Why Football Federation Australia’s new salary cap proposals may be unlawful

Published 30 September 2015 | Authored by: Francis Awaritefe

The author’s previous article (available here) examined the terms of the current dispute between the Football Federation of Australia (FFA) and the Professional Footballers Australia (PFA) over the game’s new collective bargaining agreement (CBA).

This article moves on to consider whether the FFA’s new salary cap proposals (one of the core issues of the dispute) could constitute an unlawful restraint of trade. The author gives a short overview of leading cases in common law restraint of trade in sports, and then analyses how the doctrine may be applied to the current dispute should there be a legal challenge.

 

RESTRAINT OF TRADE CASE LAW

Historically, several types of labour market restraints have been used by sports organisations to regulate the employment of players. Under English and Australian common law, such controls have been challenged as an unreasonable restraint of trade - and on several occasions, have been held to be unlawful.1 These restraints include zonal/residential requirements,2, 3 maximum wage,4 retention and transfer systems,5 and player draft.6

(i) Eastham v Newcastle United Football Club

In the early days of player unions, doctrine of restraint of trade was used to overturn the English Football League (EFL) retain and transfer system in Eastham v Newcastle Football Club.7 In essence, the retain and transfer system allowed clubs to retain players even after contractual obligations had been completed. For players placed on the transfer list, league regulations allowed them to appeal to the League Management Committee (LMC), if the player believed the transfer fee fixed by his club was excessive. The LMC had powers to determine transfer fees or grant free transfers. However, players placed on the retention list did not have such right of appeal, and could in theory be retained indefinitely without pay, if the player did not sign a new contract in the absence of an acceptable transfer fee from another club. George Eastham wanted to leave Newcastle United at the end of his contract to join Arsenal. However the club wished to retain Eastham, despite his contract having expired - for the purpose of holding out for a transfer fee in consideration for releasing Eastham.

Backed by the English Professional Footballers Association, Eastham sued the club for a declaration that the system was an unreasonable restraint of trade. Wilberforce J found that the retain and transfer system was an unreasonable restraint of trade. Further, he found (EFL) did not discharge the onus of proof that the retention system in combination with the transfer system, was no more than was reasonable or proportionate to protect its legitimate interests.8

(ii) Johnston v Cliftonville Football and Athletic Club (“Cliftonville”)

In Cliftonville, the Ireland Football League (IFL) provisions allowed for a maximum signing on fee of £120, and a weekly wage of £12. Johnston (the player) was paid extra money on top of contracted amounts in contravention of IFL regulations. Johnston commenced proceedings to have the maxima weekly and signing-on fee declared an unreasonable restraint of trade. He claimed it was a fetter on his freedom to bargain freely on his remuneration. The court held that the maximum wage was an unreasonable restraint of trade. Further, the onus was on IFL to prove the restraint was reasonable with reference to the interest of both parties and the public interest. The court held that this burden had not been discharged by the defendant. 9

(iii) Adamson v New South Wales Rugby League (“Adamson”)

In Adamson, 170 rugby league players challenged the legality of the New South Wales Rugby League (NSWRL) internal draft on the basis that it was an unreasonable restraint of trade. The internal draft system was for contracted NSWRL players who were off contract, and wished to continue to play in the NSWRL with another club. The players submitted their terms, agreeing to play for the club that drafted them, provided the club was no more than 100 miles away from the ground of the club he last played with in the competition. The internal draft was in contrast to external drafts, which applied to players outside the competition including juniors, country and overseas players. In essence the external draft was for players not already contracted to a club.

The Full Federal Court of Australia held that while the NSWRL internal draft did ‘operate to some degree’ to assist with competitive balance, the overall effect was that the restraint imposed on players went beyond what was required to protect the legitimate interests of the league.10

CAN A SALARY CAP CONSTITUTE A RESTRAINT OF TRADE?

For Murray J, the question of law at the center of the dispute in Cliftonville was did the maximum wage regulation constitute an unreasonable restraint of trade?

He found it limited the claimant’s freedom of action to trade and freely negotiate the basic matter of remuneration he could receive in exchange for his skills as a footballer.11 The effect of the salary cap was to impose an arbitrary limit on the income earning potential of the athlete.

