Musings from Arledge: House settlement

After some delay, the federal district court signed the order approving the class-action settlement in House v. NCAA.  

I’ve written on this subject multiple times, and there is no shortage of information in the mass media.  So instead of attempting a comprehensive review of the court’s order, I’ll address just a couple issues of note on the NIL rules.

First, let’s clarify that the settlement purports not to lay down new rules but, instead, green lights the existing NCAA rules in modified form.  The order says that the settlement “permits the NCAA to continue its prohibitions on NIL payments to student-athletes, except that the prohibitions permitted under the IRS will be narrower than the prohibitions under existing NCAA rules.”  

Now if that sounds like the settlement sets forth new rules, it kind of does.  But the consequences of laying it out as the settlement does might be important, depending on whether the NCAA intends to enforce these rules retroactively.  That is, the NCAA might claim the right to apply its rules to NIL deals put in place over the last year or so.  I doubt it, but we’ll see.  

So what are the changes?  The NCAA’s existing rules, which have not been enforced recently because the NCAA was emasculated by the federal courts, allow the NCAA to regulate all NIL deals.  That doesn’t mean all NIL deals are against the existing NCAA rules, but the NCAA claimed an interest in regulating them.

Under the settlement, that is not the case.  Now the NCAA’s NIL restrictions only apply to deals between an athlete and “Associated Entities or Individuals,” which essentially means a person or entity who has contributed “more than $50,000 over their lifetime to a particular NCAA member school, or an Associated Entity, to promote their athletics program or student-athletes or who has assisted a school in the recruitment or retention of student-athletes.”

In other words, deals with boosters and collectives will be scrutinized; deals with other parties will not be.  As to deals with boosters and collectives, the deals will be permitted if the compensation is “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.”  In other words, deals with Uncle Phil are fine if they are market deals.  The NIL clearinghouse, run by Deloitte, will make that determination, and if the player disagrees, he can take the issue to an independent mediator.

This is the provision that worries so many fans.  It shouldn’t.  The law frequently and in many contexts asks a trier of fact to determine fair market value.  It might be easier for some goods and services than others—cars, houses, publicly traded stocks are pretty easy—but there is a well-developed market for celebrity endorsements, and there’s no reason to believe that Deloitte can’t do a good job weeding out the nonsense, especially with an independent mediator there to clean up any mistakes.  

Interestingly, Deloitte has apparently told the major conferences that of recent NIL deals, 90% between athletes and private entities would survive whereas about 70% of deals with collectives would fail.  This makes sense.  When a real company pays Caleb Williams or Livvy Dunne money to endorse their goods, they are likely paying market value and doing what the federal courts anticipated when they struck down the NCAA’s restrictions on NIL originally.  But when a collective gives $400,000 to a high school lineman with no Q rating and no name recognition outside of recruiting junkies, they are involved in pay-for-play, not legitimate NIL.

One more point on these NIL rules before talking about whether they are lawful.  It is clear what the NCAA intends to do about new NIL deals going forward.  I suspect the NCAA will ignore payments made over the last year where the NCAA rules were in place but were essentially unenforceable.  Applying the rules retroactively would open a can of worms that I doubt the NCAA is interested in opening.

But the interesting question is what the NCAA will do about existing NIL deals that continue into the future.  Will the NCAA insist on sending to the clearinghouse NIL deals that were signed, say, six months ago but which are scheduled to be paid over the next three or four years?    

I suspect the answer is yes, and the language of the order certainly permits that interpretation.  I have yet to see anything from the NCAA on this question, although there may be something out there I missed.  

So let’s assume a collective entered into an NIL deal in the recent past and payments continue into the future.  I think past payments are no longer at issue.  If a collective front-loaded the deal, what has been paid is gone and likely not subject to any scrutiny.  But I think the deal must be sent to the clearinghouse for future payments.

One important question, then, is whether the collectives explained to players and their families (and, of course, included in the contracts) what would happen if the House settlement were approved and non-market NIL deals were subject to being struck by the clearinghouse.  I suspect the answer is yes, and if the answer in some cases is no—or if families just didn’t listen or understand—you’re going to see some angry players and parents in the very near future.

So the question everybody wants to know: are these rules enforceable?  

Who knows?  

Schools and athletes can opt out.  I don’t think any schools will do so (although some may be compelled to do so under their own state law—putting them in the unenviable position of abiding by state law and possibly being ineligible to compete in any major conference), and most athletes won’t either.  But some athletes will.  When they do, will they be blackballed by the major universities?  Probably.  Will they sue under the Sherman Act?  Almost certainly.  Will they win?  I don’t know. Will the blackballing make the rules look more collusive and thus more likely to be struck down?  Probably.

The judge’s order makes clear that the settlement terms were not litigated under the Sherman Act and the court is offering no opinion on whether they will survive a Sherman Act claim.  The court merely said that none of the objectors to the settlement as a per se violation of the Sherman Act—some restrictions on trade are so fundamentally collusive, for example, that courts can strike them without even listening to the reasons for the rules and weighing the interests underlying them—and the court said it did not engage in a “rule of reason” analysis, which is what courts do when it’s not clear whether the rules is anticompetitive.  

