On July 26, 2024, attorneys for the NCAA, the Power Five conferences and classes of college athletes filed a motion for preliminary approval of a settlement agreement to resolve three antitrust litigations: House v. NCAA, Hubbard v. NCAA and Carter v. NCAA.
Background
In our previous Alert, we outlined the historic settlement announcement for these three major class action antitrust lawsuits brought against the NCAA—all from athletes claiming the NCAA violates the Sherman Act. By way of brief recap, the plaintiffs in the lead case, House v. NCAA, alleged that the NCAA's rules prohibiting athletes from receiving such compensation and payments was a violation of Section 1 of the Sherman Act by way of conspiracy to fix prices and a group boycott or refusal to deal. House also raised issues and claims concerning the post-NIL world, specifically the lack of any compensation to the athletes in connection with the TV broadcast revenue generated by the athletes.
The proposed settlement announcement, however, was only the first of many steps required before the court can grant final approval. The parties have now reached the second step in this legal process by submitting a motion for preliminary approval of the settlement agreement. If the settlement agreement withstands judicial scrutiny, it will obligate the NCAA and member schools to pay athletes and former athletes approximately $2.8 billion, which includes a TV revenue-sharing system. U.S. District Judge Claudia Wilken will now analyze the preliminary settlement agreement and all challenges and objections to it, and preside over a fairness hearing on September 5, 2024.
The Operative Terms of the Preliminary Settlement Agreement
Overall, the agreement closely tracks the language and provisions that were announced in May 2024 and that have been discussed by the parties' lawyers. However, the agreement includes more definite and specific terms, as well as new details as to the NCAA's and its member institutions' obligations, the obligations of athletes and third-party NIL collectives, and roster and scholarship changes. Some of the key takeaways from the agreement are set forth below:
Back Pay for Collegiate Athletes Who Were Deprived of NIL Opportunities from 2016-2021
Under the agreement, the NCAA and Power Five conference schools will pay $2.6 billion in damages to multiple classes of athletes as "back pay" due to these athletes being deprived of NIL opportunities and revenue sharing. The overarching class, with exclusions, of athletes eligible for back pay includes athletes who played Division I sports from 2016 (due to statute of limitations) through present. Under the agreement, however, this money will not be equally distributed. Football players are expected to obtain in the ballpark of 75 percent, with 20 percent going to men's and women's basketball players and 5 percent for other athletes. Additionally, even though the 27 non-Power Five conferences and their member schools were not named as defendants in the House litigation, they are expected to be responsible for about $990 million in costs. Members of the former Power Five conferences, in contrast, will pay around $664 million, with the NCAA paying the remainder. It is important to note that Judge Wilken denied the motion to intervene filed by Houston Christian University (a non-Power Five conference school). It is likely that these payment obligations will be further challenged by smaller DI schools.
Permissive Revenue Sharing Going Forward
The agreement outlines a 10-year revenue-sharing plan that is transformative for college sports. If approved, NCAA member institutions will be allowed to share 22 percent of the average annual power conference revenue, stemming from media rights, ticket sales, sponsorships, etc., with their student-athletes every year―an amount that roughly adds up to $22 million annually in 2025-2026, and which could grow to $32.9 million by the end of the 10-year agreement.
Importantly, the revenue sharing plan is permissive and allows for any and all DI schools to participate if they have the funds. There is no requirement that any DI schools participate. Indeed, the parties agreed that schools can opt into an athlete pay model of sports revenue, with schools able to pay players up to an annual salary cap of about $22 million initially. The cap amount is for all athletes in a school's athletic program, with schools having discretion in how they allot payments. Additionally, colleges can also directly pay athletes for use of their NIL, though such payments would count toward the $22 million cap. As discussed further below, athletes can continue to sign NIL deals with third parties, and since the school would not be the payer, those deals wouldn't impact a school's compliance with the cap.
