Out of all the State aid investigations of recent years involving professional football clubs, the outcome of the Real Madrid case was probably the most eagerly awaited. Few football clubs have such a global impact as this Spanish giant, and any news item involving the club, whether positive or negative, is bound to make the headlines everywhere around the globe. But for many Spaniards, this case involves more than a simple measure by a public authority scrutinized by the European Commission. For them, it exemplifies the questionable relationship between the private and the public sector in a country sick of never-ending corruption scandals.[1] Moreover, Spain is only starting to recover from its worst financial crisis in decades, a crisis founded on real estate speculation, but whose effects were mostly felt by ordinary citizens.[2] Given that the Real Madrid case involves fluctuating values of land that are transferred from the municipality to the club, and vice versa, it represents a type of operation that used to be very common in the Spanish professional football sector, but has come under critical scrutiny in recent years.[3] 

By ordering the recovery of the granted State aid, the Commission showed that certain (land) transaction agreements between a public authority and a private entity can be caught by EU (State aid) law, regardless of the size and fame of the private entity. The ‘Real Madrid Saga’ (which, in addition to the Commission’s final decision, also includes the Commission’s opening decision, a number of rulings by Spanish national courts[4], a more than likely review by the Court of Justice of the EU, and a new deal between the club and the municipality) might serve as harbinger, in the professional football sector at least, for a shift towards more transparent and responsible conduct by clubs and public authorities.

This two-part blog will attempt to provide an overview of the ‘Real Madrid Saga’ in its broadest sense. The first part will briefly[5] outline the facts that led to the opening of the State aid investigation, and then analyse the role played by the Spanish national courts in the ‘Saga’. The second part will focus on the recovery decision of 4 July 2016 and dissect the arguments used by the Commission to reach it.  

The facts

The municipality of Madrid and Real Madrid have a rich history of land transactions. In fact, a particular agreement from 2001 was already questioned by a Member of the European Parliament, even though the European Commission, at that time, saw no reason to launch a full State aid investigation.

However the agreement of 29 July 2011 did not manage to escape Commission scrutiny. This agreement, referred to by the Commission as the “2011 settlement agreement”[6], settled two earlier agreements between the city Council and Real Madrid dating from 1991 and 1998 respectively. A simple analysis of the 2011 settlement agreement clarifies why the Commission doubted its legality. In 1998 Real Madrid transferred half of their old training grounds to the municipality. Additionally to a large sum of money, the club was to receive a number of terrains spread out over the municipality, including a terrain located in the area called Las Tablas valued by the technical services of the municipal administration at €595.194 in 1998.[7] At that time, the two parties “were of the opinion that the classification ‘reserved for sport’ would not exclude its transfer to private ownership”. This land was however never officially transferred to Real Madrid, and the entry of a local urban law in 2001 made the actual transfer legally impossible, because it stipulates that plots reserved for sport must be in public ownership. This was confirmed in 2004 by the Tribunal Superior de Justicia de Madrid (Madrid High Court), which ruled that the local urban laws prevent any private entity from holding the legal property over this type of plot (like the terrain in Las Tablas).[8] As a result, in 2011, the Council decided to compensate the football club not for the original value of €595.194 but for a staggering €22.693.054,44! Once again, this value was determined by the technical services of the municipal administration. Real Madrid was not compensated in the form of a sum of money, but rather it was presented with a packet of terrains including four terrains of a total area of 12.435 m/2 in the street Mercedes Arteaga in the Carabanchel district of Madrid.[9]

This last plot of land transferred to Real Madrid formed the subject of another land agreement dating from November 2011. The agreement became known as operation Bernabeú-Opañel and consisted of the following: The Council is to transfer to the club a terrain which borders the Bernabéu stadium. This would permit Real Madrid to cover its stadium with a roof, and to build a shopping centre and a hotel on the façade situated on the Paseo de la Castellana (one of Madrid’s most important streets). In return, the club agreed to transfer to the Council the shopping centre Esquina del Bernabéu, which is situated on the other side of the stadium. The Council would then demolish the shopping centre and convert it into a public park. The club also promised to transfer back to the Council parts of the four terrains located in the street Mercedes Arteaga that it received as part of the 29 July 2011 Agreement. In addition to the transfers of the old shopping centre and the terrains located in the street Mercedes Arteaga, Real Madrid is also to pay €6.6 million to the Council. The Council, however, encountered an obstacle in its own urban laws, which did not permit private parties, like Real Madrid, to construct on public terrains owned by the Council. Therefore, on 16 November 2012, the Government of the autonomous region of Madrid announced that the local urban law was to be modified ad hoc to enable the operation Bernabeú-Opañel.[10]

Even though no formal State aid complaint was ever submitted, the Commission nonetheless opened a formal investigation on 18 December 2013 based on “press reports and information sent by citizens”.[11] In its opening decision, the Commission provided a preliminary assessment of the 2011 settlement agreement under the EU State aid rules. It expressed doubts with regard to the legality of the transfer of the terrain in Las Tablas to Real Madrid; with regard to the evaluation of the market value of the Las Tablas plot of land; and with regard to market conformity of the value of the properties which were transferred to Real Madrid by the 2011 settlement agreement. Interestingly enough, although the Commission barely mentioned the operation Bernabeú-Opañel in its preliminary assessment (let alone assess it), it also doubted whether the subsequent exchange of land around the Bernabéu Stadium was carried out at market conditions.[12] 

The role of the national courts

In January 2012, the ecological movement Ecologistas en Acción (EeA) found several legal irregularities with regard to the Bernabeú-Opañel agreement, including the fact that no mention was made of the 2011 settlement agreement. It subsequently started legal proceedings in front of the Spanish administrative Court claiming that the ad hoc modification of the urban regulations was contrary the general interest and sought its annulment under Spanish law. In March 2013, a second action for annulment of the operation Bernabéu-Opañel was sought by the Ruiz-Villar family. For the sake of clarification, in the past this family was the owner of the land on which the Bernabéu stadium is build, as well as the plot of land next to the Bernabéu stadium that the Council wants to transfer to Real Madrid. Their action led to the judgment by the Madrid High Court of 2 February 2015, which will be elaborated on below. 

