A warning
addressed to fans of French teams featuring in the recently launched video game
NBA 2K15: Hurry up! The last jump ball for Strasbourg and Nanterre in NBA 2K 15
may occur earlier than expected. The French Labour Union of Basketball (Syndicat
National du Basket, SNB) is dissatisfied that Euroleague and 2K Games did not
ask (nor paid) for its permission before including the two teams of Pro A in
the NBA 2K15 edition. What is at issue? French
basketball players’ image rights have been transferred to SNB, which intends to
start proceedings before the US Courts against 2K Games requesting 120.000
euros for unauthorized use of the players’ image rights. SNB is clear: it is
not about the money, but rather to defend the players’ rights.[1]
Strasbourg and Nanterre risk to “warm up” the virtual bench if this litigation
goes ahead.
Source: http://forums.nba-live.com/viewtopic.php?f=149&t=88661&start=250
The clash between
SNB and 2K Games, albeit unprecedented at the European level, should not come
as a surprise. The commercialization of athletes’ image rights has become a sine qua non component of sports
marketing.[2]
The transfer of professional players’ image rights to their clubs or third
parties is for some of them more lucrative than their salaries. In the
framework of international basketball, this has led to the proliferation of
image rights contracts, signed by the players in addition to their employment contracts.
While the legal nature of image rights and their unauthorized use by third
parties has been recently extensively debated- in the wake of US College Athletes image rights cases
before US Courts which will be discussed in the second part of this blog series[3]-, image rights contracts and their enforcement by basketball players
before the Basketball Arbitral Tribunal (BAT)[4]
are still very much uncharted territories.
This blogpost will
look at the basketball players’ image rights contracts in a three-pronged
approach. First, we will explain how image rights contracts in international
basketball serve as tax loopholes by the clubs, which increasingly force
players to sign them (I). Thereafter, based on BAT’s case law, we will attempt
to build a legal roadmap with regard to the enforcement of image rights
contracts by players. In this light, we will examine the relationship between
the main contract and the image rights contract as well as the role of the
different dispute settlement clauses included in the different contracts when
assessing BAT’s jurisdiction (II). Finally, we will analyse the position of the
BAT in enforcing image rights contracts and the significant impact of its
awards in the basketball world, taking into account the unique features of
basketball arbitration (III).
I. Image rights
contracts in international basketball: Cherchez l’argent!
The use of image
rights contracts leads to two possible scenarios. In the first one, which is
the most common, a player signs an employment contract with a club indicating
the player’s remuneration net of all taxes. This initial contract is usually
characterized as the “main agreement”[5]
or “master agreement”[6].
Thereafter, the club approaches the player with two additional contracts: the
league contract which provides for a remarkably lower monthly salary than the
main contract; and an image rights contracts, where the player assigns his
rights to a third party, an image rights company. The league contract reporting
a much lower wage than the wage actually offered to the player is sent to the
league and is used for tax purposes. In parallel, the club signs an image
rights contract with the image rights company to which the player has
previously assigned his intellectual property rights. According to this
contract, the company owns the player’s image rights. This means that the
player assigns to the club the use of these rights for commercial and
promotional purposes. As a result of this assignment, the club undertakes the
obligation to pay a specific amount of money per month to the company. Once the
club pays the image rights company, the image rights company transfers this
amount to the player.
In order to understand
this quite complex scheme, let’s use a concrete example. A player signs with
the club a main contract indicating a remuneration of EUR 300.000. Thereafter,
the player signs the league contract indicating a remuneration of EUR 30.000 by
the club, while the club signs a contract with an image rights company and
undertakes to pay a total amount of EUR 270.000. Finally, the player receives
the amount of EUR 270.000 by the image rights company. Thus, it is clear that a
combination of the league and the image rights contracts amounts to sum
foreseen in the main contract (30.000+270.000=300.000). While this fictitious
transfer of money through a third party does not seem to have a practical
effect on the player’s remuneration, the split of the main contract into two
separate agreements helps the club to tailor its tax obligations. In fact, the
club would in principle have had to pay taxes on the full amount of EUR 300.000.
Nonetheless, by breaking up the payment into different amounts, the club pays
taxes and social contributions for the individual income of EUR 30.000 only. True,
the club is also obliged to pay the taxes due on the EUR 270.000 transferred to
the image rights company. However, taking into account that the tax rate over intellectual
property rights is typically much lower than that concerning individual income,
the club gains significant tax benefits.[7]
In the second
potential scenario, in parallel to the main contract, the player signs a side
agreement with the club, which explicitly splits the net compensation into an
amount derived from the league contract and an amount derived from the image
contract. Subsequently the player enters into an exclusive license agreement
with an image rights company to which he assigns the use of his image rights
receiving as compensation the amount stipulated in the side agreement. At the
same time, the club enters into a sublicense agreement with the image rights
company in order to use the player’s image rights, by paying the company the same
amount of money that the company then pays to the player under the license
agreement.
In short, this scheme
is a fiction invented by the clubs in order to get significant tax advantages.
