Analyzing a Case Study
Bargaining Strategy in Major League Baseball
Review Case 4: Strategy in Major League Baseball from the textbook, Negotiation: Readings, Exercises, and Cases. After reading the case, address the following prompts:
- Assess the issues of conflict between the players and management during the history of the sport.
- Analyze mistakes made in negotiations and the effect of mistakes on the processes and outcomes of negotiations.
- Evaluate the interests and goals of each of the parties.
- Analyze the best solution and strategy for all parties involved, including each party’s best alternative to a negotiated agreement (BATNA).
- Submit your answers in a 3 page
Case 4 Bargaining Strategy in Major League Baseball
Introduction During the winter of 2005–2006, Donald Fehr was faced with some monumental decisions. As the head of the Major League Baseball Players Association (MLBPA), he had been arduously preparing for the upcoming round of negotiations between his union and the owners of the 30 major league baseball clubs (collectively known as Major League Baseball, or MLB). Being the representative of the labor force in a multi-billion dollar business was no easy task, even for a seasoned negotiating veteran. The health—even the very survival—of his union had hung in the balance each time a new basic agreement (the uniform contract between the two sides) was negotiated, and Fehr couldn’t help but remember past work stoppages, which hurt both sides tremendously. Fehr knew that hard bargaining with the ownership group might cause another strike or lockout, but with attendance levels at the highest they had ever been in the history of the sport, he needed to gauge his constituents’ (and his opposition’s) resolve to decide how to approach the process. History The Early Years Tumultuous labor relations in professional baseball were almost as old as the sport itself. What started as a “gentlemen’s game” in the mid-1800’s quickly turned into business when the general public started taking interest in the sport. Throughout the second half of the 19th century, different leagues were formed by American industrialists whose intentions were to capitalize financially on the sport’s growing popularity. Only two leagues stood the test of time, the National League, formed in 1875, and the American League, formed in 1901. In 1903 the two leagues merged to become Major League Baseball, which quickly became the most profitable sports business in America. When players began to realize that their unique skills could be marketed to the highest bidder, nervous owners began to seek ways to ensure that their moneymakers would not jump ship. In the most controversial move in baseball’s early history, the “reserve clause” was developed and implemented into player contracts. In a move that some considered a form of outright collusion, owners agreed amongst themselves that after each season, each club was able to “reserve” five players that could not be sought after by the other teams. In this regard, the five players on each team that were reserved had no right to switch teams if they found the conditions deplorable or found that they could make more money elsewhere. Eventually this clause would be written into all contracts, and players who chose to dishonor the clause were blacklisted from organized baseball. Opposition to the reserve clause became a rallying point for the players, and several unions were formed over the next few decades in an attempt to give players bargaining leverage and a bigger voice. The Brotherhood of Professional Base Ball Players (1885), the Players Protective Association (1900), the Baseball Players’ Fraternity (1912), the National Baseball Players’ Association of the United States (1922), and the Association of Professional Ballplayers (1924) all had formed, in part, to oppose the reserve clause. However, those unions had trouble sustaining member interest and financial backing and eventually disbanded. During the time of these unions’ formations, the anti-union sentiment was high among the general public due to several highly publicized instances of labor union violence. The unions’ failures meant the owners maintained complete control over their players’ salaries, benefits, and livelihoods. Illegal Restraint of Trade? By restricting the movement of labor from team to team, which in almost all cases would be over state lines, it seemed to many that the owners were illegally restraining trade, a violation of the Sherman Antitrust Act. Several legal challenges were mounted against organized baseball by rival start-up leagues who were angered when they were denied access to the player market. In 1922, the United States Supreme Court ruled that baseball was a sport, not a business, and since it was conducted in local ballparks for local fans, it was mainly involved in intrastate commerce. The Federal Baseball Club v. National League decision (aka the Holmes decision, named after Judge Oliver Wendell Holmes) would ultimately give baseball an “antitrust exemption.” In 1953, the Supreme Court would reaffirm the ruling after a player (George Toolson of the New York Yankees) filed suit, claiming the reserve clause