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Antitrust Labor Law Issues in Sports

The term antitrust is used to describe any contract or conspiracy that illegally restrains trade and promotes anti-competitive behavior. Think of the term anti-competition rather than antitrust. The American economy depends upon the laws of supply and demand – the theory of freedom of competition. Congress enacted antitrust laws to prevent anti-competitive behavior in business in order to promote competition and ultimately drive down prices for consumers.

To protect the rights of workers, unions were formed to negotiate employment contracts collectively in order to achieve a collective bargaining agreement (CBA). In the sports industry, the unions that represent the players are called players associations. Labor and antitrust issues are governed primarily by federal statutes.

The Sherman Antitrust Act prohibits monopolies and restraint of trade. For example, several suppliers of widgets get together and agree they will all sell widgets for $1.00 to stores, and no less. This hurts competition. This Act prohibits:

  • a conspiracy by two or more persons to unreasonably restrain trade (i.e., to unreasonably limit competition;
  • an unlawful monopoly or an attempt to monopolize an industry; and
  • price fixing.

 The Sherman Act doesn’t regulate how big a company may get unless company continues to buy up other companies in such a way as to:

  • substantially lessen competition; and
  • tend to create a monopoly.

Violations of the Sherman Act may subject the wrongdoer to criminal penalties. Individuals may be fined by the government up to $350,000 per violation while corporations may be fined up to $10 million per violation. The government may also pursue civil damages for violations of the Sherman Act and such damages are automatically trebled (tripled). Additionally, reasonable costs and attorneys fees may be awarded.

The Clayton Act prohibits a corporation from acquiring an interest in the stock or assets of another corporation if doing so substantially lessens competition or may create a monopoly. A Federal Court may enter a divestiture order making the guilty party give up the property it acquired. This Act also allows the government or a private plaintiff to obtain an injunction against anti-competitive behavior. The Norris-LaGuardia Act was passed in 1932 and allows employees to organize as a collective bargaining units. This allows the employer to negotiate a contract that governs all covered employees as one unit.

The National Labor Relations Act was passed in 1935.This Act guarantees employees the right to form a labor union and requires employers to deal with a duly-elected union as the bargaining agent for the employees. The NLRA prohibits employers from interfering with employees and from discriminating against an employee as a result of the employee’s union activity. The NLRA requires good faith bargaining. However, it does not compel either party to agree to a proposal or require the making of a concession.

The National Labor Relations Board (NLRB) is a independent federal agency which administers and enforces the NLRA. Its two primary functions are to conduct elections in which employees decide whether a labor organization is to represent them, and to investigate and remedy unlawful labor practices committed by a labor union or employer. The NLRB investigates charges of unfair labor practices and can either dismiss the charge or pursue it further by issuing a complaint against the union or employer. The complaint is heard by an administrative law judge who sends a recommended decision to the NLRB, which issues a final decision and order. Anyone who wants to appeal the NLRB order may petition to a U. S. Court of Appeals.

Monopolizing is prohibited by section 2 of the Sherman Act. However, some monopolies are permitted. For example, newspapers can be a monopoly in a town that can’t support but one. Also, a monopoly which is the result of superior skill, foresight, and industry will be permitted. West Publishing Company had a monopoly for a long time regarding the publishing of legal opinions. They were the first publishing company, to my knowledge, to publish state and federal appellate court opinions on a large scale basis. They are still the best in the business, although they do have a little competition. The Internet is eventually going to hurt their business, since court opinions are now being put on the web.

The elements of monopolization are twofold:

  • possession of monopoly power in a relevant market; and
  • willfully acquiring or maintaining that power.

When a court uses what is called the per se rule analysis, any labor practices that are inherently unreasonable restraints of trade will be invalidated. In Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958), the United States Supreme Court stated that certain agreements or practices, because of their adverse effect on competition, are conclusively presumed to be unreasonable and therefore illegal. For example, price fixing is a per se violation of antitrust laws. Price fixing is anticompetitive and hurts consumers. Under the rule of reason analysis, a court must examine the labor practice at issue and determine whether it is reasonable or unreasonable. Some restraints are necessary as a legitimate business practice.

Congress favors the process of collective bargaining rather than having to ask the courts to intervene in labor disputes. In Brown v. Pro Football, Inc., 518 U.S 231 (1996),the U.S. Supreme Court made its position clear that courts should become less involved in disputes that arise from the collective bargaining process. The NLRA gives workers the right to strike if a CBA cannot be reached. Before a strike can occur, the union members must vote and there must be a majority in favor of a strike. The union must then give the employer 60 days notice (cooling off period). Also, if a CBA cannot be reached the employer may prevent its own employees from working. This is called a lockout.

