The Importance of Proper Competitive Balance in Sports

Transcription

1 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 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

2 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. Bosman 3 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

3 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

4 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 (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

5 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 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 Straub NCAA v. Bd. of Regents, 468 U.S. 85, 117 (1984). 8 Bosman, at

6 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 selfevident. 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. Due to a greater fan base -- as reflected in attendance and 9 Case C-250/92, Gottrup-Klim v. Dansk Landburgs Grovvareselskab, [1994] ECR, at I Philadelphia World Hockey Club, Inc. v. Philadelphia Hockey Club, Inc., 351 F.Supp. 462, 486 (E.D. Pa. 1972). 6

7 viewership of games on television -- it might be preferable for Ajax or PSV Eindhoven to contend a disproportionate amount of time; fan interest may well be less in a contest dominated by FC Volendam, RKC Waalwijk, and MVV. 11 The unique nature of European football adds another critical qualifier to the entire competitive balance justification. Labor market rules that allow Ajax to consistently contend for the top position in the Champions League, and that might allow two other Dutch teams, for example, to compete to the final rounds of the UEFA Cup, might optimize Dutch football interest, even though the Dutch league season is a bit less interesting because of this imbalance. Thus, further research is necessary to assess the validity of Mr. Straub's claim that the increasing chasm between poor and rich clubs "is having a negative effect on sporting competition," 12 if by "sporting competition," he means the type of seasons that football fans prefer to watch. Even if it were established that lessening the quality differences among teams within each nation's football league would increase attendance and viewership, the European Court's Article 85 jurisprudence makes it clear that competitive restraints adopted in pursuit of that goal must be necessary in order to achieve the desired result. It is clear that FIFA's transfer fee regulations fail to meet this standard, as Advocate General Lenz established under Article 85, and as the Court established using the same doctrinal analysis in judging the FIFA rules invalid under Article Although economic modeling of the optimum degree of competitive balance remains an open topic for further research, the optimum balance would likely be a result that included each team as a contender every few years, with most of the currently popular teams in contention almost every year. 12 Straub

8 As a matter of economic theory and actual experience, unfettered "free agency" actually promotes, rather than hinders, competitive balance by facilitating the quick improvement of mediocre clubs. Numerous studies have demonstrated that competitive balance has improved in baseball since the Reserve Clause was abolished in The result is probably exaggerated in North America, as compared to Europe, because significant cash sales of players are uncommon here. Thus, prior to 1976, an inferior team could improve only through the development of young players (trades are unlikely to generate quick improvement because quality players must be traded to obtain other players, and an inferior team is less likely than a superior one to have an excess in quality at one position). However, even where, as in European football, cash sales are common, the need to induce an out-of-contract player to change teams, and to arrange (either by agreement or by arbitration) on a transfer fee, increases the cost of obtaining new talent. Since inferior teams are the ones in greatest need of new talent, a freer labor market is likely to help inferior teams improve quickly. Critical to this thesis is the concept that, all else equal, an individual player is more valuable to an inferior team than to a superior one. 14 To analyze this, we need to make assumptions about the nature of football club behavior. Under the model 13 See, e.g., Zimbalist, 1992, and other studies cited in Ross, 1997, at This assumes the analysis takes place within the context of one league. Thus, my argument is that, all else equal, a top player on the Swiss league champion, Sion, might be more valuable next year to FC Basel, a team with a larger fan base whose record last year was disappointing. In a free market, Basel might then outbid Sion for one of its players. However, because of European play, Sion might find it to be extremely valuable to keep its entire team intact, so that the Swiss champion could improve on its mediocre performance in European play. Because of the potential revenue from success in European play, Sion might well win the bidding. 8

