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Think Before You Ink: Key Considerations in Contracting with Student Athletes for NIL Rights

August 17, 2021

Now that student athletes can engage in contracts for compensation in exchange for use of their name, image, and likeness (NIL), the commercial possibilities abound. However, given the variations among the laws in each state, companies looking to engage in this space must carefully review the laws for each state, as well as the codes of conduct enacted by the various schools, conferences, and other applicable governing bodies, before entering agreements with student athletes to endorse their brands.

Several key considerations when contracting with student athletes for their NIL rights are:

  1. Confirm whether there is any state NIL law in the state where a student athlete is enrolled in school, and review this NIL law to ensure compliance before effectuating a contract.
  2. Review the relevant NCAA eligibility rules that do not specifically pertain to NIL rights to confirm they are not in conflict with the contract.
  3. If the state does not have a specific law pertaining to the student athlete’s NIL, that does not mean there are no regulations. The general right of publicity and contracting laws will still apply.
  4. States that have enacted relevant NIL laws have very specific regulations that often require disclosure to the student athlete’s educational institution and require the student athlete to abide by the relevant team contracts and codes of conduct set out by each specific educational institution.
  5. State NIL laws often have similar requirements, but each set of laws is different and the contracting parties should review the specific laws for each individual state before finalizing a contract, as well as the specific rules set out by individual educational institutions that the law may require the student abide.

Effective July 1, 2021, each division of the NCAA suspended its prohibition on student-athletes receiving compensation for the use of their NIL rights. The NCAA further permitted student athletes to engage professional service providers such as agents and attorneys to assist with such NIL activities. This shift in policy was in response to a wave of legislation from various states that enacted laws setting out explicit rights for student athletes to be paid for the use of their NIL by third parties and explicitly permitted them to engage professional representation, often subject to certain certification requirements on behalf of the representative. The shift by the NCAA in policy was accelerated further by the ruling from the US Supreme Court in NCAA v. Alston that the NCAA could not bar its member schools from providing student athletes with various education-related benefits. The decision was unanimous, and Justice Brett Kavanaugh made clear in his concurring opinion that the remaining prohibitions on compensation from the NCAA were not long for the world, noting “Everyone agrees that the NCAA can require student athletes to be enrolled students in good standing. But the NCAA’s business model of using unpaid student athletes to generate billions of dollars in revenue for the colleges raises serious questions under the antitrust laws.” Generally, NIL rights are available to all US citizens, but student athletes in the past have been required to forfeit those rights to remain eligible to participate in NCAA college athletics, i.e., to retain their “amateur” status.

To be clear, the new NCAA policy is an interim one as the NCAA awaits uniform federal legislation to set the rules for compensation to student athletes for the use of their NIL. In the meantime, the NCAA policy guarantees that student athletes will not surrender their NCAA eligibility when they follow the laws prescribed by their respective states, even where those state laws permit the student athlete to receive compensation for the use of their NIL. Thus, a company seeking to engage in a contract with a student athlete to utilize their NIL should look to the law of the state in which the student athlete is enrolled to determine the student athlete’s ability to license his or her NIL. While the NCAA policy provides some guidance, without uniform federal law, the rules governing the use of student athlete NIL will need to be considered on a case-by-case and state-by-state basis.

In addition, other NCAA rules remain in place, and companies that engage student athletes to provide endorsements must look beyond the NCAA interim NIL policy and any applicable state NIL laws to ensure both NCAA and legal compliance, and that they receive the benefit of the proposed endorsement arrangement. For example, NCAA recruiting regulations and the NCAA prohibition on “pay for play” agreements remain in effect and may be relevant when crafting a contract pertaining to NIL value. Accordingly, even if a company is in compliance with the relevant state laws as it pertains to student athlete NIL, the company still needs to ensure that its arrangement with a student athlete does not run afoul of the other rules set out by the NCAA to ensure that they may activate the proposed promotional relationship and avoid jeopardizing the student’s eligibility and any associated adverse PR and other liabilities.

Turning to state law, the following 12 states have laws that govern the NIL rights of student athletes that became effective as of July 2021: Alabama, Arizona, Florida, Georgia, Illinois, Kentucky, Mississippi, Nebraska, Ohio, Oregon, Pennsylvania, and Texas. Further, the following five states have student athlete NIL laws going into effect in 2022: Arkansas, Michigan, Nevada, South Carolina and Tennessee. Finally, the following six states have student athlete NIL laws going into effect in 2023 or later: California, Colorado, Maryland, Montana, New Jersey, and Oklahoma. The remaining 27 states and the District of Columbia do not currently have a law specifically pertaining to the NIL rights for student athletes. The NCAA interim NIL rule has made clear that student athletes in those states may still contract in exchange for use of their NIL without penalty from the NCAA. But, when a company engages a student athlete in one of these states and the District of Columbia, it should be sure to review the applicable general right of publicity and contracting laws and regulations to ensure that the subject student athlete relationship is compliant.

