CURRENT ISSUES IN SPORTS LAW OVERVIEW FOR CLASS ONE THE FROMM INSTITUTE. ANTITRUST AND SPORTS: Why is Baseball Exempt and all other Sports are Not?

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1 CURRENT ISSUES IN SPORTS LAW OVERVIEW FOR CLASS ONE THE FROMM INSTITUTE ANTITRUST AND SPORTS: Why is Baseball Exempt and all other Sports are Not? I. Introduction Our first class will focus on the effect of federal antitrust laws on sports. This legal area has significant impact on how sports organizations conduct their operations. We will discuss examples during our class session. This Introduction is intended to provide a background for this discussion: First, a short history and purpose of the antitrust law. 1 Second, the interesting history that created the anomalous baseball antitrust exemption. Third, a quick look at some of the issues we will discuss in class. II. Federal Antitrust Laws: The Sherman Act of 1890 In a perfect world, laws are a system intended to codify accepted social, cultural and moral values. This includes laws that regulate business conduct. The federal antitrust laws are a good example of an effort by Congress to impose a code of conduct on 19 th century business practices that were viewed as anticompetitive. These practices arose as a by-product of the industrial economy that strengthened during the post-civil war Second Industrial Revolution. Troublesome to an advocate of a free, competitive market economy was device termed the business trust. These trusts were an effort by major industrialists to limit the free market by eliminating the need for competitors to lure consumers based on lower price or higher quality. 2 The centralized trusts held controlling shareholder interests of most of competitors in a market; these 1 It is difficult to summarize all the contours of this extremely complex and constantly evolving 2 Think for example, Standard Oil, U.S. Steel, the sugar industry, and the railroad industry. 1

2 control interests thus placed all competitors within one governance structure. By uniformly controlling the behavior of the companies that would otherwise be competitors, these combinations were free to engage in such anti-competitive practices as price-fixing, resale price maintenance, boycotts, territorial allocation, and restriction of supply. By this device, competition in the market was effectively eliminated, causing prices to the consumer to be higher than would exist in a free, competitive market. In response to public outcry over these anti-competitive practices, Congress passed the Sherman Antitrust Act in This Act rendered illegal these anticompetitive business practices, by stating it was unlawful for two or more parties to agree to behave in a manner that restrained interstate trade or commerce, or to engage in business practices that created or preserved a monopoly. 4 The relevant text of the act is quite simple: Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States... is declared to be illegal Section 2. Every person who 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, shall be deemed guilty of a felony... Under the broad language of Section 1, aren t sports leagues, composed of thirty or so competitor teams with separate ownership, clear examples of a combination that agrees to conduct business collaboratively, with the effect of restraining trade in that business? The short answer that we will unpack in class is: 3 The purpose of the Act stated by Senator Sherman was "To protect the consumers by preventing arrangements designed, or which tend, to advance the cost of goods to the consumer". Note the subtle difference between designed and tend to... How is this dealt with in the statute? 4 It wasn t illegal to be a monopoly by virtue of business acumen or a superior product; it was illegal to achieve or sustain that monopoly through anti- competitive practices. 5 The language of this statute is so broad that any contract that restrains trade to any degree could be held to violate its provisions; all contracts by definition restrain trade. The Supreme Court, recognizing this factor, has judicially inserted the word unreasonably as a qualifier, so that only contracts involving two or more persons that unreasonably restrain trade violate section 1. We will explore the importance of this single word in class. 2

3 A. As to all sports other than baseball, the answer is sometimes. B. As to baseball, the answer is never, almost. The origins of never we will discuss below; the contours of almost we will discuss in class. Before we study how the antitrust laws apply to most of the leagues, it is worth a detour to understand the historic origin of the never, almost answer for baseball. The answer lies in the history of baseball (19 th and early 20 th century), and this history led to the famous Supreme Court decision in 1922 holding the federal antitrust laws inapplicable to professional baseball. 6 III. Early History References to a game resembling baseball date back to , and there is history of informal games being played throughout the first part of the 19 th century. at will. Historians cite the formal birth of modern baseball as a game played by the Knickerbocker Club, at the Elysian Fields in Hoboken, New Jersey. The year was 1846 (and the Knickerbockers lost to the New York Nine 23-1). 8 By 1857 the league had evolved into sixteen clubs, organized around teams governed by the players, who were principally amateurs. There was very little stability to these teams, with players jumping from team to team After the Civil War, the game increased in popularity and the modern rules were formulated; the National Association of Base Ball 9 Players organized itself 6 The Sherman Act has been amended, and supplemented by several additional statutes, notably the Clayton Act (1914), and the Robinson- Patman Act (1936). However, the Sherman Act is today the primary statute upon which most private and governmental antitrust claims are based. 7 Pittsfield, Massachusetts had an ordinance banning the playing the game within 80 yards of the town meeting house. 8 The Knickerbocker founder was the umpire. 9 Originally, the term was two words; eventually Base Ball was combined into the single noun baseball. 3

