How MLS’ single entity status works and its relationship with antitrust law

Published 06 March 2017 By: Terry Brennan

Football player getting ready for kick

In most cases, signing a player on the international soccer market is straightforward. Clubs express interest in a player. They make offers. The player accepts the offer he likes best.  

But for teams in Major League Soccer (MLS), it is never that simple. 

MLS controls player acquisitions through an odd set of rules designed to prevent its teams from competing against each other for available players. The rules attempt to eliminate competition by granting teams exclusive rights to negotiate with and sign certain players. While these rights can be traded or sold, for any given player, they must remain exclusive. So teams cannot bid against each other for a player and, technically, a player cannot choose between offers from multiple MLS teams. In other words, MLS acquisition rules upend the straightforward process through which players are typically signed.

So why has MLS chosen these rules over the traditional transfer market? In the author’s opinion, the answer lies in its desire to attract better players while also protecting itself from liability under United States antitrust laws. Specifically, the league wants to preserve its “single entity” defense. This comes from Section 1 of the U.S. Sherman Antitrust Act,[1] which has been interpreted to mean that parties cannot engage in a “conspiracy” to restrain trade if they are part of a single entity. As a result, MLS structures itself as a single entity, where the league owns all of the teams and signs all of the players. Allowing teams to bid against each other for players might water down this single entity structure and make employing the defense more difficult. Hence, while the acquisition rules may seem confusing and unnecessary, they are crucial to MLS’ legal strategy.

This article explains the MLS’s single entity structure and how its player acquisition rules operate within the single entity framework. It then examines whether the single entity structure offers a sustainable defense to the provisions of the US Sherman Antitrust Act. Specifically it looks at:

  • MLS’ “single entity” structure;

  • MLS’ player acquisition rules;

    • Discovery process;

    • Acquisition process;

  • Section 1 of the Sherman Act and the “single-entity” defense – a look at the relevant case law to date;

  • Comment: the impact of case law on MLS’ single entity structure.

 

MLS’ Single Entity Structure 

MLS bills itself as a “single-entity” league.  This means that the league owns the teams and signs all of the players. Once they sign with MLS, players are distributed amongst the teams, according to the league’s acquisition rules: the MLS Roster Rules and Regulations (Rules).[2] So a player transferred from a foreign club signs with MLS, not an individual MLS team. The acquisition Rules then determine which team gets the player. Likewise, when an MLS player is transferred to a foreign club, the club pays the transfer fee to the league, rather than the player’s MLS team. MLS then passes a portion of the fee onto the team. In a sense, MLS does not have clubs, but rather is a club, as the league itself pays, buys and sells its players.  

Exceptions to this system have developed over MLS’ 21-year history, typically with the intent of allowing teams to find and acquire better players.  The most prominent example is theso-called designated player rule ,[3] which allows each team to sign two to three players for above the league’s maximum salary. Unlike the salaries for other players, the team pays the portion of a designated player’s salary that exceeds the maximum. These and other changes have given the teams a larger degree of autonomy than existed at MLS’ inception. 

Nonetheless, the league has been careful to maintain at least the appearance of a single entity. So for example , it is still structured as one limited liability company, which new teams pay a buy-in to join. In many areas, revenue is still split, including revenue from national television contracts and licensing fees as well as significant portions of gate receipts and transfer fees. MLS also owns the teams’ intellectual property rights. In short, although the league sees the benefit of granting teams more independence, it is reluctant to do so at the expense of the single entity structure. 

 

The Player Acquisition Rules 

The MLS Rules place each player entering the league into one of thirteen categories.[4] Each category has a separate process for acquiring players. So for example, a player determined to be a discovery player would be available only to the first team that submits a discovery claim for him. Similarly, a homegrown player would only be available to the team that had him in its academy. In some instances, like the MLS draft, teams take turns selecting available players. In other instances, like the discovery process, one team has priority to acquire a single player.  

