Baseball Beat: The Blog: Alternative Dispute Resolution & the History of Baseball: Part Two

by Brent S. Gambill

III. ARBITRATION

Curt Flood

After the 1969 season, the St. Louis Cardinals traded outfielder Curt Flood to the Philadelphia Phillies for Richie Allen. Flood had friends and business interests in St. Louis, had concerns over the racial politics in Philadelphia at the time, and simply did not want to move at the end of his career. Following the trade, Flood wrote his famous letter to Commissioner Bowie Kuhn, “I do not feel I am piece of property to be bought and sold irrespective of my wishes.”[1]In January 1970, Flood filed suit against Major League Baseball for $3 million, triple damages, and free agency. Flood lost in Federal District Court. He appealed and lost in the Second Circuit Court of Appeals. Not to be deterred, Flood appealed to the United States Supreme Court. The question before the court was over antitrust protection provided in a 1922 decision by Justice Oliver Wendell Holmes. On June 18, 1972, the Supreme Court voted 5-3 with one abstention basing their reasoning on stare decisis.[2]

The importance of the Flood case was its impact on the owners, who for the first time feared losing the reserve clause. The panic surrounding the owners flowed into their negotiations with the players in the second Basic Agreement signed in 1970. The agreement was signed prior to the final court ruling in the Flood case. It brought about financial gains for the players, but more importantly the owners agreed to impartial arbitration of grievances outside the commissioner’s office. This was the biggest step to date for the players taking some supremacy away from the all-powerful commissioner of baseball.[3]

Salary Arbitration

In November 1972, negotiation for the third Basic Agreement began. After bargaining and a short strike in spring training, the players agreed to accept the owners’ offer of player salary arbitration.[4] The procedures for salary arbitration were put into practice prior to the 1974 season. “This is not only unprecedented, a historic ‘first’ in professional sport; it is the first major reform ever effected in the reserve clause…” wrote famed New York Times columnist Red Smith.[5]

The arbitration system used in baseball has many names, “Final Offer”, “Either-Or”, or as it’s commonly referred today as “Baseball Arbitration”. Baseball’s historic arbitrator Peter Seitz called the practice “High-Low” arbitration, which he borrowed from seven card stud.[6] The rules of salary arbitration were set-up to allow players having played three full seasons in the majors, but no more than six years eligible for arbitration. Teams have until December 20th of each year to tender a contract to arbitration-eligible players. Tendering is equivalent to offering the player arbitration. Non-tendered players become free agents. If no deal is reached by mid-January, each side is required to submit a proposed one-year salary. Once submitted, numbers may not be changed. Hearings are then scheduled for the first three weeks in February.

For the most part, arbitrators are law school professors and professional labor arbitrators.There are no fixed terms for arbitrators. They serve at the will of the MLBPA and labor relations department of the commissioner’s office (hereafter “LRD”) and may be dismissed by either party for any reason. Potential new arbitrators can be nominated by the MLBPA, LRD, a club, an agent, or by himself or herself. Potential arbitrators are interviewed and approved by both the MLBPA and LRD. Most new arbitrators are assigned to panels with more experienced arbitrators until they gain more experience.

Arbitrators have no knowledge of what case they will be hearing prior to arrival. At the start of the hearing arbitrators are handed an exhibit jointly prepared that lists all major league salaries. Hearings take place in a hotel conference room, around a long rectangular table. There is no written discovery and evidence consists of charts and graphs. There are also no rules prohibiting testimony, but it is rare. The occasional exception will be where a player is coming off an injury and will testify that he is fully recovered. Lastly, arbitrators are permitted to ask questions and often do. After each side has presented, there is a brief break followed by rebuttal presentations for each side. The three main types of rebuttals are (1) exhibits designed to rebut specific points made by the other side, (2) arguments pointing out flaws in particular exhibits, and (3) overall arguments designed to rebut particular themes of the other side. A decision is made within 24 hours with no written opinions. The arbitrator can only select the player’s or the club’s proposed salary figure. Appeals are not allowed.[7]

Since the inception of salary arbitration in 1974, the owners hold a 263-197 advantage. For instance, in 2004 the owners beat the players 4-3 in the cases that went to hearings. That is the eighth straight year management has won a majority of cases. Salary arbitration has attributed to the growth in salaries as well. The average player salary in 1975 was $44,676 compared to the average player salary in 2000 at $1.9 million. For example, Alex Rodriguez 2004 salary is $25 million while in 1975 all players combined to make $29 million total.

