Month: September 2024

On September 24, 2024, University of Nevada, Las Vegas (“UNLV”) starting quarterback Matt Sluka announced that he would no longer play for the team this year because UNLV had not upheld certain off-the-field promises. Sluka stated in a social media post that: “I committed to UNLV based on certain representations that were made to me, which were not upheld after I enrolled. Despite discussions, it became clear these commitments would not be fulfilled in the future. I wish my teammates the best of luck this season and hope for the continued success of the program.” Sluka’s announcement came despite UNLV starting the 2024 season with a 3-0 record, and the timing allows Sluka to “redshirt” and not lose a year of eligibility. Comments from Sluka’s father appear to confirm that the “representations” that were allegedly not upheld were related to compensation for Sluka’s name, image, and likeness (“NIL”).

Sluka’s decision marks the next step in the evolution of college sports’ transition to a quasi-professional sports league. Similar to a professional athlete holding out during contract negotiations, college athletes are leveraging the power that they hold in negotiations with their schools in relations to NIL compensation packages—i.e., the athlete can simply decide to leave his or her team to potentially pursue better options, and preserve his or her redshirt status for that year, regardless of whether the school has upheld its compensation promises. Reports indicate that Sluka made his decision with at least some assurances of offers outside of UNLV that would lead to more money for the quarterback. Although Sluka has every right to maximize his earning potential and hold UNLV accountable for any verbal “assurances” it made, this situation certainly raises questions about whether other schools offered Sluka direct “pay-for-play” offers, which are in the “gray area” at the moment, and also displays potential issues of recruiting outside of the designated periods. There are many athletes and schools operating under verbal “assurances,” which will undoubtedly lead to more situations where players are willing to sit out and/or file lawsuits against schools, collectives, and coaches, similar to the ongoing Rashada v. Napier lawsuit.

Due to recent court decisions, the NCAA’s authority to govern player mobility and to set transfer rules has been essentially gutted, and it has led to a framework that presents more questions than answers. In other professional sports leagues, owners are able to collectively bargain with players’ unions to construct rules governing player compensation and mobility. Unless and until NCAA student athletes are able to form a union and collectively bargain with NCAA member schools, any such restrictions pose potential antitrust risks to NCAA schools. In the meantime, schools, collectives, and athletes can attempt to contract around these issues on a player-by-player basis.

In recent years, private equity and other funding sources have been active in numerous industries, in particular healthcare. In light of the fewer restrictions on student-athlete compensation in intercollegiate athletics, National Collegiate Athletic Association conferences and member institutions are looking to private equity and other sources of capital to fund future student athlete compensation, as well as for potential back-pay obligations in light of the House v. NCAA and other antitrust litigation brought by former student athletes. Originally, these deals appeared to be structured as private credit deals where the fund would invest money into an athletic department and would then be repaid by a negotiated allotment of future athletic revenues—e.g., revenues from ticket sales and media deals. This arrangement is in line with how schools have traditionally sold their multimedia rights, and allowed public universities to structure the deals in a way to avoid the rigid framework and restrictions of higher education.

Although private credit deals appear to be the easiest method for investment, many of these deals have stalled due to schools’ hesitancy to enter into such agreements contractually obligating them to pay a specific amount of future revenues, without certainty as to those future revenue streams. As a result, schools and funds will likely start discussing ways to structure deals under a more traditional private equity framework. Nonetheless, the question remains, how can an outside investor take an ownership stake and/or buy shares in an athletic department’s future revenue streams? Currently, the answer is they cannot because athletic departments are not corporate entities. Schools, however, seem to be taking steps to remedy this issue. For example, last month Clemson University announced the creation of a new entity, called Clemson Ventures, to house all of its athletics revenue generation. Clemson Ventures is a separate entity designed to handle the university’s revenue-generating functions (sponsorships, media, marketing, licensing, etc.) and will even act as an internal NIL agency for Clemson athletes.

