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Salary Cap

Salary cap – A legal (and negotiating) tool that has always generated some controversy, both within traditional sports and in the more recent world of esports. The most basic definition of this mechanism explains that the Salary Cap is an agreement, celebrated between teams in a given competition (and the athletes’ union or their representative association), through which some kind of limits (the so called “caps”) are established on the compensation paid to athletes hired by said teams. Such limits can be applied over individual salaries or the whole team’s payroll.

The official adoption of a Salary Cap clause took place, for the first time, within the National Basketball Association (NBA) in the United States of America, in the mid-1980s[1]. The main objective of instituting this type of restriction was to create a competitive balance between competing teams, preventing those organizations with greater financial power from signing the best players in the league and, thus, creating a technical-competitive imbalance in the championship.

Obviously, the institution of a Salary Cap – a tool that restricts athletes’ remuneration – was met with extreme resistance from the players and, consequently, from the association that represented them within the NBA. According to reports at the time[2], NBA representatives had an extremely difficult negotiation with the National Basketball Players Associations (NBPA), which included threats of a player strike if a Salary Cap was imposed on that league under the terms initially desired.

During the negotiations, the league representatives made a proposal that facilitated the agreement to create the first official Salary Cap in sports: the allocation of part of the NBA’s revenue to its athletes[3]. Thus, led by the initiative of the league’s teams, with the subsequent signing of a collective bargaining agreement (CBA) with the association representing NBA players, the first officially established Salary Cap rule was born, determining a limit on the payroll of competing teams. Over the years, the NBA’s Salary Cap rules have been modified through new CBAs with the NBPA, at the same time as they have served as a reference for other sports leagues that have developed their own rules.

Variations

Today, in addition to the first Salary Cap model described above (which establishes a restriction on teams’ payroll – sometimes called as Universal Salary Cap), we can find different variations of such mechanism in the sports world, such as:

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(i) Individual Salary Cap: in the Major League Soccer (MLS)[4], for example, there is a salary limit per athlete (based on its status), with the exception of the so-called Designated Players – players who, due to their distinguished condition, can receive salaries above the Individual Salary Cap established by the League due to what they can add to the tournament and its businesses;

(ii) Hard Cap: some leagues, such as the National Hockey League (NHL)[5], work with a Salary Cap that cannot be relativized (except for very specific situations), that is, if a certain team is interested in signing a player, but this would cause the Salary Cap to be exceeded, it will need to adjust its payroll to accommodate the new athlete (either by negotiating players with other teams, or by reducing their remuneration);

(iii) Soft Cap and Luxury Tax: the NBA, among other leagues, have created a Salary Cap system that accepts certain flexibility, therefore called a Soft Cap. In this case, teams that exceed the stipulated limit must pay a compensation to the league – a Luxury Tax – usually equivalent to the exceeding amount multiplied by some factor;

(iv) Financial Fair Play: The Union of European Football Associations (UEFA) created a set of rules applicable to football organizations linked to said entity that determines a series of obligations to improve the management and sustainability of said organizations, with special attention to the requirement for financial break-even, that is, football teams cannot spend more than their revenue. Even though this rule does not contain a specific Salary Cap clause, this imposition made on participating teams also leads to greater restrictions in salary negotiations with their athletes;

Following all these examples we can identify two main objectives in creating a Salary Cap rule: the competitive leveling of the tournament (generating a greater balance between teams and greater excitement for fans) and the financial sustainability of competing organizations.

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Salary Cap and Esports

In the context of esports, the implementation of Salary Caps tools is a familiar topic. Riot Games, publisher of the game League of Legends (LoL) and main controller of such esport’s professional leagues, has already announced the implementation of rules with this dynamic in its regional tournaments, more specifically in the LPL (in 2021), LCK and LEC (both in 2024). As announced by Riot Games itself[6], the purpose of implementing these rules coincides with those objectives above: competitive balance and financial sustainability of the participating organizations.

In the rules announced by Riot Games for its European league[7], the LEC’s Sport Financial Regulations (SFR) has the characteristics of a Soft Cap with a Luxury Tax model. In these rules, an upper and a lower limit shall be stipulated for the remuneration of athletes (in this specific case – of the 5 highest-paid athletes from each team), limits that will be defined based on a series of indicators (LEC player salaries, league revenue pool of the current and forecast years, team financial data (especially revenue and expenses), among other market indicators). Teams that exceed the Salary Cap must pay the so-called SFR fee to the league – which will be 50% of the excess value or, if such amount is greater than 150% of the Salary Cap, 100%. Half of the SFR fees collected will be allocated to teams that respected the imposed limits and the other half will be used to promote tier 2 leagues – a similar approach to what we see in traditional sports leagues that have a Luxury Tax system.

