MLS Antitrust

Start of Free Agency Presents A Potential Danger to MLS’s Antitrust Status

In less than one month, the 2015 Major League Soccer (MLS) Cup will take place and bring the 20th season of America’s top-flight soccer league to a close. The Cup also kicks off a hectic three-month offseason for player movement, which for the very first time will feature something resembling “free agency” following the ratification of a new Collective Bargaining Agreement earlier this year.

From a legal perspective, the introduction of free agency presents a fascinating situation to watch, as the success or failure of free agency in appeasing MLS’s disgruntled players could lead to a dangerous legal challenge to MLS’s antitrust status. In this post, I’ll quickly sketch the history of MLS’s history with antitrust law. Specifically, I will explain how the limited grant of free agency presents a danger to the league’s status as a “single entity” under the Sherman Antitrust Act.

Legal Background

When Major League Soccer was founded in the mid-1990s, a major concern of its initial investors and operators was how to avoid rapidly escalating costs — especially in the area of player salaries — which might destroy the league before it could capture a major audience. In order to control costs, and to avert a legal challenge to any cost controls as an “illegal restraint of trade” under the Sherman Act, the investors structured the league to resemble a “single entity” (a “collective unit operating together […] with similar interests”). MLS is unique among the major sports leagues in that the league’s investors collectively own the rights to all the teams, delegating the right to control certain teams to “investor-operators.” Players sign contracts directly with the league itself, rather than with individual teams, which prevents player salaries from escalating rapidly. Contrast this arrangement with the National Football League, where each team is independently owned and the 32 teams bid against each other for the services of individual players (within the limits of a league-wide salary cap).

When the league was first founded, MLS players unsuccessfully challenged the league’s single-entity status in federal court. The District Court upheld the league’s status as a single entity, noting the league’s organization as a limited liability company and stating that the team operators do not have “divergent economic interests within MLS’s structure.” On appeal, the First Circuit did not reach the issue of whether the league was a single entity, denying the appeal on different grounds. However, the First Circuit1 rejected an approach taken by the Seventh Circuit that characterized all professional sports leagues as a single entity, and distinguished investor-operators as having a “diversity of entrepreneurial interests.”

The Growth of MLS

At the time of the ruling, MLS was barely surviving. Contraction of specific teams was still a regular feature of the league. Since the mid-2000s, though, the league has been on a steadily upward trajectory. There are now 20 MLS franchises, with three more set to begin play within the next three years. Of the current clubs, fourteen play in a stadium built specifically for soccer.

In May 2014, MLS signed a massive new TV contract with ESPN and Fox Sports, for which the league will receive a reported $720 million over the eight-year period of the contract.

A transformation in the league’s salary process fueled this growth. Beginning in 2007, MLS instituted a rule known as the “Beckham Rule,” which enabled teams to exceed the salary budget for specific players. The general principle of the rule is that, for a “designated player,” the league will pay the first $400,000 of their salary, and the player will only count for that much against the salary cap. The individual team’s investor-operator would pay for any salary over that threshold. This rule enabled the Los Angeles Galaxy to bring the world-class talent of David Beckham to MLS in 2007, sparking a growing surge of extremely talented foreign players and the very best U.S. internationals coming to play in MLS. The Designated Player Rule, though, could be seen as cutting against the idea of MLS as a single entity. Investor-operators were now bidding against each other to attract superstars, and not necessarily with the mutual interests of the league in mind.

The Designated Player Rule didn’t do much good for MLS’s middle class: veteran players who don’t justify a DP salary. Strict restrictions on player movement and salaries, carefully managed by mechanisms such as a “Re-Entry Draft,” helped to keep salaries low. In 2014, the minimum MLS salary was a mere $36,500, and the median was a little more than $90,000. Meanwhile, the highest-paid player made more than $7 million, a salary nearly 200 times greater than the minimum.

Free Agency and its Discontents

Entering negotiations over a Collective Bargaining Agreement in 2015, the MLS Players Union made it clear that both raising the minimum salaries and a form of “free agency” — players being allowed to sign contracts with whatever team they wished — were crucial goals. After an arduous negotiation, the new CBA finally introduced free agency for players over age 28 and with 8 years of MLS experience.

So, for the first time, this MLS offseason will feature something every other American sports league has: free agency. The 2015 MLS Roster Rules released on May 1 — two months after the first kick of the season — set out the new processes in basically non-existent detail. Here, in its entirety, is the information contained in II(G)(2) of the Roster Rules explaining free agency:

“Players 28 years of age and with eight years of MLS service who are out of contract, or have not had their option exercised, will have the ability to select their MLS club, subject to certain restrictions. More details on the Free Agency Process will be released upon the official ratification of the CBA.”

What are the “certain restrictions” promised in the text? Well, no one quite knows. The CBA has been ratified for months, the season is four weeks from its conclusion, and yet — contrary to the promise made in the Roster Rules — no details about free agency have been publicly been provided by the league office. This is merely a continuation of a long, proud MLS tradition of keeping key processes away from public scrutiny for as long as possible. Sometimes it even seems they make new rules up as they go. (See the Jermaine Jones debacle in 2014, when a hastily engineered “blind draw” sent the U.S. international to New England over howls of protest from Chicago.)

However, it seems likely that the delay in announcing the “certain restrictions” relates back to the issue of MLS’s status as a single entity. Like the DP Rule, allowing players to select their MLS club seems to create divergent economic interests within the league, as teams will now be forced into competition for these veteran players. MLS is likely treading very carefully as it tries to avoid opening the floodgates for challenges to the league’s entire business model. In all likelihood, free agents will not be able to sign contracts that exceed their previous contract by a certain percent. This should act as a league-friendly cost control.

Since the league is growing so consistently, though, why would the players bring a possibly destructive and disruptive lawsuit against MLS? After all, they got the “free agency” they wanted, right? Well, it remains to be seen how free agency will affect the league. It is possible that players will be satisfied with their newfound freedom of movement, but the restrictions might also shrink the class of “free” players so much that it fuels a sense of unfairness. If teams seem to collude against veteran players — preferring, perhaps, to conduct the majority of their business through the Re-Entry Draft, where the players are younger and their salaries more manageable — the players might conclude that a legal challenge to MLS’s antitrust status is necessary to bring a fairer salary structure to the league.

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