Five Antitrust Concerns for Real-Estate Professionals

March 4, 2020 | Bona Law PC

I am an antitrust attorney and CEO of a growing business, but my wife loves real estate and we have been investors over the years. You may have seen our real-estate investing website. So when antitrust and real-estate issues combine, I pay close attention. Not surprisingly, we receive a lot of calls about antitrust violations or issues in the real-estate industry. In fact, the Department of Justice and FTC have recently been studying antitrust/real-estate issues.

Antitrust law is especially relevant to real-estate professionals like brokers and salespeople because (1) competitor brokers both compete and cooperate on a daily basis; (2) prices and commission splits are often announced and well-known; (3) there is a history of tension and battles between a traditional business model and new business models (this can create antitrust litigation in any market); (4) associations and cooperative Multiple-Listing Services (MLS) play large roles in the industry; (5) US antitrust enforcers, like the Department of Justice and FTC, have seriously scrutinized the real-estate industry.

Here are five antitrust issues that real-estate professionals should understand: Continue reading →

Forgotten But Not Gone—Antitrust, Price Discrimination, and The Robinson-Patman Act in the 21st Century

February 26, 2020 | Bona Law PC

Author: Steven Cernak

When I first started practicing antitrust law in the “80’s, the Robinson-Patman Act was already an object of derision.¹ With Chicago School thinking riding high in academia and the courts and antitrust law’s focus shifting to effects on consumers, not rivals, RP cases seemed to be dwindling down to nothing. My colleagues and I were convinced that RP would soon be dead and we would never again need to deal with its tortured language² and questionable economics.

But not all my colleagues. One insisted that Robinson-Patman would never be repealed—after all, what member of Congress would vote against protecting small business?—and the private right of action would mean that the threat of litigation would always at least affect negotiations even if the federal agencies stopped bring new cases.³ Despite our constant ridicule of his outdated ways, he insisted that I learn the intricacies of the statute and cases, analyze the latest changes to the Fred Meyer Guides, and otherwise prepare to take over from him the counseling of a client that sold goods “of like grade and quality” in at least three overlapping channels.

I’m glad he did. He was right. To this day, suppliers and retailers negotiate in the shadow of RP and require counseling about its sometimes-obscure details. Every year, new private litigation gets filed and generates opinions and even jury verdicts on Robinson-Patman issues.⁴ Fewer than in the “60’s but still greater than zero. So for all the suppliers and the retailers through whom they sell—along with their respective counselors—here is a summary of what you need to know about RP in the 21^st Century:

The Basics of the Robinson-Patman Act

There are two kinds of discrimination that RP is meant to prevent and where some litigation is still filed today. Section 2(a) prohibits the sale of the same commodity at different prices to two competing buyers by one seller if the result is harm to competition. It has several elements that must be met and potential defenses, all of which narrow the scope of its application. Sections 2(d) and 2(e) are per se prohibitions of the discriminatory provision of or payment for certain promotional aids meant to assist in resale of a seller’s commodity. Again, several elements must be met to prove a violation. In addition, Robinson-Patman applies only to commodities sold for use or resale in the U.S.

Section 2(a) Price Discrimination – Elements

The elements of a Section 2(a) claim are usually summarized as prohibiting (1) a difference in price (2) in reasonably contemporaneous sales to two buyers purchasing from a single seller, (3) involving commodities, (4) of like grade and quality (5) that may injure competition.

While price discrimination is “merely a price difference”, actual net prices must be compared, after taking into account all discounts, rebates and other factors affecting price. If the lower price is “functionally available” to the plaintiff but plaintiff chooses not to accept it, courts have held that such proof “essentially negates the discrimination element” of plaintiff’s price discrimination claim.⁵

The two sales at different prices must be reasonably contemporaneous, a question of fact that depends on the seasonal quality of the sales and overall market conditions. Also, those two contemporaneous transactions must be “sales”, not something else like leases, licenses or an offer to sell. Finally, two completed sales are required and so at least one court has held that this element is not met in competitive bid situations where the commodity is only purchased if the dealer’s bid is successful.⁶

Section 2(a), as well as sections 2(d) and 2(e), apply only to “commodities”, a term left undefined by the statute. Courts have consistently interpreted the term to mean tangible products. Intangible items that have been held not to be commodities include medical services, cable television programming, and advertising, including online advertising.