was illegal and was threatening his livelihood. Chief Justice Earl Warren reiterated that baseball “was not within the scope of federal antitrust laws,”1 and that action taken against the exemption should be by the U.S. Congress, not the courts. The reserve clause would remain untouched and embedded in players’ contracts until the mid-1970s. The Major League Baseball Players Association In 1946, a Mexican league was hiring several prominent U.S. players, creating competitive pressure on American player salaries. U.S. owners wanted to avoid a bidding war with the Mexican League. That same year, a labor lawyer convinced U.S. players to organize the American Baseball Guild. This union’s existence concerned management enough to cause them to bargain over a uniform players’ contract. The contract called for a minimum player salary ($5,000) and a guaranteed pension plan. Players contributed the bulk of the retirement funds, paying into the pension plan until their tenth season; owners contributed to it primarily from radio, television, and post-season ticket revenue. The union was short-lived, fading into obscurity by the end of that same year; however, the pension fund endured. By the early 1950s funds for the pension plan fell short, and the players felt it was in their best interest to organize once again. In 1953, the Major League Baseball Players Association (MLBPA) was formed to serve as the players’ main bargaining body and the owners implicitly voluntarily recognized the union by allowing it to operate the pension fund and by contributing to the fund. The union was led by player representatives and legal advisors until 1965 when it hired its first full-time executive, Marvin Miller, an economist with the Steelworkers Union. Miller brought with him experience in industrial relations and a hard-line bargaining approach. In response, the owners formed the Major League Player Relations Committee (PRC) to serve as their negotiating body. In 1968, the two sides hammered out the 1st Basic Agreement, a uniform contract that established (among other things) a formal grievance procedure for players and a significantly increased minimum salary level. Baseball historian Lee Lowenfish writes, “[the owners] conceded more rights in the 1st Basic Agreement than in all previous decades of the sport.”2 The Early 1970s: Players Challenge the Reserve Clause In 1972, the MLBPA and the PRC ran into trouble while negotiating the 3rd Basic Agreement. The major disagreement between the two sides stemmed from the amount the owners were willing to contribute to the players’ pension fund. Players union head Marvin Miller claimed that there was a surplus of pension funding that could be used to offset increased cost-of-living expenses that the players had been incurring. The owners showed solidarity (which has been rare throughout the league’s history) by refusing the MLBPA’s demands. The union even went so far as to file an “unfair labor practice” claim with the National Labor Relations Board when the owners refused to share certain financial information with them (the information was eventually provided). On April 1, 1972, a day that the Sporting News would call “the darkest day in sports history,”3 the players went on strike. The strike did not last long, as the two sides eventually reached a compromise on the contribution amount ($500,000). The half-million dollars that the players received in increased pension contributions was far less than the salary losses they incurred during the two-week long strike. The owners, who had talked the union down from their initial proposal of a $1 million increase in contributions, had lost $5.2 million in revenue.4 Shortly after the strike of 1972, the reserve clause was threatened once again. Outfielder Curt Flood of the St. Louis Cardinals challenged the legality of the reserve clause in court, and in Flood v. Kuhn, the Supreme Court once again upheld the Holmes decision. Flood was successful, however, in attracting Congress’s and the media’s attention to the reserve clause issue. In 1974, pitcher Catfish Hunter sought to become the league’s first free agent when the owner of his team (the Oakland A’s) dishonored a provision in his contract. Hunter’s case went to a three-man arbitration panel, which had been created and outlined in the 3rd Basic Agreement. The panel voted 2 to 1 that Hunter had the right to “shop his services” to other clubs since his own club did not honor the legally binding contract. Hunter became baseball’s first free agent. A year later, two players (Dave McNally and Andy Messersmith) challenged the clause once again. The two teams that held the rights to McNally and Messersmith had renewed the players’ contracts for the 1975 season, and for different reasons, both players refused to sign them. They played out the season anyway, without being under contract, and when the season concluded, the clubs employed the reserve clause once again. The players claimed that the reserve clause only provided that clubs could renew the contracts for one year, and that since they were not under contract during the 1975 season, the clubs were not within their rights to renew them for the 1976 season. The