The gravamen of Federal Baseball's case was the alleged anticompetitive impact of what is known as the "reserve clause" in the yearly contracts of players in the National and American Leagues. Id. at 687-88. The reserve clause bound a player to either enter a new contract with the same team in the succeeding year of the player's contract or be considered ineligible by the National and American Leagues to serve any baseball club. Id. at 687. Because of this restrictive provision, the Federal League and its constituent clubs were unable to obtain players who had contracts with the National and American Leagues, the effect of which, as found by the jury, was to damage Federal Baseball. Id. at 682, 687.
The Court of Appeals reversed the jury's verdict and remanded, making four significant findings. First, and quite simply, the court found that the business in which the defendants were engaged was the business of giving exhibitions of the game of baseball. Id. at 684.
Second, the court found that "[a] game of baseball is not susceptible of being transferred, . . . [and] the transportation in interstate commerce of the players and the paraphernalia used . . . was but an incident to the main purpose of the [defendants], namely, the production of the game." Id. at 684-85. Thus, the court reasoned, a baseball exhibition could not be considered interstate commerce, and the business of giving such an exhibition could not be subject to the Sherman Act. Id.
The third finding of the Court of Appeals was that, despite the fact that the giving of an exhibition was not interstate commerce, there were interstate components of Federal Baseball's business, the direct interference with which was redressable under the Sherman Act. Id. at 686. These interstate features included such things as the movement of players and their paraphernalia from place to place across state lines. Id. The court found that if unlawful anticompetitive activity directly interfered with the business of moving the players or their equipment, as opposed to the exhibition of the game itself, the Sherman Act would apply. Id.
Finally, the Court of Appeals found that the reserve clause only indirectly, if at all, affected the interstate aspects of Federal Baseball's business (the business of moving players and their equipment), which was not sufficient to give rise to a Sherman act violation. Id. at 687-88.
These four findings can be condensed into two reasons why the Court of Appeals found that the reserve clause did not offend the Sherman Act. First, the anticompetitive impact of the reserve clause on the business of giving a baseball exhibition was not redressable as a matter of law under the Sherman Act, such business found not to be interstate commerce. Second, the reserve clause had, at best, only an incidental impact on the portion of Federal Baseball's business that was considered interstate commerce.
The Supreme Court affirmed. The Court agreed that the defendants' exhibitions of baseball games "are purely state affairs," lacking the character of interstate commerce. Federal Baseball, 259 U.S. at 208. From this, the Court reasoned, "if we are right the plaintiff's business is to be described the same way and the restrictions by contract that prevented the plaintiff from getting players to break their bargains [the reserve clause] and the other conduct charged against the defendants [buying up Federal League clubs] were not an interference with commerce among the States." Id. at 209.
The Supreme Court next addressed the exemption in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953), a per curiam opinion affirming decisions of the Sixth and Ninth Circuits.
The plaintiffs in the underlying cases were professional baseball players who brought suit under the federal antitrust laws alleging harm by virtue, again, of the reserve clause. Id. at 362 (Burton, J. dissenting). Seeking to avoid Federal Baseball, the plaintiffs stressed, among other things, the obsolescence of that decision in light of the increased revenue generated by baseball due to interstate radio and television broadcasts. See Toolson v. New York Yankees, 101 F. Supp. 93. Unpersuaded by this position, the district courts dismissed the claims and the Courts of Appeals affirmed. The plaintiffs then petitioned the Supreme Court to overturn Federal Baseball. In a terse opinion, the Court refused, upholding Federal Baseball "so far as that decision determines that Congress had no intention of including the business of baseball within the scope of the federal antitrust laws." Toolson, 347 U.S. at 357 (per curiam).
Following Toolson, several attempts were made to extend its reasoning and that of Federal Baseball beyond the context of baseball. See, e.g., United States v. Shubert, 348 U.S. 222 (1955)(theater); United States v. International Boxing Club, 348 U.S. 236 (1955) (boxing); Radovich v. National Football League, 352 U.S. 445 (1957)(football). In each of these cases, however, the Court declined the invitation. Moreover, to head off any further attempted extensions of those decisions, the Court stated in Radovich with crystal clarity that "we now specifically limit the rule . . . established [in Federal Baseball and Toolson ] to the facts there involved, i.e., the business of organized professional baseball." Radovich, 352 U.S. at 451.
The next and most recent time the Supreme Court directly considered the exemption was in Flood v. Kuhn, 407 U.S. 258 (1972). Like Toolson, the plaintiff in Flood was a professional baseball player dissatisfied with the reserve clause in his contract and the "reserve system" generally.
After an extensive analysis of the history of the exemption, Justice Blackmun, who delivered the opinion of the Court, produced a list of statements that can be made regarding the exemption and its circumstances:
1. Professional baseball is a business and it is engaged in interstate commerce.