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David M. Dorsen: Nike's Worst Nightmare Is Rip Heard 'Round World

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By    |   Thursday, 28 February 2019 12:15 PM

Wednesday, February 20, was a terrible day for Zion Williamson, the Duke superstar basketball player who nearly suffered a career-ending injury when his foot tore through his sneaker less than a minute into the Duke-North Carolina game. It was also a terrible day for Nike, who made the sneaker.

Commentary the following day disclosed that Nike and other sports-apparel makers pay tens of millions of dollars to universities and others to sponsor their products. The NCAA takes a cut. The college players get nothing.

For Nike (NKE) and other manufacturers it is a straight business deal. There is a keen competition for sponsors, such as college teams and professional ball players. The payments bring returns in the form of favorable publicity, although some may wonder how they can make first-rate products after all they pay to sponsors and for advertising.

While Nike will have its problems, including probably a law suit by Williamson and very bad publicity, the more vulnerable figures will be those individuals who received payments from Nike and others, especially athletic directors, coaches, and other officials at colleges.

The reason is that colleges and universities owe their students, including athletes, a duty to act in their best interests. Their sole concern when it comes to the well-being of athletes should be to insure that they get the best available equipment. By holding an auction at which apparel and equipment manufacturers bid for the right to be the exclusive supplier to a college team, they sacrifice the welfare of the students and pick the supplier that will pay them the most money rather than deliver the best products.

This pattern becomes particularly egregious when the people who make the decisions for the academic institution, such as athletic directors and coaches, pocket a portion of the money. Many of them makes a million dollars or more in salary.

Those individuals should be denied the profit they made by recommending products based on what is put in their pockets. Obviously, Nike and other manufacturers were complicit it the arrangement, so cannot benefit from their wrongdoing. Under current rules the student athletes cannot be paid. Something has to be done.

Lest readers think that this is pie-in-the-sky legal analysis, there is a case that is almost precisely in point, although it does not involve sports, but a subject that most of the readers of this piece will readily recognize. The author of the opinion I describe, Judge Henry Friendly of the United States Court of Appeals for the Second Circuit, was the greatest judge of his era, according to the title of my book on him that Harvard University Press published.

When the investment-banking firm Lazard Frères decided to terminate its role as advisor to a mutual fund that it had organized nine years earlier, its handpicked successor, Moody Investors, paid it a substantial fee for the privilege of succeeding it as advisor. In Rosenfeld v. Black shareholders of the fund filed suit to recover the portion of the fee unrelated to its continuing to perform the services Lazard had agreed to provide.

Writing in 1971, Judge Friendly identified the evil in permitting Lazard to retain the fee: “If lured by the possibility of profit, the retiring adviser might recommend a successor who was less qualified or more expensive than other candidates, and who might be on the lookout for ways to recoup his ‘succession fee’ at the expense of the Fund.” It did not matter to Friendly that succession fees were acceptable “under the morals of the marketplace” (indeed a “succession fee” was standard practice in the industry).

Bringing the principles of equity into the common law applicable to federal securities, Friendly announced in the Rosenfeld case, “Equity imposes a higher standard”: “A fiduciary endeavoring to influence the selection of a successor must do so with an eye single to the best interests of the beneficiaries. Experience has taught that, no matter how high-minded a particular fiduciary may be, the only certain way to insure full compliance with that duty is to eliminate any possibility of personal gain.”

Lazard settled the suit for $1 million. In the wake of the case, at least 15 more similar suits were filed against mutual fund managers.

Universities and especially their employees should not profit at the expense of their students. Presumably, someone will pursue this failure to give student athletes their due by insisting that the most qualified, not the most generous, companies provide their equipment.

Meanwhile, coaches and others connected with universities who personally profited from the deals with Nike and others should be worried.

The author was Assistant Chief Counsel of the Senate Watergate Committee and is the author of “Henry Friendly, Greatest Judge of His Era,” “The Unexpected Scalia: A Conservative Justice’s Liberal Opinions,” and his latest “Moses v. Trump,” a novel. Visit him online at www.daviddorsen.com.

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Coaches and others connected with universities who personally profited from the deals with Nike and others should be worried.
nike, nightmare, rip, sneaker, duke
Thursday, 28 February 2019 12:15 PM
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