The Order for Interim Measures of 31 July 2014

At the time the European Commission opened a formal investigation in December 2013, EeA’s action for annulment under Spanish law was pending at the Madrid High Court. The fact that the European Commission was investigating the matter provided EeA the legal opportunity to invoke the so-called ‘standstill obligation’. The ‘standstill obligation’, found in Article 108(3) TFEU has direct effect and can therefore be called upon in front of national courts. Article 108(3) reads as follows: “The Member State concerned shall not put its proposed measure into effect until this procedure has resulted in a final decision (by the Commission)”. In other words, from the moment the Commission starts investigating the alleged State aid measure, the national court has an obligation to protect competitors and other third parties against (potential) unlawful aid since the Commission’s own powers to do so are limited.[13] It is, furthermore, settled case law that third parties who are not affected by the distortion of competition resulting from the aid measure can also have a sufficient legal interest of a different character, such as EeA, in bringing ‘standstill’ proceedings before a national court.[14]

EeA could not invoke the ‘standstill obligation’, as regards the 2011 settlement agreement, since the land transactions subject to that agreement had already taken place. Therefore, its focus was on preventing Real Madrid from carrying out the Bernabéu-Opañel project until the Commission closed its State aid investigation. On the one hand, this focus made sense given that EeA was also involved in a case in front of the same Court aiming to annul the operation Bernabéu-Opañel. On the other hand, it was not prima facie clear whether the ‘standstill operation’ also applied to the operation Bernabéu-Opañel, since the Commission’s opening decision made little reference to this project. In other words, it was not known whether the Commission was, in fact, actually investigating this operation.

In its Order for Interim Measures of 31 July 2014, the Madrid High Court stated that“(i)t does not correspond to this Chamber to determine at this procedural moment whether the transaction constitutes an illegal State aid or not but the inclusion of [the plots located in the street Mercedes Arteaga] in the scope of the [operation Bernabéu-Opañel] are sufficient circumstantial elements in order to determine a direct connection between the investigation undertaken by the Commission and the object of the present appeal”.[15]

With the link between the 2011 settlement and the operation Bernabéu-Opañel established by the Court, it recognised two possible reasons to suspend the renovation of the Bernabéu stadium:

- To safeguard the interests of the justiciable;

- To protect the affected parties by the distortion of competition caused by the aid.[16]

As regards the former, in essence the Madrid High Court had to decide whether EeA had standing to request the ‘standstill’. The CJEU has been quite clear on this matter: in principle, national procedural rules apply to ‘standstill’ proceedings.[17] In Spain, in administrative cases involving urban matters, the so-called acción publica urbanística, or urban public action principle, applies. This principle grants very extensive procedural rights to third parties who have a limited direct interest to launch proceedings in urban matters, including EeA in the Real Madrid case.[18] Indeed, given the possibility that procedural rights for third parties in urban matters are broader in Spain than in some, if not most, other EU Member States, standstill proceedings in other Member States could well be declared inadmissible for lack of interest under similar conditions.

With the standing of EeA recognized, the Court went on to suspend the renovation of the stadium not only to protect EeA of the distortion of competition caused by the concession of the aid, but also to protect Real Madrid itself. Allowing the renovation to go ahead could have very negative consequences for the football club if the aid were ordered to be recovered, such as the demolition of the newly renovated part of the stadium.[19] The argument that the suspension served to protect Real Madrid is hard to follow, since, as the EU State aid rules stipulate, it is up to the Member State to decide how incompatible State aid is recovered.[20] The Spanish authorities ordering Real Madrid to demolish its own stadium seems to be a rather exaggerated eventuality. Furthermore, one wonders whether suspending the renovation of the stadium really helps Real Madrid when, at that stage, there were not that many indications that the Commission was actually investigating the operation Bernabéu-Opañel.  

The judgment of 2 February 2015 ordering the annulment of the operation Bernabéu-Opañel

Any remaining criticisms regarding the Madrid High Court’s decision to suspend the renovation of the stadium were swiftly set aside when the same Madrid High Court annulled the whole operation in its judgment of 2 February 2015. As explained above, this was based on the action of annulment sought by the Ruiz-Villar family. This blog will not analyse this judgment in full detail, because it does not make any reference to the State aid investigation or any other aspect of EU law. The important element to take from this judgment, however, is that an ad hoc modification of the (local) urban law is only valid if it fulfils the general interest and not just the interest of one (private) party.[21] Real Madrid has publicly expressed that it intends to “convert the Club in a sporting institution of reference in the world. The aim is for the stadium to have a maximum level of comfort and services superior to the most modern and advanced sporting stadiums in the world”.[22] This objective was not considered by the court to be an objective of general interest and, consequently, does not allow for an ad hoc modification of the urban laws.

As a result, Real Madrid had to restart its entire renovation project while a potential negative decision State aid decision from the European Commission was still looming. Moreover, as will be shown in the second part of this blog, even though this judgment did not make a single reference to the State aid investigation, it still played an important role in the final outcome of the investigation.

