The Role of Antitrust Laws in the Professional Sports Industry From a Financial Perspective

Abstract

This research paper examines how antitrust laws have played a role in shaping the financial operations of the professional sports industry of today. Different aspects of economical, historical, governmental, cultural and financial perspectives have been identified as vital sources in the professional sports industry of the past, present and future. This paper will also provide case studies and other field research to reveal how the influence of economical, historical, governmental, cultural and financial perspectives stem from antitrust laws that have shaped the world of professional sports today in the NFL for football, NBA for basketball, NHL for hockey, and MLB for baseball.

Chapter I: Introduction

The professional sports industry has evolved into an intriguing social phenomenon. As a means to make a living and to relax the mind and body, the sports industry is both a recreational and economical entity that enjoys “certain privileges and immunities.” Just as the Supreme Court’s interpretation of the Fourteenth Amendment have nationalized rights and liberties, the professional sports industry now appeals to and employs individuals from very diverse background. As time has progressed, there has been an increase in women and minorities in both the player and managerial ranks. As a result, the professional sports industry finds refuge under public policies. As an entity of private ownership in this capitalistic American society, the professional sports industry has become a thriving market.

Purpose of the Paper

The purpose of this research paper is to examine how antitrust laws have played a role in shaping the financial operations of the professional sports industry of today.

Research Questions

In this paper, many issues arise about this televised giant called the “professional sports industry” (PSI). These issues manifest both simple and complex questions. A set of questions emerges from economical, historical, governmental, cultural and financial perspectives that are listed as follows: What actions and reactions have most often occurred in the PSI and our society in response to governmental regulations? What is the projected role of government in the PSI? Does the PSI operate under the same governmental regulations, as do other private industries? Which branch of government has been most effective in regulating the PSI? Are there applicable statutes or judicial proceedings affecting the PSI? Has the principle of judicial review been able to effectively control the PSI? Do antitrust laws have a negative or positive impact on the financial aspects of the professional sports industry? What is the economical impact of the professional sports industry? With these questions in mind, it is essential that definitions of various terms be included to provide more background information in this area of research.

Definition of Terms

Firstly, what is antitrust law? Simply stated, according to Corley and Reed (1996), antitrust law is used to describe all laws that intend to promote and regulate competition and make our competitive economic system work.

Secondly, what is the economic giant known as the professional sports industry? According to the Adams and Brock (1997), professional sports are a textbook example of a bilateral cartel made up of club owners and unionized players engaged in intrastate and interstate commerce. The club owners exercise monopoly power in the product market and monopsony power in the input market, whereas, the players try to countervail that monopsony power. For example, according to Wikipedia, i n economics, a monopsony is a market with only one buyer in the market, often an input market (Wikipedia, 2004). At the same time, this is analogous to the case of a monopoly in which there is only one seller in a market. These cartels confront each other in a love/hate, cooperation/conflict relationship with neither being strong enough to exercise total dominance over the other (Adams & Brock, 1997).

It is from these two definitions of antitrust law and the professional sports industry that the significance of this study, literary review and summary/conclusions will arise.

Significance of the Study

Answers to these questions and terms should provide relevant and significant information pertaining to the professional sports industry as a whole. By identifying governmental perspectives of the PSI, the importance of the antitrust law will be revealed through a financial perspective. This paper also contains case studies of actions and reactions in the PSI that will further support the significant role of the antitrust law in regards to the PSI from a financial perspective. This paper further pinpoints how the professional sport of baseball best exemplifies the implementation, application, and interpretation of the antitrust exemption issues.

Chapter II: Review of Literature

The professional sports industry is a very unique entity. As an entity, it controls both activities and attitudes, solicits actions and reactions, and demands the immediate attention of fans, arbitrators, mediators, lawyers, judges, players, television networks, and management. However, as an entity, it is regulated as a business activity with and without exemptions from the federal government. To limit the framework of both the professional sports industry and antitrust activities, the underlying meanings of past, present and future perspectives will be discussed.

