Part Two of this series looked at the legal challenges FFP has faced in the five years since the controversial ‘break even’ requirements were incorporated. Those challenges to FFP’s legality have been ineffective in defeating the rules altogether; however, there have been iterative changes during FFP’s lifetime. Those changes are marked by greater procedural sophistication, and a move towards the liberalisation of equity input by owners in certain circumstances. In light of recent statements from UEFA President Aleksander Čeferin, it is possible that the financial regulation of European football will be subject to yet further change.

FFP from 2010 to 2015 

FFP was integrated into UEFA’s licensing requirements in the Club Licensing and Financial Fair Play Regulations Edition 2010.  In the 2010 Edition, implementation of FFP was to be overseen by the UEFA Club Financial Control Panel. Disciplinary action was carried out by the UEFA Control and Disciplinary Body, whose decisions could be appealed to the UEFA Appeals Board.

In the Club Licensing and Financial Fair Play Regulations Edition 2012, the oversight and disciplinary procedure of FFP was amended. The functions of the Club Financial Control Panel, Control and Disciplinary Body, and Appeals Board were replaced with a two-tier Club Financial Control Body (CFCB). The two chambers of the CFCB are the Investigatory Chamber, which actively monitors FFP compliance; and the Adjudicatory Chamber, which levies sanctions for non-compliance.

Under Article 53.1 of the 2012 Edition rules, the CFCB “carries out its duties as specified in the present regulations and the Procedural rules governing the UEFA Club Financial Control Body” (the Procedural Rules). The bespoke Procedural Rules establish a framework for the composition of the CFCB, the decision making processes of both the Investigatory and Adjudicatory Chambers, and the rules applicable to the whole proceedings. Like the Club Licensing and FFP Regulations, the Procedural Rules have gone through iterative changes (2014, and 2015 editions).

The Procedural Rules are a welcome development to FFP, ensuring the independence of the CFCB (Articles 6 and 7); bestowing broad investigatory powers upon the Investigatory Chamber (Article 13); and setting clear parameters for disciplinary action and process, including setting out potential disciplinary measures (Article 29). Overall, the Procedural Rules increase the legal sophistication of the end-to-end FFP process, and in doing so reduce the risk of irrational or arbitrary outcomes.  This protects clubs and UEFA; clubs who are in breach of FFP have clear guidance on the process that will be followed; clubs who adhere to FFP are reassured that those clubs who breach the rules will be put through a sophisticated investigation and (if necessary) disciplinary process (and additionally, pursuant to Article 22, where third party clubs and member associations are affected and have a legitimate interest in joining proceedings before the Adjudicatory Chamber, may do so); and UEFA, in having a clear and detailed rules governing procedure, helps to insulate FFP from legal challenge.

(By way of aside, in light of the changes to the procedure governing FFP sanctions, it is noteworthy that Bursaspor, in CAS 2014/A/3870 Bursaspor Kulübü Derneği v. Union des Associations Européennes de Football, argued that Control and Disciplinary Body and Appeals Board were “not professional on financial subjects”, although the Turkish club was unsuccessful in its appeal, and UEFA’s rebuttal was to highlight that the Club Financial Control Panel was made up of “financial and legal experts” and that the creation of the CFCB was “principally motivated by a desire to streamline the process”.)

Amongst the Procedural Rules, Article 33 stipulates that decisions of the Adjudicatory Chamber are to be published (subject to redaction to protect confidential information or personal data), which has the effect not just of increasing the transparency of UEFA’s decision making, but also of increasing the transparency of the financial affairs of European club football.

Settlement Agreements

One of the more dramatic changes implemented by the Procedural Rules was the implementation of ‘Settlement Agreements’, which are “aimed at ensuring that clubs in breach of the break-even requirement become compliant within a certain timeframe and are designed to be effective, equitable and dissuasive.”

Settlement Agreements have been described as “basically a plea bargain”. Redolent of the settlement procedures in many competition law or white collar crime regimes, Settlement Agreements are consensual agreements entered into between a party who has breached FFP and the CFCB, which avoid the need for a breach to be referred to the Adjudicatory Chamber (Article 15.1).   Settlement Agreements have been viewed by the CAS as effectively giving clubs a ‘second chance’ to comply with FFP (CAS 2016/A/4692 Kardemir Karabükspor v. UEFA), albeit with more stringent conditions applied.

Settlement Agreements may include sanctions and timeframes for compliance (Article 15.2) and are monitored by the CFCB Chief Investigator (Article 15.4). If there is a breach of a settlement agreement, the matter is then referred to the Adjudicators Chamber.

FFP from 2015

The next major changes to FFP were implemented in the Club Licensing and Financial Fair Play Regulations Edition 2015.

Introduction of Voluntary Agreements 

In contrast to the ex post compliance approach of Settlement Agreements, Voluntary Agreements are an ex ante mechanism for clubs to derogate from the normal FFP standards, with the ultimate aim of complying with the break-even requirement. Voluntary Agreements are defined as being “a structured set of obligations which are individually tailored to the situation of the club, break-even targets defined as annual and aggregate break-even results for each reporting period covered by the agreement, and any other obligations as agreed with the UEFA Club Financial Control Body investigatory chamber” (Edition 2015, Annex XII A.5). They can last for up to four reporting periods (Annex XII A.3).

In order to enter into a Voluntary Agreement, a club must adhere to certain procedural requirements. These include submitting a long-term business plan “based on reasonable and conservative assumptions” (Annex XII B.2(a)).

On the face of it, the concept of the Voluntary Agreements–allowing clubs with new owners to incur debts on the promise of future FFP compliance–sounds like a recipe for sort of financial peril FFP was created to avoid.  However, in order to be allowed to enter into a Voluntary Agreement, there must be put in place “an irrevocable commitment(s) by an equity participant(s) and/or related party(ies) to make contributions for an amount at least equal to the aggregate future break-even deficits for all the reporting periods covered by the voluntary agreement” (Annex XII B.2(c)).

