Deppe v. Nat'l Collegiate Athletic Ass'n

                                    In the

        United States Court of Appeals
                     For the Seventh Circuit
                         ____________________
No. 17-1711
PETER DEPPE, on behalf of himself
and all others similarly situated,
                                                    Plaintiff-Appellant,

                                      v.

NATIONAL COLLEGIATE
ATHLETIC ASSOCIATION,
                                                   Defendant-Appellee.
                         ____________________

              Appeal from the United States District Court for
          the Southern District of Indiana, Indianapolis Division.
         No. 1:16-cv-00528-TWP-DKL — Tanya Walton Pratt, Judge.
                         ____________________

       ARGUED SEPTEMBER 13, 2017 — DECIDED JUNE 25, 2018
                    ____________________

      Before BAUER, ROVNER, and SYKES, Circuit Judges.
   SYKES, Circuit Judge. This case raises an antitrust chal-
lenge to the NCAA’s 1 “year in residence” rule, which re-
quires student-athletes who transfer to a Division I college to


1   National Collegiate Athletic Association.
2                                                  No. 17-1711

wait one full academic year before they can play for their
new school. A Division I football player filed a class-action
lawsuit alleging that the rule is an unlawful restraint of trade
in violation of § 1 of the Sherman Act. The district court
dismissed the suit on the pleadings.
    We affirm. The year-in-residence requirement is an eligi-
bility rule clearly meant to preserve the amateur character of
college athletics and is therefore presumptively procompeti-
tive under NCAA v. Board of Regents of University of Oklahoma,
468 U.S. 85 (1984), and Agnew v. NCAA, 683 F.3d 328 (7th Cir.
2012).
                        I. Background
    The case comes to us from a dismissal on the pleadings,
see FED. R. CIV. P. 12(b)(6), so we take the following factual
account from the complaint, accepting the allegations as
true. Peter Deppe was a star punter in high school, and
several schools recruited him to play college football. He
chose Northern Illinois University (“NIU”), a Division I
school, and enrolled in June 2014 as a preferred walk-on. In
other words, NIU invited him to join the football team but
did not offer him an athletic scholarship. Deppe decided to
“red shirt” his first year; this meant that he practiced with
the team during the 2014 season but did not compete, and
the clock did not run on his four years of NCAA athletic
eligibility.
   Shortly after Deppe enrolled, an NIU football coach told
him that he would start receiving an athletic scholarship in
January 2015. That coach soon left NIU, however, and the
head football coach later informed Deppe that he would not
receive the scholarship after all. Sometime in 2015 NIU
No. 17-1711                                                  3

signed another punter, reducing Deppe’s chances of getting
playing time or receiving an athletic scholarship, so in the
fall of 2015 he started shopping around for a new football
program.
    The University of Iowa, another Division I school, was
interested. Coaches at Iowa told Deppe they wanted him to
join the team if he would be eligible to compete during the
2016–2017 season. Deppe’s parents asked the NCAA about
their son’s eligibility to play. The NCAA responded that
under its year-in-residence rule, Deppe would be ineligible
to compete for one year following his transfer.
    The year-in-residence bylaw appears in the eligibility sec-
tion of the NCAA Division I Manual. It provides:
       14.5.5.1 General Rule. A transfer student from
       a four-year institution shall not be eligible for
       intercollegiate competition at a member insti-
       tution until the student has fulfilled a residence
       requirement of one full academic year (two full
       semesters or three full quarters) at the certify-
       ing institution.
NCAA Division I Manual, 183, http://www.ncaapublications.
com/productdownloads/D118.pdf.
    The NCAA permits a one-time transfer with immediate
athletic eligibility in certain limited circumstances. The so-
called one-time transfer exception is available to a Division I
football player only if he transfers from a school in the
Football Bowl Subdivision to a school in the Football Cham-
pionship Subdivision with two or more seasons of athletic
eligibility remaining, or if he transfers from a Football
Championship school that offers athletic scholarships to a
4                                                No. 17-1711

