Major League Baseball Skirts Antitrust Law… Yet Again
On November 2nd, Major League Baseball (MLB) avoided a possible U.S. Supreme Court challenge when it settled a federal lawsuit and two New York state suits with minor league teams.[1] The terms of the settlement were confidential and agreed upon two weeks before the state trial was scheduled to commence on November 13th.[2]
Minor League Baseball (MiLB) teams—namely the Staten Island Yankees, Tri-City ValleyCats, and the Norwich Sea Unicorns—brought an action alleging that Major League Baseball violated section 1 of the Sherman Act by orchestrating a horizontal agreement among its thirty clubs to exclude plaintiffs and thirty-six other MiLB teams from the newly implemented Professional Development League (PDL).[3] The PDL, announced in September of 2020, cut the number of MiLB leagues from six to four, and limited MLB clubs to a maximum of four affiliates, resulting in 40 minor league teams losing their affiliations.[4] The PDL was a departure from the Professional Baseball Agreement (PBA) that had served as the relationship between MLB and MiLB teams from 1903 to 2020.[5] The MiLB clubs brought an antitrust claim alleging the PDL was an anticompetitive act that restrained trade on the market for MiLB affiliates and caused an adverse effect on their ability to compete in the identified market.[6]
So, what exactly is an antitrust claim? Codified in Section 1 of the Sherman Act, any contract, combination, or conspiracy in the restraint of trade shall be declared illegal for the purpose of preventing monopolization and unfair market competition.[7] The purpose of antitrust laws is to protect competition, as it is necessary for the success of capitalism and the protection of consumers. Competition keeps prices for goods and services in check. If businesses were permitted to collude and act in anticompetitive ways, then consumers would be harmed by having to pay more for products and services, as an example.
The Southern District of New York, where Nostalgic Partners was first brought, used a three-part test to determine whether the plaintiff had an antitrust injury.[8] First, the court considered whether the defendant engaged in unlawful, anticompetitive conduct.[9] The first part is a low bar to satisfy, and the court found it was satisfied because MLB’s plans to reduce the quantity of MiLB teams had an actual adverse effect in the market for minor league affiliates.[10] Second, the court looked at whether the plaintiff was in a worse position due to the defendant’s conduct.[11] The implementation of the PDL cost forty teams their affiliations which directly hinders their ability to attract top talent.[12] A minor leaguer’s ultimate goal is to break into the MLB, so why would they want to play for a team that has no affiliation over one that does? Finally, the court looked at whether the plaintiff demonstrated that the anticompetitive conduct caused actual injury.[13] Because the ousted MiLB teams are prevented from competing for affiliation with the thirty MLB clubs, there is an actual injury from the cap on affiliations.[14] Conversely, it also prevents MLB clubs from competing with each other to affiliate more minor league teams.[15]
After the Court concluded plaintiffs alleged sufficient antitrust injuries, it began its Sherman analysis. The threshold question for this analysis is whether there was an agreement made that went “against the individual economic self-interest of the alleged conspirators.”[16] Again, the court found for the plaintiff’s argument that without the PDL there would be a greater number of affiliated teams in a competitive market, as was evidenced under the PBA’s duration.[17]
Next, the Court conducted a competitive analysis test under the rule of reason review.[18] The rule of reason analysis balances whether the challenged conduct is procompetitive or anticompetitive by addressing issues of market power, net anticompetitive effects, and consumer harm.[19] In regarding market power, a successful plaintiff must allege and show a lack of reasonable substitute markets for their products.[20] In this case, plaintiffs successfully allege that there is no reasonable substitute for MiLB affiliations.[21] Non-affiliated teams cannot obtain equivalent talent, sponsors, and fans as affiliated MiLB teams because they are prevented from playing against them.[22] Further, MLB has complete control over the market for baseball in the United States, as it is the only major professional league for the sport.[23] As mentioned earlier, limiting MLB clubs to four affiliates has anticompetitive effects. Additionally, there is a credible argument for consumer harm. Many of these ousted teams had garnered loyal fan bases because fans could see professional games in more communities without having to travel larger distances and pay more money for MLB games. The Court concluded its analysis by stating the reduction in the number of affiliates for each club supported plaintiff’s claims that MLB had reduced competition.[24]
So that’s it, right? Since the Southern District of New York found MLB to have violated antitrust law, the PDL should be voided and the plaintiffs reinstituted as affiliated teams.
Unfortunately, that was not the decision. Major League Baseball is exempt from federal antitrust laws, and the case was dismissed.
