This is the second part of a blog series on the Real Madrid State aid case. In the previous blog on this case, an outline of all the relevant facts was provided and I analysed the first criterion of Article 107(1) TFEU, namely the criterion that an advantage must be conferred upon the recipient for the measure to be considered State aid. Having determined that Real Madrid has indeed benefited from the land transactions, the alleged aid measure has to be scrutinized under the other criteria of Article 107(1): the measure must be granted by a Member State or through State resources; the aid granted must be selective; and it must distorts or threatens to distort competition. In continuation, this blog will also analyze whether the alleged aid measure could be justified and declared compatible with EU law under Article 107(3) TFEU.

The aid is granted by the State or through State resources

In its decision to launch a formal investigation, the Commission concluded that Real Madrid “enjoyed an advantage which derives from State resources, as the State forgoes possible revenues”.[1] Given that the Commission argued in 2002 that a requalification of a terrain does not entail State aid because there was no transfer of State resources and given that the facts regarding the requalification show some striking similarities with the current case, it is surprising that the Commission provided such a limited analysis. This might leave open the possibility for Real Madrid or the Council to argue that they could have legitimately expected that the land transactions concerned were free of a transfer of State resources. Therefore, it would have been more prudent for the Commission to further highlight the differences between the case in question and its decision not to start an investigation in 2002.

As regards land sale transactions, the land that is sold under market value by the public authorities is to be considered a State resource. The agreements to (1) compensate Real Madrid for the terrain in “Las Tablas” by providing the club other terrains and (2) to provide Real Madrid the land between the stadium and the “Paseo de la Castellana” are both imputable to the Council of Madrid and imply a loss of State resources. As regards the ad hoc modification of the PGOU, even though the modification provides a selective advantage to Real Madrid, this measure is unlikely to qualify as State aid, because no State resource has been transferred. 

The selectivity of the aid granted

With regard to whether the agreements favoured Real Madrid over its competitors, the Council could hold that both agreements could only be made with Real Madrid and not with any other football club. The first agreement involved a compensation for the impossibility to transfer a land from the Council to Real Madrid and the second agreement concerned further land transactions between Real Madrid and the council that, due to the location of several of the terrains in question, could not be offered to another football club.

Nonetheless, both measures at hand can most definitely be considered selective, thereby favouring Real Madrid over its competitors. The agreement of 29 July 2011 is selective because it only involves Real Madrid. Not only does the compensation include an economic advantage for the club, Real Madrid will also have the acquired terrains at full disposal, allowing it to sell, rent, swap or construct in any way it pleases.

Moreover, despite that the Council stated that Real Madrid had to bear all the costs for the construction of the hotel, the parking space and the shopping centre, it is also true that all the benefits of the exploitation will go directly to the football club and not to any of its competitors. The competitors, in this sense, should be interpreted wider than just being other football clubs. The Council has not given any reasons why a hotel and shopping centre in one of the main streets of Madrid has to be exploited by the undertaking Real Madrid. The “Bernabéu-Opañel” plan is therefore also selective in that it favours Real Madrid over competitors that exploit hotels and shopping centres. 

The aid has an effect on inter-State trade and distorts competition

In order for the measures to fall within the prohibition of Article 107(1), there must be an effect on competition and inter-State trade. For this condition to be fulfilled, it is sufficient that the Commission can establish a link between the measures in question and a potential effect on competition and trade. The recipient, Real Madrid, is an undertaking that operates in the European football sector. The 29 July 2011 Agreement could have allowed Real Madrid to receive a higher compensation than what it should have gotten, had the Council used the market values of the terrains in question. The economic advantage obtained by Real Madrid could be used to strengthen its position in the football sector. The same can be said for the operation “Bernabéu-Opañel”. A possible economic advantage deriving from this measure enables the football club to generate profits from the exploitation of a hotel and a shopping centre. This extra income could enable them to strengthen their team by buying new players. A strengthened Real Madrid would distort competition since other football clubs have not enjoyed the same support.

Secondly, the fact that the measure facilitates Real Madrid to run and exploit a hotel in one of the most important streets of Madrid, distorts competition in the hotel sector as well. Other hotels might generate less money because Real Madrid is exploiting an indirectly publicly subsidized hotel.

All the four criteria of Article 107(1) TFEU are fulfilled. The land transactions have created an advantage to the recipient, Real Madrid. Furthermore, the lands provided by the Council are to be regarded as State resources and, given that the measures were selective, competition has been distorted.  

Can the aid be justified?