The applicable process depends on a number of factors and is sometimes unclear. An example might be a collegiate player. He could be designated for the MLS draft, or, if he spent time in a team’s academy, he could be a homegrown player. The league would have to examine the criteria for both categories and make a judgment call as to which one fit the player best.

The two processes that generate the most publicity are the discovery process and the allocation process. Typically, these signings involve established players who teams hope will be immediate difference-makers. For this reason, often, there will be multiple teams that want the players. The discovery and allocation processes are meant to reconcile these competing claims without resorting to the laws of the market. 

Discovery Process 

Discovery signings are a mechanism through which MLS teams can acquire players who are not covered by the league’s other acquisition rules.  Often, these are reasonably well-known foreign players, or more obscure domestic players who have not played in MLS.

Each team initiates the process by submitting a list of up to seven players to the league office.  The teams can revise their lists at any time.  In most cases, when a player appears on a team’s list, that team has the exclusive right to negotiate with him.  The only exception is when two teams list the same player.  In those situations, the first team to list him gets the exclusive right.  

Orlando City’s acquisition of former AC Milan midfielder Antonio Nocerino is an instructive example. By January 2016, Nocerino had fallen out of favor with Milan and, with only six months remaining on his contract, was looking for a new club. Seizing the opportunity, DC United placed him on its discovery list. As DC was the first MLS team to list Nocerino, it had the exclusive right to offer him a contract. And DC did just that, offering him a multi-year deal reportedly worth $700,000 per season.

Around the same time, Orlando City ignored DC’s priority and began its own negotiations with Nocerino. Eventually, it too offered him a multi-year deal, worth $900,000 per season, $200,000 more than DC’s offer. Naturally, Nocerino was more interested in the higher offer and cooled on DC United. 

At this, DC complained to MLS that Orlando City had violated league rules by making a contract offer when DC had priority. The league agreed. As a result, it forced Orlando City to stop pursuing Nocerino. This created a dilemma, since Nocerino now wanted to play for Orlando City. So the two teams had to solve the problem by working a trade. Orlando City paid DC an undisclosed sum for its priority position. And with exclusive priority, Orlando City could sign Nocerino.

Allocation Process 

The allocation process is meant to determine which teams can acquire certain former MLS players, U.S. internationals and U.S. youth internationals who have signed (or re-signed) with MLS. Like the discovery process, the allocation process gives one team exclusive priority to acquire a given player. Priority is determined by the allocation order, which runs in reverse order of the teams’ standings from the previous year. So the team with the fewest points from the previous season would get the first spot in the allocation order. Once that team uses its priority to sign a player, it goes to the back of the line. Importantly though, teams can trade their allocation spot. This means that any team can acquire a certain player, if it is willing to compensate the team holding the top spot in the order. 

This is what the Philadelphia Union had to do to acquire U.S. International, Alejandro Bedoya.[5] In August 2016, Bedoya left French club Nantes and stated his desire to sign with MLS. At the time, the Chicago Fire held the top spot in the allocation order. Nonetheless, Philadelphia wanted Bedoya. So it traded the Fire $175,000 and a first round draft pick for its allocation spot. With this in hand, it could sign Bedoya. 

These are just two examples of the multi-stage processes that teams must complete to acquire a player. And while the eleven other processes may differ from the discovery and allocation methods, they all share a common trait – the elimination of free market competition between MLS teams.

 

Section 1 of the Sherman Act and the Single-Entity Defense

In the author’s opinion, the preceding demonstrates that MLS’ acquisition rules can be inefficient, overly-complicated and, to certain teams, unfair. The reason for this can be found in the tumultuous relationship between the United States’ sports leagues and its antitrust law. Specifically, MLS’ rules help the league maintain its single entity defense to antitrust liability. 

