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Two areas of football finances are currently under competition law scrutiny.
- Manchester City Football Club (MCFC) is at the heart of arguments about ‘financial fair play’ between Premier League (PL) clubs; and
- Championship clubs have escalating concerns about the levels of ‘parachute payments’ paid to clubs relegated from the PL.
Both arise in the context where the government has introduced its Football Governance Bill into the House of Lords to create an Independent Football Regulator with wide ranging powers, including in relation to the distribution of revenue between competition organisers.
Please note that what follows is a high level summary of issues and provides a simplified summary of a lot of the detail to present the key issues in a reasonably digestible length and level of complexity. It should not be relied on as legal advice. If you would like more information or have queries about anything that follows, please do contact Noel Beale or your usual Michelmores contact.
1. Profit and Sustainability Rules (PSR)
Put simply, the PL rules require that clubs must not make cumulative losses of more than £105m over three seasons. The purposes of the rules are generally expressed as being: (i) to achieve financial stability for clubs in the wake of past insolvencies which have had financial impacts on other clubs and disrupted leagues; and (ii) to maintain the competitive balance within the PL. Failure to comply with the PSR can lead to serious sanctions, particularly points deductions as we have seen recently for Everton and Nottingham Forest.
To avoid circumvention the rules also require that Associated party Transactions (APTs) should be at Fair Market Value (FMV). APTs are transactions with entities linked to a club’s ownership, commonly sponsorship deals. Broadly speaking, FMV is assessed by the PL with reference to comparable transactions. Where an APT is found not to be at FMV the PL can restate the value of the transaction for the purposes of the PSR.
It is reported that MCFC is currently facing 115 charges of breaches of the PL’s financial rules between 2009 and 2018. It is understood that the outcome of these charges may be public ‘early in 2025’. However, more recently, MCFC brought arbitration proceedings seeking to have the APT rules declared unlawful on various grounds including that they infringe competition law. It is the outcome of this arbitration that this article focusses on.
Even though they raise interesting points, for reasons of space and focus this article does not address the ‘procedural unfairness’ claims that were also part of MCFC’s case in the arbitration and where MCFC had some success.
Relevant Competition Law
The Chapter I prohibition of the Competition Act 1998 prohibits agreements that ‘prevent, restrict or distort competition’.
According to the arbitration tribunal, in a sporting context, agreements that restrict competition can nevertheless fall outside this prohibition provided that:
- they pursue legitimate objectives in the public interest which are not per se anticompetitive in nature;
- if the means to pursue those objectives are genuinely necessary for that purpose; and
- that effect is proportional and does not go beyond what is necessary, in particular by eliminating all competition.
The Chapter II prohibition of the Competition Act 1998 prohibits the ‘abuse of a dominant position’.
Competition law has long been found to apply to sport in so far as it constitutes an economic activity. Only rules adopted solely on non-economic grounds and which relate to purely sporting questions are regarded as extraneous to any economic activity and therefore outside the scope of competition law. Therefore, ‘mixed’ rules which have some sporting relevance and some economic relevance must be assessed under competition law.
The arguments in the arbitration
Although the PSR and associated APT rules might be argued to relate to the financial parameters of sporting competition, they are also plainly economic rules to which competition law applies.
In essence, MCFC, while not challenging the principle of the PSR, sought to challenge the substance of the rules which the PL has put in place to achieve those objectives. Very broadly speaking, MCFC argued that the APT rules infringe the Chapter I prohibitions because: (i) the PL’s assessment of FMV can lead to considerable delays which impact on clubs’ financial decision making; (ii) the PL is able to re-fix the price of any APT for accounting purposes on the basis of unclear criteria and without effective review; (iii) the rules exclude shareholder loans which should be included in any assessment of owner related financing; and (iv) the rules distort competition between clubs and the PL (which is a competitor of the clubs for sponsorship) by making club sponsorship less attractive. MCFC also argued that recent amendments to the APT rules were also anti-competitive as they made it harder for clubs to show APTs were at FMV.
Similarly, MCFC argued that the APT rules infringe the Chapter II prohibition. In particular, MCFC argued that the PL has a dominant position and that the issues it was raising also amounted to an abuse of that position.
The arbitral tribunal’s findings
The arbitral tribunal accepted MCFC’s argument that the restrictions should also extend to shareholder loans.
This is a little unusual from a competition law perspective. Normally the fewer restrictions the less likely it is that an agreement will infringe competition law. However, in this case, the tribunal said that shareholder loans were APTs and that permitting one form of APT (shareholder loans) but preventing others was discriminatory and injurious to the objective of the PSR by providing an obvious way for the PSR to be circumvented.
Accordingly, the tribunal reached the curious conclusion that the absence of a restriction on shareholder loans was a clear restriction of competition in contravention of the Chapter I prohibition.
The tribunal also found that recent amendments to the rules which included putting the burden of proof on clubs to demonstrate FMV also infringed competition law because they increased the risks of false positives. That is, they made it more likely that a sponsorship deal was wrongly found to not be at FMV.
