Moving the Ball Forward on NIL: What Businesses and Student-Athletes Should Know

April 27, 2023
Publications

The U.S. House Subcommittee on Innovation, Data, and Commerce recently held the first U.S. Congressional hearing on name, image and likeness (NIL) contracts in collegiate athletics since the National Collegiate Athletic Association (NCAA) adopted its Interim NIL policy in July 2021. That policy marked a dramatic shift in NCAA protocol and, for the first time, would allow student-athletes the opportunity to profit from the commercialization of their name, image and likeness. In other words, under the new policy, student-athletes could enter into endorsement deals.

Since then, most major colleges and universities and college athletic conferences have adopted NIL compliance policies and procedures of their own for student-athletes, coaches and other institution staff to comply with. On top of the broad NCAA Interim NIL policy and subsequent institution—and conference level compliance rules, 32 states have passed their own, preemptive legislation to regulate NIL deals that student-athletes are making within their respective state borders. All of this has left interested stakeholders—from the student-athletes themselves to coaches, administrators, boosters and interested businesses and investors—with a whirlwind of cross-border legislation and compliance policies to grapple with.

All of this set the stage for the U.S. Congressional hearing on the matter in March, at which the overarching, bi-partisan theme appeared to be that a federal preemptive standard on NIL is now necessary to provide clear and consistent guidelines that are fair and transparent while simultaneously protecting student-athletes and the integrity of college athletics.

As we wait to see if Congress does indeed adopt a preemptive federal standard on NIL, the question becomes: what do business owners and interested investors need to know prior to signing a college athlete to a NIL contract under the current landscape?

First, it is imperative that a business understands its state’s NIL law. That state law, where it conflicts with an NCAA or institution policy, will preempt the NCAA or university policy. Where the state NIL law is silent on an issue or if the state does not have an NIL law, then the NCAA Interim NIL Policy and the policy of the school that the student-athlete attends takes priority. All of this is to ensure that a business is not violating any NCAA or institution policies and to protect the student-athlete from engaging in conduct that could result in consequences for the student-athlete.

State NIL laws have many important nuances to track and understand. For example, some states require that the value of the NIL deal is assessed in accordance with the athlete’s “fair market value” while others do not. While there is not a clear definition of “fair market value,” businesses should be prudent in honestly evaluating the value that the student-athlete brings to a specific contract. To do so, consider the scope of the engagement with the student-athlete and the student-athlete’s reach or social media engagement.

The issue of “fair market value” has also raised several Title IX questions. In assessing the fair market value of the student-athlete, businesses should have a clear set of measurable and calculable standards, regardless of the student-athlete’s gender. From a practical perspective, having clear standards for assessing fair market value will be mutually beneficial for all parties while avoiding any appearance of impropriety.

Additionally, there are various intellectual property considerations and differing state law positions. Some states allow institutions to prohibit the use of the institution’s trademarks and logos in endorsements if it conflicts with the institution’s contracts and partnerships, while other state NIL statutes are silent on the issue. Therefore, without permission from the institution, depicting a student-athlete in his or her uniform or with other institutional identifiers may infringe the institution’s rights. The lack of a direct association with the student-athlete’s institution may significantly reduce the value of the endorsement if the student-athlete is not highly recognizable by a significant portion of the target audience. Student-athletes, institutions and businesses seeking to engage endorsers should consult an intellectual property attorney to advise them through the applicable state NIL statutes, institutional policies and intellectual property laws.

Second, any business seeking to engage a student-athlete should understand the NCAA Interim NIL policy and what is and is not permitted thereunder. In a question and answer resource, the NCAA clarifies that its Interim NIL Policy prohibits:

NIL agreement without quid pro quo (e.g., compensation for work not performed). Student-athlete NIL agreements should include the expected NIL deliverables by a student-athlete in exchange for the agreed upon compensation and student-athletes must be compensated only for work actually performed;
NIL compensation contingent upon enrollment at a particular school. For example, institutions should not use NIL arrangements to improperly induce matriculation (e.g., guaranteeing a particular NIL opportunity upon enrollment);
Compensation for athletic participation or achievement. Athletic performance may enhance a student-athlete’s NIL value, but athletic performance may not be the ‘consideration’ for NIL compensation;
Institutions providing compensation in exchange for the use of a student-athlete’s name, image or likeness.

The U.S. House hearing memorandum and the NCAA Division I May 2022 NIL guidance take aim at protecting the integrity of college athletics while safeguarding the rights of student athletes. In doing so, the NCAA has recently began cracking down on pay-to-play offers, or the appearance thereof, with third parties. If a business is interested in investing in the NIL space, it is critical that it avoids even the appearance of pay-to-play by understanding how the NCAA may define a third-party as a “booster.”

Under the NCAA Division I May 2022 NIL guidance, a “booster” is defined as “an individual, independent agency, corporate entity (e.g., apparel or equipment manufacturer) or other organization who is known (or who should have been known) by a member of the institution’s executive or athletics administration to have participated in or to be a member of an agency or organization promoting the institution’s intercollegiate athletics program or to assist or to have assisted in providing benefits to enrolled student-athletes or their family members.”

NIL deals must not be used as recruiting inducements and must not trigger “booster status” as a result of a conversation with, or by involving, any coach, administrator or other institution official in any way in the NIL deal with a student-athlete or prospective student-athlete. The NCAA’s first enforcement action related to this policy came on Feb. 24, when it issued a three-game suspension to Miami women’s basketball coach Katie Meier as a result of a negotiated resolution between the school and the NCAA. Meier’s suspension stemmed from an impermissible meal arranged and provided by a third-party booster to student-athletes Haley and Hanna Cavinder.

Although the Division I Committee on Infractions (COI) did not vote to dissociate or levy penalties on the third-party booster at this time, it hinted that future infractions of this kind may not be treated as leniently. In its decision, the panel stated that “boosters are involved with prospects and student-athletes in ways the NCAA membership has never seen or encountered. … In that way, addressing impermissible booster conduct is critical, and the disassociation penalty presents an effective penalty available to the Committee on Infractions.”

With potential federal legislation on the horizon, it is critical that any interested investor in the NIL space conduct its business with the student-athlete separately and independent from anyone associated with a college or university to avoid the triggering of booster status and the potential penalties and consequences therewith.

The waters in the NIL space remain choppy, but following the U.S. House hearing on NIL, a few things appear to be almost certain. First, NIL is here to stay and can be an incredibly impactful way of marketing a business venture. Also, federal legislation is seemingly imminent with bi-partisan support in the U.S. House Energy & Commerce Committee. Federal legislation will hopefully standardize NIL, which has become the “wild west” since the adoption of the NCAA Interim NIL policy in 2021.

Although the territory remains uncharted, limitless opportunity is presenting itself in the NIL industry. Our team of highly specialized intellectual property attorneys stand ready to guide businesses, institutions and student-athletes through all of the nuances and legal complexities of NIL transactions.

Phil Petrina is an intellectual property associate attorney at McNees Wallace & Nurick. He received his J.D. from Penn State University Dickinson School of Law last year where he wrote for the school’s Inside Entrepreneurship Legal Blog, and was a four-year student-athlete. Petrina can be reached at ppetrina@mcneeslaw.com or 717-237-5497.