The two commodities sold at different prices must be “of like grade and quality” for Section 2(a) to apply. When interpreting that statutory language, lower courts have followed the US Supreme Court’s lead in FTC v. Borden Co. and focused on physical differences in the products that affect consumer marketability.⁷ In that case, the Court found two varieties of the defendant’s evaporated milk to be “of like grade and quality” because the products were physically identical, even though the higher-price branded version had gained consumer preference over the lower-priced private label version.⁸

The final element of a Section 2(a) violation is whether “the effect of such discrimination may be substantially … to lessen competition or tend to create a monopoly …”, which has been interpreted to mean that a plaintiff need not show an actual adverse effect on competition, only a “reasonable possibility” of such an effect.

Injury to competition generally is found at the level of a rival to the discriminating seller (“primary line injury”) or of the disfavored customer (“secondary line injury”). The Supreme Court’s Brooke Group opinion clarified that a successful primary line claim must meet the same difficult test required of predatory pricing plaintiffs.⁹ As a result, secondary line cases now predominate.

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Apple v. Pepper, Indirect Purchaser Antitrust Class Actions, and the Future of Illinois Brick (Part 2)

February 11, 2020 | Bona Law PC

Author: Jarod Bona

This is part two of an article about the Supreme Court’s 2019 decision in Apple v. Pepper, the classic antitrust cases of Illinois Brick and Hanover Shoe, indirect purchaser lawsuits, and state antitrust claims. If you haven’t read that article, you should because it provides the background for this article.

If you read it, but it has been awhile because we published it a long time ago—yes, we’ve been busy opening offices and hiring new attorneys (and attorneys and attorneys)—here is where we left off:

We described how the US Supreme Court decided to deal with the issue of both direct purchasers and indirect purchasers wanting damages for alleged antitrust violations. The Supreme Court first prohibited defendants from raising the defense that direct purchasers “passed-on” any damages to indirect purchasers (Hanover Shoe).

Later, the Supreme Court prohibited indirect purchasers from seeking damages for federal antitrust claims (Illinois Brick).

When the indirect purchasers—represented by a resourceful bunch—then ran to the states and brought actions under state antitrust law, the Supreme Court reviewed whether those claims should be preempted by federal law. They (perhaps surprisingly), let the claims continue to go forward (California v. ARC America Corp.).

So the Supreme Court left a bit of a mess in the antitrust class action world. Defendants can’t argue that direct purchasers passed on any damages, indirect purchasers can only bring injunctive actions under federal antitrust law, and indirect purchasers bring damage actions under state antitrust laws (but only some state antitrust laws because not all of them allow indirect purchaser damage claims). Antitrust class actions are certainly complex.

By the way, before we dig into the issues, just a reminder that we at Bona Law are biased in favor of antitrust class action defendants because we defend class action lawsuits. We don’t represent plaintiff classes in class actions (despite many requests to do so).

The Supreme Court and Apple v. Pepper

The US Supreme Court took up Apple v. Pepper and had to determine whether certain plaintiffs were direct or were indirect purchasers in this antitrust class action. Phrased that way, the case doesn’t look that interesting. But before the decision came out, there was some speculation about whether the Supreme Court would gut the entire indirect/direct purchaser structure. The present structure doesn’t make much sense and isn’t based upon statute anyway (like much of federal antitrust law, I suppose).

Apple v. Pepper involves an antitrust class action lawsuit by consumers purchasing Apps from Apple and App developers (indeed—the actual source of their purchase is part of the controversy). They contend that Apple “has monopolized the retail market for the sale of apps and has unlawfully used its monopolistic power to charge consumers higher-than-competitive prices.” (slip p. 1).

For those of you that recently arrived from 1985, here is how the Apple App Store works: If you own an IPhone and want to add an app to your phone, you have no choice but to purchase it through the Apple App Store, which—according to the US Supreme Court—contains about 2 million apps available for download.

You might think to yourself, “Wow, Apple has been busy; it must be a lot of work to create 2 million separate apps.” But, no, Apple isn’t doing that themselves and they aren’t even hiring out to do it. Instead, independent app developers create the apps and, through contract, the apps are sold in the app store to consumers (my use of passive voice here is purposeful—as telling you who is selling them takes a position in this case; sort of, anyway).

The app developers pay Apple a $99 membership fee and get to pick the price for their app, so long as it ends in $0.99—an old marketers trick. No matter what the sales price, Apple keeps 30 percent of the revenue for each sale.