[1] Elena G. Sevillano and Bruno G. Gallo, “Así gana el Madrid”, El País, 6 November 2011. See also “Ten Spain corruption scandals that will take your breath away”, The Local, 28 January 2016.

[2] Ozlem Akin et al., “The Real Estate and Credit Bubble: Evidence from Spain”, Barcelona GSE Working Paper Series Working Paper nº 772.

[3] See for example Nefer Ruiz Crespo, “Urban speculation by Spanish football clubs”, in Transparency International, “Global Corruption Report: Sport”, Routledge February 2016; and “Spain Corruption Report”, GAN Business Anti-Corruption Portal.

[4] Most notably Tribunal Superior de Justicia de Madrid - Sección nº01 de lo Contencioso- administrativo - Pieza de Medidas Cautelares- 357/2013 – 01, 31 July 2014; and Tribunal Superior de Justicia de Madrid - Sección nº01 de lo Contencioso- administrativo – Procedimiento Ordinario 371/2013, 2 February 2015.

[5] The background information on the Real Madrid case is more extensively found in a previous blog entitled: Oskar van Maren, “The EU State aid and Sport Saga – A blockade to Florentino Perez’ latest “galactic” ambitions (part 1)”.

[6] Commission decision SA.33753 of 4 July 2016 on the State aid implemented by Spain for Real Madrid CF, para. 6.

[7] Ibid, para. 10.

[8] Ibid, paras. 13-15.

[9] Oskar van Maren, “The EU State aid and Sport Saga – A blockade to Florentino Perez’ latest “galactic” ambitions (part 1)”.

[10] Ibid.

[11] Commission decision SA.33753, para. 1. For more information on why the Commission opened this case without a formal complaint, see Ben Van Rompuy and Oskar van Maren, “EU Control of State Aid to Professional Sport: Why Now?” In: “The Legacy of Bosman. Revisiting the relationship between EU law and sport”, T.M.C. Asser Press, 2016.

[12] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, paras. 41-43.

[13] Commission notice of 9 April 2009 on the enforcement of State aid law by national courts (2009/c 85/01), para.25. See also: Oskar van Maren, “The Real Madrid case: A State aid case (un)like any other?” 11 Competition Law Review 1:104.

[14] Commission notice on the enforcement of State aid law by national courts, para. 72. See also in that regard Case C-174/02, Streekgewest, ECLI:EU:C:2005:10, para. 19.

[15] Tribunal Superior de Justicia de Madrid - Sección nº01 de lo Contencioso- administrativo - Pieza de Medidas Cautelares- 357/2013 – 01, 31 July 2014, page 5. Disclaimer: This is an unofficial translation by the author of the blog.

[16] Ibid.

[17] Commission Notice on the enforcement of State aid law by national courts, para.70. See also Case C-368/04, Transalpine Ölleitung in Österreich, ECLI:EU:C:2006:644, para. 45. The Court also held that national procedural rules apply “as long as those national rules do not render excessively difficult the exercise of rights conferred by EU law”. In other words, if it is more difficult to get standing under national procedural rules than under EU procedural rules, then EU procedural rules apply.  

[18] Tribunal Superior de Justicia de Madrid - Sección nº01 de lo Contencioso- administrativo - Pieza de Medidas Cautelares- 357/2013 – 01, 31 July 2014, page 5.

[19] Ibid, page 6.

[20] Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules fort the application of Article 108 of the Treaty on the Functioning of the European Union, Article 16(3).

[21] Tribunal Superior de Justicia de Madrid - Sección nº01 de lo Contencioso- administrativo – Procedimiento Ordinario 371/2013, 2 February 2015, page 10.

[22] Ibid, page 9.

Yesterday, 18 May 2016, the licensing committee of the Dutch football federation (KNVB) announced its decision to sanction FC Twente with relegation to the Netherland’s second (and lowest) professional league. The press release also included a link to a document outlining the reasons underlying the decision. For those following the saga surrounding Dutch football club FC Twente, an unconditional sanction by the licensing committee appeared to be only a matter of time. Yet, it is the sanction itself, as well as its reasoning, that will be the primary focus of this short blog.

Background

By way of reminder, FC Twente is the typical example of a professional football club who had been “punching above its weight” for years. After taking over the club in 2003, president Joop Munsterman and his fellow associates took extreme financial risks in order to overtake clubs like PSV and Ajax as the best club in the Netherlands. At first they were successful, but winning the Dutch league in 2010 did not prove enough for the overambitious executives of FC Twente. The club started spending more money than ever on the transfer marker and new massive loans were taken to upgrade the stadium to Champion League standards. Unfortunately, all this extra spending did not materialize in extra sporting successes. Furthermore, the money derived from selling players was not sufficient to service the debt incurred in the process.

