What could EU intervention mean for the future of Formula 1®?
Published 07 January 2015 By: Kevin Carpenter
Recently I was fortunate enough to be in Abu Dhabi to see my fellow countryman Lewis Hamilton win his second Formula 1 Racing (“F1”) Drivers World Championship title. However, at a circuit where the world of F1 is at its most glamorous a metaphorical dark cloud continued to hang over the paddock. Despite often objectively being viewed as a financially rich and successful global sports brand, towards the end of the season, F1 has been beset by financial turmoil and in-fighting between the teams.
During the Abu Dhabi GP this took a new twist when it was revealed that the European Union (“EU”) were being lobbied to launch a competition enquiry into the sport and how it is governed by Anneliese Dodds, Member of the European Parliament for the South East England, a region which is home to a number of businesses involved in F1.1 Given the EU’s previous intervention in FIA Formula One World Championship (Championship), it would be understandable for the F1 racing and the FIA to take these concerns seriously.
This blog will examine the history of the EU’s involvement in what is arguably the world’s most popular motorsport and the legal impact an investigation could have on F1’s financial future and governance.
The commercial and governance issues impacting F1
F1 is operated through the ‘Formula One group of companies’ (“F1 Group”). The F1 Group is actually principally owned by the private equity house, CVC Capital Partners (“CVC”), who acquired a majority stake in 2006, but kept Mr Bernie Ecclestone as Group CEO.2 Mr Ecclestone has been involved in F1 racing since the 1950s and has significant (until recently almost unfettered) influence over the running of the F1.3
The F1 Group was granted an exclusive licence to exploit the commercial rights in F1, which amount to around £1 billion a year, from 2011 until 2110 (i.e. a 100-year agreement), by the governing body, the Fédération Internationale de l'Automobile (“the FIA”), for a total fee of £211.76 million back in 2000.4 These include the right to stage and promote the events, to sell broadcast footage and to offer sponsorship and hospitality packages.5
The licensing of the commercial rights was driven by an investigation by the EU into the Championship, as I will explain later. Yet the rights are only commercially valuable to the F1 Group if another key stakeholder in the sport, the teams, are tied in to participate. Therefore, the “Concorde Agreement” governs the relationship between the FIA, the F1 Group and the teams. However, over the evolution of the Concorde Agreement, not all teams have been signatories or even involved in the negotiation of it. Indeed, the seventh and latest Concorde Agreement was signed in September 2013 as a bilateral agreement between the F1 Group and the FIA as a framework for the running of the sport up until December 2020.6 A separate bilateral agreement was then entered into between the F1 Group and the teams.7
As part of the seventh Concorde Agreement, payments are made to the teams to secure their involvement in the Championship. The total redistribution to the teams by CVC/Mr Ecclestone under the Concorde Agreement amounted this year to around £560 million.8 However, crucially, these payments were not distributed equally among the teams. Of the 11 teams that competed in this years’ championship, 60% of the redistribution went to the five ‘biggest’ – in terms of success, size and commercial appeal – namely, Red Bull, McLaren, Mercedes, Ferrari and Williams; while the remaining 40% went to Lotus, Force India, Toro Rosso, Sauber, Marussia and Caterham (the latter two of which went into administration towards the end of the season9). Lotus, Force India, Sauber, Marussia and Caterham made estimated collective losses of $300 million in the past 12 months due to the cost of running an F1 team for the season, which is now estimated at $230 million on average.10
An additional factor that has affected the financial health of the entire grid is that a key revenue source, sponsorship, has declined drastically in the past decade from accounting for 60% of team revenue to now only 20%.11 Even McLaren, one of the most famous and historic brands in the history of the F1 Championship, did not attract a title sponsor for the majority of the 2014 F1 season.
