Archive for Business

San Jose Strikes Out at the U.S. Supreme Court

When the city of San Jose, California sued Major League Baseball back in the summer of 2013, the city’s attorneys likely anticipated that they would eventually have to litigate the case all the way to the U.S. Supreme Court in order to prevail in the suit. Indeed, because San Jose alleged that MLB’s refusal to allow the Oakland Athletics to move to the city – territory assigned to the San Francisco Giants under the league constitution – violated the Sherman Antitrust Act, the city was directly challenging MLB’s infamous antitrust exemption. And because it was the Supreme Court that originally created the exemption nearly 100 years ago, that court is the only judicial body that has the power to modify baseball’s antitrust immunity today.

Given all that, it was not particularly surprising that San Jose quickly lost at both the trial and appellate court levels, with both courts basing their dismissals of the city’s lawsuit on the sport’s antitrust exemption. Nor was it surprising to learn in April that San Jose was officially appealing the suit to the Supreme Court.

As I noted at the time San Jose filed its appeal, the city faced long odds of successfully persuading the Supreme Court to take its case. Not only does the Court grant less than 3% of the appeals it receives in any given year, but it has also subsequently reaffirmed baseball’s antitrust exemption on two separate occasions since first creating the doctrine in 1922, both times insisting that any change in the law must come from Congress, and not the courts.

It should come as no surprise, then, that the U.S. Supreme Court officially rejected San Jose’s appeal on Monday, marking the end of the city’s antitrust lawsuit against the league.

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Tossed: Court Dismisses Minor League Wage Increase

Over the last couple years, the battle for higher wages for minor league baseball players has been fought on several legal fronts. The highest profile challenge has come in the form of litigation claiming that the minor league pay scale — under which minor league players often earn as little as $3,000 to $7,500 per year — violates the nation’s minimum wage laws.

At the same time, however, a separate lawsuit filed last December attacked the problem from a different legal angle. In Miranda v. Office of the Commissioner of Baseball, four former minor league players asserted that Major League Baseball’s minor league pay practices violate the Sherman Antitrust Act. In particular, the players argued that MLB and its thirty teams have illegally conspired to fix minor league players’ salaries at below-market rates not only by agreeing to a uniform, league-wide salary scale for minor league players, but also by artificially reducing the size of the signing bonuses that entry-level players receive under MLB’s domestic and international signing bonus pool rules.

As I noted at the time the Miranda case was filed last year, the plaintiffs in the suit faced at least one major impediment in their attempt to challenge the minor league pay practices under the Sherman Act: baseball’s antitrust exemption. Indeed, soon after the case was filed, MLB filed a motion asking the court to dismiss the lawsuit in light of its antitrust immunity.

Given that precedent, it should come as little surprise that Judge Haywood Gilliam dismissed the Miranda suit on Monday, concluding that MLB was shielded from the plaintiffs’ claims by virtue of its antitrust exemption.

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Fantex Selling Stock in Andrew Heaney’s Future Earnings

Fans of Major League Baseball have long held an emotional investment in favorite players and teams, spending time and money on the sport and receiving widely varying emotional returns depending on results. If Fantex and Los Angeles Angels starter Andrew Heaney get their way, fans and investors will soon be able to invest in the future earnings of the Angels left-hander. Heaney and Fantex, a company that has previously struck similar deals with multiple NFL players, have agreed to a contract that will pay Heaney $3.34 million in exchange for “10 percent of all future earnings related to his brand, including player contracts, corporate endorsements and appearance fees,” according to Ken Rosenthal. A deal like this will attempt to provide pre-arbitration players like Heaney a form of insurance against future injury or a downgrade in performance without signing a team-friendly contract that keeps players from free agency. While this concept has been around for quite some time, in practice, these deals are still in their infancy and come with some drawbacks.

Almost two years ago, Fantex made news by announcing an agreement with star running back Arian Foster of the Houston Texans. The deal, similar to the one for Heaney, would have paid Foster $10 million in exchange for 20% of Foster’s future earnings. Before the parties could follow through on the deal, Foster was injured and the IPO never got off the ground. The deals with Fantex are subject to getting enough investors to pay for the initial guarantee to the players. For Heaney to get paid, enough investors must first meet the IPO amount, in this case $3.34 million.

In some ways, this model may look like a long-term version of daily fantasy games, where fans can put forth a relatively small sum of money in the hopes that a player will play well and provide a return on the money they have deposited. I spoke with Fantex co-founder and CEO Buck French about the potential comparisons and he was quick to refute them, stating that they do not consider themselves in the same market. “[Daily fantasy sports] is totally different. It’s not investing. Either you win or you lose… A single game outcome will determine whether you win or lose.” French cited a Wall Street Journal article stating that 1.3% of daily fantasy players win 91% of the profits in the first half of the MLB season. French said that, in Fantex, people “invest in future cash flow stream and collect dividends. They aren’t trying to beat out a whole bunch of people.”

