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Sports and competition law: the case of the salary cap in New Zealand rugby union

Abstract

The legal environment of professional sports in Europe has been recently complemented by regulations adopted by sports federations and professional leagues aiming at preserving fairness in sports competitions and/or the economic viability of this sector (like the salary cap put in place in French professional rugby union from the 2010–2011 season and the UEFA’s financial fair play regulations). No formal decisions have been taken so far by the European Commission and the French competition authority on the compliance of salary cap regulations or other similar regulation tools with competition rules. Given this context, the decisions of the New Zealand’s competition authority (“Commerce Commission”) dealt with in this article are interesting as they relate to the salary cap put in place as from 2006 by the New Zealand Rugby Football Union in the domestic inter-provincial rugby competition. More particularly, the Commerce Commission’s first decision, dated 2 June 2006, is highly interesting as the Commerce Commission carried out an in-depth legal and economic analysis to authorise the entry into effect of the salary cap pursuant to competition rules applicable in New Zealand. While these decisions should be analysed under the specific sporting and legal background of New Zealand, it is interesting to investigate what could be their practical and legal impact in Europe.

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Notes

  1. Buy (2009) p. 11 – For the rules applicable to the 2013/2014 season, see the Regulation of the LNR’s “Direction Nationale d’Aide et de Contrôle de Gestion” or “DNACG” (“National Directorate for Support and Management Control”), Annex 3 entitled “Règlement relatif aux sommes et avantages dus aux « joueurs »” (“Regulation on the amounts and benefits due to players”). Article L.131-16 of the French sports code has clearly established the possibility for sports federations to adopt such systems. This article has been introduced by the law no. 2012-158, dated 1st February 2012, aimed at enhancing ethics in sports and athletes’ rights. It states that sports federations’ regulations “may contain provisions relating to the minimum number of home grown players in teams participating to competitions and to the maximum amount, relative or absolute, of the total remuneration paid to players by each company or association”. Regarding the labor law aspects of salary cap schemes, see Colonna and Renaux-Personnic (2012) p. 27.

  2. Forti (2013) p. 25 – Lindholm (2010) p. 189f.

  3. Article 101 of the Treaty on the Functioning of the European Union (TFEU) (formerly Article 81 of the Treaty establishing the European Community (EC Treaty)): article 101(1) of the TFEU prohibits 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; article 101(3) TFEU provides that article 101(1) may be declared inapplicable in the case of agreements that fulfil four conditions: (a) they contribute to improving the production or distribution of goods or services or promoting technical or economic progress, (b) while allowing consumers a fair share of the resulting benefit, and do not: (c) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (d) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

  4. Article 102 of the TFEU (formerly Article 82 of the EC Treaty).

  5. Rizzo (2012): e.g. ticket sales arrangements, sponsorship agreements, contracts for the supply of sporting goods and the sale of sports media rights.

  6. Same reference: e.g. multiple ownership rule according to which an individual or a company cannot control more than one of the clubs participating in a competition, anti-doping rules and selection procedures for participation in international tournaments. For an overview by the services of the European Commission’s Directorate-General for Competition of its decisional practice regarding the regulatory aspects of sports, see Lindström-Rossi et al. (2005) p. 72.

  7. See the European Commission’s White Paper on Sport of 11 July 2007 (COM 2007) 391 final, Annex I “Sport and EU Competition Rules”: “2.3 Main pending and undecided issues - There are currently a number of important outstanding legal issues relating to the application of Articles 81 and 82 EC to sport, in particular football. The three subjects which have attracted considerable attention recently concern (i) FIFA’s release of players’ rules, (ii) UEFA’s home grown players’ rules and (iii) the idea of introducing salary caps in professional football. No formal decisions have been taken on these issues so far by the Community courts or the Commission. Therefore, this document cannot at this stage, provide a definite or exhaustive legal analysis of the problems involved or establish whether these rules would violate Articles 81 or 82 EC”.

  8. Except for the decision of the French competition authority (“Autorité de la concurrence”) no. 12-D-28 dated 12 December 2012 relating to a complaint filed by the French rugby federation (“Fédération Française de Rugby” or “FFR”). This decision concerned the litigation between the FFR and the operator of the “Stade de France” (the “Consortium Stade de France”) regarding the conditions offered by the latter for the use of this stadium and for selling advertising spaces and sponsorship agreements.

  9. The NPC is the intermediate competition between the amateur practice of rugby by New Zealand’s clubs and the championship between professional teams from South Africa, Australia and New Zealand (“Super Rugby”). It is split into a professional competition between 14 provincial unions (now called “ITM Cup”) and an amateur competition between 12 provincial unions (now called “Heartland Championship”).

