While the proposed settlement resolves the financial threat of an adverse judgement at trial, its prospective regulatory framework raises serious questions about the future governance and administration of college athletics. The agreement also introduces significant new compliance challenges on a go-forward basis, including in existing areas such as Title IX and NIL, as well as new areas such as the effective allocation of resources for competitive and compliance purposes akin to salary cap management in professional sports. Most importantly, the settlement leaves unresolved the fundamental question of whether student-athletes are employees. Moving forward, institutions will need to take a different and more nimble approach to the administration of their athletic departments in order to maintain competitiveness on the playing field while achieving compliance in an evolving regulatory environment.
The settlement
There are two principal components of the settlement term sheet. First, the NCAA and its Division I members will pay $2.78 billion in damages to a class of current and former Division I student-athletes (dating back to 2016) over a ten-year term.1 The NCAA itself will contribute $1.2 billion to the damages payments, while the remainder will come from withheld planned distributions to the Division I membership.2 Second, the settlement includes a prospective framework creating a revenue-sharing model that will allow Division I institutions to provide direct compensation to student-athletes beginning in the 2025-26 academic year.3 During the first year of the settlement, each Division I institution will be permitted to provide its student-athletes with up to 22% of the average “Power Five” school’s revenue, currently expected to be around $22 million.4 Under the settlement, that amount would increase annually as revenues from media rights contracts rise over time.5 Student-athletes will be eligible to receive this direct compensation in addition to their athletic scholarship, third-party NIL compensation, and other educational benefits consistent with the Supreme Court’s decision in Alston v. NCAA.6
The forward-looking framework also includes significant changes to the regulation of scholarships, third-party NIL deals, and enforcement of the revenue-sharing structure. Specifically, the settlement eliminates NCAA caps on the number of scholarships per sport, and instead proposes the NCAA and conferences designate roster limits by sport.7 Under the settlement framework, institutions will be able to fully fund scholarships for every member of a team in a given sport, so long as the overall roster stays within the prescribed limits.8 The settlement also includes provisions aimed at reining in abuses in current third-party NIL deals with student-athletes, including requirements that student-athletes report their third-party NIL deals, and that third-party NIL deals must involve “true NIL” (that is, fair market value compensation).9 The new NIL regulations would also create a burden-shifting framework requiring a student-athlete and his or her institution to demonstrate that an NIL deal with a booster or collective constitutes “true NIL.”10 Finally, the settlement contemplates a new enforcement infrastructure to resolve potential violations of rules promulgated under the new revenue-sharing framework.11
According to the terms of the settlement, in exchange for the damages, revenue-sharing model, and scholarship cap elimination, the members of the plaintiff class will agree to drop their current claims in the three lawsuits and also agree not to sue the NCAA for other antitrust violations for a period of ten years.12 The settlement also provides for a “substitution” system that will allow future classes of student-athletes to opt-in to the settlement’s revenue-sharing structure over the 10-year life of the agreement.13
Importantly, the settlement will need to be approved by Judge Claudia Wilken, a process that may take some time. There are a number of steps that must occur before approval of the settlement. First, Judge Wilken will evaluate the settlement for fairness, reasonableness, and adequacy.14 Judge Wilken will likely scrutinize how payments of the settlement amounts are calculated and to be distributed, how future student-athletes will be “substituted” into the class, and how student-athletes can opt out of the class.15 Judge Wilken may also want to understand how the prospective revenue-sharing framework, and specifically the capped nature of the system, will operate.16 In addition to Judge Wilken’s review, if a significant number of student-athletes in the class decide to object or opt out of the settlement, (or even if a small number of high profile athletes opted out) the NCAA and conferences might walk away from the deal if they feel it no longer provides sufficient protection from antitrust litigation moving forward.17 Indeed, as the NCAA and the plaintiffs were finalizing the settlement agreement in House, a federal judge in Colorado ruled that Fontenot v. NCAA, another class action lawsuit alleging the NCAA’s amateurism rules violate federal antitrust law, could proceed separately from the House settlement.18 Given Judge Wilken’s pending review, as well as the potential for student-athlete objections and opt outs, it is still uncertain when the settlement agreement might become final.
The settlement raises important questions
The House settlement aims to provide a measure of stability in an increasingly tumultuous era for college sports. The agreement resolves the immediate financial threat of a loss at trial, and introduces a revenue-sharing model. That said, the agreement by necessity leaves open a number of fundamental questions about the structure of college sports moving forward, as well as more specific questions about how institutions are expected to comply with the settlement’s proposed framework. This is understandable given that the agreement is only a term sheet, but the agreement raises important questions for Division I member institutions in several areas.
