Class actions are among the most powerful legal tools available in the US to enforce competition rules. With more than 75 years of experience, the American system offers valuable lessons about the benefits and drawbacks of class actions for private enforcement in competition law. Once believed of as only a US phenomenon, class actions are slowly becoming reality in the EU. After the adoption of the Directive on damages actions in November 2014, the legislative initiative in collective redress (which could prescribe a form of class actions) is expected in 2017.[1] Some pro-active Member States have already taken steps to introduce class actions in some fashion, like, for example, Germany.

What is a class action? It is a lawsuit that allows many similar legal claims with a common interest to be bundled into a single court action. Class actions facilitate access to justice for potential claimants, strengthen the negotiating power and contribute to the efficient administration of justice. This legal mechanism ensures a possibility to claim cessation of illegal behavior (injunctive relief) or to claim compensation for damage suffered (compensatory relief).   

Class actions in antitrust and the sport sector

Throughout the years, US class actions have become an important tool to strengthen good governance in the sports sector. Due to alleged antitrust infringements, US sports organizations have been hit with a series of class action lawsuits.  The most recent and the most prominent example is the antitrust class action lawsuit O'Bannon v. NCAA. On 8 August 2014, the US District Court ruled in favour of former UCLA basketball player O'Bannon and 19 others, declaring that the National Collegiate Athletic Associations’ (NCAA) longstanding refusal to compensate athletes for the use of their name, image and likenesses (NILs) violates US antitrust laws. Previously, the college sports governing body required student-athletes  to sign ‘Form 08-3a’  in which they authorize the NCAA to use their “name or picture to generally promote NCAA championships or other NCAA events, activities or programs”, without receiving compensation. If the NCAA loses the appeal, it must allow schools to give athletes some of the money they bring in by licensing their NIL. For further discussion on the O’Bannon case, see my previous blog.

In the EU, however, antitrust class actions remain an underrated remedial option in EU competition policy and the sports sector (the same is true for competition law in general). As is well known, sports federations often have practical monopolies within certain markets. In particular, due to the substantial economic revenues of these markets, sports federations have the tendency to abuse their dominant position in contradiction with Article 102 TFEU. It is not unthinkable that the positive experiences with class actions in the US may serve as an inspiration for victims in the EU to go against powerful sports organizations. Here, useful insights may be derived from the German Handball case, which can be used as an example to explore the potential of class actions as a remedy. On 15 May 2014, German Bundesliga teams (30 of them) won the antitrust case against the International Handball Federation (IHF) and the German Handball Federation (DHB) at the regional court of Dortmund (Landgericht). For further discussion on the 2014 Dortmund judgment, see here.  

The 2014 Dortmund judgment: A comparative analysis with the O’Bannon case

The Court in Dortmund held that an obligatory release system of players for activities of their respective national teams without compensation constitutes an abuse of a dominant position prohibited by German competition law (§ 19 Gesetz gegen Wettbewerbsbeschränkungen, GWB) and Article 102 TFEU, while it also breaches the principle of good faith in contractual performance.[2] Until the judgment, German Bundesliga clubs had no other way but to release their players if they were invited to join their national team within the international calendar. According to the IHF Player Eligibility Code, “a club having a foreign player under contract is obliged to release such player to his National Federation if he is called up to take part in activities of that federation's national team” (Article 7.1.2). Furthermore, a club releasing a national player was not entitled to receive any kind of compensation and in the event of personal injury the insurance coverage was not provided (Articles 7.2-7.3). After the judgment, the IHF and the DHB should pay a fair compensation for the time of the release of the player.  

On the one hand, both cases have striking similarities. The judgments concern antitrust infringements by powerful sports federations, the IHF (also the DHB) and the NCAA respectively. Professional clubs / student athletes in both cases are not entitled to compensation due to the rules that have been set by sports organizations. The German case concerns the obligation for professional clubs to release players to national team events without receiving compensation, while the US case concerns the prohibition for student athletes to receive compensation from NIL.

