The Winds of Change?

Recent news that has attracted a lot of attention in the motor racing world is that Formula 1™s governing body, the FIA, has declared its intention to introduce dramatic measures to reduce costs within the sport.

Recent news that has attracted a lot of attention in the motor racing world is that Formula 1™s governing body, the FIA, has declared its intention to introduce dramatic measures to reduce costs within the sport. One of the more controversial measures being proposed is the restriction of aerodynamic testing and the new right to be given to the FIA to swoop and inspect factories at their choosing. Whereas there have been rumours that the resourceful FIA President Max Mosley, is considering an outright ban on the use of wind tunnels, the official Formula 1 website lists the following planned restrictions: Teams to use no more than one wind tunnel; Test fluid to be air at atmospheric pressure; Maximum test section wind speed 50m/sec; Maximum model scale 60 percent; No more than one model to be tested during a run; Maximum usage to be equivalent to 15 runs per eight-hour day on five days per week for team F1 purposes. Tunnel may be contracted out at other times; Aerodynamic testing may only take place in wind tunnels if at reduced scale or at FIA approved test tracks if full scale. Full size testing to be subject to the F1 testing agreement; Full scale specific aerodynamic testing is to be reduced to 5 days per year; Restrictions will be imposed to stop shift of resource from wind tunnel testing to CFD; The number of people involved in CFD development will be limited to a number to be agreed; and CFD computer systems will be characterised in order to set hardware performance limits but growth will be allowed year-on-year to allow for hardware / software development.

The rationale behind the proposals appears to be an attempt to put a silver bottom or perhaps a copper bottom to the currently bottomless pit of money “ many millions of dollars “ that the richer teams are prepared to spend on wind tunnels to develop ever more efficient cars. The teams which cannot afford to spend as much money on aerodynamic testing become unable to compete with the richer teams. Consequently, the championship risks becoming less and less about the skill of the drivers and more and more about the amount of money that teams can devote to the development of ever more sophisticated cars. There is also a concern about the amount of energy wasted and pollution caused by aerodynamic testing. To get an idea of the energy that wind tunnels use, McLaren™s website states the following about its wind tunnel:

"Using 400 tonnes of steel between 8-10mm thick, the wind tunnel™s construction was the equivalent of building a fairly large ship. It is 145 metres long and six metres square at its widest point. The air is driven round by a giant fan, four metres in diameter, which rotates at up to 600rpm. At start up, the fan pulls over one megawatt of electric power, taking so much out of the local grid that numbers per hour are limited by the Electricity Board. The fan sucks in air from outside in such volume and at such a rate (15 cubic metres per second) that if the building were sealed, the walls would implode. Operating at full throttle the wind tunnel generates 1500kw of excess heat and energy, so it requires 6,000 litres of chilled water a minute pumped through a nine-tonne radiator to cool it."

Many now believe that the future of F1 itself lies in restricting the huge spend on engine and aerodynamic efficiency, and instead focusing on energy efficiency and what can be achieved with a capped budget.

It is still not clear how Mosley and the FIA plan to introduce the proposals relating to wind tunnels. There is nothing in the 2008 Formula 1 Sporting Regulations or Technical Regulations that makes any express reference to wind tunnels. With the 1998 Concorde Agreement having expired on 31 December 2007 and no new Concorde Agreement still in place, it has been written that Mosley will have carte blanche to make any rules he wants and the teams will have to accept the new rules if they want to sign up to the Championship. However the 2008 Formula 1 Technical Regulations state that any amendments to the regulations for 2008 and 2009 will be made in accordance with Clause 8.10 of the 1998 Concorde Agreement, which in turn refers to the notice period that must be given. This suggests that the 1998 Concorde Agreement will continue to operate, but whether or not the provisions in the Agreement regarding the procedure to be followed for amending the regulations (for introducing the limitation or ban on wind tunnels) will apply is lost in a maze of regulatory uncertainty. Appendix 5 of the Sporting Regulations contains the procedure for rule changes but does not make any reference to the Concorde Agreement and indeed is inconsistent with the procedure in the 1998 version of the Agreement. It would be fair to say that the maze of regulations and secrecy of the Concorde Agreement do not make it easy to follow how the proposals will be introduced.