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Jays, Mets, Royals Reaping the Rewards of On-Field Success

Television deals get a lot of publicity when it comes to looking at Major League Baseball finances. National television deals that went into effect in 2014 give MLB $1.5 billion per year through 2021, and local television deals have increased over the years providing more money to clubs to provide their product to those not physically witnessing the games. Despite those big figures, all teams still see a large portion of their revenues from doing business the old-fashioned way — putting butts in the seats.

Television revenue, particularly locally, is one way that the large-markets have a big advantage in revenues. Those same teams in New York, Los Angeles and Boston also have some inherent advantages in creating local revenue due to a larger base of potential ticket-buyers, in theory leading to higher prices and greater revenues. Teams in smaller markets likely cannot bridge that gap entirely, but they do have one option in an attempt to bridge that gap, and that is to win baseball games. The Kansas City Royals saw a surge in the standings from the get-go this season following their playoff success last year — and teams like the Pirates have also benefited from winning — but small markets are not alone in their ability to increase revenue through wins: both the Blue Jays and Mets are also seeing increases in attendance, and in turn, revenue.

On the season, the Dodgers, with their massive stadium and fanbase, are once again leading the league in attendance, per Baseball Reference.

2015 MLB ATTENDANCE BY TEAM

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Dodgers’ $300 Million Payroll Not That Crazy

Back before the 2012 season, Frank McCourt owned the Los Angeles Dodgers. He had purchased the team in 2004, inheriting a club that featured a $105 million payroll in 2003. Nearly ten years later, he sold the team to the deep-pocketed Guggenheim-led group — handing over a club that also featured a $105 million payroll. Major League Baseball revenues had doubled during McCourt’s tenure as team owner — and salaries for players increased at something close to the same rate — but the Dodgers, sitting in one of the biggest media markets in the country, stuck to the status quo after fielding one of the bigger payrolls in baseball at the beginning of the century. The Dodgers have finally caught up with the times (some would say surpassed) in terms of payroll, but while their $300-plus million payroll might seem enormous, the team would still be right in line with the New York Yankees and Boston Red Sox if those two teams had not slowed their spending in recent years.

Prior to the arrival of the Dodgers’ new ownership and $8 billion cable deal, the Yankees were the only team to exceed a $200 million payroll. The Yankees crossed that threshold in 2005, but kept their spending fairly static over the following decade, only getting above $225 million once (in 2013) and falling below that mark last season. Their total outlay on players was often somewhat higher, given the luxury-tax payments the team was forced to make every season. Given the Yankees’ spending over the last decade and the Dodgers’ spending over the last few seasons, it might appear that the luxury tax is not much of a deterrent towards spending, but as Nathaniel Grow detailed back in May, the luxury tax has kept spending down at upper levels.

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Appellate Court Sides with MLB in Minimum Wage Lawsuit

Major League Baseball’s pay practices have faced a series of legal challenges in recent years. The most notable of these cases center around allegations that MLB teams routinely fail to pay minor-league players in accordance with the Fair Labor Standards Act (FLSA), the nation’s primary minimum wage and overtime law.

While the minor-league wage lawsuits have certainly generated the most attention to date, they were not the first in the recent wave of minimum-wage cases filed against MLB over the last few years. Instead, that distinction belongs to Chen v. Major League Baseball, a lawsuit alleging that MLB violated the FLSA by employing unpaid volunteers to work at the annual FanFest convention held in conjunction with the All-Star Game in New York City back in 2013.

The district court granted MLB an initial victory in the Chen case last year, determining that FanFest was not subject to the FLSA and therefore was immune from the federal minimum wage and overtime requirements. Now, in a recent decision issued earlier this month, MLB has scored yet another victory with the Second Circuit Court of Appeals affirming the trial court’s finding that the FLSA does not apply to FanFest.

However, while the Chen decision certainly represents an important decision with respect to the rights of FanFest volunteers, the appellate court’s recent opinion appears unlikely to have a significant impact on the other minimum-wage lawsuits pending against the league. Therefore, the various lawsuits challenging both MLB’s minor league and scout pay practices remain very much alive despite the recent rulings in the FanFest case.

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Relationship Between Spending, Winning Remains Low

As the Houston Astros and Pittsburgh Pirates race toward the playoffs with payrolls in the bottom 20% of Major League Baseball and the Boston Red Sox and Detroit Tigers falter with top-five payrolls, we are reminded that money cannot buy success in all cases. The Dodgers, with their $300-plus million payroll and a luxury tax bill that will add on another $40 to $50 million, have not guaranteed themselves a berth in the playoffs. We have seen billion-dollar television deals grant enormous benefits to large-market clubs and teams like the New York Yankees and the Red Sox have long wielded their financial might to buy wins. Financial parity does not exist in baseball, but even without it, single-season payroll has played a lesser role in team success over the past few years compared to a decade ago. However, payroll does become a factor when it comes to sustained success.

