Eels Blogs

Hi all,

As mentioned previously I am doing Sports law this semester. There was some interest in the last blog I wrote as to my final paper on whether the cap is an unreasonable restraint of trade.

I now have a working draft (it's not quite done yet and doesn't have a conclusion, so be NICE!) but thought it might be interesting reading for some of you.

Hope you are all enjoying the off season,

Tink. : ) x

P.S. I know it is kinda long, but it needs to be 3000 words - perhaps take a tea break between parts.

P.P.S Any thoughts would be much appreciated (and listened to as well!)

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Does the National Rugby League (NRL) salary cap operate as an unlawful restraint of trade?

While sporting activity was once largely altruistic, centred on amateurism and the display of skill and athletic prowess, the modern world has seen sport develop into a major commercial activity involving financially significant contract negotiations, complex sponsorship arrangements and lucrative broadcasting deals. Despite this, the fundamental goal remains the same; ‘pure competition between rivals is the objective in sport’.[1] One way ‘pure competition’ has sought to be protected in many sporting leagues is through salary caps which limit the amount teams can spend on player salaries. This has subsequently led to questions as to salary cap enforceability and its relationship with the common law doctrine of restraint of trade. In light of recent penalties imposed on the Melbourne Storm for extensive breaches of the NRL salary cap, this question has again been brought to the fore. The question remains whether in the face of a challenge from a club or player, the courts would render the salary cap an unlawful restraint of trade.

The restraint of trade doctrine

The starting position for the restraint of trade doctrine considers any contractual provision seeking to limit individual freedom to engage in trade, unenforceable and against public policy.[2] Trade has been interpreted broadly and applies to employment generally,[3] meaning the doctrine is applicable in the sporting context because the salary cap is a ‘labour market control’,[4] in sport. It also means that even with a legally binding contract between club and player, the player still has a cause of action available, because a contract contravening public policy will be rendered void.[5]

Despite this starting presumption, this position is rebuttable if the restraint does no more than afford ‘adequate protection’,[6] to the party it favours and if it is reasonable ‘in reference to the interests of the parties concerned and… the interests of the public’.[7] This therefore involves a balancing act to ‘afford adequate protection’,[8] to the party it favours while ensuring the restraint remains reasonable in regard to other parties concerned and is not ‘injurious to the public’.[9] All restraint of trade cases differ, so the specificity of each situation must be carefully assessed.[10] Thus, the management of the NRL as a competition must be considered in the Australian sporting context as well as the reasons why the NRL introduced the salary cap in the first place.

Protecting the legitimate interest of the NRL

Before assessing reasonableness as between the parties, it must be determined whether the NRL has ‘legitimate interests’,[11] which justify the imposition of a salary cap. A legitimate interest is any interest, economic or non-economic, that the court recognises as important enough to be granted protection.[12] Therefore the reason the salary cap was introduced requires consideration to determine the ‘legitimate interest’ the NRL is trying to protect and whether the salary cap does no more than give adequate protection to this interest.[13]

The NRL salary cap is a hard cap and was first introduced in 1990. Since then, it has consistently been part of the NRL competition apart from 1997-98.[14] It was reintroduced in 1999 and as of 2011, allowed each club to spend $4.3 million on its 25 highest paid players.[15] Each club can exercise its discretion in determining how much each player is paid, as long as total payments are below $4.3 million.[16] According to the NRL, the salary cap’s purpose is to maintain a level playing competition.[17] The view is taken that if clubs were able to spend an unlimited amount on players, ‘it would reduce the attraction of games to fans, sponsors and media partners, due to an uneven competiton’.[18] It would also place the financial position of some clubs at risk as they would be unable to compete with wealthier clubs to attract playing talent,[19] thus also seeking to protect the financial viability of the clubs. These interests have been recognised as important, with a ‘legitimate object of the League [being]… to ensure… teams… are as strong and well matched as possible’,[20] as this ensures ‘the support of the public will be attracted and maintained, and players will be afforded the best opportunity of developing and displaying their skill’.[21] These factors were also seen as contributing to an even playing field.[22]

