MLS Single entity (and all other league structure talk) Part II

Sticky this one. Look at the timeline when MLS was formed, and it's very clear what you are saying is correct. And it's not just costs, it's labor costs.

If you had to single out two men who were indispensable to forming MLS, you'd likely pick Alan Rothenberg and Lamar Hunt. People know of Rothenberg's soccer credentials, but he was (and is) also a brilliant corporate lawyer who was involved in the NBA. Hunt, of course, had founded the American Football league.

As they formed MLS following the 1994 World Cup, they undoubtedly were well aware of the earthquake occurring regarding player free agency and costs in the NFL at that time. From the early days through 1957, the NFL controlled player movement just like MLB by the use of a "reserve clause" inserted in player contracts effectively binding a player to a team even after the contract expired. Unable to effectively market their services to another team, players had little choice but to accept the wage offered them or retire. The players successfully challenged the legality of the reserve clause as early as 1957. The NFL replaced it with a gentlemen's agreement, later formalized as the "Rozelle Rule", where players could not move to another team unless the new team compensated the old one. Not surprisingly, because of compensation demands made by the teams that might lose a player, player movement was still fairly rare. A series of legal challenges, modifications, a strike and more suits followed. Finally, in 1993, the NFL threw in the towel and agreed to implement free agency contingent upon the players agreeing to what became the modern salary cap for the 1994 season.

Here's a good summary for the curious who want to know more:

http://library.williams.edu/theses/pdf.php?id=36

(European soccer players quickly won the same right to move on a free transfer when their contract expired with the Bosman ruling in 1995, effectively bringing free agency to soccer. http://en.wikipedia.org/wiki/Bosman_ruling)

The key to the NFL salary cap is that it had to be agreed for in a collective bargaining process -- it still potentially violates anti-trust laws otherwise. Indeed, the salary cap, the draft, trades -- all of those restrictions work because the players have agreed to them in the CBA.

http://www.labourblawg.ca/author/yu-sung-soh/page/2/

As they looked at pro sports in 1994, I'm sure they the guys organizing MLS thought the mighty NFL had fallen, forced into a new system where the players would get a percentage of revenue and a huge jump in wages. And, I'm convinced, the smart guys at MLS wondered if there might not be another way.

In 1984, in a case called Copperweld Corp. v. Independence Tube Corp., the Supreme Court ruled that a company and its wholly owned subsidiary are not subject to antitrust attack under Section 1 of the Sherman act because of agreements between them -- that is, those agreements aren't deemed to restrain trade. It's called the "single entity" defense.

If MLS was a single entity, they reasoned, it didn't need to rely on bargaining with the players, it could simply unilaterally set a wage scale and other rules on where players would be offered contracts to play. Essentially, as a single entity, MLS could enjoy comparable benefits of the reserve clause, without any need to give away a negotiated percentage of revenue to the players through the NFL style salary cap. (A term MLS resists to this day in favor of the more single entity friendly "salary budget").

And so MLS was set up as a single entity league. Unlike the NFL, which is a non-profit trade association, MLS was set up as a limited liability company. Instead of franchises, the league itself would own each and every team and contract with the players directly. For all intents an purposes, as a corporate entity, MLS it would look just like Copperweld -- a single company with subsidiaries. So faithful would MLS be to the model that Rothenberg envisioned a league where the owners would all own shares in the single entity, and divide up the profits and share the losses of every team collectively.

The only problem with the single entity plan is that investors balked. If your read Dave Wangerin's book Soccer In A Football World, potential investors wanted to own teams, not shares in a league where the league itself ran the show. As Lamar Hunt twisted arms, the compromise was for the league to create the "operator - investor", owners who owned shares in the league, but could also be given the right to exclusively operate a team on the league's behalf in exchange for a cut of the revenue they produced.

MLS was launched not as a true single entity, but as something of a hybrid with both teams operated by the league and teams operated by operator investors, but all with tight control over salaries and player movement. The players soon sued under various theories of how MLS violated the anti-trust laws in the case that became Fraser v. MLS, LLC. To no one's surprise, the league offered the single entity defense which had been baked in from the beginning. MLS won at the trail court, which concluded MLS was a single entity, but people often forget that the Court of Appeals wasn't convinced.

The Appellate Court in Fraser stated:

"That a stockholder may be insulated by Copperweld when making ordinary governance decisions does not mean automatic protection when the stockholder is also an entrepreneur separately contracting with the company.  Above all, there are functional differences between this case and Copperweld that are significant for antitrust policy . . . To sum up, the present case is not Copperweld but presents a more doubtful situation;  MLS and its operator/investors comprise a hybrid arrangement, somewhere between a single company (with or without wholly owned subsidiaries) and a cooperative arrangement between existing competitors."

