Looking Back at Cannabis for the Way Forward in Name, Image and Likeness

Issue March/April 2022 April 2022 By Jonathan Wynne
Young Lawyers Division Section Review
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Jonathan Wynne

The 2021 U.S. Supreme Court decision in NCAA v. Alston cleared the last major hurdle preventing college athletes from profiting off their name, image and likeness (NIL) while still in school. Much has been made of the infant and rapidly changing business and legal landscape at the start of this new reality. Sparse rules and laws shape the path that numerous stakeholders now run, including college athletes, businesses looking for a slice of the pie, and the NCAA athletic bodies and schools trying to keep up.

However, the fledgling NIL industry is not without a roadmap during these early times. The cannabis industry in the U.S. has evolved and grown in fits and starts over the roughly 25 years since California legalized medical cannabis. Massachusetts, having introduced medical cannabis in 2012 and recreational use in 2016, collected a reported $74.2 million in marijuana excise taxes halfway through the current fiscal year. Alcohol taxes during the same time totaled only $51.3 million.

Differing tax rates impact those swings today, but these tax revenue trends follow the impact that other state coffers have seen as legalization progresses through the country. The cannabis industry foothold is strong, despite federal prohibition of the product. NIL, for its part, is now permitted and enjoys the luxury of far fewer rules and regulations. That said, the early landscape is comparable to the Wild West in which cannabis has resided for the last quarter century.

How We Arrived At Today

Arguments for and against collegiate athlete compensation and the spirit of “amateurism” are as old as the NCAA itself. The ball that set today’s landscape in motion was the 2014 O’Bannon lawsuit against the NCAA. Former college basketball star and professional player Ed O’Bannon argued for a post-graduation scheme of student-athlete compensation for the NCAA’s commercial use of their image. O’Bannon brought suit upon his surprise at seeing himself in a popular college basketball video game, over a decade after his collegiate career had ended. He had received no notice and no compensation for his appearance in the game.

The U.S. District Court for the Northern District of California initially held that the NCAA’s prohibition against players cashing in was an unreasonable restraint of trade that violated antitrust law. District Judge Claudia Wilken permitted schools to offer full cost-of-attendance expenses (including living expenses) that were not included in NCAA scholarships at that time. Schools would also be permitted to put money in trust and make it available to student-athletes upon leaving. 

The 9th Circuit on appeal did away with the trust component, but affirmed crucial aspects of the O’Bannon decision. Namely, the court found that the NCAA’s compensation rules were in fact subject to antitrust laws, and also deemed them to be an unlawful restraint of trade under the three-step framework of the antitrust Rule of Reason.

The result maintained certain caps on student-athlete academic benefits for a brief time. On the heels of O’Bannon, the case line of NCAA v. Alston challenged the anti-competitive nature of the remaining caps.

After return trips to both Judge Wilken’s courtroom and the 9th Circuit, the U.S. Supreme Court in Alston handed down a 9-0 decision that struck the remaining caps on antitrust grounds. The summer of 2021 decision, coupled with the NCAA’s subsequent (and almost immediate) interim policy to suspend amateurism rules related to NIL, opened the door for student-athletes to cash in ahead of the fall sports season.

And cash in they did. In a spectacular flex of branding and marketing muscle, University of Alabama quarterback Bryce Young generated over $800,000 in NIL endorsements during the first month after Alston. Young earned this money before he ever started a single game for Alabama. The investments proved prudent, as Young’s on-field exploits led Alabama to an appearance in the National Championship game. Young was also awarded the Heisman Trophy for the sport’s most outstanding player of the year. Some would argue that $800,000 turned out to be a bargain.

What Is To Come?

Most folks did not anticipate paydays approaching seven figures in the first month of NIL. Predicting what the industry will look like, even a year from now, is largely a fool’s errand because too many variables remain unsettled. That said, the Wild West development of the cannabis industry can offer some insight on what to expect in the near and longer term.

This article will touch on the “wait and see” concept, along with the stakeholder interest and lobbying potential in NIL. Additional discussions for another article include brand and market entry, a deeper dive on taxation, revised state and federal laws, potential employment rights of student-athletes, group licensing schemes, and even the odd NCAA enforcement action if that body starts to feel neglected. New issues will arise as the industry matures, but for now the foundations deserve attention.

