Prospectus Feature: The Genius Of Arbitration

In the past two weeks Mat Latos, Neil Walker, and Jarrod Parker have lost their arbitration hearings and Danny Valencia, Jerry Blevins, and Vance Worley prevailed, determining each of their salaries for the 2015 season. More than a dozen hearings remain before February 20th. Major League Baseball and the Players Association have two types of arbitration in their collective bargaining agreement. The first is grievance arbitration, a common labor-relations dispute-resolution mechanism designed to resolve disputes over the meaning of the negotiated agreement and to deal with disciplinary matters. The other is salary arbitration and it is a rather unique animal.

Salary arbitration is a creation of the collective bargaining agreement and its origin is linked to the reserve clause system. Baseball’s reserve clause is a system that ensures clubs’ unfettered right to control a player for his first six seasons. Historically, it had been much more restrictive, though. Teams could renew players for one additional year after each season, in perpetuity. Curt Flood unsuccessfully challenged the reserve clause to the Supreme Court. See Flood v Kuhn, 407 U.S. 258 (1972). Ultimately, it was upended through a grievance arbitration decision frequently referred to as Messersmith-McNally, after players Andy Messersmith and Dave McNally, who were grievants in the case. The result of Messersmith-McNally was to allow players free agency under certain circumstances. Following the decision, Major League Baseball (“the Clubs”) and the Players Association negotiated a limit to the reserve clause and a process by which players could receive market-like salaries in the years they were under team control. That process is called salary arbitration and it is contained in Article XI, E of the parties’ CBA.

The CBA provides that players with more than three and less than six years of Major League service are eligible for salary arbitration. Additionally, a class called “Super Two” players, with at least two and less than three years of Major League service, are eligible if they have at least 86 days of service during the previous season. They must also rank in the top 22 percent in total service among the players with at least 86 days of service and at least two but less than there years. These service time cutoffs are why clubs are very conscious of when they promote top prospects to the Majors. Such delayed promotions frequently are described as not letting a player’s arbitration clock start ticking.

What makes baseball salary arbitration different from grievance arbitration in the labor-management setting, or arbitration in most other settings, is that it uses a format called final offer arbitration. In most arbitration settings, the arbitrator can craft any decision she feels is appropriate, as long as it conforms to the terms of the agreement and law. In many cases, there is a belief that the arbitrator will “split the baby,” referring to Biblical tale of King Solomon. In final offer arbitration, the parties submit their final offer as their proposed remedy, and the arbitrator is bound to select one offer or the other. The arbitrator has no discretion to fashion a different remedy.

“History attests to the genius of this one-issue process,” said George Cohen, the former Director of the Federal Mediation & Conciliation Service, who served as the MLBPA outside counsel during the 1994-1995 unfair labor practice strike. Cohen said, “at the culmination of an informal, private, expedited hearing the arbitrator must award either the team’s proposed salary or that of the player. And that award is final and binding on all parties. It requires immediate decisions, with no rationale and no precedent.”

Arbitrator Richard I. Bloch, who served as baseball’s grievance arbitrator from 1983 to 1985 and heard baseball salary arbitration cases for nearly 30 years, said that it can be frustrating not to be allowed to justify the award and tell the parties why it was the right decision, but that having no written decision definitely helps with expedition.

The CBA provides a date each year when players must file for arbitration and a date three to four days later for simultaneous exchange of salary proposals. Arbitrators are selected by the MLBPA and MLB’s Labor Relations Department by requesting lists of prominent, professional arbitrators from the American Arbitration Association. The parties alternately strike names from the lists until three remain. Those three make up the arbitration panel, with one arbitrator being designated as the chair by the parties.

Cohen’s description of a single-issue arbitration is quite clear in reading the CBA. The player and the club must sign a completed Uniform Player’s Contract (“UPC”), except for the salary section, and provide it to the arbitration panel. Within 24 hours of the conclusion of the hearing, the chair of the arbitration panel is to fill in the salary figure and forward the UPC to the Office of the Commissioner.

The hearing itself is very structured. It allows one hour for each party to make its initial presentation, followed by a half-hour rebuttal and summation. The player’s representative makes the initial argument, followed by the club. Bloch described the advocacy as “unbelievably good.”

The parties are limited in what they may present and what the panel may consider. The panel must consider the player’s contribution to his club during the past season (including but not limited to his overall performance, special qualities of leadership and public appeal), the length and consistency of his career contribution, the record of the player’s past compensation, comparative baseball salaries, the existence of any physical or mental defects on the part of the player, and the recent performance record of the club including but not limited to its league standings and attendance as an indication of public acceptance. Except for players with five or more years of service, the panel is to give particular weight to players in the same class of service time and not more than one class above that.

Arbitrators may not consider the financial position of the player and the club, press comments, testimonials, or similar material bearing on the player or the club (except for recognized annual awards), offers made by either the player or club prior to arbitration, the cost to the parties of their representatives, and salaries in other sports or occupations. Further, neither party may present evidence related to the luxury tax.

Bloch said decision-making is an inexact science. The parties present such diverse pieces of evidence and different metrics. Salary arbitration is “not a precise mathematical exercise,” Bloch said.

Bloch said he made his decisions by reviewing the stats presented and comparative players and whoever had the better case on comparison would prevail. He said the process used to provide for a single arbitrator, but once a panel of three was adopted, on the panels on which he participated the decisions were always unanimous.

Cohen said neither side wants to come in with a ludicrous number because it will mean the other side is going to win. “Precisely because if arbitration takes place one or the other proposal will prevail, each party is strongly motivated to submit a realistic number which, in turn, almost inevitably narrows the gap to the point that the vast majority of disputes are disposed of by informal settlements, thereby obviating the need for arbitration.”

Bloch concurred.

“All or nothing drives the parties closer together,” Bloch said.

He distinguished it from the National Hockey League’s arbitration system, which provides discretion to the arbitrator and requires written justification. Bloch said that in the NHL, the parties have nothing to lose by making outrageous proposals because the arbitrator has discretion to craft a reasoned result.

“Salary arbitration is an integral, fundamental part of the relationship,” Cohen said.

Numerous studies have shown the effects of baseball salary arbitration on player salaries. Nearly every study came to the conclusion that the difference between arbitrated salaries and negotiated salaries is not statistically significant. Also, as the process has matured, fewer and fewer cases have gone to hearing, proving the benefit of the system itself. At its core, salary arbitration is an alternative dispute resolution process encouraging the best possible outcome: a negotiated voluntary agreement.

Eugene Freedman is Special Counsel to the President of a national labor union. @EugeneFreedman