FINA’s decision to allow market access to rival competitions - a turn of the tide in professional swimming

Published 26 March 2019 By: Dr. Katarina Pijetlovic

Swimming competition

The organisational market in European sports is going through a period of change. Whereas, traditionally, sports governing bodies both regulated and organised competitions in their respective disciplines on an exclusive basis, staging of the alternative competitions by third-party organisers is becoming a new trend. Because most European sports are structured in a hierarchical pyramid, this trend is opening up unexploited investments opportunities and implies a restructuring of the sport model. In a new model, consumers can benefit from having extended choice and innovative formats of competitions, while athletes can benefit from having an alternative source of income and increased exposure in the media (i.e. an opportunity for more lucrative sponsorship contracts).

In an attempt to maintain their monopolistic position on the market for organisation of sporting events, sports governing bodies often seek to impose obstacles on market entry on aspiring third-party organisers. The most common combination of rules that create such obstacles involve imposing licensing requirements via a prior-authorisation system, and at the same time imposing sanctions (often severe) on athletes, officials, and other parties for participating in an unlicensed event. Additionally, threatening affiliated national federations with sanctions, such as being banned from the World Cup and Olympic events, has also been a part of the effective strategy to limit or prevent market access.1 Of course, such strategies have caught the eye of competition authorities, and there is now a broader discussion underway in sports (particularly in the EU and U.S.) about the legality of regulations that limit or prevent market access for new, alternative competitions.

Against this backdrop, this article discusses how the International Swimming Federation, Fédération Internationale de Natation (FINA), has recently changed its approach towards maintaining market restrictions, and brought its regulations in line with anti-trust law under the mounting pressure of legal actions, negative public perception, and criticism from members of the swimming community.

The applicable anti-trust law in the E.U. and U.S.

Art 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) and Sections 1 and 2 of the Sherman Act of 1890 in the U.S. essentially prohibit the same anti-competitive conduct. Under Article 101 TFEU and Section 1 of the Sherman Act it is illegal for business undertakings (including sports governing bodies) to enter into agreements and practices that restrict competition in the market, unless they protect certain legitimate objectives and are not disproportionate to it (i.e. are not in “unreasonable restraint of trade” in U.S. terminology). Article 102 TFEU and Section 2 of the Sherman Act prohibit the abuse of dominant market position, monopolies being the most extreme form of market dominance. Stark difference between the European and U.S. antitrust law systems lies in their enforcement. Specifically, penalties applicable for the breach of EU laws carry fines not exceeding 10% of the total turnover in the preceding financial year for each offending undertaking, and periodic penalty payments of up to 5% of average daily turnover.2 In the U.S., imprisonment3 and “treble” damages4 for injured parties are available in the enforcement of the Sherman Act provisions.

Against this broad legal context, the fact that the sports federation have exclusive regulatory power to issue licenses for their potential competitors on the organisational market reveals apparent conflict of interest that results in the restriction of competition on that market. Thus, the exercise of regulatory powers to license rivals via prior authorisation system requires close scrutiny by competition authorities and courts for the abuse of dominant position and restrictions on free competition.

The case-law of the Court of Justice of the European Union (CJEU) and the EU Commission decisions taken under competition laws have set certain regulatory standards applicable to the described conflict of interests scenario.

  • First, in accordance with the broad Meca-Medina rule, a rule such as prior authorisation system, must be inherent and proportionate to a legitimate goal in public interest to be compatible with Articles 101 and 102 TFEU.5

  • Secondly, in MOTO.E the CJEU considered that a rule which confers on a legal person the exclusive power to authorise staging of the sporting competitions by its rivals on the organisational market, without that power being made subject to restrictions, obligations and review, falls foul of legal requirements under Articles 106 and 102 TFEU.6

  • Thirdly, in Canal Satélite Digital the CJEU specified that for a system of prior authorisation to be proportionate it must, among other things, be based on objective, non-discriminatory criteria known in advance, so that the regulatory power is not used arbitrarily to favour own events.7