Apart from the difficulty with the regulations however, one cannot help thinking that there will be some teams which have already invested many millions of dollars into developing wind tunnels and that they will wish to resist proposals along the lines of those outlined above. McLaren, Ferrari, BMW, Renault and Toyota are among those teams that have spent millions upon millions of dollars on large scale wind tunnels; an expenditure over the years that may now go to waste and no longer give them the competitive edge over other teams. There is a debate going on in which some in F1 think the FIA has over-stepped the mark and is clearly pushing up against the limits of its powers with these new proposals. Irrespective of the way in which the proposals are introduced, the huge sums involved make it very likely that there will be legal challenges and we take a brief look at some of the arguments which may be raised.

Judicial review of the FIA™s rules might be a starting point. However similar cases against the Jockey Club have failed in England. Like the Jockey Club, the FIA operates a monopoly on motor car racing and exercises powers which are exercised in the interest of the public. However the English courts have taken the view that the powers and duties of a sporting body have to be governmental in nature before they can be subjected to judicial review. In order to be ˜governmental™ in nature, the FIA would have to be ˜woven into a system of governmental control™ or ˜integrated into a system of statutory regulation™, but this is not the case with the FIA.

If judicial review of the FIA™s rule making procedures is not possible, is it then the case that the FIA is a law unto itself?

Given its monopoly over the sport and the fact that it is clearly exercising powers that have major implications for the public in general, there should be some means of regulating its powers. Interestingly, Lord Hoffman in a case which involved seeking judicial review of the powers of the Jockey Club, said that "if control is needed, it must be found in the law of contract, the doctrine of restraint of trade, the Restrictive Trade Practices Act 1976, Articles 85 and 86 of the EEC Treaty and all the other instruments available in law for curbing the excesses of private power."

The FIA™s proposed changes on the use of wind tunnels could be perceived to be a restraint of trade and might be challenged on this front. The ban or substantial limitation on the use of wind tunnels is prima facie an interest meriting protection by the law as it interferes with individual liberty of action of the manufacturer teams, preventing them from spending their money to develop highly technologically advanced cars. Nevertheless, the courts would hold that the restraint which impinges on this interest is justifiable if it is reasonable and does not run contrary to the public interest.

Whereas an outright ban on the use of wind tunnels might be 'unreasonable', it is not so clear that a court would hold the current proposals for limiting the use of wind tunnels to be 'unreasonable'. Ultimately, this would be a question of fact, but a court might well hold that the FIA has put a cap on the budgets to enhance efficiency, without wiping out all technological freedom, and that this cannot be said to be an 'unreasonable' restraint.

Deciding whether the restraint is 'contrary to the public interest' is also far from clear-cut. On the one hand it would appear that much of the massive spend has little or no application to ordinary road cars and that such level of spend simply can™t be justified at a time when global warming, world poverty and sustainable development are under the microscope. It may be said the FIA has recognized this by curbing spend on engine and aerodynamic efficiency as well as encouraging research and development in areas which will lead to energy saving. On the other hand it may be said that F1, as the pinnacle of world motor sport should represent the ultimate in terms of engineering and development, and that therefore any action that seeks to impede this development is contrary to the public interest.

It is likely that a challenge based on restraint of trade would probably fail in that the FIA may well be able to establish the 'reasonableness' of the restraint and overcome any suggestion that the restraint is contrary to the public interest.

If the FIA (a non-governmental body) is to give itself the right to carry out 'dawn raids' on team premises, that would give rise to issues of human rights law and the European Convention on Human Rights (ECHR). The Human Rights Act (HRA) extends its application to the public acts of private bodies. Given that the English courts had taken the view that the Jockey club is exercising powers of a public nature, it is very likely to form a similar view of the FIA, with the result that the Human Rights Act would be applicable and the Convention Rights would attach to the teams. Article 8 of the ECHR on the right to privacy may become relevant.

