R&G Dugout: Navigating NIL—The Future of College Athletics and Investments

On this episode of the R&G Dugout podcast, Ropes & Gray litigation & enforcement partner and lead of the firm’s sports industry initiative, Chris Conniff, is joined by intellectual property transactions partner Erica Han. Together, they explore the evolving landscape of name, image, and likeness (NIL) in college athletics, discussing the influx of investments, recent legal developments, and the implications of the House v. NCAA settlement. Tune in to understand the complexities and opportunities arising from NIL deals, compliance challenges for universities, and the future of college sports.

Transcript:

Christopher Conniff: Welcome back to the R&G Dugout, a podcast series brought to you by Ropes & Gray focused on analyzing the landscape of sports, entertainment, and media investments. My name is Chris Conniff—I’m a partner in the New York office of Ropes & Gray, and I lead our sports industry initiative. Today, I’m joined by Erica Han, who’s a partner in the intellectual property transactions group at Ropes & Gray, and we’re going to talk about the influx of investments and NIL-related issues in college athletics. We’ll start today with some basics. Erica, maybe you can tell us, what is NIL?

Erica Han: Sure—thanks, Chris. NIL is an acronym that has been used in more recent years to describe something that is actually a very old property right, which is referred to as the right of publicity, and really what that means is the right of an individual to commercialize aspects of their name, image, likeness, signature, voice, biographical history—anything that’s tied to an individual’s identity. NIL—which stands for “name, image, and likeness”—is the term that has been used, in particular, in connection with litigation and rules around NCAA Division I athletes and their ability or inability in the past to commercialize those aspects of their identity.

Christopher Conniff: Yes, it’s really incredible. I have been working in the sports industry and particularly around college sports and the enforcement of NCAA rules for the better part of 20 years. For most of that time, the rules were quite simple—you could not pay a student athlete in any way, cash or in kind, to participate in student athlete activities at a university. In 2021, that started to change. Lawsuits started to be filed, including Alston v. the NCAA, where student athletes started to challenge their ability to get paid in connection with their name, image, and likeness. I think seeing where the trend was heading, the NCAA began to recognize that payment to student athletes was inevitable. Beginning in July 2021, I think the NCAA, seeing the writing on the wall, began to allow student athletes to receive payments for their name, image, and likeness. The issue at that point was that there was really no set of rules that allowed uniformity across schools in terms of how individual student athletes were going to get paid, and this led to a Wild West setup where different states were enacting different types of legislation—some more generous than others—in terms of how payments can be made. Lawsuits continue to get filed challenging everything from the amount of money that could be paid to the number of restrictions that somebody could impose on a student athlete who was looking to transfer from one school to the other. Ultimately, I think, Erica, it led to what is typically described as the “House settlement,” but it originated as a lawsuit, House v. NCAA. Maybe you can talk to us about the origins of that case, what the settlement says, and what it probably means?

Erica Han: When the NCAA came out with its interim policy in July 2021 that said, unlike the past, going forward until further legislation happened or further rules were enacted, there would be no enforcement against college athletes receiving compensation for their NIL—that rule still did not allow schools directly to pay athletes, and so, that was a continued issue. There was this House v. NCAA lawsuit, as you mentioned, as well as a number of other lawsuits. The NCAA, the Power Five conferences, and the class action plaintiffs have come to a settlement that is expected to be approved—or at least there is a hearing to determine whether the settlement will be approved—on April 7. So, very soon we’ll know if the settlement is approved, and the confines of that settlement will start to apply. If it is approved, this will radically change the economics of college sports.

There are a number of different pieces of that settlement: first, it provides for damages for student athletes who competed as far back as 2016. There’s over $2.5 billion to be paid out to former student athletes who claim that they did not have the ability to benefit from their NIL and that commercial value. So, student athletes will be able to opt into the settlement and receive payments related to their past competition and the value of their NIL. On a going-forward basis, Division I schools will have the opportunity to opt in to a revenue sharing model, and this is the part that is truly revolutionary because schools have never in the past been permitted to directly pay their student athletes other than obviously scholarships and educational benefits, but this is something different—this is a commercial type of payment.

