It is no secret that the National Collegiate Athletic Association (“NCAA”) landscape has transformed into a commercial marketplace where student athletes who choose to do so can recoup not only scholarships and other educational benefits, but also direct cash payments. The landmark 2021 Supreme Court decision in NCAA v. Alston fundamentally changed the rules by allowing athletes to profit from their name, image, and likeness (“NIL”) through compensation from entities outside of a school (“external NIL”), and the Ninth Circuit’s decision in House v. NCAA, took the concept of NIL as something of value that belongs to student athletes to another level by allowing colleges to “opt in” to an agreement which allows schools to pay student athletes directly for their NIL (“internal NIL”).

Under the theory that student NIL contributed to college sports’ programs financial earnings, the House decision required members of the Division I Power Four conference to compensate student-athletes directly for their NIL, and allowed other schools within Division I to “opt in” to paying athletes for NIL. Under House, the Power Four and non-Power Four schools that opt in to NIL payments are also bound by other NCAA rules, including roster limits that replace historical scholarship limits, and a cap on overall spending. We have discussed considerations for Division I schools in opting into internal NIL in previous client alerts.

This legal update will discuss NIL implications for colleges and universities that do not opt in to internal NIL. Although these schools are not paying student athletes directly, and therefore are not bound by NCAA rules applicable to internal NIL, their athletes are still able to receive external NIL payments. Schools whose athletes are receiving external NIL must be aware of NCAA rules-based, institutional mission and policy-based, and student wellness based implications of such payments. Below, we discuss NCAA rules and other considerations that apply to external NIL.

For schools in Division I, the NCAA has delegated the enforcement of NIL rules to the College Sports Commission (“CSC”), which collects information and monitors compliance for both internal and external NIL. The rules impose an obligation on Division I student athletes to personally report external NIL deals worth $600 or more. Because student-athlete compliance with rules may affect an institution’s eligibility to compete, it is critical for all colleges and universities to fully understand the key prohibitions embedded in the NCAA’s NIL rules. The two most salient external NIL-related requirements for institutions that do not opt in are prohibitions on pay-to-play, and, for Division I institutions, requirements related to reporting and market value of third-party NIL payments. These requirements apply regardless of whether the institution has opted in to external NIL.

The pay-to-play prohibition recognizes that, by the terms of the House agreement and the reasoning of the court that approved it, student athletes can be paid for the name, image, and likeness (NIL) by third parties, and that the NCAA’s previous prohibition of such payments illegally impaired the student athletes’ contract rights. The House agreement is focused on payment for NIL rights, which the court recognized legally belong to student athletes; not payment for athletic team membership or performance. This distinction is important. It continues the NCAA’s longstanding amateurism rules, which prohibit paying student-athletes for participation, wins, or other on-field achievements. It also limits liability that schools could incur if their student athletes are viewed as employees. Accordingly, any compensation provided to student athletes – even by entities outside of the school –  should be tied to NIL activities such as endorsements, social media posts, or public appearances, rather than a student-athlete’s mere participation or athletic achievement in collegiate sports.

Division I institutions that do not opt in should also be aware that their student athletes have reporting obligations for any NIL payments that they receive for $600 or more from third parties, including entities that have a relationship to a school, and entities that are not related to the school. The CSC has issued guidance explaining how it will evaluate NIL deals, which describes three main factors in assessing external NIL: (1) the nature of the payor’s relationship with the athlete’s institution; (2) whether the payment serves a valid business purpose (“VBP”); and (3) whether the compensation is comparable to what similarly situated student-athletes receive for similar promotional work (“market value”). According to NCAA rules, factor 1 – the relationship of the payor – will determine whether factors 2 and 3 are assessed.