Football Championship school that does not. Id., 184–85,
§ 14.5.5.2.10. The exception was unavailable to Deppe be-
cause he intended to transfer from one Football Bowl school
to another.
    In addition, a player who transfers due to difficult per-
sonal or family circumstances or other extenuating circum-
stances may apply for a waiver of the NCAA’s requirement
that a student-athlete’s four years of playing time be com-
pleted in five calendar years. Id., 79, § 12.8.1; id., 81,
§ 12.8.1.7; id., 88–89, § 12.8.6. The NCAA informed Deppe
that if he wanted to try to obtain a waiver, the school to
which he planned to transfer would have to initiate the
process on his behalf. In November 2015 the University of
Iowa granted Deppe academic admission. But a few days
later, Iowa football staff notified him that the team had
decided to pursue another punter who had immediate
eligibility and the school would not initiate the waiver
process for him.
   Deppe sued the NCAA on behalf of himself and a pro-
posed class alleging that two of the Association’s bylaws
violate § 1 of the Sherman Act: the year-in-residence re-
quirement, and a rule capping the number of athletic schol-
arships a school can grant each year. He dropped his
challenge to the scholarship cap; only the year-in-residence
rule remains at issue. Deppe argued that the bylaw is an
unlawful restraint of trade and that student-athletes would
receive more generous athletic scholarships if they could
transfer more freely.
    The NCAA moved to dismiss the complaint under
Rule 12(b)(6), arguing that the year-in-residence bylaw is an
eligibility rule and thus is presumptively procompetitive
No. 17-1711                                                   5

under Board of Regents and Agnew and need not be tested for
anticompetitive effect under a full rule-of-reason analysis.
The district judge agreed and dismissed the case.
                        II. Discussion
    We review the judge’s dismissal order de novo. Tagami v.
City of Chicago, 875 F.3d 375, 377 (7th Cir. 2017). Section 1 of
the Sherman Act declares illegal “[e]very contract, combina-
tion in the form of trust or otherwise, or conspiracy, in
restraint of trade or commerce.” 15 U.S.C. § 1. To prevail in a
suit alleging a violation of § 1, the plaintiff must prove three
elements: “(1) a contract, combination, or conspiracy; (2) a
resultant unreasonable restraint of trade in [a] relevant
market; and (3) an accompanying injury.” Agnew, 683 F.3d at
335 (quoting Denny’s Marina, Inc. v. Renfro Prods., Inc., 8 F.3d
1217, 1220 (7th Cir. 1993)). This case centers on the second
element—specifically, whether the NCAA’s year-in-residence
bylaw is an unreasonable restraint of trade.
    The Supreme Court considered the antitrust implications
of NCAA regulations in Board of Regents. The case raised a
Sherman Act challenge to the Association’s restrictions on
televising college football games. 468 U.S. at 91–92. The
details are not important here; for our purposes, it’s enough
to note that the Court found the restrictions unlawful under
§ 1 of the Act. Id. at 120. Along the way to that holding, the
Court had this to say about antitrust challenges to the
NCAA’s bylaws more generally:
       It is reasonable to assume that most of the reg-
       ulatory controls of the NCAA are justifiable
       means of fostering competition among amateur
       athletic teams and therefore procompetitive
6                                                 No. 17-1711

      because they enhance public interest in inter-
      collegiate athletics. The specific restraints on
      football telecasts that are challenged in this
      case do not, however, fit into the same mold as
      do rules defining the conditions of the contest,
      the eligibility of participants, or the manner in
      which members of a joint enterprise shall share
      the responsibilities and the benefits of the total
      venture.
Id. at 117. The Court closed its decision by observing that
“[t]he NCAA plays a crucial role in the maintenance of a
revered tradition of amateurism in college sports” and
“needs ample latitude” to play that role, and that “the
preservation of the student-athlete in higher education adds
richness and diversity to intercollegiate athletics and is
entirely consistent with the goals of the Sherman Act.” Id. at
120.
   In Agnew we read this language from Board of Regents to
mean that although the Sherman Act applies to the NCAA,
“most [of the Association’s] regulations will be a ‘justifiable
means of fostering competition among amateur athletic
teams[]’ and are therefore procompetitive.” 683 F.3d at 341
(quoting Bd. of Regents, 468 U.S. at 117). We also understood
these passages as “a license to find certain NCAA bylaws
that ‘fit into the same mold’ as those discussed in Board of
Regents to be procompetitive … at the motion-to-dismiss
stage” without the need for analysis under the rule-of-reason
framework. Id. (internal citation omitted) (quoting Bd. of
Regents, 468 U.S. at 117, 110 n.39). Accordingly, we held that
“the first—and possibly only—question to be answered
when NCAA bylaws are challenged is whether the NCAA
No. 17-1711                                                   7