  10. Commerce Commission, Decision n°580, Determination pursuant to the Commerce Act 1986 in the matter of an Application for the authorisation of a restrictive trade practice. The Application is made by the New Zealand Rugby Football Union Incorporated”.

  11. The following elements illustrate that: (i) this decision is 218 pages; (ii) the Commission received submissions from many interested third parties: NPC broadcasters (SKY TV, Canwest/Media Works), the most important sponsor of this competition (Air New Zealand), and nine provincial unions; (iii) for purposes of its analysis, the Commission performed a thorough review of the economic literature dedicated abroad to professional team sports as well as studies having examined the factors influencing spectators’ and viewers’ interest for a competition.

  12. This analysis relied on the modification of the NPC structure made by the NZRU in June 2005. A new two-tiered domestic competition replaced the then existing three-tiered division competition, with five unions, previously in the old second division, being added to the new first division. The NZRU feared that the fewer resources and less talent of these five unions would exacerbate the existing sporting imbalance of the first division.

  13. The NZRU negotiated with the trade union representing professional rugby players the introduction of salary cap provisions into a collective employment agreement signed on 1st November 2005. These clauses set out the general principles of the salary cap, namely a cap to all salary payments paid by each provincial union to players set at NZ$2 million for the first year (€1.2 million as of 13 November 2013), and subsequently the previous year’s cap plus a consumer price index adjustment.

  14. This relaxation took the form of draft new NZRU’s regulations (“Player Movement Regulations”) providing for (i) the widening of the transfer window from 2 to 34 weeks, (ii) a maximum transfer fee for transfers from second division unions to first division unions and (iii) the removal of transfer fees for moves between first division unions.

  15. Section 27 of the Commerce Act prohibits in general terms agreements containing a provision that has the purpose or has or is likely to have the effect of substantially lessening competition in a market. Section 30 provides that agreements shall be deemed to have the purpose or to have the effect of substantially lessening competition if they contain a provision that has the purpose or has the effect of fixing, controlling or maintaining the price for goods or services. Section 29 prohibits agreements entered into between competitors that have the purpose of preventing, restricting or limiting the supply of goods or services to, or the acquisition of goods or services from, any particular person, or class of persons, by all or any of the parties to the contract.

  16. Section 61(6).

  17. Section 61(2).

  18. Section 2(1).

  19. Namely, participating in the NPC first division or any higher level of competition such as the Super Rugby.

  20. The Commission’s decision refers to a research conducted by Colmar Brunton (Understanding New Zealand Sports Fans and their Relationship with Rugby, 2005).

  21. The model used by the Commission was based on two economic studies: Fort and Quirk (1995) p. 1265–1299. Kesenne (2000) p. 422–430.

  22. More particularly, the NZRU’s proposed salary cap provided that remuneration paid by provincial unions to players pursuant to a “Genuine Employment or Player Agreement” was to be excluded from the cap. This kind of agreements was intended to cover, among other things, fixed team performance bonuses or payments for promotional appearances or speaking engagements. The Commission’s concern was that what might fall under this category was so broad that there might be scope for the abuse of this exemption. In its submissions, the NZRU argued that audit processes and valuation methodologies would be implemented to ensure that the remuneration paid under this category would represent fair market value. The NZRU also confirmed that its intention was to capture within the cap only rugby-related payments, and not to cap or restrain payments made by the unions for the use of players’ image rights in promoting local rugby or the employment of players as coaches. More generally, the Commission also observed that it is difficult in practice to frame rules of sufficient comprehensiveness to cover all possible eventualities.

  23. Part of the economic literature reviewed by the Commission argued that to be fully effective, a salary cap system needs to ensure that low revenue-generating teams raise their spending to the level of the cap (Szymanski 2003 p. 1172). Moreover, the Commission has observed that caps in North American professional sports leagues have often taken the form of a revenue-sharing payroll cap, which would produce much less inequality between the teams in a league than the salary cap proposed by the NZRU : (i) the eligible revenues of the league as a whole are determined, (ii) a proportion of that is allotted to salaries and (iii) the resulting figure is then divided by the number of teams to derive the “cap”. Each team can spend no more than this figure on player remuneration, and not less than a fixed percentage of this figure.

  24. Forrest et al. (2005) p. 641–661. This study focused on the English football Premier League.

  25. Commerce Commission, Decision n°721, Determination pursuant to the Commerce Act 1986 in the matter of the revocation of the authorization granted to the New Zealand Rugby Union Incorporated in Decision 580”.

