This is the first part of a blog series involving the Real Madrid State aid case.

Apart from being favoured by many of Spain’s most important politicians, there have always been suspicions surrounding the world’s richest football club regarding possible financial aid by the Madrid City Council. Indeed, in the late 90’s a terrain qualification change by the Madrid City Council proved to be tremendously favourable to the king’s club. The change allowed Real Madrid to sell its old training grounds for a huge sum. Though the exact price for the grounds remains unknown, Real Madrid was suddenly capable of buying players like Figo and Zidane for record fees. However, the European Commission, even though agreeing that an advantage was conferred to the club, simply stated that the new qualification of the terrain in question does not appear to involve any transfer of resources by the State and could therefore not be regarded as State aid within the meaning of article 107 TFEU.

Agreements between the club and the Council have been a regularity for the last 25 years.  A more recent example concerns an agreement signed on 29 July 2011 (Convenio29-07-2011.pdf (8MB). The agreement regularizes two earlier agreements between the Council and Real Madrid dating from 1991 and 1998 respectively. The commitments deriving from those earlier agreements were not followed by the relevant parties and therefore had to give way to a new agreement. A closer look at the 29 July 2011 Agreement exposes a bizarre chain of events. It turned out that in 1998 Real Madrid transmitted an undivided half of their old training grounds to the municipality. Apart from a large sum of money, the club was to receive a number of terrains spread out over the municipality, including a terrain located in the area called Las Tablas valued at €595.194 in 1998. However, due to its qualification for sporting usage, the Council concluded in 2011 that the parcel could not be transferred to the club due to the fact that Madrid’s urbanity laws only permit a transfer of urban or urbanizable terrains. For that reason, the Council agreed to compensate the football club not for the original value of €595.194 but for a staggering €22.693.054,44! Real Madrid was not compensated in the form of a sum, but rather it was presented with a packet of terrains including four terrains of a total area of 12.435 m/2 in the street Mercedes Arteaga in the Carabanchel district of Madrid.

The year 2011 also saw a second agreement between the Council of Madrid and the football club, this time concerning construction works on the Real Madrid stadium Santiago Bernabéu. This agreement, dating from November 2011, is known as operation Bernabeú-Opañel and includes the following plans. The Council is to transfer to the club a terrain constituting a 12.250 m/2 buildable surface which borders the west-side of the Bernabéu stadium. This acquirement permits Real Madrid to cover the stadium with a roof, to build a shopping centre and a hotel on the façade situated on the Paseo de la Castellana (one of Madrid’s most important streets). In return, the club firstly agreed to transfer to the Council the shopping centre Esquina del Bernabéu, which is situated at the South-East-side of the stadium with a buildable surface of 6.858 m/2. The Council would then demolish the shopping centre and convert it into a public park. Secondly, the club is to transfer back to the Council part of the four terrains located in the street Mercedes Arteaga that it received as part of the 29 July 2011 Agreement.  In addition to the transfers of the old shopping centre and the terrains located in the street Mercedes Arteaga, Real Madrid is also to pay €6.6 million to the Council. The Council, however, encountered an obstacle in its own urban laws. The Plan General de Ordenación Urbana de Madrid de 1997 (PGOU) did not permit private parties, like Real Madrid, to construct on public terrains owned by the Council. Therefore, on 16 November 2012, the Government of the autonomous region of Madrid announced that the PGOU is to be modified ad hoc for the operation Bernabeú-Opañel.

By means of the operation Bernabeú-Opañel, Real Madrid expressed that it hopes to “convert the Club in a sporting institution of reference in the world. The aim is for the stadium to have a maximum level of comfort and services superior to the most modern and advanced sporting stadiums in the world” (PropuestaRealMadrid.pdf (914.2KB)). According to the Council, the operation will not only improve sporting and leisure facilities in the city, it will also create up to 9.546 m/2 of “green zones”. Moreover, the investment for the construction works will be borne only by Real Madrid and it is expected that the construction works will give employment to more than 2 000 people and the exploitation to 600 people.