Finally, the tribunal found that both of these were not just infringements of the Chapter I prohibition, but also infringements of the Chapter II prohibition as: (i) it found the PL to be ‘dominant’ in relation to the market for the organisation, promotion, and commercialisation of the PL; and (ii) they were both abuses of that dominance for the same reasons as they were infringements of the Chapter I prohibition. The tribunal did not seem to be concerned that this ‘recycling’ of arguments might have been open to criticism based on the general prohibition of simply recycling arguments and not conducting a bespoke analysis.
Raised as a concern around 20 years ago by Gianni Infantino when he was Director of Legal Affairs at UEFA, what is perhaps most interesting about the tribunal’s decision is the degree to which the tribunal felt it was appropriate to carry out a detailed competition law, economic and practical assessment, analysing in depth the degree to which “the limits contained in the rules are acceptable” despite their clear objectives having been set by people who might be expected to know their environment and have a strong interest in the rules being effective.
The PL’s response
The PL has responded by amending its rules in response to the ruling, including to include shareholder loans and remove the objectional previous amendments. These were approved by 16 out of 20 clubs. However, MCFC was among the four clubs that voted against the revised rules (along with Aston Villa, Newcastle United and Nottingham Forest). It remains to be seen what, if any, further action MCFC or others will take.
2. Parachute Payments
Clubs relegated from the PL to the Championship continue to receive a decreasing share of PL revenues for the following three seasons.
As long ago as 2008, shortly after parachute payments were introduced in 2006, the then Burnley Chairman raised them as a competition law issue and publicly threated to take action. However, this was not pursued at the time and Burnley achieved promotion in the 2008-09 season.
As amounts of payments are linked to PL broadcasting revenues and this has increased year by year, the impact compared to the standard revenue of Championship clubs has also increased. The concerns are now therefore stronger that competition within the Championship is being distorted. In the last 10 years the average payment per receiving relegated club has risen from £17m to over £30m.
An argument is that this has created ‘yo-yo clubs’ which, following relegation, are able to ‘bounce’ back to the PL because of the financial advantage over other Championship clubs due to parachute payments. However, while there may be an argument that they are more likely to bounce back, the statistics suggest that this is not guaranteed.
Rick Parry, the chairman of the English Football League, still has concerns: “the impact of these payments on competitive balance of the Championship, and on the sustainability of all other clubs, is a major concern for the EFL”.
However, Richard Masters, the PL chief executive, puts the matter differently: “A gap has built up [between the PL and the Championship]. What I think we are trying to address is to close that gap, specifically parachute and non-parachute clubs in the Championship”. The argument is that parachute payments reduce the investment risks for aspiring and promoted Championship clubs to obtain promotion and stay in the PL. The PL also shares broadcasting revenues with non-parachute EFL clubs via ‘solidarity payments’, but these are of a lesser amount.
In addition, Mr Parry has expressed concerns about there being: “a whole raft of competition law cases which are impacting on the way that we run the game. Having been more or less free to set their own rules for many years, now the competition law authorities… seem to be saying, ‘we don’t think that people running football are doing a terribly good job of it’. To be looking over our shoulder all of the time with challenges from clubs if they don’t like the rules… the game will grind to a halt unless we find a solution for that.” While it is true that there have been a number of competition law cases decided in the last 12 months (e.g. the European Super League case) and the, particularly at EU level, it’s hardly the case that competition law has not previously applied.
It seems that support for the Independent Football Regulator, whose powers will extend to potentially bring more consistency of financial regulation across the PL and Championship in particular, may be based on the idea that it will reduce the likelihood of expensive and disruptive court cases and give football a bit more freedom to manage its own affairs.
Conclusion
Going back to Gianni Infantino: “the trouble with open-ended and subjective concepts like “proportionality” is that they can mean almost anything you want (or at least it is always open to argument). In any event, the net result [of the approach of the European courts to sporting matters] now seems to be that any sports disciplinary measure could potentially be attacked under EU competition law. In effect the issue becomes a lawyers’ playground and a nightmare for sports bodies and administrators.”
With respect to Mr Infantino, as demonstrated in this article, these concerns may apply much wider than disciplinary measures, extending to nearly everything to do with professional sport – particularly a sport with such large amounts of money involved as football. Hence Mr Parry’s concerns about potential litigation on competition law grounds and the willingness of courts and tribunals to go deep into the ways in which rules function to assess their compliance with competition law.
In addition, the finding that the PL is ‘dominant’ may provide a basis for further challenges given that dominant entities have a ‘special responsibility’ to ensure that their conduct does not distort competition in the markets they are involved in or any associated markets.
It remains to be seen what impact an Independent Football Regulator will make on this situation. What seems certain is that the competition rules will not go away, so these will always be a tool the clubs (and leagues) can use to ensure that sporting competitions stay ‘fair’ economically as well as on the pitch.
If you have any questions about anything in this article, please do not hesitate to contact Noel Beale or your usual Michelmores contact. We have a thriving sports law practice across a number of different legal areas including regulatory, commercial, employment, real estate, reputation management, disputes and corporate expertise, with interests spanning a number of different sports, and would be happy to help.
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