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Today in Baseball History: Baseball gets its antitrust exemption

Oliver Wendell Holmes, Jr. at His Desk

(Original Caption) Oliver Wendell Holmes (1841-1935), Associate Justice of the Supreme Court, is shown seated at his desk. Photograph.

Bettmann Archive

May 29 should be a day that Commissioner Rob Manfred and the 30 owners of Major League Baseball pop champagne corks. Why? Because it was on this day in 1922 that the decision in Federal Baseball Club v. National League, 259 US 200 (1922) came down. That’s the decision in which the Supreme Court ruled that federal antitrust laws did not apply to baseball because, in the mind of Justice Oliver Wendell Holmes and the other eight justices, “the business is giving exhibitions of base ball” is not interstate commerce.

While there are far worse Supreme Court decisions on record in terms of intent and effect, Federal Baseball does stand as one of the worst reasoned decisions ever. Mostly because Justice Holmes really, really just wanted the baseball owners to win, logic and the law be damned.

Why? Let’s look at how it all came down and it becomes clear.

After a lot of chaos, turmoil and shaking out of upstart leagues and teams in the late 19th Century, baseball, as a business, was doing quite well by the early 19-teens. The National League and American League had a decade or so of peaceful and organized co-existence, the World Series was well-established, and big stars were becoming national, as opposed to merely local, celebrities. Against that backdrop a couple of efforts were made to form competitor leagues to get in on some of that action.

In 1912 something called The United States League began play, primarily on the east coast. It lasted three games and then folded. At the same time, a man named John T. Powers started the Columbian League, primarily in the Midwest. That actually lasted a whole 120-game season. In 1913 he reorganized it as the Federal League. It began play that year a six-team minor league with clubs in Indianapolis, Chicago, Cleveland, St. Louis, Kansas City and Pittsburgh. The league expanded to eight clubs for the 1914 season, with clubs in Baltimore, Brooklyn, and Buffalo (Cleveland was folded) proclaimed itself a major league and declared war on the NL and AL.

And it was pretty successful for a while. Federal League clubs lured away some stars from the established leagues including Joe Tinker, Mordecai “Three-Finger” Brown, Hal Chase, Eddie Plank, Chief Bender, Ed Konetchy, and Lee Magee. They almost got Walter Johnson too, before Senators owner Clark Griffith personally traveled to Big Train’s home in Kansas and outbid the Feds.

While many believe financial difficulties were what sunk the league, that wasn’t the case, at least not fully. Yes, they had some cash flow problems and a couple of teams weren’t well-managed, but league backers included millionaires such as the ice magnate Phil Ball, oil baron Harry Sinclair and the industrialist George Ward. The Federal League drew pretty good crowds, enjoyed two years with exciting pennant races and even built a nice ballpark in Chicago, Weeghman Park, to be the home of the Chicago Whales. You may be familiar with that park under its later name, Wrigley Field.

Still, there were some problems, and in early 1915, the Federal League filed a lawsuit in Illinois against organized baseball, claiming that it was colluding against the Federal League in violation of the federal antitrust laws to undermine its business. The judge on that case: Kennesaw Landis, who would become baseball’s first commissioner a few years later, primarily because Major League Baseball was thankful for and admiring of his work here. The case before Landis went nowhere, as he strongly encouraged the parties to settle.

The 1915 season went on. Then something interesting happened: Major League Baseball bought out most of the Federal League owners. Charles Weeghman of the Whales was allowed to purchase the Chicago Cubs and move them into what is now Wrigley Field. The owner of the St. Louis Terriers was allowed to buy the Browns. All the other owners, save one, agreed to buyouts and all of the players were auctioned off to Major League clubs. The Federal League was over and the lawsuit in front of Judge Landis was dropped.

One holdout ownership group, however — that of the Baltimore Terrapins — held firm. Not necessarily out of principle. They wanted to be admitted to the National or American League as a big league club, but the Major League owners didn’t think Baltimore was a suitable market, primarily because they thought the city was too small and, oh yeah, had too large of a black population (gotta hand it to the segregation-era owners for being consistently terrible). They offered to buy out the Terrapins for $75,000 but the Terrapins considered that an insult, so instead they sued, this time in the District of Columbia. While the National League gets top billing in the case’s name, they sued both it an the AL, as well as the owners of the Federal League teams who sold out and the various executives in charge of the three leagues. As before, the claim was that Major League Baseball was an illegal conspiracy in violation of the Sherman Act.