The institution of a salary cap is the first of many changes to college sports that mirrors a "pro-style" organization. As a result, NCAA member institutions will need to develop a strategic plan to determine if opting into this revenue-share model is plausible and, if so, ensure that their distribution plan is compliant. In addition, with schools potentially paying up to $22 million to their athletes―and most likely the majority of that being allotted to the revenue-generating sports of football and basketball―it is possible and likely that some schools will face difficult decisions in keeping or cutting nonrevenue-generating sports and whether to transition such sports to a "club" level.
Institutions considering adopting the revenue-share model should be careful to draft such revenue-share agreements to ensure compliance within the applicable legal framework, as set forth in more detail below.
Third-Party NIL Deal "Valid Business Purpose" Requirement and Reporting Requirement
Under the agreement, the NCAA is not permitted to implement any rules that would prohibit DI athletes from receiving payment from third parties for NIL. That said, however, there appears to be a couple practical exceptions to that rule.
First, the NCAA and its conferences will be permitted to impose rules that prohibit individual boosters or NIL collectives from engaging in and/or entering into NIL agreements with or for the benefit of current or prospective student-athletes at a given member institution unless the NIL agreement possesses a "valid business purpose related to the promotion or endorsement of goods or services provided to the general public for profit" and compensates the athlete at "rates and terms commensurate with compensation paid to similarly situated individuals with comparable NIL value who are not current or prospective student-athletes at the Member Institution." The agreement does not further define the "valid business purpose" or the commensurate rates and terms of compensation for nonstudent-athletes.
This provision, if approved, is likely to give rise to immediate litigation brought by NIL collectives, marketing agencies and/or athletes who opt out of the agreement. Indeed, a restriction relating to third-party NIL deals was recently preliminarily enjoined in Tennessee v. NCAA, 3:24-CV-00033-DCLC-DCP (E.D. Tenn.)
If conferences enact such rules on third-party NIL deals, it will likely have a major impact on current NIL collectives, which are typically set up under IRS Code Section 501(c)(3), because the rule requires endorsement "for profit."
Second, in order to police this restriction on third-party NIL deals, the agreement also implements an NIL reporting requirement on NCAA member institutions and student-athletes. According to the agreement, in an effort to ensure NIL payments relate directly to the commercial use of an athlete's right of publicity for endorsement, sponsorship, influencing or other promotion—and not pay-for-play or recruiting inducements—the settlement would obligate athletes and their schools to share with a clearinghouse information about NIL deals that exceed $600. In addition to the requirement that athletes and schools must report any NIL deals over $600, Power Five conference schools will also have to report any NIL agreements they individually enter into with athletes. This reporting rule will apply to all schools who choose to opt into revenue sharing even if the school is not involved in the settlement.
Additionally, athletes will possess the ability to seek advisory opinions about a prospective NIL deal and challenge adverse determinations that their deals are NIL in name only. This review process will involve assessment of "fair market value," which is a highly controversial metric that is difficult to assess. The specifics of this system will likely require further deliberation and rulemaking to ensure that the fair market value determinations are not arbitrary.
Scholarship Limits
The agreement also removes scholarship limits, which have been the focus of many legal challenges over the years. Previously, schools were capped at a specific number of scholarships per sport, and courts have historically found this to be a lawful practice. Now, under the new framework outlined in the agreement, schools can offer scholarships up to the total roster cap, which for most sports has now been decreased. For example, football is expected to have a roster cap of around 105 players, with other sports having smaller caps. Despite this change, the schools must still ensure they are in compliance with Title IX, immigration law, employment law and other areas of law.
NCAA member institutions have the option to provide additional athletic scholarships above and beyond the previous limit. However, to the extent such member institutions do, the full-cost dollar value of any such incremental athletic scholarships (above the previous limit) will count against the $22 million revenue-sharing cap, up to $2.5 million.