Wait And See

Sports agencies dove in headfirst, securing collegiate clients as fast as they could and betting (correctly) that they could figure out how to activate marketing opportunities later. Major companies were not as fast to sign on to deals with these athletes, opting for an initial “wait and see” approach. That approach may have been dictated by marketing budgets that were not prepared for the U.S. Supreme Court to ostensibly open the market for business, and then for the NCAA to throw up its rule-making hands, all in the same month. As fiscal years turn over and this revenue stream takes shape, companies large and small are catching up.

Cannabis remains in a “wait and see” atmosphere as far as larger companies are concerned. Questions of federal regulations and tax rates stand between potential innovations such as CBD soft drink offerings, branding partnerships, and whatever else companies can cook up. These businesses have had over two decades to tinker with their ideas, and the long approach may yet pay off as everyone slowly but surely follows the money.

Market and regulatory risk will be longer-term drivers in NIL branding decision-making. This was especially the case for cannabis as different states entered the market. Cannabis encountered a landscape where laws differed vastly from one state to the next, crowded under the umbrella of federal prohibition. For example, some states followed a limited license structure, allowing for a predetermined and typically small number of licenses to operate (Florida, Missouri, New Jersey). Others started with no limits at all (Oklahoma). California took a macro/micro approach where it legalized at the state level but permitted counties and cities to decide if and how cannabis would be permitted within their borders.

NIL faces similar uncertainty in light of the blanket decision by the NCAA to throw up the white flag and refrain from enforcing its amateurism rules. The NCAA will never be accused of innovation in this field, and the body took the position that schools, states, and maybe one day the federal government would be responsible for creating the rules and enforcing them going forward.

For now, each school and each state sets its own rules, and everyone is waiting to see what will happen. This is cold comfort to large and small universities and colleges alike, none of which operate in a vacuum. Sports programs rise and fall, players and coaches move for greener pastures and the professional ranks, and universities occasionally pick up and move from one conference to the next, in search of the next multi-billion-dollar television deal. But with major money to be had in NIL, these larger stakeholders likely will not sit on the sidelines for long.

Stakeholder Influence And Future Lobbying

The battle for influence is just starting in NIL. Student-athletes sit in a unique and challenging position. On the one hand, profiting from name, image and likeness no longer comes with the specter of running afoul of rules and losing eligibility (and accompanying scholarships). However, students must still remain academically eligible, attend workouts and practices, and compete in actual games. Despite what any good civil litigator may tell you, there are only so many hours in the day. 

Businesses and sport agencies must consequently decide into which 18-22-year-olds they will invest serious time and money, a risky venture no matter the industry. For every Bryce Young that succeeds, there are countless worthy individuals for whom things simply do not pan out. The athletic institutions (colleges and universities, coaches, conferences and divisions) still have compliance rules to follow. They must navigate the influx of influence, with limited help from the outside world. All the while, millions upon millions of dollars are changing hands.

There is no dominant lobby representing the student-athletes involved in this discussion. Historic disadvantages dog this population in large part due to the transient nature of a college career, which generally ends after four years. Consequently, NIL, among other issues, easily falls into the realm of “capable of repetition, yet evading review.” Danger lies in the possibility that other stakeholders may decide, rightly or not, that the value of NIL is too great for a proportionate balance in the hands of students in search of a shorter-term payday.

Ultimately, whoever makes the first move may come out on top. Student-athletes will likely not enjoy a say. The early California cannabis industry is again instructive. California took a me-first approach on two fronts that gave it a stranglehold. First and more obvious, California said cannabis taxes would be high, and they are. In Los Angeles County, the final sales tax today approaches 40%, a great number for state budgets, but harder for businesses and consumers.

California also maintained control. The state openly explained that it would heavily regulate the industry to intentionally cause market inefficiency. This would prevent the cannabis industry from generating the money needed to form the powerful types of lobbying groups that Americans are accustomed to seeing in billion-dollar, multi-national industries. To date, this approach has worked for California, as those lobbies have not materialized.

The NIL realm is one large, unsettled power dynamic, flush with new money, new players, and the possibility of 50 different versions of state rules to contend with. In short, a vacuum to be filled, and time will tell who takes control.

Special and sincere thanks to an old and dear friend, Erick Gustafson, for sharing his vast knowledge and experience in the California and U.S. cannabis industry.

Jonathan Wynne sits on the Young Lawyers Division Board of Directors at the Massachusetts Bar Association. He is a negotiator, breaking into the ever-changing world of sports and entertainment representation.