In 1922, the Supreme Court gave baseball a judicially-created exemption from antitrust regulation.[25] The Court reasoned that the exhibition of baseball was not interstate commerce because games were played within individual states, and the transport of teams and fans attending them was “a mere incident, not the essential thing.”[26] Thus, baseball was not subjected to regulation by the federal government.[27]
After the Southern District of New York’s holding, Nostalgic Partners was appealed up to the Second Circuit in June. The Second Circuit affirmed the dismissal based on baseball’s antitrust exemption, holding “we must continue to apply Supreme Court precedent unless and until it is overruled by the Supreme Court.”[28]
Federal Baseball created the precedent that MLB was exempt from federal antitrust laws, and despite several attempts to combat this over the last century, none has been victorious thus far. Notably, the Supreme Court has issued two opinions on baseball’s antitrust exemption since Federal Baseball. In Toolson v. New York Yankees, a player attempted to break up the reserve clause that bound him to his organization, contending a market allocation cause of action under section 1 of the Sherman Act.[29] The Supreme Court reaffirmed the exemption and held baseball was not interstate commerce.[30] The Court gave deference to precedent, worrying about the retrospective repercussions of removing the exemption, as baseball had relied on it for 30 years.[31]
Next, in Flood v. Kuhn, Curt Flood raised another challenge to the reserve clause after being traded from the St. Louis Cardinals to the Philadelphia Phillies without his consent.[32] The reserve system made a player bound to the club with which he first signed a contract for the rest of his playing days. In this case, the Court admitted, for the first time, that baseball was a business engaged in interstate commerce.[33] The Court reasoned that baseball was engaged in interstate commerce because of the advent of national television and radio broadcasts of games, expanded additional revenues, and the fact that other professional sports operating interstate—football, basketball, golf, boxing, and hockey—are not exempt from federal antitrust laws.[34]
Yet, the Court held baseball was still somehow exempt.[35] Like in Toolson, the Supreme Court was concerned with confusion from an inconsistent ruling and retroactivity problems for overturning fifty years of precedent.[36] Additionally, the Court believed that baseball’s status as America’s pastime made the exemption unique and akin to U.S. culture and history.[37] Thus, it was up to Congress, who had been aware of this exemption and had several opportunities to subject baseball to federal antitrust laws, to decide whether to terminate the exemption.[38] Congressional silence and passivity on the exemption was evidence to the Court there was no intent to overturn it.[39] Lastly, Justice Blackmun suggested these issues could be resolved through collective bargaining, which it ultimately was, and the reserve clause was replaced with baseball’s current free agency.[40]
Opponents of baseball’s antitrust exemption hoped Nostalgic Partners would set up a Supreme Court challenge bringing baseball under the antitrust standards other professional sports leagues. But hope is not lost for those opponents.
Just two years ago the Supreme Court unanimously ruled against the National Collegiate Athletic Association (NCAA) in NCAA v. Alston, affirming the Ninth Circuit’s holding that the NCAA and its 1,200-member schools violated Section 1 of the Sherman Act by agreeing to limit how much they can compensate athletes for academic related costs.[41] In Alston, Supreme Court Justice Neil Gorsuch described MLB’s exemption as illogical and inconsistent with other professional sports leagues, perhaps signaling that the Supreme Court may be willing to revoke the exemption.[42] Plaintiffs in Nostalgic Partners cited this decision, as it serves as an example of the Supreme Court deciding to overturn precedent in sports law.[43]
Governmental interest in baseball’s antitrust exemption has emerged in recent years, too. Perhaps influenced by Alston, the Department of Justice filed a statement of interest in Nostalgic Partners.[44] Although the DOJ did not pick a side in the matter, they sought clarification from the courts on how the exemption is still applicable after more than a century.[45] They highlighted the drastic change of relevant market—notably TV broadcasting—since 1922, and argued a contemporary analysis of the exemption is warranted.[46] Additionally, in July of 2022, senators sent a bipartisan request to the Office of the Commissioner of Baseball seeking information on the impact of MLB’s exemption on minor league players and teams.[47] Their concerns included contract rights, the treatment of international prospects, work stoppages and lockouts, and team contraction.[48] For opponents of baseball’s antitrust exemption, this emergence of governmental interest is promising.
Nostalgic Partners was not the only antitrust suit MLB was facing. Three former minor league players—Daniel Concepcion, Aldemar Burgos, and Sidney Duprey-Conde—have alleged an antitrust claim of conspiracy by MLB to fix minor league wages below the minimum wage.[49] Judge Bruce McGiverin, a federal magistrate in Puerto Rico, dismissed the players’ claims in June 2022, holding the claims were outside the statute of limitations and giving deference to the precedent set in Federal Baseball.[50] The players have appealed this decision to the First Circuit.[51] Like a phoenix rising from the ashes of the Nostalgic Partners settlement, Concepcion has the potential to challenge baseball’s antitrust exemption at the Supreme Court.
Are the days of MLB’s federal antitrust exemption numbered? The honest answer is: who knows. This unique exemption has survived 101 years of scrutiny. However, if a case like Concepcion is able to make its way to the Supreme Court, the Court may be willing to eliminate baseball’s antitrust exemption, if Justice Gorsuch’s strong opinion on the subject in Alston can serve as a reliable indicator. But for now, opponents of baseball’s antitrust exemption will have to continue their wait.
Footnotes