On the other hand, although both cases concern antitrust infringements by the sports organizations, they also have vital differences. Most importantly, the O'Bannon case is an antitrust class action lawsuit filed against the NCAA. This class action proved to be a powerful instrument that managed to jeopardize the long-standing fundamental principle of amateurism on which the whole economic and social system of the NCAA lies. Until now, however, the 2014 Dortmund judgment has been an ordinary litigation according to German law. However, it does share some similarities with O’bannon that may justify a class action in the form of an injunctive relief (at least, in the first instance), subject to some exceptions.  

Indirect class action for an injunction

What is injunctive relief in class action cases? According to the European Commission, the courts should treat claims for injunctive orders requiring cessation of or prohibiting a violation of rights granted under EU law in order to prevent any or further harm causing damages.[3] According to the German law, in case of danger of recurrence, the infringer has to refrain from his conduct.[4] Perhaps surprisingly, the 2014 Dortmund judgment already fulfils the conditions for an indirect class action for an injunction.

First, a group of claimants (a total of 30 Bundesliga clubs) sued the IHF and the DHB before the regional court of Dortmund. They argued (together) that mandatory release of players to the national team constitutes an abuse of a dominant position prohibited by EU and German competition law. The Dortmund court ruled in favour of the handball clubs. It seems that handball clubs only seek the cessation of the unlawful practice, yet they have not claimed the compensatory relief, aimed at obtaining compensation for damage suffered.  

Second, the claim has been initiated by victims of antitrust infringement. Under the GWB, victims are allowed to bring private actions for injunctive relief in 101 and 102 TFEU infringement cases (Sec. 33).

Third, the Forum Club Handball (FCH) financially supported the court case. This may appear as third-party financing since the financial support was provided by a private third party who is not a party to the proceedings.[5] 

Although the handball clubs dropped a quiet collective bombshell, the action cannot be considered as a real class action. Simply, there was no intention to pursue a class action. Another point is that the legal standing to bring the representative action has been limited to a law firm. In Germany, collective antitrust action can be brought by a body, which has a legal standing and to whom the claims of victims of a cartel have been assigned (Sec. 33 (2) GWB). Similarly, under Sec. 8 of the German Unfair Competition Act (UWG), the claims can be sought by: a) competitor; b) qualified entities listed with the Federal Office of Justice or, in case of foreign entities, with the European Commission; and (c) by Chambers of Industry and Commerce or Craft Chambers. For these reasons, the action brought by the clubs cannot be classified as a class action, because they have chosen to be represented by an attorney. It is not unthinkable that eventually the case will appear before the court as a follow-on compensatory class action, if the IHF and the DHB lose the appeal (if necessary, the proceedings before the Court of Justice).   

Compensatory class action: why it could be a big deal?

If the handball clubs achieve an injunction in the final Court decision, the follow-on representative action for damages may be brought against the IHF and the DHB. Some provisions in German law facilitate the incentives to bring damages claims for antitrust infringements. According to Sec. 33(4) GWB, antitrust class actions should be brought after a final decision of a public authority finding there has been a violation of competition law. Furthermore, the 8th Amendment of GWB broadens the scope of the legal standing in such a way that all associations of undertakings that are affected by an infringement, as well as consumer associations, are in principle able to claim the enforcement of German competition law in courts (including by demanding damages). Yet it appears that the UWG provisions are not applicable in this case. Under Sec. 8 available remedies allow to pursue only injunctive relief. Under Sec. 9 damages are claimed by competitors (only). Sec. 10 aims at skimming off profits (paid to the Treasury), but not at compensating victims. Due to the fact that illegal profits go to the Treasury in successful cases, the handball clubs would potentially not be happy with the expected outcome.

If the IHF and the DHB lose the appeal, the handball clubs can to a significant extent rely on the final decision. Considering that an indirect form of collective action has already been pursued by the handball clubs in the first instance, a common consent of the parties involved in the case (the major condition for class action) can be easily achieved. Still, the major concern is to solve the issue of legal standing. An actual example of class action that goes with the grain of the German law and is the Cement Cartel Case, in which 28 damaged companies purchased the cartel-related claim to Cartel Damage Claims group (CDC).[6] It is a Brussels based professional litigation that turns burdensome claims into valuable assets, taking the hassle of quantification and subsequent enforcement. The substantiation of the claim is based on evidence gathered from the cartel proceedings and the damaged companies.  In the context of the German handball case, CDC could commence the acquisition of damages claims from handball clubs and then file the collective antitrust damages action against the IHF and the DHB. This is in line with the Sec. 33 GWB under which CDC has legal standing and to whom the claims under Art. 101 and 102 TFEU have been assigned. An action brought by CDC is attractive to the handball clubs because it would strengthen the negotiating power and would reduce litigation costs, as the claim is led (or even purchased) by CDC.  