The moment an aid measure fulfils all the criteria of Article 107(1), it will be seen as constituting State aid. However, the measure could still be deemed justified under certain conditions in accordance with EU Law. There are no EU Regulations or Commission guidelines on the application of State aid rules to commercial sporting activities. Therefore, the question whether the aid can be justified needs to be based on the conditions set in Article 107(3)(c) TFEU.[2] Article 107(3)c) provides that aid may be compatible if it facilitates the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. The Commission understands that the specific nature of sport needs to be taken into account when dealing with State aid cases, as sport fulfils educational, public health, social and recreational functions. Furthermore, it is established Commission practice that a measure may be declared compatible if it is necessary and proportionate and if the positive effects for the common objective outweigh the negative effects on competition and trade.[3] In a Hungarian State aid case dating from 2011, the Commission approved an aid measure for the Hungarian sport sector, since the general objective of the measure (“increase the participation of the general public in youth activities”) took into account Hungary’s commitments that the benefits would be distributed to the widest possible beneficiaries, and is therefore in line with the common market. [4]

Furthermore, over the last two years the Commission has reached several final decisions involving State aid granted for the construction of football stadiums. For example, in a decision dating from 20 November 2013, the Commission decided not to raise objections regarding the plan of the Flemish government to subsidize the renovation and the construction of multifunctional football stadiums as the State aid contained therein was deemed compatible with Article 107(3)(c) TFEU. Even though all the criteria of Article 107 (1) were fulfilled, the Commission acknowledged that the social, cultural and educational return of football stadiums plays a central role in the decision whether the aid could should be declared compatible. Since all the stadiums in question would have a clear multifunctional character and different players could use the stadiums for different events, the Commission found that the general public would benefit from the aid and that the positive effects would outweigh the negative effects.[5]

When applying the balancing test to the possible aid measures involving Real Madrid, firstly, as regards the 29 July 2011 Agreement, there does not appear to be an objective of common interest. The agreement was made with the sole objective of compensating Real Madrid and was not beneficial for the general public.

As regards the “Bernabéu-Opañel” on the other hand, the Council held that the operation would create additional “green zones” for the city and that the hotel and shopping centre would provide work to around 600 people. The question remains, however, whether the positive effects derived from the creation of 600 jobs outweigh the negative effects on competition and trade.

In its decision, the Commission considered that it did not appear to pursue an objective of common interest, which could justify an economic advantage to one of the biggest and most successful operators in a highly competitive economic sector. [6] Indeed, the only player in the football sector that will benefit from the operation “Bernabéu-Opañel” is Real Madrid. The fact that Real Madrid could generate profits from the hotel and shopping centre will not be beneficial to other football clubs operating in the football sector, nor will it be beneficial to the football sector in general. Therefore, it seems unlikely that the positive effects of the operation “Bernabéu-Opañel” outweigh the negative effects on competition and trade.  

The recovery of the aid and possible consequences of a negative decision

A measure which constitutes State aid in the meaning of Article 107(1) TFEU and which is declared incompatible with the internal market, is unlawful. Therefore, should the Commission find that the agreements between the Council of Madrid and Real Madrid constitute unlawful aid, it will order Spain to recover the aid provided to the club.  

The Recovery of the aid

The purpose of recovery is to re-establish the situation existing before aid was unlawfully granted.[7] The procedural rules on the recovery of unlawful aid are laid down in in Council Regulation 659/1999. Article 14(1) of the Regulation provides that “the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary”. Not only is the Commission exclusively competent to decide whether or not a measure constitutes unlawful State aid, it is also exclusively competent to request from a Member State to recover the unlawful State aid. Importantly, however, the recovery itself shall be done in accordance with the procedures under the law of the Member State concerned, provided that they allow the immediate and effective execution of the Commission’s decision.[8] As regards the quantification of the aid, there is no provision of Union law that requires the Commission to quantify the exact amount of aid to be recovered.[9] Nonetheless, the Commission may include information in its recovery decision enabling the addressee of the decision to work out that amount itself without overmuch difficulty.[10]

To establish the amount of aid to be recovered, one needs to firstly determine the total advantage obtained by Real Madrid and the exact moment in which Real Madrid started obtaining the advantage. At this stage in time it is difficult to determine what the Commission could consider as possible advantage. It is neither known whether the Commission takes all land transactions into account, nor is it clear what the exact value of each parcel is due to the complexity of the case and the lack of relevant information. However, once a total advantage is established, and with that the total amount of aid to be recovered, this amount would also probably include interest at an appropriate rate fixed by the Commission.[11]  Interest would be payable from the date the unlawful aid was put at the disposal of Real Madrid until the date of effective recovery. The aid can be recovered by means of a cash payment. However, alternative measures are allowed provided that the Member State ensures that the measure chosen is transparent and eliminates the distortion of competition caused by the unlawful aid. 

