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Sports economist Andy Schwarz ’89 answers key O’Bannon v. NCAA questions

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Although Judge Claudia Wilken ’71 ruled on the O’Bannon v. NCAA case in August, the litigation is still ongoing pending the NCAA’s appeal of Wilken’s decision in favor of the O’Bannon plaintiffs. In order to get a better understanding of Wilken’s ruling and what it means for the collegiate sports world, The Stanford Daily’s Cameron Miller interviewed sports economist Andy Schwarz ’89, who served as a consultant to the Plaintiff’s in the case.

The Stanford Daily: Tell us about your professional background and connection with Stanford.

Andy Schwarz: I always wanted to go to Stanford from the moment I knew what college was. My dad was an alum and we lived on the east coast, which meant if Stanford came anywhere close (e.g., a game against Penn State when we lived a long day’s drive away – Google tells me this was in Sept 1975), we’d drive there. So when Stanford said yes to my application, it was an easy choice, even though I went through the motions of pretending I was considering other places on the east coast.

At Stanford, I studied (pre-1700) European history, lived in dorms (Paloma and ZAP are where my allegiances lie), spent two quarters at Stanford in Berlin, just before the Wall fell. In addition to my major, I also took a decent amount of quant classes (calc, stats, logic, and physics not-for-poets). I only took one econ course though, Econ 1 with John Taylor, my senior year.

TSD: What experience do you have in NCAA and other sports-related antitrust litigation?

AS: I took a bit of a winding path to become a practicing economist/litigation consultant. I started in a history Ph.D. program, left that after getting a masters, worked for a while, got an MBA, worked for a while more, started in a Ph.D. program in business/econ, and eventually ended up working for one of my professors (without finishing my degree), who just happened to be an expert witness in NFL litigation. So I started doing applied economics in litigation and in sports at the same time right from the start.  Eventually, I ended up managing the economic case for the NFL’s expert in L.A. Raiders v. NFL, which was the litigation related to the 1995 move back to Oakland (not the famous 1980s litigation, I’m not that old).

With that on-the-job training in hand, in 1999 I co-authored a paper on the NCAA in the context of antitrust law, which was published in Spring 2000 in the American Bar Association’s monthly publication. It drew on my experience from the Raiders case in terms of the economics behind the antitrust laws’ application to sports. My co-author [Dan Rascher] and I used the framework that explains why the NFL’s relocation rules are (most likely) legal under antitrust laws to show why we thought the same arguments did not apply to the NCAA as what we called a “super-cartel” a sort of cartel formed from distinct leagues like the [then-]Pac-10 and the SEC.

TSD: What was your involvement in the O’Bannon v. NCAA lawsuit?

AS: I was the case manager for several of the experts in that case, most relevantly Roger Noll [class certification and liability] and Dan Rascher [damages]. The case manager basically makes sure the work that’s being done is what the expert wants, even when the expert is off doing his/her main job (e.g., being a professor). It’s a sort of lieutenancy in the literal sense.

This meant that I conducted or managed a lot of research, did a lot of economic analysis, learned a ton of NCAA history [some of which I already knew], etc. And while the work was always directed by the expert (with me just as the supervisor), I also played a role in helping create the research agenda to begin with, working with the experts to help them know what was possible.

TSD: Explain the difference between the college education and group licensing markets.

AS: This is a hard question to answer simply.  As presented by the plaintiffs, the idea was that there were two markets – one where colleges compete to get high-quality athletes by offering reduced-cost education, and another where colleges compete to acquire the needed inputs to sell full-team-image-related products (e.g., TV shows, video games) to third parties like TV networks, video game makers, etc. Because of NCAA rules limiting compensation to a maximum “grant-in-aid” (GIA) limited to tuition, fees, room, board and required books, in effect the two markets become intertwined, with athletes implicitly or explicitly granting a $0 license for the use of their images as part of what they provide the schools in exchange for receiving a discount on attending college.

People sometimes say to me – what’s wrong with that? They get a “free” education (by the way, it’s not free if you have to do something in exchange) and they give up these rights. After all, no one is holding a gun to their head so what’s wrong with the current system? The answer is that there’s nothing wrong with a fair market exchange of services and/or cash for services and/or cash, but the antitrust laws prevent competitors from mutually agreeing/enforcing a cap on what each offers in that market. And so it’s not wrong for Stanford to decide on its own that it thinks a Stanford education is sufficient compensation and to go out into the market place and try to get the best talent it can making its non-cash offer against other schools’ self-chosen offerings.  But when Stanford and Notre Dame collude on a limit and bring Alabama in too, and they all agree to cap their offers to exclude payments, it is no longer a fair exchange. It becomes collusion. And collusion is what’s wrong with the current system.