regulations at issue are of the type that have been blessed by
the Supreme Court, making them presumptively procompet-
itive.” Id.
    Agnew involved a challenge to the NCAA’s scholarship
cap and its prohibition of multiyear scholarships. Id. at 332.
Extrapolating from Board of Regents, we distilled the follow-
ing legal standard for determining whether a § 1 challenge in
this context may go forward or should be dismissed on the
pleadings: an NCAA bylaw is presumptively procompetitive
when it is “clearly meant to help maintain the ‘revered
tradition of amateurism in college sports’ or the ‘preserva-
tion of the student-athlete in higher education.’” Id. at 342–
43 (quoting Bd. of Regents, 468 U.S. at 120). On the other
hand, “if a regulation is not, on its face, helping to ‘preserve
a tradition that might otherwise die,’” no such presumption
is warranted. Id. at 343 (quoting Bd. of Regents, 468 U.S. at
120).
    Importantly here, we also explained that “[m]ost—if not
all—eligibility rules … fall within the presumption of pro-
competitiveness” established in Board of Regents. Id. After all,
“the Supreme Court explicitly mentioned eligibility rules as
a type that ‘fit[s] into the same mold’ as other procompetitive
rules.” Id. (alteration in original). And because eligibility
rules “define what it means to be an amateur or a student-
athlete,” they are “essential to the very existence of the
product of college football.” Id.
    The rules challenged in Agnew did not govern athletic
eligibility or otherwise “fit into the same mold” of the pre-
sumptively procompetitive regulations mentioned in Board
of Regents. Id. at 344–45. But the absence of a procompetitive
presumption did “not equal a finding that [the rules] are
8                                                     No. 17-1711

anticompetitive;” rather, it simply meant that they could not
be presumed procompetitive at the pleadings stage. Id. at
345. So we moved to the next step in the § 1 analysis and
determined that the complaint failed to identify a relevant
cognizable market and affirmed the dismissal of the suit on
that basis. Id. at 345–47.
    Unlike the bylaws at issue in Agnew, the year-in-
residence requirement is plainly an eligibility rule. It appears
in the eligibility section of the NCAA Division I Manual. On
its face, it governs a transfer student’s eligibility for intercol-
legiate athletic competition. In particular, the bylaw sus-
pends a transfer student’s athletic eligibility until the student
has spent one full academic year at his new college.
    Deppe insists that the year-in-residence rule does not “fit
within the contours of a traditional eligibility bylaw.” On the
contrary, the rule falls neatly in line with other rules courts
have characterized as eligibility rules. In Agnew we gave the
example of a class-attendance requirement to explain why
eligibility rules are entitled to a procompetitive presump-
tion. We said: “There may not be such a thing as a student-
athlete, for instance, if it was not for the NCAA rules requir-
ing class attendance, and thus no detailed analysis would be
necessary to deem such rules procompetitive.” Id. at 343
(internal quotation marks and citation omitted). Bylaws that
have been classified as eligibility rules include: a bylaw
revoking a student-athlete’s eligibility to compete if he enters
the professional draft or hires a professional agent, Banks v.
NCAA, 977 F.2d 1081, 1082–83 (7th Cir. 1992); a rule allowing
the suspension of a college football program for illicitly
compensating players beyond scholarships, McCormack v.
NCAA 845 F.2d 1338, 1343 (5th Cir. 1988); and a bylaw
No. 17-1711                                                   9