Catfish Hunter

On February 11, 1974, starting pitcher Jim “Catfish” Hunter signed a standard major league baseball contract that stipulated a two-year contract with the Oakland Athletics. In signing the contract, Hunter requested, as an addendum, that his attorney J. Carlton Cherry seek Internal Revenue Service (IRS) approval to defer $50,000 of the annual salary.[8] The provision called for half of Hunter’s salary to be paid into an insurance company fund during the season for the purchase of an annuity for his benefit following his playing career.

The actual legalize of the provision stated that half of his $100,000 annual salary was to be paid “to any person, firm or corporation.” This was done in order to defer income and avoid taxation. Oakland A’s owner Charles O. Finley requested minor revisions in the wording of the contract as to exactly when the $50,000 would be paid. The words “to be paid during the seasons as earned” were eventually added by Finley before returning the contract unsigned to Cherry.

Following the signing, Finley was concerned with the tax consequences of purchasing the annuity.[9] Finley eventually discovered the club could not deduct the annual $50,000 annuity payment as a business expense.[10] He would not have use of the $50,000, as it would be in the annuity, and he could only have the tax deduction years later when Hunter collected the money out of the annuity.[11] As the All-Star game approached, Hunter ran into player representative Jim Kaat. Hunter told him he was going to be a free agent following the year because he did not think Finley was going to pay him the money he was owed. Kaat advised Hunter to have his attorney write Finley a letter concerning the non-payment.[12] Cherry sent letters to Finley in August and September 1974 asking him to sign the deferred compensation agreement. Finley never gave a straight answer concerning the matter. In one reply, he stated he was ready to commit but feared his wife, the secretary of the club, would not sign the paper. On another occasion, he complained that he was worried about other players wanting the same clause in their contracts.[13] In mid-September, Richard Moss, counsel to the MLBPA sent a contract-violation notice to Finley. He had a ten day grace period to meet the terms of Hunter’s contract per the rules of the Basic Agreement. Ten days passed without response.[14]

Cherry got tired of the stalling and took the case to the MLBPA. On October 4, 1974, the following telegram arrived at the offices of Charles O. Finley & Company:

This wire is sent on behalf of James A. Hunter. Pursuant to paragraph 7(a) of contract between Mr. Hunter and the Oakland Club, please be advised that contract is terminated due to Club’s default in making payments in accordance with said contract and its failure to remedy said default within ten days after receiving written notice thereof. Because of the impending playoffs and World Series, the effective date of termination shall be the day following the last game played by the Oakland Athletics in 1974.

Richard M. Moss, General Counsel
Major League Baseball Players Association[15]

After receiving the telegram, Finley contacted the Major League Baseball Players Relations Committee who advised him that he was not obligated to purchase the annuity, but should send the money directly to Hunter. The money was mailed the same day of the telegram’s receipt. Hunter sent the money back saying, “I can’t take it. I’ve been advised by my attorney that the check must be sent directly to the Jefferson Insurance Company.” As a result, payment was not made in accordance to the contract.[16] The former executive director of the player’s association, Marvin Miller, denies this series of events ever occurred.[17]

On October 8th, 1974[18], before Game Three of the American League Championship Series, Hunter was given a message that Finley wanted to see him. Hunter entered Finley’s office to find American League President Lee MacPhail and Commissioner Bowie Kuhn along with Finley. He offered to pay the $50,000 owed, but Hunter refused stating “you pay it the way the contract reads and everything will be just fine.”[19] During the 1974 World Series, Kuhn suggested in a press conference that he was considering mediating the dispute between Hunter and Finley. Moss, of the Major League Baseball Players Association (MLBPA), quickly responded that the Basic Agreement stipulated that an impartial arbitrator would rule on all contract disputes between a player and owner; effectively stating the commissioner lacked the authority.[20] At the end of the 1974 season, Finley had made no payments into the fund and Hunter filed a grievance against him.[21] Finley responded by offering to pay the money to the arbitrator, who would hold it until the dispute was settled, but this was refused.[22]

