Vondran Legal® Athlete & Coach Legal Representation: Can Schools Force Athletes to Pay for Transferring?

By Attorney Steve® | Vondran Legal®

As college athletics rapidly evolves into a multi-billion-dollar industry, schools, NIL collectives, and athletic departments are increasingly searching for ways to protect their investments in student-athletes.

One contractual tool receiving significant attention is the liquidated damages clause.

Under some proposed NIL, revenue-sharing, and athlete compensation agreements, schools and collectives are exploring whether athletes who transfer, terminate contracts early, or fail to perform agreed obligations should be required to pay predetermined damages.

But are these provisions enforceable?

The answer is complicated.

Courts have long scrutinized liquidated damages clauses, particularly when they appear designed to punish rather than compensate.

As NIL disputes continue to emerge nationwide, the enforceability of liquidated damages provisions may become one of the most important legal issues in college sports.

What Is a Liquidated Damages Clause?

A liquidated damages provision establishes a predetermined amount of money that one party must pay if certain contractual breaches occur.

For example:

If Student-Athlete transfers to another institution before the expiration of this Agreement, Student-Athlete shall pay liquidated damages of $250,000.

The purpose of such clauses is to avoid future disputes regarding damages by agreeing in advance on the financial consequences of a breach.

In theory, liquidated damages provide certainty.

In practice, they frequently generate litigation.

Why Schools and Collectives Are Considering Liquidated Damages

Consider a hypothetical scenario.

A university collective signs a five-star quarterback to a two-year NIL agreement worth $1 million.

The athlete receives:

• Upfront payments

• Marketing opportunities

• Housing assistance

• Promotional support

• Revenue-sharing compensation

Six months later, the athlete enters the transfer portal and signs with another school.

The collective may argue:

We invested substantial resources based upon the expectation that the athlete would remain at our institution.

The athlete may argue:

I exercised my right to transfer and pursue a better opportunity.

To address this uncertainty, some schools and collectives have considered including liquidated damages provisions.

The Legal Test: Is It Compensation or a Penalty?

Courts generally distinguish between:

Valid Liquidated Damages

A reasonable estimate of anticipated damages that would be difficult to calculate at the time of contracting.

Unenforceable Penalties

Amounts designed primarily to punish the breaching party rather than compensate for actual harm.

This distinction is critical.

Most states refuse to enforce contractual penalties.

The California Rule

California law is particularly important because many NIL disputes may involve California athletes, institutions, sponsors, or governing law provisions.

Under California Civil Code § 1671, liquidated damages provisions in commercial contracts are generally presumed valid unless the party challenging the provision demonstrates that it was unreasonable at the time the contract was formed.

However, courts continue to invalidate provisions that operate as penalties rather than reasonable forecasts of anticipated loss.

Ridgley v. Topa Thrift & Loan Association

One of California's leading cases is:

Ridgley v. Topa Thrift & Loan Assn., 17 Cal.4th 970 (1998).

The California Supreme Court explained that a liquidated damages clause becomes unenforceable when it bears no reasonable relationship to the range of actual damages the parties could have anticipated.

The court emphasized that contractual provisions designed to compel performance through punishment are generally void.

This principle could become highly relevant in future NIL litigation.

The Arizona Rule

Arizona courts similarly examine whether a liquidated damages provision represents a reasonable estimate of anticipated damages.

Arizona follows principles reflected in the Restatement (Second) of Contracts § 356.

Courts typically evaluate:

• Difficulty of calculating actual damages

• Reasonableness of the stipulated amount

• Whether the provision serves a compensatory purpose

A provision requiring an athlete to repay hundreds of thousands of dollars after transferring could face substantial scrutiny if the amount appears disconnected from actual losses.

The Restatement Approach

Many states apply the Restatement test.

Under Restatement (Second) of Contracts § 356:

Damages for breach may be liquidated only at an amount that is reasonable in light of anticipated or actual loss.

Unreasonably large liquidated damages are generally unenforceable as penalties.

This rule has been adopted in varying forms across numerous jurisdictions.

Why Athlete Transfer Cases Create Unique Problems

Liquidated damages clauses become particularly controversial in the transfer portal context.

Suppose an athlete receives:

• $100,000 in NIL compensation

• Marketing support

• Promotional opportunities

The athlete later transfers.

The school seeks $500,000 in liquidated damages.