NCAA Member Institutions Allowance to Partake in NIL Deals
In a complete departure from the NCAA's prior rules and guidance since NIL became legalized, the agreement provides NCAA member institutions and student-athletes with the right to directly enter into exclusive or nonexclusive license and/or endorsement agreements for student-athletes' NIL. In other words, schools can now directly pay athletes for their NIL. Schools are therefore allowed to be directly involved in entering into NIL deals with their student-athletes on the condition that "no such licenses or agreements shall authorize payments for the right to use a student-athletes NIL for a broadcast of collegiate athletic games or competitive athletic events." In other words, a school cannot try and opt out of the revenue-sharing plan and then enter into an NIL deal to pay an athlete for media rights to circumvent the salary cap limitations.
Additionally, the agreement allows for the NCAA member institution or a designee/subcontractor of the member institution (e.g., a local rights holder) to act as the marketing agent for the student-athlete with respect to third-party NIL contracts, either exclusively or nonexclusively, provided, however, that a parent, guardian, lawyer or other competent representative may assist the student-athlete in discussions regarding entering into a license or endorsement agreement, unless the student-athlete expressly waives that right.
NCAA Regulatory Oversight and Revised Dispute Resolution Procedure
The agreement also seeks to provide the NCAA with at least some regulatory oversight. Specifically, the agreement allows the NCAA to implement some NIL restrictions without fear of participating parties suing them in class actions on antitrust grounds in the future. For example, the agreement states that:
NCAA compensation and benefit rules as revised by the settlement will be permitted, as will certain new rules limiting boosters to making fair market value payments for NIL, addressing the number of seasons/length of time college athletes are eligible to receive benefits, the progress required toward a degree for a college athletes to be eligible to receive benefits under the Injunctive Relief Settlement, rules preventing circumvention of the agreement, as well as other rules detailed in the Injunctive Relief Settlement.
To that point, the agreement includes the framework for an arbitration system where an arbitrator, approved by the players' attorneys and the NCAA, will have the authority to hear disputes and to issue awards and rulings. These arbitration awards are not binding and may still be challenged in federal court when the losing party petitions for an award to be vacated, though courts are obligated under federal law to apply deferential review. The agreement also creates an enforcement mechanism to settle issues relating to the terms of the agreement. Plaintiffs and defendants will agree on "neutral" arbitrators, who will serve terms of three years.
Is This Settlement Finalized?
In short, no. Now, negotiations as to whether the agreement will be approved will enter a multistep approval process, which will include a fairness hearing in front of Judge Wilken on September 5, 2024. At the fairness hearing, Judge Wilken will hear from athletes, schools and conferences who object or wish to express concerns about the settlement. Objectors would have the chance to speak at this hearing and/or submit written comments. For example, as set forth above, Judge Wilken has already denied Houston Christian University's objection to the settlement and motion to intervene. The school could still appeal to the U.S. Court of Appeals for the Ninth Circuit or bring an individual lawsuit against the NCAA in state court. Following the fairness hearing, Judge Wilken will decide whether to grant preliminary approval consistent with Federal Rule of Civil Procedure 23. Judge Wilken will assess if the settlement's terms and conditions are fundamentally fair, reasonable, adequate and in the best interests of DI college athletes and will weigh the settlement against the complexity, expense and likely duration of continued litigation.
It is likely that during the preliminary approval stage, Judge Wilken will require the parties to modify the agreement in part. For example, Judge Wilken will make determinations as to whether the agreement's distribution of funds would unfairly benefit some athletes while overly disadvantaging others. While Judge Wilken may require modest revisions to the agreement's framework, it is extremely rare for an antitrust settlement to be rejected at this early stage. In any event, the approval process still faces many hurdles and the full process could take up to six months, depending on how many objections and scheduling factors are raised.
Ongoing and Future Legal Considerations
First, as with all class action settlements, if Judge Wilken grants preliminary approval, members of each class of athletes will be notified about the settlement and will be provided with a 45 day opt-in/opt-out period. Opting out would mean an athlete relinquishes the right to receive compensation from the settlement and preserves his or her legal claim to sue the NCAA and the Power Five conference. An athlete would opt out of the settlement if he/she believes that the monetary amount they would receive is lower than what they could obtain if they filed an individual lawsuit. The more opt-outs, the more concerned Judge Wilken would become about whether the settlement will achieve its goal of resolving the underlying dispute.