Baseball, football, basketball, and hockey have all had legal battles involving the application of the antitrust laws. Baseball has held a unique exemption from antitrust laws in accordance with the interpretation of the Supreme Court in Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs (1922). The Court held that antitrust laws do not apply to professional baseball. Professional baseball had a reserve system in which once a player signed with a team, he became the property of that team only until he retired from the team or the team no longer wanted him. Major League Baseball (MLB) has had eight work stoppages since 1972, with player strikes or owner lockouts causing the cancellation or postponement of games in 1972, 1981, 1985, and 1994, as well as spring training cancellation in 1990. The MLBPA was formed in 1954, and MLB had its first collective bargaining agreement in 1968. To date, the baseball players association has won virtually all of the labor disputes. This accounts for baseball players having the highest salaries among the four major sports leagues.

In one of the most controversial opinions of the U.S. Supreme Court, baseball was held to not involve interstate commerce (as required by the Sherman Act) in Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs. Even though players traveled across state lines, Justice Oliver Wendell Holmes held that it was only incidental to the game; baseball was purely a state affair and held to remain exempt from antitrust laws. Baseball used the reserve clause, which precluded players from jumping to another baseball league, the Federal Baseball League. Therefore, since the court held that antitrust laws did not apply to baseball, baseball’s reserve clause was acceptable.

Curtis Flood was a Major League Baseball player, primarily a center fielder, for the Cincinnati Reds (1956-1957) and the St. Louis Cardinals from 1958-1971). He was a three-time All-Star and seven-time Gold Glove Award winner. He hit .300 or better six times during his 15-year major league career and had a lifetime batting average of .293. As a fielder, Flood was once went 226 consecutive games without making an error.

Curt Flood’s greatest years were with the Cardinals. He had a league-leading 211 hits for the Cardinals in 1964, and played on his first of two World Series championship teams that season. Though not usually thought of as a power hitter, Flood had 11 home runs and 83 runs-batted-in in 1966. In 1967, he hit for a .335 average in helping the Cardinals to another World Series championship. However, Curt Flood will probably be best remembered for challenging Major League Baseball’s reserve clause. He maintained that it was unfair in that it kept players beholden to the team with whom they originally signed for life, even though players had satisfied the terms and conditions of those contracts. In 1969, the St. Louis Cardinals traded Flood to the Philadelphia Phillies. However, Flood refused to report to the Phillies, citing the team’s poor record and the fact that they played in dilapidated Connie Mack Stadium. Flood also believed that the Phillies had racist fans at that time. Curt Flood forfeited a relatively lucrative $100,000 contract by his refusal to be traded to the Phillies.

In a letter to Major League Baseball commissioner Bowie Kuhn, Curt Flood demanded that the commissioner declare him a free agent. “After twelve years in the Major Leagues, I do not feel I am a piece of property to be bought and sold irrespective of my wishes. I believe that any system which produces that result violates my basic rights as a citizen and is inconsistent with the laws of the United States and of the sovereign States. It is my desire to play baseball in 1970, and I am capable of playing. I have received a contract offer from the Philadelphia Club, but I believe I have the right to consider offers from other clubs before making any decisions. I, therefore, request that you make known to all Major League Clubs my feelings in this matter, and advise them of my availability for the 1970 season.”

Commissioner Bowie Kuhn denied his request, citing the propriety of the reserve clause. In response, Curt Flood filed a lawsuit against Kuhn and Major League Baseball on January 16, 1970, alleging that Major League Baseball had violated federal antitrust laws. Even though Flood was making $90,000 at the time, he likened the reserve clause to slavery. Arguably, it was a controversial analogy, even among those who opposed the reserve clause. The case, Flood v. Kuhn, (407 U.S. 258,) eventually went to the Supreme Court. Flood’s attorney, former Supreme Court Justice Arthur Goldberg, asserted that the reserve clause depressed wages and limited players to one team for life. Ultimately, the Supreme Court, acting on stare decisis “to stand by things decided”, ruled 5-3 in favor of Major League Baseball, upholding the 1922 ruling in the case of Federal Baseball Club v. National League.

Curt Flood sat out the entire 1970 season. Curt Flood played with the Washington Senators in 1971. His short tenure with the Senators was a failure. Pitcher Bob Gibson wrote that Flood once returned to his locker to find a funeral wreath on it. Despite manager Ted Williams’ vote of confidence, Flood retired after only playing in 13 games and batting .200.

Ironically, even though Curt Flood lost the lawsuit, the reserve clause was struck down in 1975. Arbitrator Peter Seitz ruled that since pitchers Andy Messersmith and Dave McNally played for one season without a contract, they could become free agents. This decision essentially dismantled the reserve clause and opened up the door to free agency. Curt Flood died of throat cancer in Los Angeles, California at age 59.

