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Major League Loophole: A look at MLS’s shaky single-entity status

By Elizabeth Cotignola, Special to SoccerWire.com

Elizabeth Cotignola mug shotEditor’s note: With Major League Soccer’s collective bargaining agreement with its players union set to expire this weekend and the sides looking quite far apart in their ongoing negotiations, the unsettling possibility of a work stoppage looms as the days count down to the 2015 season’s scheduled opening in March. 

So SoccerWire.com has again turned to Canadian-based lawyer and passionate soccer fan Elizabeth Cotignola for expert analysis on the legal underpinnings of this debate, with a focus on MLS’s single-entity structure and the issues that it presents.

Cotignola is an attorney currently located in Montréal, Québec. Born and raised the child of Italian expatriates in ‘La belle province,’ she began her career in Chicago at a boutique firm specialising in commercial litigation before returning home to Montréal, where she now works at one of the world’s leading aerospace innovators.

A former defender and lifelong devotee of the Church of [Paolo] Maldini, she loves Milan and her beloved Azzurri with a zeal most reserve for their significant others, and is currently in a tortured relationship with the Montreal Impact. The trilingual Cotignola has also written for A Football Report and XI, and maintains a blog devoted to the law of fashion. If you enjoy your football with a snide of snark, find her on Twitter at @LaDiavolina

The collective bargaining agreement Major League Soccer inked with its players in 2010 expires at the end of January. One of the main sticking points in the negotiations surrounding the new deal has been player movement and compensation.

The parties are diametrically opposed on this matter. The league believes that the centralized, single-entity structure with which it was established way back in 1995 remains necessary for the league’s future growth and stability. Others, namely the MLS Players Union and the many players whose voices it represents, believe that the league’s relatively low salaries and lack of free agency hinder it from the evolution required for it to take its place among the world’s preeminent leagues.

It appears that for the majority of the league’s players, free agency is seen as the solution to all their grievances, a catch-all fix for everything. They believe that once MLS teams are required to compete directly for players, they will no longer hold a monopoly on bargaining power, as they do now.

“Throughout the world, soccer has unrestricted free agency. It is there. It’s the norm. Certainly we’re working toward that,” FC Dallas goalkeeper Dan Kennedy, a member of the MLS Players Union’s five-man executive board, told SI.com earlier this month. “We feel like if we’re going to be a league that’s one of the best in the world, I think it makes sense to abide by those rules.”

mls crest1The Rules Of The Game: MLS’s Strange Structure

The structure of MLS is an anomaly in professional sports. Unlike other sports leagues in North America, wherein teams are owned by separate individuals or corporate entities, MLS operates as a single limited liability company. The league as a whole collectively owns all teams. On paper, a Board of Governors serves as the league’s management committee and retains centralized control over the entirety of its operations. In reality, the operations of each of the league’s franchises are managed by a specific ‘owner-operator,’ an investor who owns stock in the league and retains a seat on the board.

Accordingly, unlike other major sports leagues, MLS wields significant centralized control over the operations of both the league and its individual teams. While each team’s operator retains a degree of power over the composition of its respective team, a player’s contract is signed with the league itself and not an individual team, an arrangement unique to Major League Soccer.

The league – at least, in theory – recruits or helps recruit players, negotiates their salaries, compensates them using league funds, and, except in very rare circumstances (cough) determines where each will play via a complicated web of rules, restraints, allocation, waivers and lotteries. In other words, the league maintains near-total control over the terms of players’ employment.

Antitrust Law

The significance of the league’s single-entity structure – and its strained relationship with the specter of free agency, which has returned once more to haunt the league in this year’s CBA negotiations – is meaningless without at least a basic understanding of antitrust law. The aim of antitrust law is to protect and promote competition and prevent the operation of monopolies and cartels. A variety of legislation governs antitrust law in the United States, but the most relevant – that which is most applicable in the context of sports – is the Sherman Act.

Don GarberSection 1 of the Sherman Act prevents the domination by a single corporation or business in the relevant market via the prohibition of agreements, conspiracies or activities that restrain trade. As Section 1 requires an agreement or conspiracy, it only applies when a court can identify two or more parties who have acted in tandem. Where there is only one entity, a ‘single entity,’ Section 1 is inapplicable. It is this nuanced legal requirement – the existence of an agreement or conspiracy – upon which the league’s precarious single-entity status is balanced.

Fraser v. Major League Soccer

For much of the history of the Sherman Act, the applicability of the single-entity exception to sports leagues was much-litigated but remained obscure. It was only in 1984 that a case that had absolutely no relation to sports determined how courts would assess a sports league’s single-entity status from that point on. In Copperweld Corp. v. Independence Tube Corp., the Supreme Court considered whether a parent company and its wholly-owned subsidiary were capable, for the purposes of the Sherman Act, of conspiracy in violation of Section 1. The Court ruled that wholly-owned subsidiaries were incapable of conspiracy with each other – a single entity existed because the actions at issue were guided by a single corporate consciousness.