Past Perspective: The Historical Role of Antitrust Laws

in the Professional Sports Industry

Historically, antitrust law has played a role in developing regulations, controls, and protections in the professional sports industry of today. Laws that include such major statutes as the Sherman Act of 1890, the Clayton Act of 1914, the Federal Trade Commission Act of 1914, the Norris-LaGuardia Act of 1932, the National Labor Relations Act of 1935, and other antitrust and labor relations acts (Corley & Reed, 1996). Court decisions and/or interpretations include such parties as: Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922); Flood v. Kuhn, 407 U.S. 258, (1972); Haywood v. NBA, 401 U.S. 1204 (1971); Brown v. Pro Football, Inc., 116 S.Ct. 2116 (1996) and Wood v. NBA, 809 F.2d 954 (2d Cir. 1987). Also, there is a history of concepts relating to protections and guarantees to all parties involved in the professional sports industry. Case studies show that in baseball, the “reserve clause” was the owner’s primary weapon for eliminating free competition in the market for players. Once a team obtained contractual rights to a player, it enjoyed exclusive rights to his services. Unless those rights were waived, traded, sold, or otherwise assigned to another team, the player was literally owned by the team with which he signed the original contract (Adams & Brock, 1997). Also, certain sports in the professional sports industry are classified as with antitrust labor exemption, whenever the players can file complaints with the government alleging unfair labor practices or without antitrust labor exemption, whenever the players cannot file complaints with the government alleging unfair labor practices (McGraw, 1998).

On the other hand, case studies show that in football, basketball, and hockey, the emphasis has been on the relief granted through the application of antitrust laws (McCormick, 1989). A final aspect focuses on what is the historical, legal, economic, and future role of antitrust laws in the professional sports industry of Major League Baseball (MLB)? In evaluating this aspect, each area seems to address in its’ own way the evolution of the antitrust policy in their particular industry. For example, according to U.S. News & World Report, all four of the sports leagues enjoy some measure of antitrust exemption, which allows teams to pool their broadcasting-rights fees, and in the case of baseball, prevents the players from filing complaints with the government alleging unfair labor practices (McGraw, 1998).

Throughout the history of sports, several events have occurred leading to how antitrust laws are now applied along with their financial impact. The following timeline from “Major League Baseball’s Labor Turmoil: The Failure of the Counter-Revolution” by Jeffery S. Moorad (1997) is explained in the Villanova Sports and Entertainment Law Journal. It provides a running account of actions that have been taken by leagues and set the stage for legal court challenges: It also provides a historical time line leading up the formation of the American Association and present day (MLB) baseball.

  • 1882 The alternative league, American Association, to the National League began play. The American Association abolished the reserve clause, sold tickets for half the price of those sold by National League clubs and allowed beer and whiskey in the stands on Sundays.
  • 1883 The American Association entered into a pact with the National League in and accepted the policies of the National League. Two additional leagues, the Union Association and Players League, soon followed, but both failed within one season and the National League absorbed all three leagues.
  • 1892 The only alternative league to gain foothold during this period was the American League, which emerged as the Western League.
  • 1900 By the turn of the century, the American League had wooed 100 players from the National League, and was drawing 500,000 more fans per season. Once again, club owners found competition not to their liking.
  • 1903 The two leagues came to an agreement under which the National League accepted the American League as an equal, and together the two leagues formed the bicameral system that characterizes Major League Baseball today.
  • 1913 The Federal League was established–the last alternative league of the pre-World War II era. Next to the American League, the Federal League was the most successful of the alternative leagues, lasting for three seasons, until a dissolution agreement between the National League and Federal League owners. As part of this agreement, the National League absorbed some of the Federal League’s team, while others were simply bought out.
  • 1922 The first court challenge of antitrust laws in the professional sports industry of baseball occurred.

These events helped to establish present day antitrust law exemption and how we view Major League Baseball (MLB).

Present Perspective: Legal Case Analysis of Antitrust Law and the Professional Sports Industry with the Antitrust Exemption from a Present Day Angle

Legally, in our present day and time, antitrust legislation and court decisions with labor exemption show variations in features of provisions, applications, and interpretations of significance. From the inception of the professional sport industry to the present, actions involving antitrust have helped shape this sport. For example, cases in the past have focused on issues of antitrust and labor exemptions to professional players. According to the Antitrust Bulletin, the issue of whether sports leagues are protected from antitrust attack by the labor exemption has arisen primarily in cases challenging league rules or devices designed to restrict the unfettered movement of veteran free agent players from one team to another when their contracts with the former team expired (Roberts, 1997).