case went to arbitration, and by a 2 to 1 vote, the McNally and Messersmith won. The players had won the right to offer their services to the highest bidder (a process called “free agency”), and the reserve clause was dead. The new labor environment would become even more turbulent as free agency shook the economics of the game to its core. 1976 to 1989: Free Agency Becomes the Norm In 1976, the MLBPA and the PRC were split on the new free agency issue. The owners wanted players to gain free agency eligibility after 10 years of professional service, while the union proposed a five-year requirement. During Spring Training, the owners instituted a lockout. Commissioner Bowie Kuhn, who was technically an “employee of the owners,” ordered the owners to end the lockout, a move that lost him favor with many on the management side. The two sides eventually agreed on an eligibility minimum of six years of professional service, and compensation in the form of a draft pick for the team who was losing the player. Prior to the start of the 1980 season, the two sides were again far apart when negotiating the 5th Basic Agreement. The major issue was the compensation that a team would receive after losing a free agent. The proposals that the PRC presented were seen by Marvin Miller as an attempt to “dismantle free agency in its infancy.”5 On April 1, the players again went on strike. They agreed to start the season on the scheduled opening day, but promised to resume the strike on May 23 (the week that attendance usually plateaued) if no agreement had been reached. On the morning of May 23, the two sides reached a deal which basically provided that the free-agent compensation issue be studied for a year, after which negotiations regarding the issue would reopen. The committee that was selected to study the issue produced nothing substantial, and in 1981, the two sides were again having trouble finding common ground. The MLBPA’s Marvin Miller and the PRC’s president Ray Grebey had developed a bitter rivalry that the press could not get enough of. On May 29, the players went on strike once again. The strike lasted 50 days. The National Labor Relations Board, Congress’s Federal Mediation and Conciliation Services, and the Department of Labor all attempted to help the parties end their strike. On July 31, the two sides reached a deal that would provide the team losing a free agent compensation. The team that lost the player would receive a player from the “signing” team. The union won a free agency system that was similar to their own bargaining position—but at a heavy price. Players lost a total of $30 million in wages, and the owners lost roughly $72 million in revenues.6 Miller, Grebey, Kuhn, and other key figures in the negotiation process left their positions, and baseball witnessed labor peace and an attendance boom over the next four years. In 1985, with Donald Fehr heading the MLBPA, the two sides were determined to avoid a work stoppage while negotiating the 6th Basic Agreement. The two main issues that divided the two sides were once again free agent compensation and pension contribution levels. Several issues were agreed upon early (e.g., a drug review board would investigate cases where a player was accused of using cocaine), but it was still not enough to avoid another work stoppage. On August 6, the players went on strike, but with the 1981 strike still fresh in their minds, the two sides reached an agreement within a day. The risk of alienating the fans, who were spending more money than ever on baseball, proved to be the driving force behind the speedy resolution. The Early 1990s: Salary Arbitration, Revenue Sharing, and “The Big Strike” In 1990, the owners instituted another lockout while bargaining with the union over the 7th Basic Agreement. The disparity between large market teams (such as the New York Yankees and Los Angeles Dodgers) and small market teams (such as the Kansas City Royals and Milwaukee Brewers) was growing. With a larger fan base, large market teams were able to attract significantly richer television contracts from local networks. Because no salary cap existed, large market teams could sign better players due to their ability to offer high salaries. The owners saw this as a major problem, and proposed a “revenue sharing” program, in which large market teams would share a certain portion of their local revenue with small market teams. Their justification was that by increasing competitive balance, playoff races would be closer, attracting more people to the ballparks late in the season and producing higher television ratings. The union opposed a revenue sharing proposal because, if the large market teams had less money, they could not afford to offer top dollar contracts to free agents. Players employed by teams that received revenue sharing would not necessarily benefit either, because those teams were not obligated to spend the funds on player salaries. The owners tried to preempt a strike by locking the players out of spring training. After 32 days, an agreement was reached; the revenue sharing issue was put on hold. In 1994, the owners realized that not only was competitive and financial disparity