Timothyothy Nwachukwu/NCAA Photos via Getty Images
Examining the Broader Fallout After the Historic Grant-in-Aid Cap Ruling Against the NCAA
What happens now?
This is our third of three legal stories on U.S. District Judge Claudia Wilken’s historic ruling in the grant-in-aid cap litigation against the NCAA. Having broken down the ruling itself and what it means for the NCAA and its member conferences, we now focus on the potential broader legal fallout from this decision that extends into important related topics, namely applications of Title IX, tax law, immigration law and sports betting law. It also reviews the appellate strategy of the two sides as the NCAA prepares to challenge Judge Wilken’s ruling before the U.S. Court of Appeals for the Ninth Circuit.
Title IX implications
The ability of colleges to pay athletes more than the grant-in-aid raises a potential Title IX problem. Title IX refers to Title IX of the Education Amendments of 1972, which prohibits education programs that receive federal funding from discriminating on the basis of sex. Almost every college receives federal financial assistance, meaning Title IX almost always applies. Title IX surfaces in college sports in a number of ways, and its enforcement mechanisms are designed to hold colleges accountable for failing to remedy sexually hostile environments.
Title IX is probably best known for requiring that college athletic programs provide roughly equal opportunities to male and female student-athletes. Here is where Judge Wilken’s ruling might invite Title IX challenges. If a school pays football or men’s basketball players scholarship amounts that exceed what is paid to scholarship athletes on women’s teams, players on those women’s teams could argue that the school has failed to comply with Title IX.
However, a school would not automatically violate Title IX by paying higher value scholarships to male athletes. The relevant analysis would be more nuanced and would focus on the extent of disparity between scholarship values at a particular institution. Along those lines, Title IX does not require identical treatment of male and female athletes, nor does it compel that an equal amount of dollars be spent on both. The key, instead, would be whether the school provides the female athletes substantially proportionate opportunities for scholarships. It is possible the Office for Civil Rights at the U.S. Department of Education, which enforces Title IX, will offer advisory opinions that might help schools interpret Judge Wilken’s ruling in a way that signals an acceptable disparity range for scholarships.
As an aside, some might posit that if a school is forced to violate Title IX in order to comply with Judge Wilken’s ruling, then the ruling itself is defective. That would be an unpersuasive argument. Judge Wilken ruled on the specific legal issues raised in the litigation—namely, questions of antitrust law. Her job was not to explore potential complications with other areas of law. In fact, had she done so, her ruling would be more vulnerable on appeal since her reasoning would have traveled outside of the scope of the case. Also, defendants usually lose when they argue that in order to comply with one area of law, they had to violate another. For instance, we don’t permit a thief to steal on account of needing money to pay a bill. The fact is, we all need to figure out how to comply with all areas of law.
If the NCAA and its members need to pay women athletes more in order to lawfully compete under antitrust law and lawfully comply with Title IX, then that’s what they’ll need to do. This would be true if it means that coaches earn a little less in future contracts or new arena projects aren’t quite as elaborate.
Tax implications for NCAA, college athletic departments and college players
The NCAA, athletic conferences and private universities classify themselves as non-profits under Section 501(c)(3) of the Internal Revenue Code. This section of the tax code exempts qualified organizations from the obligation to pay corporate income taxes for income related to the organization’s exempt purpose. As detailed by the Internal Revenue Service, qualified organizations include those that are “charitable, religious, educational, scientific [or] literary.” In 1976, Congress, with the support of President (and former University of Michigan football player) Gerald Ford, amended 501(c)(3) to express that “fostering national or international amateur sports competition” reflects a charitable purpose.
Fast-forward 43 years to 2019. College sports don't seem anything like charitable activities. The industry has become heavily commercialized and often separate from the rest of higher education. Still, the law remains just as protective of college sports’ tax exemption as it did decades earlier. (For a terrific overview of the NCAA’s exemption, check out University of Illinois tax law professor John Colombo’s article, The NCAA, Tax Exemption, and College Athletics).
While college coaches earning millions of dollars a year might seem like evidence that college sports shouldn’t be tax-exempt, tax law says otherwise. Indeed, the tax exemption isn’t undermined by coaches’ pay, so long as the pay is “reasonable” based on applicable market rates. Given that top college coaches are often pursued by pro teams, whether in the NFL or NBA, a multimillion-dollar college coaching contract isn’t “unreasonable” compared to coaches’ salaries in those pro leagues.
