Foreign Clubs Turn MLS Money into Real Money

Earlier this year, FIFA’s Dispute Resolution Chamber decided two cases that may complicate MLS’ life. In each case, a DRC panel ruled the league must pay solidarity when one MLS team transfers a player to another MLS team for general allocation money (“GAM”) — a currency that only exists within the league. This could force MLS to pay foreign clubs hundreds of thousands of dollars in solidarity for intra-league transfers where no actual money changes hands.

Case Facts

Functionally, both cases were the same. In one, Charlotte FC transferred Venezuelan center back Christian Makoun to the New England Revolution for $400,000 in GAM, and Zamora, a Venezuelan club, requested solidarity for the years Makoun played there as a teenager. In the other, the Columbus Crew transferred Brazilian midfielder Artur to the Houston Dynamo for $300,000 in GAM, and Bahia, a Brazilian club, requested solidarity for the years they had Artur as a youth player. So in short, both DRC panels had to determine whether a foreign club can obtain solidarity from a transfer between two MLS teams, where the fee consisted entirely of GAM.

GAM and Solidarity

GAM and, to a lesser extent, solidarity, exist in subsets of the football world. Therefore, some background may be helpful.

General Allocation Money

General allocation money, or GAM, is a mechanism MLS teams use to get below the league’s salary cap. Now, oddly enough, getting below the cap does not depend on a team’s combined salaries. It depends on the team’s combined “budget charge.”

A player’s budget charge is a discounted version of his salary. Only this figure — and not the player’s actual salary — counts toward the cap.

That said, determining a player’s budget charge is a process that begins with his salary. From there, MLS rules offer teams several mechanisms to reduce that amount for cap purposes. A familiar example might be the designated player rule. This allows teams to sign up to three players for any salary they want (often, over $1M/year) but count them toward the cap at no more than $651,250 each.[1] This reduced number is the designated player’s budget charge.[2]

GAM is another mechanism for reducing a player’s budget charge. Teams do this by using GAM to “buy down” the charge — meaning the team applies a certain amount of GAM to a player’s budget charge and, thus, reduces it by that amount. So imagine a player who makes $500,000 per season (and, at least initially, has a budget charge of the same amount). If his team applies $150,000 in GAM, his budget charge falls to $350,000.

Before the season begins, the league gives each team an allotment of GAM. A team can increase its supply by, among other means, trading players for GAM. Here, the GAM acts as a transfer fee — though one that cannot live outside the MLS ecosystem. Both DRC cases arose from this kind of transfer.

Nonetheless, despite functioning as money within MLS, GAM is not real money. That is, the buying team does not transfer actual dollars to the selling team. Rather, its GAM total falls at the same time the seller’s total rises. In other words, GAM is a number on a spreadsheet, not money.

Solidarity

FIFA created solidarity to reward clubs for developing young players. It works as follows: When a player is sold, the buying club takes 5% of the transfer fee (the “carve out”) and distributes it pro rata to the player’s “training clubs.” These are the clubs that registered him between ages 12 and 23.

FIFA’s Regulations on the Status and Transfer of Players (the “RSTP”) provide a simple matrix establishing how each club’s share is determined. Essentially, having the player for a year between ages 12 and 15 entitles the club to 5% of the carve out. Having him for a year between 16 and 23 earns the club 10% of the carve out.[3]

Until 2021, solidarity only applied to international transfers — those between clubs in different national associations. FIFA then revised the rule to allow training clubs to obtain the payments when their former player is transferred between clubs in the same association, provided the training club is in a different association.

Legal Analysis

MLS fought both cases on behalf of the individual teams. Not surprisingly, the league argued GAM was not real money and, therefore, could not generate solidarity.

But the DRC did not find the lack of real-life funds decisive. As it noted, the RSTP requires solidarity off “any compensation paid within the scope of [the] transfer, not including training compensation.” The RSTP’s commentary specifies that “compensation” is not limited to a standard transfer fee (i.e., real money exchanged for a player).

Further, DRC and CAS jurisprudence urge an expansive definition of the term — one wide enough to encompass “any financial benefit which may derive from the transfer of the player.” In both cases, the DRC concluded GAM delivered such a benefit. Specifically, the panels observed that, through the salary cap, MLS limits the amount teams can spend on player salaries and acquisitions. In effect, GAM raises this limit to an amount greater than the cap. Thus, more GAM allows an MLS team to spend more in the player market. Both panels deemed this a financial benefit and, in turn, held that GAM qualifies as “compensation.” So when exchanged in return for a player, it does generate solidarity.

With that settled, damages became a calculation issue. Zamora had Makoun for approximately 2 ½ seasons between ages 16 and 19. Based on that, they requested 24.34% of the $20,000 solidarity carve out from the transfer, or $4868. Artur spent slightly more than two years with Bahia. The club calculated this as 22.32% of the carve-out, and as such, they requested $3348. In the end, the DRC awarded Zamora $4873.96, and Bahia $3237.94. So both clubs got almost exactly the amounts they requested.

Because it was the losing party, MLS also had to cover the $3000 in procedural costs for each case.