4 formally in There was little formal structure, and players as free agents were still free to jump between teams as it suited them. This league folded five years later. In 1876, a new professional league was formed with owners, not players providing the structure, hiring players as paid employees under contract. This league was called the National League, and is the same National League we know today. During those years, many franchises folded, as new ones came on board. By 1879, the league realized that their biggest financial problem was the inflated salary cost by competition amongst themselves for players. To control competitive payroll costs, the owners initially agreed on an unwritten system where each team could reserve five of their players and all the other teams agreed to respect this unwritten reserve list. The system worked so well in keeping salaries down, that by 1887 the reserve list had expanded to include all of the players on a roster. Importantly, the system expanded from just an agreement among the owners, to include as well a provision in each player s contract binding him to the club in perpetuity (although the club had a 10-day release clause). This clause was usually written in wordy legalese, but a translation provides the essence: 1. The player and club agreed that the player would play for the club during the current year at an agreed salary; 2. The club had an option to require the player to sign a contract for the ensuing year, at a salary to be established by the club. This one-year plus an option clause rolled over each year, and ran as long as the club wanted the player s service. It was assumed that when a club renewed for the option year, that renewal automatically created a new option for the next year, and the next, and so on in perpetuity. As you might suspect, the reserve clause caused discontent among the players. As a practical matter, however, they had no choice if they wanted to play baseball. A player could attempt legal challenge to the clause under contract law principles. However, a successful release from the contract was a pyrrhic victory, as the owners had mutually agreed not to sign a player from any other club. Only a competing league to the National League would create a choice for the player who wanted to jump from his team, and none existed. While many leagues sprung into existence in the 1880s and early 90s, they disappeared quickly; to jump to those was nether an attractive nor safe option; if a player 4

5 jumped leagues, and the league folded, he would be blackballed by his prior employer and unable to play anywhere. 10 One league of particular interest that emerged is the Players League of Angered by the low salaries of the National League, this league was formed for the 1890 season and many of the skilled players of the National League defected. This league was organized on a different business model: a cooperative between the players and financial backers. The investors were guaranteed the first $10,000 of profits, and the excess was accumulated at the League level. There was no reserve clause, players received three-year contracts, and gate revenues were shared fifty-fifty. Governance of the league was by a board of directors comprised both of players and investors. (They intentionally avoided the term owners. ) The National League met this new league with a fierce competitive response, utilizing their superior financial power. The total baseball market in 1890 was not sufficient to support both leagues, and faced with increased competition from the National League, the Players League investors incurred significant financial losses during its initial year. During its one and only year, the league was overwhelmed by the greater market power of the National League. By the end of the 1890 season, the league dissolved. 11 This different league structure is interesting however, because the current concept of salary caps, which guarantee the players a certain percentage of league revenues, has similarity to the collaborative business model of this league. In the late 1890 s, a true competitor to the National League emerged when the Western League, formed in the mid-1890s as a minor league, upgraded itself in 1899 to a major league named the American League. This competing major league did not honor the National League reserve clause, and instead sought to sign players from that league, using higher salaries as strong lure. Many players jumped to the American League, and many of the teams were competing head to head in the larger cities. Naturally, the National League clubs that lost a player sought to enforce the player contract in court, seeking to restrain the player from playing for the American League. As the remedy sought was an injunction, the relief was subject to the judicial tests for equitable relief. 10 One strong independent league existed - - the American Association - - however it had a reciprocal agreement with the National League to honor the reserve clause. 11 A few of the clubs were merged into National League franchises. 5

