Intentional Walk: Baseball, Antitrust, and the Reserve Clause

Abstract

Intentional Walk refers to the Supreme Court “walking” baseball and its antitrust
exemption down the road for further Courts and Congress to deal with. Baseball
for much of the 20th century enjoyed an exemption from antitrust legislation.
After a trilogy of Supreme Court cases, baseball gained and continued its
antitrust exemption. However, in 1975 free agency was sparked and the reserve
clause as it stood was essentially irrelevant for certain players. Still, the
antitrust exemption remained. In 1998, the Curt Flood Act of 1998 was passed
supposedly ending baseball’s exemption to antitrust. This paper will analyze
the history of baseball’s antitrust exemption, the potential effect of the Flood
Act, and whether baseball should be regulated or not under antitrust law.

By: David Bawel

______________________________________________________

Introduction

America’s pastime has survived thru wars, scandal, work stoppage, and a depression. As it has, it will continue to survive, but in what form? Baseball for much of the 20th century has been given an antitrust exemption from the Supreme Court. In a trilogy of Supreme Court cases, baseball’s antitrust exemption has stood strong until recent years. In a series of moves by the MLB, the MLBPA, and Congress, baseball has gone from being exempt from antitrust law to a grey area that has yet to be tested.

First to be addressed in this paper will be the early history of baseball’s antitrust exemption. The first reserve clause for baseball and the first teams lie down a narrative that flows into the 20th century and the second section on the Supreme Court case of Federal Baseball v. the National League. A look into three Supreme Court cases, Federal Baseball, Toolson, and Flood v. Kuhn will give a background of baseball’s exemption and how it has stood thru changing times and multiple attacks thru the courts. This will eventually lead to the creation of free agency and the Curt Flood Act of 1998.

Second, Toolson, a pitcher for the Yankees minor leagues brings the second of baseball’s Supreme Court cases. Baseball’s reserve clause is attacked for the first time at this level putting a backdrop for baseball and labor negotiations. Following Toolson v. New York Yankees is the most recent case of Flood v. Kuhn. This section puts the reserve clause on the spot again and points to Congress as a remedy, like in Toolson. Fifth on the list is the Curt Flood Act of 1998, collective bargaining, and arbitration which will help analyze owners v. players and the subsequent antitrust arguments involved. Since the Flood Act has never been tested in court, it has potential for a range of effects that are to be explored.

Part six will discuss the heart of this paper with recommendations and studies on baseball and antitrust. Reasons for and against further coverage of baseball under antitrust will be weighted. After weighting potential effects, a clear recommendation will be given. Finally, the last part will be a conclusion on the issue of baseball and antitrust.

I. The Early History of Baseball and Antitrust

Baseball started as an amateurs game. Around 1845, baseball had its first team.[1] While competition existed for years in this early time, each season’s end led to players changing teams with no restrictions.[2] The team that could bid the highest was most likely to get the players services. This process came to be known as revolving, which is comparable with today’s free agency.[3]

After a bit over a decade, in 1857 the first baseball league was formed, known as the National Association of Baseball Players.[4] After growing in size and talent, factions in the league developed. In 1870, this faction in the league split between the more talented teams from the more amateur.[5] A new league formed, The National Association of Professional Baseball Players, becoming the first professional league.[6] While a new league, the National Association of Professional Baseball Players maintained revolving. This league, short lived, eventually came to another split. In 1875, William A. Hulbert, president of the Chicago White Stockings, signed four players from Boston and two from Philadelphia during the current season to play for him in the next.[7] In violation of league rules, William Hulbert decided to form his own league of eight teams known as the National League of Professional Baseball.[8] Thus, the National League was born.

As bidding for players services drove up salaries, owners looked to drive down costs to keep financial stability. The owners came up with the first reserve rule in 1879, restricting revolving to some extent.[9] The rule established that teams could reserve five players each season that could not be touched by other teams. In 1883, the number of reserved players for a team was increased to eleven, and then fourteen in 1887.[10] Only a few years later the reserve rule covered the entire team, restricting player movement from team to team while driving down player salaries and revolving.