Example of Antitrust Laws and the Professional Sports Industry with Antitrust Exemption: Major League Baseball (MLB)

Professional baseball is the most representative of professional sports with labor exemptions in many ways.

Firstly, there is the role of the “reserve clause. According to Leshanki (2003), the reserve clause essentially stated that the teams had the right to renew a player’s contract following each season. In this way all rights to a player’s contract belonged to the team and a player could never escape from that club or seek competing bids from other teams. Players were not even able to invalidate a contract by sitting out for a year and then returning to the game. In essence, the club could buy, sell or trade a player via his contract as if the player were livestock. Even though surveys suggested that the players’ initial reaction to the reserve lists was positive, it soon became clear that reservation was not in the players’ best interest.

Secondly, according to Villanova Sports and Entertainment Law Journal, reservation brought an end to the free market for their services, along with an end to their salary increases because of two reasons: (a) reactions to the reserve clause and (b) the control it provided to owners. Moorad (1997) discussed how players and other individuals established alternative leagues, which forced the development of competition for players’ services and how players’ associations were formed (Moorad, 1997) such as the Major League Baseball Players’ Association to represent the players in union negotiations with owners.

Additional court challenges show many features of the economical, recreational, and governmental institutions. They are explicit in issues, parties involved, decisions, and the extensiveness of governmental regulations, controls, and protections. In the Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922) case, the Federal Baseball Club made two arguments against the defendants. These arguments were as follows: (1) that several defendants, including the American and the National League of Professional Baseball Clubs, monopolized the market for baseball players in violation of section 2 of the Sherman Act and (2) that the defendants were monopolizing the market because once a team was placed in the American League or the National League, the reserve clause precluded players from “jumping” to the upstart rival Federal Baseball League.

The Supreme Court’s unanimous opinion, written by Justice Holmes, held that although baseball players and their equipment were physically moved across state lines, putting on “baseball exhibitions” was “purely a state affair” that only had an incidental effect on interstate commerce and thus fell outside of the Sherman Act’s jurisdiction. Although the Court recognized that baseball was in fact a business, it also held that “personal effort, not related to production, is not the subject of commerce (Ross & Dimitroff, 1997).

Another case in 1953 revisited the exemption via the reserve clause in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953). The plaintiffs alleged antitrust violations between organized baseball and the Mexican League because they had entered into various agreements binding each to respect the other’s reserve clause, thereby eliminating each league’s rights to contract with certain baseball players. In a per curiam opinion, the Court reaffirmed baseball’s exemption on the ground that it should only be removed or limited by legislation and since Congress had repeatedly declined to do so, it shouldn’t be changed. As a result of this happening, this meant that antitrust and antitrust exemption fell into the hands of Congressional legislation. In a nutshell, the majority’s opinion effectively held that organized baseball in the United States could enter into a worldwide conspiracy in restraint of trade with baseball leagues in other countries and yet the conspiracy would be exempt from U.S. antitrust laws. Therefore, the Court’s decision had more severe potential repercussions than simply affirming Federal Baseball (1922). Also, it effectively expanded baseball’s antitrust exemption to reach global conspiracies (Ross & Dimitroff, 1997) through its impact on the overall sports world. Furthermore, according to Justices Burton and Reed in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953), the defendants (Yankees) were now engaged in interstate trade or commerce as those terms are used in the Constitution of the United States and the Sherman Act (Ross & Dimitroff, 1997).

In 1972, the court again considered the exemption issue in Flood v. Kuhn, 407 U.S. 258, (1972). In this case, the St. Louis Cardinals traded outfielder Curt Flood to the Philadelphia Phillies at the conclusion of the 1969 season. Unhappy about the trade, Flood sent a letter to Commissioner Bowie Kuhn stating his displeasure and asked the commissioner to declare him a free agent for the upcoming season so he could consider offers from teams other than the Phillies. Kuhn refused, and informed Flood that his only choices were to play for Philadelphia or not to play at all. Flood decided to sit out the 1970 season and filed suit against the commissioner, the teams, and the owners, thereby taking on the reserve clause’s 50-year exemption from the antitrust laws. This attempt by Curt Flood thus left the antitrust exemption in the hands of the Supreme Court for another challenge to see if legislation by Congress was the determining factor.