making student-athletes ineligible to compete at a graduate
school different from their undergraduate institution, Smith
v. NCAA, 139 F.3d 180, 186 (3d Cir. 1998), vacated on other
grounds by NCAA v. Smith, 525 U.S. 459 (1999). We have no
difficulty concluding that the year-in-residence bylaw is an
eligibility rule.
    As we’ve noted, most NCAA eligibility rules are entitled
to the procompetitive presumption announced in Board of
Regents because they define what it means to be a student-
athlete and thus preserve the tradition and amateur charac-
ter of college athletics. Agnew, 683 F.3d at 343. Deppe has not
persuaded us that the year-in-residence requirement is the
rare exception to this general principle. Indeed, the com-
plaint alleges that Division I football student-athletes would
transfer more often if not for the year-in-residence rule.
Without it student-athletes could be “traded” from year to
year like professional athletes. A college player could begin
the season playing for one school and end the season play-
ing for its rival. Uninhibited transfers with immediate
eligibility to play would risk severing the athletic and aca-
demic aspects of college sports, threatening the character of
intercollegiate athletics. The year-in-residence rule guards
against that risk and thus is “clearly meant to help maintain
the ‘revered tradition of amateurism in college sports.’” Id. at
342 (quoting Bd. of Regents, 468 U.S. at 120).
   Deppe points to the exceptions and the possibility of a
waiver of the Association’s five-year rule, arguing that if
these forms of relief are available, then the year-in-residence
requirement is actually unnecessary to the survival of college
football. This argument is a nonstarter. To begin, the test
under Agnew is not whether college athletics could survive
10                                               No. 17-1711

without this bylaw, but rather whether the rule is clearly
meant to help preserve the amateurism of college sports.
And scrutinizing the NCAA’s bylaws as Deppe suggests
conflicts with the Supreme Court’s admonition in Board of
Regents that the NCAA needs “ample latitude” to preserve
the product of college sports. 468 U.S. at 120. That the NCAA
allows some avenues for relief does not suggest that the year-
in-residence requirement is aimed at an objective other than
the maintenance of the amateur character of the college
game. Instead it suggests that the NCAA is willing to allow
players certain flexibility where doing so will not damage
the product of college football.
    Next, Deppe argues that the NCAA enforces the year-in-
residence requirement for economic reasons and not to
preserve the product of college football. He asks us to infer
an economic motive from the fact that the one-time transfer
exception is unavailable to most Division I football, basket-
ball, and ice-hockey players—the highest-revenue sports
programs in the NCAA. This argument ignores the innocent
explanation that these are precisely the athletes who are
most vulnerable to poaching. Without transfer restrictions,
the players in these high-revenue sports could be traded like
professional athletes.
   Deppe also argues that because the year-in-residence re-
quirement impedes transfers, it lowers the administrative
costs associated with player movement, including recruiting
and retention expenditures. That is, schools are saving
money they would otherwise need to spend on more gener-
ous scholarships to tempt their student-athletes to stay, as
well as money necessary to recruit and train new players to
replace those who leave. But the fact that colleges may save
No. 17-1711                                                  11

money as a consequence of the year-in-residence require-
ment does not mean that the bylaw is fundamentally aimed
at containing costs rather than preserving the amateur
character of college football.
   Last, Deppe argues that at bottom, the year-in-residence
rule serves economic interests because it “preserves the
hegemony of the top ‘Power 5’ conferences”—the most
powerful group of schools in the NCAA. He asserts that
these schools recruit the most talented high-school athletes
and that the year-in-residence rule prevents those student-
athletes from transferring to less powerful schools. But the
rule impedes transfers in both directions. Without it, the
“Power 5” schools could poach rising stars from smaller
schools, which would risk eroding the amateur character of
the college game.
   In sum, the year-in-residence rule is, on its face, a pre-
sumptively procompetitive eligibility rule under Agnew and
Board of Regents. Accordingly, a full rule-of-reason analysis is
unnecessary. Deppe’s Sherman Act challenge to the NCAA’s
year-in-residence bylaw fails on the pleadings.
                                                     AFFIRMED.