In the end, the players lost because of how they had defined the "market" in their claim, but the Court of Appeals noted that while it did not have to answer the question definitively, "The case for expanding Copperweld is debatable and, more so, the case for applying the single entity label to MLS."

http://caselaw.findlaw.com/us-1st-circuit/1441684.html#sthash.sHiYFbSg.dpuf

The League's 2002 victory in Fraser was nonetheless significant in that the basic structure of MLS remained intact and the Court of Appeals, while casting doubt over treating MLS as a single entity, didn't definitively conclude it could not be so.

Since 2002, however, the debate has moved somewhat. The league itself moved further away from the pure model during it's 2002 reorganization when it transferred operation of every remaining league run team to an operator investor -- a policy that continue until the league's recent takeover of Chivas USA.

The Supreme Court's 2009 decision in American Needle also must be cause for some concern. NFL Properties attempted to assert the single entity defense against American Needle and was thumped. On it's face, it's hard to see how the Court's reasoning that, "Thirty-two teams operating independently through the vehicle of the NFLP are not like the components of a single firm that act to maximize the firm’s profits. The teams remain separately controlled, potential competitors with economic interests that are distinct from NFLP’s financial well-being", wouldn't apply just as well to MLS.

http://www.supremecourt.gov/opinions/09pdf/08-661.pdf


And so MLS enters the next CBA negotiations looking to add a belt to its single entity suspenders. Clearly the single entity defense provides the league with some protection -- enough where it continues to set a salary budget rather than a negotiated salary cap -- but should push come to shove, is the single entity defense strong enough where the league could operate under the same rules, CBA or no CBA?

MLS isn't going to give up the single entity structure IMO. It's part of the league's DNA, and until a court says otherwise, it strengthens the league's hand in setting payrolls and controlling the players. But MLS is certainly smart enough to know the single entity defense is something of a legal Maginot Line -- it might be circumvented and the league overwhelmed. Therefore, the league probably welcomes the added protection of a CBA -- a CBA where MLS retains control to set pay rather then enter into an NFL style division of revenue -- but it still negotiates from a position of strength because of its structure.

Which is why, when fans say "I think they should just go away from the single entity," they are badly misreading MLS, IMO.

 

.....and just to nitpick and be a jerk this morning. The Maginot Line was never overwhelmed. It was circumvented and made meaningless.

 

I'll change it -- it can be circulated, and the league overwhelmed.

 

LOL...no worries. Great posts as usual.

 

Wow. That was a very impressive summary.

 

I think having all players be employees of MLS is the biggest defense that MLS has. It must have required a lot of trust from the original investors to get that through. We know it was a problem for Barcelona a mere 5 years ago.

 

Here is one of the better law school case studies (in addition to the many) done prior to the American Needle case:
http://hosted.law.wisc.edu/lawreview/issues/2009_4/feldman.pdf

It states a strong argument regarding the "hybrid" status the NFL or MLS may claim to have regarding anti-trust concerns. One of the key arguments the First Circuit makes include:

Then after the conclusion of the case ruling, others can cite opinions based on this law school study:
http://www.niu.edu/law/organizations/law_review/pdfs/full_issues/31_1/Jakobsze 131-174.pdf

The court recognized two options: either expand Copperweld and create new tests, or choose to reshape Section 1's rule of reason analysis to account for such hybrid arrangements. Rather than adopt either course of action, the court sidestepped the single entity issue altogether, and affirmed the district court's grant of summary judgment on grounds that the plaintiffs failed to demonstrate a market. IMO, the utilization of the Copperweld defense is slowly chipping away.

In addition, one of the more ironic studies done on "single entity" happens to be from Tim Bezbetchanko (current GM of Toronto FC, and previously a Director of Player Relations working under Todd Durbin at the league office). It was thought the designated player rule would create a disparity between the rich and poor teams that would disrupt competitive balance. I.e., create a "divergence of interests" which would be at the heart of the "unity of interests" principle that the "single entity" framework is based on. Comment, Bend it for Beckham: A Look at Major League Soccer and its Single Entity Defense to Antitrust Liability After the Designated Player Rule, 76 U. CIN. L. REV. 611, 624 (2008)

Another area that needs questioning is the ability for the individual I/O's to treat team staff, as distinctly separate class of employees that have different rights regarding their labor mobility and market value, as compared to players. Though it wasn't disclosed, I believe the Colorado Rapids received some sort of compensation for losing Oscar Pareja to FC Dallas. Pareja being an employee of the individual I/O's was someone who voluntarily resigned from one employer to join another (albeit within the same league/corporate entity). Why weren't his rights blocked and mobility denied?