In 2012, the ecological movement Ecologistas en Acción found several legal irregularities with regard to the 29 July Agreement operation Bernabeú-Opañel and (unsurprisingly) concluded that the agreements appeared to be very beneficial for Real Madrid. It therefore started legal proceedings in front of the Spanish administrative Court claiming that the ad hoc modification of the PGOU was illegal. It would later on launch on appeal in front of the Tribunal Superior de Justicia de Madrid, or Madrid High Court (TSJM-Order-31-07-2014.pdf (112.3KB)). Simultaneously, it informed the European Commission of potential unlawful State aid granted by the Council of Madrid to Real Madrid. To Spain’s outrage, on 18 December 2013, the Commission declared that it had enough reasons to believe that the incriminated transactions might involve State aid and launched a formal investigation in accordance with Article 108(2) TFEU. Concretely, the Commission expressed the following concerns:

1) The Commission doubts whether it was impossible for the Council of Madrid to transfer the Las Tablas property to Real Madrid;

2) The Commission doubts that a market value of the Las Tablas plot of land has been sought;

3) The Commission doubts the market conformity of the value of the properties which were transferred to Real Madrid by the 2011 Agreement and at the occasion of the subsequent further exchange of land around the Bernabéu Stadium, and;

4) The Commission doubts that there is an objective of common interest, which could justify selective support to a very strong actor in a highly competitive economic sector. 

The Commission’s doubts seem, in light of the facts at hand, reasonable. To decide whether or not the land transactions qualifies as unlawful State aid, however, the four cumulative criteria of Article 107(1) TFEU need to be fulfilled. (1) The aid must confer an economic advantage on Real Madrid; (2) it must be granted by a Member State or through State resources; (3) the advantage must be selective and distorts or threatens to distort competition; and (4) it must affect trade between Member States.

Advantage to Real Madrid over its competitors

As the Commission pointed out in paragraph 21 of its notice initiating the infringement procedure against Spain, “Real Madrid appears to enjoy an economic advantage from the fact that a plot of land, which at the time of its acquisition was valued at €595,194, appears 13 years later, in an operation to offset mutual debts, with a value of more than €22 million”. Furthermore, there are also doubts regarding the market conformity of the lands transferred in the operation Bernabéu-Opañel. In situations where the public authorities wish to sell public property to private investors, it should make sure that the revenue obtained from the sale is comparable to market level. This criterion is also known as the “market economy vendor principle”. In accordance with the Land sale Communication, should the public authorities wish to avoid any advantage to the recipient over its competitors during a land sale transaction, it should apply one of the two following procedures: (1) an unconditional bidding procedure or (2) a procedure where the land is valued by one or more independent asset valuers prior to the sale negotiations. The Court of Justice has ruled that other methods may also achieve the same result, but in order to comply with EU State aid rules, the national provisions establishing rules for calculating the market value of land must in all cases lead to a price as close as possible to the market value.[2] Special obligations for the buyer, such as urban planning requirements, do play a role when determining whether or not the land was sold at market value. Furthermore, land transfer deals, which often consist of more than just one land transaction, have to be scrutinized in their entirety.[3] Therefore, to determine whether an advantage was conferred to Real Madrid, both agreements between the club and the Council have to be take into account with a special focus on the valuation methods used.

In 1998, the valuation for the terrain in Las Tablas (€595,194) was done by the administration of Madrid, on the basis of legislation which offers a technique to determine the value of urban real property. The calculated value for the same terrain in Las Tablas in 2011 amounted to €22.693.054,44. According to a valuation report released by the Municipal Valuation Department, the value was calculated in accordance the same application rules. Yet it has to be borne in mind that the Municipal Valuation Department forms part of the Área de Gobierno de Urbanismo y Vivienda del Ayuntamiento de Madrid. Not only is the Área de Gobierno de Urbanismo y Vivienda the main public authority regarding urban planning in Madrid, it is together with Real Madrid the main party in the 2011 Agreement itself.