hurting their profits, but salary arbitration was driving up salary levels. Beginning with the 1985 contract, players with three years of major-league service who felt that they were underpaid could demand that their salaries be adjusted upward through a process called “final offer arbitration.” The process worked as follows: The player’s representative presented evidence that the player was underpaid, relative to peers with comparable records. The team owner’s representative presented evidence that the player was equitably compensated, given other players in his peer group. Each side proposed a salary figure. The arbitrator then had to select either the player’s proposal or the owner’s proposal. Teams had been more inclined to pay players a little bit more than what they were worth instead of risking a loss in the final-offer arbitration process (where they stood to pay considerably more). The owners suggested an overhaul of the entire economic structure of the league: eliminating salary arbitration, phasing in a “salary cap” (where a team’s total payroll was limited to a specified amount), lowering free agency eligibility, and splitting television revenue 50/50 with the players. Fehr and the MLBPA, on the other hand, rejected these proposals. On August 11, 1994, the players went on strike. This time, the strike lasted 232 days, and the World Series was cancelled for the first time ever. The courts, the NLRB, Congress, the FMCS, and President Clinton all intervened at some point during the stoppage. The strike eventually ended when Judge Sonia Sotomayor of the United States District Court in Manhattan granted the NLRB’s request for an injunction. The NLRB was claiming that the owners had implemented their proposals during the strike without the existence of a good-faith impasse. Baseball resumed on April 26, 1995, with the old contract provisions being re-implemented. Historian Paul Staudohar calls the strike “one of the most eventful, but unproductive, ever.”7 The owners estimated their total losses to be in upwards of $1 billion, and the players saw their salaries drop considerably as cash-strapped clubs sought cheaper talent from the minor leagues. Some fans turned to minor league teams for baseball entertainment; others abandoned the game altogether. Meanwhile bargaining continued. The 8th Basic Agreement wasn’t agreed upon until late December, 1996. A revenue sharing program was implemented, but the owners did not receive their highly sought salary cap. Labor Relations Developments from 1998 to 2002: The Curt Flood Act and Contraction In 1998, Congress passed the Curt Flood Act. The law called for an end to baseball’s storied antitrust exemption, but only as it applied to labor relations. The premise of the bill was to “reduce the chance of future strikes by allowing players to bring an antitrust suit against the owners if labor negotiations stall.”8 All other aspects of the exemption still applied. In July 2000, the owners tried to partially rectify the problem of competitive and financial disparity by eliminating (or contracting) two teams from Major League Baseball. Their rationalization was that by having two of the poorly performing clubs gone, the revenue sharing burden would be eased substantially. Congress unsuccessfully attempted to stop the contraction, and the union responded by filing a grievance. Eventually, the owner of the Montreal Expos (one of the teams that was being considered for contraction) sold his team to an ownership group made up of the other 29 owners for $120 million. They moved the team to Washington, D.C., renamed it the Nationals, and then found a buyer for the team.9 The issue of contraction was put on hold. In 2002, the two sides entered a bargaining process that was calmer and more productive than in previous bargaining sessions. The owners wanted to implement a “luxury tax” (a team exceeding a certain payroll threshold would pay money to MLB and those funds would be redistributed among the other teams) and a competitive balance draft (the eight worst teams could select players from the eight best teams). Fehr and the union opposed these provisions (the original proposal by the owners was a 50 percent tax on all salary spending over $84 million), and disagreements over a proposed expansion of the drug testing policy also arose. The union set a strike date of August 30, and the two sides struck a deal the night before the work stoppage was to take place. A luxury tax with higher thresholds than originally proposed was implemented as a way to slow rising player salaries, and, perhaps just as importantly, the post-season (which accounts for a large portion of baseball’s revenue) was saved. The Upcoming 10th Basic Agreement The 2002 contract was set to expire in December 2006. The history of labor relations in professional baseball—the lost revenue from strikes and lockouts, attempts to control escalating players’ salaries, and clauses found in prior contracts—all cast a long shadow over the 2006 negotiations. Baseball Commissioner Allen H. (Bud) Selig issued an order to all MLB employees that no one outside of his office was to discuss upcoming labor negotiations. While the MLBPA’s Fehr