Baseball’s anti-trust exemption: Is it time for a change?

Published 02 October 2014 By: Jonathan Gordon

Oakland Batter Baseball

Since 1922, Major League Baseball (MLB) has been exempt from antitrust law.  While other professional sport leagues have a few antitrust exemptions, none of them are exempt to the degree that professional baseball is. This article will describe antitrust law, discuss the history of MLB’S unique exemption, examine the implications of this exemption, and conclude by questioning the future of the exemption.

 

U.S. ANTITRUST LAW

There are three main federal U.S. antitrust laws1: the Sherman Antitrust Act of 1890, the Federal Trade Commission Act of 1914) and the Clayton Antitrust Act of 1914. Together, they legislate the primary purpose of antitrust laws – to prevent monopolization and foster a competitive, efficient marketplace.2

The Sherman Act was the first antitrust law passed (1890) and remains the most prominent of the three. Section 1 of the Act outlaws: “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations”.4 

The Act also prevents persons from forming (or attempting to form) a monopoly.5 Section 2 of the Act states that no person shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations”.6

In 1914, the Federal Trade Commission Act was passed, creating the Federal Trade Commission (the “Commission”).7 The Commission, which consists of five members serving seven-year terms, is responsible for enforcing antitrust laws.8 The Commission is empowered and directed to prevent persons [with certain exceptions, such as banks] from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.9

Later in 1914, the Clayton Act was passed to supplement and strengthen the Sherman Act.10 Among other things, the Clayton Act addressed price discrimination11, sales with agreements to not buy from competitors,12 mergers and acquisitions, 13 and interlocking directories. 14

It is important to note that these antitrust laws applied to interstate commerce – trade and business between states, not within states. These laws restrain trade among states.

This distinction gave way to MLB’s unique antitrust exemption.15

 

MAJOR LEAGE BASEBALL’S EXEMPTION

Currently, there are two leagues that fall under the umbrella of the MLB organization - the American League and the National League which following the 1999 season the leagues merged with Major League Baseball, and ceased to exist as business entities. In the early 20th century, however, there were three leagues for a short period of time. In addition to the aforementioned two, there was the Federal League. The Federal League was founded in 1913 to compete with the more-established American and National Leagues.

In 1915, the Federal League sued MLB, claiming it was violating the Sherman Act by monopolizing the market of baseball players.16 The Federal League claimed that MLB was interfering with its attempt to bring baseball players into the league. The parties settled, with Major League Baseball buying out the Federal League. The new league was dismantled and its owners were compensated.

The owners of the Federal League’s Baltimore Terrapins, however, were offered a miniscule amount of the settlement money. The team refused to join the settlement. It continued to claim that MLB was violating antitrust laws and filed a lawsuit against the league.

In Federal Baseball Club of Baltimore v. National League (1922), the Supreme Court ruled that antitrust laws did not apply to MLB.17 In a unanimous decision, the court decided baseball was not interstate commerce. It was a state affair. The business of baseball took place within states, not between states. While teams had to travel between states to play each other, this was considered incidental and not a major part of business.

The court wrote: “The business is giving exhibitions of baseball, which are purely state affairs. It is true that, in order to attain for these exhibitions the great popularity that they have achieved, competitions must be arranged between clubs from different cities and states. But the fact that, in order to give the exhibitions, the Leagues must induce free persons to cross state lines and must arrange and pay for their doing so is not enough to change the character of the business.18

 

IMPLICATIONS OF THE ANTI-TRUST EXEMPTION

One of the most significant implications of baseball’s antitrust exemption is that a team cannot move unless MLB allows it to. 

Interestingly, the court ruled differently in 1993 in Piazza v. MLB.19 MLB blocked the sale of the San Francisco Giants to Vince Piazza, who planned on relocating the team to Florida. A federal judge ruled that MLB’s exemption was not applicable in this situation and, thus, the league cannot prevent teams from moving. However, the federal judge then ordered a hearing to examine whether or not his interpretation of the exemption was correct. MLB eventually settled with Piazza and the hearing never happened.

The issue of relocation is again relevant, roughly twenty years later. In 2013, the city of San Jose sued MLB after it repeatedly prevented the Oakland A’s from relocating to San Jose.20 The city sued, claiming MLB was violating antitrust laws. A federal judge ruled that baseball’s antitrust exemption protected the league and that it did indeed apply to relocation issues.

The judge wrote: "The court holds that MLB's alleged interference with the A's relocation to San Jose is exempt from antitrust regulation.21 San Jose appealed in August 2014. A ruling has not been determined (it is expected to come in the fall); however, San Jose is expected to lose.

This ability to restrict relocation only applies to MLB; it does not apply to the National Football League, National Basketball Association, or National Hockey League.

In 1982, for example, Al Davis, owner of the Oakland Raiders, sued the NFL after the league prevented him from relocating the team to Los Angeles.22 Davis won the antitrust lawsuit. The court ruled that the NFL does not have authority to block relocation ventures.