The Court reasoned that a parent corporation and its wholly owned subsidiary have a complete ‘unity of interest’, and any agreement between them could not constitute a ‘contract, combination or conspiracy’ as defined in Section 1. The unity of interest test established by Copperweld set a precedent whereby all professional sports leagues could shield themselves from antitrust liability. In line with this analysis, two sports teams owned by the same entity – say, the league – could, for the purposes of antitrust law (and immunity therefrom), constitute a single entity.

In 1997, MLS’s single-entity status came under scrutiny when a group of eight players sued MLS, nine of its investor-operators, and the U.S. Soccer Federation. The class action – known to attorneys and well-read fans as Fraser v. Major League Soccer – alleged antitrust violations under Sections 1 and 2 of the Sherman Act. At issue was the league’s control over player employment and movement and the degree of competition for players among teams. The players alleged that the league’s structure was a ‘sham’ that disguised a conspiracy or agreement among the league’s investor-operators.

This sham, the players alleged, simply allowed the league to eliminate competition between teams for players; the league did not really constitute a single entity at all. The players’ complaint articulated three main arguments:

1) that the investor-operators and the league had conspired to eliminate competition for players’ services;

2) that their salaries had been artificially suppressed;

3) that the league forced players to sign adhesion contracts* with the league.

*An adhesion contract is a contract between two parties of disparate bargaining power. The terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and, given their comparative disadvantage, is placed in an unfair, ‘take it or leave it’ position.

iain-fraserAs it stood at the time, players signed contracts with the league itself and were then assigned, or ‘allocated,’ in the league’s parlance, to various teams. They did not negotiate with individual teams as players do in the NFL or NBA, for example.

What the players went to court for was the power for the league’s investor-operators to directly sign players for their respective teams, and by extension, their right to negotiate and contract freely in relation to their own movement about the league. This increased competition, they argued, would raise salaries across the league as market forces would then dictate player movement rather than the league’s myriad of arbitrarily applied rules

The district court applied the Copperweld unity of interest test and determined that the league and its investor-operators comprised a single legal entity. The court’s decision turned on the premise that the league’s investor-operators had voluntarily ceded the autonomy that would be associated with an individually-owned team for the lower costs, parity and security created and maintained by the league’s centrally-operated structure.

Critical to the court’s decision was that this had been ‘a calculation made on behalf of the entity’ and that did not ‘serve only the ulterior interests of the individual investors standing on their own.’

In other words, the determinative factor was how the league’s structure only served the interests of its investor-operators as part of the league as a whole – their actions were not of a type from which they could benefit directly, independent of the league’s success. On appeal, the First Circuit completely skirted the issue of single-entity status, and ruled that the league’s organizational structure was a hybrid arrangement that fell somewhere between a single company and a cooperative arrangement between existing competitors.

The First Circuit reaffirmed the district court’s ruling that the players had failed to define a distinct, relevant market, and thus single entity status was irrelevant. That was that, and the league has operated with shaky claims to single-entity status, immune from the application of antitrust law, since then.

How The Designated Player Rule Changes The Game

As CBA negotiations have neared a fever pitch, astute attorneys have alluded to a challenge to the league’s single-entity status. Any litigation, of course, is purely a matter of the hypothetical at this point, given the existence of the Player’s Union, which came into being only after Fraser was decided. Yet the fact remains that since the league was created – and even since Fraser was decided – a series of developments have changed the rules of the game. The playing field, these days, looks much different. While these changes have all eroded the league’s unified interests in one way or another, many would argue that the Designated Player rule is most significant to the survival of the league’s single-entity status.

david-beckham-la-galaxyFor those unfamiliar with the DP rule, dubbed “the Beckham Rule” because it was contrived in part to enable English megastar David Beckham to join the LA Galaxy in 2007, here is the league’s official definition:

“The Designated Player Rule allows clubs to acquire up to three players whose salaries exceed their [salary cap] budget charges, with the club bearing financial responsibility for the amount of compensation above each player’s budget charge. Designated Player slots may be used to acquire players new to MLS or to retain current MLS players, subject to league approval.”

Why is the DP Rule so relevant? Since the Supreme Court’s ruling in Copperweld, lower courts have applied the single-entity exception inconsistently, based upon their assessment of the degree of unity of interest in each particular case. Results have not been uniform, and a cursory review of the jurisprudence reveals that no one factor has been determinative. The inquiry is fact-intensive and the outcome is contingent upon the individual circumstances of the particular case.

In a Section 1 action, evidence that the defendants have engaged in activities that diverge from the common goal of the alleged single entity indicates that the single entity is not, in fact, a single entity. In the antitrust context, ‘divergent’ means competitive.

Evidence that the entities have engaged in any sort of competition indicates that there is more than a single entity involved, capable of an agreement or conspiracy for the purposes of Section 1. If the defendants can be deemed to be competitors, their action cannot be guided by a common conscience, and the single-entity exemption is inapplicable.

