FIFA Transfer System Rules in front of the Court

The governance of professional football is facing turbulent times. After three verdicts on 21 December 2023 (ESL, RAFC and ISU), the next case potentially sanctioning football governance is already well underway. In the pending Diarra case (C-650/22), the validity of the FIFA transfer system is at stake. Transfers are among the bread and butter of daily football practice. Any flaw in the transfer system will affect the whole industry. This blog post explores Diarra from a competition law perspective. This is interesting because Diarra will be the first case wherein the Court of Justice of the EU (the Court) will have to apply its novel framework relating to Article 101 TFEU (prohibiting anticompetitive conduct), developed in the above-mentioned verdicts.

What is a transfer and what are the rules?

Players engage with clubs via contracts of limited duration. Owing to Bosman, upon expiry of their contract, players are free to explore new horizons. The seminal Bosman case of 1995 was among the first to shake professional football to its core. As a result, no transfer fees could be charged to players at the end of their contracts. Therefore, the transfer system at the time needed rethinking. This led to the transfer system, as we know it, being attacked in Diarra.

During the contract players cannot leave their club, save for a so-called transfer. Basically, a transfer constitutes an early termination of the player contract whereby all parties involved (engaging club, releasing club, player) agree upon an early termination fee: the transfer sum. Transfers and transfer sums are vested practices. Unilateral terminations of player contracts, however, are seldom. FIFA’s transfer rules, the Regulations on the Status and Transfer of Players (RSTP), discourage such termination. Only in the limited event of a so-called just cause, such as outstanding salaries, a player is entitled to unilaterally terminate his or her contract prior to the end date, without any sanctions being applicable. If a player terminates his or her contract without just cause, he or she is liable to compensate his or her club, and he or she may face sporting sanctions too (Art. 17 RSTP). The same goes for the club who would hire such a player: that engaging club would be jointly and severally liable for any compensation due by the player (co-debtor principle), in addition to facing sporting sanctions of its own (Art. 17, 2 and 4 RSTP).

The exact compensation due by a player (jointly with the engaging club) is determined on a case by case basis, as a function of various elements. These include fees for transfers and agents and expenses paid by the former club, instead of only the residual value of the player’s contract. Amounts can be high to excessive, deterring players to unilaterally terminate their contracts early. According to some, such as Frans de Weger and Dannick Luckson this is a correct approach, in view of the principle pacta sunt servanda and to avoid moral hazard issues. Others, such as Czarnota, heavily critique the approach for its unpredictable and untransparent nature, completely ignorant of players’ mobility rights.

Procedurally, for an international transfer, the football association of the releasing club has to issue a so-called International Transfer Certificate (ITC) to the football association of the engaging club, for the latter to be able to register the player (Art. 9 RSTP). Without registration, the player is not entitled to play for the engaging club (Art. 11 RSTP). The former association will refuse to deliver the ITC if the employment contract between the former club and the professional player is considered still in force; or when there has been no mutual agreement regarding its early termination (Art. 11, section 3, Annexe 3 to the RSTP). This means that for a player who – even allegedly – unilaterally terminates his or her contract without just cause, no ITC will be delivered, preventing that player from performing his or her profession at any engaging club in a different association.

Are these rules lawful?

This is the question referred to the Court in Diarra. Diarra played for Lokomotiv Moskou. He was accused of early termination of his contract without just cause and sanctioned accordingly. Although Diarra litigated the matter with some success, the fact remained that he was not able to play for any club for almost a year. The transfer rules prevented him from performing his profession. Seeking for indemnification, Diarra took the matter to a Belgian Court. At the level of appeal, the Court of Appeal of Mons requested the CJEU to rule on the validity of the transfer rules in view of EU (competition) law, especially the co-debtor principle and the rule that no ITC is delivered in the event a player and his former club are in dispute about the termination. The latter rule was explicit in the previous edition of the RSTP, but implicitly still applies in the context of the current 2023 edition.