The salary cap’s operation must now be considered to determine whether the NRL, in seeking to protect these legitimate interests, does not go ‘beyond what is reasonable for [their] protection’.[23] This requires some connection between the legitimate interests and the restraint imposed. An even competition is the goal, so a salary cap, which restrains the amount each team can spend on players, does not appear to go beyond what is reasonable to protect this interest. Also, when considering whether less restrictive alternatives are available, options are limited. Maximum salaries have been implemented to try and regulate player payments but have been held to be an unreasonable restraint in many sporting leagues.[24] Additionally, forms of maximum and tiered salaries are still used in sporting leagues like Cricket Australia,[25] however these also look like they could be challenged as restraints of trade. Similar arguments can be made regarding player drafts, which have also been held to be an unreasonable restraint.[26] As mentioned above, no two restraint of trade cases are identical so these examples do not mean that all situations where a draft or maximum wage is imposed would be rendered an unreasonable restraint, but rather that each sporting league is different and therefore, the methods used to control player payments must be assessed within each league’s framework. With each method new challenges arise.[27]

The pertinent question then becomes whether the salary cap is successful in protecting the interests of the NRL. If not, this becomes a persuasive argument suggesting the salary cap is unlawful as it does not protect the legitimate interests it seeks to. This will be analysed following consideration of whether the salary cap is reasonable as between the parties and a consideration of the public interest.

Reasonableness in reference to the parties

To determine whether the restraint is reasonable as between the parties, a two-fold analysis is required, with the interests of the clubs and players being relevant. Their interests must be balanced against the legitimate interests the NRL is trying to protect.

For players, the starting position must be, that prima facie, the salary cap restricts their ability to maximise their earning capacity playing rugby league in Australia; their choice trade. It could also be argued that the salary cap prevents players moving to their choice club. This was demonstrated in the case of Brett Kimmorley when he wanted to join the St George-Illawarra Dragons due to his club, the Northern Eagles, being unable to fulfill their contractual obligations.[28] While St-George Illawarra was willing to remunerate Kimmorley similarly to the Northern Eagles, the move could not happen because of St George-Illawarra’s position under the salary cap. The situation was resolved by Kimmorley moving to the Cronulla Sharks and having to sign a reduced contract. This scenario clearly illustrates a situation where a player had ‘to reduce his income [and] also [had] to choose another employer’.[29] These arguments are persuasive as to why the salary cap is an unreasonable restraint of trade in regard to the players. The restraint becomes even more questionable when it is remembered that such restraints are extremely rare for any other profession.

However, these considerations fail to recognise that sporting activity is inherently different from other occupations. Although player interests are crucial, these must be balanced against the interests of the competition and the fans in an all-encompassing context where the continuing success of the game remains paramount.

It can also be argued that while the salary cap does restrict the ability of the players to maximise their earning potential, rugby league is no longer the only competition players are participating in. Recently, multiple NRL players have changed codes in Australia and moved overseas to maximise earnings. Recent defections include Israel Folau and Karmichael Hunt to the Australian Football League with deals that ‘cost the organisation more than $7 million’,[30] over three years. Similarly, players like Berrick Barnes and Sonny Bill Williams have moved to rugby union in Australia and overseas. This suggests that players are still able to earn more than what the NRL remunerates them in rival codes and therefore the argument that the players are absolutely restrained in their earning potential is not strictly correct.

For the players, rather than challenging the system itself, perhaps an area for reform is addressing collective bargaining power. In the United States, collectivism is more powerful than in Australia, seen in the significant bargaining power the National Basketball Association Players Association has been able to command in renegotiation of the current collective bargaining agreement which has resulted in a four-month lock out, seeing part of the season cancelled.[31] To achieve such collective power in the NRL however, hurdles need to be overcome including ‘the high turnover of members due to short working careers, the members' relative youth and inexperience… and incomes…arguably [promoting] independent rather than collective spirit’.[32] Regardless, the power of a body like the Rugby League Players Association does not appear appropriately harnessed in Australia.