In modern-day MLS, the league’s investor-operators do indeed have divergent interests. Their teams are separate entities of independent economic value. This was true even when Fraser was decided, of course, but the disparities are noticeably more prevalent now than they were then. This difference in value is the result of many different factors – marketing, broadcast rights, corporate sponsors, stadia, the ever-important results, and so on and so forth but few would argue that the Designated Player is not paramount among these.

For years after the rule was announced, the acquisition of a star that required a seven-figure salary was a luxury, an option, but not really a necessity. Recent evidence suggests, however, that a Designated Player (or three) has become a competitive requirement.

When Fraser was decided, the league’s ability to manipulate players’ salaries via its centralized structure was a critical factor in the district court’s analysis of its single-entity status. The (relatively) newfound freedom to contract with Designated Players, effectively unfettered by the league’s constraints, eliminates this.*

Tim Bezbatchenko*Tim Bezbatchenko, retired American soccer player, former attorney and current general manager of Toronto FC, advanced this theory in depth for the University of Cincinnati Law Review in 2007. See Bezbatchenko, Tim, Bend It for Beckham: A Look at Major League Soccer and Its Single Entitle Defense to Antitrust Liability after the Designated Player Rule, 76 U. Cin. L. Rev.  611 (2007).

First and foremost, the DP rule predominantly serves the interests of the wealthier owner-operators in the league’s larger markets.

In allowing them to exploit unlimited resources to scout, recruit and sign players, the DP rule undermines the essence of the single-entity enterprise, that of ‘unity of interest’ and a ‘common conscience.’ Major League Soccer is often lauded for its parity, and it is one of the world’s most balanced, competitive leagues, but its crude reality is that certain teams lack the cachet, and the financial heft, to draw serious stars.

Teams whose owner-operators lack the deep pockets of, say, an Emirati sheikh like those that control 2015 expansion side New York City FC, or an entertainment conglomerate like Toronto’s Maple Leaf Sports Entertainment, are disadvantaged by the DP rule, in that it might be more difficult for them to offer the exorbitant salaries demanded by a competitive global market.

On paper, the DP rule benefits the league as a whole: it raises the aggregate level of talent throughout the league. In practice, however, the rule benefits certain teams – those managed by wealthy entrepreneurs with cash to splash – more than others.

Each team, in theory, has equal opportunity to sign players. The rule allows market forces to determine where players end up; competition is substantially less regulated. Assuming, however, that certain teams will be better able to afford the most desirable players, the competitive balance that characterizes the league’s single-entity status will be jeopardized. These high-profile acquisitions threaten parity among the league’s teams, particularly for teams less able to sign such stars.

Though you won’t hear league executives admit it any time soon, the introduction of the Designated Player rule has torn a pretty sizeable hole in the already-flimsy security blanket that is the league’s single-entity status. The league’s immunity from Section 1 liability rests on the premise that the league recruits, hires, terminates, compensates and allocates all of its players. From a legal perspective, the Designated Player Rule invalidates that premise.

kakaIn permitting investor-operators to – in effect – compete freely for Designated Players, the rule undermines the league’s claim of unity of interest. Not only does the rule allow teams to pursue players independently, it encourages entrepreneurial interests apart from the whole and autonomous behavior by the league’s investor-operators.

When this sort of competition is introduced, the league’s structure resembles less a single entity than those of conventional sports leagues, comprised of individual entities who both cooperate and compete in a joint venture. As competition for players increases among teams, the less their interests align. As these interests diverge, it will become increasingly difficult for the league to convince a judge or jury that it operates as a single enterprise with a common conscience.

Looking Ahead

As negotiations over the new collective bargaining agreement reach the tipping point in the month or so before the 2015 MLS season is scheduled to kick off, the league once again finds itself at a crossroads. According to a recent study conducted by the Daily Mail, the league’s average salary currently falls behind that of obscure leagues in China, Austria and the Ukraine and even, in some cases, leagues that aren’t their nation’s top flight.

DailyMail - avg salariesCouple that with the league’s ludicrously convoluted rules regarding player movement and ‘the arbitrary, less-than-transparent way they are enforced, and it is painfully obvious why Major League Soccer lags behind Europe’s “Big Four” leagues (or even the world’s top 20). In today’s globalized game, no one with options will opt to ply their trade in an arrangement that alarmingly resembles a legally sanctioned form of indentured servitude (for all but the select few that form the league’s elite, that is).

The league’s brass has held fast to the argument that formed the basis of its business plan back in the late 1990s: that the pitiable salaries earned by the majority of the league’s athletes, along with the lack of free agency enjoyed by their counterparts abroad, are necessary evils, required to protect the league from the financial failures that befell so many of its predecessors.

This argument may have been true in 1993. It is much less convincing now. The landscape has changed since then; where Major League Soccer once fought for survival in a punishing desert, it has planted roots in the soil of North American sports, grown, and flourished.

The league’s arguments in opposition to the introduction of free agency no longer make factual sense. Nor is it its single-entity status legally sound – thanks, ironically enough, to the creeping ambition of its own owner-investors.