Over the last three seasons, here is the amount every team has spent per win, using the Opening Day payroll for each of the three seasons and about one-quarter of the season to go this year.

DOLLARS SPENT PER WIN 2013-2015

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Examining MLB’s New Domestic Violence Policy

During the height of the furor over the National Football League’s mishandling of the Ray Rice case last fall, both Major League Baseball and the Major League Baseball Players Association agreed to work together to formulate a new domestic violence policy for the league. On Friday, the two sides announced that they had finally reached an agreement on a new comprehensive policy covering not only incidents of domestic violence, but cases of sexual assault and child abuse as well:

In addition to establishing new player treatment and education protocols, the policy gives the Commissioner’s Office the authority to investigate any allegation of domestic violence, sexual assault, or child abuse involving a major-league player. Commissioner Manfred has also been given the power to place a player under investigation on paid Administrative Leave for up to seven days, a placement that the player can immediately appeal to panel of arbitrators.

Following the completion of MLB’s investigation, the new policy gives the commissioner the power to impose whatever punishment “he believes is appropriate in light of the severity of the conduct.” In other words, the agreement does not establish any minimum or maximum penalties for domestic violence, sexual assault, or child abuse cases. In fact, the policy explicitly states that a player does not even need to be criminally convicted of a crime in order to be punished by the commissioner. Once again, however, the player will have the right to appeal his punishment to a panel of arbitrators.

So how does MLB’s new policy compare with the league’s prior treatment of domestic violence? And what types of penalties might players realistically face if the commissioner determines they have violated the new agreement?

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MLB & Fox Reportedly Agree on (Partial) In-Market Streaming

Major League Baseball’s arcane – and many would say horribly outdated – television blackout policy has long been a source of frustration for baseball fans. As most readers are by now well aware, under MLB’s existing rules, fans residing within each team’s designated “local” broadcasting territory are currently unable to view that team’s games over the Internet via the MLB.tv streaming service. Instead, fans must subscribe to whichever regional sports network (RSN) owns the rights to the team’s games in order to watch their local team play.

These restrictions impact fans in a variety of ways. For starters, the existing rules prevent fans from watching their local team play on mobile devices, instead only allowing fans to view their local team’s games on a traditional television set. So anyone hoping to watch their local team’s broadcast via cell phone, for instance, is out of luck under the league’s existing rules.

Perhaps more frustrating, though, is the impact that MLB’s blackout policy has on fans who are either currently unable – or simply unwilling – to subscribe to whichever RSN owns the rights to their designated local team’s games. Under MLB’s policy, even if these fans shell out $110-130 per year to subscribe to MLB.tv, they will still be blacked out from watching any game involving their local team, even if they cannot watch the game on their local cable system.

So when news broke on Monday that MLB and Fox are nearing a deal to allow in-market streaming for 15 teams’ games, some fans were undoubtedly excited to learn that baseball was apparently, at long last, fully embracing the new digital age.

Unfortunately, in reality, the MLB-Fox agreement will do little to solve the most frequent criticisms of MLB’s blackout policy, as the scope of the new deal appears to be much more modest than some initial headlines suggested.

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MLB Announces New Minority Hiring Initiative

Dating back to at least 1999, Major League Baseball has made it a stated goal to increase the level of diversity in the highest levels of its teams’ front office operations. Under the so-called “Selig Rule,” MLB teams are required to consider female or minority candidates “for all general manager, assistant general manager, field manager, director of player development and director of scouting positions.”

Notably, the Selig Rule does not require that teams actually interview any female or minority candidates for these positions. Instead, teams must merely consider candidates belonging to an underrepresented group before hiring someone else to fill one of the five aforementioned positions. Along these lines, teams are required to provide the Commissioner’s office with a list of everyone that they internally considered for an applicable job.

Sixteen years later, the extent to which the Selig Rule has succeeded in increasing the level of diversity within MLB teams’ front office operations depends on one’s point of view. On the one hand, the number of female and minority employees in MLB teams’ front offices reportedly increased from around three percent in 1999 to 20 percent in 2013. On the other hand, today only two MLB teams employ a manager belonging to an underrepresented minority group – Seattle’s Lloyd McClendon and Atlanta’s Fredi Gonzalez – while 26 of the 30 MLB general managers are white males (the only exceptions being the Diamondbacks’ Dave Stewart, the Dodgers’ Farhan Zaidi, the Phillies’ Ruben Amaro Jr., and the Tigers’ recently hired Al Avila).

Despite this mixed success, the league is committed to continuing to increase the levels of diversity in its teams’ front office ranks. In a new initiative announced last week, MLB has hired the Korn Ferry consulting firm to help prepare minority and female candidates to interview this off-season for any of the five categories of jobs covered by the Selig Rule.

While this new initiative will undoubtedly help those candidates who are eligible to work with the consulting firm, it nevertheless seems unlikely to have a significant impact on the representation of female and minority candidates within MLB.

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