9 predominant in the United States, clubs seek to maximize profits. Thus, players will be valued based on their Marginal Revenue Product to the team -- the amount of increased revenue the team will attract as a result of that one player's presence on their roster. 15 The marginal value of top players will usually be less on a talent-laden team than on a mediocre one. To use an American baseball example, in 1996 relief pitcher John Wetteland saved all four World Series victories for the New York Yankees, but he was not given a serious offer as a free agent by the Yankees, who planned on making another, younger, relief pitcher their star "closer." (A closer is a specialist in pitching at the end of close games with his team in the lead.) Instead, Wetteland signed a highly lucrative four-year contract with the Texas Rangers, who lost to the Yankees in the 1995 league divisional playoff and had a terrible relief pitching staff. (The Rangers' previous closer, who was not given a new contract offer, has a terrible year, costing the team at least 12 games.) 16 Several European scholars have suggested that a more accurate model to describe football club behavior in Europe is that clubs seek to maximize -- or at least emphasize --wins, not profits, subject to a zero profit constraint (that is, to win as many 15 Actually, U.S. baseball players tend to be underpaid early in their career and overpaid later in their career. This may be due to the particular structure of the labor market as a result of collective bargaining, where only players with six or more years of major league service can receive competing bids for their services, Vrooman, 1996, or because of more "natural" life cycle pricing, Scully, 1995, ch. 2, or a combination of the two. 16 Ross, 1997, at

10 games as possible without losing money). 17 Under this model, too, a star player is likely to be more valuable to an inferior team. Consider, for example, the case of Ciriacco Sforza, one of many talented players on Inter Milan. He went to FC Kaiserslautern, a second-division team in Germany, and is now leading them to significant success in the first-division of the Bundesliga. There are, of course, limits to this thesis. A top player on a team with almost no other peer might not be able to accomplish much because the team's foes can simply triple-team an offensive star or avoid a defensive star. Or, with the case of two star midfielders who develop a symbiotic relationship (perhaps Emilyn Hughes and Rowdy Yeats of Liverpool), each of them are more valuable to a top team than they would be elsewhere. But, as a general matter, an unrestrained labor market, where clubs bid for player talent based on the player's value to the club, will allow lousy teams to get better more quickly. 18 Thus, initial analysis suggests that restraints that inhibit player movement cannot be justified to promote competitive balance because 17 See, e.g., Carmichael & Thomas, 1993; Késenne, The practice of promotion and relegation necessitates some elaboration on this process. Zurich, for example, has two football clubs, FC Zurich and Grasshoppers. Grasshoppers has in recent years been a contender in the top Swiss league (Nationalliga A), while FC Zurich has not. Were FC Zurich to slip down to the second division (Nationalliga B), an unrestrained market would allow new, dynamic management to make the necessary investments to quickly improve the team and become a suitable rival for Grasshoppers. There is at least one instance, however, where relegation plus unrestrained markets could create a vicious downward cycle -- when mismanagement combine with demographic changes that lessen the general demand for football in the local market. If, for example, industrial restructuring within Switzerland were to cause Zurich to lose significant population, FC Zurich might find itself slipping into the second division, exacerbated by the quick exodus of players in an unrestrained market to other teams, with no investor (whether capitalist or community-based) likely to come forward because the prospect of two viable top league teams in Zurich would not longer be likely. 10

11 they actually harm such balance. The major limit to the thesis that players are more highly valued by inferior teams, all else equal, is that all else is usually not equal. Free markets will not necessarily lead to optimum league balance. Different clubs face different fan responses to success. If an extra win attracts 10,000 more fans for Manchester United and an additional 1,000 paying customers for Derby, Manchester United is not likely to be outbid. In addition, a transaction that harms the quality of the overall league product by causing a sub-optimum degree of competitive balance is an externality that is not likely to be valued by individual clubs. To use, again, an American baseball example, in 1927 the New York Yankees improved on their 1926 championship performance by winning the American League by 19 games. (This team is often regarded as one of the best baseball teams in history.) Attendance at Yankee Stadium increased, although only by 130,000, while the runaway race caused attendance for the league as a whole to drop by 300, If the market were free (it was heavily restrained back then), we would not have expected the Yankees to refrain from holding on to its talented roster in order to maximize overall league attendance. Significant theoretical problems remain with the use of competitive balance to justify competitive restraints in the player market. First, the American experience is based on a closed league structure (no promotion or relegation), resulting in exclusive geographic territories of widely varying size. In addition, American baseball clubs, in particular, rely on the sale of local television and radio rights as a significant source of 19 Quirk & Fort, 1992, at