Economically, the non-collusive outcome of competition among schools to acquire all of those services would result in a net flow of money from schools to athletes, even after the in-kind provision of scholarships. But collusion (in the form of agreements among competing schools and conferences on how much each can pay its recruits) results in the net flow of money being even or in some cases, flowing from athletes to schools or other service providers. This causes these markets to look like A sells to B or B sells to A, when really each is selling to the other. Economically, it doesn’t matter, but to non-economists, the thought of both sides selling or of the buyer getting money is weird.

[As an aside: if you have a credit card that gives you cash back and you don’t carry a balance, then they pay you to use their card.  That’s basically being a buyer (getting payment services) and yet getting paid.  The same applies to a savings account if you don’t pay fees – they pay you to use their money storage services.]

TSD: Why do you believe Judge Wilken rejected the NCAA’s arguments supporting the pro-competitive effects of its restraints?

AS: I think she rejected them because there is little or no truth behind the NCAA’s purported pro-competitive justifications of their rules. For example, Judge Wilken said she could see no evidence that the popularity of college football rested on maintaining the current pay status of the athletes (i.e., the current GIA limit).

I often get asked “why would we want to watch a bunch of second-rate professionals play football?  What we want is college football.” People confuse “being paid” with “not being a real college student.” I think a large driver of the college sports experience is the idea that the athletes go to the same school as the other students and as the alumni. In some areas, the popularity extends beyond that, to the local region including non-alums, but the connection to the school by the athlete is supposed to be a genuine one. But that doesn’t speak to the pay status of the athletes.

In my study of sports, when athletes seek to get more money, management commonly argues that something special about the sport will go away and fans will desert.  Nineteenth century baseball was amateur and argued that payments would kill the sports. Pre-1970’s baseball and pre-1980’s football had very restrictive pay rules that allowed management to keep a large share of the profits, and both leagues argued the sport would collapse with free agency. Pre-1990’s the same arguments were made about the Olympics.

Obviously, baseball and football and the Olympics are all thriving and the change in pay status of the athletes did not cause demand for those sports/events to vanish.

People said the same things about scholarships in college sports prior to the 1950s, when scholarships were finally okayed by the NCAA (prior to that, scholarships were considered pay and “dirty”).

If you think lack of pay enhances demand, ask yourself why no league has ever gone from professional to amateur as a way to enhance demand for the product. Can you really imagine this happening: “Oh, you don’t like my sport? What if I promised not to pay the athletes, would that make you want to come now?”  It doesn’t work like that.

There were other arguments the Judge rejected as well, but each of them failed the critical “truth test.”  They are assertions that may sound good if you say them often enough and loud enough, but they don’t stand up to factual scrutiny.

TSD: In theory, what is the “trust payment system” that Judge Wilken outlined? In practice, what might the “trust payment system” look like?

AS: It’s important to note that Judge Wilken did not mandate a trust fund. All Judge Wilken said was, if athletes having too much cash in their pocket is going to cause problems’; which is a very dubious proposition – I call this “The Fear of Black Wallet” – but leave that aside for now, her injunction would not forbid compensation above the true cost of attendance being deferred.

To break that down;

1) Current Scholarships (GIAs in NCAA parlance) do not currently cover the full cost of attendance (COA).  By NCAA (collusive) rule, they are capped at the level mentioned above (room, board, tuition, fees, and required books).  This leaves a shortfall in the $2K – $8K zone depending on the school.

2) Wilken said ANY collusion not to pay for Name, Images, and Likenesses (NILs) below the full COA was enjoined. This means that when you hear schools trying to make rules about allowing full cost of attendance scholarships, they are probably in violation of the injunction (or at least will be when it kicks in in 2015)

3) Wilken also said collusion not to pay for NILs in amounts above COA was also enjoined, but she said she would not automatically reject a plan for payments that were deferred (I don’t think she blessed them as legal, just said the injunction didn’t forbid them) and she said that if the NCAA applied a cap below $5,000, she would slap that cap down. Implicitly, this meant that a cap of $5,000 and 100% deferred (other than the below-COA portion) is likely to pass muster with her for this case (though recognize she could only address the facts of this case in this case – she may expand the ruling based on future cases with different evidence). She didn’t technically say it had to $5K or that it had to be deferred, but if you assume the NCAA and its schools will continue to collude, she told them how to do it in a way that she would not immediately slap down as bogus based on the current injunction.

