Mind the Cap: exploring the competition law aspects of financial regulation in sport

Introduction

After much conjecture as to the extent of Saracens’ breach of the salary cap (ultimately resulting in a £5,360,272.31 fine and a 105 point deduction which mathematically means relegations for Saracens) Lord Dyson’s report – detailing the decision made by the Premiership Rugby’s (“PRL”) Disciplinary Panel in respect of the initial monetary fine and 35 point deduction – was finally officially released to the public on Thursday last week (“Saracens Report”).

The detail of the salary cap breaches has been documented elsewhere and are beyond the scope of this article. However, an area of law that has rarely been scrutinised by the courts (or in this case a review panel), is one of the early sections of the Saracens Report which grapples with Saracens’ challenge that the salary cap regulations were void and unenforceable under domestic and European competition rules. This piece will provide a brief overview of various salary cap mechanisms implemented globally, concluding that though regulatorily different – their underlying purposes are the same. It will then explore the relationship and compatibility between salary caps (with a particular focus on the PRL regulations) and competition law.

Salary Cap Background

The salary cap concept is not novel and is well utilised throughout global sport. Different forms of salary cap exist and relevant regulations are dictated by sporting and commercial factors unique to each league. As examples of how different leagues approach the concept worldwide:

MLB – Soft Cap (Luxury Tax): Each year, clubs that exceed a pre-determined payroll threshold ($208m in 2020) are taxed on each dollar they exceed that threshold. The tax rate increases (dramatically) based on the number of consecutive years that a club has exceeded the payroll threshold. There is also a 12% surtax for clubs that exceed the threshold by $20 to $40 million, which increases to 42.5% over $40 million and 45% if the club is over by more than $40 million for two or more consecutive seasons. Clubs can also have their draft position moved back for being over the threshold by more than $40 million.

English/ European Football – Investment Cap: The Financial Fair Play Regulations (“FFP Rules”) limits the amount (by percentage) that any one owner may invest into a club and also caps the financial losses any team can make in a certain “assessment” period (the level of this cap is dependent on the owner’s ability to guarantee such losses). The FFP Rules do not provide for an upper limit of the total aggregate salaries within a squad.

NFL – Hard Cap with a Hard Salary Floor: As well as an upper limit, the NFL operates a salary cap floor at 89% of the cap for each team each year. There is also a requirement that league wide spending is at 95% of the cap over two four year periods (2013-2016 and 2017-2020).

English Gallagher Premiership (Rugby Union) – a Variant of the Hard Cap: Utilises a cap whereby a strict financial limit is imposed on all the clubs within the league. The limit currently stands at £7m, which includes certain caveats (some of which are briefly detailed below) designed to allow clubs to (i) maintain world class talent; (ii) promote young English talent; and (iii) protect themselves from an injury crisis:

• Excluded Players: The regulations allow for two excluded players to be paid salaries which sit outside the cap and thus are not subjected to any salary limit (“Marquee Players”);
• Injury Dispensations: In the event that a player is injured for 12 weeks or more, a club may apply for a replacement player (of the same position and on a similar wage) – with a separate salary limit of £400,000 for injury replacements;
• International Player Credits: covers for player absence during international periods (and are therefore unavailable for their club sides); and
• Home Grown Player Credits: applicable to players’ salaries who have been at the club since they were 18 and now form part of the senior playing squad.

(“Regulations”)

Despite these variations, each league implements its salary cap with the aim of achieving some fundamental goals which include:

• Talent Distribution and a Competitive Balance: Salary caps prevent one team stockpiling talent by virtue of having greater financial muscle and therefore preventing sides, with less spending power, having access to the same talent.
• Higher Attendances and Increased Revenue: Increased competition should provide for a greater sporting spectacle creating a more attractive product for both spectators and broadcasters. This in turn drives revenue and income not only for the individual clubs, but the leagues as a whole. As rugby faces up to challenges from (i) an increasingly saturated European sporting market (particularly during the winter months); and (ii) other rugby-specific issues (such as an increasing spotlight on head related injuries) – PRL’s product becomes ever more important.
• Financial Sustainability: For wealthy clubs, a cap places greater impetus on how the club spends its money – moving the focus from player wages to more sustainable spending habits such as: in-depth scouting arrangements; academy development; and player welfare. At the other end of the spectrum, increased revenue achieved from increased competition between clubs provides financially less well supported clubs with an income stream they otherwise may have been deprived off.

Article 101 TFEU

Article 101 of the Treaty of the Functioning of the European Union (“TFEU”) provides that: “all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market” shall be prohibited.

It is not in dispute that (i) the thirteen clubs that constitute the PRL are “undertakings”; (ii) the PRL operates as an association between those undertakings; (iii) the Regulations constitute an agreement between these undertakings; and (iv) the Regulations may affect trade between (a) Member States and (b) within the United Kingdom under the Chapter 1 of the Competition Act 1998 (the domestic legislative equivalent of the TFEU). As such, the extent to which the Regulations (and salary caps generally) are anti-competitive rests on their ‘object’ and ‘effect’. It is worth noting that any regulation need only be judged anti-competitive in respect of its ‘object’ OR its ‘effect’ (not both) to fall within Article 101.