12 income. Thus, it is more plausible that players' marginal value will be systematically higher for certain teams (like the Yankees) than other teams (like the Kansas City Royals). Even in American baseball, the notion that star players will always be valued more highly by clubs located in larger cities is overstated. A players' marginal value will be higher for clubs with fickle fans than for those with very loyal fans -- and economists have observed that the degree of loyalty significantly varies among teams. 20 Any systematic advantage is likely to be much less in European football, where promotion and relegation and the increased geographic concentration of the population mean that teams have a much greater chance of attracting a large fan base by combining improved on-field talent with effective marketing. While there are only two baseball teams within 90 miles of downtown New York, Manchester United has more than twenty teams (including 5 Premier League clubs) resident within a fifty mile radius. Because live attendance is the primary non-shared source of revenue for most European football teams, the claim that certain clubs are systematically advantaged is less plausible. 21 A snapshot of competition in the English Premier League (with data graciously provided by Stefan Szymanski) illustrates both that free agency does not hurt 20 Scully, 1974, at 920, showed "wide differences in the slopes" of the demand for wins among different clubs. See also Porter, Even a growing new revenue source -- the licensing of merchandise -- should not be a cause for alarm, even though successful clubs like Manchester United are paving the way. In the National Hockey League, for example, one of the most successful clothing items carry the logo of an expansion team, the San Jose Sharks. The popularity is not due to the team's on-ice prowess, but rather its trendy colors (teal and black) and a clever symbol (a shark breaking a hockey stick between its jaws). 12

13 competitive balance and how it can actually improve such balance. Consider the performance of the six teams that finished among the top four in one of the two years: Team (Year) Position Payroll ( 000) Aston Villa (95) 18th 7139 Aston Villa (96) 4th 7717 Blackburn (95) 1st 9212 Blackburn (96) 7th Liverpool (95) 4th Liverpool (96) 3rd Manchester U. (95) 2nd Manchester U. (96) 1st Newcastle (95) 6th 7105 Newcastle (96) 2nd Nottingham (95) 3rd 5713 Nottingham (96) 9th 8518 Several of these examples suggest that payroll does not always correspond to winning: Aston Villa increased dramatically despite a modest increase in player salaries, while Nottingham actually declined despite a 49% payroll increase (and were relegated out of the Premier League the next year despite a similarly high payroll). At the same time, Newcastle was able to substantially improve, quickly, by increasing payroll. While this anecdotal evidence is by no means conclusive, it illustrates that free agency does not necessarily lead to dynastic domination because building a championship club is an imprecise art, not a science, but that intelligent investment in the player market can lead to quick improvements. In any event, the rules challenged in Bosman are clearly not tailored to promote any form of competitive balance. Under the FIFA formula, the transfer fee is based on 13

14 the salary of the player and his age. 22 The same fee would therefore apply whether a top player moved from Manchester United to Manchester City or the reverse, even though the former reallocation of player talent could clearly promote competitive balance within the English Premier League. As noted above, for a variety of reasons, it is not clear whether European football clubs should be interested in devising player market regulations that genuinely promote competitive balance. Such regulations might hinder the national champion in European play, and may not actually optimize fan interest. Nonetheless, it may be worthwhile to observe two obvious alternatives to the pre-bosman regulations: revenue sharing and tailored restraints. The above analysis suggests that an unrestrained market will result in suboptimal competitive balance only where historical advantages create an economic barrier to the quick improvement of previously inferior clubs by intelligent investment in "free agent" players. Teams without a solid fan base may need to spend more on marketing in order to develop an appeal so that additional wins translates into additional fans. As Stefan Szymanski observes in his paper for this conference, teams without large cash reserves may find it difficult to compete in an unrestrained market because access to credit may limit their ability to sign top players to long-term contracts. 23 Regional rivalries and geographic proximity may still make it difficult for a team to anticipate the economic rewards from success that its rivals enjoy. 22 Bosman, at Szymanski,