Yet, the scope of FC Twente’s financial trouble did not become apparent until November 2015. It was then that footballleaks released the Economic Rights Participation Agreement (ERPA), or TPO agreement, the club had signed with the Maltese investment company Doyen. The fine prints of the ERPA, explained in our blog of 2 December, took everyone by surprise, including the KNVB’s licensing committee. More than the precarious state of the club’s finances, it was the fact that FC Twente had deliberately mislead the KNVB regarding its relationship with Doyen that shocked the Dutch federation.[1]

As an immediate reaction to Twente’s omissions, on 15 December, the licensing committee decided to conditionally withdraw FC Twente’s license, unless the club collaborates fully to an independent internal investigation into its structure and governance. Moreover, the licensing committee sanctioned FC Twente with a €45,250 fine and a three-year exclusion from participating in European competitions. The report of the internal investigation, published on 1 March 2016, highlighted the complete lack of transparency in transfer matters, i.e. all the transfers and their financing were taken care of by vice-president Van der Laan without the involvement of other board members. The ‘Additional Agreement’ signed with Doyen, for example, was never mentioned in any of the board meetings. The report also brought to light a fresh case of deliberate deceit of the licensing committee in the transfer of Dusan Tadic to Southampton the summer of 2014. According to FC Twente’s original disclosure to the KNVB, Tadic’s agent would receive €1.8 million, which was 15% of the transfer amount. However, in January 2016, a month after FC Twente promised full collaboration in the investigation, it suddenly turned out that Tadic’s agent still had a claim of €1.8 million based on a second agreement between him and the club regarding the same transfer. Not only was this second agreement never notified to the licensing committee, it was also never mentioned to the investigators during several meetings held in December 2015. 

The licensing committee’s decision

In a nutshell, the licensing committee decided to unconditionally withdraw FC Twente’s license, but to simultaneously grant it a new license so that it is permitted to play in the Dutch second professional league. The committee held that:

“The Dutch licensing system was repeatedly, deliberately and systematically undermined by FC Twente and the licensing committee was repeatedly, intentionally and purposely misled. This behavior undermines the functioning of the licensing system, contributes to an unfair competition between professional football clubs, creates income for FC Twente it would not have obtained under fair conditions (e.g. income from the selling of TV rights) and leads to player transfers that possibly would not have taken place had the club behaved ethically.”[2]

It added that it had already considered an unconditional withdrawal of the license in December 2015, but decided against it because it needed more information, such as an independent report. The licensing committee’s conclusions drawn from the report was twofold. On the one hand, the licensing committee praised the fact that FC Twente collaborated with the investigation, that it promised to continue with the reorganization of the club’s governance structure after  a new license was granted[3] and that it will not ask for a UEFA license for the next three seasons.[4]

On the other hand, the licensing committee felt it needed to act as a consequence of the new information regarding the Tadic transfer. The committee determined that the “Doyen Gate” was not an isolated incident, but that it fitted in a pattern of systematic unethical behavior by FC Twente’s management. Consequently, it concluded that FC Twente had breached Article 9 of the Dutch license regulation, which requires a license holder (i.e. a professional football club) to timely provide the licensing committee all the relevant information and documents regarding the club’s financial situation, transfer details, etc. Interestingly enough, the license regulation offers only two sanction possibilities for breaching Article 9: A fine of maximum €45.250 under Article 11(1); or the complete withdrawal of the license under Article 12(2)c). The option to sanction a club with a relegation to the lower divisions is currently not an option, as stipulated by the license committee in paragraph 9 of its decision.

The lack of alternative options proved to be problematic for the licensing committee because it found a fine of €45.250, given the circumstances, disproportionately light, but the decision to withdraw the license disproportionately heavy.[5] A complete license withdrawal could realistically lead to the disappearance of FC Twente, a football club with (as held by the licensing committee) an important role in the Enschede region. “The licensing committee is aware that the effects (of a collapse) could be disastrous for FC Twente, its employees, financers, supporters and professional football in the region”.[6] With this statement, the licensing committee is demonstrating that it is taking into account inter alia the guarantee issued by the municipality of Enschede on a loan of €32 million for FC Twente in December 2015, under the condition that the club would obtain a license. Without this loan, FC Twente would have gone bankrupt. In the end, the licensing committee came up with the rather pragmatic solution to withdraw unconditionally FC Twente’s license, immediately followed by the granting of a new license to participate in the second professional league, “in order to limit the disproportionate consequences of the license withdrawal”.[7]

What makes the licensing committee’s decision worthy of debate is that the regulations, strictly speaking, do not provide for the option to replace a first division license with a second division license. The committee admits that it has sought the limits of the licensing regulations, but defends its decision by stating it is sanctioning FC Twente for its past actions in a proportionate manner while taking into account the interests of the club and its stakeholders.  

Aftermath

In an official statement following the decision, FC Twente declared that its currently studying all its options. Although an appeal remains one of the possibilities, one could argue that it might be too risky for FC Twente to do so. Concretely, an appeal would probably lead to a sanction that actually exists under the regulations: A fine of €45.250 or an unconditional withdrawal of a license. A more interesting issue is whether any other professional club might consider questioning this decision. Clubs who believe to have been placed in a disadvantageous position as a result of FC Twente’s deliberate and systematic deceit, could argue that the current sanction does not address the gravity of the misconduct. Moreover, the fact that the sanction is not enshrined in the KNVB’s regulations, could make it difficult for the licensing committee to uphold it in an appeal procedure.

This decision puts the final nail in FC Twente’s coffin. The surprising rise and brutal downfall of the Dutch club exemplifies the advantages and downsides of TPO. This practice (and other financial tricks linked to the transfer system) enabled Twente to leverage up and make the impossible possible (winning the Eredivisie), but at the same time strapped it with an unsustainable debt that has brought the club to its knees. Basically, fans must choose between a few seconds (or years) of glory on the one hand, or a sustainable future for their club on the other.

[1] FC Twente had not disclosed to the KNVB an Annex, called ‘Additional Agreement’, to the ERPA that insinuated far-reaching influence by Doyen in employment and transfer-related matters, thereby breaching FIFA and KNVB Regulations.

[2] The licensing committee’s decision, page 1.