Future antitrust protection for the NCAA and conferences?
The principal benefit of the settlement for the NCAA and conferences is protection from antitrust litigation for the ten-year life of the agreement. The scope of that benefit, however, turns on several factors. First, as described above, individual members of the class may opt out of the settlement to bring separate antitrust claims against the NCAA and conferences, although any opt-out class members likely could not bring their claims in a separate class action. Second, former student-athletes who predated the class requirements could bring lawsuits based on an antitrust theory of liability (indeed, nearly three weeks after the announcement of the settlement, 10 members of the 1983 N.C. State national championship men’s basketball team sued the NCAA for continued use of their NIL and publicity rights), although such suits will face significant hurdles under the statute of limitations and perhaps other legal regimes, such as the Copyright Act.19 Finally, future student-athletes, especially high-profile athletes in football and men’s basketball, might not opt into the settlement and could conceivably challenge the cap contained in the settlement’s revenue-sharing arrangement. Any such potential claims would likely contend that the revenue-sharing framework is the result of a settlement agreement, not a collective bargaining agreement, and therefore does not necessarily enjoy immunity from antitrust scrutiny. There are, of course, arguments to the contrary. The settlement agreement contemplates that the revenue cap will be embodied in a judicial decree, and while a court decree does not confer immunity from antitrust suits, the Supreme Court has given deference to such decrees that resolve contentious antitrust litigation, as it did in Broadcast Music, Inc. v. Columbia Broadcasting Systems.20
Does the settlement create an effective governance and enforcement structure?
The settlement also raises questions about the administration and governance of a system borne through a federal legal injunction. One fundamental question concerns the identity of the ultimate arbiter for disputes under the settlement’s framework. Is the Northern District of California, either through Judge Wilken or an appointed special master, essentially stepping in as a monitor over the NCAA with respect to the new framework? In other words, will new NCAA bylaws passed under the new framework be subject to or even require judicial review before implementation? Will NCAA enforcement matters or waiver decisions be subject to challenge in federal court? Is a federal antitrust injunction a viable mechanism for the ongoing governance of college sports?
Similar questions surround the identity of the new enforcement mechanism contemplated in the settlement agreement. It is unclear whether the NCAA enforcement staff and the Division I Committee on Infractions would operate as the primary investigatory and resolution bodies for infractions matters under the new framework, or whether the NCAA might create another process akin to the now defunct Independent Accountability Resolution Process (IARP). Alternatively, the settlement might create a separate resolution process for these types of matters entirely, perhaps a college sports version of the Court of Arbitration for Sport (CAS). Regardless of what form this enforcement mechanism takes, institutions should prepare for a new and evolving set of rules and processes for infractions investigations under the settlement’s framework.
What about the employment issue?
Importantly, the settlement does not seem to resolve questions about the employment status of student-athletes. There are multiple pending legal actions, both in front of the National Labor Relations Board (NLRB) and the federal courts, that seek to reclassify student-athletes as employees under the National Labor Relations Act (NLRA) and the Fair Labor Standards Act (FLSA), respectively.21 The settlement does not resolve those administrative claims or lawsuits. This is not surprising, as the settlement resolves antitrust litigation, and the employment issue is beyond the scope of the lawsuits. That said, the plaintiffs in those cases may cite the settlement in support of employee status for student-athletes because the settlement likely will significantly increase the overall economic benefits provided to student-athletes by their institutions and will come in the form of direct payments. Therefore, while the settlement provides a measure of protection to the NCAA and conferences on the antitrust front, it may have some effect on legal arguments in the employment cases. If student-athletes are held to be employees of their schools, conferences, or the NCAA pursuant to the NLRA and/or the FLSA, that holding would trigger additional legal and financial obligations for any entity deemed an employer. Specifically, under Section 7 of the NLRA, student-athletes at private schools would have the right to unionize and collectively bargain, and to engage in other concerted activities for the purposes of collective bargaining.22 Student-athletes at public institutions would be subject to state laws regarding organizing and collective bargaining. Under the FLSA, student-athletes deemed to be employees would be entitled to a minimum wage, as well as overtime pay for any time worked beyond 40 hours per week.23
What does all this mean for Title IX?