If the conditions for the admissibility of class action are fulfilled, the IHF and the DHB should fear potential damages. In particular as a result of the inconsistent application of the Player Eligibility Code, the claimants are in a favourable position. Despite the fact that the Code states that “a club releasing a national player shall not have any claim to compensation”, the IHF agreed to pay compensation to the clubs for the release of their players to the national team during the 2011 and 2013 World Championships. To make matters even worse, the IHF provided insurance for the players’ salaries in case of personal injury (contrary to the Article 7.3.2).[7] This suggests that in principle a compensation and insurance coverage are compatible with the Eligibility Code and thereby the interests of the IHF are not jeopardized. The perceived inconsistency provides more clout to the claimants, suggesting that the harm has already been presumed. If the plaintiffs achieve an injunction in Court, they potentially may claim broad compensation, including other undisputed World Championships[8], the Olympic Games, continental championships as well as the qualification matches and tournaments for these events. However, it is even not the worst potential outcome for the IHF. Indeed, due to the Court of Justice (CJEU) decision in Case C-302/13 flyLAL-Lithuanian Airlines, potentially all handball clubs from EU Member States can claim damages from the IHF, if they are part of the federation. In that case, the Latvian Supreme Court sent a request for a preliminary ruling under Article 267 TFEU, asking whether a Lithuanian court judgment ordering provisional measures in a damages case can be recognized and enforced in Latvia. The CJEU ruled that actions brought by undertakings seeking redress or compensation for damage resulting from alleged infringements of EU competition law, can be qualified as a ‘civil and commercial matter’, within the meaning of Article 1(1) of Regulation No 44/2001, and enforceable in Latvia under the provisions of the said regulation. Thus, the CJEU opened a wealth of opportunities for handball clubs (if the final decision in Germany is successful) to claim damages wherever they are based on the EU’s territory. Given that follow-on damages claims have a high success rate, the winning chances are high. Hence, since the common legal and factual features of each individual claim are observed, the class action would be an effective instrument to obtain redress, also adding to the deterrence goals.

Compensatory class actions: a powerful instrument to ensure better governance in sport (federations)?

If the German handball clubs bring a compensatory class action, it has the potential to become an important precedent for many other sports. One successful case may open a Pandora’s Box that would put a lot of pressure on the sports federations’ regulations.  

By forming the group, claimants (such as handball clubs) are able to bundle individual claims and thus trigger efficiency gains by tackling common legal, factual and economic issues collectively.[9] As such, the defendants can handle the risks attached to private litigation and the probability of winning the case increases since multiple plaintiffs have larger financial means. Therefore, a group of claimants having larger financial means can employ more qualified lawyers and economic experts for antitrust cases. A package of collected claims from victims are easier introduced and defended before the court, meaning that damages are proved with sufficiently high probability and thus the chance of receiving compensation is high. When focussing on sanctions, class actions appear to deter abusive conduct, therefore strengthening good governance in sport. If all victims can sue a sports federation, the group will force the infringer to internalize the negative effects of the damage caused as close as possible to the full-compensation principle that is embedded in the EU reform on private enforcement.[10] Sport entities, knowing that class actions may be used against them and anticipating that the expected cost of the infringement may increase significantly, would think twice before violating the competition rules. The achievement of better governance would solve, or at least diminish, the problem of under-enforcement of EU competition rules in the sports sector. Even if the handball case does not result in an antitrust class action, victims from other sports should pay particular attention to such a fruitful litigation model.

[1] It was adopted Commission Recommendation of 11 June 2013 on common principles for collective redress mechanisms in the Member States for injunctions against and claims on damages caused by violations of EU rights, COM (2013) 3539/3, 11.6.2013 (‘Recommendation’).

[2] German Civil Code, Section 242 (“An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration”).