However, as discussed above, the implementation of Salary Cap rules in esports tournaments (and also in traditional sports) generates some controversy. Critics of these mechanisms usually bring up two points of discussion: (i) the undue restriction on the rights of employees (athletes), as they lose the right to freely negotiate their compensation and seek better conditions for their professional activity and (ii) the practice of antitrust acts, since the implementation of tools of this kind inhibits free competition between esports professionals.

In the USA, there was an emblematic case that touched this issue regarding the implementation of Salary Cap rules in esports. Blizzard, publisher of the Overwatch and Call of Duty games, controller of the corresponding professional leagues in that country, introduced a Soft Cap rule with a Luxury Tax, which was the subject of investigation and legal action by the Antitrust Division of the Department of Justice[8].

The DOJ accused Blizzard of antitrust-labor practices, as it understood that the implementation of Salary Cap rules in Blizzard’s leagues affected the rights of players and the free competition between them, further stating that the imposition of these rules meant that the teams that wanted to hire a more expensive player had to negotiate lower salaries with lesser players to stay within the Salary Cap. The implementation of this rule, without the participation of players and associations or unions that represent them, would constitute a practice that violates US antitrust laws, among other possible infractions, as understood by the DOJ.

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The exception to this situation would be the constitution of rules of this type through CBAs with entities representing athletes, as observed in the main traditional sports leagues, since most activities performed between Unions and employers are exempt from antitrust law in the USA[9]. In the end, despite Blizzard belief on the legality of the Salary Cap rules, said publisher gave up imposing such restrictions on its leagues and, thus, entered into an agreement with the DOJ to end the law suit.

As it was possible to observe in this text, the Salary Cap rules have legitimate objectives that greatly help the competitive level and stability of organizations and leagues in the long term. Nevertheless, the implementation of such rules must be preceded by an important negotiation phase and, especially, respect the rights of the professionals working in the industry.


[1] Paul D. Stadohar, ‘Salary Caps in Professional Teams Sports’ (Player Market Regulation in Professional Team Sports in Neuchatel, Switzerland, 1998), 4 <https://www.bls.gov/opub/mlr/cwc/salary-caps-in-professional-team-sports.pdf> access on 25 March 2024.

[2] Ibid.

[3] Ibid.

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[4] Available at <https://www.mlssoccer.com/about/roster-rules-and-regulations> access on 25 March, 2024.

[5] Harris Peskin ‘Fixing Esports Finances: A Salary Cap Course Taught by Traditional Sports’ (10 January 2024) <https://www.esglaw.com/publications/salary-caps-in-esports> access on 25 March, 2024.

[6] Available at <https://lolesports.com/article/lec-introduces-sporting-financial-regulations-(sfr)/bltf7b7f07e130f0618> access on 25 March, 2024.

[7] Ibid.

[8] Available at <https://www.hollywoodreporter.com/business/business-news/esports-salary-cap-activision-1235367175/> access on 25 March, 2024.

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[9] Dan Messeloff, ‘The NBA’s Deal with the Devil: The Antitrust Implications of the 1999 NBA-NBPA Collective Bargaining Agreement’, 10 Fordham Intell. Prop. Media & Ent. L.J. 519 (2011), 526 <https://ir.lawnet.fordham.edu/iplj/vol10/iss2/13> access on 25 March, 2024.

Author

  • André de Oliveira Schenini Moreira

    André is a Brazilian lawyer with a Master’s Degree in International Law and is the managing partner at Feoli e Moreira Advogados, a law firm specializing in the tech and creative industries. With distinguished experience in Intellectual Property, Corporate, and Entertainment Law, garnered through his professional journey in corporate law firms and as a legal director at Grêmio FBPA (2009-10), André is renowned for his expertise in transactions and litigation pertaining to the gaming and esports markets. He is a member of the Esports Bar Association (EBA) and the International Game Developers Association (IGDA). Additionally, he serves as an advisor to esports organizations in Brazil and Latin America (ISURUS, INTZ, Redemption), and is a founding partner at Skillcore, a gamification startup. André volunteers as a mentor in entrepreneurship programs and entities (ACE, Global Games Pitch, MIT Hack Brazil), and regularly speaks and writes on legal issues concerning esports and gaming.

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