Lawsuit threatens NCAA’s amateur business model

The NCAA is facing a potential game-changing legal battle that has some colleges worrying their athletic budgets could be halved.

On June 20, a U.S. District Court in Oakland, Calif., will determine if an antitrust lawsuit brought by former UCLA basketball player Ed O’Bannon—who argues he should’ve been paid for the use of his likeness on game broadcasts and in EA Sports video games—can become a class action. The plaintiffs say players should get 50 percent of revenue tied to player images.

O'Bannon

If the NCAA loses the case, sports business experts say, college athletics would change forever. Many are calling the case the biggest threat to college sports’ amateurism model the Indianapolis-based organization has ever faced.

Big Ten Commissioner Jim Delany even suggested to Sports Illustrated last month that schools in his conference could move to a model without athletic scholarships.

While that might seem far-fetched and, in fact, Delany later backed off the comment, the case is serious enough that athletic directors nationwide are considering contingency plans for the worst-case scenario.

“I think Ed O’Bannon has a solid case,” said local attorney Milt Thompson, who operates the sports marketing firm Grand Slam Cos. “There’s merit that these players have the right to their own likeness and that shouldn’t be exploited without their permission.”

The case itself, which was filed in 2009, isn’t due to come to trial until July 2014. But that hasn’t kept athletic directors like the University of Notre Dame’s Jack Swarbrick from thinking ahead.

“We’ve certainly discussed the O’Bannon case internally and we’ve talked about the consideration of what might come,” said Swarbrick, an attorney who formerly practiced law in Indianapolis. “I wouldn’t feel comfortable calling it a contingency plan. It’s a matter of monitoring [this case] and thinking about the consequences.”

Swarbrick said Notre Dame is not alone.

“Most institutions are engaging in internal discussions about this,” he said. “Clearly, we have to at least consider the possibility of any ruling which would impact the basic business model [of college athletics], which this case certainly has the potential to do.”

Purdue Athletic Director Morgan Burke and Indiana Athletic Director Fred Glass declined to comment on the pending suit or its ramifications. Swarbrick wouldn’t divulge specifics of internal discussions at Notre Dame.

Pat Haden, an attorney and University of Southern California athletics director since 2010, hasn’t been shy about voicing concern. He said the case is “no slam dunk” for the NCAA.

“What do we do if we lost? All of a sudden, your television revenue—let’s say it’s $20 million a year [for a school], now if [the plaintiffs] win, it’s $10 million a year,” Haden recently told Sports Illustrated. “How do you make 21 sports work on half the revenue?”

This much is clear: With the NCAA’s enormous TV contracts and burgeoning licensing business, a lot of cash is at stake. The TV and multimedia contract for the men’s basketball tournament alone is a 14-year, $10.8 billion arrangement.

Money generated by such entities as the Big Ten Network also could become a target. Each Big Ten school—including IU and Purdue—reaped $8.1 million in 2012 and will receive $7.6 million this year from the Big Ten Network. The schools each received another $10.9 million this year from the conference’s contracts with ABC and ESPN.

Also at stake is a share of the estimated annual $4 billion in collegiate licensed merchandise, a business that has exploded over the last 15 years.

All that cash could be targeted by the expanding O’Bannon lawsuit, which now wants to include current players.

Trench warfare

As the stakes rise, the NCAA and its allies are digging in.

“This case has always been wrong—wrong on the facts and wrong on the law,” NCAA Executive Vice President and Chief Legal Counsel Donald Remy said in a statement released earlier this spring.

NCAA officials maintain the association has the right to control a player’s likeness in perpetuity. That right, say officials for the NCAA and its member institution, comes from waivers signed by college athletes.

Big Ten’s Delany told reporters in Chicago in late April that the NCAA won’t settle and that he expects a long, hard legal fight.

“There should be no compromise on this,” he said.

That all-or-nothing strategy could be a mistake—especially if things don’t go the NCAA’s way on June 20.

“If the class gets certified, the NCAA will be backed into a corner,” said Andy Staples, who has covered the case for Sports Illustrated. “It could either fight and risk a judgment that could run into the billions, or it could settle and force schools into a new economic model.”

The plaintiffs’ case is being argued by a bevy of law firms, including the renowned Washington, D.C.-based Hausfeld LLP, which specializes in difficult class action suits, having previously secured damages for Holocaust survivors from Swiss banks who kept their assets after World War II, Alaska Native Americans in their fight with Exxon after the Valdez oil spill, and plaintiffs in the European Union’s antitrust case against Microsoft.

The plaintiffs also are working with Ken Feinberg, who organized distribution plans for settlements for 9/11 victims; those affected by the BP oil spill in the Gulf of Mexico; victims of the Aurora, Colo., theater shootings; and sexual abuse victims of former Pennsylvania State University defensive coordinator Jerry Sandusky.

Big O, Russell join case

The case has morphed dramatically since O’Bannon sat in his house in 2009 watching a video game featuring a UCLA player bearing his likeness.

In 2011, high-profile co-plaintiffs such as Indianapolis native Oscar Robertson and Bill Russell joined the lawsuit, in which video-game maker EA Sports is a co-defendant.

The case took a major turn in August 2012, when plaintiffs began arguing that current and former athletes should be included in the case and the plaintiffs’ lawyers argued that players are entitled to 50 percent of revenue generated by not just video games but also NCAA and conference TV contracts.

Any judgment along those lines would be a massive blow to the NCAA, which is represented primarily by Ann Arbor, Mich., firm Schiff Hardin LLP, since TV revenue is by far its biggest revenue generator. It would also be a huge hit to Big Ten schools such as IU and Purdue, which have quickly become dependent on revenue generated by the Big Ten Network.

Whopper settlement?

The NCAA sought to halt the plaintiffs from pursuing class-action status, saying the O’Bannon group had dramatically changed its claim.

But in January, the NCAA suffered a big hit when Judge Claudia Wilken of the U.S. District Court of Northern California denied the NCAA’s motion and agreed to hear the class-action certification request. Wilken also ruled in January that plaintiffs could add current players to the case and go after everyone profiting from the likeness of college athletes, including college conferences.

Swarbrick

The June 20 court date “represents a tremendously important showdown in this case,” Thompson said. If the plaintiffs’ attorneys are granted class-action status, Thompson thinks the NCAA should be eager to settle. But that might not be easy.

“How do you calculate back damages?” Thompson said. “Those images allow the NCAA to generate a lot of money. The settlement could be a whopper.”

Even if damages escalate into the billions, they may not be the NCAA’s biggest concern.

In addition to demanding that all players get paid for every video game, highlight reel and game rebroadcast, O’Bannon’s lawyers are asking for something else—something that could position colleges one dangerous step from bidding for the services of student-athletes.

Plaintiffs are demanding that all current and future college athletes be able to forge their own licensing deals.

“Now you’re talking about a whole new game,” Thompson said. “It’s a game the NCAA doesn’t want any part of.”•