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Will Transfers and Early Draft Entrees Lose Out Under O’Bannon?

As fascinating as the 99-page ruling in O’Bannon is, for the immediate purposes of the judgment the two-page injunction order is much more significant. Yesterday I looked at how the injunction essentially solves the cost of attendance debate (much more on that soon). There is also an interesting wrinkle in the deferred compensation portion of the injunction which could have a major impact on which football and men’s basketball players get paid should this exact order stand up on appeal.

Here is the text of that portion of the injunction order:

Prohibit deferred compensation in an amount of $5,000 per year or less (in 2014 dollars) for the licensing or use of prospective, current, or former Division I men’s basketball and Football Bowl Subdivision football players’ names, images, and likeness through a trust fund payable upon expiration of athletic eligibility or graduation, whichever comes first.

It is important to keep in mind that the injunction order does not compel the NCAA or its members to create or pay any amount into a trust fund. It merely says what the NCAA may not prohibit or, to lose the double negative, what the NCAA must allow. Under the order the NCAA must allow two things:

Allow schools to pay at least $5,000 into a trust fund per year for each year a football or men’s basketball player is on the team; and
Allow schools to pay out the fund upon graduation or expiration of athletic eligibility, whichever comes first.

It seems safe to assume that in the interest of competitive balance, a continued defense of the collegiate model, and limiting the financial impact of the decision, the schools will enact NCAA rules that limit the deferred compensation to the greatest extent allowed under the injunction.

The $5,000/year cap seems self explanatory although there seems to be suggestion that this means $5,000 per year an athlete is eligible. The remedy section of the ruling does not say this explicitly. The injunction order also does not mention academic eligibility. The most obvious reading of the injunction is that the NCAA cannot enact a rule which says athletes only get money paid into the trust if they are academically eligible. I imagine this will be clarified or amended between now and the start of the deferred compensation plans.

The date of payout is trickier and raises more interesting questions. The biggest questions seem to be surrounding two groups: transfers and early draft entries.

Nothing in the injunction says how the trust fund(s) must be set up. The NCAA could set up a trust for all Division I members. Conferences could each have their own. Or individual schools could each have one. If there each school has their own trust, can they all agree to not pay out if an athlete transfers? If an athlete fails to exhaust his or eligibility or graduate at a specific school, does he lose the money he would have been entitled to at that school?

Early draft entries may also lose out. The order says that the NCAA must allow the “expiration” of athletic eligibility to be a payable event. In NCAA-speak, that means exhausting or using up athletic eligibility by playing four seasons or running out your five-year clock. Joining the professional ranks results in “forfeiting” your eligibility. But it is not clear whether the judge is recognizing this distinction or using “expiration” to mean any point where an athlete’s eligibility is gone for any reason. And what of athletes who enter a draft before graduating then return to finish their degrees?

Like the academic eligibility question above, this will hopefully be resolved before the effective date of the injunction (also a question mark). But the payout event question is more complicated and has many possible solutions for the type of rule the NCAA could enact:

  1. Transferring or entering the draft early terminates an athlete’s interest in the trust fund;
  2. Transferring or entering the draft early has no effect on the athlete’s interest in the trust fund;
  3. Transferring or entering the draft early delays an athlete’s interest in the trust fund until graduation;
  4. Transferring or entering the draft early must be payable events; or
  5. Some combination of the above for the two events.

I doubt transferring will be made a payable event. That would be a disaster, giving athletes a $5,000 incentive to transfer every year. My guess would be that in response to a post-trial motion, the judge will rule that entering a draft early causes a payout and transferring has no effect, i.e. once an athlete graduates or exhausts his eligibility, he can go back to any school he played at and receive his deferred compensation.

But if transferring or entering a draft early either causes an athlete’s interest in the fund to be terminated or makes graduation the only payable event, it could have the effect of keeping athletes at the same school longer. Transferring both delays the end of athletic eligibility (by making an athlete redshirt) and graduation (because athletes tend to lose credits in the switch). And while athletes might eventually get their payout if the entry the draft early and come back to graduate, more might be willing to stick it out, especially if their professional prospects are extremely good (guaranteed first round NBA or first-second round NFL draft picks).

Are you ready for the NEXT STEP!