15 One obvious solution to combat the historical advantages of the currently successful teams is to share revenue. If clubs are seeking to maximize wins subject to a zero profit constraint, any form of revenue sharing will suffice -- inferior clubs will simply be able to spend more money without going into the red each year. If clubs are seeking to maximize profits, the nature of revenue sharing may be a bit more complex. Where an inability to compete is due to the lack of cash, again any form of revenue sharing will suffice. In the U.S., it is often claimed that imbalance is due to static factors concerning the size of the market from which to attract fans. This entire premise is questionable on this side of the Atlantic (although baseball clubs have struggled in Montreal, Pittsburgh, and San Diego, the club in similarly-sized Denver has flourished) and even more problematic in Europe, where closer geography and the promotion and relegation system would suggests that fewer teams are situated so that investment in a championship-level payroll will never be remunerative. 24 Nonetheless, several economists' analyses suggest that revenue sharing will be ineffective at promoting competitive balance. 25 Their economic models support the intuitive proposition that a lump-sum payment to a small-market club will not lead the club's 24 For example, the Seattle Mariners baseball club, playing in a relatively small market, performed poorly and had a low attendance until they developed outstanding young talent. They were able to sign these young stars to lucrative long-term contracts (their owner is affiliated with the Nintendo electronics giant) and this investment was suddenly rewarded with huge attendance increases. The Mariners' average annual attendance since the franchise began in 1979 (through 1976, excluding the 1981 and 1994 strike years) was 1.3 million -- paltry by American standards. However, in the franchise's four years where they won more games than they lost (all in the 1990s), their attendance averaged 2.1 million, drawing a record 2.6 million in Henning, See Vrooman, 1995; Fort & Quirk,

16 profit-maximizing management to significantly increase the payroll. The profitmaximizing strategy for such a club would be simply to pocket the subsidy and maintain on-field mediocrity. Perhaps less intuitive is the claim that revenue sharing that is "winning elastic," i.e., where the subsidy increases when on-field performance increases, will be unlikely to increase the incentive for a profit-maximizing, small-market club to improve their roster by increasing payroll. The conclusion seems to be that, for example, the practice of the National Football League and many college football leagues in the U.S. of sharing live gate revenue between the home and visiting team has no effect on balance. 26 Although a complete analysis of these contentions are beyond the scope of this article, it is important to recall, however, that this limit on the efficacy of revenue sharing requires the assumptions that clubs are profit-, rather than win-maximizing, and that market conditions that are difficult to change limit the ability of a club to see a wise investment in payroll, which translated into winning games, rewarded at the gate. In any event, more direct forms of revenue sharing are clearly available to change the incentives of small-market clubs to compete. Revenue sharing could be combined with minimum salary requirements to force increased spending. Each league could also create a "lottery" fund, providing direct rewards for any club that significantly 26 Fort & Quirk, 1995, at 1297: gate sharing lowers the value of an additional win-percent to a team because the team only captures a fraction of any increased revenue at home games. On the road, the team generally loses revenue because, on average, the win-percent of its opponent has fallen.... [G]ate sharing has no effect on competitive balance in the absence of local TV. 16

