MLB CBA: What are the issues and what will happen if there’s a lockout?

It’s been more than 20 years since the last work stoppage in Major League Baseball, but a new one could happen starting this Thursday if a new collective bargaining agreement between the league and the players' union is not in place when the existing CBA expires. The failure to reach a deal would set off a damaging labor dispute that would disrupt the hot stove season and could endanger the start of spring training. Here's a breakdown of the key issues at play and what might happen next.

The Key Issues

CBAs are complicated and wordy documents—the current one is 298 pages. Most of that language will be replicated in a new CBA but certain key points are what is holding things up. While possible changes to drug testing and domestic violence policies as well as alterations to roster sizes and player travel expectations are also on the table, the majority of the haggling this time around centers on revisions to the competitive balance tax—better known as the luxury tax—and free-agent compensation. A third primary topic was expected to be an international draft for amateur players, but Fox Sports’ Ken Rosenthal reported on Monday that that is no longer an absolute requirement of owners for a new CBA.

1. Reworking the luxury tax

Of the four major sports leagues in the U.S., MLB is the only one without a salary cap. This arrangement reflects, among other things, the historic strength of the MLBPA and the willingness of MLB players to strike when faced with owners’ demands for salary constraints, as they have done four times before. MLB players also enjoy (mostly) guaranteed contracts, which supply them an additional advantage over players in certain other leagues.

But MLB is by no means a complete free market. Since 2003, MLB clubs have been subject to a competitive balance tax that is designed to deter them from spending much more on player salaries and benefits than their rivals. Indeed, clubs that spend more than a predetermined threshold must pay a “tax” ranging from 17.5% to 50% depending on the number of years the team has exceeded the threshold. The current tax threshold is $189 million, a calculation for which includes both pay and certain employment benefits. Clubs that exceed this amount pay a tax on the difference between their payroll and $189 million. To illustrate, the Los Angeles Dodgers were assessed a record-setting $43.6 million last December due to a payroll of $297.9 million. Taxed money collected by MLB is pooled into a central fund and distributed for various purposes, including to satisfy annuity compensation agreements and to finance various benefits for active players.

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Players and their agents—who, although not part of the MLBPA bargaining unit, significantly influence players’ bargaining preferences—would like to see revised methods for calculating the luxury tax and its accompanying threshold. Revisions might render these policies less influential on team spending. To the extent MLB demands equity among its clubs, players would prefer MLB adopt other devices, such as alterations to the league’s revenue sharing plan. Under the existing revenue sharing plan, each club calculates its “net local revenue,” a figure that includes (among other things) gate receipts and certain TV revenue, and allocates 34% of that figure to MLB. In turn, MLB reallocates the combined pool of net local revenue to smaller market teams. This plan, which in reality is more complicated than I just made it sound, could be modified in ways that more substantially aid smaller market teams without significantly curbing player salaries.

2. Reducing draft pick compensation for signing another team’s free agent

Since the 1970s, MLB and MLBPA have negotiated restrictions on what free agency means and how quickly players can obtain it. One such restriction is draft pick compensation for teams that sign free agents. While the formula for draft pick compensation has changed significantly in recent years, its basic idea remains the same: teams that sign another team’s free agent need to, in effect, compensate that team with a draft pick. Draft pick compensation thus suppresses wages in that teams are less likely to bid for a free agent player if it must also give up a draft pick. Players would like to see the elimination of the requirement that teams must relinquish draft picks. If owners refuse to eliminate draft pick compensation, a compromise might include lower round draft picks as the required compensation.

3. An international draft

As mentioned above, this reportedly is no longer a sticking point in negotiations, but in case it becomes one again, a refresher is in order. A draft, of course, is a contractual device to suppress labor costs: by preventing drafted players from negotiating with multiple teams and by limiting how much teams can spend on drafted players, drafted players have less bargaining leverage when negotiating a contract with the teams that drafted them. 

The current category of eligible persons for the annual MLB Draft excludes about one out of every four players who will eventually make it to the big leagues. Consider that on 2015 Opening Day rosters, 24% of MLB players were born outside of either the U.S. (including its territories) or Canada, and that 10% of MLB players were born in the Dominican Republic and 8% in Venezuela. In lieu of being drafted, those players signed with MLB clubs as free agents, in some cases for millions of dollars. Since 2012, however, MLB has severely restricted how much money each club can annually spend on international free agents. Those restrictions, it should be noted, do not apply to international players who are regarded as professional players in Japan, Korea, Taiwan and Cuba.