The consequences of a negative decision

The direct consequence of a negative decision for Real Madrid is that the situation existing before the aid was unlawfully granted would have to be re-established. Whether this situation concerns the time before the agreement of 1998, the Agreement of 29 July 2011 or before the operation “Bernabéu-Opañel” was conducted will depend on the Commission’s decision. An analysis of other Commission decisions involving land transactions in which the Commission ordered recovery of the aid indicates that the Commission does not simply undo the land transaction itself. The Commission decision that led to the Konsum Nord case included the order directed to the Swedish authorities to recover an amount equal to the difference between the amount offered for a land by the supermarket “Lidl” and the amount paid by the supermarket “Konsum”.[12] With regard to a Dutch case on an alleged sale of land below market price, the Commission established that the amount to be recovered consisted of the difference of the price paid by the undertaking “SJB” and the price initially agreed between the “SJB” and the local authorities. A third very recent example concerned unlawful forest swap transactions in Bulgaria. The Commission ordered Bulgaria to either recover the incompatible State aid granted or undo the swaps concerned. In other words, undoing the land transaction is merely an option and never an obligation.

Keeping the Commission practice in mind, in case of a negative Commission decision, the most likely scenario is that the Commission will oblige Spain to recover the advantage Real Madrid obtained from the transactions, but that the transactions themselves will not be undone. Therefore, the obvious direct consequences for the football club will constitute in paying a lump sum to the Spanish authorities equal to the difference between the valuation of the parcels as established by the Commission and as valued by the Council of Madrid.  

A more far-reaching consequence, such as an unlimited suspension of the operation “Bernabéu-Opañel”, are rather unlikely. The recovery will be done under national law[13], thus further recovery actions mainly depend on Spanish national law. The ad hoc modification of the Plan General de Ordenación Urbana de Madrid de 1997 (PGOU) that opened up the possibility of constructing on the terrain between the stadium and the “Paseo de la Castellana” can, therefore, only be challenged under national law.

If the consequences of a negative decision are only limited to paying a lump sum and, given the fact that Real Madrid is possibly financially the most powerful football club in the world, one could legitimately ask the question what the fuss is all about. Indeed, why would Real Madrid worry about paying a lump sum of, say, €20 million when its turnover exceeds €600 million per year, and when it is capable of spending more than €100 million in summer transfer fees? In my opinion, the aspects that make the Real Madrid case unlike any other State aid case are not to be found in the amount that constitutes the total financial advantage for the club nor, consequentially, the amount that would have to be recovered. What makes this case special is the very specific role played by citizens and the position Real Madrid has in the football sector. A negative State aid decision involving one of the richest and most successful football clubs in the world would serve as a warning to the entire European football sector that the Commission is serious regarding unlawful State aid granted to football clubs.  

To be continued….

[1] SA.33754 (2013/C) (ex 2013/NN) – Spain Real Madrid CF, §36

[2] Article 107(2) and Articles 107(3)a), b) and d) are also justifications, but are not relevant to the case at hand

[3] Community framework for State aid for research and development and innovation, OJ C 323, 30.12.2006, p. 1, point 1.3.

[4] SA.31722 Supporting the Hungarian sport sector via tax benefit scheme, §85-90

[5] SA.37109 (2013/N) – Belgium Football stadiums in Flanders, §28-34

[6] SA.33754 (2013/C) (ex 2013/NN) – Spain Real Madrid CF, §38-40

[7] Commission Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, Recital 10

[8] Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, Article 14(3)

[9] Case C-480/98 Spain v Commission [2000] ECR I-8717, §25

[10] Commission Decision SA.24123 Alleged sale of land below market price by the Municipality of Leidschendam-Voorburg, §107

[11] Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, Article 14(2)

[12] Commission Decision No C 35/2006 – implemented by Sweden for Konsum Jämtland Ekonomisk Förening, §74-77

[13] Council Regulation (EC) No 659/1999, Article 14(3)

Rumours are swirling around the decision (available in French here) of the Court of Appeal of Brussels in the case opposing RFC Seraing United to FIFA (as well as UEFA and the Belgian Football Federation, URSBFA) over the latter’s ban on third-party ownership. The headlines in various media are quite dramatic (see here and here), references are made to a new Bosman, or to a shaken sport’s legal system. Yet, after swiftly reading the decision for the first time on 29th August, I did not have, unlike with the Pechstein ruling of the Oberlandesgericht München, the immediate impression that this would be a major game-changer for the Court of Arbitration for Sport (CAS) and the role of arbitration in sports in general. After careful re-reading, I understand how certain parts of the ruling can be misunderstood or over-interpreted. I believe that much of the press coverage failed to accurately reflect the reasoning of the court and to capture the real impact of the decision. In order to explain why, I decided to write a short Q&A (including the (not water-proof) English translations of some of the key paragraphs of the decision).