Apple asserted that the consumers can’t sue for damages under federal antitrust law because they are indirect purchasers under Illinois Brick, and the App developers are the direct purchasers from Apple. Plaintiffs, by contrast, allege that they are—literally—direct purchasers because they purchase Apps from Apple in the Apple App Store.

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When Does Fraudulent Concealment Toll the Antitrust Statute of Limitations?

January 27, 2020 | Bona Law PC

Authors: Aaron Gott and Nick McNamara

Antitrust conspiracies, like most conspiracies, are typically carried out in secret and often actively concealed by their participants for many years. But the statute of limitations for antitrust claims is only four years. So what happens if you discover that you were harmed by an antitrust conspiracy years after the fact? The answer could depend on which of the U.S. Court of Appeals has jurisdiction in your case.

Imagine you’re a retail grocer in the business of selling farm-fresh produce. Your store sources all of its carrots from local farms, many of which belong to a trade association of carrot growers (these carrot growers weren’t organized as a farm cooperative, which could provide them with a limited antitrust exemption you can read about here). Since you opened your grocery store several years ago, the price of carrots sold by these farms has been stable and reasonable. Then, all of a sudden, you notice that the price of locally farmed carrots has increased by 10%—overnight and for no apparent reason. Soon after you learn of the price hike, you receive an explanatory letter from the farm that sold the store its most recent batch of carrots. The letter apologizes for the increased price, which it attributes to a virus which has been harming local carrot crops. According to the letter, the farm hired plant biologists who confirmed the presence of the virus in the area.

You have never heard of a virus affecting carrots, but you have little reason to doubt the explanation provided by the farm. You review the scientific documentation attached to the letter and read up about the virus on Wikipedia; it turns out it is indeed a real virus that does affect carrots. You also hear that other grocers in the area have also received similar letters from other local carrot growers (but you didn’t talk to them directly because your antitrust compliance program forbids it). On top of it all, you have always had very cordial business relations with the sales representatives of the carrot farms. You decide to eat the lost profits, knowing that discontinuing the sale of locally farmed carrots would disappoint many loyal customers.

Five years later, you are tipped off by a former employee of one of the local carrot growers that the presence of the virus in the area was a complete fabrication, as was the supporting documentation submitted by the purported scientists. The ex-employee further informs you that the plan was hatched by the carrot growers’ trade association. Feeling cheated, you search the web for the antitrust statute of limitations, which you learn is four years.

But the good news is that the statute of limitations is not necessarily fatal to a claim involving an antitrust conspiracy. In fact, courts have long recognized that the distinguishing feature of illegal conspiracies is that they are almost always hidden from public view by design—and as a result, they often harm unwitting victims unaware they are being harmed. And, in some cases, courts have applied the equitable doctrine of fraudulent concealment to “toll” the statute of limitations in cases where the statute of limitations otherwise would have barred the claim.

You may have heard of a similar doctrine called the “discovery rule.” Under the discovery rule, a claim does not accrue—and the statute of limitations does not begin to run—until a reasonably diligent plaintiff discovers or should have discovered its injury. But there is a key difference: the discovery rule is a legal doctrine governing the point at which a statute of limitations begins to run, while tolling for fraudulent concealment is an equitable doctrine that assumes that the claim has already accrued and the statute of limitations has already run. In practice, the two doctrines have a nearly identical effect, so an antitrust plaintiff can typically plead both in the alternative. Both doctrines also have a due diligence requirement, so you can’t rely on them if, under the circumstances, a reasonable person would have investigated potential claims (for example, an unexplained, sudden price hike could give rise to a duty to investigate).

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Four Questions to Ask Before Worrying About the Antitrust Risks of New Restraints on Your Distributors

January 26, 2020 | Bona Law PC

Author: Steven Cernak

While I was the in-house antitrust lawyer for General Motors, outside counsel on several occasions suggested to me that GM should “institute a Colgate program” or “a minimum advertised price (MAP) program.” I am confident that all those lawyers could have helped build a fine Colgate program or other method that would restrict how GM dealers and distributors priced and marketed GM products – but the suggestion was still wrong for a few reasons.

First, it vastly overestimated the control that I or any other lawyer had over GM pricing decisions. More importantly, it assumed that the suggested restraint was right for that GM product at that time, an unsafe assumption given the wide variety of products and services that GM sells in different regulatory and competitive environments. Before suggesting a tool to use, the attorney should have helped me determine if it was right for GM’s business situation.