The recent Commission decision in the International Skating Union (ISU) case8 has confirmed the right of international federations to regulate independent events through prior authorisation system, as long as they comply with the principles established in this line of CJEU case-law. It was the first decision at the EU level to directly address sanctioning the athletes and prior approval as a means of controlling access to organisational market. The most important norm that emerged from ISU provided that disproportionate sanctions placed on athletes for participating in unlicensed competitions can never be legal. What is considered a proportionate sanction is a question left open for determination on specific merits of each case – any specific determination by the Commission (i.e. one-size-fit-all approach) would be unsuitable.

However, not many sports federations have adapted to the ISU decision and most still have the same regulations on alternative events even in post-ISU amended versions of their rulebooks.9 This has the effect of discouraging investment into independent competitions or forcing parties into lengthy and expensive legal battles. This is not in accordance with the principles of good governance that imply voluntary compliance with law, accountability, transparency, democracy, and involvement of all the affected stakeholders in decision-making process. Embedding these principles of good governance in the work of a sports governing body has more potential to reduce legal challenges than any other policy.

Background to the dispute between FINA and International Swimming League, Ltd

FINA is the global governing body for six aquatic sports, including swimming.10 It administers its disciplines for the Olympics, and organises the Swimming World Cup and World Swimming Championship, among other events. FINA events are widely regarded as the most prestigious and valuable in the world of swimming from the point of view of audiences, sponsors and broadcasters. It is therefore a priority for every top-class swimmer to participate in those events. Importantly, FINA holds a virtual monopsony for the services of top swimmers (i.e. is virtually the only "buyer"), and a virtual monopoly over organisational market for professional swimming.

The International Swimming League (ISL) is an independent entity that describes itself as “a new initiative in the world of professional swimming”. Its plan was to introduce a new format for competitions – an innovative, team-based event with 12 women and 12 men in each team, including most of the world’s best swimmers. The regular season was to run from August to December each year. Financial incentives that ISL offered were particularly attractive and included a total prize and appearance money of $2.1 million with equal shares for men and women, and insurance and pension plans.11 No athlete previously banned for doping was to be allowed to compete and gender equality included equal media attention and equal contributions to team standings.

According to ISL, swimming is one of the most practiced sports in the world, yet commercially it gets only a tiny fraction of the sports media rights market, and not much media attention in-between the Olympics.12 They essentially highlighted the unexploited market opportunities. Swimmers get virtually no regular seasons, no development programmes, and no social security and welfare. Compared to athletes in many other sports, swimmers earn very low salaries and do not enjoy much media and sponsorship exposure. The ISL was set to change that by introducing a media-friendly format, running its competition in different cities world-wide, and making swimming more entertaining for a global audience that it planned to grow by 100 million in 5 years, which would in turn attract sponsors. Furthermore, according to ISL, revenues were to be fairly distributed between all stakeholders including athletes, clubs, coaches, federations and leagues.13

The new format of competition was broadly welcomed by both the athletes and the sports organisations, including Ligue Européenne de Natation, who signed a framework agreement with ISL on 4 May 2018.14 The ISL had previously also entered into negotiations with FINA.15 However, in a memorandum dated 5 June 2018 addressed to all 209 of its affiliated national associations, FINA made it clear that it does not recognise ISL or any “international competition” organised by it.16

For the sake of clarification, the “International Swimming League” is neither recognised by nor affiliated to FINA. Further, FINA has neither sanctioned the competitions organised by this entity, nor approved their sanction by other FINA bodies (Continental, Regional and National bodies).

Consequently, the competitions of the “International Swimming League” are not FINA sanctioned nor FINA approved. They are not part of the international calendar. The results and records achieved in these competitions are not and will not be recognised.

In support of its position, FINA cited the following rules from its By-laws, General Regulations, and Code of Ethics:

• BL 12.1: “An International Competition shall refer to any competition organised or sanctioned by FINA, any Continental or Regional Organisation or any Member Federation in which other FINA recognised Federations, clubs or individuals participate”.

