Friday, April 30, 2010

Antitrust and Competitive Balance

Competitive balance is a hot topic for baseball fans these days.  After the Yankees won their 27th World Series on a gargantuan payroll that was leaps and bounds ahead of any other team in the league, the grumblings around the baseball community about the need to address balance issues in MLB were renewed.  Indeed, without a doubt baseball does have a balance issue.  "From 1980 to 1986, twenty of baseball's twenty-six teams made it to a League Championship Series (LCS).  From 1995 through 2001, only eleven of baseball's thirty made it to an LCS." (Zimbalist, May The Best Team Win (2003) p. 43.)  Moreover, of the eleven teams that did make it to an LCS during the 1995-2001 period, none won a World Series who were outside the top fourth in payrolls. (Id. at p. 43.)  Clearly there is something wrong with baseball.  A myriad of solutions have been suggested: salary caps, salary floors, more revenue sharing, and realignment have been the most common solutions debated in the media.

There is one thing, however, that I never hear discussed.  Baseball's archaic antitrust exception.  Baseball's antitrust exception has allowed the league to create a system which lends itself to balance issues throughout the lead.  With its antitrust exception, baseball has created a flawed minor league system which may be a chief contributor to baseball's balance issues.  In this essay I will detail the history of baseball's antitrust exception, what it means, and why it still matters for baseball today.

What Is Antitrust?
Antitrust law is the federal government's attempt to stop business concentration and economic power. (E. Thomas Sullivan et al., Antitrust Law, Police And Procedure: Cases, Materials, Problems (6th Ed. 2009) p. 1.)  Antitrust law is designed to prevent economic power from being concentrated in too few hands (avoid monopoly).  It is also designed to stop unreasonable restraints on trade, including inter alia: price fixing agreements (where competitors agree to charge higher prices than they would if they competed), market allocation (where competitors to agree not to compete in certain geogrpahical areas), and attempts to monopolize.  Antitrust laws prohibit more than just the aforementioned conduct, however those actions are the most commonly seen.

Since antitrust law is federal legislation enacted by Congress, it can only reach activity that is interstate, as per Congress's commerce clause power.  This is important because what exactly is interstate commerce is not the same today as it was when baseball first was granted its antitrust exception. 

Baseball's Antitrust History
In order to understand baseball's current antitrust exception one must delve into the history of MLB.  MLB was formed in 1903 with the merge of the American and National Leagues. (Zimablist, May The Best Team Win, supra, at p. 15.)  While the leagues were once competitors, the owners of the respective leagues determined it would be economically viable for them not to compete with each other.  Pursuant to their collusion, the owners of the newly formed MLB could create labor policies that players were helpless to combat: with the two major leagues now combined into one league, players could no longer vote with their feet and move to a different league that offered better playing conditions.  The policy that was the most unbearable for players was the dreaded reserve clause.  The reserve clause forbade players from seeking free agency; players could only be moved if an owner wanted to sell that player to another team.  In a sense, this was 20th century indentured servitude.  Players hated the reserve clause, but all attempts to rid baseball of this arcane labor requirement failed.

Seeing a class of disgruntled players ripe for the picking, a new baseball league was formed in 1913.  The Federal League was originally formed as a minor league, but quickly announced that it would become a major league and began to court MLB players by promising players long-term contracts and abandoning the reserve clause.  (Id. at p. 15.)  The floodgates opening, and a army of disgruntled MLB players jumped ship for the FL.  Between 1914 and 1915, 221 major league players joined the FL.  (Id. at p. 15.) 

MLB was not about to take this betrayal sitting down.  MLB quickly blacklisted any players who went to the FL and sued many of the defectors.  (Id. at p.16.)  The FL responded by suing MLB, claiming MLB's attempt to block players from joining the FL was an unreasonable restraint of trade, an antitrust violation.

The case went all the way to the Supreme Court of the United States.  The argument in the Federal Baseball case was whether federal antitrust laws reached baseball.  Was baseball "interstate commerce"?  Ultimately, the Supreme Court found that it was not interstate commerce and ruled baseball was exempt from antitrust laws.  In an opinion by Oliver Wendell Holmes, baseball games were "purely state affairs" that did not effect interstate commerce, because the travel across state lines each team did to play in a rival city was merely incidnetal to the game, but it was not an essential element of baseball. (Id. at p. 17.)  Thus, the FL had no ability to prevent MLB's anticompetitive behavior.  Within several years the FL folded. 