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US Antitrust Agencies Release Updated Vertical Merger Guidelines

January 20, 2020 | Bona Law PC

Authors: Steven Cernak and Jarod Bona

In big antitrust news, the Federal Trade Commission and Department of Justice Antitrust Division released a draft of an update to the 1984 Vertical Merger Guidelines (VMG) on January 10, 2020. Only three of the five FTC commissioners voted to release the draft with Democratic Commissioners Rebecca Kelly Slaughter and Rohit Chopra abstaining but issuing separate statements. The agency will accept public comments on the draft through February 11, 2020.

These vertical merger guidelines make extensive references to the Horizontal Merger Guidelines, most recently issued in 2010 (HMG). Like the HMG, the VMG are guidelines only, not law, and are meant to provide the merging parties some understanding of the analysis the reviewing agency will use. Because nearly all merger reviews begin and end with these agencies, however, the HMG have become both influential and persuasive for courts. The VMG rely on the HMG for much of the analysis and so, at nine pages, are much shorter and seem to break little new ground besides updating the outdated 1984 version.

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When is the Filed Rate Doctrine a Defense to an Antitrust Lawsuit?

January 19, 2020 | Bona Law PC

Author: Jarod Bona

The doctrine of federal antitrust law includes several immunities and exemptions—entire areas that are off limits to certain antitrust actions. This can be confusing, especially because these “exceptions” arise, grow, and shrink over time, at the seeming whim of federal courts.

As a matter of interpretation, the Supreme Court demands that courts view such exemptions and immunities narrowly, but they are still an important part of the antitrust landscape. This includes, prominently, the Filed Rate Doctrine, which is the topic of this article.

Here at The Antitrust Attorney Blog, we write about these antitrust exceptions periodically. In particular, we spend a lot of time on state-action immunity, but have also published articles on, for example, the baseball antitrust exemption, the farm cooperative exemption, and the business of insurance exception (which, unlike many others, arose from statute: The McCarran-Ferguson Act).

What is the Filed Rate Doctrine?

The filed rate doctrine is simply a judicially created exception to a civil antitrust action for damages in which plaintiffs challenge the validity of rates or tariff terms that have been filed with and approved by a federal regulatory agency.

But what does that mean?

In some industries, notably insurance, energy, and shipping (or other common carriers), the participants must file the rates that they offer to all or most customers with a government agency. This regulatory agency must then, in some manner, approve those rates. This approach is an exception to a typical market and was more common in certain industries pre-deregulation.

The idea of filing these rates is that the benevolent and all-knowing government agency, rather than the market, will best look after customers. It arises from the same seed as socialism and was particularly popular in the early to mid-20^th century when the view that educated people could perform better than markets was in vogue.

Anyway, these “filed rates” are still with us and are a defense, through the filed rate doctrine, to certain antitrust actions.

The filed rate doctrine itself arose in a 1922 US Supreme Court case called Keogh v. Chicago & Northwest Railway Co., 260 U.S. 156 (1922). In that case, the plaintiffs sought antitrust damages by arguing that defendants violated the Sherman Act and the rates charged by certain common-carrier shippers were higher than they would have been in a competitive market.

The defendants, however, had filed these rates with the Interstate Commerce Commission (ICC), a federal agency that had approved them. The Supreme Court responded by precluding plaintiffs’ antitrust lawsuit on that basis, as the rates, once filed, “cannot be varied or enlarged by either contract or tort of the carrier.” It is the legal rate.

The Supreme Court has since reaffirmed this holding, most prominently in a case called Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409 in 1986, which you can read at the link if you want to dig deeper.

When Does the Filed Rate Doctrine Preclude Antitrust Liability?

The filed rate doctrine is a defense to an antitrust lawsuit, premised on damages, so long as the claim requires the Court to examine or second guess the rates filed with a federal agency.

So if you are a plaintiff that wants to bring an antitrust action against a defendant that filed rates, you could (1) seek certain types of injunctive relief; and (2) develop your action in a way that doesn’t require the Court to determine liability or calculate damages by comparing current filed rates to a hypothetical rate in a but-for world. This can get complicated, so if you are not an antitrust attorney, you might want to find one.

If you are or represent a defendant that has been sued under the antitrust laws and the defendant company files rates with some agency, you should also seek antitrust-specific guidance. You might have a strong defense.