Meanwhile, scholars have debated whether or not baseball’s antitrust exemption is legitimate and if it is beneficial.

In his article In Name Only: How Major League Baseball's Reliance on Its Antitrust Exemption Is Hurting the Game, Samuel Mann claims that the “benefits of MLB’s antitrust exemption do not outweigh the costs of protecting it.23 Specifically, Mann asserts two claims.

First, he argues that the exemption’s “cumbersome and uncertain nature” negatively impacts business dealings. Business partners, and sometimes even MLB, do not know when the league’s exemption applies and when it might be struck down. This creates great uncertainty during business deals.

Second, Mann claims that baseball often operates in “fear of congressional and judicial intervention”. Mann cites several instances where MLB has complied with congressional requests in fear of its exemption being challenged and revoked.  

Nathaniel Grow, professor at the University of Georgia, however, “challenges the overwhelming scholarly consensus opposing baseball’s historic antitrust exemption” in his paper In Defense of Baseball’s Antitrust Exemption.24 There, Grow claims the “common criticism of the baseball exemption are largely without merit” and that revoking the exemption would not yield the benefits critics expect. Furthermore, Grow claims that baseball’s antitrust exemption is actually good for the league and has a pro-competitive effect.

Like Mann, Grow acknowledges the fear that baseball operates with. However, Grow describes this as a pro-competitive benefit.  Congress’ threats of revoking the exemption pressures baseball into providing “pro-competitive benefits that would not have been directly obtained through antitrust litigation alone.” Grow adds that “every single round of league expansion in MLB history has been directly preceded by a Congressional threat to revoke the sport’s antitrust exemption.

Baseball’s antitrust exemption has been in effect for a near century. Will it continue to last? Or will it be revoked?

 

THE FUTURE

Baseball’s antitrust exemption has been challenged several times.

In Toolson v. New York Yankees (1953), pitcher George Toolson claimed that baseball’s reserve clause25 violated antitrust laws and the league’s exemption should not apply. The Supreme Court ruled in favor of the Yankees and protected baseball’s antitrust exemption. In the 7-2 opinion, the court wrote: “We think that if there are evils in this field which now warrant application of it to the antitrust laws, it should by legislation.26

A similar lawsuit occurred twenty years later. In Flood v. Kuhn (1972), outfielder Curt Flood made a similar claim as Toolson – that baseball’s reserve clause violated antitrust laws and the league’s exemption should not apply. The Supreme Court again upheld baseball’s exemption. However, the court also admitted that baseball’s exemption is somewhat flawed. In the 5-3 opinion, the court wrote: "Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.27

Despite upholding the exemption, the court’s opinion in Flood v. Kuhn paved the way for future changes. A few decades later, Congress passed the Curt Flood Act of 1998 and limited the scope of baseball’s exemption.28 The Act declared: “major league baseball players are covered under the antitrust laws”.29

A recent lawsuit has further challenged baseball’s exemption, claiming the exemption should not apply to broadcasting rights. In the ongoing lawsuit Garber et al v. MLB et al,30 a federal judge declared that baseball’s antitrust exemption does not apply to television broadcasting rights. MLB attempted to have the lawsuit dismissed by appealing to its exemption. However, the judge ruled against MLB and allowed the lawsuit to proceed to trial. Specifically, the judge wrote that the exemption does not apply "to a subject that is not central to the business of baseball, and that Congress did not intend to exempt — namely, baseball’s contracts for television broadcasting rights."31 MLB has since filed an appeal.32

 

CONCLUSION

Baseball, often called “America’s national pastime”, is exempt from one of the most fundamental American laws. MLB, a booming business with revenues over $8 billion for 2013,33 does not have to abide by the same antitrust laws that govern nearly all American businesses.  And while other professional sport leagues have some antitrust exemptions, none of them are as protected as MLB.

However, recent rulings have limited the scope of baseball’s exemption. The Curt Flood Act in 1998 ruled that baseball’s exemption does not apply to MLB players and employment matters. Earlier this year, in Garber v. MLB, the judge wrote that baseball’s exemption does not apply to broadcasting rights. While the exemption still allows MLB to block relocation efforts, it appears that the league’s immunity from antitrust laws is weakening.

 

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Author

Jonathan Gordon

Jonathan Gordon

Jonathan Gordon is a Finance student at the University of Notre Dame's top-ranked Mendoza College of Business. He is the founder of Sports Analytics Blog, a leading resource on the big data and analytics industry within sports. Jonathan has previously worked with an NFL agent and did freelance research for Couchmans LLP during his semester abroad in London. His work has also been featured on: Sports Agent Blog, Sports Law Chat, Ruling Sports, the Legal Blitz, and in the Academy of Legal Studies in Business’ 2014 National Proceedings.
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