One of the interesting oddities of American law is that Major League Baseball is exempt from antitrust rules that apply to virtually every other business. This special status was conferred to baseball in 1922, when justices of the United States Supreme Court unanimously bent over backwards to make complete fools of themselves. In all fairness to the Supreme Court, the justices were living in a naïve period of time when the business of baseball was looked at as nothing more than a pastime. So when various baseball team owners conspired to shut down a rival league (using behavior that would put executives in other industries in serious trouble), the Supreme Court permitted this conduct.
What is Antitrust?
In a word, the term antitrust is all about “competition”. Antirust rules under various laws (such as the Sherman Act and the Clayton Act) make unfair competition illegal. This means that competing businesses are not allowed to conspire to artificially raise prices. Businesses are also not permitted to become monopolies (i.e. becoming the only business to supply a particular product or service).
The federal government passed these rules in the late 1800s as a response to the railroads becoming too big and powerful. Small railroads were being bought up and merged into gigantic ones. At the time, Congress was worried that the real power in the country was shifting to the railroad owners. So the Sherman Act (and subsequent legislation) was passed in order to reduce these powers.
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One of the most famous cases prosecuted under antitrust law was the 1911 breakup of John Rockefeller’s Standard Oil Company. The government accused Standard Oil of various noncompetitive behaviors, and convinced the Supreme Court to break up Standard Oil into 34 separate, competing companies.
In the early 1900s, there were more than one professional baseball leagues in operation. The Federal League was formed in order to compete for players by allowing free agency. The other leagues did not have free agency, and players were stuck with one team, even after a player’s contract expired. The Federal League’s decision to give this kind of power to baseball players clearly irked owners in the National League and American League. So they conspired to buy out several teams in the Federal League. This behavior was clearly illegal under US antitrust law.
Except in 1922, the Supreme Court held that baseball was “an exhibition of personal effort” and not a business engaged in commerce. Therefore US antitrust law could not be enforced against baseball. A century later, even though Major League Baseball is a multibillion dollar annual venture, it is merely an exhibition, and it is not a business (according to the Supreme Court). Baseball is still exempt from antitrust laws.
In subsequent years, baseball was able to prevent player free agency as a result of this antitrust exemption. Players could be owned and moved by teams without their consent. This behavior continued well into the 1970s until the player’s union negotiated a collective agreement with Major League Baseball that had a grievance procedure involving an arbitrator. Under this grievance procedure, the union filed a claim on behalf of several players. The union challenged the rule that allowed teams to continually renew a player’s contract upon expiration (without the player’s consent). The arbitrator ruled in favor of the union and held that a team could only renew a player’s contract once without the player’s consent. This decision began the modern era of baseball free agency.