6 A majority of state courts denied equitable relief to enforce the reserve clause, based upon its one-sided nature, and the overall appearance of unfairness. Each case turned on the law of the state where the action was filed, and this element introduced variability in the results state to state. The war for players between the American and National Leagues continued into 1902, as the American league continued its success in luring famous players from the National League, and prevailed in some court cases. The fans voted with their feet, providing the American League with overall higher attendance. After offers to absorb some of the American League teams into the National was rebuffed, the two leagues finally settled the war for players by deciding to merge into a single association of two Leagues, each with eight teams. This merger created what we now know as Major League Baseball. The terms of the merger included very strong reserve clause language binding the teams of each league to refrain from stealing players. It also required every club to use a standard contract including the reserve clause, and it bound each club to honor the reserve rights of every other club. The system was watertight. The Agreement also established the original World Series between the two leagues. The first series was played in the fall of 1903 between the Boston Pilgrims and the Pittsburgh Pirates. (Boston won.) While it may have been good for owners and fans, this merger between the two leagues once again eliminated free market competition for players. Once again, a player could only challenge the reserve clause contract at his peril, as there was no alternative major league in which to play baseball. IV. Along Comes the Federal League In 1913 the baseball situation again changed for the players good. A wellfinanced group of owners established a new, competitive league of six teams named the Federal League. In 1913, this operated as a minor-league, but in 1914 expanded to eight teams and declared itself a major league, in direct competition with the combination of the National and American Leagues. Naturally, the Federal League sought to attract talented and well-known players from the Major Leagues in order to offer a competitive product. The Federal League had organized itself as a syndicated group. The league hired all the players, rather than the individual teams, and players were assigned 6

7 by the league to the various teams in an attempt to keep the talent balanced. The league rejected the reserve clause, and offered the players long-term contracts with salary increases. Once a player made the team, his contract was guaranteed for the season. This strategy returned the baseball world once again to a game of contract jumping, and eighty-one players were attracted by the contracts offered in the Federal League. The Major Leagues sought to enforce their player contracts in equity by a series of selected state court actions. Among the most well known is the 1914 challenge by the Chicago White Sox to the signing of Hal Chase, a catcher, by the Buffalo club of the Federal League, while he was under contract with the Chicago American league club. American League Baseball Club v. Chase, 149 N.Y.S. 6 (N.Y. 1914). In a lengthy analytical opinion, the New York court denied the injunction Chicago sought against Chase playing for Buffalo. The court first engaged in a lengthy analysis of the many different provisions of the National Agreement and the players contract that operated to bind the players in perpetuity. It contrasted the lack of those restrictions in the Federal League. In the process, the court reflected abhorrence at the concept of the reserve clause: How could the system restrict the freedom of a player to move to a more lucrative job in another league? The court allowed Chase to play for the Federal League club, free of contract claims by his former Chicago club. V. Federal Baseball League Invokes the Sherman Act Due in part to the doubling of average salaries through market competition, the deep-pocketed Federal League owners were losing large amounts of money and in the process hurting the bottom line of the National Agreement teams. As a competing league, the Federal League was in a perfect position to file a Sherman Act claim against the Major League baseball, claiming that its various collective behaviors constituted a combination in restraint of trade, and those activities were directly responsible for the Federal Leagues financial losses. Predictably, after the financially disastrous 1914 season, the Federal League filed its antitrust suit against the Major Leagues in early January 1915, in Chicago. The trial judge was Kennesaw Mountain Landis, later to become the first baseball Commissioner. The Federal League was optimistic about its chances of success. However, Judge Landis, after a four-day trial, took the 7

