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O'Bannon v. NCAA: Do schools make or lose money on sports?

Photo: John F. Rhodes/AP

OAKLAND, Calif.  -- The last week of the O'Bannon v. NCAA trial began with a debate over math: Do Division I colleges make or lose money on sports? Answering this seemingly straightforward question proved impossible during Monday's hearing. Two witnesses for the NCAA, NCAA research director Todd Petr and Conference USA commissioner Britton Banowsky, testified. Both sparred with O'Bannon's attorneys over how revenue should be defined.

According to the NCAA calculations, Division I colleges spend about $12 billion a year on sports, but only receive about $6 billion in revenue. Per the calculations, the average annual deficit of a DI program is approximately $12 million. NCAA calculations indicate that merely a couple dozen schools are profitable; the rest are in the red. The central theme was clear: College sports may be lucrative, but they are not profitable. This is an important legal point, because one core factor to the NCAA's antitrust thesis is that academics and athletics are intertwined. If colleges lose money on sports, it would suggest that sports do not drive institutional decisions by college presidents and that student-athletes are not more important to schools than other students.

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O'Bannon's attorneys raised two key arguments against the NCAA's definition of revenue. First was to question the underlying data. While Petr vouched for the NCAA's data on revenue and expenses, he admitted during cross-examination that the NCAA relies on reporting by individual schools and interpretation by Transylvania University professor Dan Fulks, whom the NCAA retains for computation of data. O'Bannon's lawyers attempted to undermine the NCAA's data by asserting that the NCAA does not verify -- or even fully understand -- the financial numbers it shares with the public.

The O'Bannon attorneys' second argument was to question why the NCAA excludes "institutional subsidies" from its revenue calculations. These subsidies usually refer to universities transferring general budget money into their athletic programs and student service athletic fees. Exclusion of institutional subsidies from revenue is a major exclusion. Banowsky testified that Conference USA schools fund their athletic programs mainly through those subsidies, in some cases 75 percent of funding. To question the NCAA's exclusion of institutional subsidies, O'Bannon's lawyers introduced as evidence a letter the NCAA wrote to the Ways and Means Committee of the U.S. House of Representatives in 2003. In that letter, the NCAA did not exclude institutional subsidies from calculation of revenue. The letter also indicated that 92 DI athletic programs either broke even or were profitable. Yet in the O'Bannon case, O'Bannon's lawyers stressed, the NCAA has removed institutional subsidies from revenue. O'Bannon's lawyers hope that U.S. District Judge Claudia Wilken will find the NCAA's change of calculation to be suggestive of manipulation.

NCAA: Student-athletes view themselves as part of academic environment

Throughout the trial, the NCAA has pledged that athletics and academics are inextricably intertwined. In today's hearing the NCAA focused on how the vast majority of student-athletes view themselves as part of the university experience.  According to recent NCAA survey data, 87 percent of men's basketball and 77 percent of football players agreed with the statement, "I see myself as part of the campus community." Virtually the same percent of student-athletes on basketball and football teams agreed with the statement, "I have a sense of belonging to this campus."  These surveys may sound hokey, but are actually quite important: the NCAA's legal case is strengthened if men's basketball and football players are members of the same academic community as their classmates. 

For similar reasons, the NCAA hoped to gain traction by data on rising graduation rates.  Petr presented a number of findings, including that the graduation rate for FBS schools rose from 63 percent in 1995 to 71 percent in 2006 and that African-American student-athletes, in particular, have graduated at higher rates.  He also asserted that the NCAA has evolved to meet changes in academic requirements at schools.  Again, the focus was on linking the NCAA to academic integrity as it bolsters the NCAA’s legal contention that amateurism rules are essential.​

Banowsky: Student-athletes negotiating could lead to "horrible place"

Toward the end of today's hearing, NCAA attorneys hypothesized a potential future world where O'Bannon has won the trial and student-athletes can freely negotiate their name, image and likeness.  Banowsky expressed serious concern about such a world.  He feared that a "corrupting influence of money" would materialize and dominate college sports.  He spoke of student-athletes and prospective student-athletes potentially represented by passionate but unscrupulous boosters and how this could give rise to a "horrible place."  These boosters, Banowsky worried, could prove "exploitative" of 18 and 19-year olds, especially without restriction on their contractual arrangements with student-athletes and their families.