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Your Company Isn’t Based in Silicon Valley: Why Should You Care About the Antitrust “Techlash”?

January 7, 2020 | Bona Law PC

Author: Steven Cernak

Companies like Facebook, Google, Amazon and more have faced an increasing number of antitrust investigations and challenges (globally), both private and government, in recent years. In the U.S., current Presidential candidates are lining up to propose changes to antitrust laws and advocate for enforcement focused on these same tech companies. While they might not be explicit targets in as many actions, other U.S. companies outside Silicon Valley could be swallowed up in this techlash and so need to be prepared.

Techlash not New and Not Just American

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Baseball and the Antitrust Laws Part V: Touch ‘em all, Curt Flood

December 19, 2019 | Bona Law PC

Author: Luke Hasskamp

This article—the fifth in a series—addresses some of the aftermath of the Supreme Court’s decision in Toolson v. New York Yankees, in particular the litigation involving Curt Flood that ultimately led to the free agency era of professional baseball.

You can find the other parts to this series below:

Baseball and the Antitrust Laws Part 1: The Origins of the Reserve Clause

Baseball and the Antitrust Laws Part 2: The Owners Strike Back (and Strike Out)

Baseball and the Antitrust Laws Part 3: Baseball Reaches the Supreme Court

Baseball and the Antitrust Laws Part 4: Baseball’s Antitrust Exemption

Curt Flood takes on baseball

Curt Flood was immensely important in baseball’s labor movement, serving as the plaintiff in the last baseball lawsuit to reach the U.S. Supreme Court, and helping to usher in the current “free agency” era of baseball. He was also a star player, spending 15 years in the major leagues with the Cincinnati Red(leg)s, the St. Louis Cardinals, and the Washington Senators. He was a three-time All Star, a seven-time Gold Glove winner, and retired with a .293 batting average.

After twelve seasons in St. Louis, on October 7, 1969, the Cardinals traded Flood and several other players, including Tim McCarver, to the Philadelphia Phillies. Yet, Flood, who was still near the peak of his playing years, had no interest in going, citing Philadelphia’s terrible record, dilapidated stadium, and racist fans, at least in Flood’s eyes.

Flood refused to report to Philadelphia and sent a strongly-worded letter to baseball’s commissioner at the time, Bowie Kuhn, noting that he was not “a piece of property to be bought and sold irrespective of my wishes.” Flood added his belief that “any system which produces that result violates my basic rights as a citizen and is inconsistent with the laws of the United States and of the several States.”

Flood’s letter to Kuhn fell on deaf ears, and he filed suit against the League in the Southern District of New York, alleging that baseball’s reserve clause violated antitrust law. Flood, who was then making $90,000 per season, sought $1 million in damages. Flood retained former Supreme Court Justice Arthur Goldberg, who agreed to handle the matter without charge. Flood knew that the lawsuit, which could potentially (and did) take years, would effectively end his playing career.

Several former players testified at trial on behalf of Flood, including Hall of Famers Jackie Robinson and Hank Greenberg, as well as Bill Veeck, renegade owner of the Chicago White Sox. No current players testified in favor of Flood, however. Following a ten-week bench trial, the district court ruled against Flood and in favor Major League Baseball, finding that the reserve clause had beneficial aspects for the game and its players.

Flood appealed the ruling to the Second Circuit, which affirmed the district court, holding that Federal Baseball and Toolson were binding precedent and, thus, Major League Baseball was not subject to the Sherman Act because baseball did not constitute interstate commerce. The Second Circuit added that baseball was “so uniquely interstate commerce” as the league extended over many states that the “consequent extra-territorial effect of necessary compliance” with multiple state antitrust laws would be “far reaching.” Accordingly, federal law pre-empted the application of state antitrust laws.

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Baseball and the Antitrust Laws Part IV: Baseball’s Antitrust Exemption

December 18, 2019 | Bona Law PC

Author: Luke Hasskamp

This article—the fourth in a series—addresses some of the aftermath of the Supreme Court’s decision in Federal Baseball Club v. National League, where the Court unanimously held that federal antitrust laws did not apply to professional baseball. This includes the “birth” of baseball’s antitrust exemption in the Supreme Court’s 1953 decision in Toolson v. New York Yankees.

You can find the other parts to this series below:

Baseball and the Antitrust Laws Part 1: The Origins of the Reserve Clause

Baseball and the Antitrust Laws Part 2: The Owners Strike Back (and Strike Out)

Baseball and the Antitrust Laws Part 3: Baseball Reaches the Supreme Court

Baseball and the Antitrust Laws Part 5: Touch ’em all, Curt Flood.