The impact of Judge Wilken’s ruling on the tax-exempt status enjoyed in college sports could prove modest or even inconsequential. By expressly ruling that higher athletic scholarship levels must remain tethered to education, Judge Wilken has safeguarded the (presumed) academic quality of athletic scholarships. To that end, higher athletic scholarships will continue to reflect educational goals and thus appear consistent with the tax-exempt status.
Likewise, Judge Wilken’s ruling probably won’t alter the tax implications for college athletes on athletic scholarships. The Internal Revenue Service has treated academic scholarships like academic scholarships in that they qualify for exclusion so long as they are primarily designed for the pursuit of studies. In truth, a deep-dive analysis into this topic would be more complex in that portions of scholarships for housing versus portions for books and other academic needs can, as cogently explained by economist Andy Schwarz, at least in theory lead to portions of scholarships being taxable. But the general point stands: So long as scholarships are linked to the pursuit of studies, they qualify for exclusion. Therefore, by requiring that athletic scholarships remain linked to academics, Judge Wilken implicitly guides the IRS away from treating higher-value athletic scholarships as taxable compensation. The IRS could weigh in at some point with an opinion on the matter.
If college athletes were at some point to be recognized as employees—which Northwestern University football players attempted to establish before the National Labor Relations Board in 2015—the tax analysis would certainly change. But for the time being, college athletes can probably expect a similar experience with the IRS.
Immigration law implications for college athletes from other countries
Among the college students impacted by Judge Wilken’s ruling are those from other countries who are enrolled through F-1 student visas. Such visas cap the number of hours students can work per week to 20 hours, with a higher number of hours permitted during holidays, breaks and summer sessions.
Because foreign students who play college sports are not employees of their schools, the time they spend on sports is not classified as “work.” Judge Wilken’s ruling does not alter that classification. However, as discussed above, uncertainty over what counts as “tethered” to education could lead to debate that college athletes receiving lucrative scholarships are engaged more in “work” than in school.
It seems unlikely to happen, but if the U.S. Department of Homeland Security concluded that the foreign athletes with high-value scholarships are engaged in job-related work by playing for their team, their eligibility for an F-1 visa would be questioned. Although the NCAA limits the number of hours that college athletes spend on required athletic activities to 20 hours per week, many college athletes—particularly those at big-time programs—say they spend far more than 20 hours per week and more like 40 or 50 hours per week on those activities. It’s unlikely these college players would qualify for P-1 and O-1 visas used by foreign pro athletes, as those visas require the bearers to be able to show international recognition or extraordinary ability.
Sports betting laws
With the U.S. Supreme Court’s decision last year in Murphy v. NCAA, every state can now legalize sports betting. Sports betting is legal in eight states (including Nevada, which was exempt from the federal ban and has had legal sports betting since 1949). The number of states with legal sports betting will only increase as time goes on.
In legalizing sports betting, several states have prohibited betting on certain types of college games. For instance, New Jersey’s sports betting statute permits sports betting of pro teams but not of any college games that occur in New Jersey or that involve any New Jersey college team. The ability of colleges to offer more than a grant-in-aid to recruits should not impact bettors’ opportunities: A college game is a college game, and if betting on it is barred by state law prior to Judge Wilken’s ruling, the same will be true going forward.
That’s not to say the ruling won’t impact sports betting. Some have surmised that college athletes are more vulnerable than pro athletes to being “bribed” to throw games or shave points given that college athletes aren’t paid. There have been several major point-shaving controversies in college sports history. To the extent some college athletes receive additional compensation through Judge Wilken’s ruling, it’s possible they may be less “tempted” by unlawful connections to sports betting. However, her limitation of compensable benefits to those related to education suggests the impact of the ruling on sports betting will be limited.
Then again, it’s possible that Judge Wilken’s system could lead to a significant disparity in compensation among college athletes, meaning individual players could be compensated for “education-related” benefits at very different levels. According to Daniel Wallach, a leading sports gaming attorney and the co-founding director of the University of New Hampshire School of Law’s Sports Wagering and Integrity Program, “this compensation disparity—which could become exacerbated in big-time college athletics—could make the less well-compensated athletes more vulnerable to being targeted by professional gambling syndicates” since they might be incentivized to seek out other avenues for making up that compensation shortfall relative to what other teammates are making. “Once you introduce compensation into college athletics, Wallach added, “those athletes who receive significantly less compensation than some of their teammates—and in some cases no compensation—could be at greater risk to temptation than would otherwise exist in a situation where all athletes receive the same benefits.”