8 case under submission in late January and the parties waited and waited for him to render a decision. By the late fall of 1915, he had still not acted, and time was on the side of the Major League. The Federal League lost so much money that the owners could not possibly afford a 1916 season. 12 Desperate financially, the Federal League negotiated a settlement of the case in the fall of Under the settlement, several of its teams were dissolved and paid a sum of money for their players or real estate, and several were absorbed as new franchises in the Major Leagues. One team, however, was left out in the cold the Baltimore Federals. The Baltimore owners were offered a small payment to go away, which they declined. They wanted a major league franchise for Baltimore. Thus, when the settlement agreement was presented to Judge Landis (who still hadn t decided the case), there was no provision for a Baltimore franchise. Consequently, the Baltimore Feds asked not to be part of the settlement of the Federal League case. The Baltimore club then filed its own federal antitrust suit, naming the Major Leagues, its officers, and several executives of the now defunct Federal League. After some procedural gymnastics, the case finally ended up before a jury in a federal court in the District of Columbia. The court ruled the plaintiff stated a valid claim under the Sherman Act, and the jury awarded damages of $80,000, trebled under the statute to $240,000. Implicit in this decision was that baseball was operating in trade or commerce between states, as required by the antitrust statute. The decision was appealed by the Major League to the Circuit Court for D.C., principally contending that professional baseball did not operate in interstate commerce and therefore the trial court lacked jurisdiction to apply the Sherman Act. The appellate court agreed with baseball s argument, finding instead that baseball was a local business, for which interstate travel was simply incidental. The Supreme Court, in a now famous unanimous opinion, upheld the appellate court determination that baseball was not acting in interstate commerce, as required by the statute. I have attached Holmes opinion to this Overview. It is short, and will give you a feeling for the thinking of the Court. 12 Later, after he became the first Commissioner, Landis suggested that he withheld his ruling in part because he was inclined to rule for the Federal League. However, he realized this would destroy the business model of the National Pastime, a result he wanted to avoid. He was apparently holding back his opinion hoping the parties would settle. 8

9 In class we will discuss whether Holmes opinion is a correct definition of interstate commerce in the context of then prevailing jurisprudence, which felt that Congressional powers to regulate business were circumscribed. Consistency with the thinking of the time, of course, shouldn t preclude a subsequent overruling by the Court. Subsequent legal decisions and Congressional statutes expanded the definition of trade or commerce to meet modern realities in many industries. Why should baseball be an exception? VI. Subsequent Opinions: The Opportunity to Overrule Federal Baseball. The period between the 1922 Federal Baseball decision and the end of World War II saw many changes in baseball, including the organization of team controlled farm systems, the development of a strong Commissioner with virtually dictatorial powers (Judge Landis), the advent of radio and television broadcasts of the games nationally, and in 1947 the racial integration of the leagues. Simultaneously, there was significant judicial expansion of the breadth of Congressional authority to regulate interstate commerce. 13 Many observers assumed that Federal Baseball would be overruled, but no case reached the courts to test that opinion. In 1946 that circumstance would change. A professional league in Mexico had existed since 1925, but the league had not competed actively for U.S. major league players. In 1946, some entrepreneurial owners in the Mexican League started to recruit major league players with the temptation of high-salaries. The average salary at that time in the major leagues was about $3500, and the Mexican league offered some stars in the range of ten times that salary. Several U.S. players took the offer and jumped; shortly they found the playing conditions sufficiently inferior that they sought to return to their U.S. teams. The Commissioner responded by banning these players for five years from playing in the major leagues. One such player was Danny Gardella, a marginal player for the N.Y. Giants. Banned, and needing to earn a 13 In Wickard v. Filburn, 317 U.S. 111 (1942), the Court held that a farmer producing wheat for his own local consumption, nonetheless violated a federal regulation regulating wheat production, because by producing his own wheat, he didn t need to buy any in the open market. Thus he had an indirect impact on interstate commerce and was subject to federal regulation. The Court said that even if an activity is local, that activity may be reached by Congress if it exerts a substantial economic effect on interstate commerce,... whether such effect is what might at some earlier time have been defined as 'direct' or 'indirect.'" Compare this to Justice Holmes view in Federal Baseball. 9

