Member institutions should begin preparing in earnest for direct student-athlete compensation.

TAKEAWAYS

• The NCAA president unexpectedly circulated a governance blueprint last week that would significantly alter existing Name, Image and Likeness (NIL) rules and create a new subdivision within Division I athletics.
• Member institutions would be allowed to directly manage NIL and enter into NIL agreements with student-athletes instead of NIL being managed by third-party collectives.
• The new subdivision would require schools to directly pay half of their student-athletes a minimum of $30,000 per year and would be subject to Title IX.

Last week, NCAA President Charlie Baker, without advance notice, released a framework that, if adopted, would allow schools, for the first time, to directly pay student-athletes, fundamentally altering the NCAA’s current Name, Image and Likeness (NIL) rules and governance structure.

Baker’s proposal, outlined in a letter sent to more than 350 Division I member schools, calls for allowing all Division I institutions to, “at their choice,” enter directly into NIL “licensing opportunities” directly with their respective student-athletes. Baker’s framework would also create a new subdivision within Division I that would require schools, should they opt in, to invest at least $30,000 per year—per student-athlete and for at least half of the institution’s eligible student-athletes—into an “enhanced educational trust fund.” Those schools that opt into the subdivision would also be able to set their own rules for scholarship commitment, transfers, recruitment, roster size and a wide range of other policies.

The NCAA’s Current Legal Challenges
Baker’s proposal, which caught athletics conference commissioners (and many others) off guard, aims to preserve the existing NCAA system while addressing resource disparities among Division I member institutions and acknowledging the need for greater self-governance by a subset of schools. The outline comes amidst mounting legal challenges threatening the existing NCAA governance structure, including:

• The Supreme Court’s 9-0 decision in the Alston case, wherein the Court, in June of 2021, upheld the lower courts’ enjoining of NCAA rules restraining compensation for student-athletes as violative of the Sherman Antitrust Act, perhaps making eventual direct compensation of student-athletes inevitable;
• A class-action antitrust lawsuit in the U.S. District Court for the Northern District of California accusing the NCAA of depriving student-athletes of billions of dollars in compensation over their use of their NIL;
• The National Labor Relations Board’s complaint against the NCAA, Pac-12 and USC regarding whether student-athletes should be considered employees, which could open the door to the possibility of unionization and collective bargaining; and
• Johnson v. NCAA, currently pending in the 3^rd Circuit Court of Appeals, where plaintiffs are also arguing collegiate athletes should receive employee status under the Fair Labor Standards Act.
• On December 13, 2023, District Judge John Preston Bailey issued an order temporarily restraining the NCAA from enforcing its transfer eligibility rule, which requires student-athletes transferring between Division I schools for a second (or third) time to sit out of competition for a year.

The proposal also comes against the backdrop of the NCAA repeatedly, but unsuccessfully, lobbying Congress to provide a national standard for NIL to replace the existing patchwork of inconsistent state legislation, as well as seeking an antitrust exemption and legislation establishing that student-athletes are not “employees” of their respective universities.

Two bipartisan NIL bills have been introduced by Congress: (1) Senators Corey Booker (D-N.J.), Richard Blumenthal (D-CT) and Jerry Moran (R-KS) have released a draft NIL bill entitled the College Athletes Protection and Compensation Act, or CAPCA; (2) Senators Joe Manchin, (D-WV) and Tommy Tuberville, (R-AL) have introduced the Protecting Athletes, Schools, and Sports Act of 2023. As of now, neither proposal seems likely to pass both houses of Congress, but Pillsbury continually monitors the situation.

Baker’s NIL/Governance Plan Specifics
Baker’s proposed framework would significantly reorient the NIL landscape, which currently operates largely through third-party “collectives,” many of which have no affiliation with the school and, as a practical matter, operate beyond the NCAA’s ability to enforce its bylaws. Under the recently unveiled proposal, member institutions would be permitted to:

• Enter into uncapped NIL deals with their student-athletes; and
• Manage NIL “in-house,” instead of having third-party collectives solicit donations directly from boosters and enter into contractual agreements with student-athletes.

Perhaps more significant is the blueprint’s express contemplation of a new athletics subdivision and direct student-athlete compensation, which states:

• Membership into the subdivision is voluntary, meaning schools that cannot afford to pay athletes can remain in what is now considered “Division I.” Additionally, members can voluntarily opt in and opt out.
• Member institutions that opt in must invest at least $30,000 per student per year for half of their student-athletes, totaling a minimum of $120,000 throughout a four-year tenure.
• There is no maximum amount that a school can invest in each student-athlete.
• Funds are subject to Title IX requirements.
• Member institutions that opt in would be permitted to set their own rules regarding recruitment, roster size and transfers.

Guidance for Clients
Baker’s letter, as he acknowledged, is intended to be the opening remarks in a long conversation among the membership to engender substantial reform while avoiding a “doomsday” scenario, such as where several dozen schools “break away” from the NCAA and form a separate voluntary membership organization. “This is a conversation we need to have. It’s a conversation the folks in Division I and the NCAA want to have,” Baker said last Wednesday while speaking at the Sports Business Journal’s annual summit in Las Vagas.

Nevertheless, as likely the most proactive governance and compensation proposal by a sitting NCAA president, it is a watershed moment. While the plan is unlikely to pass in its current form and raises many questions (e.g., what benefits, if any, can count towards the per-athlete donation? Are those amounts taxable income for the student-athletes? Will this lead to draconian cuts among Olympic sports to preserve football and men’s basketball?), it represents concrete recognition by the NCAA’s leadership that direct compensation for student-athletes is a looming reality. And it acknowledges and attempts to mitigate the desire of a subset of Division I athletics departments to no longer be confined by the same set of rules that apply to member institutions with fewer resources and different missions.

While collegiate athletics is entering a period of substantial uncertainty, member institutions should begin preparing in earnest for the future, including:

• Conducting internal audits, on a program-by-program basis, to accurately ascertain current revenue and liability figures within the athletics department;
• Assessing the cost of compliance with a potential voluntary or mandatory system whereby member institutions directly compensate student-athletes;
• Determining what kind of annual budget adjustments are necessary under Baker’s proposal—and at different “annual” levels of compensation;
• Assessing the financial viability of adding varsity athletics programs in light of current trends;
• Determining whether member institutions have the infrastructure and expertise to manage NIL in-house and, if so, how they would do it;
• Assessing how to distribute educational trust funds in a manner that complies with Title IX, which mandates that schools that receive federal funding provide equal opportunities and benefits to male and female athletes; and
• Counseling donors and alumni on the likeliness of direct student-athlete compensation and its impact on the institution’s annual budget.

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