Break Even Limit Increase

Another significant change implemented by the Club Licensing and Financial Fair Play Regulations Edition 2015 was a variation to the quantum of the break even limits in certain circumstances. The limits were increased from €5m to €45m for assessment periods 2013/14 and 2014/15, and €30m for assessment periods 2015/16, 2016/17 and 2017/18  “if it is entirely covered by a direct contribution/payment from the club owner(s) or a related party” (Article 61.2).

This balance between short-term losses, guaranteed in the event of financial failure (per the Voluntary Agreement process) or offset by owner input, against long term sustainability are superficially congruent with the objectives identified by UEFA for its licensing regime, which include “to introduce more discipline and rationality in club football finances; to encourage clubs to operate on the basis of their own revenues; to encourage responsible spending for the long-term benefit of football; and to protect the long-term viability and sustainability of European club football” (Article 2 (c)-(f)).  But this takes a somewhat narrow view of the impact of spending in football. A club’s spending affects not just a buying and selling club in a market transaction for a player’s registration, but affects the overall market in football players.

Inflation in the market for player registrations far outstrips inflation across the broader economy (by one estimate, inflation in football transfer fees runs ten times higher than inflation in the “normal” economy – and those figure were calculated before Paris Saint Germain doubled the record transfer fee with the purchase of Neymar in the summer of 2017. Player wage growth runs at over 10% per annum. Voluntary Agreements and increased owner investment may contribute to this vertiginous inflation. This runs in contrast to some of UEFA’s messaging around FFP. For example, it has previously been stated that FFP was intended to “decrease pressure on salaries and transfer fees and limit inflationary effect”.

Of course, it should be borne in mind that there is nothing inherently wrong with inflation where it is sustainable; but when considered in an environment where capital is accruing to the wealthy elite (top 15 European clubs) at a quicker rate than the rest of the market (see UEFA’s Financial Fair Play Regulations and the Rise of Football’s 1% by van Maren for further analysis), there is a risk of bifurcation of the financial capabilities of football clubs, with inflation marginalising the non-elite.  European clubs have seen revenue growth at over 9% per annum on UEFA’s figures, although since 2009, the average English Premier League club has added “five times more revenue than the average Italian Serie A or French Ligue Un club”. Inflation, if not intrinsically problematic, certainly has the potential to cause problems; and UEFA, in administering and approving Voluntary Agreements, and in weakening its stance on owners offsetting losses, should consider the impact on inflation and stability. Voluntary Agreements and financial input by owners are potentially gateways to the elite level; however, this should not be at the expense of those who do not have wealthy owners or pre-existing wealth.

Perhaps more significantly, there is a normative dimension to the introduction of Voluntary Agreements and the relaxation of financial input from benefactors. The message behind FFP was one of “revolutionising European football”, with then President of UEFA Michel Platini saying that UEFA would “never [be] going back on this.” Quite conversely, the changes brought about by the 2015 Edition of FFP were welcomed with a message of FFP being “eased”. This is disappointing because, on UEFA’s own figures, FFP has had a considerable positive impact on the European football financial landscape. On one view, allowing equity input from owners is a pro-competitive encouragement of exogenous investment; on another, it is rowing back from a positive and successful policy initiative at the expense of those not fortunate enough to have a benefactor owner.

The impact of FFP

In defence of its loosening of the restriction on loss-making, UEFA would doubtless point to the positive impact the FFP has had to date,^[1] which, perhaps, creates financial latitude that once did not exist.

As a part of FFP, the clubs under UEFA’s direct jurisdiction report standardised, audited, financial information. UEFA publishes annual benchmarking reports, which draw upon the information clubs submit. Since the introduction of FFP, there has been a general positive trend in European clubs’ finances.

For example, UEFA’s 7th Benchmarking Report, covering the financial year 2014, showed wage growth to have slowed to its “lowest rate in recent history” at 3%. Overdue payables (essentially debts that clubs owe but have not paid on time) had reduced by 91%. The most recent report published by UEFA, its eight Club Licensing Benchmarking Report, covering the financial year 2015, indicates that clubs “have generated underlying operating profits of €1.5bn in the last two years, compared with losses of €700m in the two years before the introduction of [FFP]”; whereas “Combined bottom-line losses have decreased by 81% since the introduction of [FFP]”.

Of course, there are methodological problems in ascribing the improvement in European clubs’ finances exclusively to FFP when in reality there are a combination of factors at play. However, what we can comfortably say is that there is an evident correlation between FFP and the stabilisation of the football financial landscape.

There is also a second-order effect of FFP at play. UEFA, in its position as the game’s regulator, in introducing FFP, has had a hegemonic influence on the governance of the game at national level.  For example, in England, domestic iterations of FFP have been instituted in the Football League, and the Premier League has introduced its own Short Term Cost Control Measures.

Thus, by setting the tone of sustainability expectations, UEFA has influenced the financial stability of clubs outside of its jurisdiction. This is highlighted neatly in the following passage from UEFA’s eight Benchmarking Report:

“The centrepiece of financial fair play, the break-even rule, may not directly address small and medium-sized clubs with costs and incomes below €5m, but financial fair play has other direct and indirect impacts on these clubs. Direct in that UEFA and the Club Financial Control Body pass their eyes over detailed financial data from all clubs competing in UEFA competitions and in particular take careful, regular note of all overdue payables. And indirect in that financial fair play has resulted in a significantly higher level of scrutiny of club finances and the actions of club owners and directors. In addition, some countries, such as Cyprus, have introduced their own versions of financial fair play, tailored to their clubs and the scale of their financial activities.” 

So, whilst UEFA can legitimately point to the more secure position across the financial landscape as a good reason that Voluntary Agreements or wider economic input from owners will do no harm, it should continue to reflect on the message this loosening of FFP may send to the wider football market.

FFP Exemptions

One area of change for which UEFA should be applauded is in its use of certain exemptions from the FFP ‘break even’ calculation. These include areas such as infrastructure and youth football, both essential to the game’s long-term sustainability. By exempting these areas from the break even calculation, clubs’ owners are incentivised to invest (by equity rather than debt) in the game’s future, without an impact on short-term competitiveness.

More recently (from 2015), UEFA has moved to exclude expenditure on women’s football from the break-even calculation (Annex X C(i). Again, UEFA should be praised for taking positive steps to encourage growth across less wealthy areas of the game.

