Baseball’s Antitrust Exemption: A Primer

To the extent that most fans pay any attention to legal issues relating to Major League Baseball, they are typically aware that MLB is somehow immune from antitrust law. How exactly this came to be, however, is often less well understood. And in many cases, fans may not have a firm grasp on precisely how this antitrust exemption actually affects MLB’s operations.

Having written a bit on the topic, I thought I’d begin an occasional series of posts examining baseball’s antitrust exemption to help clarify some misconceptions regarding what is admittedly a rather peculiar legal doctrine. This first post will recount the history of baseball’s exemption, dating back to its creation in 1922. Future posts will consider the current scope of the exemption – i.e., what it does and does not cover today – as well as the practical effect that the exemption has on the league.

Although some fans mistakenly think Congress granted baseball its antitrust exemption, the immunity really results from a nearly 100-year-old decision by the U.S. Supreme Court in a lawsuit arising out of the last on-field challenge to the American and National leagues’ dominance over the sport. Back in 1914 and 1915, the Federal League of Professional Baseball Clubs tried to establish itself as a third major league by signing roughly 50 major league players away from their then-current teams – the most notable of which was probably Hall-of-Fame shortstop Joe Tinker.

When the Federal League failed to make sufficient headway with the baseball public during the 1914 season, it turned to a different tactic, filing a first-of-its-kind federal antitrust lawsuit against the major leagues in January 1915. The case was heard by Judge Kenesaw Mountain Landis – the future first commissioner of baseball – who ultimately opted to sit on the matter for more than a year in the hope he would not have to resolve the dispute. (As I recently explained at The Hardball Times, Landis thought any decision he issued in the case would be destructive to the national pastime, and thus harm all of the parties involved in the case.)

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.

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.

More than 30 years would pass before the Supreme Court was again asked to consider baseball’s status under antitrust law. In Toolson v. New York Yankees, a minor league pitcher in the Yankees’ farm system challenged baseball’s reserve clause – which, in the days before free agency, effectively gave MLB teams control over their players’ services for the entire length of their careers – under the Sherman Act.

At the time, many anticipated that the court would strip baseball of its antitrust immunity in the Toolson case. Not only had the Supreme Court dramatically modernized its definition of interstate commerce during the three intervening decades – expanding the term to encompass almost all business activity – but the business of baseball was itself more clearly engaged in interstate commerce by the 1950s due to its greater reliance on television and radio broadcasting. Contrary to these expectations, the Court affirmed the baseball exemption by a 7-to-2 vote.

In its one-paragraph opinion, the Toolson Court provided two main justifications for maintaining baseball’s antitrust immunity. First, the majority noted that Congress had been aware of the Federal Baseball ruling for 30 years, but yet had not taken any steps to apply the antitrust laws to MLB. Indeed, Congress had just held extensive hearings regarding baseball’s antitrust status about a year before the Toolson case reached the Supreme Court, hearings that concluded without the passage of any legislation subjecting MLB to the Sherman Act. This suggested the legislature may have intended for baseball to remain protected from antitrust law.

Second, the Court feared that any decision reversing baseball’s antitrust immunity would unfairly subject the sport to retroactive liability, holding MLB legally accountable for activity that it had reasonably believed was beyond the scope of the antitrust laws. Because any monetary damages in federal antitrust suits are tripled, the Court may have even feared that MLB could potentially be driven into bankruptcy if countless current and former players affected by the reserve clause were freed to file their own antitrust lawsuits against the league. In light of Congress’s inaction and these retroactivity concerns, the Toolson opinion closed by declaring that any change to baseball’s antitrust exemption should come from the legislature, not the judiciary.

This conclusion wasn’t entirely unreasonable. Unlike the Supreme Court – which typically rules only by issuing decisions that apply retroactively – Congress can enact legislation that would apply strictly on a going-forward basis. Thus, unlike the judiciary, Congress could repeal the baseball exemption without triggering concerns about holding MLB retroactively liable for activity that had previously been considered beyond the scope of the law.