A court may ask:

What Damages Did the School Actually Suffer?

Can the institution quantify:

• Lost ticket sales?

• Lost sponsorship opportunities?

• Lost donor support?

• Lost marketing value?

These losses may be highly speculative.

Was the Amount Negotiated?

Courts often examine whether both parties meaningfully negotiated the provision.

A take-it-or-leave-it agreement may receive greater scrutiny.

Does the Clause Restrict Athlete Mobility?

Perhaps the most significant issue is whether the provision effectively acts as a transfer penalty.

Courts may view such provisions differently when they function like:

• Non-compete agreements

• Transfer restrictions

• Economic restraints on mobility

These concerns become especially important given the NCAA's evolving transfer rules and antitrust challenges.

Could Liquidated Damages Trigger Antitrust Concerns?

Possibly.

The Supreme Court's decision in:

NCAA v. Alston, 594 U.S. 69 (2021)

dramatically changed the legal landscape.

Justice Kavanaugh's concurring opinion questioned many NCAA restrictions on athlete compensation and mobility.

Future litigants may argue that aggressive liquidated damages provisions:

• Restrict athlete movement;

• Suppress competition;

• Reduce bargaining power; and

• Operate as anti-competitive restraints.

Although courts have not yet fully addressed these arguments in the NIL context, they are likely to appear in future litigation.

Clawback Provisions vs. Liquidated Damages

Many contracts contain both concepts.

Clawback Provision

Requires repayment of money previously received.

Example:

Athlete must return unearned NIL compensation.

Liquidated Damages Provision

Requires payment of a predetermined amount regardless of actual damages.

Example:

Athlete must pay $250,000 upon transfer.

The distinction may significantly impact enforceability.

Courts are often more receptive to repayment of unearned compensation than punitive liquidated damages.

Common Arguments Athletes Raise

Athletes challenging liquidated damages clauses often argue:

The Clause Is a Penalty

The amount is disproportionate to anticipated harm.

Damages Were Easily Calculable

The school could determine actual losses through traditional evidence.

The Provision Restricts Transfers

The clause effectively punishes athlete mobility.

Unequal Bargaining Power

The athlete lacked meaningful negotiating leverage.

Public Policy Concerns

The provision undermines modern NIL and transfer portal rights.

Common Arguments Schools Raise

Schools and collectives often respond:

Damages Are Difficult to Measure

Lost goodwill and recruiting impacts are difficult to quantify.

The Parties Agreed Voluntarily

The athlete knowingly accepted the provision.

Significant Resources Were Invested

The institution relied on the athlete's continued participation.

The Clause Promotes Contractual Stability

Without enforceable remedies, agreements become meaningless.

Best Practices for Drafting NIL Liquidated Damages Clauses

Parties considering these provisions should:

✓ Tie damages to identifiable losses.

✓ Avoid arbitrary numbers.

✓ Document the basis for the calculation.

✓ Include recitals explaining anticipated harm.

✓ Avoid language suggesting punishment.

✓ Consider graduated repayment formulas.

✓ Ensure compliance with state law.

The Future of NIL Litigation

As universities begin directly compensating athletes through revenue-sharing arrangements and larger NIL deals become common, courts will increasingly confront disputes involving:

• Transfer portal departures

• Repayment obligations

• Contract termination

• Revenue-sharing agreements

• Liquidated damages provisions

The next wave of NIL litigation may determine whether schools can effectively use financial penalties to discourage transfers.

The answer will likely shape the future of college athletics for years to come.

Final Thoughts

Liquidated damages clauses sit at the intersection of contract law, sports law, antitrust law, and athlete rights.

While schools and collectives seek certainty and protection for their investments, athletes seek flexibility, mobility, and freedom to pursue better opportunities.

Whether courts ultimately uphold these provisions may depend on one central question:

Are the damages a reasonable estimate of actual harm—or merely a penalty designed to keep athletes from leaving?

As NIL contracts become more sophisticated and valuable, that question will increasingly find its way into courtrooms across the country.

Need Help Reviewing an NIL Contract?

Vondran Legal® represents student-athletes, parents, agents, collectives, sponsors, and businesses in NIL contract review, transfer portal disputes, breach of contract litigation, sports law matters, and athlete compensation agreements.

Contact Attorney Steve® for a confidential consultation before signing any NIL or revenue-sharing agreement.