor possible that year, including the John R. Wooden award as the nation's most outstanding men's basketball player and the NCAA postseason tournament's Most Outstanding Player award. UCLA even retired his jersey number, 31.

As a first-round NBA draft pick, O'Bannon spent two years with the New Jersey Nets and one with the Dallas Mavericks. He played for a string of European teams until 2004, when he retired at age 32 after undergoing arthroscopic knee surgery. He moved to Henderson, Nevada, where he is raising a family and marketing Toyotas for a local dealership.

Four years after his hoops career ended, O'Bannon was watching a neighbor's kid play a basketball video game when he saw a computer-generated avatar of himself appear onscreen. The virtual player didn't use his name, but it wore his retired number, shot left-handed as he did, and resembled him physically.

"I came face to face with injustice," O'Bannon says. "I had been out of college for years, and someone was still getting paid off my likeness. It just slapped me in the face."

But legally, O'Bannon had a problem. Like every student-athlete seeking eligibility to play for a school in the NCAA, he had signed release forms giving away publicity rights to his name and image during his playing years. One of those forms, known today as "08-3a," authorizes the NCAA - or a third party acting on its behalf, such as a host institution, conference, or local organizing committee - to use the athletes' "name or picture to generally promote NCAA championships or other NCAA events, activities or programs."

A second consent form pursuant to Article 12.5.1.1 of the NCAA bylaws requires that "[a]ll moneys derived from the activity or project go directly to the member institution, member conference or the charitable, educational or non-profit agency." Ambiguous language in the releases could mean they remain in effect indefinitely.

O'Bannon's likeness wasn't just being used in video games. The NCAA had also sold TV rights and marketed videos and DVDs of his past glory at UCLA. The association sells a two-disc set of the 1995 championship tournament, including all of the Bruins' victories, for $24.99.

In 2009 O'Bannon decided to sue the sports Goliath. He became lead plaintiff in a class action accusing the NCAA of conspiring with its member schools to operate an illegal cartel that denied compensation to former student-athletes for use of their images. (O'Bannon v. NCAA, No. 09-CV-3329 (N.D. Cal. filed July 21, 2009).)

The O'Bannon plaintiffs weren't the only ones to take on the NCAA. Another group of college football and basketball players, led by former Arizona State University and University of Nebraska quarterback Sam Keller, alleged that the NCAA and sports video game producer Electronic Arts Inc. violated their statutory and common law rights of publicity - the control over use of their voice and images. Keller claimed EA had illegally used his avatar image in a video game depicting real college football teams, with rosters of virtual players that closely resembled their real-life counterparts. (Keller v. Elec. Arts Inc., No. 09-CV-1967 (N.D. Cal. filed May 5, 2009).)

The antitrust plaintiffs, later joined by former college and NBA legends Oscar Robertson and Bill Russell, numbered at least 25 in 2011. By then the publicity and antitrust cases had been consolidated into a comprehensive proceeding before U.S. District Judge Claudia Wilken in Oakland. (In Re NCAA Student Athlete & Likeness Licensing Litigation, No. 09-CV-1967 (N.D. Cal. consolidated Mar. 10, 2010).)

The antitrust group alleges a two-part conspiracy in restraint of trade: a price-fixing conspiracy to limit player pay for use of their images to zero, and a "group boycott/refusal to deal" conspiracy that requires all student-athletes to sign forms each year that purport to require each of them "to relinquish all rights in perpetuity to their images, likenesses and/or names."

The plaintiffs argue that a series of NCAA bylaws, controlling amateurism and eligibility to compete, work together to foreclose current and former student-athletes from licensing their names, images, or likenesses. And they allege that additional NCAA rules preclude member schools from violating institutional restrictions if the schools wish to continue participating in athletic conferences and bowl games.

The antitrust plaintiffs are seeking to certify separate classes that include all current Division I men's football and basketball players, plus former players from 2005 to the present. If they succeed, the class action could cost the NCAA hundreds of millions of dollars in damages, rock the foundation of its financial empire, and alter the notion of amateur sports in the United States.

"We allege that the release form is unconscionable," says Michael D. Hausfeld, principal in the Washington, D.C., office of Hausfeld LLP. "What makes it more insidious," he says, is that "the contracts for broadcast and rebroadcast are entered for multiyear terms." Under NCAA rules, the school claims it owns the copyrights for rebroadcasts as well. That means, Hausfeld says, that under the association's current 14-year contract with CBS Sports and Turner Broadcasting System a high school athlete such as Aaron Gordon "has already been licensed away before ever coming to college."

