On June 21, the U.S. Supreme Court permanently disrupted the college sports industry in a way that badly backfired on the NCAA, which had pushed for SCOTUS review, and the game-changing decision is already affecting other industries.
In NCAA v. Alston, the Court held that the NCAA and its members violated Section I of the Sherman Antitrust Act by agreeing to limit how much each can compensate athletes for academic-related costs. The ruling, which affirmed a lower court decision, supplies colleges with more flexibility in paying athletes. It also contributed to the NCAA’s capitulation on name, image and likeness 10 days later.
Less noticed at the time—but likely to become increasingly detectable—are the unintended consequences and collateral effects of the ruling on other businesses, starting with fast food giants.
In siding for the class led by former West Virginia running back Shawne Alston, the Court altered precedent for how judges must interpret and apply federal antitrust law. Two recent rulings involving restaurant chains highlight the extensive sway of Alston.
In his July 28 order in Deslandes v. McDonald’s, U.S. District Judge Jorge Alonso substantially relied on the Alston ruling in assessing the legality of employment restrictions at McDonald’s franchises. Alston also played an instrumental role in a July 23 ruling by Chief Judge Nancy Rosenstengel in a no-poach antitrust case involving Jimmy John’s fast food chain. Both cases draw from Alston not as a sports law decision but as an antitrust case.
Deslandes centers on McDonald’s franchise agreements containing an anti-tampering/non-compete provision from 1973 to 2017. Reminiscent of the NBA’s ban on teams negotiating with players who are under contract to other teams, the provision forbids franchisees from employing, or recruiting, those who worked for other McDonald’s franchises. Two plaintiffs, who hope their case in an Illinois federal court is certified as a class action, contend this provision violated Section I of the Sherman Act and suppressed their wages.
The parties disagree about whether the antitrust claim should be judged under “rule of reason analysis” or “quick look analysis.” The selected approach could determine the winner.
Under rule of reason, courts engage in a multi-faceted and often expensive analysis of whether a restraint on competition violates the law. Defining the relevant product and geographic market, assessing market power and identifying less restrictive possibilities are all part of a process that can take years to play out and require a small army of expert witnesses.
Quick look, in contrast, lives up to its name: Courts are directed to more instantly and less thoroughly examine whether a restraint on trade is anticompetitive. With quick look, the court swiftly concludes, based on a basic understanding of economics, that a restraint on competition is anticompetitive. It then examines, without having to determine the relevant market, whether there is a meaningful injury to competition and persuasive justifications.
Quick look was endorsed by the U.S. Supreme Court in another famous NCAA case. In 1984, the Court ruled against the NCAA in the Board of Regents broadcasting rights case. In doing so the Court quoted language saying that rule of reason “can sometimes be applied in the twinkling of an eye.” Fourteen years later, the U.S. Court of Appeals for the 10th Circuit applied quick look in finding unlawful an NCAA rule that capped the salaries of assistant basketball coaches to $16,000 per year.
But in the unanimous opinion authored by Justice Neil Gorsuch in Alston, the Court cautioned that quick look should be rarely applied and only in instances where restraints are either “so obviously incapable of harming competition” or “so obviously threaten to reduce output and raise prices that they might be condemned.” Justice Gorsuch added that application of quick look requires “confidence” by courts in understanding the restraints.
The plaintiffs in Deslandes urged Judge Alonso to apply quick look, but the judge reasoned that Alston precluded him from doing so. “This Court,” the judge wrote, “cannot say that it has enough experience with no-hire provisions of franchise agreements to predict with confidence that they must always be condemned, which means, under Alston, that the Court must apply rule of reason analysis to this case.”
In Conrad v. Jimmy John’s Franchise, a former employee of franchisees in Winter Park and Orlando challenges Jimmy John’s no-poach provision. At one point, the provision prohibited franchisees from recruiting or hiring those who were employed as general managers or assistant managers at other franchises during the preceding 24 months. Donald Conrad argues that if the provision—which was often waived—didn’t exist, franchisees would be more inclined to raise wages as a means of retaining employees who receive offers from rival Jimmy John’s locations.
Judge Rosenstengel, who presides in an Illinois federal court, drew extensively from Alston in emphasizing that rule of reason applies. She noted that both Alston and Conrad involve a “monopsony” claim in that both feature a single buyer of services (the NCAA and Jimmy John’s) using a restraint on competition (NCAA capping reimbursement for academic-related costs and Jimmy John’s applying a no-poaching policy).
“Alston,” Judge Rosenstengel wrote in denying Conrad’s class certification motion, “thus answers a question this Court punted at the motion-to-dismiss stage: The rule of reason applies in this monopsony case challenging a nationwide franchise’s use of intrabrand restraints that were arguably ‘designed to help [the company] more effectively compete with other brands by ensuring cooperation and collegiality among franchisees, and by encouraging investment in training.’”
Expect additional rulings to show that a case about sports will reverberate far beyond the sports industry. That development will reflect what was, in hindsight, an unwise move by the NCAA to petition the U.S. Supreme Court for help in preserving amateurism.