[3] In this regard it should be noted that four FC Twente board members resigned in March as a result of the report. See “FC Twente geeft toelichting op onderzoeksrapport Knüppe” (http://www.fctwente.nl/blog/2016/03/fc-twente-geeft-toelichting-onderzoeksrapport-knuppe/).

[4] The licensing committee’s decision, page 3.

[5] Ibid., page 4.

[6] Ibid., page 5.

[7] Ibid.

The year is coming to an end and it has been a relatively busy one for the CAS Ad Hoc divisions. Indeed, the Ad Hoc division was, as usual now since the Olympic Games in Atlanta in 1996[1], settling  “Olympic” disputes during the Winter Olympics in Sochi. However, it was also, and this is a novelty, present at the Asian Games 2014 in Incheon.  Both divisions have had to deal with seven (published) cases in total (four in Sochi and three in Incheon). The early commentaries available on the web (here, here and there), have been relatively unmoved by this year’s case law. Was it then simply ‘business as usual’, or is there more to learn from the 2014 Ad Hoc awards? Two different dimensions of the 2014 decisions by the Ad Hoc Division seem relevant to elaborate on : the jurisdiction quandary (part. 1) and the selection drama (part. 2).

Part. 1: The Jurisdiction quandary: Too early to be judged!

The scope of jurisdiction of the Ad Hoc Division of CAS is provided for in article 1 of the ‘Arbitration Rules for the Olympic Games’ (the same is true for the Asian Games)[2]. However, legal uncertainties over this scope of jurisdiction remain a defining feature. Many earlier disputes in front of the Ad Hoc division have tackled this question, and this has been true again this year.[3]

It is not so much the scope rationae personae that might be problematic, although one case arose at the Asian games in which two former squash players were denied access to the Ad Hoc division on the basis of not being “participating athletes”.[4] Nor is it the rationae materiae that has been a real problem, as claimants tend to submit disputes, which are related to the Games. No, the problem child is usually the jurisdiction rationae temporis. Indeed, article 1 of the rules states that “any disputes covered by Rule 61 of the Olympic Charter, insofar as they arise during the Olympic Games or during a period of ten days preceding the Opening Ceremony of the Olympic Games” can be subjected to the jurisdiction of the Ad Hoc Division. So the key question is: When does a dispute “arise”? 

In the Birkner case[5], the Ad Hoc Division in Sochi had to grapple extensively with the question of when the dispute arose as, during the hearing, the respondent, Comitato Olympico Argentino, “denied the existence of a basis of jurisdiction of the panel”. The case concerned a selection drama for the Sochi Games (see part 2); jurisdiction rationae personae and rationae materiae were unproblematic. The CAS did examine whether the local remedies were exhausted, and considered that “that there were no internal remedies to exhaust”.[6] The only barrier left for jurisdiction to be asserted was the ratione temporis. In short, “did the dispute arise in the required time frame?”[7]

This “vexing issue” [8] was touched upon repeatedly in past Ad Hoc division awards.[9] In the Birkner case, it had to be demonstrated that the dispute arose not earlier than the 28 January 2014, 10 days before the opening ceremony scheduled for the 7 February 2014. The panel first reaffirmed the fact that “the date when the dispute arose cannot, per se, be the date when the Request for Arbitration is filed” .[10]  So, back to the key question, when did the dispute arise?

The award refers extensively to the Schuler case[11]. In its main holding on jurisdiction, the 2006 panel considered that “it would not be possible to say that a dispute had arisen until Ms Schuler had decided to appeal and had filed notice of her appeal”.[12] Nevertheless, the 2014 panel refused to consider the Schuler precedent to be applicable to the Birkner case for two reasons: the factual situation is different and the reasoning used in Schuler is fundamentally flawed.

On the factual side, contrary to the Schuler case, the panel finds that “[i]n the present case […] the explanation was not given on a date inside the required period, as it was either on 20 January 2014, which is the date of the letter of explanation, or on 22 January 2014, which is the date on which the Applicant says that she received that letter”.[13] Both of these dates being well before the 10 days period, the panel is of the opinion that it lacks jurisdiction. On the legal side, the panel is clearly not “convinced by the legal reasoning adopted in the Schuler case” .[14] In fact, it considers that “[s]uch conclusion could extend the jurisdiction of the ad hoc Division outside the precise and limited framework set by the Rules, which this Panel is required to respect and apply” [15]. The panel is of the opinion that “the date when a dispute arises is in general […] the date of the decision with which the Applicant disagrees” .[16] However, “[s]uch a date can arise later […] if […] the decision is not self-explanatory and requires some explanation in order for the parties to know with certainty that they are in disagreement”.[17]

This is a noteworthy consideration, which indicates a substantial reduction of the scope of jurisdiction of the CAS Ad Hoc Division. If the parties do not agree to the jurisdiction of CAS (in practice they often do not contest the jurisdiction[18]) it will render more difficult the referral of a dispute to the Ad Hoc Division. This understanding of the start of a dispute is contradicting the overall aim of the Ad Hoc Division, which is to deal swiftly with all disputes intimately linked to the Games. In this light, a more flexible interpretation of the jurisdiction rationae temporis, as suggested in the Schuler case, is preferable. Athletes are no legal experts; they (and sometimes their lawyers) need time to find their way through the jungle of sporting regulations and dispute resolution mechanisms potentially applicable. The crucial importance of the Olympic Games for an athlete’s career call for an interpretation of the start of the dispute that focuses on the intention to challenge the decision as highlighted in the Schuler award[19]. Moreover, any doubts concerning the starting date of the dispute should play in favour of the athlete, unless the time between the date of notification of the contentious decision and the decision to lodge a complaint in front of CAS is disproportionately (and abusively) long. The attack by the Birkner panel on the reasoning adopted in Schuler is no anodyne move; in the future it may threaten the access to justice of athletes and their ability to obtain a swift and fair decision, in a context where they most urgently need it.