While this is done pro forma, without
any intent of changing the player’s rights and obligations under the main
contract[8],
this tax evasion scheme can lead to the club evading also its contractual
duties when a club fails to pay the player. In this case, with respect to any
outstanding remuneration, can the player enforce the image rights contract
against the club in BAT proceedings?
II. How the BAT
establishes its jurisdiction on image rights contracts disputes
An overview of the
BAT case law shows that players bring a dispute against their club for
outstanding payments on the grounds of a broadly drafted arbitration clause in
the main contract, which provides for BAT’s jurisdiction over any dispute
arising out of, or in connection with the main contract. However, as is already
discussed, a player’s remuneration is often based on a matrix of several
contracts – the main contract, the league contract, the image rights contract
and/or the license agreement-, which may contain a dispute resolution clause of
their own that does not refer to the BAT. Therefore, when a dispute for
outstanding payments is brought before the BAT, the arbitrator first has to
determine whether the claim made by the player falls within the scope of the
BAT arbitration clause included in the main contract. Thus, the arbitrator must
consequently determine the relation between the main contract and the other
contracts, including the image rights contracts.
The difficulty emerges
from the fact that the contracts do not define how they should inter-relate. As
a result, the BAT has to interpret the contracts and decide whether the
subsequent contracts actually supersede the main contract and the applicable
BAT arbitration clause or whether they only supplement the main contract. Namely,
the clubs, relying on the fact that the image rights contract is signed after
the main contract and referring to the legal principle lex posterior derogate legi priori[9],
claim that the dispute settlement provision contained in those contracts
override the BAT arbitration clause included in the main contract.[10]
In order to decide
on its jurisdiction and the underlying relation between the several contracts,
the BAT has consistently used a double test based on the common intention of
the parties and the wording of the BAT arbitration clause contained in the main
contract. At first, the BAT examines whether the main contract includes all the
essential elements with regard to the player’s rights remuneration. Then, it
elaborates whether these terms reflect the parties’ common intent under the
main agreement to guarantee the payment of the full salary to the player,
irrespective of any modalities that would be agreed upon in subsequent
contracts as to the mode and schedule of payments.[11]
If the main contract is seen as containing the common agreement of the parties
on the full amount of remuneration, any further agreement referring to the way
this payment is organized has only a supplementary function. The second
criterion is based on the interpretation of the BAT arbitration clause. The
main contract usually contains a broad BAT arbitration provision that covers
any dispute arising from the main contract. Once established that the common
intent of the parties is to guarantee the salary stipulated in the main
contract, the broad terms of the arbitration clause necessarily encompass any
dispute relating to the non- payment of any part of the player’s total salary. Once
these criteria are fulfilled, the BAT asserts that the outstanding payments
deriving from the image rights contracts fall within the scope of the BAT
arbitration clause.
Furthermore, in
some cases, the BAT has introduced other criteria, such as the necessity to
establish a link between the contracts. In the 0115/10 case, the BAT
established a close link between the main contract and the image rights
contract, in a way that the image rights contract could not exist but for the
original contract.[12]
Interestingly enough, this rather broad interpretation has been inspired by the
liberal case law of the Swiss Federal Tribunal, which requires that the
interconnection between different contracts be taken into account when
examining the substantive validity of an arbitration agreement.[13]
It is remarkable
that until now, when examining the jurisdictional basis, the BAT has
consistently adopted a rather liberal approach by piercing the fictitious veil between
the club, the player and the third party when using overlapping contractual constructions.
However, on the merits, the BAT’s approach is not totally consistent.
III. Enforcing
image rights contracts: the BAT’s enigmatic approach
In a series of
awards, the BAT has found the clubs liable for the breach of the image rights
contract and the subsequent outstanding payment of the player.
Applying the legal
roadmap established above, the BAT has addressed the supplementary role of the
subsequent contracts in organizing the payment schedule of the full remuneration
of the player provided in the main contract. Indeed, from a contractual point
of view, the terms of the main contract are deemed sufficient to entitle the
player to claim the entire amount owed to him on the basis of that contract
alone.[14]
In this sense, the fact that image rights payments have been made via a third party
does not free the club from its duty to guarantee the full remuneration of the
player.[15]
To reinforce this argument, the BAT has even asserted that the only case in
which the club would not be found liable for breach of image rights contract
would be the case where the image rights contract explicitly provided a waiver
of the player’s claims against the club relating to image rights.[16]
However, this - until
recently- consistent approach has been overturned in the latest BAT award concerning the enforcement of
image rights contracts.[17]
In that case, the image contract was signed between a company to which the
claimant assigned the rights to his promotion and a company managing the image
and endorsement rights of the club. Although having confirmed the supplementary
role of the image rights contract with regard to the employment contract at
hand, the arbitrator chose to deviate from the entrenched interpretation in BAT
jurisprudence of the intent of the parties. Namely, the arbitrator interpreted
the parties’ behaviour as intending to discharge the club of its obligation to
guarantee the full amount of the player’s salary under the main contract.