In Mackey v. NFL, 543 F.2d 606 (8th Cir. 1976), John Mackey, a tight end for the Baltimore Colts challenges the Rozelle Rule. This rule stated that when a player’s contract expired and he signed with a new team, that team had to adequately compensate the former team. The Court ultimately held that the Roselle Rule was an unreasonable restraint of trade. In Mackey, the Eighth Circuit set forth a three-prong test for assessing the applicability of the exemption, which several other circuits have since adopted. The three-prong Mackey test, under which the exemption is appropriate only when:

  • The agreement sought to be exempted concerns a mandatory subject of collective bargaining;
  • The restraint on trade primarily affects only the parties to the collective bargaining relationship; and
  • The agreement is the product of bona fide arm’s-length bargaining.

The players’ strike in 1987 became one of the most publicized labor disputes in history. On September 22, 1987, the NFL players went on strike after unsuccessful negotiations with the owners about, primarily, free agency. During the 1987 strike, NFL owners hired replacement players (referred by some as scabs) to continue the season. This fielding of replacement players in 1987 has been referred to as the darkest period of labor relations in professional football. Some NFL players crossed the picket lines to play. Television networks broadcast the scab games using replacement players. This pitted players against players.

After the 1987 strike demonstrated that traditional collective bargaining practices would probably not obtain a contract with the owners, the NFLPA turned to the courts. For five years after the 1987 strike, NFL players worked with no contract in place, and both sides spent more time in the courtroom than at the collective bargaining table. A contract was finally reached between the owners and players union. This contract, especially its salary cap feature, has caused a great deal of pressure on other sports to follow suit.

Professional basketball players organized their union, the NBA Players Union, in the 1950s, about the same time baseball players organized collectively. Now known as the NBA Players Association (NBPA), the NBPA has been successful in its advocacy efforts on behalf of professional basketball players and has never  participated in a labor strike against NBA team owners.

In Wood v. National Basketball Association,  809 F.2d. 954 (2d. Cir. 1987),  the U.S. Court of Appeals for the Second Circuit dismissed a player’s antitrust claim challenging certain provisions of a CBA between the NBA and NBPA. Wood, a college senior, challenged the NBA salary cap, the NBA draft, and restricted free agency. The court found that the challenged provisions were mandatory subjects of collective bargaining and therefore were protected by the non-statutory labor exemption. This exemption describes the court’s holdings that any CBA will receive protection from federal antitrust laws.

Hockey has had the fewest antitrust challenges of the four major sports. The NHLPA’s existence began in 1967. Still, a few issues have required judicial intervention. Similar to professional basketball in recent years, hockey has enjoyed a surge in popularity and prosperity as the fan base has increased, merchandising revenues have increased, television revenues have increased, and teams have moved to newer and more modern arenas across the country. It is likely that as hockey continues to expand teams in the United States and Canada, antitrust laws will likely be called upon to resolve a dispute. There have been several challenges to the market power of professional sports leagues by rival, newly formed upstart leagues. Professional football has had several challenges to its domination of the American marketplace. While newer leagues attempt to form a fan base and gain much needed television contracts for their survival, allegations of antitrust violations are common, particularly if the newer league ultimately folds.

In American Football League v. National Football League, 323 F.2d 124 (4th Cir. 1963), the AFL claimed that the NFL was a monopoly and sued alleging antitrust violations. However, the Fourth Circuit Court held that the NFL was a natural monopoly and did not violate antitrust laws.

Amateur sports in America do not have nearly as many legal challenges involving antitrust laws. Courts seem to have afforded amateur athletic organizations more latitude and less scrutiny. Several cases involving antitrust analysis in the amateur sports context have offered some guidance and certainty as to how antitrust laws should apply in the amateur sports context. For example, in NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85 (1984), the NCAA’s television broadcast plan was held to be anti-competitive and in violation of the Sherman Act.

In Law v. NCAA, 134 F.3d 1010 (10th Cir. 1998), the NCAA was again found to be in violation of federal antitrust laws when it implemented the REC (restricted-earnings coaches) Rule. This rule limited the compensation of assistant coaches in all NCAA Division I sports to a mere $12,000 per year plus a possible $4,000 in the summer months. The rule was enacted as a cost-cutting measure among NCAA institutions that claimed that it also provided for a more competitive balance among member institutions. A group of coaches challenged the rule as being in violation of Section 1 of the Sherman Act, and the federal court found that the rule was anticompetitive and an unlawful restraint of trade. The NCAA was ordered to pay over $22 million in damages that was trebled to $67 million. The case finally settled for $54.5 million.

Inside Antitrust Labor Law Issues in Sports