17 improved its position from the previous year, with a huge reward for a championship for any club that had not won the title in the previous decade. Alternatively, leagues may choose to employ a more tailored restraint to improve competitive balance directly. One form of player market regulation that would seem to be lawful under the Art. 48 analysis set forth by the European Court in Bosman, as well as the Art. 85 analysis set forth by Advocate General Lenz in the same case, is the socalled "Rooney Rule," which operated for one year in the National Football League as a phase-in, under the NFL's current collective bargaining agreement, prior to the imposition of a more anti-competitive salary cap. Under this rule, the top eight teams (in a thirty-club league) are limited in their ability to sign a greater number of veteran free agents than they lost from their own roster. 27 This rule is tailored to promote competitive balance. It restrains only those teams whose continued improvement would actually jeopardize such balance, without limiting franchises who, due to bad luck, poor personnel decisions, or other factors, have high payrolls but poor records. The rhetoric of competitive balance remains popular among many sports league officials. In the context of European football, however, the use of competitive balance to justify restraints on competition for players' services remains problematic. It is not clear whether, in light of strong team loyalties and increasing European play, fans really do want parity in domestic league competition. Even if they do, it is not clear why normal market forces will not allow clubs with currently inferior rosters to invest in player talent and achieve parity with current powerhouses. Finally, even if there are economic 27 The rule is discussed in Ross 1997, at

18 barriers that keep lesser clubs from entering into contention at elite levels, there are a host of other mechanisms, including revenue sharing and tailored restraints that limit participation in the competitive labor market by powerhouse clubs, but not others, that warrant serious consideration. This analysis suggests that the Court was clearly correct in Bosman in finding that the FIFA transfer fee rules cannot be justified on competitive balance grounds. II PLAYER DEVELOPMENT Before and since Bosman, defenders of the FIFA transfer fee rules have justified the system and criticized the European Court because of the adverse effect that free player movement would allegedly have on the ability of clubs to adequately train and develop players. Bosman held that player development was a legitimate justification for rules, notwithstanding Treaty of Rome principles favoring free movement of Europeans and disfavoring restraints of trade among competitors. 28 American courts, in contrast, have rejected player development as an antitrust justification, reasoning that the development of skilled players in professional sports is no different than the development of skilled workers in many other fields. 29 Nonetheless, the FIFA transfer fee ran afoul of the Treaty of Rome because it was not shown to be necessary to 28 Bosman, at See note 2 supra. 18

19 promote player development. 30 Bosman, of course, only concerned the legality of the FIFA regulations that require the payment of a transfer fee when a player moves from one club to another at the expiration of his contract. This Part suggests that private contractual arrangements can serve as an adequate substitute for the trade- and movement-restraining FIFA transfer fee regulations. In addition, FIFA can assure continued funds for player development by financially underdeveloped clubs in Europe and elsewhere by a tax and subsidy plan that would not involve restraining free movement or trade. The "problem" of player development is a problem of uncertainty. If Ajax had been certain that Patrick Kluivert would be a major star when Kluivert was a teenager, Ajax could have offered him a long-term contract, with a high salary, that would ensure that Ajax received adequate return on its investment over the period of the contract. The problem is that clubs usually cannot identify with any reliable accuracy those players who will turn out to be able to compete effectively at the highest level. To adequately train the stars, then, considerable sums must be spent on training of many players, in order to eventually separate the gold from the dross. For this reason, Advocate General Lenz' suggestion that the transfer fee should be limited to the amount actually spent on developing the player in question 31 is inadequate to cover the significant expenses for other players. Private contracting can deal with this uncertainty by making the club and its 30 Id. at Bosman, at

20 players partners in the players' professional development. Clubs will compete to sign players by offering the most attractive player development programs. 32 To be able to obtain a return on their investment, the clubs can offer players multi-year contracts, or contracts that are renewable for a period of years at the club's option. The contracts could also contain a "buy-out" clause that would permit the player to be relieved of his multi-year obligations on the payment of a specified fee (which would reflect the value of the club's right to sell the player's services to another football club). As the player continued to develop, the club would offer the player salary increases or bonuses sufficient to renew the contract, pushing the expiration date further into the future. Finally, when the player's success became more certain, the club could offer the player a handsome salary in return for a multi-year contract. Although the bulk of transfer payments are simply exchanged among top teams, or have gone overseas for major international stars, rather than filtering down to lower level clubs, 33 a number of lower clubs do depend on net revenues from transfer fees in order to maintain their operations. In a free market, this would seem to be quite desirable -- clubs that develop effective training programs to develop young players to compete at higher levels should be rewarded for so doing. Indeed, those clubs with reputations for training players successfully should be able in a free market to sign young, unproven players to multi-year or option contracts. If, during the contract period, the player's talent has appreciated markedly, the contract can then be assigned to a 32 For an argument that clubs that receive substantial transfer fees have traditionally been inefficient at training players, see Moorhouse, Szymanski,

