Baseball’s Privileged Antitrust Exemption
By Bruce Fein
Four score and three years ago, Justice Oliver Wendell Holmes Jr. (who had fought in the Civil War 60 years earlier) brought forth a blunder holding that Major League Baseball (MLB) was not subject to the Sherman Act because it was intrastate “entertainment,” not “commerce.”
This judicially concocted exemption from the antitrust laws has survived into an era when all of the owners and most of the “entertainers” are millionaires with nationwide followings, and the other major sports leagues have all been found by the Supreme Court to be engaged in “interstate commerce” and thus answerable to the Sherman Act. If the baseball exemption were just a quaint historical curio to amuse modern scholars, it would not matter. But the exemption continues to inflict nontrivial injuries, as shown by the local television rights travesty foisted on the public as the price for allowing an MLB team finally to return to Washington, D.C., in 2005.
Thus the message to the Supreme Court should be, be done with this indefensible judicial error perpetrated many long innings ago.
Justice Holmes himself in The Path of the Law penned: “It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.” Further, as Lord Acton would have reminded the Court, economic power tends to corrupt, and absolute economic power corrupts absolutely. Baltimore Orioles owner Peter Angelos’s virtual expropriation of the Washington Nationals’ broadcast rights confirms Lord Acton’s wisdom in spades.
The Supreme Court’s wild antitrust pitch came in 1922, in Federal Baseball Club v. National League. A member of a Federal League team (in Baltimore, no less) instituted a treble-damage action under the 1890 Sherman Antitrust Act against the National and American leagues and others. Speaking for a unanimous court, including the ordinarily perspicacious Louis D. Brandeis, Justice Holmes, who privately derided antitrust statutes as blunting Social Darwinism, wrote a conclusory five-paragraph opinion in which he absurdly insisted that “personal effort, not related to production, is not a subject of commerce.”
Nothing in the language or purpose of the Sherman Act even hints at such obtuseness. The act nowhere suggests a distinction between services (e.g., law, medicine, accounting), on the one hand, and traditional industrial products, on the other. Both are commerce as customarily understood. Both contribute significantly to the national economy, with services contributing an ever greater proportion of gross national product every decade.
Indeed, Chief Justice John Marshall, in the landmark case of Gibbons v. Ogden, held that interstate ferry service, which pivoted on personal effort not related to production, constituted commerce subject to congressional control. The chief justice elaborated: “[Commerce] describes commercial intercourse between nations, and parts of nations, in all its branches, and is regulated by prescribing rules for carrying on that intercourse. The mind can scarcely conceive a system for regulating commerce between nations . . . confined to prescribing rules for the conduct of individuals, in the actual employment of buying and selling, or of barter.”
Thus, the Court held the transmission of electrical impulses over a telegraph constitutes commerce in Pensacola Telegraph Co. v. Western Union Telegraph Co. And in Caminettti v. United States the Court upheld a federal statute punishing interstate transportation of a female to engage in sex, which consists solely of personal effort. Finally, the Supreme Court recently endorsed a sweeping definition of commerce to include homegrown marijuana for medicinal uses in Gonzalez v. Raich.
Holmes was equally off base in maintaining that professional baseball was an intrastate enterprise. The teams are established in different states to generate interstate rivalries and fan loyalties. Players and spectators cross state boundaries to conduct and to attend public exhibitions. Broadcasts and news coverage promoting fan attendance are interstate endeavors. In sum, the baseball leagues would have withered without the channels of interstate commerce. Holmes simply struck out as a matter of commercial reality.
The Supreme Court’s subsequent decisions have truly reduced Federal Baseball Club to museum piece status. All professional sports and other services resting on personal effort not related to production have uniformly been held subject to the antitrust laws. Thus, theatrical performances, boxing, professional football, and professional basketball have all been held accountable to the Sherman Act.
In United States v. Southeastern Underwriters Association the Court renounced the idea that the business of insurance is not commerce—a longstanding assumption deduced from the decision in Paul v. Virginia, which had upheld state regulation of foreign insurance companies, notwithstanding the preemptive force of the commerce clause. And in Goldfarb v. Virginia State Bar a unanimous court denied a “learned profession” exemption from the Sherman Act. Chief Justice Warren Burger, speaking for the Court, explained that the plain language of the Sherman Act contains no exceptions, and that “the examination of a land title is a service; the exchange of such a service for money is ‘commerce’ in the most common usage of the word.”
The Federal Baseball Club decision represents an egregious error in statutory interpretation. The doctrine of stare decisis should not shield the preposterousness from reversal.