First, the CSC will assess the relationship of the payor to the athlete’s institution to determine whether the payor is considered an “associated entity or individual.” An associated entity is:

• “an entity that is or was known (or should have been known) to the athletics department staff of an institution, to exist, in significant part, for the purpose of (a) promoting or supporting a particular institution’s intercollegiate athletics program or student-athletes; and/or (b) creating or identifying NIL opportunities solely for a particular institution’s student-athletes;
• an individual who was a member, employee, director, officer, owner or agent of any entity described above;
• an individual who directly or indirectly (including contributions by an affiliated entity or family member) has contributed more than $50,000 over their lifetime to a particular institution or to an entity described in the first bullet above;
• An individual or entity that has been directed or requested by an institution’s athletics department staff to assist in the recruitment or retention of prospective or current student-athletes, or otherwise has assisted in the recruitment or retention of prospective or current student-athletes; or
• any entity owned, controlled, or operated by, or otherwise affiliated with the individuals or entities described in the bullets above other than a publicly traded corporation.”

If a payor is determined to be an “associated entity or individual”, that triggers further scrutiny from the CSC. For such entities and individuals, the CSC will next assess whether there is a valid business purpose for the deal, and whether the deal is at fair market value. Under the House settlement, and further clarified by the CSC, a valid business purpose is any deal that demonstrates “a legitimate commercial rationale, including: (1) evidence of using the student-athlete’s NIL to promote or endorse a good or service provided to the general public for profit and (2) compliance with industry-standard NIL practices.”

One of the simplest ways to satisfy the valid business purpose  requirement is through clear evidence that a student-athlete’s NIL is being used to promote or endorse a good or service, especially when that promotion targets the general public and is tied to a for-profit transaction. Under the CSC’s guidance, the “for profit” inquiry is centered on the good or service being sold, not on whether the entity paying the student-athlete is itself is a for-profit business; what matters is that the transaction involves the sale of something for profit. Once both the student-athlete and the entity establish this for-profit relationship, they must then demonstrate that the compensation provided for the student-athlete’s NIL is consistent with fair market value. Although this test is somewhat subjective, it is informed by comparisons to how other athletes have been compensated for similar promotional activities. If these two hurdles are cleared, the CSC will approve the NIL transaction, provided that the athlete’s NIL is utilized by the entity in a clear and specific way.

While reporting external NIL to the College Sports Commission is not required for Division II and III schools, reporting such deals to institutions may be required by institutional policy or state law. Reporting to the CSC may also be a best practice, particularly for athletes who may transfer to Division I, as the disclosure requirement applies as of the date that an athlete enters the transfer portal. Due to the changing nature of NCAA rules and state and federal law, every student athlete should at a minimum keep a record of their external NIL activity, and be prepared to submit it to regulators.

Both NCAA Division II and Division III institutions and their student-athletes would benefit from schools providing oversight and assistance to student-athletes in receiving external NIL. Although responsibilities regarding such NIL generally lie personally with the student-athlete, the institution always  bears compliance burdens, including  student-athlete related compliance issues that potentially impact or affect a college or university. Schools always benefit from best practices that highlight compliance coordination between the school and their student-athletes.

NIL practices and CSC guidance have and will continue to develop in the coming years, and there is potential for Division II and III rules to change consistent with the approach the NCAA has taken for Division I institutions that do not opt in. As the approach to student-athlete NIL payments evolves, the landscape will remain fluid and, at times, unpredictable. Despite this uncertainty, colleges and universities retain full responsibility for understanding, implementing, and adhering to new regulatory requirements as they are introduced. Institutions that fail to keep pace with enforcement developments risk exposure to compliance violations, reputational harm, and competitive disadvantages in the NIL marketplace. Division II and Division III schools who are not paying their student-athletes directly are not exempted from all NIL-related compliance obligations, and must play close attention to both the regulatory landscape and to their student-athletes’ third party NIL compensation.

How Hunton’s Higher Education Team Can Help
Colleges and universities at the Division I, II, and III levels should remain abreast of the fast changing developments around collegiate athletes’ compensation and NIL. If you have questions about this and implications for your institution, please contact your Hunton Higher Education attorney.

The authors would like to thank Shawn Montgomery for his contributions to this legal update.