Forthcoming court appeals and related cases in other jurisdictions
The NCAA will appeal Judge Wilken’s ruling to the U.S. Court of Appeals for the Ninth Circuit. This is, as explained in an accompanying story, the same federal appeals court that upheld Judge Wilken’s ruling in the O’Bannon case but significantly altered the remedy. In O’Bannon, the Ninth Circuit agreed that the NCAA violated antitrust law in denying players the opportunity for compensation for use of their names, images and likenesses. However, the court eliminated Judge Wilken’s remedy that had ordered schools to pay men’s basketball and football players up to $5,000 per year. Instead, the Ninth Circuit ruled that schools can comply by providing up to the cost of attendance to their student-athletes—something which schools adopted after O’Bannon had sued.
It’s possible that a similar outcome could emerge with Judge Wilken’s grant-in-aid ruling. The Ninth Circuit could agree with her that the NCAA’s system for grants-in-aid violates antitrust law but disagree with her remedy. For instance, the Ninth Circuit could impose a more rigid definition of “tethered to education” that may be more in line with the NCAA’s goals. An outcome along those lines would still reflect a blow to the NCAA’s preferred definition of amateurism, but a less disruptive defeat.
The Ninth Circuit might also not have the final say on the matter. As in the O’Bannon case, one or both sides could petition the U.S. Supreme Court for review. The odds of the Supreme Court hearing a petition would be low, as it only accepts about 1% of cases. Along those lines, consider the O’Bannon case: Despite both the NCAA and O’Bannon petitioning the Supreme Court to hear their case, and despite their case impacting thousands of college athletes, former college athletes and their respective universities, the Supreme Court declined to take it.
Yet a timeline could play out that makes it more likely the Supreme Court eventually reviews grant-in-aid litigation. Specifically, if judges in other federal jurisdictions review grant-in-aid issues under antitrust law, it’s possible they could rule differently than Judge Wilken. Indeed, her ruling is only “binding” precedent in California. Even if the Ninth Circuit affirms Judge Wilken’s ruling, it would only become governing authority in other parts of the country within the Ninth Circuit’s jurisdiction, which consists of Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands. Elsewhere it would merely be “persuasive” and non-binding. The Supreme Court would be more likely to review the topic if there is a so-called “circuit split” where two or more federal circuits rule differently on the same issue.
The possibility of a circuit split is even connected to this same litigation. The athletes who have brought the Grant-in-Aid have been described under the same umbrella. In reality, they are involved in two different, albeit extremely similar and eventually connected, litigations.
Shawne Alston and Justine Hartman are the lead plaintiffs in the case that Judge Wilken just decided. Their case began in U.S. District Court for the Northern District of California in 2014. Aiding Alston and Hartman’s case was the testimony of several other former athletes who filed a separate lawsuit in the U.S. District Court for the District of New Jersey, also in 2014. Those athletes include Wisconsin forward Nigel Hayes and former Clemson defensive back Martin Jenkins. The Hayes and Jenkins case, which invokes the same areas of law as the Alston and Hartman case and raises analogous arguments, is no longer in New Jersey. Because of the commonalities of the two cases, the Hayes and Jenkins case was transferred to California for review by Judge Wilken, who last year postponed it indefinitely.
What does this all mean? It means that Hayes and Jenkins, perhaps seeking a more robust “free market” than the one envisioned by Judge Wilken’s ruling, could petition for their case to be transferred back to its original jurisdiction in New Jersey. They might argue that while the two cases are very similar, they are presented in substantively different ways and could yield different outcomes based on differing interpretations of antitrust law in New Jersey and California. The NCAA would presumably object on grounds that the two cases are too duplicative to meaningfully disaggregate. The NCAA would also remind Judge Wilken of the legal principle of “res judicata,” which is Latin for “a thing decided.” Res judicata bars re-litigating a legal claim. Here, the NCAA would contend that the issues presented in the Hayes and Jenkins case have already been resolved through the Alston and Hartman ruling and thus should avoid further litigation in any jurisdiction.
The NCAA would also insist that the Hayes and Jenkins are attempting to “forum shop” in hopes that a New Jersey court would reach a different result. Indeed, if the Hayes and Jenkins case returned to New Jersey and if it led to a ruling that conflicted with the one authored by Judge Wilken (and if this conflict continued after relevant appeals before the U.S. Courts of Appeals for the Third Circuit and Ninth Circuit), the U.S. Supreme Court would be more likely to take notice of the topic, once two federal jurisdictions have ruled differently on an issue that substantially impacts college education across the country.