The A-League salary cap is analogous to the maximum wage. The salary cap, albeit indirectly, interferes with the freedom of action of players to trade and negotiate their salaries with a potential employer.12

According to James, the legality of modern salary caps, which are unilaterally imposed, without negotiation with the players union in a collective bargaining agreement are ‘less likely to be found to be lawful restraints’.13

This view is supported by authority in U.S. where Sotomayor U.S. District Judge, held in Silverman, that unilateral changes made by Major League Baseball Player Relations Committee (Owners) to mandatory key provisions in the expired CBA, which had not been agreed with Major League Baseball Players Association (the Players), and where both parties had not reached a negotiation impasse, amounted to unfair labour practices, in breach of s8 National Labour Relations Act (NLRA).14 Therefore, the changes were unenforceable.

 

IS THE RESTRAINT NECESSARY TO PROTECT THE LEGITIMATE INTERESTS OF THE LEAGUE?

The onus is on the party seeking to benefit from the imposition of a restraint, to show that the restraint is reasonably necessary and doesn’t go further than what is required to protect their legitimate interest.

In Nordenfelt, Lord McNaughten stated:

All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule.15

He went on to state ‘it is a sufficient justification, and it is indeed the only justification’ if the restraint is reasonable, that is, with reference to the interest of the parties involved, and is not contrary to public policy. The restrain must afford adequate protection for the interests of the party that will benefit, but not to the detriment of public policy.16

The test, which establishes reasonableness, would place the onus on FFA to establish that the restriction that it seeks to impose on players in relation to salary cap, squad number restrictions, does not go beyond what is reasonable to protect the Leagues’ legitimate interest. It is a question of law whether the circumstances justify the restraint.17

The FFA would presumably submit to the court that the labour market restraints i.e. Salary Cap and Squad player limit it has imposed are justified to protect the legitimate interests of the A-League on the grounds of: (i) Competitive Balance and (ii) Financial Stability. Each justification will be examined in turn.

(i) Competitive Balance

Wilberforce J in Eastham accepted that if the rich clubs could acquire most of the better players, this would be to the ‘detriment’ of the ‘whole’.18 Therefore the league had a legitimate interest in preserving and promoting competitive balance.

In Buckley v Tutty, the leading case in unreasonable restraint of trade in Australia, a case which involved the Rugby League transfer system, mentioned and followed Wilberforce J reasoning on competitive balance. However, the court held the restraint imposed on the player (Tutty) was an unreasonable restraint of trade.19 The court held that rules imposed by New South Wales Rugby League (NSWRL) went further than was necessary to protect the legitimate interests of NSWRL.20

According to Neale, a sporting contest requires cooperation between sporting rivals in order to create a product. The more unpredictable the result between sporting competitors, the more interest will be generated in the [sport] product.21 Sporting clubs need competitors and cannot function as a monopoly. Neale hypothesised that this made sport different from normal industries - he referred to the product and labour restraints utilised by monopsony power as the ‘peculiar economics of professional sport.’22, 23

Based on this conventional view, FFA may submit that the restraint is justifiable and necessary for the A-League to provide an attractive competitive product for fans.

However, empirical evidence for whether the salary cap promotes competitive balance and fan interest is mixed, and by no means conclusive. Buti, Jennett, Cairns, Sloane, Ross and Dabscheck, in a survey of literature, have noted, there is a lack of empirical evidence which tends to support the justification for imposition of employment restraints on the grounds of competitive balance.24

Totty and Owens25 found in their research there was:

…no evidence to suggest that salary caps have improved competitive balance in a statistically significant manner. In fact, using standard deviations of winning percentages as a measure for competitive balance, we find evidence that salary caps are associated with a statistically significant decrease in competitive balance across leagues.

It is submitted that leagues which operate a soft salary cap, may undermine competitive balance because of richer clubs’ capacity to spend beyond the salary cap, for example, by funding the purchase of marquee/designated players whose salaries are outside the cap and facilitating the retention of star players using salary cap exemptions.26 It is worth noting, that although there have been increases in salary cap exempt allowances (see the authors related article - FFA Position), it is not mandatory for clubs to spend these allowances. For example, low revenue clubs in the smaller markets, for budgetary reasons, may only contract to salary cap floor, therefore not utilise the full cap exempt allowances, and even if they did, it may not be to the same extent as financially strong clubs.

