Staying in Bounds: Compliance Considerations in the Sports Industry

In the complex and dynamic world of sports, legal compliance is crucial for maintaining integrity, ensuring fair play, and safeguarding the interests of all stakeholders. From anti-corruption measures to tax issues to antitrust litigation, the legal landscape in the sports industry presents a unique set of challenges.

This Insight highlights recent anti-corruption, tax, and antitrust developments and considerations for sports industry participants navigating potential legal and compliance hurdles.

Anti-Corruption Considerations

Headline-making sporting events like the Olympics and World Cup offer compelling opportunities for companies to reach new audiences and grow their brands. At the same time, such high-profile events come with significant risks, particularly in regard to staying on the right side of anti-corruption rules. This makes a strong focus on compliance and due diligence not just advisable, but essential.

The United States has the most active anti-corruption enforcement frameworks, the cornerstone of which is the Foreign Corrupt Practices Act (FCPA). The FCPA is a criminal statute with two main components: an anti-bribery provision that prohibits bribery of foreign government officials to obtain or retain business or secure any improper business advantage, and an accounting provision requiring issuers with registered securities or who file certain reports with the US Securities and Exchange Commission to make and maintain accurate books and records, as well as to implement adequate internal accounting controls.

It is important to keep in mind that companies can be held liable for third-party acts based purely on an agency relationship, not merely based on direct participation or authorization. Liability can also flow from a company’s willful blindness or conscious disregard for suspicious actions or circumstances.

Areas where caution is especially warranted include:

• Controls and accounting: It is important for an entity to know with whom it is doing business and where its money is going; a payment not properly documented may constitute a books and records violation
• Hospitality: Offers of gifts, hospitality, or other perks made by sponsors, contractors, and other stakeholders to officials involved in an event can create opportunities for undue influence and conflicts of interest, and thus be construed as FCPA violations

Key tip: While it can be expensive and time-consuming, vetting third parties is a must to stay out of legal trouble, as is establishing a screening system as part of a larger risk assessment. By investigating third parties to determine the likelihood of corrupt actions, monitoring for red flags, and promptly addressing any issues that arise, companies can effectively mitigate third-party risk.

Tax Enforcement Updates

With more funding and targeted campaigns, the Internal Revenue Service (IRS) is stepping up its enforcement efforts. While many of these ongoing initiatives are relevant to sports enterprises, two recently announced initiatives in particular—the Sports Industry Losses campaign and Business Aircraft campaign—should be top of mind for sports enterprises.

The Sports Industry Losses campaign is meant to “identify partnerships within the sports industry that report significant tax losses and determine if the income and deductions driving the losses are reported in compliance with the applicable sections of the Internal Revenue Code.”

The Business Aircraft campaign will address “compliance concerns related to business aircraft usage by large corporations, large partnerships, and high-income taxpayers” to “ensure tax compliance while also increasing awareness related to the business aircraft regulations and reporting requirements.” The IRS will seek to disallow losses, including on the grounds that they exceed the partners’ investment.

There are several steps sports enterprises can take to minimize audit risk in these areas, including:

• Deduction and loss items
  • Identify income and deduction items that are driving losses (e.g., depreciation of arena or fixed assets, amortization of intangible assets, and interest on debt)
  • Evaluate the application of passive activity and at-risk limitations
  • Create a defense file and keep good records
• Company airplane
  • Review policies and procedures related to substantiation practices
  • Review retained records (e.g., flight logs, manifests, and calculations associated with imputed income and deduction disallowance) to ensure sufficiency
  • Be mindful of entertainment vs. business usage and ensure appropriate documentation is maintained
  • If a bonus depreciation was taken on an aircraft, keep a close eye on personal usage

In addition, sports enterprises that are organized as partnerships or that have partnerships within the larger organizational structure should be mindful of other areas where the IRS is placing significant focus, which include a review of partnership returns to identify year-over-year discrepancies. In September 2023, the IRS announced that it had identified ongoing discrepancies on balance sheets involving partnerships with more than $10 million in assets and found that these discrepancies were an “indicator of potential non-compliance.”

As a result, the agency contacted nearly 500 partnerships to address those discrepancies, which, in some instances, led to the initiation of an examination. If faced with this issue, sports enterprises can take several steps to minimize any further audit exposure, including:

• In the event of a difference, attach an explanation
• Respond promptly to any correspondence regarding the difference
• Depending on the response, the IRS may initiate an audit, so draft explanations with that eventuality in mind

Key tips: Review books and records closely and frequently. Remember that contemporaneous documentation is always best. Be aware of pending and potential IRS rulemaking and consider getting involved in the process.

Antitrust Developments

As with many other sectors, the sports industry is experiencing increased scrutiny from US and EU antitrust regulators, along with high-profile antitrust litigation.

A recent notable example is the US Supreme Court denying certiorari in United States Soccer Federation Inc. v. Relevant Sports LLC. This decision left intact a US Court of Appeals for the Second Circuit decision holding that when a plaintiff challenges an association rule governing the business actions of individual association members, the fact of the rule itself can be deemed to be direct evidence of concerted action. The plaintiff need not go further and allege that the association members had an express agreement or entered into a conspiracy to adopt the challenged rule.

Additionally, the US Department of Justice (DOJ) is pursuing a strategy to reduce plaintiffs’ burdens for pleading an agreement in Sherman Act Section 1 cases. Easing the standards for pleading concerted action would make it easier for plaintiffs to bring agreement or conspiracy-based antitrust claims against global sports leagues and others in the industry.

Another widely watched litigation development is a California federal jury’s decision in June to award $4.7 billion in damages to two classes of DirecTV Sunday Ticket subscribers for claims that the National Football League (NFL), its 32 teams, and DirecTV violated antitrust laws by agreeing to unreasonably restrain trade and form an illegal monopoly to artificially inflate the price of the sports broadcast package. However, after the defendants filed a motion for judgement as a matter of law, a federal judge overturned the verdict after disqualifying expert testimony used by the jury to determine damages. It remains to be seen whether the plaintiffs will challenge this decision or if a new trial will be scheduled to reassess the claims and damages.

Key tip: Institutional investors, leagues, and associations involved in or considering a transaction should consider closely monitoring developments related to television rights or other commercialization opportunities. Particular attention should be paid to whether these transactions are being consolidated or contracted for in a way that the DOJ, European Union, or other regulatory bodies might find problematic or that could be perceived to restrict consumer choice in an anticompetitive manner.

Conclusion

Staying up to date on regulatory changes, enforcement priorities, and court rulings is crucial for maintaining compliance. Trusted legal counsel can assist sports entities in assessing the potential impact of these developments and devising strategies to meet compliance obligations effectively. By staying informed and proactive, sports organizations can navigate the complex regulatory landscape and mitigate potential risk.