Is this heaven? No, it's I.O.U.: why Major League Baseball must modify its current revenue-sharing and luxury-tax procedures.

AuthorGolden, Zachary

"There's nothing wrong with a baseball team turning a profit. What is wrong is a baseball team that cries poor while posting 18 consecutive losing seasons turning a profit. This difference is why the Pittsburgh Pirates, whose financial data from 2007 and 2008, the 15th and 16th of those seasons ... are the target of such recrimination. While positioning themselves as the victim of 'the system ' and trading away an entire starting lineup, the Pirates have been one of the most profitable teams in MLB, pocketing $29.3 million in 2007 and '08 combined, years in which they cashed revenue-sharing checks for a whopping $69.3 million.'" (1)

  1. INTRODUCTION

    In August 2010, Deadspin.com, a sports and entertainment website, published leaked financial records for a number of Major League Baseball (MLB) clubs, including the Pittsburgh Pirates, Florida Marlins, Tampa Bay Rays, and Los Angeles Angels of Anaheim. (2) According to these documents, the Pirates, one of the league's worst teams, raked in an operating profit upwards of $14.4 million in 2008. (3) MLB's current revenue-sharing system aided in the Pirates' accumulation of such a robust profit margin. (4) These leaked financial statements served to demonstrate what many baseball commentators have bemoaned for years: the current MLB revenue-sharing system is clearly dysfunctional, as evidenced by the fact that smaller market teams are realizing substantial profits while remaining consistently uncompetitive. (5) Parties on both sides of the collective-bargaining process believe that the Pirates embody the "core problem" with a system that has been implemented over the last two decades, "step by arduous step." (6) In other words, the revenue-sharing structure that MLB ostensibly created to increase parity has simply produced "a welfare class of teams that can turn significant profits by keeping payroll down." (7)

    The relationship between MLB owners and players has been notoriously rocky. (8) For over a century, both sides have been embroiled in a number of passionate labor disputes concerning everything from MLB's longstanding federal antitrust exemption to its infamous reserve system, and now revenue sharing. (9) MLB first implemented a revenue-sharing system to combat glaring payroll disparities between small- and large-market teams, which most owners believed to be the predominant source of competitive imbalance in the late 1990s and early 2000s. (10) under the system, money generated from local revenue sources is transferred from presumably wealthier, large-market teams, such as the New York Yankees and the Boston Red Sox, to smaller-market teams such as the Pirates and the Marlins. (11) MLB also employs a competitive balance--or "luxury"--tax whereby a team whose salary exceeds a predetermined threshold must pay into a central fund, which is then distributed to less wealthy teams based on financial need. (12) MLB implemented this tax with an eye towards an overall depression in player salaries, much to the dismay of the Major League Baseball Players Association (MLBPA). (13) The league's revenue-sharing system will undoubtedly be a major point of contention between the players and ownership, and quite possibly among the owners themselves, during the next collective-bargaining process. (14) Given professional baseball's long history of acrimonious labor negotiations, a smooth resolution seems highly unlikely. (15)

    This Note will analyze the fundamental flaws in MLB's current revenue-sharing system, which has failed to bring about increased parity. (16) Part II.A will discuss MLB's formative years, including the genesis of its nonstatutory exemption from federal antitrust regulation as formed by the Supreme Court through a now-infamous trio of cases known as the "Baseball Trilogy." (17) These antitrust issues, and their relation to the National Labor Relations Act, which governs all agreements reached through collective bargaining, must be considered before any changes are made to MLB's current revenue-sharing structure. (18) Part II.C will then traverse the history of the collective-bargaining process between players and owners. (19) Part II.E will further discuss the fundamental structure and shortcomings of the current revenue-sharing system by comparing it to those of other prominent professional sports leagues, such as the National Basketball Association (NBA) and the National Football League (NFL). (20) Finally, Part III will utilize this comparison to suggest potential improvements to MLB's revenue-sharing system, and discuss what legal recourse the players, owners, or both, may have moving forward. (21)