Although California got the ball rolling—enacting the first state law prohibiting educational institutions from barring student athletes from earning compensation for their NIL in September 2019—Florida jumped to the forefront and triggered a torrent of state legislation when it enacted its law, SB 646: Intercollegiate Athlete Compensation and Rights, on June 12, 2020, and announced that it would take effect on July 1, 2021 (i.e., almost two years before California’s law goes into effect in 2023). In fact, over the next few months, other states that are well-known for their iconic college sports teams, including Louisiana, Georgia, Kentucky, Alabama, and Texas, enacted similar laws with the same July 1, 2021 effective date. Florida’s law has several regulations that companies seeking to engage in contracts with athletes should be aware. These regulations include:

  • If the student athlete is under the age of 18, any contract that provides for compensation for the use of its NIL must comply with other relevant state laws that govern such agreements with minors.
  • The student athlete must disclose any contract that provides for compensation for the use of its NIL to the postsecondary educational institution to which it is enrolled, pursuant to the requirements set out by the individual institution.
  • The duration of any contract that provides for compensation for the use of a student athlete’s NIL may not extend beyond the student athlete’s time participating in the athletic program at a postsecondary institution.
  • A student athlete may not enter into a contract that provides for compensation for the use of its NIL that conflicts with a term of any team contract set by their postsecondary educational institution. If such a conflict occurs, the institution must assert as such and identify to the student athlete or their representative each conflicting term. The institution may not make, as part of the team contract, a prohibition on compensation for the NIL rights of student athletes.
  • A postsecondary education institution may not prevent or unduly restrict a student athlete from obtaining professional representation by an agent or attorney for the purpose of securing compensation for the use of its NIL.

The foregoing rules are generally included in other states’ laws, but each state has a slightly nuanced law that should be reviewed prior to engaging in contracts in that state. Companies need to understand that each state law has different stipulations for compliance, and while there are similarities between these state laws, the devil is in the detail. For example, while many of these state laws expressly provide that student athletes may engage agents and other representatives to negotiate NIL arrangements, the applicable law in Oregon – i.e., SB 5 – provides that: “[a] student athlete may not contract with or retain a person as the student athlete’s professional representative or athlete agent, if the person represented a post-secondary institution of education at any time in the preceding four years.” And, Oregon’s law further stipulates that an agency contract must set out “[t]he amount and method of calculating the consideration to be paid by the student athlete for services to be provided by the athlete agent under the contract and any other consideration the athlete agent has received or will receive from any other source for entering into the contract or for providing the services.”

In addition, and again by way of example, SB 5 in Oregon includes other state-specific restrictions that must be considered and followed, such as provision that allows a post-secondary institution of education to establish and enforce a conduct code that is applicable to all students enrolled at the institution. Similarly, Ohio’s law provides: “A state institution of higher education, private college, athletic association, conference, or other group or organization with authority over athletics may prohibit a student-athlete who participates in intercollegiate athletics from entering into a contract providing compensation to the student-athlete for use of the student-athlete’s name, image, or likeness if under the contract the student athlete’s name, image, or likeness is associated with any of the following. . .” including marijuana products, vaping products, sexual products, casinos, or “[a]ny other category of companies, brands, or types of contracts that are similar to those described in this executive order that the institution or college communicates to the student-athlete before the student-athlete enrolls at the institution or college or 30 days after this executive order is in effect if currently enrolled.” As such, before entering an endorsement agreement with a student athlete, a company should ensure that the activities contemplated under the contract are in compliance with any such existing code of conduct.

In Georgia, the requirement that a contract concerning an athlete’s NIL not conflict with a team’s contract is of significant consequence as the law provides: “Team contracts may provide for a pooling arrangement whereby student athletes who receive compensation for the use of their name, image, or likeness pursuant to this article agree to contribute a portion of the compensation they receive pursuant to such contract to a fund for the benefit of individuals previously enrolled as student athletes in the same postsecondary educational institution as such student athlete.” There are limitations to this rule such as the athlete cannot be required to contribute an amount equal to or more than 75% of the compensation.

Meanwhile, Alabama’s NIL law provides that criminal liability may be imposed for certain violations. Specifically, Alabama’s law provides that nonstudents may be criminally prosecuted for a Class C felony and imprisoned for up to 10 years for violations of certain prohibitions designed to ensure that a student’s NIL agreement does not create pay-for-play relationships or provide for improper recruiting inducements.

Further, if a student athlete transfers to a new school in a different state, while already engaged in a contract set out under the state laws and the policies in place at the student athlete’s current school, it is unclear whether such a contract will be legal, permissible and/or enforceable under the laws and policies applicable to the student athlete at its new school. Therefore, companies are encouraged to consider the terms of any such contract in light of the laws and rules applicable at the student athlete’s new school, and to implement an amendment and/or look towards any “make-good” provision in the contract if these laws and rules frustrate the benefits the company expects to receive under the arrangement.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

San Francisco
Baird D. Fogel

Washington, DC
Dana S. Gross

Boston
Amelia G. Pennington