1.     What is the case about?

RFC Seraing United (hereinafter Seraing) has, since the adoption of FIFA’s ban on third-party ownership, been at the forefront of a legal crusade against the ban (as I have explained on this blog I personally believe the ban is legitimate and compatible with EU law). The club has fought the ban tooth and nail at the CAS (the award is here) and later at the Swiss Federal Tribunal (the translation of the ruling is available here), in both instances unsuccessfully. It is now challenging before the Belgian courts the sanctions that were imposed by FIFA, confirmed by the CAS award, and enforced by the URSBFA. For this protracted and expensive legal campaign, RFC Seraing enjoys the backing of Doyen, the infamous investment firm at the centre of the football leaks scandal. The 29th August decision is the last episode in this saga and the first that has been widely portrayed as a big win for RFC Seraing.

2.     What are the findings of the decision?

So, why is it widely reported as a win for Seraing? This is because the Court of Appeal considered itself competent to hear the case and disregarded the objections (in particular the claim that a valid CAS arbitration clause existed) raised by FIFA, UEFA and the URSBFA regarding its jurisdiction. However, the Court also refused to send a request for a preliminary ruling to the  Court of Justice of the European Union, a long-standing demand of Seraing’s lawyers.

3.     Why did the Belgium court find that the CAS arbitration clause invoked by FIFA & Co is invalid?

The core of the reasoning (found at §13 to §15 of the decision) on the validity of the CAS arbitration clause included in FIFA’s statutes turns on whether it aims at a « defined legal relationship », a prerequisite for the validity of arbitration clauses under Belgium law and the New York Convention. In laymen terms: if the clause is too general and does not provide a clear definition of the scope of disputes it covers, then it is invalid. Unlike reported in many outlets, the focus is not directly on the free consent to CAS arbitration, and the Court of Appeal does not declare the clause contrary to EU law or the ECHR on this basis, but on the vague nature of the CAS arbitration clause enshrined in the FIFA Statutes and its incompatibility with Belgian law.

In the case of Seraing, the clause invoked by FIFA was by reference, meaning that the reference of Seraing’s statutes to its compliance with the statutes of FIFA (at the time of initiating the proceedings the 2015 FIFA Statutes), which include an arbitration clause, was supposed to constitute a valid agreement to arbitrate the present dispute. Yet, as the Court of Appeal points out, the FIFA statutes are rather vague with regard to the nature of the disputes that are to be arbitrated. In fact, article 66.1 FIFA Statutes (2015 edition) provides simply that « FIFA recognises the independent Court of Arbitration for Sport (CAS) with headquarters in Lausanne (Switzerland) to resolve disputes between FIFA, Members, Confederations, Leagues, Clubs, Players, Officials, intermediaries and licensed match agents ». Moreover, the Court of Appeal also refers to article 59.1 and 2 FIFA Statutes (presumably this time 2018 edition) that does not allow recourse to national courts unless provided by FIFA rules. It concludes that based on these provisions, « the submission to arbitration is provided in general for all disputes between certain parties, including FIFA, UEFA, URBSFA and football clubs (including RFC Seraing), but without any precisions or indications with regard to the legal relationship affected ». Hence, « the intention of the drafters of this clause is clearly to capture all types of disputes between the designated parties, turning it into a general clause, which cannot be found applicable as it does not constitute an arbitration clause recognised under Belgian law ».

FIFA submitted that the type of disputes governed by the arbitration clause were necessarily limited to the social objective of FIFA and that the CAS’s competence was limited to « sporting » disputes. But the Court of Appeal countered that the former limit remains too vague to find that the clause targets a « defined legal relationship ». It further deemed that the restriction to « sporting » disputes was not included in the clause and that the CAS could independently decide to amend the scope of the disputes that fall under its competences. It also rejected the view of the URBFSA that the clause was limited to disputes concerning « the statutes, regulations, directives and decisions of the URBFSA, FIFA and UEFA ». And, it refused to consider that the article 38.2. of Seraing’s statutes, providing that « [E]very arbitral dispute with a foreign dimension, susceptible of being subjected to the international bodies of FIFA and concerning the statutes, regulations, directives of FIFA, will be submitted to its internal arbitral bodies », constitutes a valid CAS arbitration clause as it refers to FIFA’s internal arbitral bodies (even though no such arbitral bodies exist in practice).