While, in this
particular case, the company to which the player assigned his image rights
could have been found liable for not transferring the missing amounts to the
player, the BAT’s approach is questionable in that it undermined the club’s
liability under the main contract. At this point, it should be highlighted that
BAT decides all cases ex aequo et bono.[18]
In this light, it is the opinion of the author of this blogpost that it would
be contrary to general considerations of justice and fairness to consider that
the club could take advantage of a tax-optimising structure to no longer
guarantee principal amounts contractually due to the player. In other words, it
would be unfair to consider that the player has implicitly renounced the
guarantees offered to him by the club under the main contract.
Conclusive Remarks
The system of image rights contracts in
international basketball is fragile. Based on the lack of legal certainty in
BAT jurisprudence, this blogpost has evidenced the risk that clubs use the BAT to
escape their obligations deriving from the image rights contracts. Taking into
account that BAT awards are directly enforceable under the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards, subject only to
an appeal on the limited grounds provided in Article 190 Swiss Private
International Law Act (PILA)[19],
a denial of the BAT to enforce image rights contracts against the clubs leaves
the players deprived of any real legal avenue to vindicate their rights. In
this sense, a consistent approach of the BAT with regard to the intimate
relation existing between the image rights contract and the main employment
contract would not only be desirable, but would also be in line with the ex aequo et bono principle.
[1] Johan
Passave-Ducteil, the president of SNB remarks in l’Equipe:"Ce n’est
pas une histoire d’argent, on défend le droit des joueurs"
[2] D-R
Martens, ‘An innovative System for Resolving Disputes in Sport (only in
Sport?)’ (2011) 1-2 International Sports Law Journal 54, 60.
[3] Edward O’
Bannon et al v National Collegiate Athletics Association, Electronic Arts Inc
and Collegiate Licensing Company ( US District Court, 08.08.2014) and NCAA
Student-Athlete Name and Likeness Licensing Litigation, 724 F. 3d 1268 (9th
Cir. 2013).
[4] The
tribunal was established by FIBA in 2006 under the name “FIBA Arbitral Tribunal
(FAT)”. In accordance with the 2010 FIBA General Statutes, the tribunal was
renamed into “Basketball Arbitral Tribunal (BAT)”.
[5] Vladimir
Golubovic v Basketball Club Union Olimpija Ljubljaba, BAT 0174/11,
para 6.
[6] Pawel
Kikoeski v KK Union Olimpija Ljubljana, BAT 0155/11,
para 23.
[7] In
the case where the image rights company is seated in a tax haven state, the tax
benefits are almost double for the club.
[8] BAT
0155/11(n 6), para 51. See also, 0174/11(n 5) para 10: “The Club
suggested the image contract because it served tax driven purposes only. That
was the only purpose for such a contract, and it was irrelevant for the player,
because his remuneration were settled in net amount (tax free)”.
[9] i.e a
subsequent law imparts the abolition of a previous one
[10] Richard
Hendrix v Club Baloncesto Granada, FAT 0115/10, para 36.
[11] FAT
0115/10(n 10), para 44, Dalibor
Bagaric v Fortitudo Pallacanestro SrL FAT 0105/10 para 49, Lazaros
Papadopoulos v Fortitudo Palacanestro Societa’ Sportica Dilettantistica a R.L.
FAT 0071/09 para 61, Darryl
Eugene Strawberry and Bill Duffy International Inc v Fortitudo Palacanestro
Societa’ Sportica Dilettantistica a R.L. FAT 0067/09, para 66.
[12] FAT
0115/10 (n 10), para 41.
[13] Ibid, para 43 where the arbitrator makes an extensive
reference to Swiss Federal Tribunal case law: Decision of the Swiss Federal
Tribunal of 16 October 2003, reported in ATF 129 III 727, 735 using the
word “liberal” with reference to ATF 121 III 38, 45
and the decisions 4P.126/2001 of 18 December 2001
reported in ASA Bulletin 2002, p. 482; 4C.40/2003 of
19 May 2003 at 4, reported in ASA Bulletin 2004, p.
344; see also decision
4P.230/2000 of 7 February 2001 reported in ASA Bulletin 2001, p. 523.
[14] FAT
0067/09 (n 11), para 83.
[15] FAT
0071/09 (n 11), para 76.
[16] FAT
0115/10 (n 10), para 64.
[17] Steven
Smith v Virtus Palacanestro Bologna S.p.A, BAT 0413/13
[18] BAT
Arbitration Rules, Article 15.1: "Unless the parties have agreed otherwise
the Arbitrator shall decide the dispute ex
aequo et bono, applying general considerations of justice and fairness
without reference to any particular national or international law ".
[19] In fact,
according to Article 190 (2) PILA, only serious procedural defects or rulings
on substance that are contrary to international public policy may constitute
grounds to set aside an award. See A Rigozzi, ‘Challenging Awards of the Court
of Arbitration for Sport’ (2010)1 Journal of International Dispute Settlement
217, 217-254.