In 1974, Hunter led the American League in wins and earned run averages (ERA) going 25-12 with a 2.49 ERA.[23] He was subsequently rewarded for his regular season accomplishments by being voted the American League Cy Young award winner. Oakland finished their season by winning their third consecutive World Series by defeating the Dodgers.[24]

On November 26, 1974, Hunter took Finley to arbitration to settle the dispute over his contract. Hunter was represented by Cherry and Joe Flythe, his attorneys, Moss, counsel to the MLBPA, Miller, executive director of the player’s association, [25] and Jerry Kapstein, his agent. Kapstein thought Hunter would lose his arbitration case. He was fired by Hunter’s attorneys the day following the arbitration.[26] The lone representative for Finley was John Gaherin, chief negotiator for the major league owners.[27]

The arbitration was heard by a three-person arbitration panel headed by Seitz.[28] The witnesses were Hunter, Cherry, Finley, and MacPhail.[29] The other two members of the panel were the MLBPA’s Miller and Major League Baseball’s Gaherin.[30] This was the first non-salary arbitration conducted in Major League Baseball. During Finley’s testimony before Seitz, he claimed he never agreed to Hunter’s demand. Finley stated the signature on the contract was not his and that he never saw, read, or knew anything about the contract. His statements were easily refuted as Cherry brought all correspondence between the parties to the arbitration.[31] Moss argued that Hunter’s contract was breached by Finley and that he should be declared a free agent.[32] Section 7(a) of Hunter’s contract explained the implication of Finley’s non-payment: “The Player may terminate this contract…if the Club shall default in the payments to the Player.”[33]

On December 16, 1974, Seitz cast the deciding vote and declared Hunter a free agent as the A’s owner failed to live up to the terms of the contract. According to Seitz, there was “no ambiguity” about the club’s obligations, its failure to carry them out, or Hunter’s right to act accordingly.[34] Finley had defaulted on a material portion of that player’s contract, and the contract predetermined the remedy was free agency.[35] Seitz wrote that the remedy of the player being able to terminate his contract when it had been violated was not his remedy: “It was the remedy specified in the contract itself.”[36] The decision also ordered the Oakland team to pay Hunter the $50,000 it owed him from 1974, and to pay six percent interest on that amount from August 1st until the money was paid. Seitz’s original draft opinion did not state that Hunter was a free agent. In executive session with Seitz and Gaherin, Miller pointed out the omission. The lack of clarity would have opened the door for Finley to claim that Hunter was still property of Oakland.[37] After a short recess, Seitz changed the wording to read “Mr. Hunter’s contract for service to be performed during the 1975 season no longer binds him and he is a free agent.”[38]

“I think it was fair and just, and I knew we told the truth. I had the feeling all the time it was going to come out my way,” commented Hunter following the decision.[39] Kuhn later wrote, “To forfeit the contract over a few days’ delay in paying the $50,000 was like giving a life sentence to a pickpocket…Finley clearly was a pickpocket, trying to hold the $50,000 in his own account for as long as possible, but so far as I knew, that was the worst of it.”[40] Finley immediately attempted to get a restraining order while awaiting appeal, but Judge Spurgeon Varakian of the Superior Court in Oakland, California, refused the request.[41] Kuhn imposed a moratorium on any dealings with Hunter until he had an opportunity to review the decision.”[42]

Hunter’s free agency was unique at the time because as he was one of the best players in the game. He was the 28 year old reigning American League Cy Young award winner with four consecutive 20 win seasons. The original Oakland contract was to pay Hunter $100,000 per season for two years, but on the open market his next contract could and would be many times that.