To compound the problems of the ‘40% or smaller teams’, the seventh Concorde Agreement also allowed for the establishment of an F1 Strategy Group comprised of the five ‘biggest’ teams plus the next highest place team in the Constructors Championship the previous season (6 votes), the FIA (6 votes) and the F1 Group (Mr Ecclestone – 6 votes). The F1 Strategy Group effectively now runs the sport and has replaced sporting and technical working groups where all teams had a say and decisions had to be passed by a 70% majority. Decisions of the Strategy Group only have to be passed by a simple majority. Although the F1 Commission, at which everyone is represented including promoters, suppliers and sponsors, will ultimately have to ratify the Strategy Group’s proposals, the smaller teams will not be able to block anything, or put anything forward, at the initial stage.12 This effectively means that proposals to control the spiralling costs of participating in the F1 Championship, such as a cost cap (which has failed previously13), are unlikely to receive sufficient backing despite Mr Ecclestone now acknowledging that to maintain commercial and wider stakeholder interest in the F1 there needs to be more than just the ‘big teams’ and therefore pushing through cost cuts is of upmost importance.14
Indeed, the current governance and cost structures are two significant factors threatening the viability of half of the current teams, not to mention deterring new entrants such as Volkswagen.15
Previous EU action in relation to F1
Back in 1999 the European Commission (EC), the executive arm of the EU responsible for competition matters, launched formal proceedings into the FIA and its interest in the F1 Championship following a number of complaints, and an investigation, into the way international motor sport was organised and commercially exploited saying, “The Commission has now formally told the FIA, the body in charge of international motor racing, that it considers the FIA to be abusing its dominant position and restricting competition”.16
There were a number of issues that made up the complaint; however, a central one was the FIA’s conflict of interest in F1 Championship and the events that make up the Championship by having a commercial interest in the sport as well as being the regulator. Upon discussions taking place between all the parties, the EC closed its competition investigation in October 2001 after changes were agreed by a settlement to limit the FIA's role to that of a regulatory one.17 One such change being the transfer of the commercial rights in the Championship by the agreement described previously.18 The EC then monitored the FIA compliance with the settlement for 2 years.19
Why is F1 back on the EU’s radar?
It is believed that the EU has been informally monitoring F1 and building up a file for the past 18 months,20 so from around the time the seventh Concorde Agreement was signed. It is likely they have three significant competition concerns:
- The inequality of the distributions by CVC/Mr Ecclestone to the teams (“Issue A”);
- The role of the F1 Strategy Group (“Issue B”); and
- The re-appearance of a conflict of interest on the part of the FIA (“Issue C”).
The final one of those three has arisen because of a financial sweetener the FIA was given by Mr Ecclestone to sign the latest Concorde Agreement. This was done by paying the FIA $5 million to Register to the new agreement and allowing them to buy 1.06% of the shares in the F1 Group’s parent company for $460,000 which, at the time of signing, were actually worth an estimated $70 million.21
The three issues feature heavily in three letters that have been leaked to the media: one from Force India’s deputy team principal to Mr Ecclestone, signed by Force India, Sauber and Lotus,22 and two from Ms Dodds MEP to the European Commissioner for Competition.23,24
What EU competition laws apply?
The objective of EU laws regarding competition (antitrust) law is to ensure the EU’s internal market is not distorted in any way. To achieve this there are two principal offences, both of which derive from the Treaty on the Functioning of the European Union (“TFEU”), the principal governing instrument that Member States Register as part of the Union.
Article 101 TFEU is concerned with agreements, decisions and concerted practices which are harmful to competition (in essence alleged cartel behaviour) whilst Article 102 TFEU is directed towards the unilateral conduct of dominant firms which act in an abusive manner (in short, an abuse of a dominant position). Statements in all three letters suggest that the FIA, the F1 Group and some of the teams could be investigated under both Articles.
To fall within Article 101 the conduct must exhibit the following elements25:
- Some form of agreement, decision or concerted practice between undertakings (i.e. an entity that regardless of its legal status is engaged in an economic activity) or by an association of undertakings;
- Which may affect trade between EU Member States in the “relevant market” to an appreciable extent; and
- Which has the object or effect of the restriction, prevention or distortion of competition within the EU.
Therefore, all three of Issues A, B and C could be caught by Article 101. Issue A could be construed as an agreement between CVC/Mr Ecclestone and the “big” teams which are considered to be “undertakings” by virtue of their economic activities relating to the exploitation of commercial rights. Issue B could be construed an agreement or decision by an association of undertakings. The conflict of interest in Issue C arises from the written Concorde Agreement between CVC/Mr Ecclestone and the FIA. F1’s commercial and operational heartland is Europe so the third element (effect on trade) is arguably satisfied, and then it is very much a question of fact as to whether the final element is also satisfied meaning a breach of Article 101.