• BL 12.3: “All Continental and regional Organisations and Members Federations shall seek approval from FINA for any International Competition to be organised or sanctioned by them.

• GR 4.1: “No affiliated Member shall have any kind of relationship with a non-affiliated or suspended body”.

• CoE 9: “No Official may be involved with any company association, firm or person whose activity is inconsistent with the objectives or interest of FINA. (…)”.17

The reference to Article 4 of the General Regulations in the memorandum was significant: it constituted a direct threat to national federations and athletes as the breach of this provision carried up to a four-year ban from all FINA competitions for individuals or groups involved in any kind of relationship with “non-affiliated bodies”.

Before the release of the memorandum, ISL enjoyed the support of, and worked closely with, USA Swimming to organise a competition in December 2018 in the U.S. The cooperation suddenly ceased. In a letter dated 13 June 2018, USA Swimming withdrew its support “even as a non-host, passive participant” and cited the lack of FINA recognition of ISL and its competitions as a reason. ISL was then forced to seek other partners, but British Swimming also folded under the FINA pressure.18

On 12 July 2018, the ISL and the swimmers (Thomas A. Shields, Michael C. Andrew, and Katinka Hosszú, on behalf of themselves and all those similarly situated) filed simultaneous antitrust lawsuits in the U.S. District Court (Northern District of California),19 which will be discussed in the next section. In mid-August 2018, ISL contacted FINA disclosing all details of the competition it planned to stage, and reassuring FINA that it would work through a national federation to seek its approval. FINA’s response was that it was the host federation that was required to seek approval for any “international competition” it sought to organise, and that it would not discuss applications by sponsors such as ISL. In the weeks that followed, negotiations resumed. FINA requested $50 million from ISL over ten years, as well as event ownership and FINA-naming rights in exchange for its approval. As the terms were grossly unreasonable, the negotiations broke down by mid-October.20

In order to avoid the status of an “international competition” that requires FINA’s authorisation, the ISL arranged for the event be organised by Italian Swimming Federation as a national-level competition on 20-21 December 2018 in Turin under the name “Energy for Swim”.21 The ISL was to remain a substantial participant and investor. The invitations to the event labelled it as

national competition where national and foreign swimmers will participate on individual basis not representing member federations […].

The scheduling of the “Energy for Swim” carefully avoided clashing with FINA’s World Short Course Championship that was to take place 11-16 December 2018 in Hangzhou. The Turin event secured the services of more than 50 swimmers from around the world who committed to take part. FINA reacted with a “last-minute” reinterpretation of its rule in late October 2018 that reclassified the Energy for Swim as international competition because “it was designed to have a majority of foreign participants”. The reclassified event required the approval of FINA, for which the organisers would have had to have applied six months in advance. It therefore came as no surprise the planned Turin meet was finally cancelled in November 2018.22

At the same time, in an effort to dilute the effects of its actions and please the athletes on whose services it depends, FINA announced prize money increase for its 11-16 December 2018 event in Hangzhou. In its antitrust lawsuit, the ISL correctly noted that the sudden increase in prize money proves that even a threat of a new market entrant was sufficient to reveal anti-competitive harm that FINA was causing through suppressed competition for swimmers’ services.23

Legal action in the U.S. District Court

On 12 July 2018, both the ISL and a group of affected swimmers (Thomas A. Shields, Michael C. Andrew, and Katinka Hosszú, on behalf of themselves and all those similarly situated) filed separate and simultaneous antitrust lawsuits against FINA for violations of the Sections 1 and 2 of the Sherman Act and the common law in the U.S. District Court, Northern District of California.