Under Article 8, if the FIA were to give themselves an unfettered right of entry to team premises, that would prima facie breach the team™s right to privacy. By way of comparison, random drug testing of athletes has been perceived to be a breach of privacy but this breach has been justified as being necessary to protect the health of athletes, protection of fair competition and deterrence of drug use. However, there has been an American case on the legality of drug testing which stated that any invasion of privacy could only be justified where there is a ˜reasonable suspicion™ leading to the belief that banned substances have been used by a particular athlete and not by random subjection to drug testing. Accordingly, whereas the FIA may seek to justify a wide right of entry (on the grounds that it is necessary to ensure that no one is ˜cheating™), a court may well hold that such right of entry should only be possible where the FIA has a ˜reasonable suspicion™ of breach of the rules.

European Law applies to sports and in our view, Formula 1 is among the list of those sports that will be targeted in so far as it constitutes an 'economic activity™. Nobody would doubt that Formula 1 is not just a sport; it is a multi-million industry and any practice that might be anti-competitive in an economic sense attracts Articles 81 and 82 of the European Community (EC) Treaty on competition law and abuse of a dominant position.

Articles 81 and 82 apply to the FIA if it is an ˜undertaking™ or an ˜association of undertakings™. An undertaking has been construed broadly by the courts to include any entity which carries on an economic activity. As the governing body of the multi-million business, there is little doubt that the FIA qualifies as an ˜undertaking™ or an ˜association of undertakings™.

How do the EC Articles impact on the FIA™s activities? Under Article 81, the FIA™s proposals on the one hand have the effect of preventing or restricting one team™s competitive edge over another by not permitting that team to spend more money on designing a more efficient car. The proposals also seem to limit a substantive market for wind tunnels and reduce competition between different wind tunnel manufacturers. On the other hand, the application of Article 81 might require a different interpretation in the world of Formula One from that of other ˜businesses™ in the sense that the sport relies “ and indeed thrives “ on there being a number of teams effectively competing against each other on an even playing field. In an overall sporting sense, a court might very well hold that in fact the FIA™s proposals are not anti-competitive at all, but are in fact pro-competitive by making the sport more accessible to a wider number of teams and preserving the interest in and future of the sport.

Article 82 deals with the abuse by an undertaking of its dominant position within a market. Again, the FIA might be seen to be abusing its dominant position in Formula One by thrusting proposals on the teams that have the effect of limiting their technical innovation. A number of recent advances in road car design have their roots in the F1 paddock. However, whether or not a court might view the restriction on wind tunnels to be prejudicial to consumers and the motor industry is not clear in light of the fact that aerodynamic research and development at the level carried out in F1 is likely to be of limited application when it comes to ordinary road cars.

If the FIA were found to be in breach of Articles 81 and 82 of the EC Treaty, the repercussions could be severe. Not only would the new rules be void, but the FIA could be liable to pay hefty fines of up to 10% of its worldwide turnover and it could face claims of millions of dollars by the teams who have suffered a loss as a result of the rules.

With the recent spying scandals and the new dramatic changes being proposed, it can certainly be said that Formula 1 is in a greater state of flux now than it has ever been in before. The 1998 Concorde Agreement has expired, no new Agreement is yet in place and regulatory uncertainty paves the way for disagreement. Meanwhile, the green issue, global poverty and sustainable development are high on the FIA™s agenda and will almost certainly affect what the teams can and cannot do. The potential for disputes and legal challenges this season is high and a sensible dispute resolution mechanism needs greater attention. As dispute resolution lawyers with experience in major litigation, arbitration and mediation for over 140 years, we think that a more coherent and transparent charter to regulate Formula 1 is required and that mediation should be given enhanced status when it comes to resolving disputes. It could also be argued that an independent appeal body within the F1 structure should be set up to resolve any disputes concerning the Championship.

Jonathan Lux is a solicitor of over 30 year™s standing. A partner of international law firm, Ince & Co, he practises in the areas of International Commercial Law and Dispute Resolution. He was assisted in this article by Scarlett Henwood and Avnish Shah, members of his team.