A flurry of other less convincing arguments raised by the defendants were also dismissed by the Court, which came to the conclusion that the clause invoked did not aim at a defined legal relationship and could therefore not be considered an arbitration clause in the sense of articles 1681 and 1682, §1 of the Judicial Code. There is, however, no indication that the Court of Appeal fundamentally objects to FIFA, UEFA or the URSBFA imposing that certain disputes be dealt with by the CAS. Crucially, the emphasis is on certain: what the Belgian court criticized is the general all-inclusive wording of the current FIFA Statutes.

4.     What are the immediate consequences of this invalidity for FIFA and the CAS?

For Seraing, the consequences are vital, any other finding would have put an abrupt end to its case before the Belgian court. Now, it will have the right to argue its case in front of the Court of Appeal in October, and this is a victory in itself. Yet, beyond Seraing, the systemic effects are in my view far less far-reaching than highlighted in the media. FIFA was never immune from challenges by clubs (and other football stakeholders). It was, for example, repeatedly attacked in front of the European Commission on competition law grounds. Moreover, clubs, such as the SV Wilhelmshaven, were already challenging the implementation of CAS awards confirming FIFA sanctions in national courts. In this regard, there is nothing new under the sun. Finally, the Court of Appeal has not excluded that it would accept a reformulated CAS arbitration clause with a better-defined scope (such as one that would narrow it down only to disputes arising out of the regulations and decisions of FIFA).

In practice, not much should change with the Seraing ruling. FIFA will continue to hand out its decisions sanctioning clubs circumventing its rules. The Swiss courts, which are under the Lugano Convention primarily competent to hear challenges to the decisions of a Swiss association, will continue to enforce the CAS arbitration clauses by reference as they have always done, and clubs will, therefore, continue to have to go through CAS arbitration (or they will have to wait to be sanctioned by their national associations to initiate proceedings in front of national courts). Furthermore, from a strategic point of view, few clubs (unless they are desperate like SV Wilhelmshaven and/or backed by an external funder such as Seraing) will be interested in starting a multi-year litigation odyssey in national courts to challenge FIFA (or any other sports governing body, SGB). The same is true for athletes (let’s remind that Claudia Pechstein is bankrupt and still far from having won her case). Doing otherwise would mean being ostracized from professional football for many years, something very few clubs (and athletes) can afford. Thus, while the Seraing judgment confirms that going to national courts is an option that is available to clubs challenging FIFA, it does not affect the general governance context of global football (and sports in general) that remains extremely unfavorable to litigation in national courts. Challenging FIFA in national courts was never out of question, it was (and remains) just very costly and very unlikely to succeed, and Seraing has changed this state of affairs only at the margin.

5.     Why do I think Pechstein is more important than Seraing?

As pointed out, the Seraing case might encourage a re-writing of FIFA’s statutes and reminded us that CAS arbitration clauses cannot cover any and every dispute that can arise between SGBs and clubs (or athletes), but it stops there and does not challenge the institutional structure of the CAS, nor its centrality in the global governance of sport. The Pechstein ruling of the OLG München was more interesting in this regard, as it was addressing the core institutional problems of the CAS. These are not related to the voluntary nature of CAS arbitration (I personally think there are good reasons to bind athletes and clubs to CAS arbitration even against their will). Instead, the critical focus should be on CAS’s structure as a judicial institution that is not legitimated like any other arbitral tribunal by autonomous free consent, but by public interests (e.g. the neutral governance of global sports, the worldwide fight against doping or the regulation of the transnational labour market in football). Thus, CAS’s function and legitimacy must lie primarily in its role as an independent counter-power to the transnational private authority exercised by SGBs. It is, therefore, crucial that its independence from the SGBs be submitted to more stringent control than it currently is (see our paper with Ben Van Rompuy on this question). The OLG München recognized it in its Pechstein ruling, but the BGH failed to appreciate this profoundly constitutional question and the importance of at the same time saving forced CAS arbitration and challenging the current set-up of the CAS. The Pechstein case is now pending at the German Constitutional Court and should be decided relatively soon (but the German press recently reported that there is still no date for a hearing). The fact that the Constitutional Court has accepted to take the case on its docket is already a sign of its skepticism towards the BGH’s decision. If we want to see a ground-breaking, earth-shattering, revolutionizing new Bosman we better turn our heads towards Karlsruhe, the winds of change in sport justice might come from there...