The Future of FFP after Neymar

Over the summer of 2017, public interest in FFP has reignited. The rules are now becoming synonymous with Neymar and his new club, Paris Saint Germain, after the Brazilian player’s reported €222m release clause was activated, doubling the world record fee for a player transfer.   This move, followed by French player Kylian Mbappe joining Paris Saint Germain from Monaco for similarly large fee, has upset some in the game.

These events pose a significant problem for UEFA. It is not yet known whether PSG are in breach of FFP (and, of course, it is conceivable that they have sufficient financial capabilities to fund the purchases without any breach of the rules); however, the transactions have raised questions, including La Liga President Javier Tebas stating that he believed PSG were guilty of “infringing on UEFA regulations, financial fair play and EU laws”, and Arsenal manager Arsène Wenger saying that “it looks like we have created rules that cannot be respected…there are too many legal ways to get around it.” 

The public grievances around FFP precipitated by PSG’s spending do, to an extent, seem to conflate simply spending large sums of money with breaching FFP. The rules do not prohibit spending large sums on transfers or otherwise; rather, they limit how much debt can be incurred by a club, assessed over a three year rolling period, with only limited equity input from an owner. The rules were not designed to prevent a €222m transfer per se (with the fee amortised across the length of the contract period, as is standard practice in the football industry); rather, they were designed to ensure that any such spending was sustainable, and did not put clubs at risk.

However, FFP is a reactive, not a proactive tool. Clubs report spending after the event; they are not required to seek permission from UEFA to make a capital investment. This ex post approach does perhaps reveal a flaw in managing any egregious short-term infractions that should arise, the impact of which will be felt by other clubs before UEFA, through the CFCB, can have its say.

The broader problem associated with PSG’s spending is one of opacity. PSG is owned by Oryx Qatar Sports Investments, which is an investment vehicle for the state of Qatar. There were contemporary (unconfirmed) reports that the deal would be structured to take place off of PSG’s accounting books, with Neymar being paid the value of his release clause directly for agreeing to become an ambassador to the Qatar World Cup, so that he could in turn pay his own release clause.  If true, this would notionally take the release clause fee off of PSG’s books, but would almost certainly qualify as a related party transaction with the meaning of FFP’s Annex X F and thus remain examinable by the CFCB. Similarly, it was reported that PSG’s loan-come-purchase of Kylian Mbappe was “complex”. While complicated transfer arrangements are to be expected in a game that is going through increasing commercial sophistication, there are evidently some suspicions that PSG are attempting to circumvent FFP (or, more colourfully, ‘peeing in the pool’).

However, UEFA anticipated clubs employing ‘creative’ tactics to superficially comply with FFP, and gave the CFCB jurisdiction to consider “at all times…the overall objectives of these regulations, in particular to defeat any attempt to circumvent these objectives” (Article 72.1). (At this stage, one can only speculate as to what, if any, FFP objectives PSG may have breached, but the CFCB will surely consider Article 2.2 (a) and (c) - (f)).

UEFA has publicly stated that it is investigating PSG’s FFP compliance, saying “The investigation will focus on the compliance of the club with the break-even requirement, particularly in light of its recent transfer activity”. Of course, this should not be particularly surprising given the CFCB annually examines the finances of each club that enters into UEFA competitions under the standard FFP procedure, but it will be interesting to observe how CFCB’s investigation progresses, and, if PSG is found to have breached FFP in letter or in spirit, what punishment is meted out to PSG. 

Whether PSG’s aggressive spending was emboldened by UEFA’s weakening of the more restrictive elements of FFP will remain unknown.  Similarly, one can only speculate as to whether the dilution of FFP, through changes such as the implementation of Settlement Agreements and Voluntary Agreements, came about as a result of legal challenges already brought and defended by UEFA; or whether UEFA is insulating itself from further legal challenges; or whether UEFA is simply altering the rules for the good of the game. As detailed in Part One of this series, the legality of FFP will rest on its proportionality. These changes have moved FFP towards a more flexible, and arguably more proportionate, proposition; but, given the public exposure that PSG’s spending has precipitated,UEFA will surely wish to ensure that FFP is not seen as a paper tiger.

The matter is on UEFA’s agenda. Even before the events involving PSG in the summer of 2017, incoming UEFA president, Aleksander Čeferin, spoke about the possibility of a fixed wage cap and closing the gap between the game’s haves and have nots. Such changes would certainly make FFP more congruent with its name. FFP is not about being ‘fair’ in the sense of being egalitarian or introducing a level playing field. It is a gentle brake applied to the rate of growth in the game, aimed predominantly at reducing long-term loss making and insolvency. Perhaps the rules might have been less controversial from the outset, and might not have been a mechanism for the frustration ventilated by sum following PSG’s purchase of Neymar and Mbappe, if instead of being called FFP, the rules were called ‘financial management rules’, and absolved themselves from the pretence of ‘fairness’.

Alternatively, UEFA could revisit FFP, implementing a genuinely egalitarian set of rules – a hard salary cap, a luxury tax, the abolition of the transfer market, or some combination of those things and others. This would, however, undoubtedly engender its own set of legal challenges, as we have seen with FFP. 

Whilst the challenges to various aspects of FFP have been largely ineffective in defeating FFP (see for example CAS 2016/A/4692 Kardemir Karabükspor v. UEFA; CAS 2016/A/4492 Galatasary v. UEFA; CAS 2014/A/3870 Bursaspor Kulübü Derneği v. UEFA; CAS 2014/A/3533 Football Club Metallurg v. UEFA; CAS 2013/A/3067 Málaga CF SAD v. UEFA; CAS 2012/A/2824 Beşiktaş JK v UEFA; CAS 2012/A/2821 Bursaspor Kulübü Dernegi v. UEFA; CAS 2012/A/2702 Györi ETO v. UEFA ), the rules have, against the backdrop of repeated disputes about their legality, iteratively changed, including a move towards greater liberalisation in respect of equity input into clubs by owners. 

