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self-study / Torts

Aug. 25, 2023

How federal legislation can effectively tackle NIL collectives

Frank N. Darras

Founding Partner, DarrasLaw

Email: frank@darraslaw.com

Western State Univ COL; Fullerton CA

Name, image, and likeness (NIL) rights in college sports dialogues has heated up over the past two years since the National Collegiate Athletic Association (NCAA) adopted interim guidelines for college players to earn income while enrolled at school.

NIL collectives drove in-depth discussions in the media and on Capitol Hill this summer. In return, college sports stakeholders, athletes and lawmakers brought new ideas to the table on ways to institute long-term policy on the depth and breadth of their influence. These are key developments needed to eventually create a federal framework, which most believe is the simplest way to establish NIL rules and guidance.

Let’s discuss how NIL collectives have influenced student-athlete endorsements and why they are making the news, and last, how they are addressed in recently proposed legislation.

Collectives vs. Boosters

Collectives are groups of alumni and supporters of a school who fund NIL opportunities for the athletes. Collectives are school-adjacent, and are able to leverage their influence to pool revenue through NIL compensation, which is generated from various sources – like businesses and local advertisers to fans.

According to NIL news site On3.com, more than 200 collectives have been formed in the U.S. to date. The numbers have skyrocketed following the Supreme Court’s 2021 ruling in American Athletic Conference et al. v. Alston et al. In that case, the Supreme Court unanimously ruled against the NCAA, having found the association was profiting off students’ NIL and that antitrust laws “should not be a cover for exploitation of the student athletes.”

Alumni and former players have helped drive the popularity of collectives since nearly all were ineligible for NIL when they participated in college sports, and most want to empower their alma mater and current players. Collectives are ideally supposed to provide a modicum of protection for the players’ financial interests and set them on the right path to build their networks, and strategic relationships in the business of sports.

Collectives are intended to differ from “boosters,” which the NCAA currently defines as any third-party entity “that promotes an athletic program, assists with recruiting or assists with providing benefits to recruits, enrolled student-athletes or their family members.”

In 2022, the NCAA’s guidelines broadened the definition of a booster to clarify that collectives are subject to the same restrictions that prevent individual boosters from recruiting and/or providing benefits to prospective student-athletes.

The NCAA’s interim policy is supposed to help distinguish one from the other, but the association’s confusing verbiage (which it has acknowledged) forces it to assess each claim individually. Lynda Tealer, chair of the NIL Working Group and executive associate athletics director at Florida, emphasized that: “…the new guidance may require institutions and key stakeholders to modify practices, and some disentanglement may be necessary.”

The newest bills in Congress

In mid-July, Southeastern Conference (SEC) Commissioner Greg Sankey publicly stated that “only Congress can truly set a national standard for name, image and likeness compensation in college athletics.”

Sankey’s comments were well-timed. New bipartisan bills addressing NIL and collectives are again being introduced in the Senate.

On July 20, Senators Cory Booker (D-NJ), Richard Blumenthal (D-CT), and Jerry Moran (R-KS) announced a draft of legislation – the “College Athletes Protection & Compensation Act, which would set national standards for NIL, and emphasize health care and wellness for athletes.

The bill, which is open to feedback through Aug. 20, addresses collectives: “Athletes would be allowed to have representatives assisting them with contracts, finances, marketing, and brand management, and institutions would be prohibited from punishing athletes for receiving food, rent, medical expenses, insurance, tuition, fees, books, and transportation from a third party.” This final detail seems to supersede certain of the aforementioned NCAA guidelines.

Senators Joe Manchin (D-WV) and Tommy Tuberville (R-AL) introduced the “Protecting Athletes, Schools, and Sports (PASS) Act of 2023.” A joint press release issued by the duo on July 25 claims that PASS will establish a national standard for NIL that will “protect student-athletes, maintain fair competition and compensation, strengthen transparency, and preserve the time-honored tradition of college sports.”