[3] Recommendation COM (2013) 3539/3, sec. 19. In the area of injunctive relief, the European Parliament and the Council have already adopted Directive [2009/22/EC OJ L 110, 1.05.2009]  on injunctions for the protection of consumers' interests

[4] GWB, sec. 33.

[5] Recommendation COM (2013) 3539/3, Sec 14-16.

[6] http://www.carteldamageclaims.com/portfolios/cdc-german-cement-cartel/. On 17 December 2013 the Regional Court of Düsseldorf dismissed the action in its entirety [Case No. 37 O 200/09]. CDC has appealed the judgment to the Higher Regional Court in Düsseldorf.

[7]See http://www.forumclubhandball.com/?p=707 and http://www.forumclubhandball.com/?p=707. The outcome had been reached after the negotiations with the FCH in 2010-2011.

[8] The IHF decided to pay compensation for the release of players to the 2011 and 2013 World Championships.

[9] Z. Juska, ‘Obstacles in European Competition Law Enforcement: A Potential Solution from Collective Redress’ (2014) 7 EJLS, 149.

[10] Directive of the European Parliament and of the Council on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union’ COM (2013) 404 final, 11.6.2013

On the first of May 2015, the Spanish Government finally signed the Royal Decree allowing the joint selling of the media rights of the Spanish top two football leagues. The Minister for Sport stated that the Decree will allow clubs to “pay their debts with the social security and the tax authorities and will enable the Spanish teams to compete with the biggest European Leagues in terms of revenues from the sale of media rights”.[1]Although the signing of the Royal Decree was supposed to close a very long debate and discussion between the relevant stakeholders, its aftermath shows that the Telenovela is not entirely over. 

This blog post will first provide the background story to the selling of media rights in Spain. It will, thereafter, analyse the main points of the Royal Decree and outline how the system will work in practice. Finally, the blog will shortly address the current frictions between the Spanish League (LFP) and the Spanish football federation (RFEF). 

I. The road to the royal decree 

The old individual selling system 

The individual selling model of media rights in Spain was adopted in the 1997/1998 season. The Spanish individualized marketing system required that the TV operators and the clubs sign individual agreements over the media rights for La Liga games. Obviously, not all the agreements were born equals. The two biggest clubs in Spain, Real Madrid and FC Barcelona, were soon deriving much more revenue from TV rights as the other clubs. Hence, it is not surprising that latter have been asking for a bigger share of the TV rights revenues since then. For the 2014/15 season, for example, Barcelona and Madrid earned 140 million € each, whereas Córdoba, Eibar and Deportivo la Coruña have only earned 17.5 million €. Even the last winner of La Liga (Atlético de Madrid) has received only 45 million € (3.1 times less than Barcelona and Madrid). Meanwhile, the overall sum paid by the operators to all the teams (MEDIAPRO Agency and PRISA Media Group) reached 742.5 million €/year for a three-year deal (2012/13 to 2014/15).[2] 

Due to the delay in approving the Royal Decree, some clubs (such as Barcelona) decided to sign an individual contract with a TV operator for the 2015/16 season. Consequently, it is unlikely that La Liga will be able to collectively sell its media rights for the next season. However, the new system should be in place for the 2016/17 season.  

Disagreements prior to the Royal Decree 

The negotiating process prior to signing the Royal Decree involved three main stakeholders: the Spanish Government (CSD –High Sports Council- and the Minister for Sport), the RFEF and, obviously, the LFP. The most difficult hurdle to overcome was the RFEF’s demand of a non-negotiable 2% share of the broadcasting revenues. Both the CSD and the LFP refused to budge and considered that the RFEF should not get more than 1%. The negotiations were especially tense as a consequence of a personal feud between the presidents of the main bodies involved.  

Why a Royal Decree? 