And so UEFA finds itself at a crossroads. FFP, bombarded with legal challenges (which it has to date ridden) has gradually developed and liberalised as financial stability in European football has improved. Now, with the transfer market having escalated, the efficacy of the rules has come into question. UEFA must decide on the path it wishes to take; whether to liberate the market altogether,  whether to institute a truly ‘fair’ system, or whether to continue on FFP’s current centrist ground. Aleksander Čeferin, a lawyer by extraction, is certain to face a legal and political struggle in whichever direction he turns.

^[1] For further discussion on the efficacy of FFP, see Neil Dunbar (2015) "The union of European football association’s club licensing and financial fair play regulations - are they working?" ISSN 1836-1129 http://epublications.bond.edu.au/slej/27

Editor's note: Björn Hessert is a research assistant at the University of Zurich and a lawyer admitted to the German bar.

The discussion revolving around the invalidity of arbitration clauses in organised sport in favour of national and international sports arbitral tribunals has been at the centre of the discussion in German courtrooms.[1] After the decisions of the German Federal Tribunal[2] (“BGH”) and the European Court of Human Rights[3] (“ECtHR”) in the infamous Pechstein case, this discussion seemed to have finally come to an end. Well…not according to the District Court (LG) of Frankfurt.[4] On 7 October 2020, the District Court rendered a press release in which the court confirmed its jurisdiction due to the invalidity of the arbitration clause contained in the contracts between two beach volleyball players and the German Volleyball Federation[5] (“DVV”) – but one step at a time.

1.     Arbitration clauses in organised sport

Over the past few decades, the Olympic movement has created its own judicial system in its endeavour to create and maintain a uniform judicial level playing field outside national courts. This is important, because athletes participating in international sports competitions need to be subject to the same sanctioning regime in the light of fairness and equality in sport.[6] In this regard, the jurisdiction of national courts threatens the uniform application of rules and regulations of international sports federations insofar as they could apply them differently. This could lead to the unsatisfying result that, for example, an athlete from Germany is punished for an anti-doping rule violation with a 2-year ineligibility sanction while a Swedish athlete is subject to a lifetime ban for the same misconduct.

In order to preserve the uniform application of sporting rules and – ultimately – a legal level playing field, the rules and regulations of the respective sports federation or individual contracts, including employment contracts or athlete agreements and licence agreements (“entry forms”), generally contain arbitration clauses in favour of private sports arbitral tribunals, e.g. the Court of Arbitration for Sport (“CAS”). As a result, the arbitration agreement between the parties to membership contracts or entry forms ousts the jurisdiction of national courts.[7] Due to the fact that athletes are not generally direct members of national and international sports federations, contractual clauses in their employment contracts or entry forms make reference to arbitration clauses set out in the rules and regulations of said sports federations. For example, international football players are generally bound by the regulations of the Fédération Internationale the Football Association (“FIFA”), including its statutes. Article 58(1) of the FIFA Statutes (2020 edition) provides that “[a]ppeals against final decisions passed by FIFA’s legal bodies against decisions passed by confederations, member associations or leagues shall be lodged with CAS […]”. References in individual contracts of sportspersons contained in the rules and regulations of sports federations, so-called “arbitration agreements by reference”, have been considered to be valid. In this respect, the Swiss Federal Tribunal (“SFT”) held that

“in sporting matters the Swiss Federal Tribunal examines arbitration agreements between parties with a certain goodwill in order to promote the fast resolution of disputes by specialised courts, which as the CAS, offer comprehensive guarantees of independence and neutrality.”[8]

Athletes are generally forced to accept such arbitration agreements in favour of sports arbitral tribunals due to the monopolistic structure in organised sport, meaning that only one national and international sports federation governs each sport on the basis of the pyramidal European Model of Sport (so-called Ein-Platz-Prinzip).[9] In other words, athletes can only choose between accepting such arbitration agreements (by reference) or renouncing their calling as professional athletes.[10] Against this background, it appears to be questionable whether mandatory arbitration agreements in organised sport concluded between monopolistic sports federations and athletes are valid, taking into account that arbitration as a mechanism of alternative dispute resolution generally finds its basis in the free and voluntary will of the parties to the dispute concerned. The validity of mandatory arbitration agreements was at the heart of the Pechstein[11] case and has now been addressed in the recent decision rendered by the District Court of Frankfurt[12].

2.     The decisions of the BGH and the ECtHR in the Pechstein case

Claudia Pechstein is a professional speed-skater. Prior to the speed-skating world championships, organised by the International Skating Union (“ISU”), she signed an entry form, including an arbitration agreement in favour of the CAS.[13] During her proceedings before German courts and the ECtHR, Pechstein argued that the arbitration agreement concluded between her and the ISU had not been accepted freely and voluntarily, because otherwise she would not have been eligible to participate in professional speed-skating competitions.

After the Higher Regional Court (OLG) of Munich had decided that the arbitration agreement signed by Ms Pechstein was invalid under German competition law as a result of ISU’s abuse of a dominant position[14], the BGH overruled this decision.[15] In the view of the BGH, the ISU is a monopoly within the meaning of sec. 19(1) of the German Competition Act (“GWB”).[16] However, the BGH took the view that the dominant position of a party to the arbitration agreement does not automatically revoke the voluntary nature of the consent to an arbitration agreement in favour of private sports arbitral tribunals.[17] Instead, the examination of the validity of the arbitration agreement is subject to a balancing process in consideration of the interests of both parties, i.e. sports federations and individual athletes.[18] In consideration of the legal protection of athletes and the specificity of sport, particularly in ensuring fair competitions and uniform case law in organised sport, which “would be seriously jeopardised”[19] by the invalidity of the arbitration agreement, the court came to the conclusion that the interests of the ISU prevail in this regard.[20] The CAS is a genuine arbitration court and guarantees legal protections for athletes equivalent to national courts.[21] Furthermore, the consistent application of the rules and regulations of sports federations by a specialised arbitration institution is not only in the interest of sports federations, but also in the interest of athletes.[22] 