Impact on MLS

In isolation, neither ruling will hurt MLS much. The two cases only awarded the foreign clubs a total of $8111.90 in solidarity. So combined with the $6000 in procedural costs, MLS owes slightly over $14,000 — not significant in the grand scheme.

As they build up, future claims could leave a mark on MLS — though only a small one. Based on a quick scan, the data from prior years suggests the league’s total bill would reach about $350,000-$400,000 per season. While this amount will not shatter MLS, the league would rather avoid paying it. Case-in-point, MLS fought Zamora and Bahia over less than $10,000.

Still, the strongest headaches may not be financial, but logistical. As can happen when MLS is forced to mesh with the world soccer market, it may have to create another roundabout process to fit its single-entity structure to the new FIFA requirement.[4] Consider just some of the unanswered questions. For example, if teams agree on an intra-league transfer, will MLS pay the solidarity? Or will it fall on the individual team? If it falls on MLS, will the league try to limit these transfers and, therefore, its solidarity payments? If it falls on the teams, how might this affect the intra-league market? Will GAM have the same value if receiving it would lead to more fees?

Again, these are merely some of the logistical challenges MLS would face.

International GAM transfers may also force MLS to pay solidarity

Solidarity can apply in two transfer scenarios. One involves a transfer between clubs in the same association and a solidarity request from a training club in a different association. Here, the RSTP grants solidarity to the foreign club. Both DRC cases addressed this type of transfer.

The second scenario occurs when a player is transferred between clubs in different associations. These transfers allow training clubs from any association to collect solidarity — even if that association is the same as one of the clubs in the transfer. While they only addressed the first scenario directly, the DRC rulings could also expose MLS to solidarity payments for GAM transfers in the second scenario.

MLS is unique in that it takes teams from two different national associations — the United States and Canada. This means a transfer between associations could involve GAM. The DRC has now ruled that GAM qualifies as “compensation” and, thus, solidarity may derive from it. At least theoretically, the calculus would not change if the transfer were between associations, rather than within one. The RSTP authorizes solidarity in both instances. So provided the transfer is for “compensation” — which now includes GAM — solidarity should follow.

Like solidarity from intra-league transfers, these payments are not going to break MLS. But they will impose a small burden. And along with solidarity payments authorized in the DRC rulings, the league could be looking at a new expense of roughly $500,000 per season — not nothing.

Keep in mind MLS’ perspective is not the only view of this story. Several clubs — foreign and domestic — will receive small boosts from these new solidarity payments. In many cases, the payments will go to modest clubs where they will be valuable. For example, in past fifteen months, veteran MLS midfielder Julian Gressel has been the player in two international GAM transfers. Combined, these involved slightly over $1.4M (all in GAM). Gressel is German,[5] first arriving in the US at age 19 to attend college. Until then, he played for at least four German clubs. These ranged from Greuther Furth, which played in the Bundesliga as recently as the 21–22 season, to the Neustadt community sports club in his hometown (Neustadt).

One club in between was Quelle Furth, which currently reside in Germany’s sixth tier. Based on the two years the club had Gressel, they are owed approximately €13,850, or $14,660 (as of October 20, 2023[TB1] ). And if this does not sound like much, consider that Quelle probably pay their players €100–200 per game, have not sold a player in years, and attract crowds in the hundreds to their decades-old stone stadium. So while €14,000 may not turn them into Bayern Munich, it would offer a noticeable benefit.

Random Observations Unleashed

1. One way to think about the relationship between an MLS player’s salary and his budget charge is that it operates like the relationship between gross and taxable income on a personal (US) tax return. The filer starts with its gross income. From there, it arrives at a taxable income by applying deductions to reduce that original number. The government taxes the reduced number. So to complete the analogy, the player’s salary represents the actual income, with his budget charge standing in for the taxable income. MLS rules for reducing the player’s budget charge play a role similar to the deductions.

2. In some instances, non-MLS clubs in the US may earn solidarity from international GAM transactions. It is unlikely that many transfers will fall into this category because American and Canadian MLS players now spend significant portions of their training years with MLS youth teams. Nonetheless, as with Quelle Furth, a few thousand dollars would occupy a valued place in these clubs’ budgets.

[1] MLS rules provide that designated players count as the maximum salary budget charge — i.e., the maximum budget charge for an individual player. In 2023, this amount was $651,250.

[2] Though not directly relevant here, a team gets its final cap number by adding the budget charges of the 20 players it designates for its “Senior Roster.” It has players on its “Supplemental Roster” who do not count toward the cap at all.

[3] To be more specific, clubs’ shares are calculated based on the number of days the player was registered with them. So technically, for a year between ages 12 and 15, a club gets 5%, divided by 365, for each day it had the player. For age 16 and beyond, the formula is 10%, divided by 365, for each day.

[4] Prior examples of this are discussed here and here.

[5] In 2022, Gressel also acquired United States citizenship.

NOTE: This article is also published on the Terry Brennan Law website (https://terrybrennanlawyer.com/2023/10/30/foreign-clubs-turn-mls-money-into-real-money/).