Notwithstanding the RFEF’s outspoken disapproval, the Royal Decree 5/2015 was adopted by the Council of Ministers on 30 April 2015 and was published in the Official Journal on the following day. In principle, a Royal Decree is only used for extraordinary and urgent matters and the Spanish Parliament must consolidate it in a law 30 days after its approval, which was done, last week. Nevertheless, one may question whether this was truly a matter of urgency requiring the introduction of a Royal decree. According to the explanatory memorandum of the Royal Decree it is justified on the basis of the public interest in securing a new system to commercialize the media rights. The justifications included in the Decree read as follows: 

“Concerning the media rights of professional football competitions, three reasons justify the need for an urgent response by the Government: first, the undisputed social relevance of professional sport, second, the repeated and unanimous demands to intervene from all parties involved and, finally, the need to promote competition in the market for the ‘pay-per-view’ television.”[3]

II. The new LFP’s media rights collective selling system 

The LFP’s media rights remain owned by the clubs. However, the football clubs are obliged to assign the right to commercialize them to the organizing bodies of the competition, i.e. the LFP (first and second division) and the RFEF (the cups).[4] 

The conditions for the joint selling of the media rights

In accordance with article 4 of the Royal Decree, the organising bodies will commercialize the media rights on an exclusive or non-exclusive basis.  Moreover, the procedure must be fair and equitable. The LFP and the RFEF will define the different packages commercialized in line with Article 4(4) of the Royal Decree.  These conditions will be attached by the organizing body into categories (‘packages’), depending whether it is on an exclusive basis or not, the time of the game and the duration (maximum 3 years), in accordance with the Article 4(4). The structure of the packages will be set out when the collective selling takes place.  

The specific distribution key of the revenues derived from the collective selling is enshrined in Article 5: 90% of the revenues will go to the first division clubs, and 10% to the second division clubs.   

Graph: Distribution of the money regarding the media rights of the first and second division:

Payments by the clubs after the distribution of revenue: The overdue debts to the Public Revenue and the indirect solidarity contributions.  

After receiving their share of revenue from the media rights, the clubs must first cover their overdue debts with the Spanish tax authorities. Indeed, Article 6(2) holds that “(t)he payment of overdue and payable debts owed to the ‘State Agency Tax Administration’ and the ‘General Treasury of the Social Security’ shall be considered on a preferential basis”. No club will be able to carry out the indirect solidarity payments foreseen by Article 6(1), if they do not reimburse their outstanding liabilities with the public authorities.

It is a well-known fact that Spanish football clubs have accumulated large amounts of debts over recent years. Indeed, at the end of the year 2013, the debt of the Spanish football amounted to 3.600 million € in total, with “around 700 million” to the public authorities. The Royal Decree is also aimed at tackling this longstanding debt “addiction” of many Spanish football clubs.                                             

Furthermore, in accordance with article 6(1) of the Decree, the clubs will have to make solidarity contributions to specific funds and Institutions promoting football and sport. These contributions will only be made after the obligatory contributions to the tax authorities have been paid. The five contributions include:

1. 3.5% of the broadcasting revenues will be used to create a ‘Compensation Fund’ in order to assist relegated clubs from the first Division to the second and from the second division to the third division (in Spain known as the second division “B”). Out of the Compensation Fund, 90% will flow to the relegated clubs from the first Division and 10% to the relegated clubs from the second Division.

2. 1% of the broadcasting revenues will go to the LFP for the purpose of promoting the League on the domestic and international market.

3. 1% of the broadcasting revenues will go to the RFEF as a solidarity contribution to develop amateur football[5].

4. Up to 1% of the broadcasting revenues will go to the Consejo Superior de Deportes (CSD), a Spanish Governmental body encouraging the development of sport in Spain. The goal of this contribution is to finance the social protection of high-level athletes (not just football players).

5. A further 0,5% of the broadcasting revenues will go to the CSD, and shall be distributed in the following way:

   1. Aid to female football clubs participating in the Women’s First Division, covering social security contributions.

   2. Aid to football clubs participating in the Second Division “B”, in order to pay social security contributions.

   3. Aid to associations or unions of players (‘AFE’), referees, coaches and trainers. 
      

The Spanish cup and Supercup revenue-sharing criteria

The packages will be made according to the criteria similar to those applicable to the LFP’s media rights. The revenue generated by the RFEF’s competitions will be shared as follows (Article 8):

1. 90% will be directly allocated to the LFP teams (first and second division). This money will be distributed to these clubs using similar criteria as for LFP Competitions. The revenue share depends on the results obtained by the teams in the cup. The distribution envisaged foresees 22%, for the winner; 16%, for the runner-up; 9%, for the semi-finalists; 6%, for the quarter-finalists; and 2,5%, for the clubs who got knocked-out the round of the last 16.