The ECtHR indirectly confirmed the validity of the arbitration agreement concluded between Ms Pechstein and the ISU. However, in determining the free will of athletes when entering into an arbitration agreement with a monopolistic sports federation, the court held that the arbitration clause is generally not based on the free consent of the athlete and thus has a forced nature.[23] In case the athlete is compelled to accept an arbitration agreement, Article 6(1) of the ECHR is applicable to the sports arbitration proceedings in protection of the procedural rights of the athlete.[24]  

However, arbitration agreements in organised sport are not compulsory per se if the applicable sports rules and regulations leave it to the sports federation and the athlete to freely and voluntarily agree on an arbitration agreement. In this case, athletes are not in the same predicament and may therefore choose between different clubs before signing an arbitration agreement.[25]Furthermore, the complaining athlete must provide evidence that “other professional football clubs, which perhaps have more modest financial means, would have refused to hire him on the basis of a contract providing for dispute settlement in ordinary courts.”[26]

According to the BGH, the validity of arbitration agreements in organised sport is subject to a balancing process between the competing interests of the parties to it. However, if an athlete was compelled to accept arbitration clauses of monopolistic sports federations, the ECtHR concluded that Article 6(1) of the ECHR is applicable to the arbitration proceedings concerned. Both courts therefore set the benchmark against which the validity of arbitration agreements and proceedings in organised sport is measured. 

3.     Decision of the District Court of Frankfurt (based on the press release)

The decision of the District Court of Frankfurt is insofar remarkable as the court was in the position to consider both the decision of the BGH and the ECtHR in its decision-making process. With regard to the validity of the arbitration agreement concluded between two volleyball players and the DVV, the court stated in its press release of 7 October 2020[27] as follows:

“Die Streitigkeit habe nicht vorrangig vor einem Schiedsgericht ausgetragen werden müssen. Zwar enthielten die Verträge der Klägerinnen mit dem Beklagten jeweils eine Schiedsvereinbarung. Dieser sei aber unwirksam, «weil die Klägerin sich ihr nicht freiwillig unterworfen habe», so die Richter. Seit der Entscheidung des Europäischen Gerichtshofs für Menschenrechte (EGMR) im Fall Pechstein sei bei professionellen Leistungssportlern von einer unfreiwilligen Unterwerfung unter einer Schiedsgerichtsbarkeit auszugehen, wenn die Profisportler «vor der Wahl stehen, eine Schiedsklausel anzunehmen, um durch die Ausübung ihres Sports ihren Lebensunterhalt bestreiten zu können, oder sie nicht zu akzeptieren und damit vollständig auf ihren Lebensunterhalt durch Ausübung des Sports zu verzichten.» Es sei nicht belegt, dass die Klägerinnen seinerzeit tatsächlich die Wahl hatten, die Schiedsklauseln abzuschliessen oder nicht. Deswegen sei von einer Unfreiwilligkeit auch dann auszugehen, wenn die Volleyballerinnen die Klauseln kritiklos unterzeichnet hätten.”

[free translation: The dispute did not have to be settled primarily before an arbitration tribunal. It is true that the plaintiffs' contracts with the defendant each contained an arbitration agreement. However, this was invalid ‘because the plaintiff did not voluntarily submit to it’, the judges said. Since the decision of the European Court of Human Rights (ECtHR) in the Pechstein case, professional athletes must be presumed to have involuntarily submitted to arbitration if the professional athletes ‘are faced with the choice of accepting an arbitration clause in order to be able to earn their living by practising their sport or not accepting it and thus refrain completely from earning a living from their sport’. There is no evidence that the plaintiffs at the material time actually had the choice of whether or not to accept the arbitration clauses. Therefore, it can be assumed that the arbitration was involuntary even if the volleyball players had signed the clauses without criticism/objection.]

Based on the wording of the press release – and in absence of the full judgement – it appears that the court sided with the findings of the ECtHR insofar as it qualified the arbitration agreement contained in entry forms of athletes as mandatory in nature.

Furthermore, it can only be speculated why the court stated in its press release that the athletes had not objected to the signing of an arbitration clause. The court may have considered that the volleyball players were in a similar position than Ms Pechstein. This approach would be consequent, because beach volleyball players, like the plaintiffs in the proceedings before the District Court Frankfurt, are generally faced with the same dilemma as Ms Pechstein was. They cannot choose between different national federations for the sport of volleyball. In this case, it is not necessary for the athletes to show that they could not conclude a contract with the DVV without an arbitration agreement in favour of a sports arbitral tribunal.

Be it as it may, it is – with the BGH decision in the Pechstein case in mind – difficult to understand how the District Court of Frankfurt came to the conclusion that the arbitration agreement between the beach volleyball players and the DVV is invalid. It appears that the court deduces this invalidity from the compulsory nature of arbitration clauses in organised sport, as highlighted by the ECtHR. This would contradict the BGH’s view that forced arbitration can be justified in the sporting context and that the validity of particular clause must be determined on the basis of a balancing process.[28] If the District Court of Frankfurt applied such a balancing process between the competing interests of the parties to the dispute, it will be interesting to see why the court arrived at the conclusion that the arbitration agreement is invalid. In light of the above, the specificity of sport, particularly the consistent and uniform application of rules and regulations of sports federations, is a strong argument in favour of forced arbitration. Indeed, the legal level playing field and ultimately the sporting level playing field would be jeopardised if national courts would decide on sporting cases instead of national sports arbitral tribunals, such as the German Court of Arbitration for Sport (“DIS”) or the CAS. The interest of sports federations also prevails in domestic disputes. Otherwise, there is a risk that the national courts will interpret the sporting rules of a particular sports federation inconsistently.

On balance, it will be important to carefully analyse how the Frankfurt court substantiated its departure from the BGH decision in the Pechstein case. In my view, the press release indicates that the court was apparently unable to strike a fair balance between the competing interests involved, bearing in mind the specificities of sport.

[1] See e.g. District Court (LG) Cologne, decision of 13 September 2006, 28 O (Kart) 38/05; District Court (LG) Munich I, decision of 26 February 2014, 37 O 28331/12; Higher Regional Court (OLG) Munich, decision of 15 January 2015 – U 1110/14 Kart.

[2] BGH, decision of 7 June 2016, KZR 6/15; a translation of the decision is published on the CAS website.

[3] Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018.