planned to travel to each of the teams to listen to player concerns in the early spring, as of December 2005 the following issues seemed prominent: 1. Steroids In the fall of 2005, with negotiations over the 10th Basic Agreement still months away, the two sides were forced to bargain over a drug testing program. The endless media coverage over certain players’ alleged steroid usage was harming Major League Baseball’s image greatly, and Congress (most notably Senator John McCain, R-Arizona) had been threatening to act if the two sides could not develop a tougher policy.10 The controversy began when a book by ex-slugger Jose Canseco claimed to reveal the extent to which major league ballplayers were using and abusing steroids. The steroid issue had been gaining momentum for several years prior, as home-run records were broken and balls were flying out of the park like never before. In what some say was an attempt to garner media attention and solidify anti-drug stances with the public, several Congressmen became involved, even subpoenaing several former players and executives to testify in front of the Government Reform Committee in March of 2005.11 The MLBPA complained that the union should be contacted before either current or former players spoke out publicly on this issue. Fehr and Commissioner Selig were far apart on the issue of punishment for steroid users, with Fehr’s proposal being far more lenient than Selig’s.12 Fehr was calling for suspensions of 20 games for the first time a player was tested positive for steroids, 75 games for the second penalty (with some flexibility, based on circumstances), and a lifetime ban for the third penalty. Selig countered with an absolute ban of 50 games for the first penalty, 100 games for the second penalty, and a lifetime ban “for anybody dumb enough to be caught a third time.”13 Congress was threatening to act if the two sides could not voluntarily agree on a drug testing program for steroids. Amphetamines also became a topic for discussion. Owners wanted to expand the drug testing program to include amphetamines, albeit with lighter penalties than for steroids. The union leadership generally opposed this expansion of the drug testing program, but again Fehr was sensitive to Congressional pressure. 2. Contraction In 2002, “contraction”—a possible decrease in the number of MLB teams and/or relocation of poorly performing clubs—was a prominent topic. However, with the transformation of the Montreal Expos into the Washington, D.C. Nationals, it was unlikely that the topic would be a part of the 2006 negotiations; the owners had sent signals that contraction was no longer a pressing issue. However, it was possible that the topic could reemerge, if only as a “throw-away” issue. The 9th Basic Agreement stated that the owners had until July 2006 to notify the union of contraction/relocation plans. 3. The “Luxury Tax” Financial disparity was a topic that the PRC would certainly not consider to be “throw-away” issues. Owners argued that because some teams could afford to pay high salaries, they could hire the best players and make it unlikely that most other teams could make the playoffs. To restore competitive parity, the owners wanted to continue, and even expand, the luxury tax that had been implemented in 2002. The players union remained philosophically opposed to any formula such as the luxury tax (which they considered to be a type of flexible salary cap) that might hurt player incomes. However, as Murray Chass of The New York Times wrote, “. . . the owners would be hard pressed to make proposals based on economic hardship. Industry revenues didn’t reach $2 billion until 1997, and last year  it soared to $4.7 billion.”14 The luxury tax which was laid out in the 9th Basic Agreement only affected a few teams (most of the penalties were paid by the New York Yankees), so both sides could have trouble proving or disproving its worth. It started in 2003 with a tax threshold of $117 million and rose to $136.5 million in 2006. Certain alterations to the complicated tax formula—the tax increased with each offense—could be proposed during bargaining, but it was doubtful that team owners would agree to a complete overhaul of the system so early in its existence. 4. Revenue Sharing In addition to the luxury tax, MLB used revenue sharing (e.g., from television contract rights and ticket sales) to distribute income from the most profitable teams to the least profitable teams. In 2004 and 2005, Major League Baseball witnessed its highest attendance levels ever, with 73,022,969 and 74,915,268 fans passing through the turnstiles, respectively.15 With luxury box and ticket prices rising, this attendance boom signaled an unprecedented rise in gate revenue. While this helped improve the profitability of the smaller-market teams, the union was concerned about how these funds were used. Minimum team salary levels needed to be addressed. After the Florida Marlins club received luxury tax and revenue sharing funds, it slashed its payroll to $15 million ($20 million less than the second lowest payroll). To the union leaders, such a move exposed holes in the revenue sharing program—in effect, funds were being transferred from some owners to other owners, but there was no guarantee that the players would see any of those funds. 