In court filings, Hausfeld cites the published words of Walter Byers, executive director of the NCAA from 1951 to 1988 and one of its pillars. Byers wrote in his 1997 book Unsportsmanlike Conduct: Exploiting College Athletes and confirmed in a deposition that, "[w]hereas, the NCAA defends its policies in the name of amateurism and level playing fields, they actually are a device to divert the money elsewhere."

The NCAA's current leadership, however, hotly disputes Hausfeld's claims, denying that its eligibility requirements entail any "perpetual release" of publicity rights. The association maintains that former student-athletes are free to negotiate licenses after college - and it points out that two such players are named plaintiffs in O'Bannon's antitrust case: David "Big Daddy D" Lattin, of the NCAA champion 1965-66 Texas Western Miners basketball team, signed a deal with ESPN to license use of his name, likeness, and life story for a TV movie; Lattin's teammate Harry Flournoy Jr. licensed his publicity rights to Walt Disney for a film.

"Their arguments fail on the law," says Donald M. Remy, general counsel of the NCAA. "[Former student-athletes] are not in any way prohibited from marketing their images."

But in a 2009 hearing Hausfeld told Judge Wilken, "At this point, whatever revenue the NCAA and its member institutions extract from the market, they are keeping. And in essence, if there is a right - and we contend that [there] is - of the former student-athlete to participate in that market, they are getting zero. That's the fix."

The NCAA was founded in 1906 following two White House conferences convened by President Theodore Roosevelt to "encourage reforms" after repeated injuries and deaths of college football players. The nonprofit association has grown over 106 years into a national governance body of 1,281 participating colleges and universities. It oversees 89 championships in 23 sporting activities. A policy-setting platform for the conduct of 450,000 intercollegiate athletes, it is the guardian of traditional notions of amateurism in college sports.

From its headquarters in Indianapolis, the NCAA and its subsidiaries gather close to $1 billion in annual revenue from broadcasting, merchandising, endorsement deals, and player image-and-likeness use in video games and other multimedia products. A recent law review article estimates that college sports and their attendant businesses have burgeoned into a $60 billion a year industry.

The NCAA's richest purse so far is its blockbuster 2010 agreement with CBS and Turner Broadcasting for television rights to its March Madness men's basketball tournament. The $10.8 billion deal runs through 2024, and in its first year was projected to funnel at least $740 million to the association's member colleges.

In 2011 the NCAA signed another 14-year deal with ESPN, garnering $500 million for exclusive rights to televise men's Division I basketball during the regular season.

That avalanche of money flowing to NCAA member schools has greatly benefited a few individuals - notably Division I coaches in men's sports. In the 25 years between fall 1985 and spring 2010, the average pay for head coaches at 44 universities in five major conferences soared by 652 percent, making many of them multimillionaires. The 60 highest-paid Division I-A coaches averaged income of more than $2 million in 2011. The top 25 basketball coaches - those who appear regularly in March Madness - averaged $2.4 million, buoyed by the University of Louisville's Rick Pitino's earnings of $7.5 million.

Few young athletes with the prospect of playing in the nationally televised tournament, however, pause to ponder licensing rights. Outside the 500-seat high school gym at Archbishop Riordan in San Francisco, where the Monarchs won their third victory in a row, Aaron Gordon lights up at the idea of a future role in an event watched by millions. "I see myself playing for a national championship," he says. "I can't see any other way."

While the money rolls into the NCAA, student athletes share a far different experience. Should they accept any outside benefits beyond their scholarships covering tuition, room, board, and books, they face severe sanctions. Punishment is proscribed for accepting a free ticket to a sporting event or a dinner from appreciative alumni and even for selling their own jerseys.

College players are forbidden to trade on their reputations. So a star athlete hired to work in a sporting goods store can't allow his or her name to be used to attract customers. The work restrictions they face do not apply to their peers who aren't student-athletes.

Yet they may practice 50 hours a week for their team, while maintaining the minimum twelve class credits per semester. It's hard to imagine how they find time to work part-time jobs, which often are necessary to make ends meet. The average school-year shortfall for athletes on full scholarship is $3,200 per player, according to a 2011 study by the National College Players Association.