As you might guess, “rule of reason” analysis in antitrust law iscomplex and decisions will hinge on all kinds of evidence we simply don’t have before us, including expert testimony, the emails between the various universities and each other or NCAA officials, and other things.  I am not an antitrust specialist, although having litigated complex business disputes for the last 27 years, I sometimes bump into antitrust issues.  I think the new rules are far more likely to be enforced than the old NCAA rules.  That’s not saying much, of course, because the old rules were completely unjustifiable and the NCAA was getting beaten up consistently in the courts.  For a while there, the NCAA was basically Detective Nordberg when he got shot by the bad guyson the boat, running into more and more problems every second.  

The new rules have more of a chance.  I don’t know how much of a chance.  So I’ll simply tell you that I know these rules will be challenged, and I don’t know what will happen when they are.

I’ve always believed that the cap on revenue sharing is the biggest problem with the NCAA’s new framework.  Usually compensation restrictions set between rival employers are anticompetitive unless agreed upon through collective bargaining.  That’s how the NFL and NBA get enforceable salary caps.  Salary caps apart from collective bargaining certainly look pretty collusive and anti-competitive to me.  But, hey, nobody has given me a black robe and a case to adjudicate.

Ironically, the more-limited NIL rules probably seem more reasonable but are also less likely to survive a Sherman Act challenge.  There was, I think, a compelling argument that a clearinghouse should see and analyze NIL deals to make sure that third parties were not taking advantage of students or to ensure that schools’ rosters and personnel decisions were not being interfered with by parties over whom they have no control.  But by limiting the clearinghouse’s work to deals with boosters and collectives, those arguments seem to be unavailable.  The rules apply only to those over whom schools do exercise some level of control.  It is clear now that the only reason for the clearinghouse is to keep schools and boosters from sidestepping the revenue caps.  

So while I can imagine a world where revenue caps get struck as anticompetitive but an NIL clearinghouse would survives litigation, that doesn’t seem likely here.  The NIL clearinghouse is simply there to police the revenue caps; if they go, it probablygoes.  

How long will the rules stay in place?  Again, who knows?  It’s possible to imagine a lawsuit being filed in the near future and the plaintiff getting an injunction.  If so, they won’t be in place very long.  

As long as players and the plaintiffs’ bar are interested in challenging the rules, as long as state legislatures are acting to undercut the rules, we have to assume that there is at least a decent chance the rules will go up in flames at some point in the near future.   

One final thought, and I’m on my shakiest ground yet here, but let’s talk about the likely impact so long as these rules stay in place.  

It is clear that no universities will be able to dramatically outspend the others, at least not collectively.  The days of Oregon simply out-paying everybody else are gone.  But that’s already the case now that everybody is playing the NIL pay-for-play game, and you can see the impact losing that advantage has had on their recruiting.  Now everybody will have the same amount of money to spend.

Yes, some markets and programs lend themselves to higher legitimate NIL.  It probably helps to be in Los Angeles rather than Lincoln, Nebraska.  But college football is a national sport, and the superstars are known around the country.  NFL stars can get major endorsement deals even if they play in small markets; elite college players will as well.  Tim Tebow would have been able to cash out in a big way, even though Gainesville is not Los Angeles.  

And most players, even in the best markets, just have little or no endorsement value.  Indeed, you might make an argument that being a decent player with no Q rating is better in Norman Oklahoma, where everybody is crazy about Sooners football, than in Los Angeles, where non-descript college football players have no celebrity value at all and the public at-large doesn’t really care about them.    

I think the elite players are slightly better being in major markets.  Caleb Williams did better financially in LA than he would have done had he stayed in Norman. But the Calebs, Reggies, and Tebows of the world are rare.  The small-time guys might be more likely to get small-time deals in small college towns. I’m just not sure.

But note that just because everybody has the same amount to spend on revenue sharing does not mean we’re returning to the days when pay was against the rules.  Money still matters, and everybody will have money to spend. Northwestern won’t be able to compete with Ohio State in recruiting; it never has and it never will. But Northwestern will probably be able to compete with Ohio State for a handful of individual players. Ohio State likely won’t have the money to pay the number-four receiver in its recruiting class; it will already have committed a lot of its revenue-share money to its top receiving prospects. But Northwestern, which has no shot at those top prospects, may have a lot more money for Ohio State’s fourth guy. They may get him.

I think what this means is that the elite programs will still land many of the elite recruits. But the talent will be spread out more broadly. In the old days, Bear Bryant or John McKay would stack up elite prospects five deep.  I don’t think that’s possible any more.  The second and even third-tier programs will be able to compete for quality four-star recruits that they could not have landed in the past, and they might even make a huge financial offer to a single elite prospect that the major powers can’t touch.  USC and Ohio State will have lots of elite prospects to pay; Minnesota, however, might take the bulk of its revenue-sharing dollars and spend it on one elite quarterback.  

Remember, salary caps are always designed to achieve parity; there’s no other reason for them.  And they will probably have that effect.  The best second-tier programs, like Bill Snyder’s at Kansas State or Kyle Whittingham’s at Utah, have always been better at identifying under-the-radar guys and developing them. The top second-tier programs will still be the programs who can do that the best. But they might also have a greater chance of landing a couple of elite prospects from time to time that would have gone elsewhere in the old days. Just imagine if Bill Snyder could occasionally supplement his roster with a five-star quarterback.  

So the elite programs will still be elite. But the gap will narrow, and the likelihood that second-tier programs will make legitimate playoff runs will increase. That’s probably good for college football. It’s probably not great if you’re Alabama, Ohio State … or USC.