The transfer rules will have to be assessed under Article 101 TFEU, prohibiting conduct that by its object or by its effect prevents, restricts or distorts competition. “By object” conduct reveals such degree of harm to competition that it is no longer necessary to assess its effects; “by its very nature” the conduct limits competition. Conduct that doesn’t by its very nature limit competition, can nevertheless still have anti-competitive effects, and as such fall foul of EU competition law. In this context, the so-called Wouters and Meca-Medina exemption is relevant. It means that if anticompetitive conduct can be justified as inherent in the pursuit of legitimate objectives of public interest and proportionate to these objectives, it is legal after all.

In its 21 December 2023 verdicts, the Court clarified the scope of this exemption, thereby developing a novel framework to assess (among others) sports related cases. Particularly, the Court clarified that only conduct that merely has the “effect” of limiting competition can benefit from the Wouters and Meca-Medina exemption. For conduct that by its very nature (“by object”) infringes Articles 101 (or 102 TFEU) only the more stringent efficiency gains exemption is available. The conditions for that exemption are tougher than the conditions for the more lenient legitimate objectives defense. This is among others because its requirements are of an economic nature mostly and considerations on the specificity of sport will not carry much weight.

Transfer rules in light of contractual stability, integrity and uniformity

In Diarra, the qualification of FIFA’s transfer rules as a restriction of competition “by object” or merely “by effect” will be the heart of the matter too.

Do the transfer rules constitute a “by object” restriction? Engelen suggests that they do. He analyzes FIFA’s transfer rules as no poach agreements that hinder players from performing their economic activities in the free market. He argues that in the past various courts across Europe have found no poaching agreements invalid as a restriction of competition “by object”, seemingly in situations less restrictive of competition than in the case of Diarra. In so far as the FIFA RSTP actually intend to close the labor market, they may indeed infringe on competition by their very nature.

FIFA justifies its transfer rules in view of maintaining contractual stability between professionals and clubs, and in addition may rely on other objectives too, such as the integrity of the game, or uniformity of rules throughout a global sport. Let’s dissect these objectives a bit further.

Contractual stability seems a legitimate objective worthy of protection. Stability can benefit both clubs and players. Clubs can rely on the players for the whole duration of their contract; players are assured of a place to work for that same duration. From the club’s perspective, stability allows to pursue a sportive and business strategy in the longer term. Transfers can be part of that strategy. For instance, it can be clear from the outset that a club and a player who engage into a multiple year contract will work towards a transfer in year 2 or 3. The club then hopes to get a profit out of the transfer; the player to better himself in another competition at better wages.

This example reflects a case where the club and the player’s interests are aligned. This is not always the case. For example, a club may insist on a transfer to lower its overall wage spend, whereas the player may be unwilling to convert to such business logic. On the other hand, and more importantly in view of Diarra, a player may want to play for another club offering better sportive and/or financial conditions, whereas his current club refuses to collaborate. Such a refusal could have very good sportive reasons: a club’s attempt to win a title may for instance be jeopardized by a transfer that doesn’t fit the sportive plans of the club. A refusal may also have business reasons: from the club’s perspective the offered transfer sum may be considered too low, endangering the club’s long term business plan. For the club, it then makes sense not to let the player go.

The player, then, is “stuck” to his or her contract without a real option to terminate early. This is apparent from the hearing in Diarra, uncovering that very few players ever did. Speculating the reasons, it might be that only a few players dared to take the risk of facing financial and sportive sanctions in an already short career. Furthermore, no club in its right mind would consider hiring such a player, as it would then face pecuniary and sporting sanctions too. Furthermore, what worth does it have to hire a player who is not eligible to play, absent an ITC?

Contractual stability is a valid aim. The question conferred upon the Court is whether FIFA’s RSTP achieve it proportionately, or whether less restrictive measures could strike a better balance between the interests of releasing clubs, engaging clubs and players. Stability is important, but is it so important as to eliminate any unilateral mobility? Another matter is whether it is up to FIFA to determine the rules, top down. It might be that clubs and players themselves are better placed to find the right balance, bottom up. This ties in with a more general remark on private regulation of labor relations, such as the FIFA RSTP. It seems that such regulation may exist only as a default rule, i.e. insofar lawmakers have not regulated the matter themselves and insofar the workers (players) and their employers (clubs) have not entered into a collective bargaining agreement.

