Breaking Competitive Balance II: Young Players, ‘Young Money,’ and Building a Roster of Experienced MLS Talent

Even with a Salary Cap zeroed in on parity, only 5 clubs of a potential 12 have made it to the MLS Cup in the 6 seasons since MLS introduced Targeted Allocation Money (the “TAM era”).  Two clubs, the Seattle Sounders and Toronto FC, have faced each other three times in the six TAM era MLS Cups.  Seattle themselves have made four of the six TAM Era MLS Cups. 

From that, it seems clear that a pathway to sustained, regular MLS Cup success exists. As we will discuss, one of those factors are teams with high-quality, experienced, players. 

However, MLS provides numerous initiatives via its salary cap to incentivize signing young, inexperienced, players who may provide future transfer value for their clubs.  This creates a disconnect and a friction between the model that the MLS salary cap incentivizes – signing young players – and the model proven to establish sustained MLS Cup success – fielding an experienced squad. 

The question becomes, is there a way to marry both MLS’s incentives to invest in young talent, and the data that shows a strong correlation between having an older, more experienced clubs and winning MLS Cup?

This a second piece in the Breaking Competitive Balance Series.  You can view the inaugural piece, MLS Salary Cap 101, HERE

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MLS Free Agency: Geoff Cameron Case Study

Last week, FC Cincinnati announced that former USMNT defender Geoff Cameron had signed with the club.[1] With the changes in MLS’s Free Agency[2] eligibility rules, it’s possible Cincinnati availed itself of the signing mechanism to bring on Cameron, which creates a great opportunity for us to break down the new MLS Free Agency rules, and how they affect eligible players’ return to MLS.   

Major League Soccer and FIFA’s Third Party Ownership Ban. What You Need to Know.

FIFA announced on December 22, 2014 that as of May 1, 2015, Third Party Ownership would be banned from professional soccer competitions.[1] Unfortunately, for US soccer fans, by virtue of Major League Soccer’s single entity structure, the league itself may be a third party owner. The new global ban now has the potential to completely up-end the US’s top-level soccer league.

Third Party Ownership

Third Party Ownership is, in its simplest form, an agreement between a club, and an investment company to cover the initial cost of a transfer fee, in exchange for a percentage of a future transfer fee that the club may receive when the player is sold to a new club. This practice has become extremely prevalent in Argentina, Brazil, and Portugal, among others, because it allows clubs to add players to their roster that they could not otherwise afford.

Opponents of the practice argue that Third Party Ownership inflates player transfer market values. This in turn decreases the ability of clubs to field competitive squads while staying within their financial means.

Additionally, third party ownership agreements have the potential to take roster and transfer decisions away from clubs, which threatens the integrity of the sport.

Because of this, various leagues, including the English Premier League and the French Ligue 1 have banned Third Party Ownership outright. As well, FIFA instituted article 18bis of its Regulations on Status and Transfer of Players, which banned third parties from influencing roster and transfer decisions.[2]

MLS Single Entity Organization.

Major League Soccer is a “single entity.” This means that all of the teams are technically subsidiaries of the league, and team “owners” are merely stockholders of MLS, who also act as managers of the business affairs of the individual franchises. Put simply, the clubs are local branches of a larger MLS business.

The purpose of the single entity structure is to avoid potential anti-trust lawsuits that other U.S. sports leagues were subject to in the past. Due to case law established in Copperweld Corp. v. Independence Tube Corp., an organization and its wholly owned subsidiary cannot violate Section 1 of the Sherman Anti-Trust Act because they are not separate economic entities and thus cannot enter into a conspiracy (or agreement) to restrain trade.

Sports leagues in the United States have had a special struggle with anti-trust law. Under Radovich v. National Football League, the U.S. Supreme Court held all sports leagues except Major League Baseball were subject to the Sherman Act. However, Mackey v. National Football League allowed leagues to avoid some Sherman Act scrutiny by bargain with players’ unions regarding roster and employment policy via the Sherman Act labor exemption. However, Los Angeles Memorial Coliseum Comm’n v. NFL determined that requiring a vote from other league clubs to approve a move by another club to a new city violated the Sherman act. As well, American Needle, Inc. v. National Football League determined that when leagues grant exclusive licensing deals with manufacturers to use logos and other intellectual property of the constituent clubs they violate the Sherman Act.