[4] District Court Frankfurt, 7 October 2020, 2-06 O 457/19 (unpublished); press release available at https://ordentliche-gerichtsbarkeit.hessen.de/sites/ordentliche-gerichtsbarkeit.hessen.de/files/PM%207_10_2020%20Schadensersatz%20f%C3%BCr%20Profi-Volleyballerinnen_0.pdf.

[5] Press Release, District Court Frankfurt, 7 October 2020 available at https://ordentliche-gerichtsbarkeit.hessen.de/sites/ordentliche-gerichtsbarkeit.hessen.de/files/PM%207_10_2020%20Schadensersatz%20f%C3%BCr%20Profi-Volleyballerinnen_0.pdf.

[6] Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018, para. 98.

[7] Daniel Girsberger and Nathalie Voser, International Arbitration (3rd edn, Schulthess Juristische Medien AG, 2016) 4; see also Antoine Duval, ‘Not in my Name! Claudia Pechstein and the Post-Consensual Foundations of the Court of Arbitration for Sport’ Max Planck Institute for Comparative Public Law & International Law (MPIL) Research Paper No 2017-01.

[8] SFT, decision of 7 November 2011, 4A_246/2011, para. 2.2.2; see also SFT, decision of 28 May 2018, 4A_314/2017, para. 2.3.1; SFT, decision of 2 February 2018, 4A_490/2017, para. 3.1.2.

[9] Commission of the European Communities, ‘White Paper on Sport’, COM(2007) 391 final, 13. SFT, decision of 22 March 2007, 4P.172/2006, para. 4.3.2.2.; BGH, decision of 7 June 2016, KZR 6/15; Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018, para. 113.

[10] SFT, decision of 22 March 2007, 4P.172/2006, para. 4.3.2.2.; BGH, decision of 7 June 2016, KZR 6/15; Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018, para. 113.

[11] BGH, decision of 7 June 2016, KZR 6/15; Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018.

[12] District Court Frankfurt, 7 October 2020, 2-06 O 457/19 (unpublished)¸ ); press release available at https://ordentliche-gerichtsbarkeit.hessen.de/sites/ordentliche-gerichtsbarkeit.hessen.de/files/PM%207_10_2020%20Schadensersatz%20f%C3%BCr%20Profi-Volleyballerinnen_0.pdf.

[13] BGH, decision of 7 June 2016, KZR 6/15, para. 2.

[14] Higher Regional Court (OLG) Munich, decision of 15 January 2015 – U 1110/14 Kart.

[15] BGH, decision of 7 June 2016, KZR 6/15.

[16] Ibid, para. 9.

[17] Ibid, para. 54; Ulrich Haas, ‘The German Federal Court on Treacherous Ice- A final point in the Pechstein case’ in Christoph Müller, Sébastian Besson and Antonio Rigozzi (eds), New Development in International Commercial Arbitration 2016 (1^st edn, Schulthess Juristische Medien AG, 2016) 219, 256 et seq.

[18] Ibid, para. 55.

[19] Ibid, para. 50.

[20] Ibid, para. 59; Ulrich Haas, ‘The German Federal Court on Treacherous Ice- A final point in the Pechstein case’ in Christoph Müller, Sébastian Besson and Antonio Rigozzi (eds), New Development in International Commercial Arbitration 2016 (1^st edn, Schulthess Juristische Medien AG, 2016) 219, 263 et seq.

[21] Ibid, para. 62.

[22] Ibid.

[23] Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018, para. 113.

[24] Mutu and Pechstein v Switzerland, ECtHR, Application no. 40575/10 and no. 67474/10, 2 October 2018, para. 115.

[25] Ibid, para. 120.

[26] Ibid, para. 119.

[27] Press Release, District Court Frankfurt, 7 October 2020, 2.

[28] Ulrich Haas, ‘The German Federal Court on Treacherous Ice- A final point in the Pechstein case’ in Christoph Müller, Sébastian Besson and Antonio Rigozzi (eds), New Development in International Commercial Arbitration 2016 (1^st edn, Schulthess Juristische Medien AG, 2016) 219, 250.

The tax benefit scheme in the Hungarian sport sector decision of 9 November 2011 marked a turning point as regards the Commission’s decisional practice in the field of State aid and sport. Between this date and early 2014, the Commission reached a total of ten decisions on State aid to sport infrastructure and opened four formal investigations into alleged State aid to professional football clubs like Real Madrid and Valencia CF.[1] As a result of the experience gained from the decision making, it was decided to include a Section on State aid to sport infrastructure in the 2014 General Block Exemption Regulation. Moreover, many people, including myself, held that Commission scrutiny in this sector would serve to achieve better accountability and transparency in sport governance.[2]

Yet, a recent report by Transparency International (TI), published in October 2015, raises questions about the efficiency of State aid enforcement in the sport sector. The report analyzes the results and effects of the Hungarian tax benefit scheme and concludes that:

“(T)he sports financing system suffers from transparency issues and corruption risks. (…) The lack of transparency poses a serious risk of collusion between politics and business which leads to opaque lobbying. This might be a reason for the disproportionateness found in the distribution of the subsidies, which is most apparent in the case of (football) and (the football club) Felcsút.”[3]

In other words, according to TI, selective economic advantages from public resources are being granted to professional football clubs, irrespective of the tax benefit scheme greenlighted by the Commission or, in fact, because of the tax benefit scheme.

One would expect TI’s report to be a wake-up call for the Commission, triggering it, as “Guardian of the Treaties”, to re-investigate Hungary’s tax benefit scheme without delay. Further incentives to scrutinize the matter is provided by the Hungarian MEP Péter Niedermüller, who in November 2015 officially asked the Commission whether it intended to review its earlier decision to authorize the tax benefit scheme. The Commission’s answer, seen here below, indicates that immediate action is not to be expected.

Not satisfied with this answer, Niedermüller replied that even though the Commission had authorized the tax scheme in 2011, it does not absolve it “from the obligation to proceed with the appropriate care thereafter and to monitor whether the system is operating in accordance with the objectives originally set”.