  26. Section 58 of the Commerce Act.

  27. Council Regulation (EC) no. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in articles 81 and 82 of the Treaty, Official Journal of the European Union (OJEU) L 1/25 of 4.1.2003.

  28. This similarity is illustrated by point 11 of the European Commission’s Guidelines on the application of article 101(3) of the TFEU (OJEU C 101/97, 27/04/2004) : “The assessment under Article 101 thus consists of two parts. The first step is to assess whether an agreement between undertakings, which is capable of affecting trade between Member States, has an anti-competitive object or actual or potential anti-competitive effects. The second step, which only becomes relevant when an agreement is found to be restrictive of competition, is to determine the pro-competitive benefits produced by that agreement and to assess whether these pro-competitive effects outweigh the anti-competitive effects. The balancing of anti-competitive and pro-competitive effects is conducted exclusively within the framework laid down by Article 101(3)”.

  29. European Commission’s press release dated 27 juin 2002, IP/02/942: in June 2002, the European Commission has closed an investigation into the UEFA’s multi-ownership rule according to which a company or individual cannot directly or indirectly control more than one of the clubs participating in a UEFA competition. The Commission has come to the conclusion that although these rules might theoretically be caught by the prohibition provided for in article 81 of the EC Treaty, their purpose was not to distort competition but to guarantee the integrity of competitions. Moreover, according to the Commission, the limitation of the freedom of action of clubs and investors which the rule entailed did not go beyond what was necessary to ensure its legitimate aim, i.e. to protect the uncertainty of the results in the interest of the public.

  30. Court of Justice of the European Union, 18 July 2006, case C-519/04 P, Medina D. et Majcen I. c/Commission, concerning anti-doping rules.

  31. Point 47 of the above-mentioned European Commission’s communication (see footnote 29) is a good illustration of how this rule of reason is specific to the sport sector: “Any claim that restrictive agreements are justified because they aim at ensuring fair conditions of competition on the market is by nature unfounded and must be discarded”. The European Commission thus recalls that in general for all economic sectors to which competition rules apply, the argument that a restrictive agreement would have the purpose of ensuring fair conditions of competition on a market is not grounded.

  32. See point 541 of the decision dated 2 June 2006, in which the Commission cited the case law that imposed this analytical framework (Goodman Fielder/Wattie Industriels (1987) 1 NZBLC (Com) 104,108) : “It is important to note that the detriments may only be found in the market or markets where competition is lessened, whereas benefits may arise both in those and in any other markets”.

  33. See point 43 of the above-mentioned Commission’s communication: “The assessment under Article 101(3) of benefits flowing from restrictive agreements is in principle made within the confines of each relevant market to which the agreement relates. (…). However, where two markets are related, efficiencies achieved on separate markets can be taken into account provided that the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same”.

  34. See footnote 30.

  35. See the interview with Mr. Paul Goze, President of the LNR, Midi Olympique dated 18 August 2013 : “For the moment the legislative framework does not allow us to use other forms of punishment, for example sporting sanctions. (…). But this should change quickly with the upcoming new sport law, which will be passed probably in the first half of 2014. This law should allow us to sanction offending clubs via the forfeiture of competition points. That seems to me to have a much more deterrent effect” (“Pour l’instant le cadre législatif ne nous permet pas de punir autrement, par des sanctions sportives par exemple. (…). Mais cela devrait très vite changer avec la loi sur le sport, probablement votée dans le premier semestre de 2014. Elle devrait nous permettre alors de sanctionner les clubs fautifs par des retraits de points au classement. Ce qui me semble beaucoup plus dissuasif”).

  36. Article 9 of the “Règlement relatif aux sommes et avantages dus aux «joueurs»” (“Regulation on the amounts and benefits due to «players»”). This article also provides that the registration of a professional player’s contract and/or an amendment can be refused if that contract and/or amendment would have the effect of exceeding the cap applicable for a season.

  37. One question is in itself whether the stated objectives are really legitimate.

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Correspondence to Grégory Basnier.

Appendix—Summary of the Commission’s analysis regarding the balancing of detriments and benefits flowing from the salary cap

Appendix—Summary of the Commission’s analysis regarding the balancing of detriments and benefits flowing from the salary cap

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Basnier, G. Sports and competition law: the case of the salary cap in New Zealand rugby union. Int Sports Law J 14, 155–166 (2014). https://doi.org/10.1007/s40318-014-0050-8

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Keywords

  • Sport
  • Rugby
  • Salary cap
  • Competition rules
  • Anticompetitive agreements