The Supreme Court reevaluated baseball’s antitrust status for the third and – to date – final time in 1972 in Flood v. Kuhn. As in Toolson, the Flood suit involved a challenge to the reserve clause, this time by former All-Star center fielder Curt Flood, who objected to being traded against his will from St. Louis to Philadelphia. Flood and the Major League Baseball Players Association hoped the case would help pave the way towards introducing free agency to professional baseball.

Although some commentators yet again anticipated that the Supreme Court would overturn baseball’s antitrust exemption in Flood, the Court once more affirmed MLB’s immunity, this time by a 5-to-3 vote (Justice Lewis Powell did not participate in the case because he owned stock in Anheuser-Busch, the then-parent company of the St. Louis Cardinals). Despite acknowledging that MLB was engaged in interstate commerce and that baseball’s exemption was “an exception and an anomaly” – following Toolson, the Court had refused to extend the same immunity to either the National Football League or National Basketball Association – a majority of the Supreme Court nevertheless decided to defer to the prior precedent in light of the Congressional inaction and retroactivity concerns identified in Toolson.

Thus, although some fans think Curt Flood prevailed in the case, he actually lost the suit. Instead, MLB players would achieve the right to free agency a few years later via arbitration, not litigation.

Baseball’s antitrust exemption has not been seriously challenged in the courts in the more than four decades since the Flood case was decided (although that could change if the Supreme Court agrees to hear the pending appeal in the suit filed by San Jose against MLB). Meanwhile, Congress waited 26 more years before it finally heeded the Court’s call to action by addressing baseball’s exemption.

In the Curt Flood Act of 1998, Congress partially repealed MLB’s antitrust immunity, but only to allow current MLB players to file antitrust suits against the league. The Act was the result of a compromise between MLB and the MLBPA following the 1994 players’ strike, in which both sides agreed to seek a limited repeal of the exemption in order to place baseball players on the same legal footing as those in the other U.S. professional sports leagues. Because the Flood Act goes on to state that it “does not change the application of the antitrust laws in any other context,” however, baseball’s immunity otherwise remains largely intact today.

In many respects, then, baseball’s antitrust exemption is really best viewed as a historical accident. Had MLB faced its first antitrust lawsuit in the 1940s rather than the 1920s, the Court would have almost certainly held that the sport was subject to the Sherman Act. But because MLB was – in hindsight – lucky enough to be challenged under antitrust law for the first time during an era when courts interpreted the law much differently than they do today, the league was able to secure a favorable legal ruling that the Supreme Court has subsequently been unwilling to overturn.

And while one can, of course, reasonably differ with the Court’s decisions in Federal Baseball, Toolson, and Flood, all three opinions were nevertheless plausibly justifiable at the time they were issued in light of either the then-existing state of the law or the subsequent retroactivity concerns.

While many fans are quick to dismiss the baseball exemption as being hopelessly illogical, the doctrine really emerged through a series of decisions that were each arguably defensible at the time they were made. That been said — and reasonable as they may have been — these decisions have nevertheless resulted in a horribly inconsistent outcome, as MLB today is the only professional sports league in the United States to enjoy broad antitrust immunity. The extent to which MLB benefits from this unique status will be the subject of a future post.

We hoped you liked reading Baseball’s Antitrust Exemption: A Primer by Nathaniel Grow!

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Nathaniel Grow is an Associate Professor of Business Law and Ethics at Indiana University's Kelley School of Business. He is the author of Baseball on Trial: The Origin of Baseball's Antitrust Exemption, as well as a number of sports-related law review articles. You can follow him on Twitter @NathanielGrow. The views expressed are solely those of the author and do not express the views or opinions of Indiana University.

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Jim S.
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Jim S.

Outstanding. Thank you.

That Guy
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That Guy

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Thank you very much.

That Guy
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That Guy

So, obviously not a direct response to Jim S. Jim S’s comment as nice but nearly deserving of such high praise.