II. Federal Baseball v. National League

Till 1922 baseball had continued largely as it had with little thought of antitrust legislation. However, in 1922, baseball was under the microscope by the U.S. Supreme Court. At the time before the Federal Baseball case, multiple leagues existed whom would fight for players. The National League and the American League had both taken on the reserve clause and thus mostly eliminated competition in regards to labor. The Federal League did not play by the same rules. The Federal League did not recognize the reserve clause and thus would bid for players to jump leagues where they could theoretically receive a better salary.[11] As competition continued, a “treaty” between the leagues came around in 1915. The agreement dissolved the Federal League in exchange for payments of $600,000 to backers.[12] With other exchanges and bargaining, the National League and American League where looking to come out with numerous prizes. However, the Baltimore Federals of the Federal League were angered. The club filled a treble damage antitrust suit under the Sherman Act.[13] After receiving a ruling in favor of Baltimore, the Court of Appeals overturned the ruling. The Supreme Court was the last stop for its final decision.

In the case, the court ruled in favor of the National League, reaffirming the Court of Appeals. Justice Holmes gave the opinion and established baseball’s antitrust exemption. The opinion established certain reasoning on the case. The Court decided that the business, exhibitions of baseball, is purely state affairs.[14] While clubs travel, the exhibition itself is within the state and is the main action of the business.[15] Therefore, baseball is exempt to antitrust since it is not interstate commerce. Justice Holmes further addressed the issue of transportation. He established that the Court thought transportation is a mere incident, the essential thing is the exhibition. Justice Holmes in the opinion says, “a firm of lawyers sending out a member to argue a case, or the Chautauqua lecture bureau sending out lecturers, does not engage in such commerce because the lawyer or lecturer goes to another State.”[16] Thus, baseball’s exemption was born.

III. Toolson v. New York Yankees, Inc.

Following Federal Baseball in 1953, the second part of the baseball trilogy was targeted at baseball’s long standing reserve clause. George Toolson, a pitcher for the Newark Bears (Yankees AAA affiliate), thought he could play in the majors but was restricted under the reserve clause.[17] Eventually Newark was dissolved and Toolson was demoted to an A class affiliate.[18] He filed suit arguing the reserve clause was a restraint of trade and baseball’s exemption should be struck down.

In the decision by the Supreme Court, the Court ruled that baseball would keep its antitrust exemption. The opinion, a per curiam majority opinion expanded upon Federal Baseball. The opinion, citing Federal Baseball, decided that baseball was not within the scope of antitrust law.[19]  The major part of the opinion was, however, addressed toward Congress. It held that since Congress had ruling under consideration but not done anything thru legislation, it was not Congresses intentions to have antitrust laws applying to baseball.[20] Going further, the opinion believed that if antitrust laws should apply to baseball it should be done by legislation and not the Court.[21] The Court left the topic of baseball and antitrust open, it was in Congress to figure in what regards. Baseball’s exemption was safe.

IV. Flood v. Kuhn

To finish the trilogy is the Curt Flood story. Flood, a Major League player for St. Louis was traded to Philadelphia. Refusing the trade, Flood sought injunction relief from the reserve clause.[22]  Bowie Kuhn, the baseball commissioner, was named as an initial respondent.[23] In the final of the baseball antitrust cases the opinion was delivered by Justice Blackmon. In his interestingly written opinion, Justice Blackmon starts with a brief history of baseball.[24]

Further on, Justice Blackmon cites a Report of the Subcommittee on Study of Monopoly Power of the House Committee on the Judiciary, it said:

On the other hand the overwhelming preponderance of the evidence established baseball’s need for some sort of reserve clause. Baseball’s history shows that chaotic conditions prevailed when there was no reserve clause. Experience points to no feasible substitute to protect the integrity of the game or to guarantee a comparatively even competitive struggle..The evidence adduced at the hearings would clearly not justify the enactment of legislation flatly condemning the reserve clause.[25]

The opinion continuing its relatively lengthier writing, compared to Toolson and Federal Baseball, gave reasoning for the Court continuing baseball’s exemption previously and now.