(ii) Financial Viability

The other justification for imposition of salary caps is to promote financial viability of clubs in a professional league. In Cliftonville, to hold that the maximum wage would be reasonable Murray J stated:

It seems to me that I could not find that it is reasonable for the League to retain the maximum wage regulation for players in order to save the clubs from financial disaster unless I had had before me a general survey of the finances of the clubs in the League and an expert opinion based on that survey to the effect that such a disaster is at least a real risk.27

To justify the unilateral imposition of a salary cap, FFA must demonstrate to the courts that the restraint is reasonable. The FFA may be compelled to disclose to the courts, its finances and that of all A-League clubs, along with expert opinion on the financial position of clubs, and evidence of risks to the league’s viability, which might materialise in the absence of a salary cap. Currently, A-league clubs, which are private corporate entities, do not publicly publish their financial statements, unlike publicly listed entities. This state of affairs creates challenges for third parties, in accessing the total value of the Australia Football economy, especially in regards to unshared revenue streams generated by clubs, revenues which are not currently publicly disclosed, such as membership sales, match-day revenue, local sponsorships, licensing, merchandising and stadium deals. Under the current CBA, PGR is based on revenue streams generated centrally by FFA through Socceroos, A-league and Matildas commercial properties.

Salary caps are not necessarily determinant of the viability of a club, as other non-player operating costs and revenue streams may play a greater role in shaping club cost structure. The A-League, in its ten year existence has lost three clubs (New Zealand Knights, North Queensland Fury and Gold Coast United),28 and has experienced change of ownership at most clubs. Three clubs which dropped out of the A-League were lost, because market size in which they were established was not financially sustainable. It is submitted that FFA took a capital driven approach, rather than a market driven approach to league expansion, in admitting North Queensland Fury and Gold Coast United to the A-League. There is currently no evidence, to suggest that the level of the salary cap (or player payments) played a major role in the demise of the two expansion clubs.

On the other hand, FFA has argued that with only two profitable clubs and one other breaking even, the rest are sustaining average losses of approximately $1 million annually. The FFA may submit that these figures make the imposed salary cap justifiable with regard to financial viability of the A-League.29 Newcastle Jets is currently under FFA ownership, after FFA stripped the previous owner of its franchise license in July 2015 for a series of breaches of the FFA participation agreement, when the club subsequently went into voluntary administration.30 A second club, Brisbane Roar has been in default with player payments including superannuation and other creditors, with club owners currently searching for a buyer.31

In Bosman,32 Advocate General Lenz33 suggested revenue sharing as a means of supporting and providing financial solidarity to smaller clubs. This avoids the attendant problems inherent in alternative methods that justify labour market restraints on the basis of financial viability, which deny players their autonomy and human rights.

 

PUBLIC POLICY

In considering whether a restraint is an unreasonable restraint of trade, the courts will also consider whether the restraint is contrary to public policy. It is in the public interest that there is a financially viable league. However Lord Denning in Petrofina (Great Britain) v. Martin34 stated:

Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful: with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest.

The last part of Lord Denning’s statement raises the importance of a restraint being collectively bargained in good faith, by parties with equal negotiating power - a point also raised by US District Judge Sotomayor in Silverman discussed above.

 

CONCLUSION

To date, the salary caps have not been legally challenged in Australian sport. However, the unilateral imposition of a salary cap on professional footballers, conditions which have not been negotiated and agreed as part of a CBA,35 does however leave open a real possibility of a legal challenge.

After a survey of literature and case law, legal principles suggests that imposed salary caps are prima facie an unreasonable restraint of trade, and therefore, vulnerable to legal challenge.

There is also doubt as to empirical evidence, whether salary caps in professional team sports achieve the legitimate interest of competitive balance and financial viability claimed by monopsony and /or cartel power, and whether the restraints are reasonable, and in the public interest.

Assuming that the ‘legitimate interest’ argument for competitive balance and financial viability is accepted, it is submitted that salary caps are not in the public interest, as there are less restrictive means to achieve both objectives - namely revenue redistribution.36, 37, 38

To date, judgments in common law restraint of trade in sports, jealously protects the principle of individual autonomy and liberty - the freedom to trade and to contract. These principles are the foundations on which the common-law is built.39

 

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About the Author

Francis Awaritefe

Francis Awaritefe

Francis Awaritefe is a former Socceroo and National Soccer League player. He has been a Professional Footballers Australia Executive Committee member, as well as an A-League Club Executive, and is currently in final year studying honours in law.

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