Impact of Covid-19 on the Sports Industry: A Competition Law update from Portugal

Our previous analysis of Covid-19’s impact on the Portuguese sports industry focussed on the effect on the organisation of sporting events of the pandemic itself and the mitigating steps taken to stop its spread.

As of June, Portugal progressively lifted most of the confinement measures that severely limited almost all activities. This included sports events, and financially lucrative competitions such as football’s Primeira Liga have since resumed (with matches played behind-closed-doors, in sealed-off venues). UEFA's announcement that the 2019/20 Champions League quarter-finals, semi-finals and final would be played in Portugal brought some much-needed respite to a very gloomy year for Portuguese football fans, as well as a seal of approval to the country’s healthcare infrastructure. Talks of other possible international sporting events, including a 2020 Formula 1 Grand Prix in the Algarve to make up for venues being cancelled outside Europe, are helping to showcase the country’s ability to host large sports events.

The balancing act: economics vs law

However, when dealing with the impact of the pandemic on the economics of professional sports, sporting organisations face a difficult balance between ensuring the economic viability of their affiliates and the legality of the decisions they take. Sports organisations and associations must take particular care when invoking exceptional circumstances; they must remain compliant with competition law insofar as such decisions apply to professional sports as a business activity.

This balancing act was brought to light following two recent decisions by the Portuguese Competition Authority (the AdC) affecting the two main regulatory bodies of professional football in Portugal: the Portuguese Football Federation (which is responsible for setting up and organising all professional football tournaments) and the Portuguese League of Professional Football (the association of all major football clubs that organises the Primeira Liga and the LigaPro, the first and second tier domestic leagues).

A no-poach agreement between several football clubs and a salary cap for the women’s football championship (both purported to be justified by the impact of Covid-19) led the AdC, in a matter of a few weeks, to (i) initiate an investigation into the Football League, including an almost unprecedented adoption of interim measures; and (ii) issue a recommendation to the Football Federation to cease its planned adoption of a salary ceiling affecting female footballers.

This post explains the background, impact and main takeaways of these measures.

An introduction to competition law enforcement amidst the Covid-19 pandemic

Competition authorities were quick to respond to the challenges raised by the Covid-19 pandemic, wary of the risks for competition law compliance across the full spectrum of economic activities.

While their focus has been steered mostly towards cooperation agreements in the pharmaceutical and medical supply sectors, competition authorities also flagged risks of anti-competitive behaviour stemming from a highly volatile economic environment, with drastic shifts in demand and output: as early as 23 March, the European Competition Network signalled how the European competition authorities would continue to pursue their policy objectives and, simultaneously, how companies could cooperate when dealing with an unprecedented worldwide economic shock. This was followed by a similar statement from the International Competition Network on 8 April and, on the same date, the adoption of the Temporary Framework Communication of the European Commission, setting out the Commission’s enforcement guidelines and assessment criteria for cooperation agreements stemming out of the need to address supply shortages. National competition authorities followed suit, issuing general recommendations and making themselves available to openly discuss cooperation agreements with companies and associations.

In Portugal, the AdC issued formal recommendations to associations in the banking, pharmaceutical and leasing sectors, following a review of their proposed cooperation frameworks, after announcing it would keep a watchful eye on market behaviour during the pandemic.

However, its most forceful pandemic-related enforcement actions to date have taken place in the sports sector: by the end of May, it had announced an investigation against the Football League and imposed interim measures (the first since 2009), suspending a “no-poach” agreement between football clubs in the top division. By the end of June, it had issued a recommendation responding to public discussions concerning the proposed capping of salaries of women football players by the Football Federation.

Flagged offside: the no-poach agreement between football clubs

A no-poach agreement precludes competing companies from hiring (or ‘poaching’) each other’s employees. This type of covenant is a common fixture in M&A deals as restrictions to competition directly related to and necessary to bring about the transaction (otherwise known as ‘ancillary restrictions’). The AdC has previously dealt with these clauses in merger cases, usually to limit their overall duration and applicability to key staff.