The argument that the salary cap represents an unreasonable restraint of trade for players also does not consider the strong argument that the salary cap is required to protect the continuing financial viability of the clubs. Fourteen of the sixteen clubs are currently operating at a financial loss,[33] and only seven are privately owned, meaning they are the only ones with ‘a corporate entity to underwrite losses’.[34] The ability of clubs to remain financially afloat is illustrated in the case of the Melbourne Storm and their sustained breaches of the salary cap from 2005-09. Whilst Melbourne was able to exceed the salary cap by approximately $3.8 million over five years, this would have been impossible without the support of News Ltd who provided the Storm with approximately $8 million each year to meet its financial obligations.[35] As a club Melbourne’s situation is not unique; like others it is unable to ‘generate enough of its own income to pay the players what is due under the salary cap, let alone well beyond it’.[36] This is a core argument as to why a salary cap is required, because currently, the NRL does not generate the revenue other sporting codes do, restricting its ability to ‘pay the players much more than it presently does’.[37]

While other competitions like the English Premier League do not have a salary cap and despite this competiton generating over €2 billion in revenue per season,[38] this must be balanced against the tremendous debt and interest payments clubs like Manchester United and Liverpool are straddled with.[39] While the earning power of this league and its teams cannot be questioned, it cannot be replicated in Australia as rugby league does not enjoy the financial backing nor have the world-wide, let alone national appeal to generate such significant revenue.

Therefore in considering the interests of the parties, a balancing act is required between the interests of the NRL, players and clubs. Additionally, whether the restraint is injurious to the public must be considered. This is inherently intertwined to the interests of the parties already discussed.

The interests of the public

Rugby league is referred to as ‘tribal’ in its support, with the public interest involving the NRL continuing as a competition with clubs being able to successfully exist and participate in a strong, competitive environment. With this objective in mind, the factors which suggest that the salary cap is required for the club’s ongoing financial viability, must weigh heavily when considering the public interest and mounts a persuasive argument favouring the salary cap’s reasonableness. Supporting this are the ramifications of the Super League War when there was no salary cap in place. In this period, many clubs were unable to meet their financial obligations, including the Adelaide Rams and Hunter Mariners which saw them leave the competition.[40] Since the salary cap’s reintroduction in 1990, club attrition rates have decreased dramatically, suggesting it has assisted clubs in remaining financially viable.

In regard to players, one argument which might suggest that the salary cap is ‘injurious to the public’, is in regard to player movement to other codes. The NRL’s inability to remunerate players in a manner ensuring they continue to play rugby league means that many players have switched codes. This reduces player talent and sees clubs and fans lose talented sportsmen to other sporting leagues. As emphasised however, the importance of the overall interests of the NRL, clubs, players and public means such outcomes must be weighed against the importance of ensuring the financial viability of the clubs, as it needs to be ensured ‘that the clubs are healthy first… no individual is bigger than the game’.[41] Further, rugby league sees new talent unearthed each year, illustrated by high caliber rookies emerging in 2011 like Daly Cherry-Evans, Tariq Sims and William Hopoate, so player losses are not such a significant consideration.

Does the salary cap achieve its aims?

The above factors weigh heavily in favour of the salary cap. However, there are grounds which suggest that the cap could successfully come under legal challenge centred upon whether it is achieving the interests it was put in place to accomplish. If it does not, the restraint will be deemed ‘unnecessary or futile’,[42] and consequentially, unenforceable.

A ‘level playing field’ is a fundamental aim of the salary cap. However, when considering the results of the regular season and the Final Series it is debatable as to whether the salary cap has achieved this goal. The results illustrate that from 1979-89, ten years prior to the salary cap’s introduction, the Premiership was shared amongst five clubs. In the ten years following the salary cap’s introduction, this increased to seven teams. This is only a superficial analysis and fails to take into account the increase in teams during this period from ‘12… in the 1970’s to a peak of 20 in the mid-1990’s’,[43] which might account for the higher pool of clubs experiencing Premiership success. Other factors could be considered as indicative of a more level playing field, like the number of draws, greater propensity for a team finishing in the bottom half of the ladder one year, to rise to the top half of the ladder the next and the spread of points scored and conceded between teams.[44] None of these however have differed markedly in the post, compared to the pre-salary cap era. Indeed, there is little agreement as to methods to evaluate the evenness of competition with differing results dependent on the measure used.[45] This suggests that perhaps the salary cap has not led to a more even competition.

