Can an athlete sell a portion of future earnings for an up-front payment?
Recent litigation between San Diego Padres slugger Fernando Tatis, Jr. and the investment firm currently known as Big League Advantage (BLA) suggests that athlete financing arrangements, where an athlete receives an up-front payment in exchange for a share of future earnings, may withstand legal challenge if structured and documented properly.
BLA invests in athletes, providing up-front cash payments in exchange for a share of the athlete's future earnings in professional sports. In 2017, BLA signed an agreement with Tatis, then an 18-year-old minor leaguer, paying him $2 million in exchange for 10% of his future professional earnings. Tatis went on to become a successful major league player, signing a $340 million contract with the Padres in 2021. BLA claimed it was owed $34 million under the agreement. When Tatis failed to pay, BLA initiated arbitration as required by the contract and prevailed. Tatis then challenged the agreement in California court, alleging predatory tactics and that the arrangement constituted an illegal loan.
The court found that Tatis's challenge was barred because he had failed to raise his claims during the arbitration and had therefore waived them. Although the court did not rule on the merits, the case offers important lessons for athletes and investment firms alike.
Lender Licensing and Regulatory Compliance
A central legal question in athlete financing is whether these arrangements constitute loans subject to state or federal regulation. Among Tatis's principal arguments was that BLA operated as an unlicensed lender, a finding that, if accepted, could have voided the contract entirely, regardless of its terms.
Whether a particular arrangement constitutes a "loan" depends on the governing statutory framework and the economic substance of the transaction. Key factors include how risk is allocated, for example, whether repayment is contingent on the athlete's earnings (suggesting equity-like risk sharing) or whether the investor is effectively guaranteed a return (suggesting debt).
Because some states have begun scrutinizing or regulating income-share arrangements as consumer credit products, companies should carefully evaluate applicable lending, licensing, usury, disclosure, and consumer protection laws in every jurisdiction in which they operate. A thorough regulatory analysis before entering any transaction is essential, particularly given that this area of law is evolving and regulatory approaches vary significantly.
Companies should also assess whether athlete financing deals implicate federal or state securities laws. When interests in athlete financing portfolios are structured, marketed, or sold to investors, much like mortgage-backed securities, securities registration and other regulatory requirements may apply.
Dispute Resolution and Enforcement Risk
The arbitration clause proved critical in Tatis. Because Tatis failed to raise the contract's alleged illegality during the arbitration, his later court challenge was barred. Under applicable California law and the circumstances of this case, a party must raise all claims in the initial proceeding or risk waiving them.
Companies should ensure that arbitration clauses, governing law provisions, and forum selection clauses are carefully drafted and internally consistent. Parties bringing claims must strictly comply with the arbitration provisions or risk forfeiting their rights.
Unconscionability Challenges in Future Earnings Agreements
Future earnings agreements with young athletes may also face unconscionability challenges. These athletes are often inexperienced, may have limited bargaining power, and may lack legal representation. Courts evaluating such claims typically consider the athlete's age, sophistication, and access to counsel, and the circumstances of the negotiation.
Tatis argued that his contract with BLA was unconscionable, but this claim was barred because it was not raised in the earlier arbitration. In 2018, MLB prospect and catcher Francisco Mejía brought a similar challenge, citing his limited English proficiency, lack of an interpreter, and ninth-grade education; he voluntarily withdrew the suit before any court ruled on the merits. While neither challenge resulted in a judicial finding invalidating these agreements, different facts or jurisdictions could yield different outcomes. Best practices include:
- Using plain language contracts that clearly identify the future income covered by the agreement
- Providing examples of potential payout scenarios
- Providing translations for athletes who are not native English speakers
- Requiring athletes to obtain independent counsel, and considering paying for that counsel
- Allowing athletes sufficient time to review the agreement before execution
- Maintaining records documenting that the athlete understood the transaction
The goal is to demonstrate a fair contracting process and ensure enforceability. A useful benchmark is: would a neutral observer view both the agreement and the negotiation process as commercially reasonable?
If you or your company would like to discuss athlete financing arrangements and fair contracting practices, please contact the authors or visit the Venable Sports Law team's web page and subscribe to Chalk Talk.
The authors thank summer associate Steven C. Estep for his assistance in writing this alert.