The Catastrophic Fallout of the Ed O'Bannon vs. NCAA Lawsuit is Already Beginning

Joe Goldman |

The NCAA is apparently preparing for the worst possible outcome when it comes to the Ed O’Bannon-led class action lawsuit, announcing that it will not renew its contract with Electronic Arts (EA) to license its name and logo in sports video games.

You heard right, sports fans. The age of the hugely popular NCAA Football videogame series is over. NCAA Football 2014, which was released on July 9, will be the final edition, although the game could be published under a different format in the near future.

What prompted the NCAA to take such drastic and disappointing action? The decision is probably linked to the Ed O’Bannon lawsuit, a widely publicized and tremendously important legal battle between the NCAA and student-athletes. The suit is putting the entire business model of college athletics under a microscope, questioning whether student-athletes should be compensated for their commercialization.

Moreover, the NCAA’s contract decision with Electronic Arts indicates that the NCAA may now expect an unfavorable ruling in court. Here is a brief breakdown of the trial, the expected outcome, and a list of other companies that could be affected.

The Plaintiffs

Former UCLA basketball star Ed O’Bannon and other former greats like Bill Russell and Oscar Robertson are leading the charge against the NCAA. The plaintiffs equate the NCAA to an illegal monopoly over its workforce: the student athletes. They believe that the NCAA unlawfully profits through the commercialization of athletes, who deserve a slice of the NCAA’s multi-billion dollar revenue pie. After all, the athletes are the ones who put on the show and fill the stadiums.                                                                                                

The plaintiffs also seek to do away with a concept called “likeness,” which allows the NCAA to market student-athletes as long as the athletes’ names aren’t specifically revealed. In NCAA video games, for example, Electronic Arts is allowed to publish an accurate resemblance of Texas A&M quarterback Johnny Manziel. His athletic abilities, physical characteristics, and jersey number can be portrayed without Manziel’s consent, so long as they don’t refer to him as “Johnny Manziel,” but rather as Texas A&M #2. Because “#2” technically isn’t the same person as Johnny Manziel, Electronic Arts and the NCAA are not legally obligated to compensate him.

O’Bannon and company believe these practices are unjust, unlawful, and unethical, especially because student-athletes don’t even have the resources to pay their own bills money or fill their stomachs with an adequate meal. With so much money circulating in college athletics, O’Bannon wants the student-athletes to earn proper compensation for their work.

The Defendants

The NCAA believes that college athletes are amateurs and do not need to be compensated for their athletic accomplishments. The defendants, which include Electronic Arts and some others, argue student athletes are lucky to receive a free education, as the value of the scholarship can sometimes exceed $50,000. Thus, they are already paid for their work, and excess profits should be used to fund other university operations.

The defendants also claim that “likeness” is in full compliance with the law. Meanwhile, the universities argue that they can’t afford to pay the players and continue to fund smaller, non-revenue generating sports. Thus, an unfavorable ruling from court could effectively kill the age of scholarships for athletes of less media-driven sports like, lacrosse, soccer, tennis, and water polo.

Who’s In the Lead?

USC Athletic Director Pat Haden is not encouraged about the NCAA’s chances. “All of a sudden your television revenue – let’s say it’s $20 million a year [for a school]. Now, if they win, it’s $10 million a year. How do you make sports work on half the revenue?” he told sports illustrated. “What I’m reading is that we have a real chance of losing.”

Warren Zola, who teaches sports law at Boston College, agrees with Haden, telling USA Today that the NCAA’s cancelled contract with Electronic Arts is a foreboding sign. “They are no longer able to handle a jury decision against them. They are taking precautions against a judgment causing them significant financial hardship.” Zola believes that a new contract “would allow more members into the [prospective class of plaintiffs] able to claim damages,” which is why the NCAA cut ties with EA.

Legally, O’Bannon and company has a strong case against the NCAA. However, the most likely outcome between the two sides is a settlement, although it remains to be seen what will happen to “likeness” and the future of student-athlete compensation.

Potential Companies Affected

Disney (DIS) , Twenty-First Century Fox (FOX) , and CBS (CBS)

As mentioned, the NCAA would face significantly higher expenses if the court rules in favor of O’Bannon. Allowing players to market themselves would also create a flashier, more entertaining final product, hence driving up the value of media rights. Therefore, college football content providers like ESPN (a subsidiary of Disney), Twenty-First Century Fox, and CBS would likely have to pay more to purchase media rights, pending a ruling in favor of O’Bannon.

However, Fox and ESPN already have deals locked up with a number of athletic conferences. Meanwhile, CBS and Turner reached a 14-year deal worth $11 billion in 2010 to broadcast the NCAA tournament. Thus, for the most part, content providers won’t have to pay up again for at least another decade.

Nike (NKE) , Under Armor (UA) and Adidas

If the court rules that players are not being fairly compensated and deserve a portion of their own jersey sales, major apparel makers may need to pay higher royalties to universities and student-athletes. Down the road, the court could also enable student-athletes to sign sponsorship deals on behalf of themselves, which could generate bidding wars to win the rights to sponsor star college athletes.

Nike, Under Armor, and Adidas, however, are all multi-billion dollar companies. These higher expenses and potential effect on profits, therefore, would be negligible.

Dicks Sporting Goods (DKS) , Big 5 Sporting Goods (BGFV) , and other retailers

If Nike and other apparel manufactures are forced to raise prices, apparel retailers will need to follow suit. It remains unknown exactly how a price hike would affect these retailers, although the expense will likely be distributed between all parties involved.

[Cover image via EASports, Image via Wikipedia Commons]

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Companies

Symbol Name Price Change % Volume
BGFV Big 5 Sporting Goods Corporation 13.62 0.09 0.67 317,072
CBS CBS Corporation Class B 54.69 0.12 0.22 6,477,992
DIS Walt Disney Company (The) 92.87 1.07 1.16 6,606,362
DKS Dick\'s Sporting Goods Inc 56.75 0.18 0.32 2,845,413
FOX Twenty-First Century Fox Inc. 24.74 0.12 0.49 3,091,647
NKE Nike Inc. 52.68 0.52 1.00 11,034,985
PTPIF PT Chandra Asri Petrochemical 0.77 0.00 0.00 0

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