Without getting too technical about it, the Sherman Act is a federal law which prevents businesses from conspiring with one another in an effort to thwart competition, agreeing to fix prices and otherwise undermining the market, which might hurt consumers. It and other such laws were passed in the late 19th century and early 20th century after massive business combinations — referred to as “trusts” — in key industries came to monopolize wide swaths of the economy. Thus the name, “antitrust” laws.

The key thing about the Sherman Act, though, is that it can only apply to business that engages in “interstate commerce.” That is, business that crosses state lines. The reason is pretty basic: the Constitution does not give Congress the power to simply regulate the economy, full stop. It can only do so with respect to interstate commerce. Stuff that happens only within a single state’s borders is not subject to the Sherman Act. Theoretically. Which, now that I say that, requires a quick digression.

There has been a century-long debate about what is and what is not interstate commerce, with Congress and the Courts taking an increasingly expansive view of what is truly “interstate” as the 20th century went on. “Sure, your shop here in Michigan only sells flowers to people in this city, but you import some from Florida, and that makes this interstate commerce.” That kind of thing. Courts giving Congress a blank check in this regard for so long — and reaching kinda far at times to do so — is why many assume that Congress has total power to regulate the economy. In the past few decades, however, there has been pushback on this, with many judges taking a less-expansive view of what is, in fact, interstate commerce, taking away certain aspects of regulation from Congress. This has been one of the main battlegrounds between liberals and conservatives in both politics and the law, even if it doesn’t get the press that sexier social topics get. End digression.

Baseball games are clearly interstate commerce, right? One team is in New York, another is in Chicago and they have to take trains or planes to get to one another. Fans from Philly may go to Washington to watch a game, traveling and spending money across state lines to do so. Even as early as 1922 some games had been broadcast on the radio, sending their signals — and advertisements — across state lines. The very essence of the business of baseball, then as now, involved multi-state travel and interstate commerce. Indeed, professional sports as both historically and currently constructed are the very definition of national operations.

The trial court in the Baltimore Terrapins case against organized baseball certainly agreed with that and let their case proceed. The Terrapins won and received an award of $80,000 which, per the terms of the Sherman Act, were tripled to $240,000. That was a big, big win for them!

Organized baseball appealed, however, and the decision was reversed, with the Court of Appeals holding that baseball was not subject to the Sherman Act because it’s not interstate commerce. The short version: a game is only played in one place — a game is “local in its beginning and in its end,” the court said — nah, it’s not subject to the Sherman Act.

This is absolutely bonkers. So, obviously, Justice Holmes, one of the greatest legal minds in the history of Anglo-American jurisprudence agreed with it.

Holmes didn’t even expand on it or explain it. It’s one of the shorter Supreme Court decisions you’ll ever read. Just — to paraphrase — “yep, the Appeals Court was right. Case over. Sorry, Terrapins, you lose. Baseball has the right to conspire and collude all it wants because it’s not a national concern. Go forth and make tons of money, Major League Baseball owners!”

Why did Holmes rule this way, even if it made no factual or legal sense whatsoever? Some — including a current Supreme Court justice — disagree, but most think that Holmes, basically, just wanted to do a solid for baseball owners given baseball’s extraordinary prominence and national importance at the time.

A big hint about that came from the mouth of the first judge — Kennesaw Mountain Landis — who had this basic case before Holmes did. Landis was a Teddy Roosevelt appointee and Roosevelt was known as a trust-buster. Landis soon became that kind of judge too, and famously ruled against big business in some earlier cases. It’s probably why the Federal League filed suit in his court in the first place. As I noted, he stalled the case and encouraged settlement. Probably because he knew that he’d have to rule against Major League Baseball if he didn’t and he really, really, didn’t want to do that because, in his words, “any blows at . . . baseball would be regarded by this court as a blow to a national institution.” Baseball was special, see, and people would get really, really upset! It’s not hard to imagine that the Court of Appeals which reversed the $240,000 to the Terrapins felt that way and that Landis, looking for a way out of a sticky situation adopted that reasoning.

Current Supreme Justice Alito — a strong proponent of ratcheting back federal power and a fan of the Sherman Act having less reach — wrote a big thing for SABR a few years ago defending Holmes and claiming that he was, actually, in keeping with mainstream thinking of the day on the matter, but it’s not a convincing argument. Alito said that, in 1922, judges didn’t look at the business surrounding an economic activity, just the narrow transaction, such as a game, or a sale of a good, or a show or whatever, ignoring the stuff that had to happen to make it happen. The contracts and supply chains may be interstate commerce, but the essential part of it — here, the baseball game — is not. At least as long as the ballpark doesn’t straddle state lines.