5. Salary Levels The average salary earned by a MLB player rose 7 percent—about double the inflation rate for 2005. The average MLB player certainly seemed well-paid, with a 2005 salary of $2.4 million. However, this figure was skewed by the very high salaries paid to star players, some of whom earned over $20 million annually. The minimum annual salary was $327,000. The union wanted to increase that minimum. 6. Salary Arbitration and Free Agency How long one must play before becoming eligible for salary arbitration and/or free agency remained an issue. The union wanted to shorten the length of time so that high-performing players could increase their income to be comparable to their peers. The owners wanted to keep it where it was, or perhaps even lengthen the eligibility requirements. The appropriate compensation a signing team should pay to the team losing a free agent also remained a topic of potential discussion in contract negotiations. 7. Pension Contribution Levels The union wanted owners to increase their contributions to the player’s pension fund. Owners balked at this request, citing declining television revenues, which were used to fund pension contributions. The World Series television contract that Major League Baseball could sign with the FOX network might be the X-factor in the owners’ approach to bargaining over economic matters. A large percentage of baseball’s revenues came from national broadcasting contracts, which gave a network the right to broadcast playoff games, the All-Star Game, and a certain number of games throughout the regular season. The previous contract with FOX, which ran from 2000 through 2006, was worth $2.5 billion, but unfortunately coincided with the lowest television ratings in the sport’s history. The World Series ratings in 2000, 2002, and 2005 were the three lowest-rated broadcasts since the Series began airing in 1968.16 Because of this surprising trend, the new contract with FOX, which was to be signed in July of 2006, was rumored to be worth significantly less (estimated at $1.75 billion over seven years).17 Since the owners used large portions of the television contract to fund the players’ pension fund, the claim of financial hardship by the PRC could rear its ugly head during Basic Agreement negotiations. 8. Strike Risks The potential alienation of baseball’s fan base by undergoing another work stoppage might prove to exert more influence over bargaining matters than any other factor. Past work stoppages had cost both players and owners significant amounts of money. A strike could result in team owners attempting to bring in “scab” players (e.g., minor league players) or it could result in the decertification of the union by disgruntled players. 9. The Media and Public Perception Finally, with any labor relations situation, the media play an important role in the approaches that the two sides take to bargaining. In prior negotiations, national media attention to labor contract negotiations was considerably more intense than in other industries. The ESPN television network only added to the scrutiny as it complemented traditional media outlets, such as Sports Illustrated magazine and the USA Today, New York Times, and Washington Post newspapers. The MLBPA was recently accused of shielding drug addicts and criminals because of its stance on steroid testing. Yet to give in to owner demands for a tough new drug testing policy would only lead to media criticism that “the strongest union in America” was ineffective and could be beaten by determined owners. Such criticism could cause some union leaders to encourage taking a hard-line approach to regain the confidence of their constituents. The Big Decision: What Bargaining Strategy Should Fehr Adopt? Donald Fehr realized that he could go one of two ways when the bargaining sessions were to begin during the 2006 season. On one hand, he could probably secure the “basic” increases in minimum salary and pension contributions without a lot of resistance from the PRC and its leader, Commissioner Bug Selig. Although the owners might claim that the decreased television revenue put them in a less desirable financial position, Fehr knew that he could retaliate by going to the media with the astronomical industry revenue figures that baseball was currently realizing. With gate revenues and industry profits at an all time high, a hard-line approach and the threat of a strike or anti-trust lawsuit might allow the union to secure better wages and benefits than they had ever imagined. On the other hand, Fehr knew that the public image of the union had suffered because of past “strikes by millionaires” and because of the union’s current resistance to a tougher steroid policy. As Fehr mulled his options and planned his bargaining strategy, he perhaps hoped that Jose Canseco wasn’t planning on writing another book anytime soon. Source: This case was prepared by Daniel T. Romportl and William H. Ross, Jr., both of the University of Wisconsin–La Crosse. Used with permission from the authors and the Society for Case Research.