Does the prevention of Third-Party Ownership of Footballers in England breach Competition Laws?

In this article I will focus on third-party ownership (‘TPO’) of football players and will analyse whether the prevention of the phenomenon in England whilst it is allowed in other EU Member States breaches Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’). To understand TPO, it must be stressed that there are different rights that arise out of a footballer’s contract with his club. According to the Court of Arbitration for Sport (‘CAS’) decision in the case of Espanyol v Atletico Velez, there are distinctive federative and economic rights in relation to all football players. The first right refers to the club’s ability to register a footballer into the national league or federation so that the footballer can play in the official competitions of the said federation. The club gains this right automatically as a result of the employment contract it has entered into with the footballer. At the same time, the club has the right to sell the player’s registration to other clubs for a transfer fee (‘the economic right’). This economic right can be assigned partially without affecting the federal rights. In simple terms, TPO refers to the concept of the economic rights of a footballer (or a proportion of it) being owned by a non-footballing entity (such as an investment fund). The entity owning the economic rights would then ‘loan’ the player to a club (that is, the club would register the player’s federative rights) so as to give the player the highest exposure possible. As such, with the player progressing and his transfer value increasing, the entity will be able to sell the economic rights to another club at a large profit.

TPO originates from less economically developed countries in South America where football clubs cannot compete with the wages on offer to young players in Europe. Therefore this led to the conception of non-footballing entities that sponsor the football clubs in return for ownership of the economic rights of the most promising footballers. By selling proportions of the economic rights to third parties, these clubs can raise finance and still manage to keep hold of the talent for longer periods. As a result they may be able to offer higher wages to players and therefore provide enough of an incentive so as to delay the departure of the player to more prestigious clubs in Europe. The phenomenon of TPO has also become widespread in European football, with clubs in Portugal and Spain in particular regularly fielding players owned by investment funds. For example, famously a large proportion of the economic rights of Colombian striker Radamel Falcao was owned by GestiFute fund, a subsidiary of Quality Football Ireland Ltd, whilst he was registered to and played for Spanish club Atlético Madrid. As a result, GestiFute fund received a substantial percentage of the £55m transfer fee that was paid by AS Monaco during the summer transfer window of 2013. Similarly the Benfica Stars Fund owned 25% of the economic rights to Brazilian defender David Luiz, and received 25% of the transfer fee that Chelsea FC paid to sign the player from Portuguese club Benfica.

Though TPO is capable of benefiting many football clubs, it is prohibited in some European leagues such as the French Ligue 1, English Premier League, and the Polish Ekstraklasa. For example in England TPO is prohibited by the Football Association Third Party Ownership Regulation. In fact the English Premier League has set the precedent that clubs fielding TPO players will be fined heavily, as was shown when West Ham United received a fine of £5.5m for fielding Javier Mascherano and Carlos Tevez who at the time were partly owned by Media Sports Investments, Just Sports Incorporated, Global Soccer Agencies and Mystere Services Limited, all entities that were ultimately beneficially owned by football ‘fixer’ Kia Joorabchian. The fact that TPO is allowed in some of the EU countries but prohibited in others means that there are issues of competition being distorted.

Article 101(1) TFEU prohibits a decision by associations of undertakings which may affect trade between Member States and which has as its object or effect the prevention, restriction or distortion of competition within the internal market. The Football Association Premier League by definition is an association of English football clubs who compete in the highest tier of English football. A decision by the FAPL to ban TPO players from playing for their affiliated clubs is clearly a decision that falls within Article 101(1). The trade of football clubs has been held to include transfer dealings (i.e. for tax purposes the transfer of players which involves a transfer fee is trade and not the acquisition of capital), and English Clubs regularly ‘trade’ with football clubs based in other EU Member States, so the regulation banning TPO in England is capable of affecting trade between member states. Article 101(1)(d) states that where the agreement leads to the creation of dissimilar conditions for some undertakings to equivalent transactions with other trading parties, and the said undertakings are placed in a competitive disadvantage, then competition in the internal market would be distorted.

The effect of the ban of TPO of players in England is that the English clubs are at a competitive disadvantage to other continental clubs in light of the Financial Fair Play Regulations (‘FFPR’) that have been introduced by the European football governing body UEFA in order to restrict the amount of money that can be spent by football clubs to within their revenue. For the purposes of the FFPR, amounts spent by a club on a player are amortised over the length of the contract of the player. For example if Club A signs Player X for £50m and ties him to a contract of for 5 years, the value that appears on the books of the club for each of the 5 years is £10m in relation to the sum spent on the player. Now, if the player had been partly TPO and a Portuguese or Spanish club signed him, then they could register the player without purchasing the share of the economic rights owned by the third-party fund. In modifying the scenario above, imagine Club B signs 75% of Player Y whose market value is £50m on a 5 year deal, with Investment Fund 1 keeping hold of the remaining 25% of the economic rights of Player Y. The value that Club B would need to put in their books in relation to the purchase of Player Y in this scenario, would be £7.5m per each of the 5 years during which the contract will run. Though Club B would need to account for how much of the player’s economic rights they own, and must disclose the identity of the owner of the rest of the rights, they are at a clear advantage compared to Club A. If Club A and Club B have the same exact revenue, for the same year, Club B would be able to spend more money on player acquisitions that Club A and still remain within the FFPR. This means that competition between the two clubs will be distorted.

