‘Financial fair play’ or an ‘oligopoleague’ of football clubs?

UEFA, the trade association of 54 European football leagues, has recently updated its FFPR. In essence, the FFPR, which has been in force since 2011, defines the minimum financial criteria for a club to fulfil in order to qualify for UEFA competitions, and includes conditions such as restrictions on overdue amounts payable to other clubs, their players and social authorities, as well as other monitoring and reporting requirements.[1] The FFPR has introduced a ‘break-even requirement’ from 2013/14, which stipulates that football clubs cannot spend more than the amount they earned in previous seasons (with a tolerance level of €5m).[2]

For example, if Real Madrid generated revenues of €500m in year X (through ticket sponsorship, TV rights, merchandising, etc.), its expenses in year Y would not be allowed to exceed €500m. Similarly, if Standard Liège’s revenues were in the ballpark of €25m in year X, it would face a spending cap of €25m in year Y.[3] Clubs that do not comply with the break-even requirement are exposed to a battery of sanctions—including fines, a ban on purchases of new players, exclusion from the Champions League and the Europa League, and withdrawal of a title or award. In May 2014, UEFA penalised Manchester City, Paris Saint-Germain and seven other clubs with fines of up to €60m each.[4]

At first glance, there are sound justifications for the break-even rule. In using it, UEFA seeks to guarantee the long-term financial stability of the clubs by forcing them to ‘keep their wage bill under control’ by ‘lowering salary costs and/or limiting the number of players under contract’.[5] In other words, the idea is to reduce ‘player costs’ (e.g. transfer fees, agents’ fees and wages), which have exploded in recent years. Moreover, the break-even requirement is claimed to help promote a competitive balance among clubs, by making sure they compete ‘on an equal footing’.[6] In short, the idea is to prevent ‘fake’ financial competition from taking precedence over ‘true’ sports competition.

Clearly, the FFPR is in the spirit of the times. In recent years, spending discipline—i.e. ‘austerity’—has been the mantra of contemporary economic policies across the globe (in fiscal matters, banking, etc.).[7] However, the FFPR is still subject to the law, including competition law—and there are grounds to believe that it violates both the spirit and the letter of EU competition law.

Is the FFPR in violation of EU competition law?

A number of aspects suggest that the FFPR is likely to be in violation of EU competition law.

First, several economic studies highlight that the break-even rule will distort competition by giving rise to an ‘ossification’ of the market structure. In other words, the break-even rule freezes the clubs’ existing financial positions and, as a result, the big clubs—i.e. those with the highest current revenues—gain an unparalleled advantage over the small clubs with lower current revenues. This is because the latter can no longer use debt to make large investments in order to compete with the former.[8] In our example, Real Madrid, with revenues of €500m, can purchase five Cristiano Ronaldos at a price of (say) €96m each. However, Standard Liège, with revenues of €25m, cannot even afford a third of this transfer price. The FFPR is therefore promoting the emergence of an ‘oligopoleague’ of big, wealthy clubs within the UEFA competitions.[9] These clubs will continue to enjoy a strong position in the upstream input market for the purchase of players which, in turn, is likely to lead to a cascade of anticompetitive effects on downstream secondary markets such as those for football tickets, subscriptions, merchandising, sponsoring, TV rights, mobile telephony rights, and Internet rights.

Second, the anticompetitive nature of the break-even rule violates the core principle of the prohibition rule under Article 101 TFEU. UEFA is, indeed, an ‘association of undertakings’ within the meaning of Article 101,[10] and the break-even rule is a ‘limitation of investments’ within the meaning of Article 101(1)(b) TFEU. Although the FFPR does not limit all investments, it does limit those that lead to debt (i.e. where spending exceeds revenues), and Article 101 prohibits any concerted limitation of investments, regardless of its type, magnitude and/or effects. Indeed, this is understandable, given that, in real-life markets, debt is a conventional strategy to finance productive investments, and a driver of market competition.

Third, European Commission and Court case law has repeatedly held that a concerted limitation of investments is, by its nature (‘by object’), unlawful. In Brasseries Kronenbourg and Brasseries Heineken, the Commission sanctioned as a hard-core infringement an agreement whereby two rival breweries had jointly agreed to halt investments in downstream capacities.[11] Similarly, in Irish Beef, the EU Court of Justice held that a ‘crisis cartel’ that sought to reduce overinvestment was a restriction of competition ‘by object’, contrary to Article 101(1) TFEU.[12]

Of course, under EU competition law, firms liable for a potential infringement of Article 101(1) TFEU remain free to rebut the allegation by bringing forward objective justifications for their conduct.

Are there any objective justifications for the FFPR?

One potential justification involves a defence under the exemption clause of Article 101(3) TFEU—which is that agreements that improve the production or distribution of goods, or promote technical or economic progress, are exempt from the Article 101(1) TFEU prohibition rule as long as consumers receive a fair share of the resulting benefit, and these agreements are required to achieve such benefits. However, in practice, this defence is almost systematically inapplicable in cases of ‘by object’ restrictions of competition, and in particular for horizontal agreements such as the FFPR.[13]

Another possibility is to invoke the protection of the Wouters[14] and Meca-Medina judgments.[15] Under this stream of case law, the applicability of Article 101(1) TFEU can be neutralised if the restriction of competition is ‘inherent’ in the pursuit of the objectives of the regulation, and if it is ‘proportionate’.

However, far from placing clubs on an ‘equal footing’, as in the stated objective of the FFPR, the break-even rule creates an asymmetry among football clubs: the rich clubs can make major investments; the poor ones cannot. This could even be akin to an additional violation of competition law, and in particular of Article 101(1) TFEU paragraph d), which prohibits any conduct that creates a ‘competitive disadvantage’ in the market.

In addition to failing the ‘inherency’ test, the break-even rule fails the ‘proportionality’ test. In the economic literature, less-restrictive alternatives have been proposed, such as bank guarantees, and a ‘luxury tax’ on overspending (e.g. 10 cents for each €1 that is overspent, which can be redistributed to other clubs to promote a ‘sport balance’).[16] The disproportionality is further exacerbated by the proposed prohibition of third-party co-investment, which essentially prevents third parties, including banks, financial institutions and sponsors, from co-investing with a club in the purchase of players.[17] According to UEFA, this supplementary prohibition is necessary to ensure the effectiveness of the break-even rule.

What next?

Against this backdrop, legal challenges to the FFPR have commenced. In May 2013, a complaint against the break-even rule was lodged with the European Commission by a football player’s agent, followed by a civil case challenging the validity of the rule before a court in Brussels.[18] In his action, the applicant requested that the Brussels court send a preliminary reference to the Court of Justice of the European Union (CJEU) in Luxembourg, to seek the latter’s views on the compatibility of the FFPR with EU competition law.[19] Given the complex and intrinsically pan-European nature of the issue, the CJEU is the best-placed judicial expert to handle this matter, and the sole competent court to rule authoritatively on the interpretation of the TFEU. An alternative would be for the Court to formally request the amicus curiae Opinion of the Commission pursuant to Article 15(1) of Regulation 1/2003. Once again, it is all in Brussels’ hands…

Nicolas Petit

Contact: Pascale Déchamps