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Tuesday, February 11, 2014
 
Sports Law History: The Federal League as the First Single Entity League

This is the second in a series of posts discussing my research into the history of the 1922 U.S. Supreme Court case of Federal Baseball Club of Baltimore v. National League, culminating in my recently released book, Baseball on Trial: The Origin of Baseball's Antitrust Exemption. Click here to read the earlier posts in the series.

Those who are well familiar with the Supreme Court's decision in the Federal Baseball case know that the lawsuit evolved out of the Federal League challenge to the American and National Leagues in 1914 and 1915.  One potentially interesting aspect of the Federal League's operations that I discovered during the course of my research was that the league was arguably structured as the first single-entity professional sports league.  While much has been made in recent years of the so-called single-entity defense under Section One of the Sherman Act -- ultimately culminating in the Supreme Court's 2010 decision rejecting the theory in American Needle v. National Football League -- the Federal League appears to have been well ahead of its time, structuring its operations in such a manner that may have arguably allowed it to avoid the Section One scrutiny that the existing professional leagues' operations are typically subject to today.

Founded in 1913, the Federal League was organized as a for-profit, Indiana corporation.  More importantly, the league exerted significant control over its member teams.  For instance, under the terms of the league's franchise agreement, the Federal League could seize control of any team if it violated any league rule.  Indeed, the Federal League exercised this authority on at least one occasion, declaring that the Kansas City Packers franchise had been forfeited to the league in February 1915 due to its failure to raise sufficient capital for the upcoming season (the history of the litigation resulting from this seizure is detailed in my forthcoming law review article, Insolvent Professional Sports Teams: A Historical Case Study).  In contrast, the NFL Constitution only allows the league to terminate a franchise in instances where the team (i) files for bankruptcy, (ii) disbands in mid-season, or (iii) permanently goes out of business.  Thus, the central Federal League office possessed greater authority over its individual franchises than is typically the case in professional sports leagues today.

Meanwhile, although each of the Federal League's eight teams owed 1/8th of the league entity's corporate stock, the league required that these shares be assigned back to it in return for the grant of a franchise.  Similarly, the league also required that each franchise assign its stadium lease to the league, so that teams could not unilaterally desert the league to join the major leagues (or if they did, they would at least no longer have anywhere to play).

Admittedly, this structure may not have been enough for a modern day court to hold that the Federal League operated as a single economic actor in the marketplace, and thus was a single-entity beyond the scope of Section One after American Needle.  This is especially true given that each Federal League team was independently owned and operated, and had a direct voice in the league's operation by holding a seat on the league's Board of Directors.  In many respects, the Federal League structure was thus roughly analogous to that originally adopted by Major League Soccer.  Despite initially convincing a federal district court that it was a single-entity, MLS's bid for Section One immunity ultimately failed at the First Circuit Court of Appeals.  Nevertheless, a league adopting the Federal League's structure today would likely be able to stake a stronger claim to single-entity status than can many of our existing professional sports leagues.

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