Dave Hoffman on NIL Buyouts as Penalty Clauses
I try to follow developments in the college athletics space, but it is hard to keep up. Dave Hoffman’s latest post on his Substack Contracts’ Empire shows just how far behind I have fallen. Here’s what I knew:
Collectives enter into Name, Image, and Likeness (NIL) deals with college athletes that purport to compensate those athletes for promotional activities but are really a way to pay the student athletes for playing for the college or university associated with the collectives. We have posted before about the contractual messes that arise when there is poor communication among the athletes and their agents, the coaches/athletic directors, and the people who run the collectives. Sometimes, the athletes allege that the coaches have made promises that are not reduced to contractual form and which the coaches have no authority to enter into. Sometimes, the athletes allege that the collectives have not paid what they promised. Sometimes, the schools treat the student athletes like fungible commodities and they bounce from school to school. It doesn’t always work out well on either end. In addition, ProPublica has shown that a lot of student athletes skirt reporting requirements associated with their NILs.
But as Professor Hoffman (above) shows, NILs can also come with strings attached. There are penalty clauses (labeled liquidated damages clauses) that can prevent a student athlete from switching schools. Professor Hoffman discusses the case of Damon Wilson, a defensive end who entered into a $500,000 NIL with the University of Georgia’s collective but then soon transferred to Missouri. You would think that the only consequence of that would be that Mr. Wilson would not get his NIL. Instead, Georgia is coming after Mr. Wilson for $390,000, representing the unpaid portion of his NIL.
Currently, the University of Georgia Athletic Association (UGAA), to which the collective assigned its rights, has filed a motion to compel arbitration. In the motion, the UGAA explains, “Wilson promised to pay the Collective liquidated damages equal to all remaining Licensing Fees that would otherwise have been payable to [him] under the Agreement.” The motion attaches the Term Sheet between the collective and Mr. Wilson. So if you are curious to see what these things look like, have yourself a gander.
If UGAA’s motion succeeds, we may never learn the outcome. As Dan Murphy reports on ESPN, there are other, similar cases:
Arkansas‘ NIL collective filed a complaint in the spring against quarterback Madden Iamaleava and wide receiver Dazmin James after both players transferred out of the program. The Iamaleava case was “resolved to Arkansas’s satisfaction,” according to a source familiar with the matter. James’ attorney, Darren Heitner, told ESPN that the wide receiver “stood his ground” and that Arkansas has not moved forward to date with further attempts to collect damages.
Professor Hoffman gives reasons for optimism in Mr. Wilson’s case. The agreement at issue is a partially-executed term sheet, not a finalized contract. Here’s the relevant provision:
Even if UGAA could succeed on its claim that its penalty clause actually represents liquidated damages, it is not clear that the term sheet or its arbitration provision is enforceable.
As usual, Professor Hoffman is a reliable guide on why schools are utilized this anti-competitive mechanism and why it is fraught both as a strategy and as a matter of legal doctrine. He predicts that adjudicators will not ignore the anti-competitive nature of the buy-out clauses. They will reject the analogy to college football coaches and treat these clauses as impermissible penalty clauses.