If there any lawyers on the board, please feel free to add to the discussion. I think this would help add some better clarity regarding the CBA discussion and the overall understanding of the "single entity" league structure.

 

Actually we know that his contract was bought out by Dallas and additional compensation was also given (presumably to avoid a tampering charge, though nobody has officially stated that). So essentially his mobility was limited (he was under contract with the Rapids) until compensation was paid to the team, just like a player.

 

Serious question for any lawyers/super sports law geeks:

Would a soft cap or luxury tax jeopardize MLS' standing as a single entity? Seems tough to argue that its not 20 teams at that point but maybe I'm wrong.

 

I don't see why it would. I like thinking of MLS as a burger joint (it lends itself to good examples), but let's just say that MLS is a company that has stores in 20 cities that sell widgets. (Here 'widgets' is 'live soccer', but stay with me).

If Major League Widget Corporate told MLW Seattle (and the manager there) that an efficient monthly payroll was $100,000 and gave the manager of MLW Seattle (and all other 19 stores) the ability to send contracts to MLW Corporate which get mailed to the employees, we have a pretty good simplification of the Capital Call/Player Salary .

Now, let's look at MLW Los Angeles. They think they can be more efficient with more staff, or by paying more experienced Widgetmongers, or whatever. If MLW Corporate told MLWLA that they could only spend the extra money if they can prove that the Widgetery is in fact making more money (i.e. By sending more money to MLW Corporate). Now is MLW took that money to try to improve stores that were not as successful, would that make MLW any less "one company"?

 

I'm hardly an expert on the topic, but from what I do know it's a little messy. Still, the idea of some of the players being under contract to the I/O and some to MLS probably works IMO. Keep in mind, there is a liability here -- the US Pro player payroll. As it now stands, my understanding is that AEG is responsible for paying these players on Galaxy II unless a player signs an MLS contract and is part of the 30 man roster. If the US Pro players are signed to MLS contracts and become union members, liability for that payroll shifts to MLS. So how does MLS get the money from AEG to pay it?

A capital call is imperfect. The bedrock principle of capital calls is that the cost is equally shared by the shareholders. So, if it costs $1m in salaries to keep a US Pro team like Galaxy II, if MLS is on the hook for that and makes a capital call of the owners to recover the money, AEG will only pay 1/20th of the cost. Obviously, that won't work. MLS might be able to adopt a rule to pass that cost through, just like it does with designated players, but I don't think it has done so. So, to me, leaving the US Pro players on the AEG payroll until they make the 30 man roster and sign an MLS deal makes some sense because AEG has to pay the cost of having these additional players.

The union probably won't like it though. It may not be a compensation issue per se; remember the capped portion of the salary budget only applies to the top 20 players, not players 21 - 30, so I'm not sure the pay for the 28th player on the MLS roster and a top US Pro player may be all that different. The big difference is the guy on the MLS roster is paying dues and the guy on the US Pro roster isn't. To be fair, the guy on the MLS roster gets some benefits from the union the US Pro guy won't get, but still I can see where the union would look at this structure as a means to weaken the union's position with the players. It also provides a ready pool of strike replacement players, should it ever come to that. So, if I'm the union, I want the US Pro players under my tent, paying dues. I'm just not sure how hard the union will push for that -- yet.

 

Not a lawyer, but my understanding is that the only way there can be a cap (hard, soft or otherwise) in the absence of collective bargaining is a single-entity (and MLS' single-entity setup has already survived one court challenge, has it not?).

Given the various work arounds (DPs, off-budget players, etc.), the MLS salary cap appears to be soft(ish). Luxury tax I don't know. What happens to luxury tax dollars in MLB and the NBA? Do they get thrown into the pot of shared revenues?

 

USL Pro.

 

Meaning what?

They're relaxing the rules and giving more autonomy to local teams to make personnel and marketing decisions, but I don't know what you mean by the league is "moving away from single ownership more and more."

The building blocks of the league are the same: investors own stock in MLS, LLC and have the right to operate a club in their market. I don't know how they're moving away from that model at all, much less "more and more."

There are no I/Os that don't own stock in MLS, LLC (though there are investors who do but don't operate a team, making them not I/Os). So I don't know what "moving away" looks like or what you're describing.

 

I do not believe someone can play in an MLS match without being under contract to MLS, LLC. I don't think so. But this whole MLS Teams Owning USL Pro Teams thing is still rather new. Last spring, even the USSF registrar didn't know quite how it worked.