The only comparable situation also involved Finley. In August 1967, seven years after purchasing the Athletics in Kansas City, he released Ken “Hawk” Harrelson for being quoted as calling Finley a “menace to baseball” following the firing of the team’s manager, Alvin Dark.[43] Harrelson is credited with being the first player to wear a golf glove regularly, the first to wear wrist bands, and the first to wear lampblack under his eyes.[44] Harrelson quickly received a $75,000 bonus and salary package from the Boston Red Sox for the remainder of the season. Harrelson went on to help the Red Sox appear in World Series in 1967 and 1968.[45] During his first full year in Boston, Harrelson led the league in runs batted in (RBI) with 109.[46]

Once the moratorium was dropped by Kuhn, the race to sign Hunter began in the law offices of Cherry, Cherry & Flythe in Ahoskie, North Carolina.[47] Miller first had to convince Cherry, who had no experience in baseball, not to accept Finley’s offer of $200,000 before Hunter had even entertained offers from other clubs.[48] Kansas City Royals owner Ewing Kauffman was the first to call and was the only appointment on the first day. The next day the phone began to ring and appointments were set-up for representatives of teams to come to Ahoskie.[49] The New York Mets made the first offer at $2 million on December 19, 1974, and by that afternoon the Boston Red Sox offered $3 million.[50] Los Angeles Dodgers owner Peter O’Malley offered $3 million for two years, which was the largest offer throughout the process. In the end, 22 teams partook in attempts to sign Hunter with the Baltimore Orioles and Detroit Tigers the only teams not participating.[51] Within two weeks Hunter signed a five-year, $3.7 million dollar contract with the New York Yankees. The contract also included bonuses, life insurance, attorney’s fees, and appearance fees.[52] The breakdown of the contract was $100,000 a year for five years with half of it deferred, $53,462.67 a year in insurance annuities for ten years, a $100,000 signing bonus, 15 years at $100,000 per year until 1994, $25,000 college endowments for Todd and Kim Hunter, $200,000 in attorney fees, and a brand new Buick every year for five years.[53] Hunter was the only player in baseball with a multi-year contract in 1975.[54] “My family has been set up for life,” said Hunter following the signing.[55]

Even with the signing, Oakland and Finley were still intent on going to court in efforts to get Hunter’s rights back under the reserve clause.[56] The case was heard before Judge George Phillips, Jr. in Alameda County Superior Court in California. Neil Papiano, Finley’s attorney, argued that impartial arbitrator Peter Seitz exceeded his jurisdiction and that the reserve system goes beyond an individual player’s contract and the reserve system itself is explicitly exempt from the arbitration process. The reasoning is that even if an individual contract has been broken, the absence of a contract does not free a player from other aspects of the reserve system and still limits the player to dealing with is original club.[57]

The actual legal issue before the court was should the decision of an arbitrator agreed to by both sides in the original dispute be overruled? The only ground for overturning an arbitrator’s decision would be that the arbitrator was “grossly irrational” in going beyond the bounds of the problem presented to him.[58] After listening to three hours of arguments and studying voluminous briefs, Judge Phillips, Jr., refused to overturn the arbitration decision. “Reasonable men may differ on how the various clauses can be interpreted, but there is nothing unreasonable in the conclusion this arbitrator reached.[59] The key fact is that Hunter did not get paid the way he was supposed to,” stated Judge Phillips, Jr., in his ruling.[60]

While Hunter never won another Cy Young award, he did pitch in two more All-Star games and three World Series with the Yankees before retiring following the completion of the contract in 1979.[61] In hindsight, the Hunter case had no direct implication on the reserve clause, but as time would tell, the decision was the beginning of things to come.

