✨ REVOLUTION

So Long Amateurs

A landmark settlement by the NCAA in a class-action suit may mean college athletics has changed forever.

As a $2.8 billion settlement in the case of House v. NCAA awaits approval by a US district judge in California, two major points have surfaced: first, the creation of a revenue-sharing plan that means schools will be able to directly pay their athletes. This would upend the NCAA business model in place since 1906 by redefining college athletes as professionals rather than amateurs.

Second, though colleges can now pay athletes, the athletes are not employed by the institutions, and thus are not eligible for collective bargaining.

The response to this settlement has been swift.

“It’s both a historic and deeply flawed agreement,” Michael H. LeRoy, a law professor at the University of Illinois, told the New York Times. “The idea that schools are paying millions of dollars to the people who are selling the TV contracts and filling the seats — that’s good. But it closes one Pandora’s box and opens four or five others.”

One of the most pressing issues colleges will now face is how to divvy up the estimated $20 million or so in annual share of revenue to their athletes.

“A key complexity is the fair value measurement of an athlete’s NIL [name image, and likeness], which must be initially determined and regularly assessed…This requires defined process and personnel to manage the ongoing evaluation,” Jim Booz, director of college athletics advisory services at James Moore, told Forbes.

Additionally, “as tax-exempt entities, universities must be cautious with flat payments to athletes, as this can attract IRS scrutiny,” said Katie Davis, a CPA and partner at James Moore. “Payments should reflect fair market value to avoid issues with private benefit rules and maintain tax-exempt status. Ensuring compliance through individualized valuations and proper documentation is important to meeting IRS requirements and avoiding potential penalties.”

Unionizing

While the NCAA is trying its hardest to keep college players from unionizing (and therefore demanding a potentially larger portion of the pie, amongst other things), teams at both Dartmouth and USC may be threatening that.

In March, Dartmouth's men's basketball team voted to unionize. A decision the university has since rejected. “[Refusing to bargain] will likely result in SEIU Local 560 filing an unfair labor practice charge with the NLRB, which we would appeal…This is the only lever Dartmouth has to get this matter reviewed by a federal court,” a spokesperson for the university told The Dartmouth.

Meanwhile, the men's football and both men's and women's basketball teams at the University of Southern California have filed a complaint with the National Labor Relations Board stating that the school and Pac-12 should classify them as employees rather than "student-athletes".

The Verdict

The NCAA's settlement may be historic, but it's been a long time coming. For several years, students have been fighting for pay, and now they seem to have won it. Rather than continue delaying the inevitable, the NCAA and universities should begin creating processes and legal structures for how to deal with their new reality.

💼 MANAGEMENT

Partner Pay

To give partners equity or to not give partners equity—that is the question.

As many large law firms are going the way of non-equity partners in order to grow profitability and retain talent, a new report by Bloomberg Law points out the long-term financial risks this structure entails for a firm.

Bruce MacEwan of Adam Smith Esq. explains, non-equity partners end up becoming "the least hard-working bunch of lawyers—they bill the fewest hours consistently." In fact, a recent Reuters analysis found that non-equity partners bill anywhere from 7 to 11 hours fewer per lawyer per month.

"A non-equity partner tier needs to be managed gingerly," says Michael McKenney of Citi's law firm, who suggests associates are more economical than partners. "Oftentimes it is very difficult to get the same level of contribution out of the income partner as you do from your seasoned associate…the expense per lawyer number gets out of whack."

Meanwhile, a study by Fairfax Associates finds that the gap in pay for equity partners both between AM100 and the second AM100 firms is widening, while also widening within firms themselves between highest-paid partners and lowest.

According to the study, "more firms are adding levels to the top end of their compensation scale to pay top performers. This is stretching the ratio of top to bottom compensation substantially, and ratios of 8:1 to 10:1 are becoming common, and higher ratios are not unusual." And between first and second tier firms, "over the last 5 years (2019 to 2023) the average profits per partner of the AmLaw 100 firms has increased 44% and the AmLaw 2nd 100 by 22%."

Limited Equity Partners

Is there a pay structure that can straddle both non-equity and equity options, but still help the firm grow profits? Fairfax suggests that "the limited equity partnership is an elegant solution to many of the challenges of non-equity partnerships today, and one we have worked with a number of our law firm clients to implement. The idea of a limited equity partnership is that those partners have a stake in the firm, albeit small initially, and share in the risk and rewards of the firm."

The Verdict

As the legal world continues to evolve into a more cyclical business model with outsourcing to ALSPs, the pay structures of firms big and small need to adapt as well. Whether that means adopting a non-equity model for partners, or a limited-equity approach is a question that firms will continue to grapple with.