NIL collectives were specifically called out in the PASS Act, most prominently as it would require “collectives and boosters to be affiliated with a college or school” as a measure to protect student-athletes; and also require agents and collectives to register with a regulating body, such as the Federal Trade Commission (FTC), in an effort to “improve transparency of NIL activities.” The PASS Act incorporated general and specific feedback from stakeholders and has public commendations from the Big 12 Conference, SEC and even NCAA President Charlie Baker.

The best bills to date incorporate the most practical ideas from both sides, allowing the players to choose, and in some cases make mistakes, while also maintaining some of the dignity that accompanies the privilege of entrepreneurship.

Such an example arrived in 2021, when Rep. Anthony Gonzalez (R-OH) and Rep. Emanuel Cleaver (D-MO) introduced the “Student Athlete Level Playing Field Act” (LPFA), which established a middle ground. For example, it did not feature NIL disclosure requirements of athlete contracts, and would also prohibit sin categories like tobacco, gambling, or alcohol from benefiting from NIL deals. LPFA was updated and reintroduced in May 2023 “to increase transparency in the process by establishing an FTC clearinghouse in which NIL deals worth over $500 must be uploaded.”

Tackling big issues

A federal NIL framework should set precedent for future generations and truly promote equity among schools and players. The will to act in Congress seems to exist, driven sometimes by a personal stake as some bill co-authors like Sen. Booker were college athletes. The bills that seek to regulate collectives and hold them accountable for their actions may ultimately prove to be the strongest.

A federal bill could also eliminate the disparity with current compliance issues, and address concepts and issues regarding NIL collectives, such as:

Can collectives claim tax exempt status as non-profits?

Nearly 80 of the 200 collectives in the U.S. are claiming nonprofit status. Notably, the IRS has taken up this issue, and the IRS Chief Counsel released a statement in May noting the agency does not recognize “many organizations” that are essentially NIL collectives as tax exempt as per section 501(c)(3).

The memo states its reason:

“...because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity.”

Accepting tax-deductible donations can make a significant difference when dealing with rich donors, some of whom have expressed serious consternation that the IRS may disallow their donations and possibly penalize NIL collectives. A key detail to the IRS note is that it generalizes collectives and refers to “many organizations.” A federal framework should provide solutions for the uniqueness of each collective.

Addressing the right to privacy, publicity

In the U.S., no federal statute or case law recognizes the right of publicity, although federal unfair competition law recognizes a related statutory right to protection against false endorsement, association, or affiliation.

Furthermore, the right to privacy is implied in the Fourteenth Amendment to the Constitution by the guarantee of due process for all individuals, meaning that the state cannot exert undue control over citizens’ private lives.

Against the backdrop of publicizing NIL and collectives data, the federal standard should address these issues to avoid being struck down as unconstitutional.

Some of the additional issues the federal framework should address include:

● Distinguishing collectives from boosters.

● Will scholarships be taxable now that athletes are earning NIL compensation?

● Will college athletes get a seat at the federal level with a voting voice on NIL issues, laws and rules?

Anticipating the next round

Bloomberg Law reported in July of this year that it “obtained two contracts that expose the vulnerabilities of students to NIL deals. One shows a company taking a potentially exorbitant 40% commission; the other fails to define who would own the athlete’s intellectual-property rights, even after they graduate.” These scenarios are just a few examples where collectives could step in to truly protect players. It also illustrates why athletes should retain lawyers to review any contract before signing.

NIL collectives are clearly shaping the current landscape regarding compensation for student athletes. The NCAA has demonstrated that by virtue-signaling via the enforcement of its interim policies that it is ill-equipped to root out bad actors and contracts in the current market. Federal comprehensive legislation that addresses these risks and regulates collectives will help legitimize this new era of NIL in college sports.

A standardized federal framework certainly will not be perfect, and will not meet everyone’s needs, but it is preferable to a patchwork of states with and those without NIL laws.

It took over a hundred years to break the NCAA stranglehold on student athlete compensation. Let’s get a federal bill passed with clear goalposts that protects and secures our college athletes’ financial futures and their health.

#1329

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