UEFA’s Financial Fair Play Regulations and the Challenge of Trans-Atlantic Comparisons
Stephen F. Ross, Professor of Law, Pennsylvania State University
Recent news of a legal challenge to UEFA’s FFP regulations provides another case study for reviewing the proper application of competition law to sporting rules. The contentious aspects of the regulations require clubs participating in lucrative UEFA-sponsored competitions to match expenses with “football revenues” over a 3-year period of time. A controversial aspect of the rule is its definition of “football revenue” to limit the ability of wealthy “sugar daddies” to subsidize a club’s player-related expenses (interestingly, the rule does not bar subsidization of a club’s investment in stadium infrastructure or youth player academies.)
EU law and US antitrust law are similar in their application to sports. On both sides of the ocean, courts (1) require some showing of an actual distortion of competition in a real market; (2) allow sporting organizations to justify competitive distortions by pointing to legitimate procompetitive benefits that will ensue from the rule; and (3) bar organizations from pursuing legitimate goals by overly restrictive means. In the American context, we assume that the owners, players, sponsors, and other economic actors are profit-maxizers, so measure a distortion of competition on that basis. In Europe, it’s a bit more complex.
The first question requires a prediction (of the sort that Soccernomics readers should enjoy) as to what will actually happen on the field after five years of FFP. There is certainly no evidence that, freed of “unfair financial play,” European football will be more popular as measured by attendance or TV ratings. The English experience (the only clubs to displace Manchester United and Arsenal for the EPL trophy have been “unfairly” subsidized clubs) suggests to the contrary, but it seems difficult to demonstrate a significant “distortion” in the market for European football, asking the question that Americans ask: will football fans face higher prices, lower output, or output unresponsive to their preferences?
One could argue that FFP distorts the market for investment in football franchises, but this claim makes this case unique in the annals of competition law as applied to sports, because it only “distorts” the market by inhibiting someone from investing in a club without economic justification. Plus, there is a Court of Arbitration for Sport (CAS) decision concluding that the number of investors in sports are fairly numerous, suggesting that inhibiting Roman Abramovich and Sheikh Mansur will not have an overall adverse effect on the market.
More significantly, a recent study by economists Stefan Szymanski and Thomas Peeters concluded that FFP would reduce player salaries by around 10% a year. However, this again is a more complicated issue than we have seen in the past. In prior cases, players succeeded in competition challenges based on a claim that their economic value was being artificially suppressed by an agreement among clubs that would otherwise “compete” for their services. The FFP challenge is effectively that players currently enjoy, in the aggregate, compensation that exceeds their economic value (their ability to collectively contribute to on-field success, leading to increased revenues for the club and long-term capital appreciation for their owner), and that FFP will eliminate this. I’m not saying this is a meritless claim, but one that is unusual in the annals of sports law.
Assuming that the challengers succeed in a prima facie case that FFP distorts competition, the question is whether it can be justified. (A similar analysis is applied to the uniquely European challenge to restrictions as impeding the free movement or workers or capital across European borders.) Asking that UEFA develop a coherent justification for their rule should be independently important, because unlike US sports regulators, the European Model of Sport puts sports governing bodies at the top of a pyramid where they are vested with huge powers, which they should exercise in the public interest. This means that, regardless of whether FFP “distorts competition” in the precise sense of Art 101 of the EU Treaty, UEFA rules ought to be reasonably tailored to meet stated and legitimate objectives. This analysis casts in question much of the public rhetoric offered in support of FFP.
Most glaring is the claim that FFP is designed to what is perceived as a serious problem facing European football with regard to the ongoing solvency of many clubs. For FFP to be an appropriate response requires UEFA to explain three things: (1) why club insolvency is a serious problem requiring resolution; (2) why FFP significantly solves the problem; and (3) why FFP details are not overly restrictive. FFP fails, in my view, the first and third claims. As Stefan Szymanski has suggested elsewhere, club insolvency does not really harm those who need UEFA to protect them. Player associations can certainly work out self-insurance or negotiate with clubs and FAs to protect players from insolvent clubs; governments can easily change their own tax laws; private lenders and investors can simply stop making imprudent investment in insolvent clubs. Fans are not directly affected, in that clubs virtually never disappear, and to the extent that a club’s financial mismanagement causes points deductions or even relegation, this is really no different than a club’s similar fate due to player personnel mismanagement. In any event, FFP’s targeting of wealthy sugar daddies is wildly overbroad regarding insolvency; it would be easy enough to ensure that wealthy supporters have enough money pledged to make good on all existing contracts.
We can quickly put aside several other potential drivers for an FFP rule. The rule does not remotely promote competitive balance (there is some evidence that it harms the ability of near-top teams to challenge the traditional power). Holding down player salaries as an end in itself, or because UEFA thinks the money is better spent elsewhere, is not a legitimate goal. And while encouraging infrastructure and player development investment is worthy of UEFA’s attention, FFP is not remotely tailored to achieve that end either.
That leaves us with a general sense of “unfairness” that Chelsea or Man City fans should be able to see more on-field success than Spurs or Liverpool fans simply because of the random willingness of some owners to subsidize club success from their otherwise-gained wealth. In the world of European sports policy, I find this philosophical goal to be a legitimate one, and limiting clubs’ expenditures to “football related income” would seem to significantly solve the problem. (In a related, cross-Atlantic controversy, I have argued that US college football programs should only be able to compete at the top level if they can afford to do so based solely on football-related income, and that universities’ should not be able to transfer money otherwise spent on general education to the football team. See http://law.psu.edu/_file/Ross/Radical_Reform.pdf)
The question remains whether FFP is reasonably tailored to that end. Two issues arise in this regard. First is whether there is a principled difference between cash payments from a wealthy owner or supporter or from a major local corporation who is an official “sponsor.” UEFA claims that it can meaningfully distinguish between the two, because there is an objectively “fair” market value for corporate sponsorships, and only that value would be included in football revenue. It remains to be seen whether this assessment is practical, or fair. The second issue is whether FFP unfairly catches legitimate and prudent financial investment in its net. In the US, I support the LA Dodgers’ baseball team, purchased for over $2 billion and currently sporting the largest payroll in the league. No one seriously suggests that this is a prudent investment within the next 3 years, which is what the FFP rules require. If, according to UEFA’s philosophy, it is manifestly “unfair” for Chelsea to compete with Arsenal by means of Abramovich’s deep pockets, than it must be manifestly “fair” for NFL owner Randy Lerner to seek to turn Aston Villa into a European power by means of prudent commercial investments. To the extent that the very narrow deviations from revenue and relatively short time period (3 years, no more than 5% annual deviation) inhibits this, it is extremely anticompetitive and problematic.