10 living, Gardella filed an antitrust suit against baseball in 1948, alleging that the league-wide prohibition constituted an illegal restraint of trade. The trial court recognized that the legal contours of interstate commerce had changed significantly since 1922 (as had the nature of the baseball business, particularly the advent of radio and television). However, the judge felt bound by the precedent of Federal Baseball and dismissed the complaint. The 2 nd Circuit, however, was divided. One judge thought the precedent of Federal Baseball was binding on the court. A second judge wanted to declare Federal Baseball as non-binding on the 2 nd Circuit due to the significant change in the nature of baseball since 1922 he referred to the Holmes opinion as an impotent zombie. The third judge, Learned Hand, was on the fence about whether Federal Baseball should be overruled, less on the merits than on concern for stare decisis 14 and the appropriate role of lower courts. He felt, however, that whether baseball operated in interstate commerce was initially a fact question for the trial court to determine. Thus, 2-1, the case was sent back to the district court for trial. Baseball was faced with a tough decision: They could seek review in the Supreme Court, try the case in the district court, or settle. Weighing on their decision were other lawsuits filed by other major leaguers likewise banned for their participation in the Mexican League. Baseball took the safe route: In 1949, it lifted the ban on players, and settled with Gardella for $60,000, thus averting a potential overrule of Federal Baseball. VII. Congressional Action by Inaction Baseball leadership was anxious about continued viability of the exemption following the Gardella scare in the 2 nd Circuit. They discussed seeking federal legislation codifying Federal Baseball, but were worried about the implications if the legislation failed to pass. Finally, four separate bills were introduced in the House and Senate forbidding the application of the antitrust laws to organized professional sports enterprises or to acts in the conduct of such enterprises. In play was the inherent need of politicians for publicity, and nothing provided more press than congressional hearings studying the legality of the historic structure of baseball. Emanuel Celler was chair of the House Judiciary Committee, with jurisdiction over the antitrust law, and of the subcommittee studying monopoly power. In this subcommittee he initiated hearings on the 14 The judicial doctrine that precedent should be adhered to whenever possible, in order to provide certainty and predictability in the legal system. 10

11 baseball antitrust exemption, suggesting in his public statements that he was in favor of reinforcing the holding of Federal Baseball, not on theoretical grounds of interstate commerce, but on the broader public policy grounds of preserving baseball as it is, avoiding harassment of constant antitrust suits, and retain its cultural role as the national pastime. For some reason, this cultural icon deserved special treatment over all other industries, including education and healthcare. The Cellar hearings lasted about four months, with testimony from thirty-three witnesses, most of who were management, preaching the essential need for the reserve clause as essential to maintain competitive balance and stability in baseball. Ostensibly, the question before the committee was whether baseball should be protected or not from antitrust claims by an amendment to the antitrust statutes. However, the committee could not agree internally on the various options ranging from protecting baseball completely, protecting only the reserve clause, protecting the major but not the minor league structure, or, alternatively providing that baseball was subject to antitrust claims similar to all other industries. The work-product was a final report, published in 1952, entitled Study Of Monopoly Power: Organized Baseball in the House of Representatives. The report, some 1600 pages in length, concluded as follows: The requested [legislative] exemption would extend to all professional sports enterprises and to all acts in the conduct of such enterprises. The law would no longer require competition in any facet of business activity of any sport enterprise. Thus the sale of radio and television rights, the management of stadia, the purchase and sale of advertising, the concession industry, and many other business activities, as well as the aspects of baseball which are solely related to the promotion of competition on the playing field, would be immune and untouchable. Such a broad exemption could not be granted without substantially repealing the antitrust laws. Finally, the Subcommittee recommended a postponement of any legislation until the status of Federal Baseball was clarified in the courts. Thus, no further action was taken on any of the bills; a baseball-friendly Congress left intact the thenexisting coverage of the antitrust laws as pronounced in Federal Baseball, to be addressed by the courts in future disputes. Essentially, congressional action by inaction. 11

12 VIII. The Next Opportunity to Overrule: Toolson v. New York Yankees. Meanwhile, other antitrust suits by players were making their way through the courts. One was filed by a minor league ballplayer named George Toolson in Toolson was the property of the Yankees and played at their minor league Newark Bears. When he was assigned from Newark to Birmingham, he refused to report, sat out the 1950 season, and filed his antitrust suit in Los Angeles federal district court against the Yankees and baseball (prior to the Celler hearings). Not surprisingly, the case was dismissed at the trial court citing Federal Baseball-- and the 9 th Circuit affirmed (without writing an opinion). As this created a conflict with the 2 nd Circuit opinion in Gardella, the Supreme Court granted certiorari in Toolson s case. Thus, the stage was set for overruling Federal Baseball. Surprising many lawyers, and confusing even more, the Court recharacterized the holding of Federal Baseball. We saw that the basis of Holmes opinion was that, under the thinking in 1922, baseball did not fit within the narrow interpretation of what constituted trade or commerce, and thus was beyond the commerce power of Congress to regulate. The opinion did not reach the question whether if baseball were engaging in interstate commerce, its structure would violate the Sherman Act. Nonetheless, the Toolson Court cites that the antitrust laws did not apply to the business of baseball. Referring to the Celler hearings, and other legislative inaction, the Court indicates that whatever the right approach to a baseball exemption is, the result should be achieved by legislation and not by the Court overruling Federal Baseball. 15 The majority expressed this conclusion in a short per curium opinion. The dissenters had a field day with the circular logic. IX. Other Professional Sports If baseball now had a fortified, judicially created antitrust exemption, would that extend, a priori, to the other professional sports? Logic and consistency suggest that conclusion. Professional Boxing was the first test. Boxing was quite popular post-world War II, and professional football, basketball and hockey were emerging as legitimate professional leagues. Certainly, for judicial 15 Recall that the Celler report suggested that the courts and not Congress should fix the problem. 12