If a sports league were a single entity, under Copperweld, it could avoid those legal issues. From that, it is clear that Major League Soccer opted for a single-entity structure to give them more freedom in their ability to organize and regulate their league, and their commercial enterprises.

Single Entity and Player Ownership

Because of the MLS’s single entity structure and roster rules, the MLS is the bargaining unit for international transfers. The MLS negotiates the purchase and sale of players moving in and out of the league. The MLS is also the organization that cuts and cashes the checks when players move in and out of the league on a transfer fees. Therefore, the league owns the economic interest in the player instead of any individual club or franchise.

FIFA’s 18ter

On December 22 2014, FIFA posted its proposed ban on third party ownership. The new regulation, 18ter, which came into effect On January 1, 2015 and comes into force on on May 1, 2015, states:

No club or player shall enter into an agreement with a third party whereby a third party is being entitled to participate, either in full or in part, in compensation payable in relation to the future transfer of a player from one club to another, or is being assigned any rights in relation to a future transfer or transfer compensation.[3]

Under 18ter, a “third party” is “any party other than the two clubs transferring a player from one to another, or any previous club, with which the player has been registered.”[4]

Application of 18ter to Major League Soccer

Two issues arise when applying 18ter to Major League Soccer: 1) is the league a third party owner, and 2) has it “entered into an agreement” with its franchises?

Per the definition of a “third party” under 18ter, Major League Soccer is neither 1) one of the two clubs transferring a player from one to another,” nor 2) “a previous club which the player has been registered.” It could be said that since the clubs are subsidiaries of the league, the league is technically all of the clubs. However, since the regulation specifically mentions clubs, and Major League Soccer is more than just a “club,” it most likely fits in the category of “any other party,” and therefore a third party owner.

Whether Major League Soccer enters into an agreement with its franchise subsidiaries when establishing its single entity structure is unclear. From a reading of Copperweld, it seems as though US case law states it is impossible for a parent company to enter into an agreement with its wholly owned subsidiaries. However, a FIFA DRC panel, or a CAS tribunal, not bound by US law, would determine whether an agreement existed. It could be found that the league roster rules, the CBA, and the general arrangement of the league is a de facto agreement between the clubs and their parent league to cede control of players movement into, out of, and within the league. This analysis would lead to a finding that the MLS league structure violates new article 18ter.

Additional Considerations

There is a possibility that Major League Soccer may change its league structure without the push of 18ter. There have been a few recent conflicts between clubs and the league over roster policies. Most notably, Chicago Fire’s lost its bid for US international Jermaine Jones due, at least in part, to MLS Allocation player rules.[5] As well, LA Galaxy Manager Bruce Arena took issue with MLS’s negotiation strategy on a bid for Sasha Kljestan.[6] As the MLS continues to grow, additional similar conflicts may cause Major League Soccer’s reconsideration of its roster and transfer policy, if not completely reconsider its single entity status.

Practicalities

Problems with the single entity ownership issue may begin upon the July 2015 MLS transfer window. As all international transfers must be registered via TMS and all rights holders to the players being transferred must be included, the MLS should be listed on the TMS international transfer. The system may not allow the transfer of registration to go through if the rights holder is not listed as the registering club.

If a TMS issue does not arise, a challenge to Major League Soccer’s Third party Ownership must come from a dispute involving a player or club, and Major League Soccer. [7]

Sanctions

Article 18ter is vague on the result of a finding of a third party owner stating only that “the FIFA Disciplinary Committee may impose disciplinary measures on clubs or players that do not observe the obligations set out in the article.” This is interesting, because it does not allow any punishment for leagues that allow the practice to continue. However, since the sanctioning language is broad, it could force MLS franchises to own the players rights themselves, and not defer them to MLS, should a case before the FIFA DRC or CAS go forward. As well, the wide discretion may allow Major League Soccer a pass as the DRC or CAS could find that no sanction is necessary as league ownership is not a practice that the regulation intended to abolish.