21 higher level team for a significant fee. As noted earlier, Bosman dealt only with the application of the FIFA transfer fee formula to players whose contracts with their prior club had expired. The assignment of a player's existing contract to another team in return for a transfer fee can be done without any horizontal restraint of trade among rival football clubs, by reliance on traditional principles of contract law. In common law regimes, courts will enforce freely negotiated assignment clauses in player's contracts. 34 Therefore, a club's contract damages if a player breached his obligations would not only be the cost of replacing the player but also the lost value of being able to assign his contract -- i.e., the value of the transfer fee. Thus, the courts would also enforce a liquidated damage clause in the contract that approximated the transfer fee. In addition, clubs can often establish that a football player brings unique skills to the field, so that courts will also enforce specific performance clauses in the contract that permit an injunction against the player appearing on a football field for another team. 35 Another club interested in signing the player will be willing to pay a fee so that the current employer does not assert these rights. Under either theory, a club will be able to assure that a player's multi-year contract can be sold to another team, without the necessity of FIFA rules. In civil law regimes, contracts for employment are not ordinarily assignable, even 34 Specter & Finkin, 1989 (citing, e.g., Kosberg v. Brown, 601 S.W.2d 414 (Tex. Civ. App. 1980)). 35 Dobbs, 1993, at 165 et seq. 21

22 if the employee has agreed to an assignment clause in the contract. 36 For this reason, a some civil law countries have specific statutes governing football player contracts. 37 However, unlike common law countries, freely negotiated penalty clauses are traditionally enforceable. 38 An amount that reflects the value of the player's contract can be included in the contract itself, whether phrased as a penalty, or as a "buy-out" clause that permits the player to withdraw from the contract on the payment of an agreed-upon sum, to assure that the club will receive an adequate return on its investment in the player. FIFA and its members may be uncomfortable relying on the marketplace to ensure adequate investment in player development, for several reasons. One is that the proposal is novel, and hence the results are uncertain. Those who have spent a lifetime in football are understandably reticent to place their entire faith in some academic speculation about market-based solutions to problems that have been dealt with through restraints of trade for a century. Another is that markets rely on business actors who know what they are doing. Contracts have to be drafted that incorporate a fair "buy-out" clause, and an economic equilibrium has to be established as to the terms under which lower level clubs will agree to train and develop unproven young players. 36 Bucher, 1989, at 539; Switzerland: Art. 164(1) Swiss Code of Obligations [CO]; France: Art in connection with Art Code Civil [CCF]; Italy: Art Codice civile [CCI]; Germany: Art. 398 Bürgerliches Gesetzbuch [BGB]. 37 See, e.g., Legge 23 marzo 1981, n Nome in materia di rapporti tra societb e sportivi professionisti, Art Bucher, supra, at 521; Switzerland: Arts CO; France: Art et seq. CCF; Germany: 339 BGB; Italy: Art CCI. 22