The way this will work—it’s pretty complicated, but just to simplify things a bit—there will be a pool of money. It’s called a pool, but really what that means is it’s a cap on each school. Once that cap is determined, which in the first year is expected to be around $20-$22 million per school, schools then have the discretion to provide additional payments to student athletes up to that cap. For example, the schools could enter into NIL deals directly with student athletes or they could provide additional benefits. There is not a lot of restriction on how the schools can pay their student athletes, and it’s really up to the school’s discretion, subject to other types of laws, including Title IX, that may be implicated—which we can talk about as we come along in this conversation. But that is the big change in this settlement.

Christopher Conniff: Most people would ask, Erica, “Does this mean that colleges and universities can start paying the student athletes to participate in sports for them?”

Erica Han: Effectively yes, but it’s a little more complicated than that. Within the pool or the cap, there is true discretion in terms of how you characterize payments to student athletes. There’s not a requirement, for example, that it has to be specifically related to NIL or fair market value or anything like that. Now, the piece of this that gets a little more complicated is—you may have heard the term “booster collectives”—these are organizations that are not technically affiliated with the schools but are created for the purpose of providing benefits or support to schools’ athletic programs. These booster collectives popped up in extremely large numbers after the NCAA’s interim policy allowing NIL deals for student athletes. At that time, schools couldn’t directly enter into NIL deals with their athletes, and so, these booster collectives popped up as outside organizations—at least in name or technically speaking—who would be paying these student athletes NIL deals. So, the settlement understands that this is a potential end-run around that cap for schools.

If you have a booster organization whose sole purpose is to support an athletic program for a Division I school, arguably, that booster collective could then pay athletes well over the cap and defeat the purpose of the cap. And so, there are specific rules around what are called “associated entities.” The definition is pretty broad, but it would include those booster collectives that are created to support one specific school and its athletic program. There are very specific rules about the NIL payments that booster collectives can make to student athletes, and in that case, it has to be for a valid business purpose and fair market value. The goal is that those are real commercial deals related to NIL and not an additional way to just give more revenue share or pay for play, for example.

Christopher Conniff: Thanks for that great summary, Erica. One thing seems clear to me, and that is that there’s a lot still to be written on where this is heading and how it all shakes out once the settlement is finalized, and universities opt in or out of that settlement structure. Switching to the realities of what this means, what are the considerations you think for brands and for student athletes to keep in mind when they enter into these NIL deals?

Erica Han: I think one of the big things that is going to be important for student athletes who are entering into NIL deals with these types of associative entities and these collectives is to really keep in mind those requirements around the valid business purpose and fair market value. I think what we will expect to see is a lot of IP valuation firms who traditionally, in the past, would value things like trademark rights or patent rights and technologies will now be focusing on how to value NIL, which you can imagine is a little bit complicated and involves things like how many followers does the athlete have on social media, or does the athlete have a big personality. It’s not something I would ever want someone to evaluate for me personally—it seems quite personal. But that’s the point—it’s a very personal right. I think there will be a lot of attention on ensuring that those rules are followed so that you don’t risk eligibility or having to potentially pay back payments that were deemed to be not proper under those rules.

Even if athletes enter into NIL deals with completely unaffiliated entities—let’s say it’s a sports drink or an athletic apparel brand or a sneaker company—there are still some rules that the athletes need to follow that are the same for any influencer or celebrity endorser of any kind. The big thing is that under FTC guidelines for influencers and endorsers, if there is a celebrity—in this case, it would be the athlete—endorsing a third-party product, they have to disclose that there was compensation for that. Compensation doesn’t necessarily need to be monetary payment—it could be that they received the product for free and were asked to post about it. Those things have to be followed in order to avoid false advertising claims, which could actually make the influencer—in this case, the student athlete—themselves liable, in addition to the brand. This is a testimonial rule that has been true for years but will apply to the student athletes doing these deals. If they’re talking about a product and they’re talking about their personal experience with that product, that has to actually be true. They have to have actually used the product. They have to be expressing their true opinions about that product and disclosing the relationship. So, that’s something that the athletes and the brands will need to make sure there’s good compliance and training so that these athletes who now have opportunities that they never had before to do a number of endorsement-type activities are doing it within the bounds of all applicable laws.

Christopher Conniff: I know you’ve been doing this for years, Erica, and it sounds like a lot of the rules of the road that you just went through have been in place for a long time regarding rights of publicity in general. It’s an important reminder to athletes who are now selling their rights of publicity that they follow the same rules and have good counsel on what those rules look like.