Conclusion

 

FIFA’s new article 18ter may put the MLS single entity structure in jeopardy. Unless either Major League Soccer changes how it organizes its control over player movement in and out of the league, or finds relief somewhere by FIFA or CAS, it may be forced to significantly alter its business model in the near future.

Additionally, if clubs are given more independence and begin to actually compete for players in the transfer market, single entity protection may unravel, causing additional legal headaches for the top-flight North American league.[8]

[1] See FIFA’s press release on the matter: http://www.fifa.com/mm/document/affederation/administration/02/49/57/42/tpocircular1464_en_neutral.pdf

[2] 18bis states “No club shall enter into a contract which enables any other party to that contract or any third party to acquire the ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams.” See FIFA Regulations on the Status and Transfer of Players, Art. 18bis(1).

[3] FIFA RTSP Article 18ter(1)

[4] Berry, Richard R.I.P. TPO: A Guide to FIFA’s Ban On Third Party Ownership, Law In Sport, http://www.lawinsport.com/articles/item/r-i-p-tpo-a-guide-to-fifa-s-ban-on-third-party-ownership#references

[5] Murray, Shane, After missing out on Jermaine Jones, Chicago Fire’s Frank Yallop not giving up on adding “top player,” http://www.mlssoccer.com/news/article/2014/08/28/after-missing-out-jermaine-jones-chicago-fires-frank-yallop-not-giving-addin

[6] Young, Jared, The MLS CBA: Unpacking Don Garber’s recent comments on single-entity, The Brotherly Game, http://www.brotherlygame.com/2014/9/24/6836267/the-mls-cba-unpacking-don-garbers-recent-comments-on-single-entity

[7] Note, however, that a challenge like that would only make it before FIFA and CAS if there was an international dimension, and that the FIFA DRC/CAS found that the MLS Grievance Procedure does not comply with FIFA’s dispute resolution standards.

[8] Additionally, under Fraser v. Major League Soccer the US First Circuit Federal Appeals Court felt that Major League Soccer may not be totally a single entity under Copperweld, however it also held that the fact MLS competes with other leagues in the US as well as abroad for labor, it was not an illegal monopolization of the labor market.

Steven Gerrard’s Transfer to Major League Soccer

Gerrard’s Transfer to the LA Galaxy

Liverpool Legend, Steven Gerrard, announced that he will move to the MLS franchise LA Galaxy at the end of the Premier League season. While a huge deal for both Liverpool and LA Galaxy, a move to Major League soccer from Europe is not without its idiosyncrasies. Because of this, Gerrard’s marquee move creates a great opportunity to review the mechanics on high-profile moves in and out of North America’s top-flight soccer league.

Player Registration

According to FIFA rules, players must register with a club to compete in FIFA-recognized competitions . At the upper level, these registrations are logged via FIFA’s computerized TMS system. FIFA requires the use of the TMS for all international transfers of professional players.

A player can only register to a single club at one time. Even for loaned players, said players can only register with the team they intend to represent on the pitch.  Additionally, registration can only happen (with limited exception) occur during a designated registration period generally referred to as the “transfer window.”

This scenario is generally straightforward. Club A signs an agreement with Club B to transfer Player C’s registration during the designated transfer window. Or, as the Case is with Gerrard, Player A’s contract with Club B expires, and player A signs and registers with Club C.

However there are two difficulties regarding players competing in leagues outside of MLS moving to MLS franchises. First, the fact that the MLS season and therefore registration periods (transfer windwos) are different than most professional soccer seasons throughout the world. Second, because of MLS’s single entity structure and roster rules, what types of designated categories the player fits determines where the Player will go, and how much say the player will have regarding which MLS franchise the player is moved to.

Registration Period

Under most circumstances, a player can only change club registrations during designated registration periods. Most major professional soccer leagues follow an August to June season. Most leagues have two registration periods during those seasons, generally, one running through July and August and a second, mid-season, in January. However, the MLS season begins in March and runs through October. Therefore its registration period runs between mid-February and mid-March, and then again, mid-season, in July.