Courts have interpreted the single entity defense from the language in Section 1 of the Sherman Antitrust Act. Section 1 prohibits any “contract, combination…or conspiracy, in restraint of trade.[6]  When determining liability under this provision, the threshold question is whether the parties have formed a “contract, combination…or conspiracy”  (see American Needle v. National Football League[7]).  Only if such a conspiracy has been formed can courts move on to the next question: whether that conspiracy restrains trade.[8]  The single entity defense targets the threshold question: whether a “contract, combination…or conspiracy” exists.  

The doctrine first arose in Copperweld, a 1984 U.S. Supreme Court case involving collective action by a parent and its subsidiary.[9]  The Court held that the parent and subsidiary were a single economic actor and, thus, could not form a “conspiracy” as set forth in Section 1.[10]  In other words, there can be no conspiracy to restrain trade when there is only a single party (or entity) to the alleged conspiracy.  In ruling that the parent and subsidiary formed a single entity, the Court noted that, for a conspiracy to exist, there must be a “joining of economic resources that had previously served different interests.[11]  Collective action by a parent and subsidiary clearly does not fit this standard.

MLS employed the single entity defense in 1997, when it faced a lawsuit by a group of its players (Fraser v. Major League Soccer[12]). In part, the players argued that MLS and some of its owners (also known as “operator/investors”) had violated Section 1. The District Court granted MLS summary judgment on this claim, holding that the single entity defense applied to the league. The Court’s ruling interpreted Copperweld strictly in that it applied the single entity defense to MLS solely because the league was organized and incorporated as an LLC.[13] At the same time, the Court provided little analysis on whether MLS teams actually functioned as a single entity.

On appeal, the First Circuit seized on this deficiency and, though affirming the District Court’s result, questioned its rigid interpretation of the single entity defense.  Namely, the First Circuit’s opinion clarified that, when determining single entity status, the form of the parties’ relationship is not “conclusive.”[14]  With this as its guiding principle, the Court explained that MLS, though maintaining characteristics of a single entity, possessed other features that resembled an agreement between competitors.[15]  For example, the Court noted that MLS owners did “some independent hiring,” made “out-of-pocket investments in their own teams,” retained “a large portion of the revenues from the activities of their teams,” and each held “specific sale rights in its own team that relate[d] to specific assets and not just shares in the common enterprise.[16]  Based on this, the First Circuit concluded that MLS was a “hybrid” structure and, therefore, its single entity status was an open question.[17]  Nonetheless, the First Circuit also concluded that this debate was moot because the result from the District Court could be affirmed on other grounds.[18]

Eight years later, the Supreme Court further clarified the issue in American Needle.[19]  There, the Court held that, for the purposes of examining if parties comprise a single entity, the “relevant inquiry…is whether there is a ‘contract, combination…or conspiracy’ amongst ‘separate economic actors pursuing separate economic interests,’ such that agreement ‘deprives the marketplace of independent centers of decision-making.’”[20] In American Needle, the thirty-two NFL teams had formed a partnership, the NFLP, through which they sold team merchandise and apparel.[21] The teams argued that the NFLP was a single entity and, therefore, exempt from Section 1 scrutiny.[22] The Supreme Court disagreed, citing, among other factors, that each of the NFLP teams was a “substantial, independently owned, and independently managed business,” and that the teams “compete with one another, not only on the playing field, but to attract fans, for gate receipts and for managerial and playing personnel.[23] As such, the Court found that NFLP was not a single entity and remanded the case to the District Court to determine whether it violated Section 1.[24]  

In short, the single entity defense began in Copperweld as a bright line rule, but evolved into the balancing test set forth in American Needle. The current approach is more comprehensive, balances more factors and makes parties’ ability to establish the defense more uncertain.

 

The Impact on MLS 

The substantive approach puts MLS’ single entity status in greater peril.  For one, in light of the First Circuit’s reasoning in Fraser and the Supreme Court’s decision in American Needle, it is unclear whether MLS’ structure at the time Fraser was decided would constitute a single entity.  But moreover, MLS’ case today is even weaker because, in the 15 years since Fraser, it has drifted further away from its single entity roots.  For example, 15 years ago, MLS had only 3 operator/investors for its 10 teams. This meant that the teams had little individual identity and there was less competition between them.  Today, MLS has 22 teams, each with its own operator/investors.  And MLS wants this to continue, as it requires any new team entering the league to have its own ownership group in place.  