Section 203. Player eligibility

(a) Teams entering the Open Cup shall use their official league roster as their Open Cup roster. Except as specified in this Policy or except as the result of discipline matters imposed by U.S. Soccer, all players on an official league roster will be eligible for Open Cup competition, regardless of any status (e.g. injured reserve) each player may have with regard to league competition.
Players on loan from another team or league may not be included on an Open Cup roster, with the exception of the following:
1) Loaned players originating from teams competing in leagues that are not active participants in the Open Cup Tournament or qualifying process (professional indoor leagues, foreign clubs, etc.); or
2) players on loan from other US clubs for a period of greater than 90 days.

A team may list up to 18 players on its game day roster. Professional teams may have no more than 5 foreign players listed.
Amateur teams are not restricted as to the number of foreign players they may list. Foreign players shall be those players who are not protected individuals as defined in 8 U.S.C. § 1324b (e.g. U.S. Citizens, lawful permanent residents, asylees and refugees).

(b) Two weeks prior to the first Open Cup Round in which a team participates, that team shall submit to the Open Cup Commissioner its Open Cup roster, together with additional player information that has been requested by the Commissioner. A team’s Open Cup roster shall not be frozen at any time during the competition. For Open Cup matches, a team may add players to or drop them from its league roster under the league rules currently in place. Any changes to a team’s roster must be communicated to the Open Cup Commissioner and all clearances obtained, including approval from U.S. Soccer’s player registration department, no later than 24 hours prior to any Open Cup match.

(c) Except as otherwise provided in subsection (d) of this section, any player who plays in any part of an Open Cup match for a team, may not be included in the Open Cup roster or play for any other team in the Open Cup competition for that year.

 

Yeah, if you eliminate a page of disclaimers the short answer is that's true. In 1994, the NBA players sued trying to get the NBA salary cap set aside as a violation of antitrust laws. The judge "did not find any antitrust violations because the collective bargaining relationship exists, and it is controlled by federal labor laws."

http://articles.orlandosentinel.com...tive-bargaining-nba-salary-cap-antitrust-laws

So there are a couple accepted defenses that make salary caps acceptable, one is to negotiate it through a CBA, the other is to be a single entity because one entity can't "conspire" with itself to restrain trade under Section 1 of the Sherman Act. (See my post up above).

Now this gets a bit interesting.

I don't think anyone in the general public noticed, but there appears to be a material difference in the CBA from 2004 and the CBA from 2010 that is now expiring.

Here's the 2004 CBA:

http://www.mlsplayers.org/files/collective_bargaining_agreement__final.pdf

In it, you will find no mention at all of any salary cap. There is a minimum payroll spending guarantee, but no cap of the salary budget. Now, we all remember there were numerous reports that there was a yearly cap on the salary budget at this time (2005 - 2010 seasons), but it appears it was simply set by the league, not bargained for with the union. I suspect as a single entity, MLS was comfortable that they didn't need to bargain over the cap in order to be complaint with antitrust laws, so they didn't.

Okay, let's fast forward to the current deal. Unlike the previous agreement, the current CBA was never put online. There were reports by reporters who talked with people familiar with the agreement, including this one:

http://www.rslsoapbox.com/2012/5/16...league-soccers-collective-bargining-agreement

Note what he says:

"I was given access to what I was told was a partial summary of the CBA that currently governs MLS.
There was little shocking in the document, and not a lot that was really revealing but that is the nature of these types of documents. I did find some interest in the Salary Cap numbers that will be in play the next couple years:

Salary Budget
2010 $2,550,000
2011 $2,675,000
2012 $2,810,000
2013 $2,950,000
2014 $3,100,000"

It was so subtle, I missed it for years, but if this guy is correct, the current deal has a huge change in it: MLS appears to have bargained over the salary cap in the current CBA.

If you are dead set sure the league is a single entity and the single entity defense applies if the players sue you over an alleged antitrust violation, there is no reason for MLS to bargain over a salary cap. Again, MLS didn't in the previous CBA -- at least there is no mention of it. Yet in the current deal, it appears the cap is included.

It appears to me MLS concluded it was safer to negotiate the cap with the players than to put all of its eggs in the "we're a single entity" basket.