23 To assure, in the short run, that adequate funds remain available among lower level clubs, or leagues in poorer countries, FIFA may want to consider a revenue redistribution scheme. One example would be a payroll tax on top division clubs in Europe, to be distributed by FIFA to poorer clubs. A tax of just 5% of payroll would raise an enormous amount of money, but it could be hardly argued that such a tax would significantly restrain any club from bidding for player talent. The International Ice Hockey Federation recently adopted a policy requiring a payment of up to $250,000 to the Federation for a training fee, in lieu of the transfer fees struck down by Bosman. Assuming that the fee is not so high as to discourage free movement, this is another example of a viable alternative. Player development is, of course, the lifeblood of any sport. Although football clubs have used exploitive trade restraints among themselves to assure that training and development was adequately compensated, these restraints are incredibly overbroad. Most of the transfer fees paid under FIFA rules are recycled among peer clubs at the top level. Even where a club is a net recipient of transfer fees, there is no assurance that the club actually added value to a player's talent. In a free market, different clubs will pursue different strategies that should actually make player development more efficient. Top clubs with a development philosophy (such as Ajax Amsterdam) can continue to develop players, signing those whose promise is clear to long-term contracts to play on their own team, and using option and buy-out clauses so that other players' contracts can be assigned, for a fee, during their term. Other top clubs will acquire talent through acquisition of long-term player contracts from lower 23

24 level clubs. In order to obtain the best terms from players, lower level clubs will have to offer the best training and development programs. Finally, to the extent that the market response is deemed inadequate, lower level player development programs can be directly subsidized by FIFA, funded by a non-restraining payroll tax. These alternatives demonstrate the validity of Bosman's conclusion that the FIFA transfer rules are not necessary to promote player development. III OTHER COMPETITION ISSUES IN THE WAKE OF BOSMAN The maintenance of competitive balance among teams in each domestic league and the ability of the football industry to continue to develop quality talent are the major issues raised by, and that remain after, the Bosman decision. However, Bosman has implications for several other aspects of European sports as well. This Part addresses three of them: (1) the degree to which the recognized and legitimate interest in developing quality national teams for international competition is harmed by Bosman; (2) the relevance of the Court's reliance on Article 48 rather than Article 85 for its judgment; and (3) the relevance of Articles 85 and 86 to the anticipated development of a European "superleague." Development of National Teams The focus of this paper thus far has been on the holding by the Court in Bosman 24

25 that the FIFA-formulated transfer fee payable to clubs for the lost services of out-ofcontract players constituted a restraint on the free movement of Europeans. For many officials of European sports, even greater concern is raised by Bosman's other principal holding -- that domestic league rules limiting the number of foreign players on each team -- also ran afoul of Article 48, insofar as fellow Europeans are considered "foreign" under the rules. At the conference, a senior official of the International Ice Hockey Federation stressed his concern, in light of this second holding, that a "way must be found to reserve places for native born players in the top league in each country." 39 In his spoken remarks, the official expressed concern about the large number of North American developed hockey players playing premier European hockey, who were foreclosing opportunities for young European players to develop their own skills at the highest possible level. Bosman was simply the latest in a line of European Court cases drawing a fairly clear line between rules that directly relate to the development of a national team in international competition (which the Court found was not inter-european commerce subject to the restraints of the Treaty of Rome) and rules relating to professional sports leagues. 40 The generalized concern that British youngsters will not be able to develop into internationally competitive ice hockey players because of the omni-presence of Americans and Canadians in Great Britain is inconsistent with the Court's analysis in Bosman. 39 Meredith, See, e.g., Dona v. Mantero, case 13/76, [1976] 2 C.M.L.R

26 There are, however, a number of creative steps that sports federations in EU member states can take to assure that their native soil produces quality talent for international competitions, without having to relax eligibility criteria to allow transplants to represent the home flag. If in fact those who would comprise the national team in any sport are seriously being foreclosed from competition in the top league, one solution consistent with Dona v. Mantero would be to have the sports federation sponsor the National Team as a club within the country's top league. Restricting membership on the National Team to genuine nationals has been explicitly upheld, and nothing in Dona or Bosman suggests that the direct benefits to the National Team would not also apply to the Team's competition within an actual league. Another concern may be that clubs will not invest in the development of young native talent, because it is cheaper in the short-run to simply sign proven talent from abroad. The younger the player, though, the less likely that Bosman-barred limits on "foreigners" will be necessary. For example, each top level club could be required to maintain a junior team, comprised of teenagers. (It is unlikely that clubs would go to the expense of importing teenagers, especially after Bosman.) Funding for the development of junior teams could be subsidized by a tax on all clubs; a certain level of expenditure for the maintenance of such teams could be mandated. In addition, market incentives could be created (such as a healthy financial prize to the premier league club whose junior team prevails against its rivals in its own competition). These ideas are merely suggestions from a source that is admittedly far removed from the context of developing and developed European sports. They are provided 26