In practice, it wouldn’t be very hard to create accounts for each athlete with a trustee that convert into regular accounts upon graduation or ending of eligibility. I’m sure the Stanford business school could do a quick consulting project and set it up in a quarter. But don’t be surprised if a lot of collective “difficultization” occurs.

TSD: Why, in your opinion, would collegiate administrators (like Stanford’s Bernard Muir) want a hard cap on the trust fund money a student-athlete might receive after graduation or the exhaustion of NCAA eligibility?

AS: Any member of an input cartel wants a hard cap on costs to lower their costs. To quote Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  (― Adam SmithThe Wealth of Nations: An Inquiry into the Nature & Causes of the Wealth of Nations )

The college sports version of this is basically just “some contrivance to lower costs” but otherwise Smith got it right, even though he published in 1776.

Each school knows that if unrestrained by collusion, its self-interested impulse is to spend more. So it asks its competitors not to compete, and in exchange it agrees not to as well, and then they authorize the NCAA to police the agreement, and to punish those who deviate. The net result in a sub-competitive price for inputs and (in theory) higher profits for the cartel members. However, because not all forms of competition are banned, much of the profits are dissipated into wasteful competition for coaching, for facilities, etc.

TSD: What can we expect from the litigation process (concerning the O’Bannon decision) going forward?

AS: The appeals schedule is (to the best of my knowledge) as follows:

NCAA’s opening brief be due Nov. 14,

Plaintiffs’ response on Jan. 21, 2015,

NCAA’s reply brief on Feb. 11, 2015.

Appeals are supposed to focus on law, not facts. So I think that means the first half of the Wilken ruling is taken as true, though beware that as an economist my understanding of the law is not a result of expertise. A lawyer can probably better address this, but I think it will come down to questions like whether the Court should have even asked if those purported pro-competitive justifications were true, or whether the NCAA was entitled to assert them as true without their being tested.

TSD: What does the O’Bannon decision mean for current NCAA student-athletes, revenue and non-revenue players alike?

AS: The O’Bannon decision only applies to FBS football and D-1 [Division I] men’s basketball. Starting next year, when a recruit is being courted by a school, the school will be able to offer him a full COA scholarship and a binding promise of $5,000 per year in deferred payments, and if they seek to dampen that competition by agreeing with other schools NOT to compete in this fashion, they will be in violation of the law and could face Court sanctions.  This does not mean they have to make such an offer, just that they cannot agree with other schools not to do so.

Schools agreeing among themselves that COA scholarships may become allowed have missed the news. Starting next year, colluding on maximum levels of payment for name, images, and likeness less than COA + $5K deferred will be enjoined by federal law.

I don’t think you’ll see any change with respect to non-revenue sports, except I think that for Title IX reasons, about 70% of the additional spending on football/men’s basketball will get matched in additional scholarship money in women’s sports. [It’s 70% because on average women athletes’ scholarship funding is in the 2/3 – 4-5 range of their men’s programs.]

I would predict that most of these increased payment to women would not tend to be in cash, but instead would come in the form of larger GIAs (e.g., a full scholarship rather than a half scholarship). This is because on average a women’s scholarship is about 2/3 of a FB or men’s BB scholarship – so there is room for more in-kind payments which are cheaper for schools because they account for them at inflated prices. [This is another story in itself – how schools overstate the cost of a scholarship]. This may require the NCAA to change some of its rules limiting how much a school can give to women athletes on certain teams, but that’d be a really nice side effect – right now the NCAA schools also collude to hold down women’s scholarships too.

TSD: When might the public see actual change in the compensation of NCAA student-athletes for the use of their NILs?

AS: The 9th circuit appeal will be decided before Aug 2015.  If Plaintiffs prevail, I think you’ll see offers to athletes including some form of licensing payment (likely deferred) for freshmen who show up on campus to start practicing in August 2016.  It’s possible the ruling will be stayed pending Supreme Court appeal, but I wouldn’t be too surprised if it’s not.

Contact Cameron Miller at cmiller6 ‘at’ stanford.edu.

 

Cameron Miller is a sports desk editor for The Stanford Daily's Vol. 246 and is the men's and women's golf writer. He also writes on NCAA-related matters. Cameron is also a Stanford student-athlete, competing on the cross country and track and field teams. He is originally from Bakersfield, California, but spends most of his time away from the Farm on the state's Central Coast. Contact him at cmiller6@stanford.edu.