END NOTES:
[1] Roger I. Abrams, Legal Bases: Baseball and the Law 43, Temple University Press (1998).
[2] Flood v. Kuhn, 407 U.S. 258 (1972). [3] Zimbalist, at 19.
[4] Zimbalist, at 20.
[5] Red Smith, Solomon and the Wage Slaves, N.Y. Times, Feb. 18, 1974, at 35.
[6] Red Smith, By Study, Incantation and Prayer, N.Y. Times, Aug. 7, 1974, at 19.
[7] Mark Rosenthal, An Insider’s View on Baseball Arbitration, The Sporting News, Mar. 26, 2004.
[8] Jim Hunter & Armen Keteyian, Catfish 127, McGraw-Hill Book Company (1988).
[9] Bowie Kuhn, Hardball 139, Times Books (1987).
[10] Roger I. Abrams, Legal Bases: Baseball and the Law 108, Temple University Press (1998).
[11] John Helyar, Lords of the Realm: The Real History of Baseball 137, Villard Books (1994).
[12] Hunter/Keteyian, at 129. [13] Hunter/Keteyian, at 130.
[14] Helyar, at 137. [15] Hunter/Keteyian, at 130.
[16] Bowie Kuhn, Hardball 139, Times Books (1987).
[17] Marvin Miller, A Whole Different Ball Game: The Sports and Business of Baseball 230, Birch Lane Press (1991).
[18] Burt Solomon, The Baseball Timeline 756, DK Publishing (2001).
[19] Hunter/Keteyian, at 131. [20] Hunter/Keteyian, at 135.
[21] Andrew S. Zimbalist, Baseball and Billions 21, Princeton University Press (1999).
[22] Kuhn, at 140.
[23] Peter Palmer & Gary Gillette, The Baseball Encyclopedia 965, Barnes & Noble Books (2004).
[24] Palmer/Gillette, at 1667.
[25] Ruling on A’s Hunter in Month, N.Y. Times, Nov. 27, 1974, at 42.
[26] Marvin Miller, A Whole Different Ball Game: The Sports and Business of Baseball 231-233, Birch Lane Press (1991).
[27] Ruling on A’s Hunter in Month, at 42.
[28] Andrew S. Zimbalist, Baseball and Billions 21, Princeton University Press (1999).
[29] Bowie Kuhn, Hardball 140, Times Books (1987).
[30] Leonard Koppett, Real Hunter Fuss Is on Bidding, N.Y. Times, Dec. 17, 1974, at 45.
[31] Jim Hunter & Armen Keteyian, Catfish 136, McGraw-Hill Book Company (1988).
[32] Ruling on A’s Hunter in Month, at 42.
[33] Roger I. Abrams, Legal Bases: Baseball and the Law 109, Temple University Press (1998).
[34] Koppett, at 51. [35] Abrams, at 109.
[36] Marvin, A Whole Different Ball Game: The Sports and Business of Baseball 113, Birch Lane Press (1991).
[37] Miller, at 233.
[38] John Helyar, Lords of the Realm: The Real History of Baseball 137, Villard Books (1994).
[39] Koppett, at 51.
[40] Bowie Kuhn, Hardball 140, Times Books (1987).
[41] Leonard Koppett, Finley Plea to Change Hunter Ruling Denied, N.Y. Times, Jan. 4. 1975, at 39.
[42] Kuhn, at 140.
[43] Arthur Daily, Kansas City Buttinski, N.Y. Times, Aug. 22, 1967, at 45.
[44] Kuhn, at 49. [45] Koppett, at 51.
[46] Peter Palmer & Gary Gillette, The Baseball Encyclopedia 280, Barnes & Noble Books (2004).
[47] Kuhn, at 142.
[48] Marvin Miller, A Whole Different Ball Game: The Sports and Business of Baseball 237, Birch Lane Press (1991).
[49] Jim Hunter & Armen Keteyian, Catfish 139, McGraw-Hill Book Company (1988).
[50] John Helyar, Lords of the Realm: The Real History of Baseball 142, Villard Books (1994).
[51] Hunter/Keteyian, at 140. [52] Kuhn, at 143.
[53] Jim Hunter/Keteyian, at 150.
[54] Andrew S. Zimbalist, May the Best Team Win: Baseball Economics and Public Policy 79, Brookings Institution Press (2003).
[55] Total Near $4 Million, The Washington Post, Jan. 1 1975, at D1.
[56] Red Smith, Dred Scott and Some Other Guys, N.Y. Times, Dec. 27, 1974, at 41.
[57] Leonard Koppett, Court to Hear Finley Plea on Hunter Today, N.Y. Times, Jan. 3, 1975, at 44.
[58] Leonard Koppett, Backing of Hunter Arbitration Decision Called Prelude to Changing Pro Sports Setup,N.Y. Times, Jan. 5, 1975, at S4.
[59] American & National Leagues of Profession Baseball Clubs v. Major League Baseball Players Association, 130 Cal.Rptr. 626 (Cal.App. 1976).
[60] Leonard Koppett, Finley Plea to Change Hunter Ruling Denied, N.Y. Times, Jan. 4. 1975, at 39.
[61] Peter Palmer & Gary Gillette, The Baseball Encyclopedia 965, 1614, Barnes & Noble Books (2004).

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