The Supreme Court has not shied from overruling statutory precedents despite the power of Congress to correct the misinterpretation by simple legislation. In the antitrust field, for example, the Court has overruled decisions making vertical restraints and maximum price fixing illegal per se in Continental TV, Inc. v. GTE Sylvania Inc. and State Oil Co. v. Khan. The Court was uninhibited from overruling a major civil rights statutory precedent in Monell v. Department of Social Services of New York and an immigration law ruling in Girourard v. United States.
On two occasions since 1950, the high court has issued an intentional walk to baseball’s unjustified exemption when an appellant sought to bring MLB back under the antitrust laws. Each time it gave patently unpersuasive reasons for leaving its relic in place and insisting that Congress come to bat.
In Toolson v. New York Yankees, Inc. a 7–2 majority balked in a per curiam opinion. The Court observed that Congress had declined to enact legislation to bring baseball within the Sherman Act since Federal Baseball Club. It further observed that the sport had developed for 30 years “on the understanding that it was not subject to existing antitrust legislation.” The first reason, however, would thwart any Supreme Court from overruling a statutory precedent, and be contrary to historical practice. The second reason is equally misconceived. The Court had sent shock waves through the insurance industry in 1944 when, in Southeastern Underwriters, a criminal case, it held the insurance companies subject to the Sherman Act. The Court was not deterred by the understanding of the industry that had developed since Paul, that insurance was beyond the commerce clause powers of Congress.
In any event, professional baseball has no reasonable expectation that Federal Baseball Club, which had already become antiquated, would not be overruled. As chronicled above, the high court not infrequently reverses statutory precedents. In addition, professional baseball’s interstate imprint had significantly magnified since 1922. As the dissent of Justice Harold Burton recited, by 1953 organized baseball featured 39 interstate leagues, while radio and television revenues were soaring. Gross receipts had climbed from $10 million in 1929 to $32 million in 1950. Further, as amplified hereafter, the Court could have denied retroactive effect to a Federal Baseball Club overruling, to avoid a treble-damage financial wreckage.
The high court again gave MLB a pass in Flood v. Kuhn. Writing for a 5–3 majority, Justice Harry Blackmun was no more convincing than the per curiam in Toolson. The justice began with a symphonic tribute to the national pastime, summoning from the past such icons as Ty Cobb, Babe Ruth, Walter Johnson, and Jackie Robinson and such signature versifications as “Casey at the Bat.” That ebullition earned the rebukes of Chief Justice Burger and Associate Justice Byron “Whizzer” White, both of whom declined to subscribe to Blackmun’s Ode to Joy or its relevance to the case before the Court.
More pertinent would have been a baseball legend akin to the interstate home run of Adam Dunn, an Atlas-like outfielder for the Cincinnati Reds. On August 10, 2004, the slugger whacked the ball out of Cincinnati’s Great American Ballpark on to Mehring Way, a stupendous 535 feet from home plate. It then hopped another 200 feet before coming to rest on a piece of driftwood on the banks of the Ohio River in Kentucky. The essence of Dunn’s marvel was interstate, not local, thus satisfying even Holmes’s cramped conception of the Sherman Act.
Justice Blackmun readily conceded the error of Federal Baseball Club, and the glaring aberration of baseball’s antitrust exemption. He largely repeated the lame arguments of Toolson: namely, that an overruling would cause confusion within MLB, and that Congress had by “positive inaction” endorsed the misinterpretation. But every other professional sport operates successfully under the antitrust laws. Blackmun was unable to cite a single aspect of MLB that would distinguish it from the National Basketball Association or the National Football League, both of which thrive despite their subjection to the Sherman and Clayton acts.
Moreover, the Court worried most about disturbing the reserve clause in player contracts that bound players to their existing teams and thereby promoted stability among team rosters. Yet Congress, in the “Flood Amendment,” subsequently lifted MLB’s antitrust exemption on the reserve clause without wreaking havoc amongst the teams, owners, or players (and made possible the modern “free agency” system that has made star players so transitory in so many cities). Additionally, when Flood was decided in 1972, the nonstatutory labor exemption from antitrust liability was ill-defined. The Supreme Court later clarified in Brown v. Pro Football Inc. that the Sherman Act leaves intact the terms and conditions of employment subject to mandatory collective bargaining under the National Labor Relations Act.
In any event, the Court has regularly overruled statutory precedents in the face of congressional inaction or acquiescence. Justice Blackmun offered no reason why Federal Baseball Club should receive special indulgence—an indefensible posture, because MLB’s clout with Congress would ensure its arguments to reinstate an antitrust exemption would be carefully heard. Furthermore, statutory interpretation pivots on the intent of the enacting Congress, which cannot be altered by how subsequent Congresses respond. If the 1890 Congress intended professional baseball to fall within the Sherman Act, the Supreme Court is obligated to honor that intent by overruling Federal Baseball Club, and not wash its hands of the matter like Pontius Pilate. The Southeastern Underwriters decision held that Congress intended Sherman Act jurisdiction to expand commensurate with its maximum commerce clause powers as expounded by the Supreme Court.