Another question I had around the rules of the road is the longevity of these contracts. I’ve heard in a number of situations that athletes, in particular, have to be careful about signing away their rights of publicity, their NIL, over an extended period of time because these contracts may come to them at the very start of their college career, and they may have a long professional career after that. Any thoughts about that, or any guidance you can provide in that area?

Erica Han: I think that’s right, Chris. I think that’s one of the big concerns that has been raised all along with the change in this rule, is that these college athletes, in many cases, are very young, don’t have sophisticated counsel or agents, and are potentially going to be taken advantage of by enterprising third parties who see an opportunity. I think it’s really important to have proper advice and counsel to make sure that the rights that are being granted under those NIL deals are appropriate in connection with their compensation. Some things to think about, as you mentioned, are the length of the contracts, but also exclusivity. If an athlete is giving away their publicity rights in connection with a product category, that can get complicated, depending on how that exclusivity is explained or drafted in the agreement. They may give a sneaker brand exclusive rights with respect to all apparel and then may hear from a raincoat company that wants to do a deal and will be excluded from doing that. And so, they’re going to have to be able to comply with any exclusive obligations that they give and also think about the value of their NIL as it might evolve over time and whether they’re giving away too much too quickly.

Chris, now turning to some questions I have for you. I know you have been working with colleges and others on compliance and compliance issues for a long time. How do you see the House settlement impacting what universities are going to have to do to make sure that they are following NCAA rules and guidelines as well as state rules? What do you see that compliance and enforcement landscape looking like now?

Christopher Conniff: It’s a great question, Erica, and I think the short answer is TBD. There are some provisions in the House settlement that speak to the areas of enforcement, but they speak to it in general brush strokes at this point and I think there is work to be done around how some of these provisions are going to be enforced. First and foremost, as you mentioned, I’ve done this type of enforcement work for a long, long time, represented both student athletes and coaches and institutions on NCAA enforcement provisions. The world has obviously changed dramatically, so it’s going to be interesting to see how things pan out over the next couple of years.

I think there are two observations I would make at this point. The first is that the NCAA remains alive and an institution that has oversight over college athletics. There was no guarantee that that would be the case as things started to unfold in the summer of 2021 and NIL first burst on the scene. There were folks who, I believe, thought that the NCAA enforcement mechanisms—their enforcement teams—would be on the shelf, essentially, because of the ability to start paying student athletes. That’s not the case. A lot of the rules that existed—including rules around recruiting and unfair benefits—still exist, and they have not been done away with as a result of the settlement. There is still a concept that inducing a student athlete to come to a school by a coach in return for payment could violate the recruiting rules that are in place right now. I think that is subject to further review based on all that’s happening in the world right now. But the NCAA will continue to exist. My personal view is that the conferences will likely have a larger and larger role, particularly the Power Five/Power Four conferences, because they have such an outsized role in determining some of these policies and procedures at this point.

The second thing I would take away from it is that an enforcement paradox will continue—everybody wants that. What I hear and I’m sure what you hear from coaches all the time when we speak to them is they want an even playing field. They want to make sure that what they’re doing is consistent with what other coaches are doing around recruitment and that nobody’s getting an unfair advantage. That’s the spirit behind the continued NCAA enforcement system. How it actually is put into place, again is yet to be determined. In the agreement, the House settlement, there is specific mention of discipline and how it will be imposed. The agreement contemplates that either the NCAA or a new enforcement entity will have the power to enforce NCAA rules. Interestingly, I believe it will all be subject to arbitration—it takes the role of final decision-maker out of the hands of the NCAA and puts it in the hands of arbitrators, which I’m sure college athletes and coaches will be very happy with because I think they felt for a long time that the NCAA enforcement mechanism was very much one-sided. So, that could be a step in the right direction in terms of how enforcement actually occurs, but there is definitely work to be done to finalize how those mechanisms are put in place.

I think from a compliance standpoint, if I were at a Power Four conference school right now, I would be focused most heavily on the issues of what the payments are being made for and that there is backup, as you mentioned earlier on, to support the fair market value of the payments that are being made either through a collective or otherwise to ensure that it doesn’t look like someone is getting money just to come to the school. That’s probably going to be a concept that continues into the future.