[1] On the early days of the CAS Ad Hoc Division at the Olympics, the book by Gabrielle Kaufmann-Kohler is a must read : G. Kaufmann-Kohler, Arbitration at the Olympics, Kluwer Law, 2001.

[2] Article 1 of the Arbitration Rules for the OG stipulates that:

“The purpose of the present Rules is to provide, in the interests of the athletes and of sport, for the resolution by arbitration of any disputes covered by Rule 61 of the Olympic Charter, insofar as they arise during the Olympic Games or during a period of ten days preceding the Opening Ceremony of the Olympic Games.”

“In the case of a request for arbitration against a decision pronounced by the IOC, an NOC, an International Federation or an Organising Committee for the Olympic Games, the claimant must, before filing such request, have exhausted all the internal remedies available to him/her pursuant to the statutes or regulations of the sports body concerned, unless the time needed to exhaust the internal remedies would make the appeal to the CAS Ad Hoc Division ineffective.”

[3] CAS OG 14/03; CAS AG 14/01; CAS AG 14/02.

[4] See CAS AG 14/01, §2.5. See also CAS OG 12/03, §2.3.

[5] CAS OG 14/03

[6] CAS OG 14/03, §5.14

[7] CAS OG 14/03, §5.17-5-30

[8] CAS OG 14/03, §5.20

[9] Most notably in the Schuler case, CAS OG 06/002. For a general commentary see: I.S.LR. 2006 pp.50-51 and A. Rigozzi, ‘The decisions rendered by the CAS Ad Hoc Division at the Turin Winter Olympic Games 2006’, Journal of International Arbitration 23 (5): 453-466, 2006

[10] CAS OG 14/03, §5.21

[11] CAS OG 14/03, §5.24

[12] CAS OG 06/002, §14

[13] CAS OG 14/03, §5.25

[14] CAS OG 14/03, §5.25

[15] CAS OG 14/03, §5.27

[16] CAS OG 14/03, §5.28

[17] CAS OG 14/03, §5.28

[18] See for example CAS OG 14/01 §6.2 and CAS OG 14/02 §6.5

[19] In cases, in which the dispute overtly arose earlier than 10 days before the games such a restrictive interpretation could be tolerated. See for example: CAS OG 12/03, §2.3.23; CAS OG 12/02, §4.10; CAS OG 12/04, §5.2.

This is the second and final part of the ‘Real Madrid Saga’. Where the first part outlined the background of the case and the role played by the Spanish national courts, the second part focuses on the EU Commission’s recovery decision of 4 July 2016 and dissects the arguments advanced by the Commission to reach it. As will be shown, the most important question the Commission had to answer was whether the settlement agreement of 29 July 2011 between the Council of Madrid and Real Madrid constituted a selective economic advantage for Real Madrid in the sense of Article 107(1) TFEU.[1] Before delving into that analysis, the blog will commence with the other pending question, namely whether the Commission also scrutinized the legality of the operation Bernabeú-Opañel under EU State aid law. By way of reminder, this operation consisted of Real Madrid receiving from the municipality the land adjacent to the Bernabéu stadium, while transferring in return €6.6 million, as well as plots of land in other areas of the city. 

The Commission’s ‘pragmatic’ solution regarding the Operation Bernabéu-Opañel

As was explained in part 1 of this blog, during the formal investigation period (i.e. from 18 December 2013 until 4 July 2016), the operation Bernabéu-Opañel (referred to by the Commission as the ‘2011 urban development agreement’) was firstly suspended by the Madrid High Court (31 July 2014) and later completely annulled (2 February 2015) by that same Court. It is worth reiterating that the Court believed there to be a sufficient link between the 2011 settlement agreement and the operation Bernabéu-Opañel in order to examine the agreements together.[2]

The Commission, however, was actually surprisingly brief on this matter. As can be read from paragraphs 79 and 80 from the decision, “(a)s a result of (the judgment of 2 February 2015), the 2011 urban development agreement has been cancelled between the parties. Consequently, that agreement will no longer be implemented so that the Commission assessment of the 2011 urban development agreement has become without object. The present Decision therefore only examines the 2011 settlement agreement under State aid rules”.[3]

From an EU State aid law perspective, declaring the operation Bernabéu-Opañel “without object” makes sense. With the agreement annulled, there has been no transfer of resources from the State to Real Madrid of any sorts, nor could Real Madrid have obtained an economic advantage from an annulled agreement. Therefore, removing all the problematic aspects of the agreement from a State aid perspective. Yet, it does remain slightly ironic that that the ‘standstill obligation’ was applied to an agreement that was later on never analysed by the Commission. True, the subsequent annulment (based solely on Spanish administrative law) made Commission scrutiny redundant, but one does wonder what the Commission would have decided had the Madrid Court not annulled the operation. 

