Dempsey Transfer Highlights Influence of MLS Single-Entity Economic Structure

When Clint Dempsey took the field last night for his first home game with the Seattle Sounders, the crowd’s ovation marked the culmination of collective efforts to bring the United States Men’s national team captain back to MLS after 7 years in the Barclay’s Premier League.  And there is no question that those efforts were truly collective: the Seattle Sounders management and MLS both played important roles in securing Dempsey’s services.  In particular, reports indicate that MLS paid the $9 million transfer fee to Tottenham Hotspur to acquire Dempsey.  Almost immediately, questions arose about MLS’s involvement and whether MLS’s actions bent the rules to get Dempsey to land in Seattle.

Clint Dempsey was given a soccer scarf by Sounders general manager Adrian Hanauer. Photo courtesy of Sports Illustrated and the Associated Press.

Clint Dempsey was given a soccer scarf by Sounders general manager Adrian Hanauer. Photo courtesy of Sports Illustrated and the Associated Press.

It is not disputed that MLS was involved in Dempsey’s transfer.  Some have questioned, however, the method by which the Sounders were able to obtain Dempsey.  Many criticized the move because it did not appear to comply with MLS’s allocation process.  The allocation mechanism determines which MLS club has the first priority to acquire a U.S. national team player who signs with MLS after playing abroad (or, alternatively, a former MLS player who returns to MLS after having gone abroad for a transfer fee).

With respect to Dempsey’s transfer, the allocation process was triggered by virtue of Dempsey’s play for the U.S. national team.  (The New England Revolution, for whom Dempsey played before signing with Fulham FC, was not entitled to a right of first refusal on Dempsey’s rights because the Revolution received a portion of Dempsey’s transfer fee when he signed with Fulham.)  The allocation ranking mechanism ranks MLS teams from 1-19.  The first team in the allocation order has the priority to acquire incoming U.S. national team players signing with MLS from abroad.  Should the first team decline to sign the player, the second team in the allocation order may select the player, and so on down the order.  When Dempsey signed with MLS, the Portland Timbers, the Sounders’ fierce rival, were ranked first in the allocation order.  Portland did not pass on Dempsey, but Seattle, which was second in the allocation order, was able to negotiate with Dempsey.

Wait, what?

That was the common refrain among fans and writers, and led to MLS issuing a statement on the Dempsey transfer.  MLS stated: “For new players signed by an MLS club as a Designated Player, the allocation process does not apply. Examples of this include previous high profile player signings like David Beckham, Thierry Henry, Robbie Keane and US national team player Claudio Reyna when he signed with New York.”

Putting aside that the caveat was not spelled out in MLS’s summary of roster rules, MLS’s willingness to make a statement on the matter speaks to the importance of Dempsey’s arrival in MLS.  MLS’s statement is also relevant, however, to the role that MLS plays in all player transfers, whether there is substantial league involvement or not.  Inevitably, the discussion evolves into a broader conversation about MLS, its relationship to teams in MLS, and the most common of MLS buzzwords: “single-entity.”

MLS’s single-entity status will be explored more in-depth at Business of Soccer over the coming months, particularly with the continuing expansion discussions and the expiration of the players’ current CBA in 2014.  Speaking in the broadest terms, the term “single entity” got its start in the context of an antitrust lawsuit brought by players against MLS in 1998 and which was ultimately heard by a United States Appeals Court (Fraser v. Major League Soccer).  The general issue was whether MLS and various “operator-investors” could conspire with one another to monopolize the Division 1 soccer player market in the United States.  The courts ultimately determined that MLS was a single entity—or a “single economic actor”—and that the league and the operator-investors could not conspire with each other to the detriment of competition for players.  Under MLS’s current structure, MLS owns all teams in the league but contracts with operator-investors (more frequently referred to in conversations as team “owners”) who manage teams and are entitled to certain potential benefits from running the teams.  That is, the team “owners” in MLS, including AEG, the Kraft family, and others, are really operator-investors in MLS’s structure.

With respect to Dempsey and all player transfers, MLS retains the responsibility to negotiate and enter into agreements with players, as well as compensate those players.  It is therefore not surprising that MLS’s vested interest in bringing Clint Dempsey back to MLS in his prime would manifest itself in MLS’s purported willingness to pay the applicable transfer fee.  The more interesting immediate issue, however, is the exact arrangement that MLS has with Seattle to foot the transfer fee bill.  What are the conditions to MLS’s payment of the transfer fee?  What restrictions, if any, remain on Seattle?  How will MLS interact with other MLS teams in the future who seek to make similar acquisitions on the transfer market?  It seems likely that we will never fully understand the answers to the first two questions.  The answer to the third question will come in time, and may cause friction with teams that are unable to secure players with similar league assistance.

This is not the first time that MLS’s involvement with player transfers has been scrutinized, and it certainly will not be the last time.  In as much as Dempsey will be under the magnifying glass on the pitch, MLS’s future actions will similarly be carefully assessed and picked apart by teams and fans alike with each new player transfer event.

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Author:Kevin O'Riordan

Kevin graduated magna cum laude from the University of Minnesota Law School in 2008. During law school, Kevin served as the editor-in-chief of Volume 92 of the Minnesota Law Review. After law school, Kevin worked for two years as a judicial clerk for the Honorable John R. Tunheim of the United States District Court for the District of Minnesota. Kevin has practiced corporate transactional law since 2010, with an emphasis on mergers & acquisitions, private equity transactions, and venture capital financing.
Reporting on the business side of the world's game.