Trifecta Follow-up to Title IX, NIL Collectives, and NRA Trial

This fine Friday, I have follow-up mini posts about all three of the things I blogged about this week: Title IX, NIL collectives, and the NRA trail. So, in reverse chronological order, here they are:

Yesterday, I wrote about the suit against Hillsdale college asserting that it was subject to Title IX regulation on account of its tax-exempt status. My colleague Darryll Jones alerted me to a press release from Senator Marco Rubio on Wednesday announcing proposed legislation to clarify that tax exemption is not “Federal financial assistance” for the purpose of Title IX. Obviously, if the legislation passes, that clarifies the law. But our legislative branch is not designed to easily pass legislation, and (it sure seems like) that the problem is worse these days, so I think it’s likely courts will probably have to make up their own mind what the original statute means.

On Wednesday, I wrote about NIL collectives, and got a very good series of questions from a commenter that I think are worth answering. A reader commented, “How do they determine the amount of the payments to avoid them being classified as excess benefit payments?  Do equal payments have to be paid to all players on the team?  How do you determine if one player's NIL is more valuable than another? I heard that Univ. of Texas is paying $50,000 to new football linemen; can they pay this to certain players and not to others?”

The answer to the first question is easy: “excess benefit” payments (if this is meant in its technical sense to refer to “excess benefit transaction” penalties in the Tax Code) occur between an organization and “disqualified persons” (people who have some level of control over the organization). Players are unlikely to be disqualified persons, so payments between NIL collectives and players will probably never be “excess benefit” payments. That’s why the question for NIL collectives is whether there too much private benefit, not whether there is any “inurement.” Honestly, if I were to try to identify the five most important things to understand about nonprofit law (for the students who take my introductory class, for example) this line between inurement and private benefit is definitely on the list, and so I can’t help point it out, even at the risk of fetishizing the phrase “excess benefit.”

But charities still have an obligation not to make excessively large payments to private persons who are not “disqualified persons,” notwithstanding the fact that “excess benefit” is technically the wrong word for such payments. As a state law matter, this obligation is found somewhere in the duty of care or the duty of obedience, the concept of “waste,” or in statutes that try to clarify this obligation. Some people (including the IRS) think that this duty is also reflected in the Federal-law concept of “excess private benefit.” Jurist Richard Posner famously proposed that idea (in dicta) in his opinion in the United Cancer Council case. This is also plausibly what the IRS means when it says that private benefit can be excessive either quantitatively or qualitatively. As I mentioned on Wednesday, Hail! Impact (the charitable NIL collective that has received IRS approval of tax-exempt status) solves the quantitative problem by only using 30% of its fund expenditures to pay NIL fees to athletes and uses the other 70% for truly charitable expenditures. But that 30/70 solution doesn’t solve the “qualitative” problem.

So, how should a charitable NIL collective make sure that it is not providing an excessive private benefit to athletes qualitatively through the wrong structure of its individual payments? The answer is: hard to know. The theory should be that it’s pretty safe if it pays them “fair market value” for the rights. That’s what American University (my employer, a charity) does when it decides how much to pay me. It tries to figure out what the market would bear, and then (if my economic theory serves me in this case) pays me the lowest it can get away with to keep me from jumping ship and to motivate me to do whatever it is that it wants me to do. So, as to the question of whether the NIL collective must (or can) pay the same amount to all players or must (or can) pay each player based on the value of their individual NIL, the default answer should be that it makes more sense to pay them based on an evaluation of their individual NIL value. But, of course, if the collective thinks that it can get away with paying all players the same amount, and if it thinks that’s good for the team or school, I can’t think of an argument for why that would violate the “private benefit” doctrine (or the directors’ state-law duty of care or obedience). But because the “qualitative” aspect of the private benefit doctrine is so under-developed as a legal matter, I’m not sure there is a clear answer to how it would apply in this case. Now that the IRS Chief Counsel’s office is focused on NIL collectives (as evidenced by the pretty quick and excellent Memorandum), I could imagine them using this opportunity to provide some guidance on their interpretation of the question. But, just like with Congress clarifying the scope of Title IX, I wouldn’t hold my breath. They’ve got a lot of other legitimate priorities, to say the least.

On Tuesday, I wrote about the expert testimony given by Jeffrey Tenenbaum in the NRA case. It was pointed out to me that there is some tension in what I wrote (that I wasn’t really aware of) about the purpose of Mr. Tenenbaum’s testimony: whether it was to establish “customary” practices among nonprofits or “best” practices. As I pointed out in the first paragraph, the court permitted his testimony about “what is regular and customary in the nonprofit sector.” But then in that same paragraph, I said he testified that “best practices” counsel against boards of more than 30 members because large boards make it “impossible [for individual board members] to fulfill their duties.” That’s a confusing quote because “best practices” is a quote of my source, NRA Watch, which said that “Tenenbaum said that best practices typically dictated an ideal non-profit board size of between 12 and 20 people.” But it did not quote him as using the term “best practices.” Instead it quoted him as saying that if a board has more than 30 people, it “becomes impossible [for individual board members] to fulfill your duties.” Anyway, in case it was confusing at all, I changed my own sentence in my final paragraph to clarify that I think it is valuable for juries to be educated about customary practices in the nonprofit sector, and that I’m glad Mr. Tenenbaum did that in this case. Although, obviously, it is still true that the jury will have to apply the legal standard, not whether NRA practices are “customary” or not.

Benjamin Leff