While it may seem odd to us today, the decision was not necessarily wrong at the time.  Prevailing views of what constituted interstate commerce were extremely different in 1922, when the case was heard.  It was not until the 1930s and 1940s that our modern idea of what constitutes interstate commerce began to take shape. The decision in Wickard v. Filburn (1942) 317 U.S. 111 noted that Congress has the power to regulate any activity, local or interstate, that either in itself or in combination with other activities has a substantial economic effect upon or effect on movement in interstate commerce.   This decision greatly broadened the power of the commerce clause, as now federal laws could reach activity that was entirely intrastate if that activity, in the aggregate, would or could have an effect on interstate commerce.  Clearly, after Wickard, baseball fell into that class of activity.

However, the battle over baseball's antitrust exemption did not end there.  Following World War II, a new baseball league was formed.  The new Mexican League offered players handsome salaries, especially for young players looking for an initial club to sign with.  One such player, Danny Gardella, signed with the ML after getting a handsome offer (coincidentally, the MLB he snubbed was the Giants).  (Id. at pp. 17-18.)  Gardella began playing in Mexico, but found the playing conditions simply unbearable.  He walked away from the league and sought return to the MLB, however for his defection to the ML, he was now blacklisted.  Gardella sued MLB, claiming that baseball's antitrust laws no longer applied given the advancement of commerce clause jurisprudence and that the advent of radio and television had changed the nature of baseball so drastically that it certainly constituted interstate commerce. (Id. at p. 18.)  Lower circuit courts ruled for Gardella and awarded him damages of $300,000.  MLB attempted to take the case to the Supreme Court, however before the Court could hear the case it was settled.  Thus, there remained ambiguity about baseball's antitrust exemption: a federal circuit court had seemingly struck down the exemption, however the Supreme Court never got the chance to have the final word.

The battle continued.  In the 1950s, Congress held hearings, not unlike the ones following the steroid scandal in the 21st century.  Aftering hearing from many ballplayers, including Ty Cobb, who argued that the reserve clause was required in order for baseball to stay competitive, Congress declined to remove the antitrust exemption as it applied to baseball (Zimbalist 18).

The Supreme Court, bizarrely, confirmed baseball's antitrust in yet another decision in 1953.  George Toolson sued MLB after he was to be traded from the Yankees.  Toolson refused to report to duty when the Yankees informed him they were moving him.  The Supreme Court claimed that baseball had an antitrust exemption for two reasons: (1) we already ruled that baseball has an antitrust exemption (even if it no longer makes sense); (2) Congress held hearing and decided not to remove the exemption.  This seems like a bizarre excuse from the high court.  They felt they did not need to act because Congress did not decide to remove the baseball exemption that Congress never gave them in the first place?  Baseball's antitrust exemption was a judicial monster, not a congressional one.  Should not the solution come from the judiciary?  What made this case so frustrating, is just several years later in Radovich v. NFL, the Supreme Court ruled that the National Football League did not have an exemption from baseball.  (Id. at p. 20.) 

Finally, the Flood case would begin the death knell of the reserve clause, which remained to be hated by major leaguers throughout baseball.  Curt Flood was one of the best center fielders in the game in the late 1960s and early 1970s.  When he was traded from the St. Louis Cardinals he objected.  He wrote to the baseball commissioner and requested that he not be traded; the request was denied.  Following this, Flood sued MLB, claiming that the reserve clause was an unreasonable restraint on trade.  The Supreme Court eventually heard the case, and in a decision by Justice Blackmun the Court noted that baseball's antitrust excemption was an "aberration."  The Court refused, however, to remove baseball's exemption, alleging that the rule had stood for so long, and so many people had many important business or life decisions on baseball's exemption.  Justice Blackmun also noted that the decision was a "reconition of baseball's unique characteristics and needs."  Oddly enough, Blackmun failed to explain exactly what made baseball so unique from football.  (Id. at pp. 20-21.)