Melbourne’s salary cap breaches also raise questions as to whether all clubs are operating on an even playing field. Davies argues, following breaches by the Canterbury Bulldogs in 2002 and New Zealand Warriors in 2006 and the fines and docking of competition points as penalties, the result was deterrence to other clubs considering breaching the salary cap.[46] However, his analysis occurred before Melbourne’s extensive ‘rorting’ of the salary cap through methods involving dual contracting, falsely representing that its players had agreed to contract variations, the creation of sham invoices and secret side letters.[47] This all occurred even though each year clubs must provide a statutory declaration to the NRL declaring the value of contracts and indicating compliance with the salary cap. This suggests that the deterrent effect Davies alluded to was not as effective as he thought. Further, Melbourne managed to sustain these breaches over 5 years without being caught with the eventual discovery of the breaches only occurring with the assistance of a ‘whistleblower’.[48] This suggests the difficulty in policing and enforcing the cap, which is concerning. It has been suggested that such systemic breaches are still happening in the NRL, with former player Jason Taylor suggesting that ‘players are being paid in the back pocket payments that are outside of the salary cap and that has been going on for a long time’.[49] This is a persuasive argument as to the salary cap’s inability to ensure one of its fundamental aims, being an even playing competition.

A further issue undermining the salary cap’s ability to ‘even’ the playing field is the increasing trend of private ownership and its impact on third party deals which are directly made to players by companies. This is because the salary cap does not impose any restrictions on the amount a player can earn through such means as long as he is ‘being paid for his own intellectual property, without the need to employ club logos or names’.[50] With owners commanding significant financial standing emerging, like Nathan Tinkler at the Newcastle Knights, their ability to exercise corporate clout toward their playing group, increases significantly. A prime example is the Thoroughbreds, a group of businessmen in Brisbane who assist the Broncos, with ‘the really rich ones [staying] in the background, content for the club to be competitive’.[51] Brisbane has been reported as paying its players $5.15 million in total in 2011, well above the salary cap, largely through third party deals.[52] It is arguable as to whether a Sydney club could generate such support as they are competing amongst each other for the corporate dollar, whereas Brisbane is a one-team town. These trends raise questions about the ability of the salary cap to achieve its goals. This unevenness becomes more profound when the position of clubs like Cronulla is considered, who are awaiting approval for a major residential and retail development which will determine the financial future of the Club.[53]

Despite these factors suggesting the salary cap is not achieving its aims, there has been no litigation in relation to it. Players have threatened legal action like Brett Kimmorley,[54] as did the Sydney Roosters who demanded that the salary cap be increased in 2005.[55] Other clubs called the Roosters move ‘selfish, arrogant and… a threat to the game’s existence as a genuine competition’.[56] Indeed, recent developments indicate the clubs would rather form their own competition if their demands for increased funding are not met.[57] While this funding would not impact the salary cap’s amount, it suggests that the clubs are more willing to begin their own competition rather than challenge the NRL’s rules.[58] While the NRL hierarchy argues that the salary cap protects the clubs financially, this is debatable because while the clubs struggle, the clubs remain ‘responsible for 95 per cent of the $140 million in revenue generated by the game’,[59] yet ‘receive less than half that amount’.[60] This suggests that while financial viability is a significant issue, perhaps increasing the percentage of earnings to the clubs might alleviate this problem.

Conclusion

For the salary cap to be considered a reasonable restraint of trade, the NRL must show it has legitimate interests the salary cap protects and that the restraint is reasonable ‘in reference to the interests of the parties concerned and… the interests of the public’.[61] When balancing these competing interests it can be seen that the salary cap does provide benefits, including assisting the financial viability of clubs, enabling them to participate in a competitive environment for the game’s adoring fans. This however has been undermined by recent salary cap rorts, particularly by Melbourne and the emergence of wealthy owners who impact the ‘evenness’ of the competition through their ability to provide third party deals to high profile players. Despite the issues encircling the salary cap, it has, to date, not come under legal challenge. This suggests that while the salary cap might not be perfect, there is recognition that it provides the best available protection for the vital interests the NRL seeks to protect, thus playing an essential role in maintaining the NRL competition for the clubs, players and paying public.