13 consistency with baseball, other professional sports should be free of antitrust restraints as well. Not so. Occasionally cases turn on differences that are not distinctions, but nonetheless useful in containing the impact of a previously questionable decision. This was the case here. In the late 40s, professional boxing fell under the substantial control of two individuals, who did business as the International Boxing Club of New York. Through binding contracts with most of the professional fighters, IBCNY was the promoter of all but four professional fights between 1949 and They also held exclusive television contracts for most of the major fights. The Justice Department, under its authority to file Sherman Act suits, brought an action against IBCNY asserting monopolistic practices. On the basis of the stillfresh Toolson decision, the district court dismissed the action. The Justice Department then took the case directly to the Supreme Court. In an opinion that reads similar to describing an octopus climb into a beer bottle, the Court distinguished Toolson on its facts, and found that the exemption granted under Federal Baseball was inapplicable to boxing. How did the Court rationalize its opinion in Toolson (and other companion cases dealing with the entertainment industry)? Here is the relevant language: The question is perhaps a novel one in that this Court has never before considered the antitrust status of the boxing business. Yet, if it were not for Federal Baseball and Toolson, we think that it would be too clear for dispute that the Government s allegations bring the defendants within the scope of the Act. A boxing match... is of course a local affair. But that fact alone does not bar application of the Sherman Act to a business based on the promotion of such matches, if the business is itself engaged in interstate commerce or if the business imposes illegal restraints on interstate commerce.... [T]he defendants contend that they are exempt from the Sherman Act under the rule of stare decisis. They... base this contention on Federal Baseball and Toolson... [and] argue that Federal Baseball and Toolson immunized only such businesses as involve exhibitions of an athletic nature. We cannot accept [this] argument. For the reasons stated in the Toolson opinion, Toolson neither overruled Federal Baseball nor necessarily reaffirmed all that was said in Federal Baseball. Instead, (w)ithout reexamination of the underlying issues, the Court adhered to Federal Baseball so far as that decision determines that Congress had no intention of including the business of baseball within the scope of the federal anti-trust laws.... [Consider: Was Congress even thinking about baseball in 1890?] The controlling consideration in Federal Baseball... was, instead, a very practical one 13

14 the degree of interstate activity involved in the particular business under review. It follows that stare decisis cannot help the defendants here; for, contrary to their argument, Federal Baseball did not hold that all businesses based on professional sports were outside the scope of the antitrust laws. The issue confronting us is, therefore, not whether a previously granted exemption should continue, but whether an exemption should be granted in the first instance. And that issue is for Congress to resolve, not this Court. X. O.K., So Boxing is Different; What about the Other League Sports such as Football? Anyone with minimal parsing skills can weave a distinction between boxing and baseball boxing was a monopoly structure controlled by two individuals, the government was the plaintiff, boxing is not exactly the national pastime, and is not a league sport. But what about professional football? How could the Court do other than apply the Federal Baseball precedent to this very similar league sport if presented with an antitrust claim? The Court faced this question in Radovich v. National Football League (1957). This is an interesting case to watch the Court try to finesse Toolson. You see the clear desire of the Court to limit the damage of its decisions in Federal Baseball and Toolson to the baseball context. The Court felt free to so limit those opinions, and found no difficulty applying the antitrust laws to football. In distinguishing the baseball precedent, the Court says: If this ruling [Federal Baseball] is unrealistic, inconsistent, or illogical, it is sufficient to answer, aside from the distinctions between the businesses, that were we considering the question of baseball for the first time upon a clean slate we would have no doubts. But Federal Base Ball held the business of baseball outside the scope of the Act. No other business claiming the coverage of those cases has such adjudication. We, therefore, conclude that the orderly way to eliminate error or discrimination, if any there be, is by legislation and not by court decision. Beyond football, any doubt about the application of antitrust to professional basketball and hockey also were eventually dispelled by the Supreme Court in Hayward v. National Basketball Association, 401 U.S (1971), and Philadelphia World Hockey Club v. Philadelphia Hockey Club, 351 F. Supp. 462 (1972). Today every sports organization--including the NCAA, soccer, tennis, golf, and martial arts--operates under the thumb of the antitrust laws; baseball is the unique exception. 14