Object

The 2014 judgment of the court of Justice of the European Union (“CJEU”) P Cartes Bancaires held that an arrangement shall be anti-competitive if its object revealed: “a sufficient degree of harm to competition”. Any salary cap (on the face of it) appears to restrict the ability of clubs, once they reach the upper limit of the cap, to compete with each other for the services of players.

On the other hand, the judgement of the CJEU in Bosman held that “the aims of maintaining a balance between clubs by preserving a certain degree of equality and uncertainty as to results…must be accepted as legitimate”.

In QPR v EFL, QPR argued that the FFP Rules infringed competition law by object since they fundamentally conflicted with the economic independence of the club. It was also not disputed that QPR’s ability to pay salaries and wages to any level they wished was curtailed. But against a backdrop of promoting sustainable, internally generated revenues, as opposed to one-off debt/equity injections and over reliance on one source of income (often from high wealth individuals) – the FFP Rules were deemed to be unlikely to cause sufficient harm to competition.

Summarily, effective salary cap rules allow for clubs to benefit from the generosity of wealthy owners, while protecting both the financial stability of clubs and the competitive integrity of the competition as a whole. In that spirit, arguably salary caps should not be harmful (indeed, it could be argued that they are protective) and therefore ‘by object’ not restrictive of competition.

Effect

In understanding the “effect” of an anti-competitive arrangement, the judgments of the CJEU in MasterCard and Racecourse provide clarity:

“it is important that [any] hypothesis is appropriate to the issue it is supposed to clarify and that the assumption on which it is based is not unrealistic” and “the effect of the [salary cap] has to be compared with that which would have prevailed had it not been entered into, an exercise requiring an assessment of the competitive landscape that would exist in its absence” respectively.

The upshot: any analysis of the counterfactual scenario of English rugby union must focus specifically on English professional rugby union (not incorporate comparisons from separate leagues/sports).

For some time, rugby union’s governing body in England the Rugby Football Union have implemented a rule that requires players to be playing within the PRL if they are to be considered for selection for the national team. Arguably this leads to elite English qualified players effectively being held ‘captive’ - unable to play abroad and command increased wages for risk of giving up their international aspirations and thus creates a separate, restricted market for English qualified players.

Such analysis, considering finances only, may be too simplistic. For example, it ignores the significant measures that the Rugby Player’s Association has installed to support player welfare. Players make decisions on matters outside of just basic salary. There are numerous examples where players, having experienced a significant increase in wages as a result of moving to France, have opted to return to the Gallagher Premiership despite the salary cap restraints.

There is also arguably no appreciable evidence that English players are being paid below the ‘market rate’. Ignoring the relevant vagaries over what equates to ’market standard’, the lack of transparency of clubs’ financials (both in England and abroad) do not allow any useful comparisons between the leagues to be made and therefore understand if the average levels of ‘take home salary’ differ substantially. What is certainly true is that the Marquee Player provisions allow for the very best players to receive substantial remuneration. Bristol Bears’ full back Charles Piatau (a former All Black) was reported in 2017 to be the world highest paid rugby union player. Evidently, while remaining salary cap compliant, English club rugby is able to remunerate its most elite players to a level beyond ’market standard’.

Moreover, arguably the Regulations do not appear to be restricting clubs’ ability to participate in the global player market: 134 players representing 16 different countries (outside of the British Isles) currently provide their services within the Gallagher Premiership. Similarly, the Regulations do not appear to prevent teams competing on the field with clubs from leagues subjected to far less stringent salary caps. Since the Regulations were introduced in 1999, the Heineken Champions Cup (rugby union’s equivalent of football’s Champions League) has been won by English sides on eight occasions.

Article 102

For completeness, having concluded that Article 101 TFEU to did not apply to the Regulations, the Saracens Report concluded that there was no question of such caps constituting any abuse of an individual or dominant positon under Article 102 of the TFEU.

Conclusion

The European Commission themselves acknowledge that a “certain degree of equality in competitions… sets the sport sector apart from other industry or service sectors”. It would seem that if salary caps are set and regulated in such a manner that meet the objectives identified earlier in this piece – namely sporting competitive balance and financially sustainability – then it can be argued that salary caps are both proportionate and justifiable.

Unlike the American sports identified earlier, rugby union faces the additional challenge of implementing its salary cap - players have a choice where they ply their trade; France, Japan, South Africa, and America itself (to name a few). As such, PRL continually strives to find a balance with the Regulations which retains the accepted aims of a salary cap, while also (from a wage perspective) maintains the Gallagher Premiership as an attractive proposition for the sport’s superstars. Rugby union’s professionalism (as is all too easily forgotten) comparatively is in its infancy. Accordingly, there will no doubt be more chapters in this particular story as salary cap regulations evolve to keep up with the ever changing sporting and commercial demands of professional sport.

This article was written by James Scott. For more information, please contact James at james.scott@crsblaw.com or on +44 (0)20 7203 5319.