The overall aim of this two-part blog is to analyze the rules and procedures surrounding the monitoring of previously authorized aid schemes in the sports sector by the Commission. It will use the tax benefit scheme in the Hungarian sport sector decision as a starting point, describing the objective and the functioning of the aid scheme, as well as the conditions and obligations for Hungary and the Commission attached to it. In continuation, basing myself on the findings and conclusions drawn in the report, I will try to determine whether the current practice in Hungary deviates from the original objectives and conditions of the aid scheme, and what the consequences of such a deviation could be. Do the State aid rules impose an obligation upon the Commission to act and, if so, in what way? Furthermore, could the Hungarian case make one reconsider the usefulness of State aid rules to achieve better accountability and transparency in sport in general? 

The tax benefit scheme in the Hungarian sport sector decision

A description of the scheme

In April 2011, the Hungarian authorities notified the Commission of their plans to introduce a tax benefit scheme with the aim of developing the country’s sport sector.[4] More specifically, via the scheme, they hoped to “increase the participation of the general public in sport activities, by inter alia, promoting mass sport events, training of the young generations as well ensuring adequate sport infrastructure and equipment for the general public”. Due to the existence of a market failure (i.e. a situation where individual market investors do not invest even though this would be efficient from a wider economic perspective), Hungary saw itself obligated to provide public money to the sport sector in order to achieve the aforementioned objectives.[5]

Under the scheme, which will run until 30 June 2017, corporations (operating in any sector that is subject to corporate tax) can choose to donate money to sport organizations, both amateur and professional. Sport organizations may use these resources to train the young generation, cover personnel expenses and to construct/renovate sport infrastructure. The donations would be deducted from the corporation’s taxable income and from their tax liability.[6] Hungary decided to focus the aid scheme on the five most popular team sports in the country, i.e. football, basketball, ice hockey, water polo and handball. The reasoning behind this choice is that the scheme would not only benefit the sport organizations themselves, but also the sportsmen and sportswomen using the facilities, as well as the general public interested in attending the sporting events.[7] Sport organizations wishing to receive donations have to elaborate a development programme (DP), in which they outline the planned use of the donations. The DPs are evaluated by the respective national sport governing bodies (SGBs), who decide whether the sport organization is eligible for the donations. Once the SGBs approve a DP, the sport organizations may approach corporations willing to donate money to them.[8]

In the specific case of donations used for the construction, renovation or maintenance of sport infrastructures, Hungary notified the Commission that it had introduced a monitoring system that serves to avoid any misuse of the donations or cross-subsidizations of other activities of sport organizations. The so-called Controlling Authority (a public entity falling directly under the Ministry of National Resources) monitors compliance of donators and beneficiaries with the central price benchmarking mechanism regarding rental and operation fees of the infrastructure, introduced to limit the distortion of competition arising from the tax benefit scheme.[9]  

The Commission’s decision

As stated above, the donations should be used to fund the development of sport infrastructure, train the youth teams and cover personnel expenses. The Commission agreed with Hungary that the training of youth teams falls outside the scope of EU State aid rules, in line with the 2001 Commission Decision Subventions publiques aux clubs sportifs professionels. Donations used to cover personnel costs could be falling under the General Block Exemption Regulation[10] or the de minimis aid Regulation.[11] Compliance with the two Regulations is a task for the Hungarian authorities.[12] Consequently, and taking into account that amateur sport clubs are generally not considered to be undertakings within the meaning of Article 107(1) TFEU, the tax benefit scheme in the Hungarian sport sector decision only covers aid for the infrastructures used by the professional sport organizations.

Although the tax benefit scheme fulfilled the criteria of Article 107(1), and thus constituted State aid, the Commission declared the scheme compatible with EU law under Article 107(3)c) TFEU. Importantly, the Commission held that the scheme was introduced in a sufficiently transparent and proportionate manner, i.e. that the measure was well-designed to fulfil the objective of developing the country’s sport sector.[13] Moreover, the Commission acknowledged the special characteristics of sport and held that the objective of the scheme is in line with the overall objectives of sport as stipulated in Article 165 TFEU, namely that the EU “shall contribute to the promotion of European sporting issues”, because the sport sector “has enormous potential for bringing the citizens of Europe together, reaching out to all, regardless of age or social origin”.[14]

It is worth mentioning that the Commission took a very similar approach in its decisions on the other State aid measures granted for sport infrastructure. It considers a sport infrastructure as embodying a typical State responsibility for which the granting of State aid is a well-defined objective of common interest.[15]

Finally, to ensure that the monitoring and transparency obligations are carried out properly, the Commission requires Hungary to submit an annual report to the Commission, containing inter alia, information on the total aid amount allocated on the basis of this scheme, the sport infrastructure projects funded, their aid intensities, their beneficiaries, the parameters applied for benchmarking prices, the rents effectively paid by the professional sport organizations, as well as a description on the benefits provided to the general public and on the multifunctional usage of the infrastructures.[16] There is no requirement to publish this annual report. Therefore, assessing whether the information provided by Hungary to the Commission is in line with the actual practice in the country is currently extremely difficult. 

Transparency International report, “Corruption Risks in Hungarian Sports Financing”

The tax benefit scheme in the Hungarian sport sector decision looked like a blue print for the way in which public authorities could grant State aid to the sport sector: It was aimed at a wide scope of recipients and the general public would benefit as well, transparency was guaranteed, monitoring and compliance mechanisms were introduced and, last but not least, it was notified in advance to the European Commission. 

Lack of transparency

However, TI’s report shows that, four years after the scheme was launched, little remains of all those good intentions. To start with, TI claims that Hungary’s objective was not to increase the participation of the general public in sport activities, but simply to make Hungarian football clubs “excel at the European and international levels”.[17] TI’s primary finding is that there is a flagrant lack of transparency on every level regarding the scheme. Most of the data collected in the report was obtained by TI through freedom of information requests.[18]

The first flaw in the scheme is that under Hungarian national laws and regulations, there is no obligation to disclose the identity of the donating corporations. Consequently, even though the SGBs keep count of which clubs are entitled to receive donations and how much they actually received, many questions remain on how the money is distributed in practice.

