1 Restraints on Player Competition That Facilitate Competitive Balance

Restraints on Player Competition that Facilitate Competitive Balance and Player Development and their Legality in the United States and in Europe Stephen F. Ross* University of Illinois American law has had considerable experience in recent years with agreements among professional sports clubs to restrict competition among themselves for talented athletes. The widely accepted holding of the circuit court of appeals in Mackey v. National Football League established that, under U.S. antitrust law, a severe restriction on free agency was unreasonable. The court dealt with two major and recurring issues in this area. It concluded that the league "has a strong and unique interest in maintaining competitive balance among member teams," but that the restraint in question was illegal because broader than necessary to effectuate that interest.1 Second, Mackey rejected the league's effort to justify a restraint based on the need to * The author benefitted from many comments and questions at the conference in Neuchatel, and particularly wishes to thank Neils Blomgren-Hansen, Rodney Fort, Stefan Kesenne, Robert Lucke, Roger Noll, Sune Troels Poulsen, and Stefan Szymanski for insightful comments and Michael Stanek for superb research assistance. 1 543 F.2d 606, 621 (8th Cir. 1976). The plaintiff challenged the NFL's "Rozelle Rule," providing that a club signing an out-of-contract player must provide "compensation" to the player's former employer. If compensation were not agreed to, the Commissioner would arbitrate. After several arbitral awards that seemed excessive, the market for signing free agents virtually disappeared. 1 recoup the club's investment in training and developing young players. The court held that there is nothing unique about sports leagues that would justify this defense.2 The recent decision of the European Court of Justice in Union Royale Belge des Societes de Football Association v. Bosman3 has focused European attention on the same subject. The court limited its analysis to a holding that Article 48 of the Treaty of Rome -- which prohibits restrictions on freedom of movement within the European Community by citizens of member states -- bars agreements among European football clubs that require payment of "transfer fees" when a player moves from one club to another on expiration of his contract. The court's reasoning, made explicit in the initial opinion by the Advocate General, however, extends to application of the competition law principles embodied in Article 85 of the Treaty -- which prevents rivals from agreeing to restrain trade. Like the U.S. approach, both the Advocate General's initial opinion and the judgment of the Court of Justice responded to two major justifications offered in defense of player market restraints like FIFA's transfer fee rules. Both opinions seemed to recognize as legitimate a concern that reasonable balance among football clubs was desirable. This stems from an assumption (which, as we will see, may not hold up to 2 Id. The court wrote: We agree that the asserted need to recoup player development costs cannot justify the restraints of the Rozelle Rule. That expense is an ordinary cost of doing business and is not peculiar to professional football. Moreover, because of its unlimited duration, the Rozelle Rule is far more restrictive than necessary to fulfill that need. 3 Case C-415/93, [1996] 1 C.M.L.R. 645. 2 analysis in the context of European football) that the "good of the game" and the interest of fans generally is enhanced when all clubs have a reasonable opportunity to compete for the championship, at least periodically, and that the game is not enhanced when dominated by a few wealthy clubs. Both opinions also recognized as legitimate the need to maintain an effective means of developing and training young talent. Like Mackey and other U.S. cases, though, Bosman found that the FIFA rules were broader than necessary to achieve these goals. There are, to be sure, many important differences between the legal, economic, and sociological contexts in which American sports leagues operate and those affecting European football. This paper, suggests, however, that the underlying legal principles are quite similar under U.S. and European competition law -- restraints on competition are suspect, but can be sustained if leagues can demonstrate that they are necessary for the efficient development of the sport; in establishing necessity, leagues must show that unrestrained-market solutions are not feasible. In addition, the U.S. experience can be useful in predicting the consequences of various responses that national sports leagues and international federations might make toward the Bosman case. Part I of this paper discusses the legitimacy of competitive balance as a justification for trade restraints in European football. After questioning whether competitive balance is even desirable for football fans, the paper suggests several alternatives that, unlike the FIFA transfer fee rules, are tailored to promote competitive balance. Part II