The author suggests that Issue B is a prima facie case of restricting, preventing and/or distorting competition in the sport. Issue C is a potential breach of the 2001 settlement made with the EU, “The role of the FIA will be limited to that of sports regulator, with no commercial conflicts of interest.”26
Issue A is more likely to be treated as an Article 102 matter. The text of Article 102 sets out a non-exhaustive list of what “abuse” may consist of including at (c) “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. The unequal distributions from CVC/Mr Ecclestone appear at first sight to fall within this description given the financial and sporting hardship Lotus, Sauber, Force India, Caterham and Marussia have and continue to face (Toro Rosso are in a slightly different position being the junior team of Red Bull). The counter argument being, and one Mr Ecclestone has stated, is that the teams receive sufficient funding from the F1 Group to be ‘competitive’, should run their business accordingly, and knew full well what the structure was at the start of the season and participated on that basis.27
Powers the EU could exercise on FIA and F1 Group if a breach of competition law is found
The Commission has broad powers should it find that the F1 Group and/or the FIA and/or the “big teams” have breached Articles 101/102. One of its principal sanctions is a fine which can be up to 10% or worldwide turnover in the most serious of cases. In the event of a breach of the FIA/F1 settlement arising from Issue C, the European Commission may well resort to such a fine as well as ordering the FIA to sell their shareholding in the F1 Group’s parent company. For issues A and B the Commission could order positive measures and structural changes to take place to bring F1’s financing and governance into line with competition law and principles but most importantly make the Championship more competitive and fair.28
What happens next and could an investigation affect a proposed sale of F1?
A further intriguing layer to the EU’s interest in F1® is the backdrop of continuing uncertainty about the future governance and ownership of the commercial rights to the Championship. Mr Ecclestone’s has become increasingly weak due to a number of factors, principally recent civil and criminal cases which have alleged serious bribery by Mr Ecclestone of the previous sale of the F1 Group to CVC.29 As a result CVC began to take steps to replace him as F1’s ringmaster by allegedly lining up Paul Walsh, former CEO of Diageo, to take over as Chairman of the F1 Group but with executive duties.30 This change is with a view to get ready to either float or sell the commercial rights to F1®. However, Mr Ecclestone appears to have other ideas, recently saying that he would choose Sacha Woodward-Hill as his successor, his close aide and F1’s legal counsel.31 Indeed, Mr Ecclestone has, for now, resisted attempts for Mr Walsh to have any meaningful executive duties by recently being re-appointed as CEO of the F1 Group, with Mr Walsh merely joining the board as a non-executive director.32
A formal EU investigation would have a potentially significant impact on this continuing power struggle and governance uncertainty, not only due to the potential outcomes as outlined above, but also the time it takes for EU investigations such as this to be concluded. There is no hard and fast rule, but it is likely to take at least between 2 to 3 years from when the formal investigation is launched to matters being concluded.33 For CVC this would impact negatively on the value of F1, and thereby the sale price, and could indeed kibosh a sale for the foreseeable future.
The International Olympic Committee (“IOC”) will also be keeping a close eye on proceedings given the FIA was only last year given full member status of the Olympic Movement.34 This includes being subject to the IOC’s Olympic Charter and it’s guidance on good governance.35 With the FIA’s alleged current poor governance of the F1 Championship and new financial interest in the Championship the lobbying stakeholders will no doubt press the IOC to put political pressure upon the FIA alongside any action taken by the EU.36
Many observers, and some of F1® stakeholders, have for some time wanted F1 and its business model and governance to come under external scrutiny. Given the highly political nature of the F1, if the EU Commission do launch a formal investigation, as seems likely given Mr Krzysztof Kuik, head of the anti-trust in sport unit at the EU’s Competition Commission, has already spoken to some F1 team principals and experts37, then like the cars on the night race in Singapore sparks are likely to fly!
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- Tags: Contract Law | EU Law | European Commission | European Union | Fédération Internationale de l'Automobile (FIA) | Formula 1 | Governance | Motorsport | Regulation
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Kevin is a advisor and member of the editorial board for LawInSport, having previously acted as editor. In his day-to-day work he has two roles: as the Principal for his own consultancy business Captivate Legal & Sports Solutions, and Special Counsel for Sports Integrity at leading global sports technology and data company Genius Sports.