27 here both in the hopes that they might spark consideration of creative ideas among the real experts (those who are involved directly in the sport), and to demonstrate that the case has not been made that direct restraints on trade or nationality are not essential to maintain or develop strong national teams. Article 48 v. Article 85 For reasons the Bosman judgment did not explain, the Court chose to base its holding entirely upon Article 48's prohibition on free movement among Europeans, although the Advocate General had made a forceful case for the illegality of FIFA transfer fee rules under Article 85. The most immediate effect of this holding is that European football clubs are still bound to follow FIFA rules with respect to players hailing from non-member states. This already has been perceived to have had a distorting effect on European football. In Spain, for example, the football players union has protested what they perceive as the response of the Spanish football clubs -- faced with a choice of signing a Spaniard, for whom they will receive no transfer fee at the expiration of his contract, or a Latin American, for whom they can still demand a fee under the FIFA formula, the Spanish clubs are allegedly choosing the latter. 41 If Article 85, with its focus on agreements among clubs, were applied, then European clubs could not agree among themselves to pay a transfer fee for out of contract players, regardless of their nationality. Any regulation which interferes with the ability of an entire league to field the highest quality talent that the market will support 41 El Pais, Aug. 28,

28 ought to be problematic for competition policy. Such a practice, moreover, has perverse implications for national team competition. Although football officials have claimed that Bosman hurts player development, it is the FIFA rules that create a disincentive for clubs to develop native talent (perhaps using the option contracts suggested in Part II above), because it is cheaper to import foreigners who are not subject to Bosman. European Superleague Although neither persistent competitive imbalance nor an inability to develop talent for the future is likely to result from Bosman, many prognosticators have suggested that the future of European football will change radically with the introduction of a permanent European "superleague" composed of the top teams from many countries. In light of the success and popularity of the Champions' League and UEFA Cup competition, the development of such a league would seem to be in the interest of fans. However, the North American experience with monopoly sports leagues serves as an ominous reminder of the potential such a league has to abuse its dominant position in the eyes of football fans for whom no other sport is a realistic substitute. 42 One of the most pro-competitive features of European football has been the ease of entry. 43 Because of the near-universal practice of promotion and relegation, clubs (or, more recently, investors) always have the potential to rise to the top. Of even greater importance, this practice allows the market to provide its typical and appropriate 42 Ross, Szymanski,

29 retribution on those in control of important operations who mismanage their stewardship to the detriment of consumers. Because most European clubs are associations under the control of voting membership (i.e. ownership and management are divided), those who engage in such mismanagement are likely to find themselves seeking new employment. In the U.S., in contrast, rank incompetence and mismanagement are common. First, sports owners are monopolists in closed leagues, with no threat of displacement. Second, most clubs in the U.S. neither owned by member associations nor by a large number of shareholders. Thus, there is not even a market for corporate control to discipline mismanagement. Any effort by a European super-league to significantly limit the principle of promotion and relegation should be carefully and skeptically scrutinized as a major step toward facilitating abuse of dominance in violation of Article 86 of the Treaty of Rome. Competition policy ought to be particularly skeptical about claims that a closed league is necessary to attract investment, in light of the rapid increase in publicly traded shares in European football clubs currently subject to promotion and relegation. 44 CONCLUSION The European Court's decision in Bosman ushered in a new era of competition in 44 To the extent that closed leagues are justified, competition policy officials should seriously consider requiring the development of at least two competing closed leagues. Ross,