What could EU intervention mean for the future of Formula 1®?

Recently I was fortunate enough to be in Abu Dhabi to see my fellow countryman Lewis Hamilton win his second Formula 1 Racing (“F1”) Drivers World Championship title. However, at a circuit where the world of F1 is at its most glamorous a metaphorical dark cloud continued to hang over the paddock. Despite often objectively being viewed as a financially rich and successful global sports brand, towards the end of the season, F1 has been beset by financial turmoil and in-fighting between the teams. 

During the Abu Dhabi GP this took a new twist when it was revealed that the European Union (“EU”) were being lobbied to launch a competition enquiry into the sport and how it is governed by Anneliese Dodds, Member of the European Parliament for the South East England, a region which is home to a number of businesses involved in F1.¹ Given the EU’s previous intervention in FIA Formula One World Championship (Championship), it would be understandable for the F1 racing and the FIA to take these concerns seriously.

This blog will examine the history of the EU’s involvement in what is arguably the world’s most popular motorsport and the legal impact an investigation could have on F1’s financial future and governance.

The commercial and governance issues impacting F1

F1 is operated through the ‘Formula One group of companies’ (“F1 Group”). The F1 Group is actually principally owned by the private equity house, CVC Capital Partners (“CVC”), who acquired a majority stake in 2006, but kept Mr Bernie Ecclestone as Group CEO.² Mr Ecclestone has been involved in F1 racing since the 1950s and has significant (until recently almost unfettered) influence over the running of the F1.³

The F1 Group was granted an exclusive licence to exploit the commercial rights in F1, which amount to around £1 billion a year, from 2011 until 2110 (i.e. a 100-year agreement), by the governing body, the Fédération Internationale de l'Automobile (“the FIA”), for a total fee of £211.76 million back in 2000.⁴ These include the right to stage and promote the events, to sell broadcast footage and to offer sponsorship and hospitality packages.⁵

The licensing of the commercial rights was driven by an investigation by the EU into the Championship, as I will explain later. Yet the rights are only commercially valuable to the F1 Group if another key stakeholder in the sport, the teams, are tied in to participate. Therefore, the “Concorde Agreement” governs the relationship between the FIA, the F1 Group and the teams. However, over the evolution of the Concorde Agreement, not all teams have been signatories or even involved in the negotiation of it. Indeed, the seventh and latest Concorde Agreement was signed in September 2013 as a bilateral agreement between the F1 Group and the FIA as a framework for the running of the sport up until December 2020.⁶ A separate bilateral agreement was then entered into between the F1 Group and the teams.⁷

As part of the seventh Concorde Agreement, payments are made to the teams to secure their involvement in the Championship. The total redistribution to the teams by CVC/Mr Ecclestone under the Concorde Agreement amounted this year to around £560 million.⁸ However, crucially, these payments were not distributed equally among the teams. Of the 11 teams that competed in this years’ championship, 60% of the redistribution went to the five ‘biggest’ – in terms of success, size and commercial appeal – namely, Red Bull, McLaren, Mercedes, Ferrari and Williams; while the remaining 40% went to Lotus, Force India, Toro Rosso, Sauber, Marussia and Caterham (the latter two of which went into administration towards the end of the season⁹). Lotus, Force India, Sauber, Marussia and Caterham made estimated collective losses of $300 million in the past 12 months due to the cost of running an F1 team for the season, which is now estimated at $230 million on average.¹⁰

An additional factor that has affected the financial health of the entire grid is that a key revenue source, sponsorship, has declined drastically in the past decade from accounting for 60% of team revenue to now only 20%.¹¹ Even McLaren, one of the most famous and historic brands in the history of the F1 Championship, did not attract a title sponsor for the majority of the 2014 F1 season.

To compound the problems of the ‘40% or smaller teams’, the seventh Concorde Agreement also allowed for the establishment of an F1 Strategy Group comprised of the five ‘biggest’ teams plus the next highest place team in the Constructors Championship the previous season (6 votes), the FIA (6 votes) and the F1 Group (Mr Ecclestone – 6 votes). The F1 Strategy Group effectively now runs the sport and has replaced sporting and technical working groups where all teams had a say and decisions had to be passed by a 70% majority. Decisions of the Strategy Group only have to be passed by a simple majority. Although the F1 Commission, at which everyone is represented including promoters, suppliers and sponsors, will ultimately have to ratify the Strategy Group’s proposals, the smaller teams will not be able to block anything, or put anything forward, at the initial stage.¹² This effectively means that proposals to control the spiralling costs of participating in the F1 Championship, such as a cost cap (which has failed previously¹³), are unlikely to receive sufficient backing despite Mr Ecclestone now acknowledging that to maintain commercial and wider stakeholder interest in the F1 there needs to be more than just the ‘big teams’ and therefore pushing through cost cuts is of upmost importance.¹⁴

Indeed, the current governance and cost structures are two significant factors threatening the viability of half of the current teams, not to mention deterring new entrants such as Volkswagen.¹⁵

Previous EU action in relation to F1

Back in 1999 the European Commission (EC), the executive arm of the EU responsible for competition matters, launched formal proceedings into the FIA and its interest in the F1 Championship following a number of complaints, and an investigation, into the way international motor sport was organised and commercially exploited saying, “The Commission has now formally told the FIA, the body in charge of international motor racing, that it considers the FIA to be abusing its dominant position and restricting competition”.¹⁶

There were a number of issues that made up the complaint; however, a central one was the FIA’s conflict of interest in F1 Championship and the events that make up the Championship by having a commercial interest in the sport as well as being the regulator. Upon discussions taking place between all the parties, the EC closed its competition investigation in October 2001 after changes were agreed by a settlement to limit the FIA's role to that of a regulatory one.¹⁷ One such change being the transfer of the commercial rights in the Championship by the agreement described previously.¹⁸ The EC then monitored the FIA compliance with the settlement for 2 years.¹⁹