2. 10% will be used for the promotion of lower (semi) professional football and amateur football, that is to say, for clubs who play in the cup but are not in first or second division.

III. The Problem with the Decree: RFEF and AFE’s Opposition 

The main beneficiaries, i.e. the clubs, are quite exultant after the publication of the Royal Decree. Nonetheless, two bodies believe that they are the principal losers of the distribution model adopted, namely the RFEF and AFE (Spanish Professional Footballer's Association). In fact, the RFEF and AFE’s discontent is such that they have threatened to organize a strike paralysing the last few games of the current season, should the Decree not be renegotiated.

RFEF

The RFEF wanted 2% of the total revenue for itself, but the Decree allocated to the RFEF only 1% of the total. , As discussed above, this share will be paid indirectly by the club as outlined in Article 6(1). This implies that the federation will get paid only once, and if, the clubs have serviced their overdue debts with the public authorities.

In addition to this, the Federation did not obtain any compensation for women’s football or (semi) professional football in lower divisions. The competence for supporting women’s football and lower professional football rests with the CSD even though it is the RFEF that is in charge of the organisation of the competitions. In other words the RFEF has no control over the money flowing into the competitions it is responsible for. 

AFE

The frustration expressed by AFE (Professional Footballer's Association) is also understandable. The players have not obtained a fixed share of the broadcasting revenues, as is the case in England (1.5%) or France (1.09%). Nevertheless, according to the Royal Decree, AFE will receive from the CSD a contribution of “up to 0.5%” (Article 6(1)(e), par. 3). Moreover, the players’ representatives claim they were unjustifiably excluded from the negotiations. Without the ability of partaking to the negotiations, they were unable to secure higher guarantees for the players regarding the payment of the salaries in the lower divisions of Spanish football. Given that many players do not receive their salaries on time in the lower Spanish divisions, this money would have been a potential solution to a chronicle problem.

The strike

In return, AFE (supported by elite players like Casillas, Xavi, Piqué or Ramos) threatened with a strike. For its part, RFEF suspended all the Spanish football competitions. In response to these moves, the LFP lodged a case against AFE in the Spanish Courts, requesting the suspension of the strike and the recognition of its illegality as it would lack a legitimate ground and would violate the existing collective bargaining agreement. 

The Audiencia Nacional (the National High Court in Spain) decided on 14 May in a preliminary decision to suspend the strike. This decision ensured that the last two games of the season and the final of the Copa del Rey will be played. The case is still pending and awaits a decision on the merits. The hearing will be held on 17 June. The parties have already commenced negotiations in order to reach an agreement before the hearing. But, given that the Royal Decree has been ratified by the Parliament, very few substantial changes to the system put in place by the Decree can be made. Thus, only minor peripheral adjustments are to be expected.  

Conclusion

In my opinion, there are two key aspects that must be kept in mind. First, the duty to pay overdue debts to the public Authorities. This mandatory requirement cannot be found in any other countries and is clearly linked with the specific problems that exist in Spanish football with regard to the clubs’ indebtedness and the enmeshment of local politicians in their management. On the other hand, the other key change introduced by the Royal Decree will be that La Liga will be in a position to negotiate a much hoped for gigantic TV deal with the broadcasters. A deal, which will not exclusively benefit Real Madrid and FC Barcelona. The economic gap between these two teams and the rest of the pack was growing bigger and bigger over the last years. With the new system in place, this gap is poised to be reduced. Nevertheless, the distribution method still heavily favours the status-quo. The traditionally large clubs are rewarded for having a large number of supporters, and for their past performances. Hence, it is still virtually impossible for a smaller Spanish clubs to become, over a short time span, one of the top-earning clubs in La Liga.

[1] IUSPORT: “Aprobado el Real Decreto-Ley de los derechos audiovisuales del fútbol”

http://iusport.com/not/6713/aprobado-el-real-decreto-ley-de-los-derechos-audiovisuales-del-futbol/

[2] MARCA, “Así será el reparto del dinero televisivo”, available at http://www.marca.com/2015/05/01/futbol/1430467483.html

[3] RD 5/2015, Explanatory Memorandum.

[4] Article 2 RD 5/2015.

[5] This percentage may be expanded by agreement

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.