The College Sports Commission (CSC) on Thursday issued additional guidance for the term “valid business purpose” and indicated NIL collectives whose sole focus is to pay athletes to attend or remain at a particular school will see their NIL deals rejected.
The clarification is arguably in line with the House settlement, the longstanding NCAA prohibition against pay-for-play and, more conceptually, the relationship between the right of publicity and NIL. But it could spark legal challenges.
As part of the House settlement, college athletes must report NIL deals that are worth at least $600. Those deals are subject to a clearinghouse review by NIL Go, which is spearheaded by Deloitte. The basic analysis is whether a proposed deal is consistent with the commercial use of the athlete’s NIL or better understood as an impermissible pay-for-play arrangement.
In this examination, NIL Go considers whether the payor of the NIL deal intends to use the athlete’s NIL for a valid business purpose, which CSC defines as a goal to “sell a good or service to the public for profit.” This examination also considers the range of compensation, and specifically whether the amount of money is commensurate with money paid for similar athletes in the same situation.
The term “valid business purpose” stems from NCAA Bylaw 22.1.3, which governs involvement of associated entities or individuals in NIL deals. The bylaw requires a valid business purpose “related to the promotion or endorsement of goods or services provided to the general public for profit, with compensation at rates and terms commensurate with compensation paid to similarly situated individuals with comparable [NIL] value who are not prospective student-athletes or student-athletes of the institution.”
The idea of a valid business purpose becomes less abstract when imagining an endorsement deal in pro sports.
Think of a pro athlete paid to appear in a TV commercial for a car, sneaker, weight loss program or some other product or service sold to the public. The athlete is paid to tell their followers and consumers that they should buy whatever the athlete is pitching. In this scenario, the payor is trying to make a profit by selling a good or service to the public. The payor is banking on the athlete’s endorsement boosting sales, otherwise the payor wouldn’t want to pay the athlete.
NIL deals are supposed to do the same thing.
NIL is a college sports twist on a longstanding legal principle, the right of publicity, which forbids misappropriation of the unique and marketable personal qualities of athletes (and entertainers, actors, musicians, artists, models and others who possess sellable traits). For a long time, the NCAA generally forbade college athletes from profiting from their NIL as a condition of eligibility. However, that prohibition was successfully challenged by Ed O’Bannon and, later, state NIL laws.
When an athlete is paid to attend a college, that is not NIL, even if the deal is superficially labeled or coined “NIL.” The athlete is compensated to matriculate to a school, much like someone is paid a signing bonus to join a company. Pay-for-play remains prohibited by the NCAA. State NIL laws also typically stipulate that NIL deals must mean NIL.
The CSC on Thursday elaborated on the need for a valid business purpose in NIL deals. It stated an entity with a business purpose of paying athletes or colleges “rather than providing goods or services to the general public for profit” would not satisfy Bylaw 22.1.3. This is true, CSC says, even if a particular NIL deal involves an athlete paid to make an appearance on behalf of the collective at a golf tournament, which is open to the public and charges an entrance fee. The problem with that deal is any money collected would be used to pay the athlete or other athletes and not sell a product or service (think cars, sneakers, weight loss programs etc.) to the public.
The CSC adds that if the payor and recipient of entrance fees is a golf course or an apparel company, there’s a good chance the deals would satisfy the valid business purpose. That’s because they have a broader purpose than paying athletes.
This is a logical arrangement given what NIL is supposed to mean, but it could nonetheless invite a bevy of legal challenges.
The arrangement suggests that collectives which operate simply as vehicles to pay athletes to attend a recruit will see their NIL deals rejected. NIL Go could thus reject deals that are already in place between collectives and recruits, who may have relied on them in picking a school. How those deals address termination of a contract before it is performed could lead to breach of contract litigation, though terms of the (then) proposed House settlement have been known since last summer and the NCAA has consistently forbade pay-for-play.
A legal challenge to CSC’s interpretation of “valid business purpose” from NCAA Bylaw 22.1.3 could arise if NIL Go rejects a deal and the athlete and/or collective challenges the decision as an illegal restraint on trade under antitrust law or as violating a state NIL law.
Such a challenge would face some headwinds.
Parties that submit NIL deals to NIL Go agree to an arbitration process that would preempt litigation until the arbitration is played out. And, as Sportico explained last month, the arbitration decision would be accorded high deference by a court in the event the losing party petitions the court to vacate the arbitration award.
Even if arbitration could be overcome, the athlete/collective would only advance in an antitrust claim if they prove the CSC’s interpretation causes more harm than good to economic competition. In February 2024, a federal judge in Tennessee restrained the NCAA from enforcing rules related to NIL collectives on antitrust grounds. But CSC would likely argue its interpretation is consistent with the House settlement (which wasn’t in place in February 2024), NCAA rules forbidding pay-for-play and NIL as a subset of the right of publicity.
Alternatively, the athlete/collective might argue the CSC’s interpretation violates one of the recent statutes and executive orders in Georgia, Virginia, Texas and other states that protect NIL rights in ways that might pose conflicts with the CSC. That type of dispute (discussed in depth here) could spark an opportunity for the CSC to raise U.S. constitutional arguments against the state law, particularly claims based on the Constitution’s Commerce Clause and Contract Clause. These clauses forbid a state from adopting laws that unduly interfere with other states’ economies and impairing contracts, be they membership agreements or settlements.
It’s also possible that some collectives might reorganize and expand their scope of operations to better comport with the CSC’s interpretation. Collectives that sell products or services to the general public for profit would appear more likely to meet the requirement.
In short, just when it seems there might be stability in college sports law, the industry has a way of raising new topics for debate.
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