What are the implications of this potential effect of the ban of TPO of players in England? First of all, English football clubs may be able to argue that the ban by the FAPL to TPO affects them by applying the above argument. Moreover, investment funds involved in TPO may also challenge the ban of TPO in England as it prevents them entry to the English market (i.e. they cannot sell their players to English clubs directly). As a result it is possible that the ban can be uplifted if it is challenged. The alternative would be for TPO to be uniformly banned in all EU states. UEFA has acknowledged the possible competition issues, and president Michel Platini has recommended complete prohibition of TPO in UEFA affiliated associations. However, for the foreseeable future, until TPO of players is completely prohibited uniformly, some clubs will be at a competitive disadvantage to others.

By Andi Terziu

FIFA rules on the unilateral breach of contract by footballers

Following on from the last post on this blog, what can a player do to release himself from his playing contract before the expiration of his terms if no buy-out clause exists in his playing contract? In the wake of the decision of the Bosman case it was felt that the ruling which allowed out-of-contract players to move freely to other clubs could have implications for those under contract too. One compelling argument suggested that a contract can be ended before the end of the contractual term by the player and the player would be able to walk away from his football club, after simply paying compensation to the club. This argument was based on the fact that that football contracts are essentially employment contracts and that the Trade Union and Labour Relations (Consolidation) Act forbids the ordering of specific performance of labour contracts. Similarly, a court will also be reluctant to grant a negative injunction preventing a person from taking up a different employment position after a breach of contract. As such the argument that damages would be the only recourse for the clubs if a player unilaterally breaches his contract seemed to be a sound argument at the time.

However, in the wake of the Bosman decision, FIFA updated their transfer rules. The FIFA transfer rules allow the unilateral termination of the playing contract by the Player only in certain conditions. The main problem that players are faced with if they want to employ this procedure is that according to Article 16 of the FIFA Regulations on the Status and Transfer of Players, unilateral terminations can only take place at the end of any particular season, and the player only has a short window of two weeks from the end of the final match of the previous season during which he has to notify his club that he is willing to terminate his contract. In most cases therefore, this procedure would only be available to players who have already made a decision to end their contract before the end of the season, as the window of opportunity is very small. Furthermore, and perhaps more importantly, FIFA has introduced a protracted period to every contract which ultimately means that a player cannot terminate the contract before some of the term has already passed. The protracted period ultimately means that players up to the age of 28 at the time when they want to end the contract in question cannot unilaterally terminate the said contract before playing for their club for at least 3 seasons. This means that contracts of three years or less are not eligible for termination by this means; only long term contracts of more than 3 years that can be terminated after the protracted period has passed. A player who is aged over 28 at the time would need to have honoured at least 2 years of his contract before he can terminate it. According to Article 17(3) of the FIFA transfer rules, if a contract is terminated within the protracted period, sanctions such as a ban from playing football for up to 6 months will be issued to the player. Potentially at least, the FIFA transfer rules allow an opportunity for a player to terminate his contract if his club as unwilling to transfer him. However, this perceived freedom depends on the amount of compensation payable by the player for the unilateral breach.

There have been a number of relatively recent cases where a player has terminated his contract unilaterally by taking advantage of Article 17 of the FIFA transfer rules. As such FIFA’s Dispute Resolution Chamber (DRC) has had the jurisdiction to decide the amount of compensation payable. In all of the cases, however, an appeal regarding the amount of compensation due to the player’s previous club has been made to the Court of Arbitration for Sport (CAS) which itself has given inconsistent decisions.

The first case is that of Andy Webster who took advantage of Article 17 to unilaterally terminate his contract with Scottish club Hearts of Midlothian FC, and then signed for English club Wigan. CAS who heard the case after an appeal by Webster stated that damages should only be punitive in nature and therefore they rejected the need to pay a large sum equivalent to a transfer fee, settling the amount of damages to the remaining value of Webster’s contract with Hearts. Naturally FIFA were dismayed by the decision as they saw it as a green light for more players to disregard their contracts; something which would disrupt football. However the decision was quickly overturned. The case of Matuzalem had very similar facts, involving the Brazilian player’s unilateral breach of his contract with Shakhtar Donetsk (Ukraine) and later registration with Real Zaragoza in Spain. The case was appealed to CAS who this time imposed a penalty of €11,958,934 payable by the player and his new club in damages for the unilateral breach. This sum was calculated by taking into consideration the transfer value of the player before the breach and a prospective future transfer fee which Real Zaragoza had inserted into a loan agreement with a third club (SS Lazio) where Matuzalem subsequently ended up. In short CAS calculated the market value of the player and stated that this was the amount of damages that were due to the club for the breach of contract. The decision is not without criticism, not least because CAS did not even consider the Webster case when reaching their decision. It is also felt that the decision is wrong because it was based on ‘fictions’ such as a future transfer fee. Though CAS did follow this decision in the latter case of El-Hadaray, the approach has again been overturned subsequently.

The most recent case of De Sanctis, which again involved similar facts (this time the goalkeeper Morgan de Sanctis terminated his contract with Italian club Udinese and subsequently signed for Sevilla in Spain), was decided differently by CAS. Here CAS found that the compensation payable would be calculated differently. They worked out the amount of money spent by Udinese for getting a replacement for De Sanctis, and subtracted from this the total of all the money which would have been spent by the club remunerating the goalkeeper until the end of his contract, including wages and other bonuses. By justifying yet another approach to calculation of damages, CAS stated that each case would have damages calculated differently according to the particular elements of the case and evidence produced by both parties. However, at present it would seem that the decision in De Sanctis is the settled rule that is likely to be followed in future instances of unilateral breaches of contract by players. The true worth of Article 17 to players will not be known until a player with a high market value decides to invoke it.

By Andi Terziu