Aroldis Chapman and the Duty to Disclose

As everyone reading this is by now undoubtedly aware, Monday’s proposed blockbuster trade that would have sent Aroldis Chapman from the Cincinnati Reds to the Los Angeles Dodgers is on hold, following reports that the star closer was allegedly involved in a domestic incident with his girlfriend back in October. Although the Reds remain free to trade Chapman pending Major League Baseball’s investigation of the incident under the league’s new domestic violence policy, the market for Chapman is reported to have predictably dried up as teams wait to learn what type of punishment the pitcher will face.

It remains unclear how much, if anything, the Reds knew about the allegations against Chapman prior to Monday’s media reports, or if the team took any steps to notify potential trade partners of the incident. Nevertheless, the episode has raised questions regarding the extent to which teams are expected to disclose unfavorable information of this sort to one another during trade discussions.

As is so often the case, this is an area in which MLB operates a bit differently than most other industries.

Legally speaking, parties are generally required to be truthful with one another when discussing proposed transactions. If one side of a deal intentionally makes a false statement to the other regarding a material fact – i.e. one that an average person would consider relevant to the transaction – before reaching an agreement, then the lying party has committed fraud.

So if the Reds did in fact know that Chapman had been involved in an alleged domestic incident, and the team was asked about it, then Cincinnati could not have denied having any knowledge of the event without potentially running afoul of the law. Indeed, the possibility that Chapman could be facing a potentially lengthy suspension for the incident under MLB’s domestic violence policy would certainly be very relevant to any team thinking about acquiring the reliever in a trade.

In fact, even if the Reds were never asked point blank about any potential disciplinary issues, the team could still have faced legal liability if they traded Chapman without disclosing their knowledge of his incident during trade negotiations. Under the legal concept of fraud by omission (or “silent fraud”), parties must generally disclose relevant information, even if never asked about it, if they know that failing to do so would result in the other side being misled.

So from a strictly legal perspective, teams engaging in trade negotiations would be expected to disclose any information that would be relevant to the other side. This would include not only alleged incidents of domestic violence, but presumably any injury concerns or evidence of a player’s suspected use of banned substances, as well. If a team fails to reveal this sort of information, then the acquiring club could theoretically sue for fraud.

But if the Reds truly had no idea that Chapman had been involved in a domestic incident until Monday, then it is unlikely that the team could have faced legal liability for failing to disclose the incident to trade partners. Unless the team consciously went out of their way to avoid learning about the incident, then they would not have been intentionally misleading anyone. In order to commit fraud, the offending party typically must be found to have either known, or been in a position where it should have known, of the relevant information that was allegedly concealed.

All that having been said, it is highly unlikely that a dispute of this sort would ever actually end up in court. MLB strongly discourages its teams from suing one another, insisting instead that all disputes between clubs be resolved internally by the league.

Rather than suing one another, then, teams typically resolve these types of cases by filing a grievance against the other side with the commissioner’s office. Back in 2001, for instance, Toronto asked Commissioner Selig to void a trade involving Mike Sirotka after discovering that the pitcher – the key player the team received from the White Sox in exchange for David Wells – was suffering from a more severe shoulder injury than Chicago had allegedly led the Blue Jays to believe.

Similarly, the Reds themselves filed a grievance against Washington in 2007, alleging that the Nationals had failed to notify Cincinnati that reliever Gary Majewski was injured before trading him in July 2006.

While teams will sometimes be able to reach a compromise in these cases, with the acquiring team typically receiving some sort of alternative or additional compensation (either agreeing to substitute someone else in the deal for the injured player, or exchanging some form of cash considerations), the commissioner’s office has historically refused to involve itself in such matters.

In the Sirotka case, for example, Commissioner Selig rejected Toronto’s request to have the trade rescinded. Instead, Selig maintained that baseball trades were governed by the principle of caveat emptor – let the buyer beware. As Selig’s decision explained:

“[T]he burden [is] on the acquiring Club to seek the medical information it feels it needs. If there is any doubt about the sufficiency or the quality of the information provided to it, the acquiring Club may always press for more. Or, if the acquiring Club believes that the medical information is inconclusive, the Club can decline to go forward with the assignment. This burden is as it should be in Baseball, and I am not prepared to replace the rule with another.”

Presumably, the league would apply this same logic in a case where a team failed to disclose a domestic violence incident. So even though the failure to disclose known, relevant information would, in most contexts, give rise to a potential claim of fraud, in baseball the burden falls on the acquiring team to complete its own investigation before signing off on a transaction.

This explains why teams typically insist on performing their own physical examination of a player before completing a trade, rather than simply relying on the other team’s medical reports. This also explains why the Red Sox reportedly conducted their own background check of Chapman – an investigation that reportedly uncovered details surrounding Chapman’s alleged domestic incident – before seriously engaging Cincinnati in trade discussions. (This news raises a potentially interesting, related question of whether Boston disclosed – or should have been obligated to disclose – the information it learned to either Cincinnati or MLB.)

All that having been said, even if MLB does not require its clubs to disclose known, relevant information to potential trade partners, there are other reasons why teams might decide to negotiate openly and honestly with one another. Indeed, even if a team might benefit in the short-term by concealing relevant information from another club in order to complete a trade, the benefit of such deception could be outweighed by the damage it would ultimately inflict on the team’s reputation throughout the rest of the league, potentially making future trades more difficult to complete.

At the end of the day, though, under existing MLB precedent it does not appear that Cincinnati would have been required to disclose any knowledge it may have had of Chapman’s alleged domestic episode to trade partners. So if the Reds did in fact know about the incident, but determined that the benefits of concealing such information outweighed any reputational harm that the team might sustain, then the club would have been free to withhold these details without any significant risk of legal or league-imposed sanctions.