A brief history of baseball’s antitrust exemption

Every year about this time my brother and I get into a heated argument or two about free agency. At some point he’ll bring up how much money players make, I’ll counter with a pro-players argument and take a swipe at owners. All families have their predictable holiday squabbles and this just happens to be the one my brother and I engage in every year. Inevitably someone will sign a huge contract and he’ll tout the brilliance of free markets at which point I’ll remind him that baseball is not even close to a free market economy.

I’ve been thinking about this a lot recently even though the annual “Sanchez siblings litigate the economics of baseball” conversations haven’t hit their peak for 2019. But baseball’s antitrust exemption is back in the news and honestly it’s the reason we have this conversation every year even if it isn’t explicitly part of the argument.

In November Rob Manfred floated the idea that baseball could shutter as many as 42 minor league affiliates arguing that would allow baseball to improve the minor league experience and pay across the remaining 120 or so teams. There are any number of reasons to be skeptical of this logic and some very smart people have already broken down how easy it would be to keep all of the minor league teams AND improve minor league playing conditions and pay at the same time. However, one other development in this fight jumped out at me — it managed to create rare bipartisan consensus in Congress against the Commissioner’s Office. As tensions have increased between Congress and MLB one of the key elements of all of those arguments with my brother is squarely at the center of it all - baseball’s antitrust exemption. So today I wanted to take a closer look at MLB’s exemption from the Sherman Antitrust Act, what it means for baseball, and whether it’s actually in jeopardy.

The Antitrust Exemption

Baseball’s Antitrust Exemption is a quirk of history more than anything else and it has a Cubs connection. In 1915 Judge Kenesaw Mountain Landis was not yet the first commissioner of baseball, but he was a federal judge and a Cubs fan. He was also responsible for hearing a lawsuit brought by the Federal League of Professional Baseball Clubs that contended the American and National Leagues were an illegal monopoly and he wanted no part of it.

Fangraphs’ Nathaniel Grow has written extensively about baseball’s antitrust exemption and he explains that Landis heard the case, admonished everyone and then sat on the decision for over a year in the hopes that the American, National and Federal League owners would work something out. Despite Landis’ stall tactics, and an ultimate agreement between most of the parties in the suit, the Federal League’s Baltimore club chose to pursue the lawsuit against Major League Baseball all the way to the Supreme Court, and thus baseball received its antitrust exemption:

Landis’ wish was ultimately granted when seven of the eight Federal League teams agreed to cease their operations in December 1915 in exchange for various concessions from MLB. The Federal League’s Baltimore Terrapins, however, decided to fight on and filed its own antitrust lawsuit against the two major leagues (i.e., the so-called Federal Baseball case). The Terrapins alleged the major leagues had illegally monopolized the baseball industry in various ways, including by driving the Federal League out of business.

Baltimore won at the trial court level, but lost on appeal. The suit eventually reached the U.S. Supreme Court in 1922, where, in a unanimous decision, Justice Oliver Wendell Holmes, Jr. ruled that professional baseball was not subject to the Sherman Antitrust Act. Because of that, the American and National Leagues could not be held legally liable for monopolizing the industry. In particular, Holmes held that MLB was not engaged in “interstate commerce,” and therefore did not fall within the scope of the Sherman Act.

A couple of interesting things here. The first is that it’s notable that baseball’s antitrust exemption is the result of a court ruling, not legislation (more on that in a moment). Second, it’s possible that you, like I, read “not engaged in interstate commerce” and your eyebrows shot up in skepticism. This is where the quirk of history comes in, as Grow explains:

Holmes’ ruling in Federal Baseball has been heavily criticized. Many fans remain perplexed by how Holmes could conclude that baseball was not engaged in interstate commerce. Not only was professional baseball already a big business in 1922, but MLB teams also repeatedly traveled across state lines to play games.

As I’ve argued in my recent book on the Federal Baseball lawsuit, the Court’s ruling in the case was actually quite defensible at the time. Back in the 1920s, federal courts typically interpreted the phrase “interstate commerce” quite narrowly. In particular, courts defined “commerce” differently than they do today, typically limiting the term to apply to only those activities related to the production or distribution of physical goods. Because MLB teams produced no physical products, but instead only played ephemeral games in a single state, the Court could reasonably determine professional baseball was not engaged in interstate commerce and thus was not subject to federal antitrust law.

By today’s standards of what constitutes interstate commerce that ruling would be unlikely. However, this case was decided in 1922, so baseball has an antitrust exemption unlike any other professional sport in the United States. Grow does an exceptional job explaining the nuance of all of this in his book and I highly recommend you read the whole thing, but for purposes of this piece I’m going to fast forward and summarize a bit.