No-poach (as well as wage-fixing) agreements as part of a wider collusion between companies have been the object of renewed attention from competition enforcers. The AdC has not, to date, adopted any decision fining a company – or an association of companies – because of any such agreements. The applicability of competition rules to collective bargaining agreements between trade unions and associations of companies is also yet to be the object of the AdC’s attention.

In the case of the Portuguese football clubs, the Football League announced on 7 April that following a discussion between a number of its members (18 football clubs, including major clubs SL Benfica, FC Porto and Sporting CP, out of the 36 clubs that comprise the premier and second leagues) and the League’s president, it was decided that no football club would hire football players if they had rescinded their employment agreements with any of the League’s members, invoking the exceptional circumstances resulting from the Covid-19 pandemic. There were growing fears that players could terminate their employment agreements in response to the salary cuts (as well as other measures such as the extension of the season) imposed by clubs to soften the economic blow of the pandemic and move on to competing clubs. In response to the League’s announcement, the AdC revealed on 26 May that it was launching an infringement investigation against the Football League (as an association of undertakings) and imposed interim measures ordering the immediate suspension of the decision.1

The AdC noted in its press release that horizontal non-solicitation agreements have been considered by other authorities to be serious competition infringements. Meanwhile, the League stated that no decision on no-solicitation had been reached. The facts are now under investigation, and in the infringement procedure that follows, the League will have the opportunity to defend itself against charges brought against it by the AdC (in case the AdC decides to adopt a statement of objections by the end of the investigation) and appeal to the Competition Court against any fines. Additionally, the interim measures can also be appealed to the Competition Court. If the AdC decides to push for an infringement decision and impose a fine, it is worth noting that in the case of an association of companies, the fines can reach 10% of the aggregated turnover of the association’s members (in this case, the football clubs) that took part in the decision.

One of the most remarkable features of this enforcement action is the imposition of interim measures. While the adoption of interim measures to quickly address competition concerns pending an investigation has been available since 2003, the AdC had previously only adopted them on one occasion, more than ten years ago.

Finally, it remains to be seen how the exceptional circumstances that triggered the imposition of the measures – and the subsequent investigation – in the first place will play out in the AdC’s own review of the case.

A salary cap for female footballers– comparable to price-fixing?

A more recent initiative adopted to protect football clubs from the economic fallout of the pandemic was the object of a recommendation of the AdC, even after the initiative itself had been withdrawn.

On 29 May, the Portuguese Football Federation launched a public consultation for the regulation of the 2020/21 women’s national football championship. Controversially, the Federation established a maximum cap for salaries payable to the players for the whole season, to address the exceptional circumstances resulting from the pandemic and to support the clubs’ financial position. Within a week, having realised the potential discriminatory nature of the salary cap (which would only apply to the women’s championship), the Federation announced it would be withdrawing the proposal.

The AdC’s non-binding opinion, issued on 26 June, acknowledged that the proposal had been withdrawn. It nevertheless commented on the potential for a salary cap, enforced through an internal regulation and adopted by an association of companies, to restrict competition. Indeed, the AdC made it abundantly clear that, insofar as football clubs are “undertakings” under competition law, collective organisations such as the Football Federation (and the Football League in the no-poach case) are also associations of companies and must comply with competition rules. In this case, a salary cap (imposed by a regulation adopted by the Federation) would be comparable to an input price fixing agreement and thus prohibited under both Portuguese and European competition rules.

Comment

These interventions by the AdC in the Portuguese football market highlight a number of important takeaways:

  • The first is that the football market – as well as the markets for other sports activities – is, indeed, a market, and rules applicable to all market activities are also applicable here. In both these cases, the AdC went to great lengths to explain that the Football League and the Football Federation are associations of undertakings and must be in full compliance with the competition rules;
  • The second takeaway is that the “Covid-19 exception” can only go so far as a justification for anti-competitive behaviour. In launching its investigations, the AdC signalled to the market that it will pursue potential infringements, especially when they may be the outcome of opportunistic behaviour. This exacting approach is in line with that taken by other national competition authorities and the European Commission.
  • Finally, these two cases also display the growing appetite of competition authorities for “out-of-the-ordinary” cases in their pursuit of competition policy goals, even amid widespread economic turmoil. No sector is ‘safe’ by virtue of playing the Covid-19 card, least of all sports.

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