Real Madrid was not compensated in the form of a payment, but rather it was presented with another packet of terrains valued at €19,972,348.96. In the valuation report released by the Municipal Valuation Department, a list is included with average terrain values per district calculated by the independent appraiser Tasamadrid. In continuation, the Municipal Valuation Department applied a formula based on its own legislation to determine the final value of the terrains. This packet of terrains included land in the street Mercedes Arteaga, valued at €4,360,862 which were transferred back to the municipality in the operation Bernabéu-Opañel.

The operation Bernabéu-Opañel also included the club transferring the old shopping centre Esquina del Bernabéu and added a payment of €6,6 million. A second valuation report indicates that the value of the Esquina del Bernabéu is €3,861 per square meters passed on the average values of terrains found in adjacent streets. Furthermore, the Council “requalified” the terrain between the Bernabéu stadium and the street Paseo de la Castellana by ad hoc modifying the local urban laws (PGOU) before transferring it to Real Madrid. The value of this terrain is also calculated in the second report and ads up to €1,208 per square meter. Even though two of the terrains in question can be found in the same area, the value per square meter of the Esquina Bernabéu is much higher (€3,861) as compared to the value of the land between the Bernabéu stadium and the street Paseo de la Castellana (€1,208). True, the terrain with the Esquina del Bernabéu has already been built on, thereby increasing the value, but one should keep in mind that the operation Bernabéu-Opañel consists of demolishing the Esquina del Bernabéu and turning it into a green zone. On the other, the other terrain will be used for the construction of a hotel and a new shopping centre. Secondly, a quick glance at other real estate transfers in the same area of Madrid shows that the value of the terrains is in fact much higher. In 2012, the Picasso tower was purchased by a private firm for €400 million, or €5000 m/2. Today, the building Torre Titania can be bought for €11,000 m/2 and the building Castellana 200 is for sale for €150 million.

With all the above in mind, one could legitimately get the feeling that the actual aim of the Agreement of 29 July 2011 was to pave the way for the operation “Bernabéu-Opañel”, as some media suggested. Unlike in the Konsum Nord case, where the General Court held that the presence of a link between different transactions could mean that the measure in question does not constitute State aid, the link between the agreements in the Real Madrid case only increases suspicions regarding unlawful State aid. Furthermore, the Council of Madrid has also been inconstant regarding its valuation methods. The value of the terrain in Las Tablas was calculated without an independent appraiser and the value of the Esquina del Bernabéu was calculated using the average value of terrains found in adjacent streets. In short, there are good reasons to believe that the transactions were made in order to provide a financial advantage to Real Madrid.

The remaining three criteria of Article 107(1) TFEU and possible justifications will be discussed in an upcoming blog post.

[1] Notes are omitted. A comprehensive article can be accessed at Oskar van Maren, "The Real Madrid case: A State aid case (un)like any other?".

[2] Case C-239/09 Seydaland Vereinigte Agrarbetriebe [2010] ECR I-13083, §33-35

[3] Case T-244/08 Konsum Nord ekonomisk förening v Commission [2011] ECR II-0000, §58

Register now for the second edition of our advanced professional training and learn how to respond in a safe, appropriate, and effective way to cases of human rights abuse in sport. 

In recent years, the world of sport has seen a rise in reports of cases of emotional, psychological, physical, and sexual abuse. Sport has often struggled to respond in a safe, effective and appropriate way to these cases.  This has, at best, led to missed opportunities to improve and strengthen prevention mechanisms.  At worst, it has caused retraumatisation and additional harm to those affected. 

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The last five years have seen a huge uptick in reports of cases of emotional psychological, physical and sexual abuse in sport. All over the world, across different sports, non-recent and recent cases have come to light: abuse allegations in Dutch gymnastics and US gymnastics, the abuse of female basketball players in Mali, systematic abuse of child athletes in Japan, the abuse of young boys within the English football, or children in other grass-roots sport in Germany, the sexual abuse ofwomen’s football national teams in Afghanistan and Haiti, or the recent sexual assault against a player of the Spanish women’s national football team, to mention but a few.

