Wednesday, May 28, 2003

Antitrust News: Baseball Wins Again

Yesterday the U.S. Court of Appeals for the Eleventh Circuit thwarted the Florida attorney general’s effort to prosecute Major League Baseball for supposed antitrust violations arising from the now-aborted plan to contract two franchises. While the Court of Appeals’ ruling was a total vindication of baseball, the judges made little effort to hide their official disdain for Major League Baseball’s antitrust exemption. The opening of Circuit Judge Tjoflat’s opinion states things succinctly:

For better or worse, professional baseball has long enjoyed an exemption from the antitrust laws. The scope of this exemption – a judge-made rule premised upon dubious rationales and labeled an “aberration” by the Supreme Court – has been the subject of extensive litigation over the years. In this case, we are called upon to address two key issues: (1) the effect of the federal rule upon state antitrust law and (2) whether the exemption extends beyond antitrust prosecutions into the realm of mere investigations. With regard to the first issue, we hold that the federal exemption preempts state antitrust law. As for the second issue, we hold that the Florida Attorney General cannot proceed with the investigation in this case. This holding is based upon the Fourth Amendment and state law rather than the antitrust exemption. In this vein, our analysis differs significantly from that of the district court, although we ultimately affirm its decision.

In November 2001, MLB owners voted to contract two franchises. The Miami-based Florida Marlins and the Tampa Bay Devil Rays were among the possible contraction candidates, although the Montreal Expos and Minnesota Twins thought to be the favored choices of MLB management. The Florida attorney general then issued a “civil investigative demand,” essentially a political call for prosecuting baseball to curry favor with voters and the media. The idea was to drown baseball in document production and deposition requests to convince them not to contract the Marlins or Devil Rays. As it turns out, no team would face immediate contraction, as MLB’s 2002 labor agreement with its players union tabled any contraction until the expiration of the five-year pact. Simultaneously, however, MLB filed suit against Florida to prevent the civil investigation from going forward.

Businesses generally don’t have to justify closing down failing operations, and even the Eleventh Circuit acknowledged MLB had perfectly valid business reasons for closing the Marlins or Devil Rays. Thus, Florida’s only legal remedy to stop contraction would be to claim a violation of the antitrust laws. Since baseball already enjoys a federal antitrust exemption, Florida tried to claim that state antitrust law could still be applied to MLB. The theory here is that the federal exemption merely removes baseball from the scrutiny of federal antitrust laws, leaving a gap the states may fill with their own regulation. The Eleventh Circuit correctly rejected this theory, relying on the Constitution’s Supremacy Clause as giving baseball “a universal exemption in the name of uniformity.”

Of course, it’s unclear to me how the antitrust laws would prevent contraction in the first place. The antitrust laws might prevent certain activities, such as a league preventing a team from moving to another city (as was the case with the NFL’s Oakland-L.A.-Oakland Raiders), but outright contraction is hardly an affront to traditional antitrust theory. Think of it this way. As outlined by MLB in 2001, contraction would involve the remaining MLB teams collectively purchasing two franchises and liquidating them. In other business contexts, this is hardly an unusual or illegal practice. For example, if McDonald’s were to close one of its failing stores by buying back its franchise from the local owner, it’s doubtful anyone would claim the antitrust laws were violated. But as I noted above, Florida’s case was more about political populism than enforcing the law.

The one curious thing about the Eleventh Circuit’s opinion is its argument that the baseball antitrust exemption—a Supreme Court ruling later written into law by Congress—is somehow illegitimate as a matter of law. The Court of Appeals seems particularly concerned with judicial activism in antitrust, as seen in this passage discussing legislative intent:

Any discussion of whether Congress meant to immunize the business of Baseball from all antitrust law (as opposed to federal antitrust law) is, of course, fanciful because Congress never conveyed its preference one way or the other. The exemption is entirely judge-made, although some decisions have attempted to cloak this disturbing fact in the language of Congressional intent.

Arguing the baseball exemption lacks legitimacy because its “judge made” is intellectually dishonest. All antitrust law is “judge made.” The two principle rules of antitrust analysis—the per se rule and the rule of reason—are fabrications of the Supreme Court, not the mandate of Congress. For more than 100 years, the courts and unelected federal agencies have been given a blank check to write, amend, and enforce the antitrust laws at will without oversight or restriction. It is the judges who bear a large share of the responsibility for this, by not only refusing to strike down the antitrust laws as facially unconstitutional (which they are), but also by indulging every politicized antitrust theory offered by government prosecutors. The Eleventh Circuit considers the baseball exemption an “aberration,” yet the courts permit the Federal Trade Commission to apply the antitrust laws to such things as “superpremium ice cream” manufacturers and private membership associations. This is hardly consistent reasoning.

Of course, one can’t fault the Eleventh Circuit too much for despising the baseball exemption. The Court’s only trying to reconcile the exemption with the theory of morality posited by the antitrust laws, a theory nicely described by the Court as follows: “the antitrust laws form the bedrock of our capitalist system premised upon competition, and that anticompetitive conduct harms consumer welfare.” As CAC has always maintained, this is just plain wrong. Capitalism is a system premised upon individual rights as the bedrock of society. Baseball is entitled to its antitrust exemption, not because it deserves special privilege, but because every business is entitled to the protection of basic economic freedom. Resolving the conflict between the antitrust laws and the baseball exemption should be resolved by repealing the antitrust laws, not by repealing the baseball exemption.

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