The integrity of the game is a legitimate objective for football governing bodies to pursue too. Integrity for instance benefits from a certain stability of squads within one and the same season, so as to assure that clubs can compete on equal footing over the span of the season. This is achieved through the mercato rule: transfers can only occur during two specific transfer windows; the co-debtor rule, nor the necessity of an ITC, seem to have any bearing.

Regarding the ITC, integrity can also relate to the necessity of having some kind of objective oversight on whether a transfer occurs in accordance with applicable norms. Whether integrity requires that an ITC cannot be released in the event of a dispute between a club and a player is another matter. Again, the Court will have to assess whether less restrictive options are available; and the burden of proof that its rules are proportionate lies with FIFA.

Uniformity of rules in sport is certainly also a legitimate objective, especially in a global sport such as football. But in and of itself, uniformity is no excuse for any kind of rule. Uniformity never outperforms legality, so if a less restrictive measure is available to achieve a legitimate objective, that measure should be preferred above another. Furthermore, as aforementioned, with regard to labor relations, it seems that football governing bodies’ regulations can apply as default rules only.

The novel competition law framework: restriction of competition “by object” and “by effect”

The aforementioned considerations reveal a difficulty in the Court’s novel competition law framework: when and where does a “by object” analysis end a “by effect” analysis start? Indeed, the above considerations relate to the effect of the FIFA RSTP equally, and perhaps even more, than to their object.

The 21 December 2023 verdicts themselves do not shed much light on this issue. This is because in ESL and ISU the prior approval scheme for novel competitions was so obviously designed to fend off the market, that a “by object” analysis was inevitable and that no further clarification was needed. In RAFC, the Court didn’t clarify either. In this case, the Court seems to hint towards a “by object” infringement, because the labor market is partitioned along national borders, but ultimately the Court declines to categorize the so called “home grown player rule” – a rule requiring clubs to include a minimum number of locally trained players in the list of 25 players that make the A team – in either bucket and passes the hot potato to the national court.

Hence, the qualification question is not easy. Also, in Diarra it is not clear from the outset in which direction the Court will go: a “by object” or a “by effect” qualification. According to Weatherill, a “by effect” analysis, allowing the Meca-Medina test, seems most likely, absent the level of blunt anticompetitive conduct that featured in ESL and ISU.

However the case may be, the survival of the transfer rules as we know them will depend heavily on FIFA’s ability to put flesh to the bone. FIFA will have to prove that its transfer system pursues efficiency gains (in the event of a “by object” qualification) or legitimate aims in a proportionate manner (in the event of “by effect” qualification). It will have to do so convincingly. In ESL and RAFC the Court made abundantly clear that domestic courts should not be lenient in discharging the burden of proof. Not without importance in this respect is perhaps that domestic transfers seem to function without noteworthy contractual stability issues. FIFA’s RSTP is not applicable to those transfers. It would go too far as to require FIFA to prove its RSTP strikes a better balance than the domestic regimes of all its members, but the thought is worth consideration, nonetheless.

The ball is at AG Szpunar

The ball is now in the court of Advocate General Szpunar. He is due to deliver his opinion in Diarra at the end of April. His opinion in RAFC proved instrumental in settling the three sports related cases of 21 December 2023. It carried significantly more weight than that of his colleague Rantos in ESL, which was set aside by the Court almost entirely. Conscient of Szpunar’s weight and proven track record in sports cases, his opinion in Diarra will probably prove a good prediction of the case’s final outcome.

After Bosman in 1995, Diarra offers the Court once again the opportunity to rebalance the contractual stability and mobility of players in football and the interests of clubs and players alike. Thus, Diarra might lay the foundations for a new paradigm. Will April showers for FIFA’s RSTP bring May flowers for a novel transfer scheme, not created top down, but bottom up by the protagonists (clubs and players) themselves?