It seems that schools intend to use entities like Clemson Ventures, which has its own governance and board of directors, to sell equity to outside parties. This affiliated organization model could allow schools to not only offer equity to institutional funds, but also to their main boosters and could also allow schools to offer athletes equity vesting opportunities as part of their NIL compensation packages. An athletes’ ability to obtain equity in the athletic department they helped grow would be a massive bargaining tool if athletes are deemed employees in pending litigation. For example, schools could seek to retain their athletic talent by offering vesting shares in the athletic department if the athlete stays for two, three, or four years.   

In sum, schools and institutional investors will continue to work to structure deals that are the most advantageous for each side. At the moment, institutional investors and funds likely favor the private credit model because they can better control the exact monetary amount paid out each year. Schools, however, will likely favor a traditional private equity model because it allocates risk between the athletic department and investors equally—i.e., if the program increases in value, both entities are rewarded, and on the flip side, if the program decreases in value, the school is not required to pay a specific monetary amount to the investors, which would greatly injure the program and school overall.

As reported in our prior Alerts (including on June 6, and August 1, 2024), the parties involved in three of the major class action antitrust lawsuits brought against the NCAA: House v. NCAA, Hubbard v. NCAA, and Carter v. NCAA — all from athletes claiming the NCAA violates the Sherman Act, conducted a fairness hearing on September 5, 2024, before U.S. District Judge Claudia Wilken. At the fairness hearing, the Court declined to rule on preliminary approval of the settlement, after hearing arguments from the attorneys for the NCAA, plaintiffs’ counsel, and other attorneys involved in other litigations against the NCAA, e.g., Fontenot v. NCAA who have raised objections to the settlement.  By way of brief background, and as set forth more fully in our August 1, 2024 alert, the settlement agreement outlines a system where the NCAA and Power Five Conference schools will pay $2.75 billion in “back-pay” damages to multiple classes of athletes, provides an opportunity for colleges and universities to opt in to a revenue sharing arrangement to share approximately 22% of the average annual power conference revenue with the athletes, and imposes restrictions on “pay-for-play” payments by third-party collectives an boosters.

At the fairness hearing, Judge Wilken declined to rule on preliminary approval after raising various concerns regarding the NCAA’s efforts to limit athlete compensation from outside entities. Specifically, and most notably, Judge Wilken stated that she was “quite concerned” with the settlement’s proposed restrictions on third-party NIL payments, particularly from boosters and NIL collectives, and the justifications for those restrictions. Under the proposed settlement, college athletes would be required to report all third-party NIL contracts worth $600 or more to a newly created clearinghouse database, and requires all such deals to be for a profit seeking business purpose and represent a “fair market value” payment. The settlement would also empower the NCAA and power conferences to form a “designated enforcement agency” that would determine whether those reported third-party NIL deals provide fair market value. In theory, this would eliminate pay-for-play inducements — which are currently against NCAA rules, but have gone unenforced since a federal ruling in Tennessee v. NCAA earlier this year.

Judge Wilken took issue with the settlement’s proposed restrictions regarding third-party NIL, and how they differed from the current NCAA guidelines, stating: “What I’m concerned about is whether the change from what’s in the guidelines to what is in the settlement agreement is going to mean that some people who are getting large sums of money in third-party NIL right now will no longer be able to get them.” Judge Wilken seemed concerned about the Settlement’s attempt to “cap” these third-party NIL deals, and how this is not just another artificial and anticompetitive cap on player compensation – asking questions such as: “What if Mr. Fan loves his team and wants to give them all a truck, or give them $1 million dollars to get a new player?” said Wilken. “Is having your team win a valid business purpose?”

Counsel for the NCAA, without referencing the current injunction on the NCAA’s third-party NIL restriction rules, expressed that it was unlikely that a deal could be reached without a provision in the settlement restricting third-party deals to fair market value.  Nonetheless, Judge Wilken expressed optimism that a settlement could be reached, but declined to rule on preliminary approval and advised the settlement attorneys to redraft the agreement to assuage with the Court’s concerns. The parties agreed to confer, and will make supplemental submissions to Judge Wilken on September 26, 2024.