For MLS, Liberalization Breeds Exposure
Last week, reports surfaced that Major League Soccer is considering a rule change that would allow teams to keep 100% of their transfer fees from homegrown players. Previously, the amount had been 75%. The rule’s aim is to incentive youth development by offering teams a bigger reward for grooming valuable players.
From a soccer standpoint, this approach makes sense. If a team can profit from selling a player, it is more likely to invest time, effort and money developing him into a quality professional. Conversely, if a team has to give a slice of that profit away, its loses some of that incentive. For the most part, globally, player transfers operate through a free market, where clubs get to keep the fees their sales generate (subject to sell-on clauses and other payments, like training compensation and solidarity). So MLS’ proposed rule change would inch the league closer to the economics governing most of the soccer world.
But despite the potential sporting benefits, the rule change could expose MLS to added legal risk. This is because allowing teams greater autonomy weakens the league’s single-entity structure, which, in turn, weakens its single-entity antitrust defense.
As most domestic soccer fans know, MLS is a single-entity league. This means that the league owns the teams and signs most of the players. Owners are not club owners in the traditional sense. Rather, they are investors in Major League Soccer LLC (the company that runs the league), with the right to operate a certain team. As such, MLS teams are not standalone entities, like the independent clubs that populate most of the world’s soccer leagues.
Maintaining single-entity status is important because it can shield MLS from antitrust scrutiny. Section 1 of the Sherman Antitrust Act prohibits any “contract, combination…or conspiracy, in restraint of trade.” When determining liability under this provision, the threshold question is whether the parties have formed a “contract, combination…or conspiracy.” Courts have ruled that such an arrangement cannot exist where the defendants comprise a single actor, or entity.
MLS has employed the single-entity defense twice — both times in Fraser, a 1996 federal lawsuit by a group of MLS players against the league. The suit included a claim against MLS and some team operators for violation of Section 1 of the Sherman Act. MLS moved for summary judgment on that claim, arguing the league was a single entity and, therefore, could not engage in a “conspiracy.” The District Court agreed and granted MLS’ motion. Its sole basis for the decision was that MLS was incorporated and structured as an LLC.
On appeal, the First Circuit cast doubt on the lower court’s conclusion. It determined that the substance, rather than form, of the parties’ relationship governed whether they formed a single entity. Based on this standard, MLS was a mixed bag. On one hand, the league had single entity characteristics, like centralized decision-making and league control over teams and players. But MLS also had characteristics that resembled an “agreement between competitors.” For example, MLS owners did “some independent hiring,” made “out-of-pocket investments in their own teams,” and retained “a large portion of the revenues from the activities of their teams.” Because the Court affirmed the District Court result on other grounds, it did not reach a conclusion on whether MLS constituted a single entity. As a result, MLS’ ability to use the single entity defense remains an open question.
The First Circuit issued its Fraser opinion in 2002. In the 15 years since, MLS has relaxed its centralized decision-making further. For example, in 2002, MLS had only 3 operator/investors for 10 teams, which reduced the teams’ individuality and limited competition between them. Today, MLS has 22 teams, each with its own operator/investor. Many have built soccer-specific stadiums, financed, in some cases, by the owner’s personal funds. MLS now grants teams more freedom to manage their rosters, with the designated player rule, allocation money and discretion over player salaries. There is even (limited) intra-league free agency. So if anything, MLS has a worse case for the single entity defense than in Fraser.
Allowing teams to keep 100% of transfer fees from homegrown players will only accelerate MLS’ drift away from single entity status. The proposed rule change would sever any connection between the league and the transfer. Teams would be able to develop players in their own academies, nurse them to their first teams and sell them for fees they alone keep. The league would have no involvement with these players other than paying their salaries. As such, teams would enjoy more autonomy, from both a sporting and financial perspective.
The rule change would also ignite new economic competition between the teams. At present, MLS gifts each team first priority over any youth players within a certain distance from the team’s home. But outside of these 21 areas (New York has 2 teams), a less regulated market prevails. Teams already compete for youth players in these unclaimed territories. But if they could keep the entire transfer fee for homegrown players, these recruiting battles would assume an economic bent, as teams could be competing for transfer revenue they would not have to share.
By itself, the proposed rule change would not eliminate MLS’ single entity defense. But it is another factor weighing in that direction. Nonetheless, even if a court did rule that MLS was not a single entity, it would still have to determine whether MLS restrained trade. While this is also an open question, it is one MLS would probably prefer no one asked. So losing the single entity defense would be at least somewhat detrimental to the league.
These and other rule changes present MLS with a catch-22. The steps that may be necessary to improve the league’s quality carry legal risk. So as MLS teams do more to make the league competitive in the global soccer market, they may lose protections that have shielded them from competition at home.
Random Observations Unleashed
- Credit Paul Tenorio from FourFourTwo (USA) for breaking this story.
- Reportedly, along with giving teams 100% of their homegrowns’ transfer fees, MLS is also considering increasing the amount of those fees that can be used on player salaries. If the 100% cut of the transfer fee is to have any direct competitive benefit, teams have to be able to spend more of that money on existing or new players. As it stands, teams can only use $650,000 of the fee for that purpose. If the league does not raise this number, giving teams a larger cut of their fees would mean little because the extra portion could not be used to improve their rosters.
- Under the current rules, MLS plays a role in negotiations over transfers with foreign clubs. It is unclear whether eliminating MLS’ cut of homegrowns’ transfer fees would also eliminate its role in negotiating those fees.
- For analysis of how MLS’ player acquisition rules (as opposed to player sale rules) affect its single entity defense, see this article.