15 After the Radovich decision, there was the usual flurry in Congress to create an exemption variously for football only, for all sports, and/or to eliminate the baseball exemption altogether. None of these conflicting proposals led anywhere, except to create a Congressional record of normative inaction. XI. Flood v. Kuhn: Final Chance to Fix the Problem In the 70s, as popularity and breadth of all sports grew, the anomaly of the baseball exemption seemed ripe for a solution; the Court needed only the right case and a sympathetic fact pattern. The opportunity to finally achieve uniformity arose when a star player for the St. Louis Cardinals, Curt Flood, was traded without his consent to the Philadelphia Phillies. He declined the trade, was suspended by the Commissioner, and proceeded to file an antitrust suit in 1970 against Major League Baseball. To no one s surprise, his complaint was dismissed in the federal district court of New York, and failed on appeal to the 2nd Circuit. Both court s cited Federal Baseball. That the Supreme Court accepted the case in 1972 seemed to portend that the antitrust rules for all sports might be harmonized; otherwise, why would the Court become involved? This now famous Supreme Court opinion was titled Flood v. Curt Flood Kuhn. (Kuhn was the then Commissioner of Baseball.) Instead of overruling Federal Baseball, and uniformly apply the antitrust laws to all sports, the Court declined the opportunity and instead perpetuated the holdings of Federal Baseball and affirmed the precedent of that case, in an opinion written by Justice Blackmun Congressional inaction on the exemption was important to Blackmun in his opinion; it is difficult to get an exact count, but at least eleven bills had reached the floor seeking either to eliminate or perpetuate the exemption. Blackmun considered this significant. In evaluating the weight he placed on this issue, consider this quotation from Blackmun in a later opinion: Congressional inaction lacks persuasive significance because several equally tenable inferences may be drawn from such inaction. 110 S.Ct (1990) 15

16 As we consider the Flood case, think about the political and social context of the times: The Civil Rights Acts had been recently enacted, Kent State student protestors had been killed, the Vietnam War and the draft was dividing the country, Richard Nixon was President, and the terrorist event occurred at the Munich Olympics. In short, there was tremendous social and political unrest, an increasing sense that the system operated unfairly to minorities and women; traditional structures were being challenged. The Flood narrative resonated with this unrest. However, the Court s opinion reflects either complete unawareness or indifference to that climate of social unrest and change. In fact the first part of the majority opinion is an uber-glorification of baseball s role as the national pastime. The revery for the past failed to note, for example, the history of total exclusion of African American players until 1947, and the blackballing of the Mexican League. This part of the opinion was such a hagiography that several justices who voted in the majority expressly distanced themselves from this section. Nonetheless, the Flood majority held that although the baseball exemption was a clear anomaly, and that baseball clearly operated in interstate commerce, and the antitrust laws applied to all other professional sports, it was for Congress to correct the problem, not the Court. The out-of-date definition of commerce applied in Federal Baseball, and the consequent disparity between baseball and all of the other sports (and other industries) was viewed as unfortunate, but not the Court s problem. XII. Current Antitrust Issues for Class Discussion As a consequence of Flood, the baseball exemption originally articulated in 1922 survives today. Recently San Jose filed an antitrust claim against Major League Baseball, based on the alleged refusal to allow the Oakland A s to relocate to San Jose. The district court granted a motion to dismiss by baseball, based on the precedent of the Flood opinion. This dismissal was upheld by the 9 th Circuit, also on the precedent of Flood. According to these decisions, major league baseball has no antitrust liability for allocating territories among teams, and denying cities the opportunity to bid on new locations free of league constraints. We will compare this result to the successful antitrust suit brought by the Los Angeles Coliseum in the mid-80s, when the NFL prohibited the Raiders relocation to Los Angeles. 16