  2. HISTORY

    1. MLB's Formative Years

      Baseball slowly emerged as a profitable professional sport during the latter half of the nineteenth century. (22) In the early years, players signed one-year contracts and negotiated with any interested team at the end of each season. (23) This free and open system had the effect of dramatically increasing player salaries. (24) In an effort to maintain control over ever-fluctuating rosters and payrolls, baseball's owners adopted the infamous "reserve rule" at a secret meeting on September 30, 1879. (25) The original reserve system allowed each team to prohibit five of its players from engaging in contract negotiations with other clubs. (26) Because the rule quickly and successfully reduced player mobility and salaries, the owners expanded the application of the reserve system to all major and minor league contracts. (27) The expanded reserve system effectively provided ownership with the "option of renewing a player's contract ad infinitum at a salary determined by the owner." (28) Thus, if a player did not agree with the terms provided unilaterally each year by the club, he had only two possible courses of action: continue to play begrudgingly for the same owner or retire from professional baseball altogether. (29) By instituting an expanded reserve clause, baseball's owners were able to successfully prevent professional baseball players from enjoying the ability to offer their services in a competitive, open market. (30) Yet such an obvious restraint on free trade and services would have seemed to constitute "a perfect example of a Sherman Act violation and an easy way for the players to confront the owners." (31)

      Beginning in the 1880s, the United States underwent an industrial revolution, during which business tycoons, such as John D. Rockefeller, were able to create "megacorporations" in an effort to monopolize entire industries. (32) In 1890, Congress took direct aim at these monopolies by passing the Sherman Antitrust Act (Sherman Act), which was designed to encourage fair trade and competition in the open market. (33) On its face, the Sherman Act appeared to provide baseball players with a federal cause of action against the owners for their decision to restrain competition for player services. (34) Historically, however, both the United States Supreme Court and Congress have deemed the business of professional baseball to be outside the scope of federal antitrust law, and thus immune from attack under the Sherman Act. (35)

      The United States Supreme Court first recognized, and subsequently developed, baseball's federal antitrust exemption through three landmark decisions known as the "Baseball Trilogy." (36) In Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, (37) the first case in the trilogy, the plaintiff, a member club of the defendant league, brought a claim for treble damages against the two major professional baseball leagues in existence at the time, alleging a conspiracy among owners to monopolize the business of baseball. (38) Writing for the majority, Justice Holmes held that the business of baseball did not fall within the purview of federal antitrust regulation because baseball was not part of interstate commerce. (39) The Court acknowledged that players occasionally crossed state lines for purposes of league competition, but dismissed the practice as immaterial, analogizing such travel to that of lawyers crossing state lines to try a case. (40) More than thirty years later, in Toolson v. New York Yankees, (41) the Court affirmed Federal Baseball, reasoning that because the decision had stood for such a length of time, Congress had clearly decided against taking any action regarding baseball's antitrust exemption. (42) Almost twenty years later, in the final act of the "Baseball Trilogy," Curt Flood, a major league baseball player who had been traded to another team without his knowledge or consent, challenged the propriety of baseball's reserve clause. (43) Flood argued that the reserve clause subjected professional baseball players to "a form of peonage and involuntary servitude" that constituted a violation of federal civil rights and antitrust law. (44) The Court rejected this argument, choosing instead to reaffirm baseball's antitrust exemption, but limited the application of the exemption to the reserve clause. (45) The Court referred to Federal Baseball and Toolson as "an aberration" and concluded that baseball was engaged in interstate commerce, but, given its unique history, the business of baseball still required such a narrow exemption. (46)

    2. The History of Baseball and Labor Law

      In recent years, players and owners have relied on collective bargaining to negotiate and resolve major labor issues. (47) Yet, the history of MLB's collective-bargaining processes illustrates the historical tension between federal antitrust and labor law. (48) As discussed above, Congress designed the Sherman Act to prohibit industry monopolization and to prevent the formation of conspiracies to control and restrain trade. (49) Less than twenty years after Congress passed the Sherman Act, the Supreme Court characterized organized labor as a conspiracy against trade and therefore a violation of the Sherman Act. (50) Congress responded to this ruling shortly thereafter...

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