Congress plays a key part in all of this because while the Supreme Court is the source of baseball’s antitrust exemption, all the courts have really shown the desire to do since 1922 is uphold that previous ruling. They have done so in multiple decisions since then including a ruling against Curt Flood when he challenged the reserve clause in Flood v. Kuhn. Grow explains the elimination of the reserve clause was the result of an arbitration decision after Flood lost his court challenge. The courts have consistently ruled that Congress is the entity with the power to limit baseball’s antitrust exemption. It’s a power Congress exercised when they passed the Curt Flood Act of 1998 which Sports Illustrated explains limited “baseball’s antitrust exemption to issues of franchise relocation, the amateur draft and the minor leagues.”

Congress and MLB

Major League Baseball spends a lot of money lobbying Congress as do many of the individual team owners. In March 2019 Open Secrets published this look at where their money goes along with some of the legislation they’ve lobbied for:

Like any other major organization, the MLB Commissioner’s Office retains a robust lobbying presence on Capitol Hill. The league has spent roughly $1.32 million in each of the last three years on lobbying. A primary focus of the MLB’s lobbying in 2018 was the Republican tax reform bill. The law added a new tax which affects sports franchises and may impact how baseball trades are made. Team owners pushed the IRS to allow them to take advantage of a new tax break that the law created.

In March 2018, Congress as part of a massive spending bill passed the Save America’s Pastime Act which exempted organized baseball from federal wage and overtime rules which help keep the pay of minor league players extremely low — most minor leaguers only make around $7,500 a year and aren’t represented by a union. One of the issues that the MLB lobbied on was “clarification of the FLSA [Fair Labor Standards Act]” which sets the standards for minimum wage and overtime.

Another major issue subject to MLB lobbying was the American government’s relations with Cuba. The Caribbean country has a storied baseball history with a robust league of its own. Since the deterioration of relations in the 1960s between the two countries and the ensuing embargo, Cuban baseball players that wanted to play in the MLB had to defect, often in dangerous conditions sometimes utilizing human traffickers.

Which brings us full circle to the original impetus for this post: Congressional backlash to MLB’s proposal to shutter 42 minor league teams. At a time where Democrats and Republicans can barely agree what day it is, 106 members of both parties have signed a letter that reads in part:

The abandonment of Minor League clubs by Major League Baseball would devastate our communities, their bond purchasers, and other stakeholders affected by the potential loss of these clubs. We want you to fully understand the impact this could have not only on the communities we represent, but also on the long-term support that Congress has always afforded our national pastime on a wide variety of legislative initiatives.

I added the emphasis at the end, because this appears to me to be a barely veiled threat at the one element where Congress can fundamentally alter the rules of the road for the business of baseball: the antitrust exemption. Presidential candidate and Vermont Senator Bernie Sanders was even more explicit in an interview with the LA Times’ Bill Shaikin on December 6 (bold is Shaikin):

Every time something happens in baseball that gets the attention of Congress, the possibility is floated that Congress might take away baseball’s antitrust exemption. That never happens. Why should baseball be concerned that it actually might this time?

The Congress of the United States has given a great deal to Major League Baseball, and Major League Baseball owes consideration to the people of this country not to shut down 42 teams. All I can say is that I have the feeling I am not just speaking for myself, as a United States senator from Vermont. I think you will find many, many members of the House and the Senate who are prepared to take a hard look at that issue if Major League Baseball moves forward and shuts down baseball in 42 communities.

Lest you think this is just bluster from one of America’s most outspoken politicians, it is not. Multiple outlets are reporting that the Congressional Representatives who signed the original letter have already moved to form a bipartisan Save Minor League Baseball Taskforce. One of the co-chairs of the organization, Max Rose (D), is a fairly moderate Representative whose district includes the Staten Island Yankees. Rose was quoted in the Washington Post:

“And now, what, just for an extra buck? Just so a couple of billionaires can, what, buy another yacht? We’re going to turn our backs on these communities? This is disgusting,” he said. “. . . And to those who think they’re going to get away with doing this, the funny thing is, they’re going to come to [Congress] next year asking us for something. And I want all of them to know we have long memories.”

The antitrust exemption has always been about far more than whether the Federal League could exist and free agency. In the years since those decisions it has come up in countless business matters for MLB including the Cubs lawsuit against the rooftop owners and San Jose’s attempt to convince the Athletics to leave Oakland. Rob Manfred is playing with fire by threatening baseball in dozens of communities across the country. Those communities all have representation in Congress and Congress is one of the few institutions with the power to hit baseball where it hurts most.