There are a couple of problems with that. First, the lawsuit was not about regulation of a game (e.g. a law passed by Congress saying there must be four outs in an inning or something) but about the business deals that stocked teams with players, established schedules, caused money to change hands and the like, all of which took place over state lines. So if Holmes was looking narrowly at an on-fild game itself, he was ignoring the issue presented in the case before him, which is not a very Holmes thing to do.

Second, and more tellingly, a year later, Holmes was fully prepared to go the other way on a case involving regulation of Vaudeville performers that touched on the very same topics. There he allowed that the surrounding stuff might, in fact matter, if the surrounding business was big and extensive enough to cross state lines. What a difference a year makes!

Aside from Alito, who I think is totally wrong on this topic, almost everyone else who has studied the matter has considered it one of the worst decisions ever handed down. It’s been called “infamous,” “clearly wrong,” “[a] curious and narrow misreading of the antitrust laws and/or [an] utter misunderstanding of the nature of the business of baseball,” “remarkably myopic, “willfully ignorant,” “simple and simplistic,” and “an embarrassment for scholars of Holmes.” (see notes 69-72 here). Even judges have said so in their own opinions, with a federal appeals court judge once calling the decision an “impotent zombie void of vitality in light of the Court’s more recent decisions.” Another judge has said that “Federal Baseball was not one of Mr. Justice Holmes’s happiest days.” (see notes 74-75).

Yet the case — and thus Major League Baseball’s immunity from the antitrust laws — persists. Why?

Originally inertia, and then a lot of political glad-handing.

Holmes’ decision went unchallenged for over thirty years before the matter came to the Supreme Court again when a minor league pitcher named George Toolson sued the Yankees over the reserve clause that kept him from negotiating with other teams. The first stab at free agency, really. The Court was sympathetic and, all things being equal, probably would’ve ruled in Toolson’s favor, but they decided that Holmes’ Federal Baseball decision had lasted so long that Major League Baseball had come to rely on it and build its whole business model on it that it’d be unfair to take the antitrust exemption away now via a judicial decision. It was up to Congress to change that by explicit legislation. The Court later said basically the same thing in the famous Curt Flood case, which Flood lost, by the way, even though many people believe otherwise.

And, with a few changes, that is where things still stand today. Sure, there is free agency now, but that was a function of an internal arbitration on specific facts in baseball’s standard player contract, followed by baseball willingly agreeing to Collective Bargaining Agreements which give players more rights. It was not because a federal court said baseball is now subject to antitrust laws. The Collusion cases of the 1980s and the 1994-95 work stoppage ended in a arbitration and judicial decisions against the owners, respectively, but again, those were based on contract violations and unfair labor practices, not a ratcheting back of owners’ immunity from the antitrust laws.

What is still in place, firmly, is Major League Baseball’s ability to work to thwart competitors, if any ever arise, and its ability to carve out protected geographic territories for its clubs and anti-competitive contract rights for its clubs. The Rays can’t pick up and move to Brooklyn. Jeff Bezos can fund an eight-team upstart league, try to put it in some cities and Major League Baseball can do all manner of things in concert to stop him that no other businesses could do when faced with competitors. They can agree to set salaries for scouts or other team employees who are not part of a union across the league and make rules against hiring players from one another. It can also dictate the terms of employment of minor league players and institute a draft which prevents teams from separately negotiating with amateur players. It’s an enormously powerful tool that any business would kill to have but which belongs exclusively to baseball. It’s a gift, really.

As mentioned, the only thing that can change it is if Congress passed laws to change it. Which also explains why Major League Baseball maintains a sophisticated and robust political lobbying presence in Washington. When you’ve given a valuable gift, you do whatever you can to hold onto it tightly.

And all of that is thanks to a short, cursory legal opinion. Issued by one of the most famous judges in history, who lost leave of his senses 98 years ago today.

I’d like to give a big thanks for research help from the essential Baseball and the Law, which is a legal textbook by Louis H. Schiff and Robert M. Jarvis. I wrote about this book once before. It’s something that every baseball/law nerd should own.

Note: I’ve written about this case and the Federal League several times over the years for this site, so if this seemed like something of a re-run, well, yeah, it sort of was in a Frankenstein way. Still, I get enough people asking me about baseball’s antitrust exemption that it’s always worth revisiting it. -- Craig

Follow @craigcalcaterra