Again, MLS prevailed in Fraser, but it didn't prevail because of the single entity defense. The court of appeals opinion concluded, "We also find that the case for applying single entity status to MLS and its operator/investors has not been established . . .", later adding, "MLS and its operator/investors comprise a hybrid arrangement, somewhere between a single company (with or without wholly owned subsidiaries) and a cooperative arrangement between existing competitors."

http://caselaw.findlaw.com/us-1st-circuit/1441684.html#sthash.lXmUkIlV.dpuf

For MLS, it's cold comfort. And, with the Supreme Court's analysis in American Needle v. the NFL, where the NFL single entity analysis was rejected by the Supreme Court unanimously, it's downright chilly.

Here's the arrow right through the heart of the defense:

"In defense, respondents argue that by forming [NFL Properties, "NFLP"], they have formed a single entity, akin to a merger, and market their NFL brands through a single outlet. But it is not dispositive that the teams have organized and own a legally separate entity that centralizes the management of their intellectual property . . .

The NFL respondents may be similar in some sense to a single enterprise that owns several pieces of intellectual property and licenses them jointly, but they are not similar in the relevant functional sense. Although NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned."

http://www.supremecourt.gov/opinions/09pdf/08-661.pdf

From the moment MLS introduced the Investor Operator, I think it made the MLS investors "separate, profit-maximizing entities", and separate, profit maximizing entities do not a single entity make. I appreciate a lot of smart lawyers may disagree, but if I was MLS, given what the court said in Fraser and following American Needle, I wouldn't bet the mortgage on the defense if I was in their shoes.

In fact, my guess is that MLS reached that conclusion too. American Needle was argued before the Supreme Court in January, 2010 and it got a lot of attention. The CBA that was agreed to before the 2010 season by MLS apparently had a negotiated salary cap. I think MLS hedged it's bets and determined, given its structure, it couldn't or shouldn't rely on the single entity defense alone.

So what does that mean?

Practically, I think the single entity structure matters less and less with every passing year. From the pure form that never got off the ground, to the modified form where all league shareholders were responsible for the losses of the league owned and operated teams and half of the losses of the I/O operated teams, to the post 2001 restructuring that transferred the operating losses and profits to the I/Os, the single entity model has been severely watered down over the years. What had remained was the fact that MLS held the player contracts, and MLS, as a single entity, could and would impose much of the salary structure, salary cap included. That too now seems to be bargained over.

As I said, I don't think MLS will give it up unless it has a reason to do so. It would be expensive to unwind and, who knows, maybe in some court case someday it will do some good. But I don't think MLS relies on it now, and that makes it less and less important in how the league is structured IMO.

 

I'm not sure whether I agree or disagree with your conclusion at the end but the post was well thought our and for that alone it should be moved to another forum.

 

In terms of SE, Rothenberg knew what he was doing legally (as much as anyone can, considering that the interpretations of the same law can vary greatly from court to court - this is why the NFL PA usually chooses Minnesota based 8th Circuit or California based 9th - and lawyers arguing these cases are usually at the top of the profession).

The business case is is whether cost containment ought to be the primary goal of a start-up. And most professors would reply that, with rare exceptions, that would be idiotic and that the market penetration ought to be the primary goal. In other words, Rothenberg put that carriage in front of the horsey and assumed that the league would be successful and that the money would flow in. He just didn't want to share that money with the players.

The problem, as it was soon discovered, was that the money was not flowing in and the league was losing a ton of cash in its early years and I would argue that, while there's technically nothing wrong with the SE, the economic notion that it was supporting was wrong for that enterprise at that given time.

As to Rothenberg's business acumen - he was the President of the LA Clippers 1982-89. And they were a disaster (sure, he was working for Sterling but it was still a horribly run organization)

 

Rothenberg is now well into his 70s, but back in the day he was an incredibly bright lawyer. He served as counsel to Jack Kent Cooke, owner of the Redskins, and lead a group that purchased the LA Aztecs in the old NASL. And, my personal view is that he helped shape the narrative that the NASL might have worked but for the nasty old Cosmos driving up the cost of players. This view was not universally shared remember. Sonny Werblin of MSG, who lead the group that bought the Jets out of near bankruptcy and turned them into a financial powerhouse, argued that the better course for the NASL (and the Washington Diplomats) was to shed the league's weaker teams and reorganize with the teams and owners that could match the Cosmos spending power -- MSG gave up on the NASL when they couldn't pull off the reorganization.

I agree though that this idea of keeping labor costs low almost certainly was at the philosophical core of the single entity concept, although, with the league on the hook for half of the cost of operating the teams (and all of the cost of the league operated teams), the model proved to be totally ineffective at containing other costs IMO. Again, MLS reportedly lost $350 million in the early years -- losses that make the NASL look frugal in comparison.

http://www.businessweek.com/stories/2004-11-21/commentary-soccer-time-to-kick-it-up-a-notch