Ineffective response
Responses from the relevant entities like sport organisations and governments have often fallen short of both the expectations of those impacted, and internationally recognised human rights standards. Some organisations have failed to initiate any investigation whatsoever, while others have commissioned or led inadequate responses. This has resulted in strong  criticism from affected persons, their representatives, and other civil society organisations. However, until now sport has not benefited from  any real  clarity or consistency around good practice on how to respond in a safe, adequate and effective way to allegations of abuse. This course seeks to address that.

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The European Commission’s competition decisions in the area of sport, which set out broad principles regarding the interface between sports-related activities and EU competition law, are widely publicized. As a result of the decentralization of EU competition law enforcement, however, enforcement activity has largely shifted to the national level. Since 2004, national competition authorities (NCAs) and national courts are empowered to fully apply the EU competition rules on anti-competitive agreements (Article 101 TFEU) and abuse of a dominant position (Article 102 TFEU).

Even though NCAs and national courts have addressed a series of interesting competition cases (notably dealing with the regulatory aspects of sport) during the last ten years, the academic literature has largely overlooked these developments. This is unfortunate since all stakeholders (sports organisations, clubs, practitioners, etc.) increasingly need to learn from pressing issues arising in national cases and enforcement decisions. In a series of blog posts we will explore these unknown territories of the application of EU competition law to sport.

In this second installment of this blog series, we discuss a recent judgment of the regional court (Landgericht) of Dortmund finding that the International Handball Federation (IHF)’s mandatory release system of players for matches of national teams without compensation infringes EU and German competition law.[1] 

Background

In 2009, the Spanish Handball League (ASOBAL) and Group Club Handball (the predecessor of the Forum Club Handball (FCH); an association representing the interest of the top European handball clubs) launched a complaint with the European Commission alleging that the rules of the IHF and EHF on the mandatory release of players were in breach of Articles 101 and 102 TFEU.[2] The Commission opened a preliminary investigation. This prompted the EHF to seek an amicable solution with the complainants.

In May 2010, the EHF signed a Memorandum of Understanding with FCH, covering issues such as the terms of compensation for the release of players and the representation of clubs and other stakeholders in the bodies of the EHF:

• The EHF agreed to pay compensation to the clubs for the release of their players to the national team. Starting from the 2010 European Championship, the EHF paid a fee of 270 EUR per player per match via the national federations to the clubs (amounting to a total compensation of 400.000 EUR, i.e. 10 percent of the profits of the 2010 European Championship).[3]

The EHF agreed on the principle that “each day a player spends with the national team/selection his salary should be insured by the National Federation, EHF or IHF in case of injury in favour of the clubs”.[4]

The EHF took an important step towards more inclusive governance by creating the Professional Handball Board, a strategic platform for various stakeholders (leagues, clubs, national federations, and players). It plays an advisory role through the submission of reports and analyses to the EHF Executive Committee and contributes to the decision-making process through its chairperson (who is a full member of the Executive Committee).

Since many of the complainants’ demands were met, ASBOL and FCH withdrew their competition law complaint. Subsequently, the European Commission closed its preliminary investigation in June 2010.

The EU handball “case” is a good illustration of the remedial potential of EU competition law to strengthen good governance in sport. The mere threat of a formal investigation by the European Commission proved sufficient for the EHF to change its rules for the release of players and to establish a channel for clubs and other stakeholders to participate in its decision-making process.

In 2014, the EHF and FCH renewed the 2010 Memorandum of Understanding (MoU) until June 2018. The modified MoU, which has been the subject of negotiations for more than one year, foresees increased fees for the release of players to the European Championships.

Strengthened by the satisfactory outcome reached with the EHF in 2010, the FCH made attempts to come to a similar arrangement with the IHF. Following negotiations during the course of 2010 and 2011, the IHF for the first time in history paid compensation for the release of players to the World Championship and signed insurance for player salaries for injured players. The IHF Council also proposed to integrate the clubs as stakeholders in its bylaws. The clubs, however, did not accept with the terms and conditions of the proposal and no agreement was reached. The clubs were also dissatisfied with the amount of the compensation paid by the IHF: qualification matches were not compensated and the fee only amounted in average to 10-20 percent of the monthly salary paid by the European top clubs. The prospects of reaching an agreement between the IHF and the CFH dimmed. In March 2012, the IHF made clear that it was no longer prepared to discuss a MoU with the FCH. This prompted 30 German clubs to sue the IHF and the German Handball Federation (DHB) before the regional court of Dortmund in April 2013. 