The 2011 settlement agreement under Article 107(1) TFEU

By way of reminder, in the opening decision, the Commission primarily doubted whether:

1) It was impossible for the Council of Madrid to transfer the Las Tablas property to Real Madrid;

2) This legal impossibility automatically led to an obligation for the Council of Madrid to compensate Real Madrid;

3) A market value of the Las Tablas plot of land has been sought;

4) And whether the value of the properties which were transferred to Real Madrid by the 2011 settlement agreement were market conform.[4]

In reaction to the opening decision Spain argued that transferring the plot in Las Tablas was illegal based on the local urban law 9/2001 of 2001, this interpretation was later confirmed by the Spanish High Court in 2004. Yet, this was already the case in 1998 when the Madrid Council agreed to transfer the land to Real Madrid.[5] Given that Real Madrid had legitimate expectations that it was the owner of the land, it has suffered damages as a consequence of the transfer’s invalidity. As a consequence, Real Madrid needed to be compensated by an amount equal to the market value of Las Tablas in 2011, namely €22.693.054,44. Since this sum was calculated on the basis of an objective model set by the Ministry of Economy and Industry[6], Spain considered that it matched the market value and could not constitute State aid.

The economic advantage criterion according to the market economy operator principle

The Commission’s State aid assessment essentially revolved around the question whether the 2011 settlement agreement between the Council of Madrid and Real Madrid resulted in an economic advantage to the benefit of Real Madrid.[7] As is standard Commission practice[8], “to determine whether a particular transaction carried out by a public authority has been carried out in line with normal market conditions, it is necessary to compare the behaviour of that public authority with that of a similarly situated hypothetical “market economic operator” operating under normal market conditions. If the “market economy operator” would have entered into that transaction under similar terms, then the presence of an advantage may be excluded as regards that transaction”.[9] Referring to EU case law[10], the Commission argued that a prudent market operator would carry out his own ex ante assessment on the basis of sound economic and legal evaluations, when entering such transactions. Public authorities cannot claim that evaluations made after the transaction, based on a retrospective finding that it was actually economically rational, like the Madrid Council did in this case, is the course of action that a prudent market operator would take under similar circumstances.[11]

In continuation, the Commission indicated the two criteria it used in order to determine whether the amount of compensation offered to Real Madrid was in line market conditions:

1) The probability that the Madrid Council would be held liable for its inability to perform its contractual obligations;

2) And the maximum extent of its financial exposure resulting from finding such a liability.[12]

Though these criteria are clearly cumulative, it should be noted that the Commission did not support the criteria with a reference to case law, its own decisional practice or documents of (soft) law. Be that as it may, based primarily on these criteria the Commission concluded that a market economy operator in a similar situation to the Madrid Council would not have entered into the 2011 settlement agreement.

As regards the first criteria, the Commission argued that the Madrid Council should have sought legal advice so as to establish the likelihood that it was indeed liable for not performing its contractual obligations. Without legal advice, the Commission found it hard to believe that a prudent market operator would have assumed full legal liability, especially considering “the legal uncertainties surrounding the potential impossibility to perform (the land transaction), the legal consequences of that potential impossibility, and the Madrid Council’s ability to remedy that legal impossibility through other means”.[13] The Commission seems definitely correct in questioning the chain of events that eventually led to the compensation of more than €20 million. Even though, as Spain now claims[14], it was already legally impossible to transfer the land in 1998, why did the Madrid Council sign this agreement in the first place? After the introduction of local urban law 9/2001, shouldn’t the parties have been aware of the legal impossibility at that moment, or in any case after the 2004 judgment of the Madrid High Court? Consequently, why did the Council wait until 2011 before compensating Real Madrid? In paragraphs 103 and 104, the Commission also drew an interesting comparison with the operation Bernabéu-Opañel. Although this latter operation was declared void by a Spanish Court for not being in line with the general interest, it simultaneously shows that reclassifying a terrain from public to private (sport) use is not entirely legally impossible. In other words, by analogy, the plot in Las Tablas could have been reclassified for private use (provided the reclassification served the general interest) and be legally transferred to Real Madrid.

With regard to the second criteria, i.e. the maximum extent of the Madrid Council’s financial exposure resulting from finding such a liability, the Commission firstly argued that the different valuations of 1998 and 2011 of the land in Las Tablas were based on the mistaken assumption that this land could have been transferred in 2011, which, in hindsight appeared to be legally impossible. “Assuming the Madrid Council could not be held liable for that legal impossibility, for which it never solicited legal advice, it is at least arguable that the market value of the plot in its relationship with Real Madrid would be zero, since the land in question cannot be transferred”.[15] On the other hand, and assuming the Madrid Council is liable and Real Madrid had a right to a compensation, this amount should have been way less than €22 million as a Commission-assigned study concluded. Taking into account the Commission’s consideration that the correct parameter for the valuation of the concerned plot is the long-term exploitation of the land for sport use, the study arrived at a valuation in 2011 of €4.275 million.[16]

For all the above reasons, the Commission established that the Madrid Council had not acted as a prudent market operator. It had not sought legal advice before entering the 2011 settlement agreement, and the subsequent compensation granted to Real Madrid too high. In conclusion, by means of the 2011 settlement agreement, a selective economic advantage was granted to Real Madrid and the State aid criteria of Article 107(1) TFEU were fulfilled. As a result, the amount of aid that Spain was required to recover from the football club amounted to €18.418.054,44 (€22.693.054,44 - €4.275.000) plus interests.[17]

The aftermath

On 2 September 2016, the municipality of Madrid officially ordered Real Madrid to repay €20.3 million, an obligation complied with by the club in early November. Nonetheless, the Real Madrid ‘saga’ has not come to an end. In fact, now that Real Madrid’s appeal is registered by the CJEU, it has become clear that it could take several more years until the case is finally closed. The pending questions are; what are the grounds of Real Madrid’s appeal and could the appeal be successful?