The opinion gave numerous factors to the decision. Congressional awareness for three decades after Federal Baseball, coupled with congressional inaction led the Court to let the game be.[26] Baseball, was left alone for this period, with the understanding that the reserve clause was not subject to antitrust laws.[27] Overruling Federal Baseball would also have consequent retroactive effects.[28] Once again, as before, the Court said that a remedy should come from Congress, not the Court.[29]

Eventually the opinion concluded with eight points. The first was that professional baseball is a business and it is engaged in interstate commerce.[30] The second, baseball is exempt and an anomaly and, “Federal Baseball and Toolson have become an aberration confined to baseball.”[31] Third, this “aberration” has been used in numerous other cases. There is recognition and acceptance of baseball’s unique situation.[32] Forth, other sports are not exempt.[33] Fifth, radio and TV will not get an overruling of Toolson and Federal Baseball.[34] Sixth, Congress has been aware and has not acted on the situation.[35] Seven, confusion and retroactivity will occur from an overruling.[36] Finally, “the slate with respect to baseball is not clean. Indeed has not been clean for half a century.”[37]

All in all, the lengthy and almost confusing opinion given by Justice Blackmon extended baseball’s exemption even with some contradictions present. It ended the court cases and once again left legislation as a means to an end. First to the plate though was baseball.

V. Arbitration, Free Agency, and the Curt Flood Act of 1998

In 1973, salary arbitration was agreed to in the 1973 collective bargaining agreement.[38] The idea was that a player of certain experience could dispute before an arbitrator an annual salary. This brought about two important arbitration cases with Andy Messersmith and Dave McNally. The dispute was focused around the “renewal year” provision.[39] Peter Seitz, the arbitrator for the case ruled in favor of the players, stating that nothing in the contracts held a right to renew a contract annually.[40] This allowed for free agency and the ability for players who had played for some time to freely market themselves when their contracts expired. The significance is that the reserve clause, baseball’s issue with labor and antitrust was significantly weakened.

However, finalizing baseball and antitrust is the proverbial nail in the coffin, the Curt Flood Act of 1998. Due to the 1996 collective bargaining agreement, owners joined the MLBPA to ask Congress to repeal the antitrust exemption for baseball.[41] Salience over the issue due to the 1994 strike was huge.[42] Fans, players, and owners were recovering from the fighting and looking to keep another strike from happening. Introduced by Senator Orrin Hatch, the Flood Act makes baseball covered under antitrust laws, particularity in regards to labor.[43] It continues by explicitly excluding the minor leagues from the act.[44] After congressional debate, it is apparent that the acts purpose is to stop a potential work stoppage from happening at the end of a collective bargaining agreement.[45] The idea that Congress had was to have the MLBPA to decertify in the scenario of a work stoppage and for individual players to sue under antitrust law.[46] The lawsuit, or at least the threat, was to compel labor disputes to be settled quickly.[47] Since the Act’s passage, it has not been put to the test.

VI. Recommendations and Analysis

            The problem at hand revolves around the free movement of players to market their services. After establishing the legal standing of baseball and antitrust it is important to note that the Flood Act is geared toward bringing baseball within antitrust law in regards to labor. However, minor league players, drafted players, and players within six years of MLB experience are still subject to a reserve clause. Restriction of players is at the heart of Toolson, Flood v. Kuhn, and the Flood Act.

When looking at the most recent form of the reserve clause, players with three years or less of MLB experience are not eligible for free agency or arbitration.[48] Players with experience between three and six years are eligible for arbitration.[49] In arbitration, the player is brought before an arbitrator, who thru looking at performance and others similar to that performance, makes a decision on what their essential market value is, in which they are offered that salary where they can take it or quit.[50]

This reserve clause restricts players particularly with less than three years MLB experience. While restrictions on players of certain experience go potentially against antitrust law, it is necessary for the current reserve clause to remain untouched.

When analyzing the reserve clause as it now stands, it has shown that players in the minor leagues and with less than three years experience are almost burdensome on  teams. In a study by Anthony Krautmann and Margaret Oppenheimer, they found that after subtracting the “surplus” (measure of income while in their first six year of MLB service) from the average development cost per player, on average, an organization loses $123,946 per player.[51] Their findings were that players, being underpaid or exploited according to some, can be attributed to the team trying to regain the investment put into a player during the minor leagues.[52] This economic analysis of baseball’s reserve clause and minor league players gives reason for player restriction. To get a return on their investment, maintaining control over a player that was invested in for a period of time is needed to maintain the financial feasibility of the game. Players being allowed to jump ship while in the minors or within six years experience would negate any investments and allow for talent to be bid on like the free agent market. As a financial institution, baseball needs to keep a competitive balance between teams which often stems from teams being able to maintain some control over the talent, the player.