The 2014 Dortmund judgment

The IHF Player Eligibility Code provides that a club having a foreign player under contract is obliged to “release such player to his National Federation if he is called up to take part in activities of that federation's national team” (Article 7.1.2). The activities include the Olympic Games, World Championships, and continental championships as well as the qualification matches and tournaments for these events. According to Article 7.2 of the Code, a club releasing a national player “shall not have any claim to compensation”. Furthermore, the club must take out insurance coverage for the player in the event of personal injury and resulting consequences for the period for which the player has been called to his federation’s activities (Article 7.3.2). A club failing to release a player that is able to play will be penalized in accordance with the IHF Regulations Concerning Penalties and Fines and the disciplinary regulations of the Continental Confederation concerned (Article 7.4.4).

The German handball clubs, supported by the FCH, argued that the rules concerning the mandatory release of players to the national team and their application by the IHF and DHB constitute an abuse of a dominant position prohibited by Article 102 TFEU and the equivalent German competition law provision (§ 19 Gesetz gegen Wettbewerbsbeschränkungen, GWB).

The regional court of Dortmund first addressed a number of procedural issues. Considering that the DHB is bound by the rules of the IHF, the court decided to join the proceedings against the IHF and DHB. Moreover, the court did not defer to the jurisdictional exclusivity claimed by the defendants. It stressed that the internal disciplinary bodies or even the Court of Arbitration could not be considered independent and impartial for the purpose of reviewing the compatibility of the mandatory player release system with competition law.[5] According to the court, neither the IHF nor the DHB regulations could prevent the clubs from seeking direct recourse to an ordinary civil court. Lastly, the court found German law to be applicable. Even though Article 7 of the IHF Player Eligibility Code affects handball clubs worldwide, its obligations also substantially affect the German market in which the claimants operate.[6] The intimate connection between the claims against the IHF and the DHB further supported the conclusion that the regional court of Dortmund was the appropriate legal venue for hearing the case.

On substance, the court found that the IHF is a monopolist on the market for the organisation of international handball events, including the World Championships and the Olympic Games (i.e. events in which national teams compete), and on a number of other separate, but closely related, commercial markets (e.g. sponsorship). Also on the markets for the organisation of European and national handball competitions, the IHF holds a dominant position (solely and together with the EHF and the national federations).[7]

Turning to the contested rule of the IHF Player Eligibility Code (Article 7), the court stressed that the obligation for clubs to release players for matches of national teams without compensation is incompatible with the civil code rule of good faith in contractual performance.[8] In any normal business, it would be unthinkable that an undertaking would provide for free a resource, its employees, to a competitor seeking to make profits from that resource.[9] At the same time, the court found that this obligation constitutes an exploitative abuse of a dominant position prohibited by § 19 GWB and Article 102 TFEU. When recruiting top foreign-raised players, clubs must take into account the costs of paying their players while they are absent and, what is more, the costs incurred if those players would get injured during an international match. As such, uncompensated player release restricts the clubs’ contractual freedom and distorts competition between the clubs.

Although Article 102 TFEU does not contain an exemption clause similar to Article 101(3) TFEU, an undertaking may escape an abuse finding by demonstrating an objective justification or efficiency defense for its conduct. The court, however, brushed aside the arguments put forward by the IHF and DHB to this end. 

