Last week, Rep. Jeff Duncan (South Carolina) and Sen. Mike Lee (Utah) introduced legislation to end the antitrust exemption Major League Baseball (MLB) has held for nearly 100 years. While most see this a punitive measure after the MLB moved its 2021 All-Star Game from Atlanta, Georgia to Denver, Colorado in protest of Georgia’s recently passed voting laws, this is not first time MLB’s antitrust exemption has been debated.
Joel Maxcy, PhD, a professor in the LeBow College of Business, spoke with the Drexel News Blog about the history of the exemption and what’s at stake for the MLB.
What is the history of the MLB’s antitrust exemption?
The exemption derives from the 1922 US Supreme Court decision in Federal Baseball Club of Baltimore v. National League of Baseball Clubs et al., commonly referred to as Federal Baseball. The Federal League operated as a third major league in 1914-15, a legitimate rival league to the existing major leagues, National League (NL) and American League (AL). The AL, NL, and their affiliated minor leagues, had entered into an agreement in 1903 not to tamper or negotiate with players under contract from other clubs and leagues. This player reservation system included a mandatory contractual clause that allowed a player’s current club to perpetually renew players’ contracts.
The Federal League however was not obliged by the agreement and recruited players from the existing major and minor league clubs. Players jumped to the new league and bidding wars for player services significantly increased player salaries driving up costs for all clubs. The existing leagues moved quickly to undermine the Federal League and drive them out of business. Following the 1915 season, owners of NL and AL clubs bought out four Federal League club owners and two others were allowed to buy into ownership of existing AL & NL clubs (St. Louis Browns and Chicago Cubs, respectively).
The Baltimore club’s owners were not included (or rejected an offer) in the buyout and sued under relatively new federal antitrust law, the Sherman Antitrust Act (1890). The Baltimore club won in federal district court and was awarded $80,000 in damages (more than $1 million in 2020), which was tripled in accordance with antitrust law. The Federal Court of Appeals overturned the verdict stating the Sherman Act did not apply to baseball. The Baltimore club appealed to the U.S. Supreme Court, which unanimously upheld the appeal court’s decision. The opinion stated baseball games are local exhibitions, and even though teams travelled from city to city across state lines, baseball did not characterize interstate commerce; thus, the Sherman Act does not apply to baseball.
The ruling established the antitrust exemption precedent that was reaffirmed by the Supreme Court in Toolson v. N.Y. Yankees (1953) and Flood v. Kuhn (1972). Both of those cases were antitrust challenges to baseball’s reservation system. Moreover, in antitrust cases targeting other major professional leagues, courts have ruled the exemption applies only to baseball, and no other American sports league is exempt from antitrust law. The opinion in Flood suggested that baseball’s antitrust exemption was wrong but left it to the U.S. Congress to correct the mistake through legislation.
In the meantime, baseball players had organized a labor union and effectively used labor law to dismantle the reservation system, but only for major league players, by the mid-1970s. In 1998 Congress passed and President Clinton signed the Curt Flood Act into law. The act declares that the antitrust laws be amended so as to apply to organized professional major league baseball relating to or affecting employment of major league baseball players. The law effectively formalized what had been accomplished by the players union through labor law 20 years prior. The antitrust exemption as it relates to minor league players and the business activities of professional teams and leagues still stands with legal precedent based on the 1922 decision.
How does the exemption impact MLB?
First, minor league players, who are not unionized, remain under the reservation system. Most economists agree their compensation is much lower and working conditions are substandard compared to a situation of a more competitive market for their services.
Second, MLB has been able to maintain tighter control over franchise locations than the leagues without the antitrust exemption. A monopoly outcome in all the American professional sports leagues is that they offer existing clubs exclusive territories to protect them from local competition from another league team. MLB team owners can move, and have moved, their clubs to more lucrative markets, (e.g. Montreal to Washington, 2005; Washington to Texas, 1972). However, these moves require approval of MLB and the other owners, and MLB club moves are much less frequent than in the other leagues. The National Football League famously lost an antitrust suit brought by the Raiders owner Al Davis in 1982, who was denied by the league from moving the team from Oakland to Los Angeles. That decision set off numerous moves by other NFL teams over the past 25-30 years.
Third, Major League Baseball has much control over the number of and location of the affiliated minor league clubs (MiLB), which is most of the minor baseball leagues. There are a few independent minor leagues, but the large majority are members of organized baseball. Some MiLB teams are independently owned and operated but many clubs are owned by their affiliated major league club. The announcement by MLB in December that it is cutting affiliations with about 25% of minor league teams (reducing the number from 162 to 119) has brought much criticism. The cuts otherwise may have subjected MLB to antitrust challenges by owners and cities losing clubs. But the antitrust exemption will protect them from those cases.
Do you see this latest attempt to strip the league of the exemption as achievable?
It is possible because there are congress members and senators with unhappy constituents because MiLB teams are being shut down. The complaint and threat to reconsider the antitrust exemption voiced by Sen. Bernie Sanders (Vermont) is legitimately based on a perceived abuse of market power by MLB.
The bill introduced by five Republican senators is more of a threat for punishment than an antitrust issue. The motivation is the transfer of the 2021 MLB All-Star game from Atlanta to Denver, because of MLB objections to Georgia’s new voting laws. MLB does not need its antitrust exemption to site or move All-Star game locations. So, removing the exemption would have little or no effect on decisions of this sort. That does not mean their bill cannot pass, but they will need support from those who have interests because of the legitimate costs/harms of the MLB antitrust exemption.
The National Basketball Association moved its All-Star game away from Charlotte, North Carolina to New Orleans in 2017, also for a political protest reason. North Carolina passed a new state law which limited anti-discrimination protections in the state. The NBA has no antitrust exemption.
Where do you stand on MLB’s antitrust exemption?
I would like to see the antitrust exemption revoked by law. All of the sport antitrust exemptions are damaging to the parties antitrust laws are meant to protect. However, I’m not sure there is enough political wherewithal to pass this bill, largely based on a gripe that has little to do with the real costs caused by baseball’s exemption.
Media interested in speaking with Maxcy should contact Annie Korp, news manager, at 215-571-4244 or amk522@drexel.edu.
