Analysing Everton’s rivals’ potential compensation claims – who will blink first?

On Friday, Everton were docked 10 points, the heaviest punishment ever dished out to a Premier League club, and dropped into the relegation zone.

Everton have said they will appeal the “wholly disproportionate and unjust” decision after the club were found to have breached the Premier League’s profitability and sustainability rules, but the impact will be felt far beyond Merseyside.

The ruling also leaves Everton — now 19th in the table, off the bottom only on goal difference — open to potential compensation claims from other clubs.

In May, David Phillips KC agreed rival clubs including Leeds United, Nottingham Forest, Southampton, Leicester City and Burnley could pursue Everton for compensation if they were found to have breached financial rules.

The Premier League has also confirmed that the independent regulatory commission that ruled on Everton’s case will decide on any compensation claims. The commission was headed by Phillips, Judge Alan Greenwood and Nick Igoe, the former financial director at West Ham.

So what are other clubs’ views on taking possible action against Everton? How would a compensation claim work and what are possible outcomes?

The Athletic spoke to sports lawyers and experts for their thoughts…

What are the rival clubs’ positions?

On Friday, the Premier League also published a High Court judgment from May, which had remained private until a decision was reached in Everton’s case. This ruled that rival clubs could launch compensation claims against Everton if a complaint was upheld.

Sports lawyer Nick De Marco KC acted for five clubs earlier this year: Leeds United, Nottingham Forest, Southampton, Leicester City and Burnley.

Leeds, Leicester, Southampton and Burnley have all been relegated in the past two seasons while Everton have stayed up. Forest finished 16th in 2022-23, a place above Everton, and drew twice against the Merseyside club during that campaign.

On a sliding scale from top to bottom, every place in the Premier League is worth roughly £2.2million ($2.8m) in prize money and relegation is estimated to cost clubs around £100million, largely from the loss of lucrative TV deals, commercial revenue and prize money.

Each side has 28 days from last Friday to pursue a claim against Everton.

Any compensation claim will be ruled on by the Premier League commission that looked into Everton’s breach. The amount of compensation would then be decided by a second independent commission if the first one found Everton to be liable.

None of the five clubs in the Phillips ruling have yet gone public with a statement. They are all, however, closely monitoring the situation and planning their next steps.

Several clubs, including Burnley, had threatened legal action when they went down and Everton stayed up in May 2022. Leeds United were also part of that group but abandoned the idea once they avoided the drop on the final day of the season away at Brentford.

After staying up, Leeds sold Raphinha and Kalvin Phillips in the summer of 2022, in part to ensure they were compliant with the Premier League’s financial regulations, which allow losses of £105million over a three-year period. Leeds went down in May and are now third in the Championship.

A potential stumbling block is that Leeds, Southampton and Leicester were relegated at the end of 2022-2023, yet the final season in which Everton’s breaches took place was 2021-22. Southampton and Leeds would have gone down anyway — even if Everton had been docked 10 points last season. However, Leeds could argue they only got one point rather than six from their matches against Everton.

In Leicester’s case, they put the brakes on their spending in the summer of 2022 as they were sailing close to FFP limits. This came after five consecutive top-10 finishes in the Premier League. They didn’t buy a player that summer until they sold Wesley Fofana to Chelsea for £75million and then only reinvested £15million of that money. The club believe adhering to FFP played a huge part in their relegation to the Championship.

Leicester were relegated in May (Michael Regan/Getty Images)

How did rival clubs’ spending compare to Everton from 2018-21?

Under FFP rules, clubs are allowed to lose up to £105million over three years, but spending on infrastructure, community projects, the women’s team and youth development are not counted towards their final total. The impact of Covid-19 was also factored into the accounts, with the two pandemic-affected seasons — 2019-20 and 2020-21 — treated as one season, with the financial result for them being an average of the two.

Everton’s losses in this period (before deductions) were £112m (2018-19), £140m (2019-20) and £121m (2020-21). This dropped to £45m in the latest set of accounts.

Over the three seasons when Everton breached the rules, Leeds’ recorded losses (pre-tax) were £21.4m (18-19), £62.4m (19-20) and £11.9m (20-21). Their last set of accounts showed losses of £36.7m (21-22).

However, it’s important to note that Leeds were in the Championship in 2018-19 and 2019-20, where clubs are permitted losses of £39million over three years. In 2020-21, they originally posted an overall profit of £25m (largely because of loans being waived). But after losing the Jean-Kevin Augustin case, the accounts were updated and resubmitted to reflect that, which meant a loss of £11.9m.

