The Covid-19 crisis of 2020 brought the whole world to a standstill and had a major impact on Formula One. The F1 season suffered postponements and several questions were raised about the survival of the teams amidst the financial constraints induced by the economic climate during the pandemic. The various income streams were jeopardised and owing to the investment heavy nature of the sport, the various stakeholders were keen to find a sustainable solution not just for the 2020 season but for the years to come so as to protect the various teams and their interests moving forward.
An initial budget cap of $175m had been set, however, after various discussions; it was reduced to $145m for the year 2021, and then subsequent reductions to $140m in 2022 and $135m for the year 2023 were agreed upon.
The budget cap however, did not include various items which in essence represents the cost of building and running the cars. The budget also excluded the salaries of drivers and those of the three highest paid employees at each team which would typically include the Team Principal and the Technical Director. To further soften the blow of the financial impact resulting from the pandemic, which could have repercussions for years to come, it was agreed that the drivers and the team bosses would also be added to the cap equation.
The restrictions will come into force from 2023. The teams will be allowed a maximum budget of $30m to be split between their two drivers. The teams could spend more than the agreed cap; however, such excess would be deducted from the team’s operational budget.
SALARY CAPS UNDER EU COMPETITION LAW
Under Article 101(1) of the TFEU any agreement, undertaking, or any concerted practices which may affect the prevention, restriction, or distortion of competition within the EU is prohibited.
As per the EU Treaty there is no specific definition for an undertaking, however, the European Courts and their jurisprudence has established that the legal status of an entity is not a cause for concern as long as it is indulged in some form of an economic activity.
The Fédération Internationale de l'Automobile (FIA), F1’s regulatory authority along with the teams is based out of Europe and is therefore under the purview of EU’s competition rules. Under Article 101(1), the FIA and the teams could be considered as undertakings as they indulge in various economic activities relating to promotion, licensing and organising of racing among other things.
THE SARACENS CASE
In 2019, Saracens, an English Professional Rugby Club was found in breach of the Premiership Rugby Salary Cap Regulations and were heavily sanctioned by an independent disciplinary panel.
Saracens challenged the salary cap rules on the grounds that it was violative of the competition law rules as it prevented them from being able to acquire and attract the best talent.
This matter was the first of its kind where salary cap rules were challenged in Europe.
The decision was made by an independent arbitration panel and not a Court or a competent Competition Authority, however, the argument in support of salary caps was that for a breach of competition law, the test of proportionality must be applied in order for its justification:
1. The measure must be an effective way of achieving a specific aim (The test of suitability).
2. Such measure must be necessary for achieving the specific aim, and that no alternative or less restrictive measure is capable of achieving the specific aim (The test of necessity).
3. The restriction imposed by such measure must not be greater than necessary to achieve the aim (The test of proportionality )
Saracens failed to provide adequate evidence or analysis whether the salary cap imposes a restriction on competition. Very little data was presented on basic principles required for such a conclusion, such as what is the relevant market in which competition is allegedly appreciably limited and, in order to measure the degree of that restriction, what level of competition might have theoretically existed without the regulation in question.
The salary cap regulations of F1 as per the test established in the Saracens case can be considered as:
1. An effective measure to achieve a specific aim of ensuring financial sustainability.
2. The measure ensures that no teams exceed the stipulated budget.
3. The measures ensure that by operating within the means of the salary cap so imposed, greater financial stability would be achieved and that no other alternative would ensure the above stated objective.
Since the F1 salary cap regulations fulfil all the conditions mentioned above, it could be argued that the decision in Saracens would support the implementation of salary cap regulations in F1.
LESSONS FROM THE AMERICAN MODEL
The National Basketball Association (NBA) was the first league to introduce a salary cap in the 1984-1985 season. The practice of imposing salary caps was then adopted by major North-American leagues such as) Major League Baseball (MLB), National Football League (NFL), National Hockey league (NHL) and others. The introduction of individual salary caps could be an attractive proposition for majority of drivers as it would ensure a more equitable distribution.
The rationale for the introduction of salary caps focused on achieving two main objectives: increasing the competitive balance and maintaining financial stability in the sport. One of the most significant characteristics of professional team sports is the concern for competitive balance. It is widely held that a degree of uncertainty about the outcome of such competition is needed for entertainment. Salary caps therefore, help small-market clubs retain star players who would otherwise be tempted by higher salary offers from large-market clubs, preventing large-market clubs from becoming overly dominant.
One of the major reasons for the success of salary cap regulations in US Sports is closely linked to the structure of such leagues. The market is fairly limited as there are a stipulated number of teams who share broadcast and sponsorship money in equal proportions. Thus, the effective implementation of salary caps has been possible in the United States.
Formula One is also a closed league in that regard, wherein 10 teams compete. The introduction of salary cap, although exacerbated by the pandemic; would ensure higher levels of competition and financial stability.
The Covid-19 crisis brought to the fore, certain challenges to the financial health of the sport. Formula One being one of the most investment-intense sport, found itself in a precarious position where survival of the teams and a sustainable model for the coming years became the top priority. The budgetary cap and the salary cap prima facie seem at loggerheads with the EU Competition laws, however, as was stated in the Saracens case, the regulations aim to create financial stability through the restrictions imposed and would thus not violate Article 101 of the TFEU. Salary caps as a concept is relatively nascent in Europe, however, the practice could be adopted by various leagues across different sports who are reeling from the tremors caused by the financial instability during the pandemic.
F1’s decision on introducing salary cap and budgetary cap is a commendable effort taken by the various stakeholders, and it ensures not just the survival but the sustenance of the sport in the years to come. Key decisions regarding the regulations are yet to be formalised, however, the teams have welcomed the move with open arms. The salary caps would provide an equitable distribution of salaries; however, it would not necessarily impose restrictions as certain teams could for instance, enter into agreements with their sponsors who could in turn finance the salaries of top drivers as a way of ensuring that the best drivers are retained by the sport and incentivised accordingly.
In the last decade, F1 has seen the dominance of two teams, Red Bull Racing and Mercedes who have accounted for 11 Constructor’s Championship Titles. The sport needs a revamp so as to make the playing field more even and competitive and the said regulations hope to achieve this objective. Thus, the regulations could prove to be a masterstroke in the years to come as they would not only ensure the sustainability of the sport but also improve the standards of competition which could help generate more viewership and invite further steams of revenue in the future.
* We would like to thank Avirath Pareek (5th year law student, Symbiosis Law School, Pune) who is currently doing an internship with Sensato Sports Law, for his invaluable contribution.