THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE SCHOOL OF LABOR AND EMPLOYMENT RELATIONS MAJOR LEAGUE SOCCER AS A SINGLE-ENTITY SPORTS LEAGUE: HOW THE LEAGUE’S SETUP HAS AFFECTED PLAYERS’ BATTLE FOR FREE AGENCY, SALARY NEGOTIATIONS, AND COMPETITIVE BALANCE WITHIN THE LEAGUE ANDREW SABA SUMMER 2016 A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in Labor and Employment Relations with honors in Labor and Employment Relations Reviewed and approved* by the following: Paul Clark Professor of Labor and Employment Relations Thesis Supervisor Alan Derickson Professor of Labor and Employment Relations Honors Adviser * Signatures are on file in the Schreyer Honors College. i ABSTRACT Major League Soccer (MLS) is unique among professional sports leagues in that it was originally established as a single Delaware Limited Liability Company. The NFL, NBA, NHL, and MLB, in contrast, are set up as unincorporated associations of independently-run teams. Teams are considered separate employers each competing against one other for players’ services. In the MLS, the league is the single employer of all players. “Investor-operators,” as they are called in the MLS, own a financial stake in the league, rather than in an individual team. The single-entity structure of the league greatly affects collective bargaining negotiations between the Major League Soccer Players’ Union and the MLS. In other professional leagues, when bargaining hits an impasse, the players can renounce and disclaim the union as their sole bargaining representative. Once the union is renounced and disclaimed, players can sue the owners under antitrust laws in order to gain leverage in negotiations. The MLS’ single-entity structure effectively grants it an exemption from this antitrust litigation, which leaves the union with less leverage in negotiations. This thesis will examine how the MLS has upheld its single-entity defense when other leagues have tried many times to establish themselves as a single-entity, but have failed to do so. It will also examine how the single-entity structure has affected collective bargaining negotiations and if the league is more or less susceptible to antitrust litigation today, given its growth in recent years. In addition, it will examine the future of the league’s single-entity status as it continues to grow. Finally, it will examine to what extent the single-entity structure has hindered the MLS player’s battle to gain free agency and whether not having free agency has caused fewer gains (compared to other leagues) in collective bargaining with the MLS. ii TABLE OF CONTENTS ACKNOWLEDGMENTS ........................................................................................... iii Chapter 1 The Origin of the MLS as a Single-Entity Sports League .......................... 1 Chapter 2 Failures of the Single-Entity Defense in Other Leagues ............................. 5 Chapter 3 Has “Single-Entity” Become a Superficial Label for the MLS? ................. 15 Chapter 4 Free Agency in Professional Sports ............................................................ 23 Chapter 5 MLS Analysis .............................................................................................. 52 REFERENCES ............................................................................................................ 58 iii ACKNOWLEDGMENTS I’d like to thank Doug Allen, Professor of Labor and Employment Relations, for his tremendous help and guidance throughout this process. 1 Chapter 1 The Origin of the MLS as a Single-Entity Sports League In 1968, the first major American professional soccer league was formed. It was called the North American Soccer League (NASL). At its onset, it did not enjoy much success. Things changed in 1975, however, when Brazilian star Pele, considered one of the greatest soccer players ever, joined the New York Cosmos. Soon, the Cosmos were selling out the Meadowlands in East Rutherford, New Jersey, and playing games in front of 70,000 people. As a result, the league began to expand rapidly. New franchises were awarded quickly, and the number of teams in the league doubled from 12 to 24 in just a few years (Mendelsohn, 2003). At the time, the Cosmos were the “New York Yankees” of the NASL. They dominated the league, winning four championships in six years. The team was owned by Warner Communications, which could afford to pump money into the roster and afford international stars like Pele. Most of the other owners in the league were individual owners or small partnerships that simply couldn’t keep up with the financial power of Warner. Desperate to compete with the Cosmos, team after team spent millions on aging international stars with little success. Many of the new owners were not “soccer people,” and quickly gave up after they stopped receiving a return on their investment. Teams began to fold, and the popularity of the league quickly faded (White, 1). On March 28, 1985, the league suspended operations after only two teams committed to playing that