The evolution of the Commerce Clause

It seems safe to say that it is widely known that baseball is exempt from antitrust laws. But that exemption did not arise in the Court’s 1922 ruling in Federal Baseball. Instead, there, the Court had concluded that the Sherman Act did not apply to baseball at all—because baseball was not a form of interstate commerce. This is an important distinction.

The Sherman Act makes it unlawful to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States . . . .” The reason Congress included “among the several States” in the statute is because its authority to enact the Sherman Act flowed from Article I, Section 8, Clause 3 of the U.S. Constitution, also known as the Commerce Clause.

Specifically, the Commerce Clause gives Congress the power “to regulate commerce with foreign nations, and among the several states . . . .” If the conduct at issue did not affect commerce “among the several states,” Congress had no authority to regulate it. Thus, because the Court determined that baseball did not affect interstate commerce, Congress had no power to subject it to antitrust scrutiny.

The Federal Baseball decision has been widely criticized, both at the time and today. But when considered in context, it is somewhat understandable. For starters, the game in the 1920s was obviously much different than the multi-billion-dollar industry that we know today. There were fewer teams, lower revenues, and games were not yet watched on television—the first televised Major League Baseball game would occur on August 26, 1939, a doubleheader played at Ebbets Field between the Brooklyn Dodgers and the Cincinnati Reds.

Perhaps an even more understandable explanation for the Federal Baseball outcome was the Supreme Court’s interpretation of the Commerce Clause at the time and, specifically, its definition of interstate commerce, which was narrower than it is today.

Federal Baseball was decided during the Lochner era, which encompassed the three decades following the Supreme Court’s 1905 decision in Lochner v. New York, 198 U.S. 45 (1905). During this period, the Court struck down a number of federal and state laws relating to labor and working conditions, as the Court took a narrow view of states’ police powers and Congress’s powers under the Commerce Clause.

The Lochner era came to an end beginning in 1937, with a series of decisions from the Court upholding several federal and state statutes in this realm, and, importantly, recognizing broader grounds upon which the Commerce Clause could be used to regulate state activity. Instead of viewing the Commerce Clause as a limitation on congressional authority, it now marked one of the most effective means by which Congress could expand its regulatory reach. The narrow definition of interstate commerce was tossed out and activity was now viewed as commerce if it had a “substantial economic effect” on interstate commerce.

Baseball’s deft touch

The late 1930s to the 1950s marked an era of strategic litigation, settlements, and lobbying by baseball. With this expansion of the Commerce Clause, many predicted that it would not be long before the Supreme Court overruled Federal Baseball. Accordingly, baseball sought to avoid legal challenges that would give the Supreme Court an opportunity to do so, and it also worked to negotiate concerns in Congress that led some members to call for legislation clarifying that the Sherman Act should apply to baseball.

An interesting example of the threat faced by professional baseball, and its strategic response to it, arose from the emergence of professional baseball in Mexico soon after World War II. To attract top talent, the Mexican league offered lucrative salaries more than double what players were making in the U.S., causing several players to abandon their contracts and play south of the border. One such player was Danny Gardella, who had been offered $4,500 to play for the New York Giants but $10,000 to play in Mexico for the 1947 season. (The Mexican League was owned by Jorge Pasquel, another colorful character in the long roster of colorful characters in professional baseball, who allegedly used campaigned funds siphoned from the Mexican presidential election to pay for the substantial salaries.)

Perhaps as expected, Major League Baseball was not pleased with the defections, and Commissioner Happy Chandler banned the defecting players for five years, a remarkable penalty considering such strict penalties had only been imposed for violations that impugned the integrity of the game itself, such as gambling or cheating on games. When Gardella returned to the U.S. after the 1947 season—the year in Mexico had not been a success, especially for the Mexican league—he was unable to find a team willing to take him. Thus, he sued in federal court in New York.

The district court granted Major League Baseball’s motion to dismiss. The court recognized that Federal Baseball appeared to rest on a shaky foundation, but it also recognized that it was not its place to overturn the decision—the authority rested with the Supreme Court. Gardella appealed to the Second Circuit Court of Appeals, where it was heard by Chief Judge Learned Hand, Judge Harrie Chase, and Judge Jerome Frank.

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