This poses an obvious complication for Gerrard, and any player moving between the MLS and foreign leagues. Specifically, deciding on the best time period to register with the player’s new american soccer franchise.

So long as a transfer is within the registration period for one of leagues involved, the registration can be changed. Gerrard’s Liverpool contract will expire in July, the end of his Premier League Season. He will then presumably (more on that later) register with the Galaxy with no transfer fee (or as it is better known in International soccer parlance, move in a “Bozeman” transfer) as he will be a free agent.

After the July transfer, Garrard will have played a full Season of EPL, Capital One Cup, FA CUP, and UEFA matches with Liverpool, since last August, after playing in the World Cup in the summer before that Season. The World Cup is also sandwiched between the end of the 2013/14 season and the beginning of the current 2014/2015 season. Additionally, by July, Major League Soccer will be midway through their season. With Gerrard playing so much football and moving stateside so late in the MLS season,  Fans may not see Gerrard competing on American soil until either the MLS playoffs (if the Galaxy qualify), or possibly may have to wait until the start of the Major League Soccer 2016 season. There is even a potential for Major League Soccer to loan Steven Gerrard back to Liverpool for the first half of Premier League 2015-16 season and join at the beginning of the 2016 MLS season.

Single Entity

A quick note: If the Player is moving to the MLS (like in Gerrard’s case), the player and the foreign club (if the player is still within the contract term with the foreign club) must negotiate with Major League Soccer, not one of the individual franchises. Luckily, “Designated Players” (like Gerrard) have more bargaining power with what franchise they move to, as they are more desirable to the League.

Designated Player, MLS CBA and MLS Roster Rules

Additionally, Major League Soccer has detailed roster rules, which all franchises must comply. These rules put various players into different categories, which have different effects on how players are brought to clubs and how their compensation is calculated towards the league’s salary cap.

Steven Gerrard will transfer as a Designated Player. Per the collective bargaining agreement between the MLS player’s association and Major League Soccer, each squad has a specific number of Designated Players whose individual salaries will not exceed $387,500.00 in the capped roster budget. In 2014 that number was three, although there have been rumors that the 2015 MLS CBA may increase that number. Therefore, Gerrard’s alleged $6M per year salary will only count towards $387,500.00 of the LA galaxy’s salary budget for cap purposes.

Likewise, unlike allocation players, Super Draft players, and lottery players, Gerrard’s Designated Player status allowed him some control over deciding where he wants to move within the league. Allocation slots and team selection order (for USMNT players coming into the MLS) depend on prior team performance and player transfer success. Super draft selections depend on player desirability and club performance the season before. Lottery selections follow the same process as Super Draft selections but occur when a player has signed with Major League Soccer after the Draft has occurred.

For Designated Players, a franchise must merely desire to sign a player, have an available Designated Player slot open and have the player desire to sign with the Franchise. Seeing as the LA Galaxy has an open Designated Player slot after the retirement of Landon Donovon, and seeing as in an interview Gerrard stated, “they [The LA Galaxy/MLS] basically told me what I wanted to hear,” it seems those requirements have been met.

One note: the MLS CBA gives Major League Soccer the ability to move players as they see fit. Specifically the MLS CBA[1] states that “a Player may be required, without his consent, to relocate to any Team in the League as directed by MLS.” This means, if for some reason, major chances come in the league, or the league feels the need to move Gerrard to a different franchise/media market within the league, it can do so without Gerrard’s consent. Whether that is legal pursuant to FIFA rules, FIFA DRC jurisprudence, or CAS jurisprudence is another story. While it is permissible within the rules, it would be an absolute PR nightmare for the MLS if Gerrard, or any player in that position protested, so it seems an unlikely event.

 

 

[1] The only full version of an MLS CBA available to the public expired on January 1, 2010. The following CBA effective until January 1, 2015 was never published, although a memo outlining changes was distributed. That memo made no mention of this section (15.1), so it is fair to assume it is still a valid provision. However, a new CBA is being negotiated at the moment, so this discussion may become completely moot depending on what comes from those negotiations.