season. In 1988, the Fédération Internationale de Football Association (FIFA) granted the United States’s bid to host the 1994 World Cup. It was to be the first World Cup hosted outside Europe 2 or Latin America. In the years leading up to the World Cup, one of FIFA’s major concerns about the state of soccer in the United States was that there was currently no professional soccer league in place. In exchange for the successful bid, the U.S. promised to create a league, which ultimately led to the creation of Major League Soccer. At the time, there was only a small fan base for soccer in the United States as well as major competition from the other four established sports leagues. The founders of the MLS were faced with a difficult dilemma. They needed to attract high-priced talent in order to create a premier, first division soccer league. At the same time, however, they needed to learn from their NASL predecessors. There needed to be more parity in the MLS, and costs needed to be controlled. As the New York Cosmos were selling out stadiums, small-market teams like the Rochester Lancers only played in front of 5,000 people. Other teams simply could not spend with the Cosmos, and as a result, they could not compete. In order to control costs and have an equal distribution of players, the founders of the MLS wanted strict salary restraints and player movement rules (Mendelsohn, 2003). Many of the founders were already involved in other sports leagues in the U.S. These leagues had previously attempted to restrict player movement and apply salary restraints, which courts consistently found to be in violation of Section 1 of the Sherman Antitrust Act. In order to avoid antitrust litigation while still implementing rules they saw as necessary for the success of a professional soccer league in the U.S., these men decided to create the MLS as a single-entity, thereby avoiding any “combination” in restraint of trade (Mendelsohn, 2003). 3 Obstacles to Becoming a Pure Single-Entity Sports League The original formula, as these founders quickly realized, was not a plausible one. They structured the MLS as a single limited liability company governed by a board of directors who were to be appointed by league investors. Initially, men like Alan Rothenberg, the World Cup USA 1994 Chairman and CEO who was tasked with leading the creation of this league, wanted the league to own and operate all of the teams. That is, the board of directors would assign players, team personnel, as well as set local ticket and concession prices. Investors would simply own shares in the MLS. Rothenberg and his investors quickly found, however, that this plan would never attract the amount of investors the league needed in order to be successful (Mendelsohn, 2003). As Mendelsohn puts it, “This plan, however, failed to attract enough investors as potential investors wanted to operate their own franchise and have the ability to make decisions concerning their multimillion dollar investment, not to mention receive the notoriety that comes along with owning a professional sports franchise” (Mendelsohn, 2003, p.72). The initial plan needed to be altered in order to get the new league off the ground and running. Rothenberg approached his potential investors with a revised plan; one he hoped would retain the league’s single-entity structure while still attracting enough investors to maintain a successful league. Under his new plan, the MLS would still retain formal ownership of all franchises in the league. The league would, however, issue a special class of stock to potential investors. These investors came to be known as “investor-operators,” and with this special class of stock they were each given almost full operating control over their franchise. Profits and losses were to be distributed among investor-operators equally, like any other limited liability company. Although there was competition in a few areas, Rothenberg and his investors insured 4 they would avoid it in several crucial areas, thereby retaining their coveted single-entity status (Mendelsohn, 2003). First and foremost, because the MLS owns all franchises, investor-operators do not directly sign players for their respective teams. Players sign a Standard Player Agreement with the MLS, who then assigns players to a specific team. Under the initial agreement, the league would consider several factors when assigning players, including the maintenance of a salary cap, the competitive balance throughout the league, and a team’s needs both on and off the field (Mendelsohn, 2003). No longer could a New York Cosmos sign all the best talent and expect small market teams to be able to compete. Rothenberg and his investors could now maintain a competitive balance throughout the league to ensure teams would not burn out once again trying to keep up with one dominant team. Setting up the league as a single-entity allowed Rothenberg and his investors to solve the problems that led to the NASL’s downfall. Rothenberg did not just have this goal in mind, however.