Clearing the NIL Air: Is it Permissible for NIL Contracts to Provide for Termination If the Student-Athlete is Not Enrolled at a Specified School?

30 September 2022 Lead1 Association Publication
Author(s): Jonathan L. Israel Gregory A. Marino

This article was originally published in the August-September issue of the Lead1 Association NIL Institutional Report and is republished here with permission.

The college sports world is 13 months into the NIL era.  Your business manufactures fly traps, and you decide to ride the NIL wave and begin negotiating an endorsement deal with Billy “Sticky Hands” Buford, an All-American wide receiver who plays college football at your alma mater, Big State.  There is value to you that Buford is playing football at Big State, which is located near your business’ headquarters and manufacturing facility.  You would not do an NIL deal with Buford if he were playing college football anywhere other than Big State, so you ask your lawyer to put a provision in the contract that specifically states that the contract will terminate if Buford leaves or becomes unenrolled at Big State.  You are surprised when your lawyer tells you that you may not be able to include this critical contract term in the agreement.

This hypothetical presents a real-world question for contracting parties in the college sports NIL space:  Under applicable rules, is an NIL contract valid if it expressly provides for termination if and when the student athlete is not enrolled at a particular school or institution?  The question arises from a now apparent conflict between NCAA rules, which arguably prohibit such terms, and various state NIL laws, which arguably would permit them.  The apparent conflict highlights the complicated legal landscape of college sports and NIL rights, where the NCAA has tried to layer its own rules into the uneven patchwork of varying state NIL laws, which have primacy, as even the NCAA has acknowledged.  Here, we examine the legal issues surrounding the “enrollment” question, as well as the practical considerations flowing from them for contracting parties. 

The general interplay of various NIL rules is as follows: state NIL laws and individual university NIL policies govern NIL activities in their respective jurisdictions. In states with no NIL laws, the NCAA’s rules (which are a composite of interim policies, guidelines, FAQs and the existing NCAA Bylaws) fill the regulatory gaps. State NIL laws do vary, but they typically do not conflict directly with NCAA rules. For example, all state NIL laws uniformly contain prohibitions on NIL compensation as an inducement to attend a certain school. The NCAA’s so-called “Name, Image and Likeness Policy Question and Answer” document does the same.

The interplay between NCAA rules and state NIL is not always seamless, as revealed by the above Billy Buford hypothetical. In certain states, a conflict has surfaced around the issues of term limits and school enrollment.  In its May 2022 NIL guidance, the NCAA reiterated its focus on improper inducement by prohibiting NIL deals which are “guaranteed or promised contingent on initial or continuing enrollment at a particular institution.” Most NIL stakeholders have taken this language to mean that any NIL agreement that is contingent upon matriculation or continued enrollment at a particular institution is a violation of NCAA rules. This interpretation seems fair from a recruiting perspective, as the prospect of an NIL deal should not induce a student athlete to enroll in a specific school or to induce a student-athlete who may enter the transfer portal either to stay at particular school or move to another one. It seems, however, that these principles, which involve the front end of NIL contract negotiation, are not relevant to the back end of an existing contract where the parties agree that the contractual relationship and obligations should end if and when the student exits a specified school.  This is a distinction with a meaningful difference, as under any applicable rule, a NIL contract itself cannot even exist until after the student-athlete is enrolled at school somewhere.

Nevertheless, as noted, NCAA rules have been interpreted to prohibit the termination of any agreement based on a student-athlete ceasing enrollment at a given college. Meanwhile, and in contrast, certain state NIL have taken a different tack by prohibiting NIL agreements between student-athletes and licensees that would extend beyond a student-athlete’s playing career at a given school (i.e., the law mandates that the NIL contract terminate when the student-athlete leaves a given school).  Specifically, six states (Florida, Illinois, Louisiana, Oklahoma, South Carolina and Texas) currently restrict NIL deal term lengths to the duration of a student-athlete’s enrollment at a certain institution. On this point, the language of these state laws is nearly identical—South Carolina’s is typical: “[NIL deal] duration cannot extend beyond participation in an athletic program at an educational institution.” Practically speaking, a NIL contract that provides for termination when the student-athlete ceases enrollment at a particular school would be entirely consistent with South Carolina law, but, conversely, appears to violate the NCAA’s rules.  This paradox has had the effect of creating confusion and inefficiency in the NIL marketplace for no obvious benefit to student-athletes or NIL licensees.

From a policy perspective, there are benefits from allowing parties to terminate a contract if and when the student-athlete leaves a specific school.  First, a termination rights protect endorsing entities from paying student-athletes for use of their NIL beyond their marketable time as college athletes. Take the above hypothetical:  the fly trap manufacturer, which is located in Columbia, SC, would have little use for Billy Buford’s NIL when he graduates from the Big State (also located in Columbia, SC) and then transfers to Clemson or, alternatively, gives up the sport all together. Further, these term and enrollment limitations provide sensible bookends to NIL deals, because, without them, student-athletes could be exploited by predatory licensees. An unsophisticated freshman baseball player who signs an exclusive 20-year NIL agreement with a sport drink company may unwittingly limit his marketability in that category when he ultimately makes it to the big leagues. More than anything, these limitations introduce a sense realism to NIL agreements. It is no secret that those contracting with student-athletes for their NIL typically have an interest in that student-athlete continuing to attend and compete at a specific school. This is just as true whether the NIL licensee is an alumni booster group, a local delicatessen, or a performance apparel manufacturer—in all cases, contracting entities are best served by certainty of performance, and clarity in termination. This should not be confused with “pay-for-play” inducement, but instead should be seen stakeholders legitimately aligning their pecuniary interests.

Notably, the majority of state NIL laws (e.g., Oregon and North Carolina) do not include durational or enrollment limitations, and, as a consequence, in these (and other state without NIL laws), NCAA rules control, including the NCAA’s apparent prohibition against tying an NIL contract to enrollment at a particular school. As a result, in these jurisdictions, contracting parties eschew identifying a particular school in their NIL agreement, often to absurd effect. Rather than including commonsense termination provisions triggered by a student-athlete’s transfer or graduation, these NIL deals typically have one-year terms, which deprive student-athletes of the security of long-term arrangement, or incorporate geographic limitations to ensure that the NIL contract is operative only if the student-athlete attends an obvious – but nevertheless unnamed – school within the specified geographical area. These form over-substance contractual contortions and seemingly needless inefficiencies only serve to complicate NIL deals without offering any obvious benefit to the contracting parties.  They also highlight the uneven playing field that exists in a system where the applicable rules vary from state to state.

To be sure, there are practical ways to avoid the enrollment issue entirely, including, for example, by contracting and paying for NIL rights or services on request or an activity-by-activity basis.  In such circumstances, the licensee could simply stop engaging with and paying the student-athlete if and when the student-athlete leaves a particular school.  This, however, effectively limits the ability of parties to enter into a longer-term agreement or take the risk of delivering up-front payments in exchange for future services. For now, it appears that contracting parties only within certain states can avail themselves of such broader contractual terms and opportunities.

Given these discrepancies and inefficiencies, the NCAA should consider clarifying its NIL rules to allow contracting parties to include common-sense terms providing for the termination of NIL contracts if and when a student-athlete ceases playing a sport at a particular school.  In doing so, the NCAA would eliminate what has become a two-track system in NIL contract construction and strengthen the bona fide contractual relationships between NIL licensors and licensees in a way that reflects the reality of these relationships as they actually exist in the marketplace. All NIL stakeholders should have the freedom to enter into agreements that accurately reflect the benefits of their bargain, not just those operating in six states.