Fortunately for Mr. Flood, however, while the antitrust exemption survived, the reserve clause did not.  In 1975, MLB agreed to abandon the reserve clause and in 1976 the free agency system began. 

So where do we stand now?  Today there is still ambiguity over whether baseball has an antitrust exemption.  Most of the litigation surrounding the exemption addresses the reserve clause.  Some pundits have talent his to mean that the exemption only reaches the reserve clause, and seeing now that the reserve clause is dead, the exemption means nothing.  MLB has been very good at avoiding litigation it believes will destroy its antitrust exemption.  As it stands now, baseball has a broad antitrust exemption in most legal circles; at least until there is cause for the Supreme Court or Congress to clarify exeactly what the exemption reaches today.  Regardless, the presumed exemption has effects on the modern game.

What The Antitrust Exception Means
There are several practical effects the antitrust exception still has on baseball.  Traditionally, as I hope has been made clear, most litigation surrounded the reserve clause.  Despite the fact that the reserve clause is a thing of the past, the minor leagues are still greatly effected by the antitrust exception.

Minor Leagues and Antitrust
Baseball is unique in professional American sports in that it grows players in a unique minor league system.  How does this system work?  Every June MLB holds a draft.  Unlike the NFL draft, where teams get together to draft NFL-ready players out of college, the MLB draft is for high school and college players from the US, Canada, and Puerto Rico.  Players are chosen by a particular team.  "Once chosen, players can either sign with the selecting team with a fixed salary . . . plus a signing bonus for the top prospects, or they can stay out of professional baseball until the next year's draft.  Chosen players who sign witha major league team then spend up to four years in that club's minor league system before another team has an opportunity to sign them."  (Id. at p. 25.)  If a minor league player is put on a team's 40 man roster, then he cannot be picked up by another team for seven years.

As I noted above, antitrust laws prohibit unreasonable restraints on trade.  Generally, a restraint the artificially fixes prices or prohibits competition will be unreasonable.  In the case of minor league players, this is clearly an unreasonable restraint of trade.  Why?  First, because players are not allowed receive competitive bids for their services after they are drafted.  Their pay rate is set by the owners and does not reflect his own skill.  Imagine you have a business making pizza.  Your pizza is the greatest pizza in town, but the city has put some restrictions on you: (1) you can't raise your price; (2) you can't move to a more profitable block.  These are unreasonable restraints on trade and it is what goes on with baseball players in the minor leagues.  Furthermore, minor league players are not, and cannot, be unionized.  They cannot partake in collective bargaining.  All htese are unreasonable restraints on trade and the only reason they are legal is because baseball has an antitrust exemption.

What would happen if the antitrust exemption were lifted?  Baseball competitive balance would probably improve.  Currently, teams draft players and then are responsible for a player's development.  It is on the team to grow budding players into superstars.  Often, prospects do not work out.  Under the current system, the teams with the worst records from the previous year get the first pick in the draft.  However, it is extremely common for these top prospects to not pan out.  So, the fact that weak teams often get first dibs often does not matter.  However, if the antitrust exemption were lifted, baseball might have to modify its system.

Zimbalist envisions a system were minor leagues still exist, but they are not controlled by major league franchises as they are today.  Under this system, minor league teams would develop players and after a set service time they would be eligible to be drafted in the major leagues.  This would probably have a good effect on competitive balance in baseball, because unlike the current system, where teams essentially pick players and then hope for the best, under this proposed system teams would select players after they have largely been developed.

Under current free agency laws, a player cannot hit free agency until he has six years of big-league experience.  This would allow smaller market teams to draft MLB-ready players directly out of the minors and get six years of play time.  For those six years, small market teams could try to create a team that could compete with the big boys.  It would be easier for smaller teams to make educated decisions about which players would better fit their club, because they will have a better idea of what kind of major league player they are going to get.

Conclusion
Baseball's antitrust exemption is still a problem for the sport.  Today baseball does face competitive balance problems.  Some solutions, such a salary cap, may never be realized considering the great opposition from the Players' Union.  In fact, I don't think a salary cap would make much of a difference either: money would simply go to management and not necessarily to the players.  Reorganizing baseball's draft and minor league system may be one part of the ultimate solution to see more balance in the sport. 

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