As a result, the Supreme Court recognized that baseball’s long-standing exemption was an aberration since no other professional sport had been similarly favored, at least not without special legislation from Congress. Further, the Court reversed the underpinning of Federal Baseball (1922) by holding that professional baseball is engaged in interstate commerce.

But, in a close decision, the majority again explained that Congress had considered the issue and tacitly approved the exemption by refusing to overturn it. In addition, the Court held that baseball and its reserve system are also exempt from state antitrust laws. The exemption was therefore not only left intact, it was again extended (Ross & Dimitroff, 1997).

Despite the seeming lack of rhyme or reason to its holding in Federal Baseball (1922), the Court has continued to staunchly clutch to its ruling in subsequent decisions (Ross & Dimitroff, 1997). This is true because baseball’s antitrust exemption has proven to be remarkably resistant to challenge despite the suspect reasoning behind its creation (Moorad, 1997). On the other hand, a district court opinion in 1993, took at least a chink out of the exemption’s protective armor. The federal district court in Pennsylvania held that the exemption applies only to the reserve clause in Piazza v. Major League Baseball, 831 F. Supp. 420, 422 (E.D. Pa. 1993), (Ross & Dimitroff, 1997).

In this case, several investors (including Vincent Piazza, father of New York Mets’ all-star catcher Mike Piazza) sued Major League Baseball when it refused to approve the sale and relocation of the Giants from San Francisco to Tampa Bay. Major League Baseball filed a motion to dismiss, citing the antitrust exemption. The federal district court denied the motion on the ground that the exemption is restricted to the reserve clause, even though Piazza analyzed the exemption in terms of stare decisis. The court also pointed out that the Supreme Court itself had acknowledged that the trilogy between the cases of Federal Baseball, Toolson, and Ford was limited to the reserve system because professional baseball’s reserve system is within the reach of the antitrust laws” (Ross & Dimitroff, 1997) and did not apply to teams’ attempts to move from city to city (Moorad, 1997). Basically, the holding in Piazza signaled that the current restrictions on the sale or transfer of major league baseball teams were not included because this action may not be insulated from the Sherman Act by baseball’s antitrust exemption (Ross & Dimitroff, 1997).

Other issues that have been recent challenges are between owners and players. According to Moorad (1997), when the owners tried to gain back some of the ground they had lost in the most recent set of bargaining talks a decade ago, the players refused to budge. The standoff ultimately led to a season long strike in 1994-1995. Although the World Series had survived two world wars and even natural disasters, it could not survive this labor dispute and was not played for the first time in 90 years. Moorad (1997) estimates that the hard out of pocket losses to both sides as a result of the 1994-95 strike were one billion dollars. The aftershocks of the unseemly and distressing strike were still being felt in 1997; with attendance and TV ratings significantly lower than pre-strike figures. Fans begin to realize that they could live without baseball and found other ways of spending their time. More importantly, fan sympathy, which had traditionally been with the players, turned into fan annoyance at both the owners and the players (Palm, 1997). One additional argument that could have shed light during this period is the belief held by Isidore: (a) even if the team’s payroll increases significantly, market forces limit the amount owners can charge fans (Isidore 2002, April 5) and the proliferation of variable pricing is further evidence that player salaries do not drive ticket prices (Isidore 2002, December 27). With this additional note, it can be seen why some stability has returned to baseball.

In the last few years, this stability has returned because the owners and players have reached a new collective bargaining agreement. Thanks to the strength of the union, the agreement allows the players to retain the mobility that they had. Secondly, it creates the notion that the owners and players are in a joint venture, as opposed to the players being mere employees. Thirdly, from an economical standpoint, the agreement also begins to address the great disparity of financial benefits and burdens between the major market franchises and the smaller market franchises with modified profit sharing among clubs and a luxury tax imposed on clubs whose salaries exceed certain levels. Furthermore, the agreement contains important exceptions to a full profit sharing approach. However, there is a long way to go before the gap between the big and smaller markets are closed (Palm, 1997) even though the professional baseball industry is enjoying a period of relative tranquility (McCormick, 1997). For example, the demand for baseball and football increased between 1996 and 2002 as compared to the overall demand for hockey and basketball (Rishe & Mondello, 2004). This demand, whether increased or stagnant, led to the following economic values in 2001 as described by Howard and Crompton (2004) for the four major leagues:

Economic Value of the Major Leagues

MLB *Gross Revenue: $2.79 Billion *Net Worth: $6.55 Billion

NHL *Gross Revenue $1.82 Billion *Net Worth: $3.75 Billion

NFL *Gross Revenue: $3.51 Billion *Net Worth: $12.80 Billion

NBA *Gross Revenue: $2.1 Billion *Net Worth: $6.01 Billion

Future Perspective: An Outlook of Antitrust Law in the

Professional Sports Industry Beyond 2004

What does the future hold for the role of government in business regulations, controls, protections, and exemptions in the professional sports industry and their reactions? Based on this research paper, and according to Palm (1997), the future for professional sports is uncertain. Although the intersection between labor in the professional sports industry, antitrust laws and finance is clearer than it was, recent decisions in each of the sports leagues may result in a “decertify today–recertify tomorrow” mentality which may make professional sports even more unstable. For example, if players unionize and engage in collective bargaining, then they receive the benefits arising from the labor laws and collective bargaining, but lose virtually all of the protection that the antitrust laws would afford. In such cases, the labor laws primarily govern the relationship between the players and the owners, and the antitrust laws will be largely applicable due to the nonstatutory labor exemption. This action of decertification is primarily focused on players keeping or breaking up their unions. On the other hand, if the players choose to decertify their unions, then they obtain the full protection of the antitrust laws, but will enjoy the benefits of the labor laws and collective bargaining (McCormick, 1997). Ultimately, the parties have to come to grips with the issue of whether the financial pie will be distributed more equitably among the players and owners. The real dispute may become whether it should be more of a partnership model or remain an employment model (Palm, 1997). Regardless of what model the two parties choose, the value of professional sports franchises has been appreciating at double-digit rates annually for the past 30 years (Howard & Crompton, 2004) and should continue to grow in the future.

Another projection, according to U.S. News & World Report, is that some officials consider the practices of the leagues and the teams to be monopolistic. Some economists propose breaking sports leagues into separate businesses, much like AT&T was broken into Baby Bells. Others propose government regulation, such as a federal sports commission that regulates ticket prices, team relocation, salaries and the like because it has gotten to the point where huge amounts of tax money are aiding and abetting the behavior of an industry that is gouging its consumers (McGraw, 1998).

Even others, such as Howard and Crompton (2004), predict that part of future expansion in sports is likely to take the form of increased globalization. Women’s sports are rapidly emerging as a component of the professional sports mosaic in North America, and there has been growth in niche sports, which have a relatively small but avid following. These authors found that this growth has been aided by the multitude of cable television channels that are in constant need of new programming to fill their 24-hour schedules.

Chapter III: Summary and Conclusions

Conclusively stated, the writer found that the emergence of the professional sports industry has become an entity with which public policies have significantly affected the sports arena. Specifically, it was found that there are several features and trends that are observable about the role of antitrust laws in the professional sports industry from a financial perspective.

Secondly, the writer found that governmental controls, regulations, and protections make up an array of historical, legal and economic factors involving owners, players, and fans.

Thirdly, according to the Economist, the historical role of antitrust laws in the professional sports industry shows that this law has affected the industry through antitrust exemption granted in baseball, and not granted in football, basketball, and hockey (Andrews, 1998) and the writer agrees with this finding.

Fourthly, findings from the Antitrust Bulletin show that if the structural reorganization of professional sports is the goal of the public or government, antitrust offers the requisite weapons for achieving it. For example, in professional sports, where a cartel of club owners exercises a monopoly power in the product market, and where powerful trade unions dominate the relevant labor markets, there is an almost irresistible tendency toward tacit vertical collusion (Adams & Brock, 1997). It is the writer’s view that this exercise of power will continue as each major league sport continues to become more commercialized through the websites of: www.nfl.com; www.nba.com; www.mlb.com; and www.nhl.com.

Finally, the writer believes that antitrust laws will continue to play a very important role because as history shows us, the professional sports industry has had many landmark cases that have helped to shape the industry of today from a financial and legal standpoint. Therefore, antitrust laws will affect the professional sports industry of tomorrow because of the principle of judicial review and profit-sharing. Furthermore, the author believes that the world of reality sports, including fantasy league sports participation, by billions of fans, will contribute to the growth of this “intriguing social phenomenon” and now “worldwide social phenomenon” known as the professional sports industry.

 

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