In another study, Mark Gius and Timothy Hylan find that arbitration and free agency ended the “monopsonistic nature of the baseball labor market and resulted in a shift of monopsonistic rents from the owners to the players.”[53] In this, the team has control of players within the reserve clause. However, once a player is arbitration eligible or becomes a free agent, the market can determine the salary of the player. Going further into the issue, in 1976, MLB conducted a study at the request of a special committee of the U.S. House of Representatives.[54] The study found similarities between baseball labor and a patent. Teams invest in something uncertain in hopes to gain the benefits of potential MLB talent.[55]

These studies show that players are not being exploited but rather gaining from the reserve clause. While players cannot move with freedom for some time, once they hit arbitration and free agency the market takes control and talent is bid for amongst teams. Due to the reserve clause, teams try to produce the best talent they can thru the farm system so they can get a return on their investment. Once the player hits free agency, the team loses control over the player and the salary for his services. It is therefore understandable that the reserve clause should stand as is to maintain a competitive balance between rich and poor teams while also taking out some risk in investing in a player of uncertainty.

Much of regulation and recommendations are focused solely on the minor leagues (still exempt from antitrust law) and the reserve clause. One idea stems from other sports like football in which players are brought up thru the collegiate system. While reducing the cost of player development, many players don’t reach MLB potential till after four years (the amount of time players can compete at the collegiate level). This idea would also hurt minor league teams which rely on the parent organization to stay afloat. If college took over development of the player, then it would be reasonable that minor league teams could see drops in gate revenues and losses in income.[56] This could kill the minor leagues. The minor leagues are key to player development, if this is taken out of their responsibility, there would be little feasibility for many minor league teams.

The system as it works for labor now, allows for “hard years” for players with the potential for a large payoff after time given there has been service of quality. While still questionable under antitrust legislation, the reserve clause of baseball is a necessity to keep the game feasible as a business. Many questions still exist over the effects of the Flood Act and what decertifying would do. Regardless, the reserve clause is something of a necessity to the game of baseball.

In a speech given March 7, 1914, A.G. Mills, then president of the National League, spoke on the revolving process:

As now, each summer’s campaign was planned during the preceding winter and the habit was general on the part of the clubs to take on obligations in the way of players’ salaries that were not justified, as the spring games would inevitably demonstrate that the majority of such clubs could have no hope of winning even a respectable number of games. Moreover, this condition was greatly aggravated by the general practice on the part of the richer clubs, of stripping the weaker ones of their best playing talent. Then would follow the collapse of a number of these clubs in mid-season, leaving their players unpaid, while the winning clubs, owing to the disbandment of the weaker ones, would also frequently fail from inability to arrange a paying number of games.[57]

Regulation of labor thru some reserve clause has been instrumental to keep the game of baseball afloat. Immense costs for labor as shown by the statement above will cause nothing but financial stress on the system. Regulation in favor of the players could prove hostile for the minor leagues and for financial success of teams. On the other hand, a reserve clause such as before free agency and arbitration was complete restriction of trade, regardless of Supreme Court decisions. The reserve clause as it is now, allows for player development and a potential for balanced competition amongst teams. It also allows for players to reap the benefits of free agency and the market.

VII. Conclusion

Congress throughout history has been involved in the game of baseball but acted little upon it. Salience over the issue of baseball and antitrust hit a high after the 1994 strike and stoppage of the World Series. The idea was simple, on one side players were restricted for many years and should have been covered under antitrust law. On the other side, teams needed a reserve clause to remain financially stable and ensure a relative competitive balance. When collective bargaining brought the six-year reserve clause, a middle ground was found. Players after time gather freedom while teams still could remain afloat financially.

Congress had the option from the Supreme Court to act on baseball’s antitrust exemption but chose not to. The Court thru use of stare decisis wanted to retain the legitimacy of numerous cases and the Court itself, so they gave the job to Congress. Baseball acted first, thru arbitration and collective bargaining, where the players gained ground.

Ultimately, regulation of baseball in regards to antitrust should be avoided. The potential regulation of the business could prove to be too costly to teams and/or players. The game, thru over a hundred years, grew as America’s pastime survived war, strike, and Congressional and Judicial meddling. The business of baseball, as said in Federal Baseball, is the exhibition itself. As it should be, the exhibition should remain the focus of the game of baseball.