As an example of the type of nefarious conduct that might proliferate in a world where O'Bannon wins, Banowsky referenced the Nevin Shapiro controversy at the University of Miami. Shapiro, who is currently imprisoned for his role in a Ponzi scheme, was a wealthy Hurricanes booster that purportedly provided various benefits to Miami players.  Those "benefits" included cash and access to prostitutes, among other items and services that were clearly in contravention of NCAA rules and in some cases the law.  For NCAA attorneys, Banowsky's reference to Shapiro may have caused some discomfort.  The NCAA received sharp criticism last year over paying Shapiro's attorney in order to obtain documents used to punish Miami. Still, Banowsky's testimony could help the NCAA establish that O'Bannon's proposed injunction might damage the integration of academics and athletics. 

Keep in mind, it is expected that if O'Bannon wins, most if not all DI men's basketball and football players would negotiate their name, image and likeness through a trade association, rather than individually.  This collective arrangement would presumably diminish or even eliminate any possible "corrupting" influence of crooked boosters, opportunistic sports agents and other third parties. However, in fairness to Banowsky, there would likely be nothing that bars an individual athlete from entering into a negotiation contract with a booster or agent.
 
Banowsky also stressed that if O'Bannon wins, "teams with the best players would win more consistently than they do now." Competitive balance is core part of the NCAA's antitrust defense.  According to the NCAA, amateurism rules prevent college sports from waging a spending war that would advantage a relatively small number of schools and conferences but also make sports too expensive for many schools.  In the absence of these rules, a small number of teams would dominate whereas many colleges would downsize or outright eliminate sports. Banowsky went so far as to say football programs could be cut at Conference USA schools if student-athletes could negotiate their name, image and likeness.

O'Bannon's attorneys rejected Banowsky's conclusions.  They emphasized that Banowsky bases his concerns not on any data, but rather personal beliefs and internal reasoning. Banowsky was also asked to explain why colleges continue to seek joining Division I if doing so would cause them to lose money.  Banowsky explained their desire as varied, but often based on uniting a university and bringing alums back to campus. Banowsky, in other words, returned to the NCAA's contention that athletics and academics run together.​

NCAA may have found one possible ground to appeal

If Judge Wilken issues an injunction against NCAA amateurism rules, the NCAA will surely appeal the order to the U.S. Court of Appeals for the Ninth Circuit. In an appeal, the NCAA could not merely argue that Wilken "got it wrong." The NCAA must instead assert that Wilken made specific mistakes. A classic ground for an appeal is when a trial judge prevents the defendant from raising evidence, or bars the defendant from obtaining witness testimony, and the defendant insists the judge's denial was both erronenous and materially harmful to the case.

In today's hearing, an attorney for the NCAA tried to ask Banowsky about his experience negotiating media rights contracts with television broadcast companies. The attorney hoped that Banowsky would express that broadcast companies never mentioned name, image and likeness rights for student-athletes in negotiations. Such a statement would have advanced the NCAA's legal argument that name, images and likenesses are not distinct from the broadcast of college games. But before Banowsky could answer, O'Bannon attorney Seth Rosenthal objected, saying the topic was beyond the scope of the allowable topics for Banowsky's testimony.  Wilken agreed and sustained the motion, reasoning that she previously excluded the issue of media rights negotiation from Banowksy's testimony.  Further protests by NCAA attorneys that Wilken misinterpreted her previous ruling were to no avail. 

In any appeal by the NCAA, expect them to argue that Wilken prevented NCAA attorneys from waging an effective defense. Today's exchange is one possible example the NCAA would cite in an appeal.

Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.

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