First, the defendants contended that without the player release system, clubs would not be willing to release their players to national teams. The release rules would also prevent clubs from trying to weaken foreign national teams in favor of their own national team.[10] The court stressed, however, that the mandatory release of players for national teams in itself is not being contested. It also pointed to the fact that the IHF, notwithstanding Article 7.2 of the Player Eligibility Code, decided to pay compensation for the release of players to the 2011 and 2013 World Championships. This indicates that in principle a compensation would not adversely affect the sporting or other interests of the IHF. In addition, the court made numerous references to the MoU reached between the EHF and the FCH as well as to the MoU between FIFA and the European Club Association (ECA) (i.e. the deal as a result of which the Oulmers litigation was terminated, see below). These examples indeed exemplify that an uncompensated player release system cannot be considered indispensable.

Second, the defendants argued that participation in international handball events increases the exposure and thus the value of the players, which indirectly benefits the clubs.[11] Also this argument failed to convince the court. If the IHF and DHB would be able to quantify this advantage, this could be taken into consideration when determining the compensation. Yet it could not objectively justify the denial of compensation for the release of players or for their potential injuries.

In light of these observations, the court declared the conditions for the release of players to foreign national teams, embedded in Article 7.2 and 7.3.2 of the IHF Player Eligibility Code, null and void. Interestingly, the court also suggested that the IHF would introduce a cap on the number of days an association would be entitled to call up players for the national team. 

A landmark judgment in the making?

Unsurprisingly, the IHF and the DHB lodged an appeal against the judgment before the higher regional court (Oberlandesgericht) of Düsseldorf. It is not unthinkable that eventually the case will trigger a preliminary reference to the Court of Justice and emerge as the successor of the abandoned Oulmers litigation against the FIFA player release system.

The regional court of Dortmund did not expressly rely on the Wouters proportionality test, transposed in Meca-Medina, to assess whether the IHF’s player release system constituted an abuse of a dominant position. The court’s analysis is, however, largely consistent with the analysis that the Court of Justice would follow. After having established that the contested rules emanate from an undertaking that has a dominant position, the court verified whether there are less restrictive means to achieve the objectives pursued by the IHF’s mandatory player release system. It did not call into question the necessity of a mandatory player release system for the organisation of international handball competitions, but the court did conclude that the current system – which leaves clubs uncompensated – could not be objectively justified.

For at least two reasons the Dortmund judgment, while not final yet, has potential to become an important precedent for many other sports.

First and foremost, it offers the first substantive assessment of the compatibility of player release rules with EU (and national) competition law. Particularly in the event of a preliminary reference to the Court of Justice, the case could serve as a much-needed wake up call to all international sports federations that currently operate a similar system. Arguably, federations could assert that the compensation should not cover all the costs incurred by the clubs. Indirect benefits to the clubs could be discounted. Yet it appears undeniable that the imposition of the burden on clubs to supply players without allowing them a fair share of the resulting benefits constitutes an abuse prohibited by Article 102 TFEU.

Second, even though sports federations usually have practical monopolies in a given sport, the remedial potential of Article 102 TFEU to tackle abusive conduct remains underexplored. This case, and even the earlier competition law complaint lodged against the EHF, reveals that it offers a powerful instrument to steer sports federations into the direction of better governance. Eventually the IHF will have to follow the path that others (e.g. EHF, FIFA) have traveled. After all, the determination of a fair compensation for player release necessitates a consensual strategy that balances the needs of stakeholders, in this case the clubs, with the needs of the federation.

We continue to follow this case closely, so stay tuned.

[1] Landgericht Dortmund, Urteil vom 14.05.2014, 8 O 46/13.

[2] Cases COMP/39659 ASOBAL v handball federations and COMP/39669 Group Club Handball v handball federations.

[3] Forum Club Handball, EHF pays compensation to the clubs, 28 February 2010.

[4] Forum Club Handball, Insurance of player salaries in case of injury, 15 June 2010.

[5] Landgericht Dortmund, Urteil vom 14.05.2014, 8 O 46/13, paras. 104-114.

[6] Idem, para. 118.

[7] Idem, paras. 121-122.

[8] German Civil Code, Section 242 (“An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration”).

[9] Landgericht Dortmund, Urteil vom 14.05.2014, 8 O 46/13, para. 129.

[10] Idem, para. 130.

[11] Idem, para. 132.