 

Work Cited

- Bautista, Philip. “Congress Says, “Yooou’re Out!!!” to the Antitrust Exemption of Professional   Baseball: A Discussion of the Current State of Player-Owner Collective Bargaining and           the Impact of the Curt Flood Act of 1998.” Ohio State Journal on Dispute Resolutions             15.2 (2000): 445-82. Print.

- Dworkin, James B. “The Impacts of Collective Bargaining: The Reserve Clause and Free            Agency.” Owners Versus Players: Baseball and Collective Bargaining. Boston: Auburn          House, 1981. p. 41. Print.

- Federal Baseball Club v. National League, 259 U.S. 200. U.S. Supreme Court. 29 May 1922.

- Flood v. Kuhn, 407 U.S. 258. U.S. Supreme Court. 19 June 1972. Print.

- Jones, Joshua P. “A Congressional Swing and Miss: The Curt Flood Act, Player Control, and     the National Pastime.” Georgia Law Review 33.2 (1999): 639-91. Print.

- Krautmann, Anthony C., and Margaret Oppenheimer. “Training in Major League Baseball: Are Players Exploited?” Baseball Economics (1996): 85-96. Print.

- Markham, Jesse W., and Paul V. Teplitz. “Baseball Economics and Public Policy.” (1981)

- Staudohar, Paul. Diamond Mines: Baseball & Labor. Syracuse: Syracuse UP, 2000. Print.

- Toolson v. New York Yankees, Inc., 346 U.S. 356. U.S. Supreme Court. 9 Nov. 1953.

- Weiss, Stuart L. The Curt Flood Story: The Man behind the Myth. Columbia: University of         Missouri, 2007. Print.


[1] Dworkin, James B. “The Impacts of Collective Bargaining: The Reserve Clause and Free Agency.” Owners Versus Players: Baseball and Collective Bargaining. Boston: Auburn House, 1981. p. 41. Print.

[2] Id.

[3] Id.

[4] Id. see p. 42.

[5] Id.

[6] Id.

[7] Id. see p. 43.

[8]  Id.

[9]  Id. see p. 44.

[10] Id.

[11] Id. see p. 53.

[12] Id. see p. 54.

[13] Id. see p. 55.

[14] Federal Baseball Club v. National League, 259 U.S. 200. U.S. Supreme Court. 29 May 1922

[15] Id.

[16] Id.

[17] Jones, Joshua P. “A Congressional Swing and Miss: The Curt Flood Act, Player Control, and the National Pastime.” Georgia Law Review 33.2 (1999): 639-91. Print.

[18] Id.

[19] Toolson v. New York Yankees, Inc., 346 U.S. 356. U.S. Supreme Court. 9 Nov. 1953.

[20] Id.

[21] Id.

[22] Weiss, Stuart L. The Curt Flood Story: The Man behind the Myth. Columbia: University of Missouri, 2007. Print.

[23] The Curt Flood Story.

[24] Flood v. Kuhn, 407 U.S. 258. U.S. Supreme Court. 19 June 1972. Print.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] Staudohar, Paul. Diamond Mines: Baseball & Labor. Syracuse: Syracuse UP, 2000. Print.

[39] Bautista, Philip. “Congress Says, “Yooou’re Out!!!” to the Antitrust Exemption of Professional Baseball: A Discussion of the Current State of Player-Owner Collective Bargaining and the Impact of the Curt Flood Act of 1998.” Ohio State Journal on Dispute Resolutions 15.2 (2000): 445-82. Print.

[40] Id.

[41] A Congressional Swing and Miss.

[42] Id.

[43] Id.

[44] Id.

[45] Id.

[46] Id.

[47] Id.

[48] Id.

[49] Id.

[50] Id.

[51] Krautmann, Anthony C., and Margaret Oppenheimer. “Training in Major League Baseball: Are Players Exploited?” Baseball Economics (1996): 85-96. Print.

[52] Id.

[53] A Congressional Swing and Miss.

[54] Markham, Jesse W., and Paul V. Teplitz. “Baseball Economics and Public Policy.” (1981)

[55] Id.

[56] A Congressional Swing and Miss.

[57] Owners versus Players. see p. 42.

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