The settlement’s revenue-sharing model also raises Title IX questions for institutions. The Office for Civil Rights wrote the Title IX regulations for an era in which direct NIL compensation to student-athletes was unthinkable. It is unclear whether and to what extent the very specific proportionality rule applicable to athletic scholarships would apply to direct NIL compensation (See 34 C.F.R. §§ 106.37, 106.41). Notably, the settlement contemplates that existing athletic scholarships can continue (and, indeed, expand, given the elimination of caps on such scholarships). If the separate new payments are structured as compensation in exchange for a student-athletes’ NIL rights based on the market value of those rights – and untethered to the cost of attendance – they might not be considered “financial assistance” or “athletic scholarships” under Title IX. This question is particularly crucial given that men’s sports, especially football, tend to play an outsized role in revenue generation for campus athletic departments. Institutions will therefore need to proceed carefully and strategically as they plan for the future and chart a path forward.
What does the settlement mean for athletics compliance offices?
The settlement also raises new NCAA compliance issues for Division I athletic departments. Specifically, the revenue-sharing framework will raise new questions about how institutions can use offers of direct compensation in the recruiting context, both for prospective student-athletes in high school as well as student-athletes in the transfer portal. Additionally, the new requirements for third-party NIL deals will introduce additional considerations for institutional education and compliance efforts. These potential NIL restrictions come on the heels of recent NCAA legislation affording institutions more freedom in facilitating third-party NIL deals, and would introduce a new set of considerations for campus athletic compliance offices in formulating institutional NIL policies and procedures.24 Overall, the settlement will add layers of complexity for athletic departments looking to maintain compliance while achieving excellence on the field and recruiting trail.
Takeaways for Division I institutions
If the settlement becomes final, Division I institutions will need to take a multidisciplinary approach to these issues in order to remain competitive while minimizing regulatory and compliance risks and avoiding litigation. Schools will also need to consider new factors as collegiate sports moves towards a different model that has more in common with professional sports than the current structure. These considerations include the compliance and asset-management components of “capology,” and a strategic approach to student-athlete NIL licensing agreements. Institutions will also need to take a revised approach to the monitoring and support of third-party NIL deals. Finally, athletic compliance offices and campus legal departments will need to adapt to a world in which legacy processes are no longer as relevant, and the ability to remain competitive and compliant will increasingly depend on more sophisticated and creative approach to compliance and infractions matters.
We recommend that Division I institutions closely monitor the settlement process for emerging details and developments. Additionally, schools should begin developing a comprehensive and principled approach for a revenue-sharing plan with their student-athletes. That process will likely require careful attention to legal requirements and perhaps some difficult choices. Such a plan should include an institutional assessment of Title IX, tax consequences and employment litigation risk, and should strategically balance competitive priorities, gender equity concerns, and employment law considerations. Institutions should also continue to monitor ongoing developments in the NLRB and FLSA matters, as well as legislative updates in Congress addressing student-athlete employment status and international student-athlete concerns. Finally, schools should watch out for updated NCAA regulatory guidance regarding the settlement’s revenue-sharing and NIL provisions.
How can we help?
With leading sports, higher education, employment, antitrust, and investigations practices, Hogan Lovells can deliver comprehensive solutions to your most pressing questions in an ever-shifting collegiate sports environment.
The firm’s sports practice includes attorneys with on-campus and national office experience, as well as lawyers with expertise in salary cap management and salary arbitration matters for professional teams in the NFL, MLB, and NHL. Our higher education practice group regularly advises institutions on Title IX, and, together with our employment practice, assists on campus employment matters, including unionization. The firm’s antitrust practice has a long history advising conferences and the College Football Playoff in matters relating to antitrust law, championships, and television rights. And our investigations practice has represented multiple “Power Five” institutions in “bet-the-program” NCAA infractions matters.
We invite leaders on campus interested in learning about this alert’s ramifications as well as other collegiate sports legal issues to contact our higher education, sports, investigations, and employment law teams.
Authored by Joel Buckman, Steve Argeris, and Evan Guimond.
References
3 Id.
8 Id.
10 Id.
13 Id.
14 FRCP 23(e).
20 441 U.S. 1 (1979).
21 Trustees of Dartmouth College and Service Employees International Union, Local 560, Petitioner. Case 01-RC-325633; University of Southern California; Pac-12 Conference; National Collegiate Athletics Association, Joint Employers and National College Players Association, Petitioner. Case No. 31-CA-290326; Johnson v. NCAA, No. 22-1223 (3d Cir.).