MLB’s judicially fabricated antitrust exemption grows more outlandish by the year. At present approximately 73 million fans attend MLB games annually. Gross revenues exceed $3.5 billion. The World Series commands a staggering television rating: the equivalent of 25.4 million viewers in 2004. These MLB figures are almost in the same league as those of the movie industry, which sported revenues of $9.4 billion in 2004 based on ticket sales approximating 1.5 billion.
If the MLB team owners desisted from exploiting their antitrust exemption, there would be no urgency about revisiting Federal Baseball Club. But team owners, as Adam Smith would have predicted, “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public. . . .” Cheating the Washington Nationals of their television rights through a squalid deal between Baltimore Orioles owner Peter Angelos and the other MLB owners proves Smith’s prescience in Wealth of Nations, long before baseball was even invented.
Angelos fiercely fought for years to deprive Washington of an MLB franchise in order to protect the Orioles from nearby interstate competition and to inflate the value of the Orioles’ franchise. The fact that over a million fans have attended the first two months of the new Washington Nationals’ home games underscores the enormity of the loss Angelos was able to impose on the Washington public for so long.
He eventually lost that battle against the arrival of a new team, but seemingly has won the war by obtaining monopolistic control over that team’s television rights. In a largely secret part of the Washington franchise award, MLB bowed to Angelos’s ultimatum that the new team be forced to become a fringe minority partner in a new regional sports network, the Mid-Atlantic Sports Network (MASN), controlled by him, with broadcast rights for both the Orioles and the Nationals. Angelos will own 90 percent of MASN, which might recede to 67 percent over the next 30 years.
The 90–10 split favoring Angelos is incontestably a noncompetitive arrangement. Baltimore’s broadcast rights are decidedly inferior to Washington’s. Baltimore is the 23rd largest media market, whereas Washington is the eighth largest. Washington features more than twice the number of television sets and twice the personal income of Baltimore.
MLB teams on average earn $40 million annually from television rights, which characteristically generate more cash than any other income source but ticket sales. (Angelos has thus succeeded in depriving the new Washington team of very important potential revenues that would enable it to spend more on high-value, experienced players, as the Orioles, the Braves, and the Yankees have done, in the no-salary-cap world of Major League Baseball.)
In addition, the Angelos–MLB pact threatens greater expense for home team fans to follow the Nationals. The New York Yankees example is suggestive. The team created its own regional sports network, followed by an escalation of $2 per month per subscriber it charged cable and satellite operators.
In conclusion, the Supreme Court should overrule Federal Baseball Club, preferably in an injunction action initiated by the Department of Justice (or the District of Columbia) attacking the MASN deal. Ideally, the ruling should be made prospectively to avoid perceived injustice flowing from private treble-damage actions over past MLB antitrust wrongs. In deciding Hanover Shoe Inc. v. United Shoe Machinery and Simpson v. Union Oil Co., the Supreme Court indicated that nonretroactivity might be proper when an antitrust precedent is overruled.
The overruling of Federal Baseball Club in 2005 is exceptionally compelling because that precedent, as well as Toolson and Flood, was a labor-related case. Congress has addressed the antitrust–labor issues in the Flood Amendment. There is nothing else specific in baseball that the Supreme Court has exempted from the Sherman Act, including the familiar array of antitrust sports litigations, such as television rights, stadium leases, and team relocations. Indeed, in light of the ruling of the U.S. Court of Appeals for the Ninth Circuit in Los Angeles Memorial Coliseum Commission v. National Football League, if the Supreme Court had struck down the baseball exemption in Flood, Angelos would almost certainly have been unable to conspire for so long to keep an MLB team out of Washington.
The high court waited 96 years before rejecting Swift v. Tyson in favor of Erie Railroad v. Tompkins, recognizing the wisdom of being better late than never. Federal Baseball Club has enjoyed a run of 83 years, and similarly deserves consignment to the Smithsonian Institution or, better yet, some quiet back room in the Baseball Hall of Fame in Cooperstown.
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Bruce Fein is a constitutional lawyer and international consultant with Bruce Fein & Associates and the Lichfield Group.
Taking the Stand appears periodically in Washington Lawyer as a forum for D.C. Bar members to address issues of importance to them and that would be of interest to others. The opinions expressed are the authors own.