As a preliminary remark, neither Spain nor Real Madrid have claimed that the 2011 settlement agreement falls, or could fall, under one of the exceptions of Article 107(3) TFEU. In principle, this does not prevent Real Madrid from advancing a compatibility plea in front of the General Court, even though it did not raise the argument during the formal investigation.[18] Nonetheless, given the Commission’s wide discretion in applying the exceptions of Article 107(3)[19], the review of the legality of its decision is restricted to determining whether the Commission committed a manifest error in its assessment of the facts or misused its powers.[20] Moreover, as the Commission indicates in paragraph 135 of the decision, the aid granted to Real Madrid is considered as operating aid.[21] In other words, the aid releases an undertaking from costs which it would normally have to bear in its day to day activities.[22] Both the Commission and the CJEU have been very reluctant in permitting operating aid since it rarely facilitates the development of certain economic activities without adversely affecting trading conditions.[23]

In a press-release following the Commission’s announcement of its recovery decision, Real Madrid inter alia argued that the valuation method used in the 2011 settlement agreement is the “only objective method, as it is based in the cadastral value, legally obliging for all Spanish City Councils, and therefore is applied in all transaction between City Councils and third parties whether they are public or private”.[24] The Commission’s final decision takes note of the criticism expressed by Real Madrid regarding the Commission-assigned valuation study, especially concerning the (in its eyes erroneous) valuation method used for the study.[25] Though the Commission rebutted Real Madrid’s criticism[26], it will be up to the General Court of the EU (and potentially later the Court of Justice) to decide whether the Madrid Council used the correct valuation method when determining the 2011 value of las Tablas. This will not be completely new territory for the General Court, given the rich jurisprudence available on valuation methods.[27] As regards the standard of review applied by the General Court, Conor Quigley argues that “where the Commission is found by the Court to have committed a sufficient error of assessment, the decision will be annulled”.[28] It is settled EU case law, that the valuation method must be based on the available objective, verifiable and reliable data, which should be sufficiently detailed and should reflect the economic situation at the time at which the transaction was decided, taking into account the level of risk and future expectations.[29] The General Court remains, however, entitled to fully review and assess the valuation methods presented by the Commission and the interested parties.[30]

The Real Madrid case is too complex and intertwined to draw definitive conclusions on the possible outcome of the appeal. Nonetheless, the thorough State aid assessment conducted by the Commission in its decision should not be underestimated. This will be a tough “legal match” on an entirely new turf for Real Madrid.

[1] By way of reminder, Article 107(1) TFEU reads: “Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market”.

[2] See Oskar van Maren, “The EU State aid and sport saga: The Real Madrid Decision (part 1)”, Asser International Sports Law Blog, 15 November 2016.

[3] Commission decision SA.33753 of 4 July 2016 on the State aid implemented by Spain for Real Madrid CF, paras. 79 and 80.

[4] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, paras. 41-43.

[5] Interestingly enough, Spain’s comments contradict Real Madrid’s comments, according to which, as can be read in paragraph 46 of the decision, Spanish law did allow Las Tablas to be reclassified for private use in 1998 and beyond until a specific law that prohibits that was introduced in 2001.

[6] Commission decision SA.33753 of 4 July 2016 on the State aid implemented by Spain for Real Madrid CF, paras. 29-36.

[7] Since it was clear State resources were transferred, that the measure was selective and that it at least had the potential of affecting intra-Union trade, the other criteria of Article 107(1) TFEU were only briefly discussed.

[8] See also e.g. Commission decision SA.41613 of 4 July 2016, on the measure implemented by the Netherlands with regard to the professional football club PSV in Eindhoven.

[9] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 88.

[10] Case C-124/10 P Commission v. EDF ECLI:EU:C:2012:318, paras. 84, 85 and 105.

[11] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 89.

[12] Ibid, para. 92.

[13] Ibid, para. 94.

[14] Ibid, para. 29.

[15] Ibid, para. 108.

[16] Ibid, paras. 111-112.

[17] Ibid, paras. 139-142.

[18] See for example T-110/97 Kneissl Dachstein v Commission ECLI:EU:T:1999:244, para. 102.

[19]Case T-304/08 Smurfit Kappa Group v Commission ECLI:EU:T:2012:351, para. 90.

[20] Conor Quigley, “European State Aid Law and Policy”, Hart Publishing, 3^rd edition (2015), pages 738-739. See also for example T-20/03 Kahla/Thüringen Porzellan v Commission, ECLI:EU:T:2008:395, para. 115.

[21] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 135.

[22] See for example Case C-172/03 Heiser ECLI:EU:C:2005:130, para. 55.

[23] Quigley, page 276.

[24] Real Madrid further found it surprising that the Commission used a valuation made by an architect’s office in Barcelona to dictate their decision. Though many will find this comment by Real Madrid rather amusing, it once again shows that the rivalry between the two clubs (and cities) far exceeds the performances on a football field.

[25] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 89.

[26] Ibid, paras. 119-128.

[27] See for example T-366/00 Scott v Commission ECLI:EU:T:2007:99; and C-239/09 Seydaland Vereinigte Agrarbetriebe ECLI:EU:C:2010:778.

[28] Quigley, page 737. Based on the case law of the Court, it is not entirely clear whether a “sufficient error of assessment” by the Commission is enough for the Court to annul the decision.

[29] T-366/00 Scott v Commission ECLI:EU:T:2007:99, para. 158. See also Commission Notice C 262/1 of 19 July 2016 on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, para. 101.

[30] Case T-274/01 Valmont v Commission ECLI:EU:T:2004:266.