Second, the agreement continues to present antitrust issues, particularly with respect to the permissibility for conferences to impose rules restricting certain types of third-party NIL deals and requiring such deals to be reported to a clearinghouse if over $600.
Third, the agreement here has the potential to turn college sports into a professional sports league. Judges have been skeptical of approving settlements that have this type of impact. For example, a federal judge rejected the Google book search settlement because it found that the proposal went too far in reshaping an industry, and a judge recently vacated a settlement agreement involving Johnson & Johnson sunscreen products where the judge found that the agreement disproportionately benefited the attorneys compared to class members.
Fourth, even if Judge Wilken approves the settlement, litigation concerning athlete compensation would not necessarily end. For example, the Fontenot v. NCAA case is not part of the House settlement. Plaintiffs in the House settlement recently amended their complaints to broaden the types of compensation at issue, in a likely attempt to bring the Fontenot claims within the gambit of the House settlement. It remains to be seen whether this tactic will be successful in mooting such cases like Fontenot. In addition, while the settlement would insulate the NCAA from antitrust challenges brought by class members, it wouldn't preclude claims from players who opt out or from future athletes.
Fifth, the agreement filed in House could act as a "blueprint" for Congress to codify the settlement terms. Specifically, the Power Five conference commissioners, in addition to other members of the NCAA's governing body, stated that "[t]he need for federal legislation to provide solutions remains," and "[i]f Congress does not act, the progress reached through the settlement could be significantly mitigated by state laws and continued litigation." Counsel for the athletes also favors Congress codifying the terms of this agreement.
Finally, the agreement here also would not resolve controversies under other areas of law—specifically, labor and employment issues. For example, a settlement agreement is neither binding case precedent, so it does not govern future lawsuits―nor is it a collective bargaining agreement, so it does not benefit from the nonstatutory labor exemption that insulates labor agreements from antitrust scrutiny. As a result, college athletes remain as nonemployees, pending the outcome of certain ongoing proceedings, and thus do not yet have the right to join labor unions, within the meanings of the National Labor Relations Act and/or the Fair Labor Standards Act. If student-athletes are classified as employees and can unionize, NCAA member institutions would have to invest significantly to comply with labor and employment laws and regulations, which could lead to the shuttering of nonrevenue-generating sports and could also implicate Title IX compliance issues.
On that note, Title IX is also an important legal consideration and presents many practical issues as to the agreement's real-world application. For example, payments by schools that reflect athletes' NIL or broadcasting rights could be construed as outside the scope of Title IX, and direct payments by conferences or the NCAA would fall outside of Title IX. The analysis is complicated, however, if the payments are functionally pay-for-play—even if labeled "NIL" or "broadcasting money"—in which case schools would likely need to pay men's and women's players equitably. The schools, student-athletes and other college athletics stakeholders should tread carefully as these issues play out. They should seek experienced counsel to help them navigate this ever-changing environment.
As institutions consider adopting the revenue-sharing model, it is important that institutions carefully draft these agreements to ensure compliance with Title IX and other Department of Education regulations such as the incentive compensation rule. We note that the Higher Education Act prohibits institutions of higher education from providing a commission or bonus to individuals or entities based on securing enrollment or awarding financial aid, and this is a consideration that should be taken into account in drafting such agreements (and impending changes to the incentive compensation rule may further complicate this issue).
Institutions should consult with counsel to draft agreement templates that adequately address all of these considerations and place the institution in an advantageous situation to comply and profit from this new opportunity.
For More Information
If you have any questions about this Alert, please contact Sean P. McConnell, Andrew John (AJ) Rudowitz, Bryan Shapiro, Matthew Steinway, any of the attorneys in our Antitrust and Competition Group, any of the attorneys in our Sports Group or the attorney in the firm with whom you are regularly in contact.
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