The Anti-Trust Exemption (1922)

Part 6 of our series on Important Moments in Team Building.  See introduction, and up-to-date list.

 

In December 1915 the Federal League’s still solvent owners reached an agreement with the Major League owners to fold their competing league. In return, the Major League owners agreed to pay roughly $700,000, with FL’s owners receiving widely varying payouts. One problem with the deal came when the owners of Baltimore’s FL franchise, a large collection of Baltimore business and professional men, did not want to fold their club and disband the league—they wanted major league baseball in Baltimore.

Baltimore’s shareholders were angry with the other Federal League owners for agreeing to settle, and particularly angry with major league baseball’s owners for all the underhanded tactics used against the Federals in the battle for players. Rather than take the $50,000 they were offered as part of the settlement, Baltimore elected to file suit against their fellow FL owners and major league baseball.

PepperGeorgeWhartonAfter one misstep in court and some behind scenes negotiations that led nowhere, in September 1916 Baltimore filed suit charging major league baseball with numerous antitrust violations. Baltimore’s attorneys highlighted the myriad ways that Organized Baseball had interfered with the Federal League, noting in particular the reserve clause and the blacklist. Organized Baseball’s lead attorney George Wharton Pepper, later a US Senator from Pennsylvania, sloughed off his clients’ unseemly behavior and reliance on the reserve clause. Instead he argued that baseball was not subject to being regulated under Congress’s antitrust legislation because it was not actually commerce, and even if it was, it wasn’t interstate commerce.

Baltimore prevailed at the initial trial in 1919. The jury awarded the group $80,000 in damages; under the Sherman Antitrust Act provisions the award was trebled to $240,000 and Baltimore was also awarded legal costs of $24,000. In total, the Baltimore shareholders received a verdict for $264,000. In the months after the jury award, a compromise settlement seemed likely as both sides had strong reasons to consider one. At this point a monetary payment was the best Baltimore could hope for; a major league franchise for their city was simply not on the table. For Organized Baseball, a settlement offered the opportunity to pay a sum they could afford, admit no wrongdoing, and continue business as usual.

Nevertheless, no settlement was forthcoming and the case was eventually appealed all the way to the U.S. Supreme Court where Organized Baseball won a complete victory. In a unanimous opinion written by Associate Justice Oliver Wendell Holmes and released on May 29, 1922, the Court ruled that the personal effort of baseball players was not trade or commerce, and, furthermore, that as baseball wasn’t fundamentally interstate in nature, it was not interstate commerce. Thus, Organized Baseball could not be in violation of the antitrust laws because it did not meet two conditions necessary to be subject to them.

HolmerOWJr
Oliver Wendell Holmes, Jr.

This opinion was not as strange at the time as it seems today. The definition of interstate commerce used at the time was much more restrictive than how it has evolved. In addition, the court was much more concerned about the line between federal and state authority.

So what did this decision mean for team building? We can get some insight into what a counterfactual might have looked like by examining other professional sports. Other sports leagues behaved as if they had an antitrust exemption as well until 1957, when the Supreme Court oddly ruled that the antitrust exemption was an anomaly given to only baseball, and the other major sports were in fact subject to antitrust laws.

Unfortunately for football, hockey and basketball players, making sports leagues subject to antitrust laws did not lead to more evenhanded player control rules. The leagues instituted other expedients to limit the impact of the Court’s ruling on player freedom. For example, the National Football League introduced the “Rozelle Rule,” named after Commissioner Pete Rozelle, which gave him the power to decide on compensation to a team losing a free agent from the team signing one. The fear of losing one’s top players or draft picks as compensation was a strong deterrent against signing players at the expiration of their contract. Not until the 1970s and 1980s did the other sports begin to have true free agency.

The players in these other sports benefited indirectly, however, from the emergence of rival leagues. The antitrust laws tempered many of the more blatant actions–such as the blacklist and inducing players to break contracts–used by Organized Baseball against the Federals. These laws clearly made a difference. Successful rival leagues emerged in all three other major professional sports. The existence of these rival leagues benefited the players as the competition for their services helped drive up salaries. Roster building took on its own challenges as owners and GMs addressed both possible defections from their own squad and the potential new source of talent by going after players in the competing league. With its antitrust exemption baseball was effectively immune from this competition. After the demise of the Federal League, no competing major league ever again took the field.

For more on the Federal League settlement see this book.

 

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