analyses how private contracting with young players can provide football clubs with a strong incentive to invest in player development, notwithstanding 3 the abolition of transfer fees for out-of-contract players. Finally, in Part III, the paper briefly addresses three other concerns raised in the wake of Bosman: the ability of European countries to develop their own players for national team competition; the distortions in the market caused by the European Court's reliance on Article 48 rather than Article 85, so that the effect of its judgment applies only to players who are citizens of EU member states; and competition issues involved in the creation of a European "superleague". The analysis suggests that competition policies shared by the U.S. Sherman Act and the Treaty of Rome can be applied to European football without harming the sport. I COMPETITIVE BALANCE Over twenty-five years ago, Major League Baseball successfully defended its "reserve clause", barring all competition for a player's services once he signed an initial contract from antitrust challenge.4 One of the principal arguments made by club owners was that "without the balance provided by the reserve system, the clubs with greater financial resources would attract the most outstanding players." As a result, "successful and reasonably balanced league play [would be] impossible to maintain."5 Last 4 Flood v. Kuhn, 407 U.S. 258 (1972). 5 Brief for the Respondents at 7, Flood v. Kuhn, No. 71-32 (O.T. 1971). In Flood, the U.S. Supreme Court held that baseball's reserve clause was exempt from scrutiny under the Sherman Act. 407 U.S. 258, 284 (1972). The court made it clear that its holding applied only to baseball, not the other sports, thus allowing antitrust 4 October, a leading German football official, commenting on Bosman, wrote that the "chasm between the poor and rich clubs is becoming ever greater and this is having a negative effect on sporting competition."6 Competition policy acknowledges that there are circumstances when competitive balance can improve the quality and attractiveness of a sports league's product, and that restraints tailored to achieve those results would be sustained. The U.S. Supreme Court has held that "the interest in maintaining a competitive balance" is "legitimate and important."7 Although the European Court, which limited its analysis to Article 48, did not address this issue, Advocate General Lenz did. Assuming (a point discussed in the next paragraph) that competitive balance is desirable, he concluded that agreements necessary "to ensure by means of specific measures that a certain balance is preserved between the clubs" were lawful.8 Lenz' opinion is consistent with general competition law principles established by the European Court. For example, the Court upheld an agreement among rival members of a cooperative purchasing group that restricted them from joining other cooperatives and discouraged them from making independent purchases, based on a conclusion that the restrictions were limited to "what is jurisprudence, such as the Mackey case, to go forward. The same result as Mackey -- free agency for players -- was initially achieved in baseball through labor arbitration, and maintained subsequently in collective bargaining. Staudohar 1989. Recent decisions and commentary call into question the continuing viability of the Flood doctrine. See Butterworth v. National League, 644 So.2d 1021 (Fla. 1994); Piazza v. Major League Baseball, 831 F.Supp. 420 (E.D. Pa. 1993); Ross 1995. 6 Straub 1997. 7 NCAA v. Bd. of Regents, 468 U.S. 85, 117 (1984). 8 Bosman, at 734. 5 necessary to ensure that the cooperative functions properly."9 To justify restraints as promoting competitive balance, though, European football clubs or associations would have to establish what Advocate General Lenz assumed -- that competitive balance is actually desirable; in other words, that competitive balance within domestic leagues will actually improve the popularity of the sport. This is not self- evident. The conventional competitive balance argument is that overall attendance and television viewership -- the way economic output is measured in sports -- are enhanced when each season features a close contest for the league championship, and when each team has a reasonably chance to contend for the championship every few years.10 One of the better measures of such balance, for example, would be the correlation between winning percentage that each club enjoys over a several year period -- the higher the correlation between winning in Year 1 and winning in Years 2, 3, or 4, the greater the competitive imbalance. Thus, if Ajax, Feyenoord Rotterdam, and PSV Eindhoven were to consistently dominate the Dutch league, we would conclude that the league was competitively imbalanced. However, it is not clear if overall output (measured by live attendance plus television viewership) is enhanced in the Netherlands by greater balance within the Dutch league. Relative parity among Dutch teams may well not be optimal from the fans' perspective.

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