17 For most organized sports, antitrust liability is a scepter overhanging many of their business activities, one frequently wielded by plaintiffs. The practical dilemma for organized sports is the necessary requirement for some level of agreement between the competitive teams or individuals, including rules for the playing of the game itself, approval of ownership transfers, expansion, relocation, and national broadcast contracts. The question is where the line is drawn between agreements between the teams necessary for the efficient and predictable operation of the leagues, and agreements that are designed to maximize market leverage by combining the business operations of the individual teams into a common enterprise. The former most likely do not violate antitrust laws; the latter are clearly vulnerable to third-party claims for antitrust damage. As examples, may NFL teams centralize in a single entity the marketing of their respective team trademarked merchandise through an exclusive manufacturer/distributor? What are the boundaries on centralizing broadcast rights to gain greater market leverage with the cable and media companies? May leagues prohibit cross-ownership by an owner of a team in another sport? In class we will discuss the antitrust case law that has affected the structure and operation of the various professional leagues. In a later class we will look at how the antitrust laws affects the climate and tactics of collective bargaining between the players and the leagues. I hope this history is helpful to you in providing an historical context for those discussions. See you in class! Attachment: Federal Baseball of Baltimore v. National League of Baseball Clubs, et al. Holmes opinion

18 42 S.Ct. 465 Supreme Court of the United States FEDERAL BASEBALL CLUB OF BALTIMORE, Inc., v. NATIONAL LEAGUE OF PROFESSIONAL BASEBALL CLUBS et al. No Argued April 19, Decided May 29, Opinion [Edited] Mr. Justice HOLMES delivered the opinion of the Court..... This is a suit for threefold damages brought by the plaintiff in error under the Anti- Trust Acts of July 2, The defendants are the National League of Professional Base Ball Clubs and the American League of Professional Base Ball Clubs.... It is alleged that these defendants conspired to monopolize the baseball business.... The plaintiff is a baseball club incorporated in Maryland, and with seven other corporations was a member of the Federal League of Professional Base Ball Players, a corporation under the laws of Indiana, that attempted to compete with the combined defendants. It alleges that the defendants destroyed the Federal League by buying up some of the constituent clubs and in one way or another inducing all those clubs except the plaintiff to leave their League, and that the three persons connected with the Federal League and named as defendants, one of them being the President of the League, took part in the conspiracy. Great damage to the plaintiff is alleged. The plaintiff obtained a verdict for $80,000 in the Supreme Court and a judgment for treble the amount was entered, but the Court of Appeals, after an elaborate discussion, held that the defendants were not within the Sherman Act. The appellee, the plaintiff, elected to stand on the record in order to bring the case to this Court at once, and thereupon judgment was ordered for the defendants The clubs composing the Leagues are in different cities and for the most part in different States.... [T]hese clubs shall play against one 18

19 another in public exhibitions for money, one or the other club crossing a state line in order to make the meeting possible. When as the result of these contests one club has won the pennant of its League and another club has won the pennant of the other League, there is a final competition for the world s championship between these two. Of course the scheme requires constantly repeated travelling on the part of the clubs, which is provided for, controlled and disciplined by the organizations, and this it is said means commerce among the States. But we are of opinion that the Court of Appeals was right. The business is giving exhibitions of base ball, 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.... [T]he transport is a mere incident, not the essential thing. That to which it is incident, the exhibition, although made for money would not be called trade of commerce in the commonly accepted use of those words. As it is put by defendant, personal effort, not related to production, is not a subject of commerce. That which in its consummation is not commerce does not become commerce among the States because the transportation that we have mentioned takes place. To repeat the illustrations given by the Court below, 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. If we are right, the plaintiff s business is to be described in the same way and the restrictions by contract that prevented the plaintiff from getting players to break their bargains and the other conduct charged against the defendants were not an interference with commerce among the States. [Emphasis Added] Judgment affirmed. 19