These complicated dynamics ensure that the legality of caps on athletic scholarships under federal antitrust law will remain in the courts—and possibly courts in multiple jurisdictions—for years to come.
Potential role of Congress and state legislatures
As the courts and federal agencies opine about the legality of athletic scholarship caps—as well as names, images and likeness rights (O’Bannon) and the prospect of college athletes as employees and union members (Northwestern)—potential legislative actions could prove to be game-changers.
Earlier this week, Congressman Mark Walker of North Carolina revealed he will introduce the Student-Athlete Equity Act. If it became law, the act would amend the U.S. Tax Code so that college athletes could sign endorsement deals and be paid for use of their names, images and likenesses. The specific change to the code would be to alter the NCAA’s eligibility as a non-profit so that qualification as a non-profit is dependent on allowing college athletes to enter into contracts with third parties for endorsements and use of names, images and likenesses.
There is also activity at the state level. In California, for instance, state Senators Nancy Skinner and Steven Bradford recently introduced the “Fair Pay to Play Act.” If it became law, Senators Skinner and Bradford’s proposal would prevent California colleges that receive an average of $10 million a year in media rights revenue from keeping their athletes from earning compensation derived from the use of their names, images and likenesses. Likewise, the act would prohibit schools and, by extension, the NCAA and conferences, from pulling or reducing an athlete's scholarship on the basis of him or her receiving name, image and likeness compensation.
Both the Student-Athlete Equity Act and the Fair Pay to Play Act capture the spirit of O’Bannon’s case against the NCAA. It would guarantee that athletes at California-based D-I programs be able to profit off of their names, images and likenesses. College athletes would be able to sign endorsement deals and video game licensing contracts without fear of NCAA consequences. Likewise, college sports fans would be able to enjoy different products and services related to their favorite program and its players.
Whether the Student-Athlete Equity Act and the Fair Pay to Play Act have the requisite political support to become law remains to be seen. Take the Fair Pay to Play Act, for example, The NCAA and California colleges will no doubt lobby against it should it advance in the California State Legislature and get closer to the desk of California Governor Gavin Newsom.
If the Fair Pay to Play Act became law, the NCAA and California colleges would probably challenge it in court. One possible argument would be that the Fair Pay to Play Act unduly interferes with interstate commerce. Article I, Section 8 of the U.S. Constitution makes clear that Congress has the power to regulate interstate commerce. This power has been interpreted to mean that states cannot interfere with interstate commerce. Here, the NCAA would insist that its amateurism rules are designed to create a level playing field for its more than 1,200 members across the country. For one state to prevent member schools from complying with NCAA rules would likely prevent those schools from playing games across the state lines. This is because a California college could not comport with NCAA amateurism rules under the Fair Pay to Play Act, which suggests those schools would need to leave the NCAA. To that point, California colleges might argue that the Fair Pay to Play Act unlawfully interferes with those colleges’ contractual and fiduciary obligations as NCAA members.
Maryland lawmakers are contemplating legislation that would impact athletes’ rights and amateurism. In the state’s General Assembly, Delegate Brooke Lierman has introduced House Bill 248. If it became law, the bill would require Maryland’s Higher Education Labor Relations Board to adopt regulations that would create a process for collective bargaining with college athletes who attend public universities.
As noted above, football players at Northwestern University attempted to be declared employees under the National Labor Relations Act (which governs private universities but not public universities). However, that effort fell short of succeeding. One difference with Delegate Lierman’s bill is that it would involve state law, rather than federal law. Specifically, the bill would govern public universities in Maryland. Those universities are governed by Maryland’s body of labor laws. If the bill became law, public universities would challenge it in court, most likely arguing that Maryland law should not recognize students as employees.
Lastly, Congress could contemplate legislation that impacts the rights of college athletes. Congressman Walker could be the first of several members of Congress to propose college sports legislation. Perhaps another member of Congress could propose a bill to amend the National Labor Relations Act so that college athletes would be defined as employees. A federal agency could also play a role. The U.S. Department of Education could revise financial aid regulations related to college athletes.
There are myriad possibilities of state and federal legal changes that would connect to Judge Wilken’s decision in the grant-in-aid litigation.
Michael McCann is SI’s legal analyst. He is also Associate Dean of the University of New Hampshire School of Law and editor and co-author of The Oxford Handbook of American Sports Law and Court Justice: The Inside Story of My Battle Against the NCAA.