Teams have asserted autonomy in other ways.  Many have built soccer-specific stadiums, financed, in some cases, by the owner’s personal funds.  In 2003, the league introduced the aforementioned designated player rule.  Generally, teams now have greater freedom to manage their rosters, including the ability to pay down certain players’ salary cap numbers, refuse to pick up option years on certain players’ contracts and determine how much newly acquired players should be paid.  Every team now has a youth academy, from which it can develop and sign homegrown players.  The league has even introduced a limited form of free agency, where out-of-contract players with a certain level of seniority can sign with new teams for pre-determined salary increases.  So to a much greater degree than in 2002, MLS operator/investors resemble franchise owners in other U.S. sports leagues (none of which have single entity status).

And beyond these cracks in the single entity, the league’s existing rules do not eliminate competition between the teams for players entirely. The aforementioned Nocerino example illustrates the point. D.C. and Orlando had competing discovery claims, and, within MLS’ rules, Orlando outmaneuvered D.C. for a player both teams wanted. In short, the two teams competed, and Orlando won. Competition can also arise in the league’s various drafts, where teams will “trade up” to get a player that a team with better position wants. These examples demonstrate that, while the league’s rules may water down some forms of economic competition between the teams, other forms of competition will continue to exist.

All of this may be why MLS is fighting for and emphasizing the elements of the league that still resemble a single entity.  In February 2015, while MLS and the players were engaged in tense negotiations over a new collective bargaining agreement, Commissioner Don Garber argued that the “key aspect” of MLS’ single entity system is that its “owners will not bid against each other for player services.”  Garber’s comments appear tailored to American Needle, where the Supreme Court denied single entity status to the NFL Players Association, in part, because the team owners “compete with one another…for…playing personnel.”  Garber has also indicated that, while rule changes have and will continue to be made, the single entity “structure will remain the same.” According to Garber, this will always entail owners who will “collectively chart the turbulent waters of professional sports.”  So again, the league appears determined to promote the centralized elements of its decision-making.

It is worth noting that losing single entity status would not automatically subject MLS to antitrust liability.  A Court would still have to conclude that an MLS policy constituted an impermissible restraint on trade. This determination would hinge on a number of issues that are still in doubt, such as whether there is a relevant market for soccer players, whether MLS has sufficient power within that market and whether MLS’ restraint on trade is nonetheless acceptable under the “rule of reason.” Thus, even without the single entity defense, MLS would still have cover.

But in all likelihood, the league would not want to put that to the test.  So for now, MLS will probably continue its balancing act of trying to open its acquisition rules enough to attract better players, while clinging to its single entity roots.

 

Bottom Line 

The most striking feature of MLS acquisition rules is that they exist. After all, they seem unnecessary. Rather than make teams engage in the extra step (or steps) of the discovery or allocation (or any other) process, the easier route would be to let all franchises negotiate with players and let the players accept whichever offers they like best.  This is the system employed by leagues around the world, including U.S. leagues like the NFL and the NBA.

But allowing MLS teams to bid against each other would strike at the heart of MLS’ single entity argument. So until the legal landscape changes, fans should expect more convoluted acquisitions. 

Related Articles

Author

Terry Brennan

Terry Brennan

Terry Brennan is a commercial litigator at Goldstein & McClintock in Chicago. He has experience across a broad range of subjects, including financial regulation, corporate fraud, sports, commercial real estate, breach of fiduciary duty, and contract disputes.

Prior to joining Goldstein & McClintock, Mr. Brennan worked at Kirkland & Ellis' Chicago office. He has a bachelor’s degree in political science from Duke University and a law degree from Northwestern University School of Law.

@terryblaw

  • This email address is being protected from spambots. You need JavaScript enabled to view it.