Leeds players contemplate life in the Championship in May 2023 (Robbie Jay Barratt – AMA/Getty Images)

Leicester’s finances during the same period included losses of £20m (18-19), £67m (19-20), and £33m (20-21). That then jumped to £92m in the last set of accounts published (21-22). Leicester’s Covid-19 allowances, academy investment and infrastructure costs, however, bring them closer to the FFP cut-off, which will kick in again if the club returns to the Premier League.

Burnley’s finances included a £4.3m profit (18-19), £519k profit (19-20), and a £3m loss in 2020-21. They then delivered a £36m profit in 21-22.

Southampton’s recorded losses in this period were £41m (18-19), £76m (19-20), and £23m (20-21). In their last set of accounts, their pre-tax loss dropped to £15m.

In Nottingham Forest’s case, their recorded losses over the period were £25m (18-19), £16m (19-20), and £15.5m (20-21). This had tripled to £46.2m (21-22) in the season they got promoted from the Championship.

So what might happen now?

We know rival clubs are entitled to request compensation. Yet how do the clubs go about claiming compensation? And how might that look?

Dan Chapman, partner and head of sport and employment at Leathes Prior, said the only precedent for this was the Carlos Tevez case. Sheffield United were relegated in 2007 but it was found West Ham had broken the rules on third-party ownership with his signing and that Tevez’s goals had helped keep them up at Sheffield United’s expense. However, that ended in a £20million settlement in 2009, so is not necessarily a useful indicator of what a court would impose.

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“This one is even more complicated,” Chapman told The Athletic. “You have got to try to imagine what would have happened if Everton had not overspent in the relevant seasons. If I were Everton’s lawyers, I would say the overspend didn’t actually make a difference to anything. Obviously, the lawyers for the other clubs are going to say, ‘No, that isn’t the case’.

“It gets really complicated because if you’re Burnley, you say, ‘Well we were only relegated because of that’. But the counterargument is perhaps that Burnley are in a better position because you’ve got parachute payments (the money given to relegated clubs), you rebooted, you walked the Championship under Vincent Kompany and now you’re back in the Premier League anyway.”

In his view, the clubs currently in the Championship (Leeds, Leicester and Southampton) would have stronger cases, but it would still be difficult to prove.

Chapman said a potential scenario would be clubs receiving a small percentage of the losses they claim — because proving that Everton’s breach caused their loss is difficult, even if the bar is lower than in a criminal case where a jury must be satisfied “beyond reasonable doubt” as opposed to “on the balance of probabilities”.

“It’s highly possible that a judge will say, ‘We can’t be satisfied on the balance of probabilities that causation is made out’, and even if it is, they’ve then got to say what is the appropriate compensation to put them in a position they should have been and it’s going to be very difficult.

“What you often find in cases like this is they look at a loss of opportunity and they apply an arbitrary percentage chance. They might say, for example, had Everton not overspent, I think there’s a 10 per cent chance that you would have stayed in the Premier League and therefore the difference between being in the Championship and the Premier League that season is £100million, therefore you’re going to get £10million. I think the numbers will end up being lower than some people might think.”

Everton fans celebrate staying up in May (Will Palmer/Sportsphoto/Allstar Via Getty Images)

Nii Anteson, a partner and solicitor advocate in the sports group at Sheridans law firm, agreed.

“I would imagine the claims would in effect be ‘loss of a chance’ claims, i.e. had Everton not breached the rules, we would have had a better chance of staying up.

“You can already see the potential problems with it – you are trying to persuade a tribunal or court that a particular alternative scenario (Premier League survival at the expense of Everton) was more likely to occur than what did happen or other alternatives (you would be relegated anyway). Even if you did manage to persuade the tribunal or court of that, it’s likely to apply a discount to any amount it might award you to reflect the probability of your chosen scenario coming to pass above all others.”

Anteson also pointed out that Everton’s appeal needs to be determined before any claims against the club can progress. Everton’s appeal must conclude before the end of the season.

Chapman said it was possible Everton could try to negotiate settlements with the rival clubs by arguing they might otherwise go into administration.

“Everton might get to a point where they’ll say, ‘We’re in the relegation zone anyway, let’s take another nine points and write all our debts off and leave them behind us’,” he explained. “Therefore, if you’re one of the clubs who want to get money out of it, you might think the bird in the hand is better than two in the bush.

“Everton might try to negotiate settlements using the threat of, ‘You might get nothing anyway because we might go under’.”

Since Friday’s ruling, it appears to be a case of who blinks first among Everton’s relegation rivals, who are keeping their cards close to their chests.

They will all be closely watching to see who is willing to make the first move by formally launching a claim and taking this to the next level.

 (Top photo: Chris Brunskill/Fantasista/Getty Images)