Erica Han: Yes. To clarify that, Chris, if a school opts in to the pool where they have the ability to make these direct additional payments to their athletes, it does seem like there is a bit of pressure off. They won’t have to show an NIL deal’s fair market value if it’s under the pool, or the cap, in that case, but it sounds like they will still need to carefully track the money that they are giving to their student athletes to confirm all of it is complying with that pool or that cap because there are really specific rules about what is in and what is out. Then, to your point, any booster collectives that are associated with that school will have that fair market value test, and so, if there is a recruiting inducement tied to a promise to a booster NIL deal, that seems like it will be heavily scrutinized. Does that sound right?

Christopher Conniff: That sounds exactly right. Under the settlement, the NIL payments to athletes are going to be entered into a system and tracked, and so, there’s probably going to be better recordkeeping around these payments, which historically, people felt were under the table, and therefore, not really identified or properly recorded. That is going to be a helpful tool, I think, in terms of enforcement.

Erica Han: Great—that makes a lot of sense. One other question I have for you, Chris. We know that the NCAA, over the past several years, has been a defendant in a number of lawsuits that just seem to keep coming—not only against the NCAA but against individual schools or conferences—so this settlement certainly sounds like it will provide some resolution, but there are other issues that it doesn’t address. What do you think are the risks that the NCAA might be shy about enforcement because it’s worried about additional lawsuits weighed against all of the schools’ interests in making sure the playing field is fair?

Christopher Conniff: That’s a good question. Hard to answer at this stage, again, because things are still being hashed out, but I would say the student athletes at this point, I think, really are in the driver’s seat. I think if you look at the court decisions across the board over the last five years, they’re favoring the athletes in terms of fairness and opportunity. One of the issues that is still out there, yet to be decided, is: Should these student athletes be treated as employees? My personal view is that the student athletes are going to continue to press to remove almost any limitations in how they’re compensated for what they’re doing at the school. The flood gate is opened at this point, and so, if I were representing a student athlete, I’d keep pushing my rights forward.

Erica Han: Chris, while schools are watching what happens with the House settlement and with additional NCAA, Division I, and conference rules that are to be enacted, are there other laws already out there that schools still need to be concerned about and thinking about in terms of this new economic landscape? One I think of immediately is the nonprofit status of a number of universities and the tax implications for their additional activities—that, I think, could be an entirely different podcast, but are there others that you think schools should keep in mind as they’re looking at how the legal landscape is evolving?

Christopher Conniff: There definitely are, Erica. You put your finger on one of the key ones, and I’m sure we’ll be talking about this in a future podcast, but the interest by investment firms in grabbing a piece of this very profitable type of business in terms of sports investments is clearly on the rise. When you’re talking about a nonprofit institution, like an educational institution, it definitely adds a layer of complexity. Another area, of course, is Title IX. As you probably know, Title IX essentially requires equality across gender in university activities, among other things, and one of the places it’s had a huge impact is trying to level the playing field in college athletics for men and women in the areas of things like scholarships and otherwise. When you are now introducing NIL payments into the mix, it’ll be interesting to see how Title IX is impacted by the distribution of the revenue monies that you talked about earlier, that a school that opts in can now provide to its student athletes and how Title IX will impact that decision-making.

Erica Han: All very good points, Chris. One of the headlines we can take away from where things stand today is that there is a lot of opportunity. There are opportunities for student athletes that they never had before. There’s opportunity for agents, brands, and companies who are interested in doing deals with student athletes. There are opportunities for private equity investors to try to help schools better commercialize the assets that they have in light of potentially being required to use some of their existing revenue to pay their student athletes. There are all these opportunities out there, but also a number of risks, and so, there is an importance of understanding where the laws are going, and keeping up with things as they change, and being able to adapt. Any final observations on your side, Chris? I know we’ll be talking about this, I’m sure, for months and years to come.

Christopher Conniff: I think you just put your finger on it. In terms of the takeaway, it’s really important to understand the House settlement, what the parameters of it are, and how it’s going to impact your university’s athletic program. This is the time to get educated on it. I know, Erica, you’ve been doing a lot of that, as have I. I’d really urge people to continue to get educated on it, so you don’t make a foot fault as the ground shifts underneath you, to mix my metaphors.

Erica Han: Thank you all for joining us in the R&G Dugout today. You can also listen and subscribe to this and other Ropes & Gray podcasts wherever you regularly listen to your podcasts—that includes Apple and Spotify. Looking forward to discussing more on the next episode.