Somewhere, Cartman is crying because he knows that his days of restraining his student-ath-o-letes are numbered.

In a monumental ruling today, the 9th Circuit Court of Appeals determined that the NCAA’s rules prohibiting student-athletes from being paid for the use of their names, images, and likenesses constituted an unlawful restraint of trade in violation of the Sherman Antitrust Act.

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As Judge Jay Bybee, perhaps best known for authoring the “torture memos,” explained in his O’Bannon v. NCAA decision (full text below),

Section 1 of the Sherman Antitrust Act of 1890, 15 U.S.C. § 1, prohibits “[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce.” For more than a century, the National Collegiate Athletic Association (NCAA) has prescribed rules governing the eligibility of athletes at its more than 1,000 member colleges and universities. Those rules prohibit student-athletes from being paid for the use of their names, images, and likenesses (NILs). The question presented in this momentous case is whether the NCAA’s rules are subject to the antitrust laws and, if so, whether they are an unlawful restraint of trade.

The 9th Circuit heard the case after the NCAA appealed an unfavorable ruling following a bench trial with Judge Claudia Wilken. Judge Wilken had concluded that the NCAA’s compensation rules were an unlawful restraint of trade and that the NCAA was essentially a cartel with an oft-changing definition of amateurism. She then enjoined (or prevented) the NCAA from prohibiting schools from increasing scholarships to cover the full cost of attendance. Of course, the fact that scholarships were not covering the full cost of attendance in the first place was ridiculous.

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Judge Wilken also allowed schools to pay athletes up to $5,000 per year in deferred compensation that would be held in a trust fund until after graduation. As an aside, I testified before the South Carolina Senate in support of a bill by Senator Marlon Kimpson to mandate these post-graduation trust funds. Needless to say, the representatives of Clemson and the University of South Carolina were none too pleased with me.

Judge Wilken’s trial-level decision was the first federal ruling to hold that the NCAA’s amateurism rules violated antitrust laws. Now, the appeals court has weighed in and largely upheld Judge Wilken’s ruling. The 9th Circuit concluded in a 73-page opinion that:

the district court’s decision was largely correct. Although we agree with the Supreme Court and our sister circuits that many of the NCAA’s amateurism rules are likely to be procompetitive, we hold that those rules are not exempt from antitrust scrutiny; rather, they must be analyzed under the Rule of Reason. Applying the Rule of Reason, we conclude that the district court correctly identified one proper alternative to the current NCAA compensation rules—i.e., allowing NCAA members to give scholarships up to the full cost of attendance—but that the district court’s other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. We therefore affirm in part and reverse in part.

On appeal, the NCAA argued that the Court should be precluded from deciding the case because: (1) The Supreme Court held in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), that the NCAA’s amateurism rules are “valid as a matter of law”; (2) the compensation rules at issue here are not covered by the Sherman Act at all because they do not regulate commercial activity; and (3) the plaintiffs have no standing to sue under the Sherman Act because they have not suffered “antitrust injury.”

The Court, however, found none of these arguments persuasive.

Perhaps most important for the future of the NCAA — and an issue that the NCAA will likely take to the United States Supreme Court — is that the 9th Circuit dismantled the NCAA’s favorite Board of Regents defense. For decades, the NCAA has clung to the Board of Regents case as a shield from antitrust actions. However, the 9th Circuit held that this decision about television contracts was inapplicable here and chose to apply a Rule of Reason test.

The Board of Regents Court certainly discussed the NCAA’s amateurism rules at great length, but it did not do so in order to pass upon the rules’ merits, given that they were not before the Court. Rather, the Court discussed the amateurism rules for a different and particular purpose: to explain why NCAA rules should be analyzed under the Rule of Reason, rather than held to be illegal per se. The point was a significant one. Naked horizontal agreements among competitors to fix the price of a good or service, or to restrict their output, are usually condemned as per se unlawful. See, e.g., United States v. Trenton Potteries Co., 273 U.S. 392, 398 (1927); see also, e.g., Broad. Music, Inc. v. CBS, Inc., 441 U.S. 1, 19–20 (1979) (arrangements that “almost always tend to restrict competition and decrease output” are usually per se illegal). The Board of Regents Court decided, however, that because college sports could not exist without certain horizontal agreements, NCAA rules should not be held per se unlawful even when—like the television rules in Board of Regents—they appear to be pure “restraints on the ability of member institutions to compete in terms of price and output.” Bd. of Regents, 468 U.S. at 103.

Board of Regents, in other words, did not approve the NCAA’s amateurism rules as categorically consistent with the Sherman Act. Rather, it held that, because many NCAA rules (among them, the amateurism rules) are part of the “character and quality of the [NCAA’s] ‘product,’” id. at 102, no NCAA rule should be invalidated without a Rule of Reason analysis. The Court’s long encomium to amateurism, though impressive-sounding, was therefore dicta. To be sure, “[w]e do not treat considered dicta from the Supreme Court lightly”; such dicta should be accorded “appropriate deference.” United States v. Augustine, 712 F.3d 1290, 1295 (9th Cir. 2013). Where applicable, we will give the quoted passages from Board of Regents that deference. But we are not bound by Board of Regents to conclude that every NCAA rule that somehow relates to amateurism is automatically valid.