TI also questions the integrity of the clubs’ eligibility process. The Hungarian SGBs, who are in charge of selecting the clubs worthy of receiving donations, are to a large extent run by people with close ties to the Hungarian Government.[19] Moreover, for the selection process, the SBGs do not need to provide a reasoning behind the decision to choose or not to choose a club worthy of donations. As TI states, the tax benefit scheme poses a serious threat to transparency and accountability, and can lead to illicit lobbying and backroom deals between politicians, businessmen and clubs. 

Disproportionate distribution of beneficiaries

The advantage of using a general tax scheme as a State aid measure is that it leads to many different beneficiaries and is therefore considered as one of the least distortive type of state intervention.[20] However, the functioning of this particular tax benefit scheme creates the exact opposite result a few clubs are clearly favored. According to the report, the subsidies from the tax scheme totaled €649 million in four years. An amount of €240 million was specifically designated for football clubs, 37% of the total amount. Of all the money donated to football, 28% (or €68 million) went specifically to 13 football clubs, who, perhaps unsurprisingly, all play in Hungary’s highest football league.[21] Of these 13 football clubs, Puskás Akadémia FC received by far the highest amount, no less than €30 million. Puskás Akadémia FC plays in Hungary’s top division, but also functions as the youth team of Videoton FC, one of Hungary’s biggest and most successful clubs. Interestingly enough, Puskás Akadémia FC was founded in 2007 by the current Hungarian Prime Minister Viktor Orban. 

Unnecessary construction of new sport infrastructure?

The Hungarian authorities expressed the need in 2011 for adequate sport infrastructure facilities. Due to a market failure, it was necessary for the State to step in and provide the necessary funds, albeit by means of a tax benefit scheme. The Commission agreed with Hungary that there is a lack of investments in sport infrastructure and that using public money to do so is an objective of common interest.[22] The TI report indicates that especially the Hungarian football stadiums have undergone significant upgrades since 2011, but at the same time questions the necessity to use public funds for these upgrades. Hungarian professional football has not been attracting more people to stadiums since 2011. The country’s highest division averaged only 4,897 spectators per game for the 2014/15 season, 624 less than in the previous year.[23] An example of potential unnecessary construction of sport infrastructure is the “Nagyerdei” stadium, opened in 2014,  in the city of Debrecen. The stadium, that can hold over 20,000 spectators, cost €40 million to construct. However, with a match average of 3,400,[24] one wonders whether the construction of this stadium was an objective of common interest, or whether there was another, hidden, agenda. Referring to the well-reported, including by the European Commission, close relationships between Hungary’s businesses and its political elite, TI points to the realistic possibility that the construction and renovation of (football) stadiums through public procurement procedures, was simply a way to for contractors to “finance the economic orbit of influential politicians in return for all manners of political and financial favours”.[25]  

Interim conclusion

TI’s report clearly shows that there is a huge discrepancy between Hungary’s intention to devise a tax benefit scheme benefitting to the entire sport sector, as notified to the Commission in 2011, and the actual operation of the scheme. The necessity for new and renovated football infrastructure appears superfluous and the tax benefit scheme itself proved to be more beneficial for some clubs, particularly Puskás Akadémia FC. Furthermore, the Commission decision declaring the tax benefit scheme compatible with EU law highlighted the transparency of the scheme and acclaimed its monitoring mechanisms. More than four years on, it can be concluded that the scheme is far from transparent and questions can be raised on the independence and functioning of the monitoring mechanisms. Assuming that the Commission receives annual reports by the Hungarian authorities on the tax benefit scheme, why has it not undertaken any action? Is it simply a matter of unwillingness or could the answer be found in EU State aid law and its procedural rules itself? The next part of this blog will analyze the rules and procedures surrounding the monitoring of previously authorized aid schemes by the Commission, and determine whether Commission action can be expected.

[1] An explanation on why the public financing of sports infrastructure and professional sports clubs only started to attract State aid scrutiny in recent years can be read in: Ben Van Rompuy and Oskar van Maren, “EU Control of State Aid to Professional Sport: Why Now?” Forthcoming in: “The Legacy of Bosman. Revisiting the relationship between EU law and sport”, T.M.C. Asser Press, 2016.

[2] See for example Oskar van Maren, “EU State Aid Law and Professional Football: A threat or a Blessing?”, European State Aid Law Quarterly, Volume 15 1/2016, pages 31-46.

[3] Transparency International, “Corruption Risks in Hungarian Sports Financing”, page 41.

[4] Commission Decision of 9 November 2011, SA.31722 – Hungary - Supporting the Hungarian sport sector via tax benefit scheme, paras 2-3.

[5] Ibid., paras 88-90.

[6] Ibid., paras 15-16.

[7] Ibid., paras 28-34.

[8] Transparency International report of 22 October 2015, “Corruption Risks in Hungarian Sports Financing”, page 31.

[9] Commission Decision SA.31722, paras 37-39.

[10] The GBER applicable at the time the decision was taken was Commission Regulation No800/2008 of 6 August 2008.

[11] Commission Decision SA.31722, para 10.

[12] Ibid., para 64.

[13] Ibid., paras 95-98.

[14] Ibid., paras 86-87.

[15] See for example Commission Decision of 20 March 2013, SA.35135 Multifunktionsarena der Stadt Erfurt, para 14.

[16] Commission Decision SA.31722, para 57.

[17] Transparency International report, page 29.

[18] Ibid., page 31.

[19] Ibid., page 32. TI points out that the chairman of the Hungarian FA is CEO of the country’s biggest commercial bank and close to the Government.

[20] Commission Decision SA.31722, para 20.

[21] The TI report actually mentions the clubs as well as their youth academia. The 13 clubs are: Puskás Akadémia FC (aka Felcsút FC, the youth team of Videoton FC); Ferencváros; Újpest FC; Vasas SC; Szolnoki MÁV FC; Debreceni VSC; Diósgyőri VTK; Zalaegerszegi TE; OVI-FOCI; Illés Sport Alapítvány; Budapest Honvéd FC; Balmazújvárosi FC and; Békéscsaba 1912 Előre.

[22] Commission Decision SA.31722, paras 91-93.

[23] Transparency International report, page 38.

[24] Ibid.

[25] Ibid., page 42.