Recently, the NCAA has been forced to acknowledge the financial struggles of student-athletes. In October 2011 it issued a rule change - dismissed by the O'Bannon plaintiffs as "hypocrisy" - that permits member conferences to pay student-athletes a $2,000 stipend toward incidental costs beyond tuition, room and board, and books.

Michael P. Lehmann, one of the plaintiffs attorneys in Hausfeld's San Francisco office, stated in court filings that the rule change "only illustrates the subjective and ever-changing criteria applied by the NCAA and its member Division I institutions as to when and how they will compensate student-athletes."

The NCAA's current president, Mark Emmert, was asked in a deposition if an NCAA member school could share revenue with former student-athletes if it wished to. "They are not free to do so if that was ... an agreement that was struck before or during the time that the individual was a student-athlete," he stated.

In the publicity rights part of In re NCAA, Judge Wilken denied a motion to strike by defendant Electronic Arts under California's anti-SLAPP statute (Cal. Code Civ. Proc. ยง 425.16). EA had claimed that its video games "are so transformative that they clearly qualify for First Amendment protection as a matter of law," and also because "NCAA football and basketball are matters of public interest." But Wilken's denial triggered an automatic appeal, putting the Keller half of the case on hold. The Ninth Circuit is now wrestling with whether EA's First Amendment rights trump the former players' claim of publicity rights.

On the antitrust side, Wilken denied a motion to dismiss filed by the NCAA and its product-licensing arm, Collegiate Licensing Co. Initially, she granted dismissal to EA Sports, but two months later she reinstated the game-maker as a defendant, citing two "significant new allegations": that EA had agreed not to offer pay to athletes after they left school, and that the "NCAA has allowed EA to propose amendments to NCAA bylaws which would allow the use of student-athlete names in EA products."

Based on facts alleged in the plaintiffs' second amended complaint, Wilken ruled that EA's agreement "satisfies the requirement that Plaintiffs plead the existence of a price-fixing agreement." She also found that "EA's alleged agreement not to offer compensation could demonstrate its participation in the group boycott."

EA declined to comment while the case is pending. But before the company stopped producing college basketball video games in 2009, it negotiated to pay a few former players whose images were used on a title's box cover.

In late January, Wilken postponed until June a class certification hearing and scheduled a trial date for June 2014.

The suit's putative antitrust damage class includes all former student-athletes who competed for NCAA-member colleges in Division I men's basketball or football, whose images were licensed or sold after July 2005. The declaratory and injunctive relief class includes both former and current athletes whose future compensation rights are affected.

"Class certification opens the way for an enormous potential damage award," says Daniel E. Lazaroff, a sports and antitrust law professor at Loyola University in Los Angeles. "In the way the plaintiffs want, it will be a big incentive for the NCAA to settle. I don't think the NCAA really wants to try this matter. [But if certification] is denied, there is much less incentive for athletes to go forward on an individual basis."

NCAA general counsel Remy contends that the plaintiffs changed legal theories without court consent in their motion for class certification, forcing the defendants to repeat and expand discovery. The perpetual release liability theory was the only claim in the second amended complaint, he maintains, and it has "all but disappeared" in the plaintiffs' motion for class certification.

In his opposition brief, NCAA litigation attorney Robert J. Wierenga claims the antitrust plaintiffs now allege that the NCAA engaged in "collusive restraints" because they do not pay current or former student-athletes for use of the names and images. But Wierenga, a partner in the Ann Arbor office of Schiff Hardin, points out that the antitrust class was specifically limited to former student-athletes. The brief concludes, "[T]here simply is no conspiracy to 'boycott' former student-athletes from any post-graduation 'collegiate licensing' market, via use of wrongfully obtained 'perpetual releases' or any other means."

The NCAA's Remy adds, "Our view of those theories is that, at their core, they fundamentally misunderstood the operation of the NCAA and the collegiate model." Were the plaintiffs to succeed, he says, "it would change the operation of the intercollegiate model to the detriment of student-athletes and universities."

Antitrust law, however, may be evolving in favor of the athlete. For decades the NCAA was immune from federal antitrust law as a self-regulatory body. But it lost that protection long ago, partly because of its broadcasting revenue. The U.S. Supreme Court held in 1984 that the Sherman Act applied to the NCAA, based on the organization's restriction of the number of college football games that could be televised each year, and its prohibition on member schools contracting for additional broadcasts. The Court ruled that the association's broadcasting plan constituted a restraint on the operation of a free market, in violation of section 1 of the Act. (NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85 (1984).)