In this case, the Circuit Court determined that the NCAA failed to prove that its prohibition of payment for the use of athletes’ names, images, and likenesses — particularly in video games — was valid in the face of a Rule of Reason analysis.

The Rule of Reason is a three-step framework. As the Court put it, “[1] The plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects within a relevant market. [2] If the plaintiff meets this burden, the defendant must come forward with evidence of the restraint’s procompetitive effects. [3] The plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner.”

Put simply, it is not reasonable to restrict athletes from receiving payment when a video game company gets to profit from their names and images.

The NCAA tried to argue that the Sherman Act does not apply to its rules because it does not regulate “commercial activity.” As the Court politely explained, “This argument is not credible.” In other words, trying to claim that rules governing one of the largest industries in the nation — college sports — is not commercial activity is flat-out laughable. The Court actually wrote,

“The NCAA’s argument that its compensation rules are “eligibility’ restrictions, rather than substantive restrictions on the price terms of recruiting agreements, is but a sleight of hand. There is real money at issue here.”

At the end of the day, that is what this whole thing is about — money. After this decision, money is exactly what the NCAA is fighting to prevent its athletes from gaining in a fair and free market system. Some athletes have value in an open market, such as Johnny Football, while the third-string guard might not. That’s capitalism. The Court agreed that absent the NCAA’s rules, video game makers would negotiate with student-athletes for the right to use their names and likenesses. Pay attention, DraftKings.

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The NCAA countered that any payment athletes would receive would be “too small to matter.” The Court swatted that irrelevant argument aside too:

“Indeed, if anything, loosening or abandoning the compensation rules might be the best way to “widen” recruits’ range of choices; athletes might well be more likely to attend college, and stay there longer, if they knew that they were earning some amount of NIL income while they were in school. See Jeffrey L. Harrison & Casey C. Harrison, The Law and Economics of the NCAA’s Claim to Monopsony Rights, 54 Antitrust Bull. 923, 948 (2009). We therefore reject the NCAA’s claim that, by denying student-athletes compensation apart from scholarships, the NCAA increases the “choices” available to them.”

However, although the 9th Circuit decision confirmed that NCAA regulations are subject to antitrust scrutiny under the Rule of Reason, the Court rejected the payment of $5,000 in deferred compensation. Judge Bybee wrote,

“We cannot agree that a rule permitting schools to pay students pure cash compensation and a rule forbidding them from paying NIL compensation are both equally effective in promoting amateurism and preserving consumer demand. Both we and the district court agree that the NCAA’s amateurism rule has procompetitive benefits. But in finding that paying students cash compensation would promote amateurism as effectively as not paying them, the district court ignored that not paying student-athletes is precisely what makes them amateurs. . .

The difference between offering student-athletes education-related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point; we have little doubt that plaintiffs will continue to challenge the arbitrary limit imposed by the district court until they have captured the full value of their NIL. At that point the NCAA will have surrendered its amateurism principles entirely and transitioned from its “particular brand of football” to minor league status. Bd. of Regents, 468 U.S. at 101–02. In light of that, the meager evidence in the record, and the Supreme Court’s admonition that we must afford the NCAA “ample latitude” to superintend college athletics, Bd. of Regents, 468 U.S. at 120, we think it is clear the district court erred in concluding that small payments in deferred compensation are a substantially less restrictive alternative restraint. We thus vacate that portion of the district court’s decision and the portion of its injunction requiring the NCAA to allow its member schools to pay this deferred compensation.”

Avoiding the minimal $5,000 payouts is a consolation prize for the NCAA. Although direct payments to athletes is highly unlikely in the near future, today’s ruling is significant because it placed the NCAA’s amateurism rules under antitrust scrutiny. The NCAA is no longer above antitrust laws and courts can now require the NCAA to play by the Sherman Act’s rules.

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An antitrust exemption is like having a pot of gold for an organization like the NCAA. Just ask Major League Baseball. Now, however, the NCAA is subject to the Sherman Act.

In essence, the NCAA can no longer do whatever the hell it wants. The rules it makes in preserving the fading notion of amateurism must be reasonable and not unfairly restrictive from here on out. Score one for the athletes today, but look for the NCAA to keep fighting all the way to the Supreme Court.

Steve Silver is the founder of TheLegalBlitz.com. He is a former sports reporter for the Las Vegas Sun and is now a lawyer in Philadelphia. You can reach him at steve@thelegalblitz.com or on Twitter @thelegalblitz.

Image via Getty Images.

O’Bannon v. NCAA Decision