Antitrust exemption in major league baseball

Economics

Major League Baseball's Antitrust Exemption

Major League Baseball has a history of antitrust exemption granted by Congress, despite obvious characteristics that would characterize another industry as dominated by a monopoly. Despite the rationale of the U.S. Government for this exemption, there have been challenges to the exemption intent on opening the baseball industry to greater competition. The purpose of this study is to examine the standing reasoning behind the antitrust exemption for Major League Baseball in the United States, analyze some of the major challenges to the exemption, and discuss the overall implications and ramifications for the industry (and, indeed, any industry).

Major League Baseball's Status

Though Major League Baseball's antitrust exemption isn't as relevant as it once was, with the absolution of the reserve clause and the rise of collective bargaining, it remains a strongly controversial component of the industry. But to understand the reasons why this exemption exists for Major League Baseball, we must look deep into the history of the game at the beginning of the 20th century. In January 1903, the early years of the game in the United States, two baseball leagues -- the American and National Leagues -- combined to form Major League Baseball (MLB) (Greenberg). As part of this union, the new league created a reserve clause in all contracts with players, effectively binding players to their first teams. The team, thus, held all the power to sell or trade athletes, leaving individual players with little power to control their own careers.

When a new baseball league, the Federal League, was unable to lure many players from MLB, they sued the league in 1915 for violating the Sherman Antitrust Act (Greenberg). Their argument was that MLB had unfairly cornered the market for players, largely through the reserve clause, and had made it impossible for other leagues to compete. Though the Federal League as a whole settled with MLB out of court, some of the owners in the Federal League took the case to the Supreme Court for arbitration.

Unfortunately, the case did not go as they had hoped. The Supreme Court ruled against the upstart Federal League owners and determined that MLB was not prosecutable under the Sherman Antitrust Act. The 1922 decision was built on the seemingly untenable position that baseball is 'just a game' and not a business or industry in the sense that steel manufacturing or mining is an industry (Belth; Greenberg). Justice Oliver Wendell Holmes articulated the position when he explained that baseball consisted of "personal effort, not related to production" and was thus not a form of commerce that could be regulated by the Court under the Sherman Antitrust Act (Greenberg). The end result of this decision was that MLB cannot be sued for antitrust violations, meaning that the League and its owners could make any decision regarding individual players and that those players had no legal recourse under the Antitrust Act (Belth).

To the modern eye, this decision is difficult to understand. Baseball is most certainly an industry. The industry produces hundreds of millions of dollars every year. The movement of teams across state lines can easily be characterized as interstate commerce, and should therefore be able to be regulated under the Sherman Antitrust Act. However, in 1922, the Supreme Court did not see the situation in these terms. Baseball, at the time, was still somewhat in its national infancy and did not operate on the industrial scale it does today. The core idea behind their decision was that baseball "was not the interstate travel to far flung cities, but rather the intrastate exposition of individual effort in the playing of a game" (Morrissey). Rather than negatively impact the game of baseball with the possibility of antitrust suits, the Supreme Court argued that the value of the game as a game and a national pastime outweighed any antitrust violations that might occur. In positing that Congress had only intended the Sherman Antitrust Act to apply to steel magnates and railroad tycoons, the Court removed MLB and the game of baseball from consideration as an industry open to regulation by the Act. In this way, baseball earned an antitrust exemption that permitted MLB and team owners to tightly control the game.

Challenges to the Antitrust Exemption

Interestingly, baseball is the only major sport that has an exemption from antitrust law (Belth). While baseball was granted an antitrust exemption in the 1922 Supreme Court decision, other sports have not been so lucky. The NFL, the NBA, and others are all subject to potential lawsuits if the leagues act in a way that would stifle competition in the industry. Baseball is the only game in the United States that still, or ever, enjoys some freedom from the application of antitrust protections. Over the years, the courts have consistently upheld baseball's antitrust exemption, despite repeated attempts to challenge the Supreme Court decision. Two notable instances of challenges to the Court's 1922 decision are Toolson v. The New York Yankees (1953) and Flood v. Kuhn (1972).

In 1953, the Supreme Court was granted a chance to correct the anomalous decision that was made in 1922 that granted baseball exemption from antitrust suits. The case was Toolson v. The New York Yankees. In the case, George Toolson was reassigned from a minor league team to another team. The reserve clause, still in effect at that time, was used by the league as the means to forcibly transfer Toolson. Toolson, apparently, did not want to make the move. He believed that the reserve clause interfered with his ability to manage his own career, a point that was not incorrect. He sued the team by claiming that the forced assignation violated antitrust laws (Greenberg). The argument against MLB was straightforward: the reserve clause severely truncated Toolson's ability to engage in interstate commerce through monopolization, which the prosecution argued baseball was.

Ultimately, the Supreme Court disagreed with Toolson and upheld the original 1922 decision with the argument that if changes to baseball's exemption needed to be made, then they must be made via Congress and legislation rather than through the Courts (Greenberg). This decision might seem like the proverbial passing-of-the-buck, but Congress already had provided other industries with exemptions from antitrust suits as well as explicitly applied the Sherman Antitrust Act to others via legislation. Therefore, the Court concluded that since MLB was not included in these pieces of legislation -- i.e., it was neither directly included nor excluded -- then the burden to make changes to the Court's original decision must lie with the legislature. The Court, in its 7-2 decision, argued that more harm would be done to game by overturning the 1922 decision since the industry had evolved in the thirty intervening years with the understanding that the exemption was in place (Morrissey). Even though the ruling was probably incorrect in the first place, the Court did not believe the harm inflicted on Toolson was sufficient to warrant the upheaval of the entire industy.

Similarly, the Court again upheld its 1922 decision in Flood v. Kuhn (1972). In 1969, the St. Louis Cardinals traded player Curt Flood without his agreement. Because of the reserve clause they had every legal right to do so. However, Flood had not desire to be transferred because he didn't want to move his family, give up his local business interests, or live in Philadelphia (Greenberg). Like Toolson in 1953, Flood challenged the move on antitrust grounds. The case reached the Supreme Court in 1972.

Like, Toolson, Flood's efforts were for naught, though this time the decision to uphold the 1922 decision came at a much closer margin. Rather than 7-2 split, the Court ruled against Flood in a 5-3 split. Notably, in Flood's case, the Court determined that the antitrust exemption that baseball enjoyed was an anomaly (Rovell). They even went so far in their decision as to state that if they were ruling on baseball for the first time, they would not grant an antitrust exemption. Baseball, they concluded, was in fact a form of interstate commerce and should be governed as such an therefore subject to antitrust suits. However, because the exemption had in force for fifty years, the Court was loathe to overturn the decades of precedence and open the possibility of retroactive countersuits that could destroy the industry (Morrissey). Once again, they let the burden of changing the exemption squarely on the shoulders of Congress.