"The Supreme Court says that the NCAA commandeered the rights of its members - the universities and other institutions - and enforces those rights through punishment, sanctions, if there is a violation," Hausfeld told Judge Wilken in a 2009 hearing. "That's a classic cartel. And it's a classic cartel both with respect to fixing prices and a group boycott."

Then in 1998, the Tenth Circuit held that the NCAA had violated antitrust law in its effort to cap coaches' salaries by restricting entry-level pay to $16,000 per year. (Law v. NCAA, 134 F.3d 1010 (10th Cir. 1998).)

Over the years, as student-athletes struggled to maintain amateur status and still meet campus living expenses, more of them brought claims against the NCAA. In 2002 Olympic gold-medal skier Jeremy Bloom challenged NCAA employment restrictions prohibiting him from receiving lucrative modeling and skiing endorsements while he played football for the University of Colorado. Although his suit ultimately failed, the case did establish that college athletes have standing to sue the NCAA as third-party beneficiaries to its contract with member schools. (Bloom v. NCAA, 93 P. 3d 621 (Colo. App. 2004).)

Another crack in the NCAA's defenses appeared in 2006, when four former football and basketball players filed an antitrust claim in Los Angeles, arguing that capping the association's grant-in-aid formula at less than the true cost of attending college created a hardship. The plaintiffs sought to enjoin the NCAA from enforcing the policy, and requested treble damages for a class of Division I student-athletes that could have amounted to hundreds of millions of dollars.

At trial the judge found that the players had established a relevant market for their services, and that the NCAA directly determined the price its members paid for those services through grant-in-aid restrictions. The case settled in 2008, with the NCAA agreeing to provide $218 million to Division I institutions for the benefit of student athletes through 2012-13, and to set aside $10 million to cover claims by qualifying former student-athletes. (White v. NCAA, No. 06-CV-999 (C.D. Cal. settlement approved Aug. 5, 2008).)

But the NCAA has had court victories of its own. The U.S. Supreme Court's Board of Regents decision, for instance, permits some collusive behavior and includes a reminder that "a certain degree of cooperation is necessary if the type of competition that [the NCAA] and its member institutions seek to market is to be preserved."

In addition, the plaintiffs in White added weight to the NCAA's position by stipulating that the settlement did not serve as a "presumption, concession, or admission" by the NCAA of any "violation of law, breach of duty, liability, default or wrongdoing as to any facts or claims alleged or asserted in the action."

The NCAA's Remy also points to the Seventh Circuit's decision in June upholding dismissal of antitrust claims by Joseph Agnew and Patrick Courtney, two high school football players who lost scholarships after they suffered career-ending injuries. (Agnew v. NCAA, 683 F.3d 328 (7th Cir. 2012).) That suit, however, failed not because of a direct assault on antitrust claims, but because the plaintiffs' lawyers made a strategic decision not to define the relevant market.

If Hausfeld's antitrust class claims prevail in O'Bannon, the remedy would not bring immediate, lucrative licensing deals for college athletes. His motion for class certification states that the NCAA's "purported justifications for the challenged restraint" - maintaining the current eligibility of student-athletes - can easily be accommodated. He suggests that "monies generated by the licensing and sale of class members' names, images and likenesses can be temporarily held in trust for those individuals until the cessation of their collegiate careers."

The NCAA's arguments that extending licensing rights to current and former players would destroy amateurism or create second-tier professional leagues may be overblown. In Board of Regents, for instance, the NCAA argued that uncontrolled television access to the football games played by member schools would lower stadium attendance and limit the popularity of college sports. Instead, broadcast revenues exploded, making college football and basketball into a multibillion-dollar business.

Aaron Gordon's coach at Archbishop Mitty High School doesn't see compensating student-athletes as much of a problem. "The NCAA is making so much money," Tim Kennedy says. "Players aren't getting the benefit. Something is wrong with the system."

The coach continues, "[Student-athletes] spend a lot of time scrounging to get extra meals. They don't have a chance to work like normal students. They are full-time basketball players - that's their job. With the TV contract they are treated like they are not high profile, when they really are. It is a disservice to these guys."

As for predictions about the NCAA's other upcoming court battle this month, former UCLA star O'Bannon, "a Bruin through-and-through," says the team will "make some noise" in the 2013 March Madness tournament.

Pamela A. MacLean is a contributing writer at California Lawyer.

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