The choice of jurisdiction to file the lawsuits in the U.S.24 was deliberate and well-thought through. An infringement of Sections 1 and 2 of the Sherman Act carries persuasive sanctions that could result in a financial blow to FINA and provide triple the level of damages for both the ISL and all the affected swimmers in a class action. Conversely, the EU Commission does not have a power to award damages. Apart from treble damages for violations of Sherman Act, the ISL and the swimmers in both U.S. lawsuits sought injunctive relief, preventing FINA from further violations of Sherman Act. ISL in addition sought relief for tortious interference with prospective economic relations and the swimmers for the tortious interference with contractual relations.25

ISL and the swimmers both alleged that FINA, as a monopsony (i.e. sole purchaser) for swimmers’ services, leverages its market dominance to extract and enjoy – and largely keep for itself – substantial revenues from the labour of the world’s best swimmers.26 Furthermore, they claimed that FINA unlawfully wields its dominant influence to prevent outside organisations from expanding opportunities for hundreds of world-class swimmers and their million fans across the world. This in turn also restricted the opportunities for related ancillary businesses that would benefit from increased number of top-tier international swimming competitions, such as sponsors, event broadcasters, and licensees.27

Interestingly, in both U.S. District Court complaints, the ISL and swimmers mentioned the EU Commission decision in ISU highlighting that the same reasoning was applicable in their respective cases.28 ISU had similar factual background and cause of action, albeit in a different jurisdiction. In that case, the disproportionate sanctions on athletes for participating in the event staged by rival organiser, and foreclosure of the market for the rival organiser by operating arbitrary, non-transparent and disproportionate prior authorisation system, constituted infringements of EU competition provisions.

The two complaints are still pending in the US District Court and, in the author’s opinion, the outcome is expected to be in favour of the ISL and the swimmers. Indeed, FINA’s recent actions perhaps illustrates the strengths of the complaints it faces.

A turn in the tide: Removal of restrictions by FINA

It appears that under the mounting pressure of the lawsuits, dissatisfaction among the broader swimming community, and unfavourable public perception,29 FINA has decided to change its stance on rival competitions.

On 15 January 2019, FINA’s communication department announced that swimmers were free to participate in the competitions staged by independent organisers without facing any sanctions:30

FINA acknowledges that swimmers are free to participate in competitions or events staged by independent organisers, namely entities which are neither members of FINA nor related to it in any way.

Any independent organisers which intend to have the results and records of any competitions or events duly registered with and acknowledged by FINA shall cooperate with or seek approval from FINA or from any relevant member federation, as the case may be, the approval procedure shall be set out in FINA By-laws BL 12, which will be entirely applicable. 

Accordingly, independent organisers are still required to seek FINA’s approval in the form of a licence issued according to the rules to be introduced in Article 12 of its By-laws. Should the license be refused or approval not sought, all the results and records of the unapproved events will be deemed null and void and ignored by FINA for all purposes. However, FINA confirmed that participation in the events by swimmers shall not be characterised as “unauthorised relations” in contravention of Article 4 of FINA General Regulations and shall therefore not give rise to sanctions.31

In the author’s view, this is arguably a proportionate method of controlling the access to the market. The proposed changes appear sufficient to address any competition law concerns, provided that the licensing system to be introduced complies with the applicable legal parameters. Athletes are now free to utilise the full potential of the market to their advantage and the rival organisers will hopefully benefit from a clarified and proportionate procedure for issuing of FINA licenses.

This was a welcome change that has turned the tide in the sport of professional swimming. It was the product of a battle fought on many fronts, rather than a result of application of principles of good governance.

Related Articles

Author

Dr. Katarina Pijetlovic

Dr. Katarina Pijetlovic

Reader in Sports Law, Manchester Law School

Katarina is a Reader in Sports Law at Manchester Law School. She is the author of EU Sports Law and Breakaway Leagues in Football (2015), regularly contributes to academic journals and presents at conferences on the topic of sports law, and establishment of rival competitions. She is also a Sports Law Module Lead at Football Industries MBA programme, University of Liverpool. Her interests include fundamental rights of athletes, with emphasis on tennis. She occasionally acts as a legal adviser for professional athletes and clubs.

@sportslawyer78