If adopted in the next CBA, an international draft would subject a broader category of amateur players to the draft. This means that instead of those players signing as free agents with MLB clubs, they would be drafted by those clubs and presumably subject to a more restrictive wage scale than is currently available. 

The Lockout Risk

So what happens on Thursday if there is no deal?

If the two sides are close to an agreement, there is a good chance they will simply extend the life of the current CBA to a nearby date that is mutually agreeable. One drawback to an extension is that clubs would remain uncertain of potential changes in a new CBA, and that could affect how they conduct their off-season business.

If the two sides remain apart and an extension is not mutually acceptable, MLB would likely institute a lockout. A lockout refers to an employer denying its employees their wages, health care, access to facilities and other conditions of employment. Here, MLB and the 30 ownership groups would collectively decide to deny employment to MLB players in hopes that the players acquiescence to management demands for a new CBA. 

A lockout this December would put Major League Baseball on pause, though it would be much less disruptive than a lockout in the spring that leads to canceled games. Still, teams would be barred from signing free agents and making trades, and players would be forbidden from communicating with team officials, including coaches and managers. MLB players normally receive their annual salaries in 17 installments during the regular season, meaning, absent some other pay arrangement (such as deferred money), they wouldn’t miss paychecks during a winter lockout. However, they would be denied non-salary employment benefits, such as access to training facilities. Players and their families could continue to receive health care benefits by utilizing the Consolidated Omnibus Budget Reconciliation Act (COBRA), albeit those benefits would be at the players’ own expense. MLBPA might also make financial resources available to its locked out membership. Unions typically have “lock out” and “strike” funds that help ease the financial burden of employees not working. In baseball, a portion of the players’ licensing money is withheld each year. That portion could be disbursed to players in December and therefore used as a lockout fund.

In response to a lockout, players would be poised to take legal action. The most likely action would be the MLBPA “disclaiming interest” in its membership. A disclaimer of interest would represent the MLBPA declaring that it no longer represents MLB players and thus does not bargain on their behalf.

At least in theory, after a disclaimer of interest, each MLB player would represent himself in negotiating an employment relationship with MLB and one of its clubs. As a practical mater, MLB players would disclaim interest in order to sue MLB under federal antitrust law. Significant economic policies in baseball—such as the luxury tax, the amateur draft and drug testing—are only exempt from antitrust scrutiny because they were created through collective bargaining. If those policies were no longer protected by collective bargaining due to the MLBPA disclaiming interest, those policies would be vulnerable to antitrust scrutiny. They might then be found unlawful on grounds that competing MLB clubs have conspired to adopt anti-competitive policies. These policies, so the argument goes, damage MLB players’ opportunities to maximize their wages, hours and other working conditions.

There would two major hurdles for players in suing Baseball under antirust law. First, Baseball enjoys a historical antitrust exemption. The exemption stems from a U.S. Supreme Court decision in the 1922 Federal Baseball Case. In that case, the Supreme Court reasoned that baseball games, which are played in one state, did not constitute interstate commerce, a requirement for application of federal antirust law. Although the legal reasoning in Federal Baseball is now viewed as antiquated—the modern judicial interpretation of “commerce” is far more expansive than in 1922 and would recognize that the production and broadcast of baseball games extend to many states— Supreme Court precedents are difficult to overturn. This is mainly due to the principle of stare decisis, which dictates that judges should uphold rulings and honor precedent. The Supreme Court has upheld Baseball’s antitrust exemption on several occasions.

On the other hand, Congress and President Bill Clinton reduced the scope of MLB's antitrust exemption through the Curt Flood Act of 1998. The Act, named for the former outfielder whose challenge of the reserve clause in the 1970s eventually led to free agency, intended to remove the exemption for certain issues, including matters “directly relating to or affecting employment of major league baseball players.” A sensible reading of the Act would suggest that MLB players’ salary, benefits and drug testing would all fall within the scope of the Act, thereby—potentially—empowering players to overcome Baseball’s antitrust exemption in a lawsuit. It should be stressed, however, that there is significant debate in the legal community over how to correctly interpret the Act. Further, the Act has not yet been used in response to an MLB lockout and would be a matter of first impression for a judge applying it in such a scenario.

Even if baseball players could overcome the antitrust exemption through the Curt Flood Act, they would still face unfavorable precedent in Tom Brady et al. v. NFL. That case constituted NFL players’ legal response to the 2011 NFL lockout. The NFL defeated Brady and 14 other named player-plaintiffs by convincing the U.S. Court of Appeals for the Eighth Circuit that, per the Norris-LaGuardia Act of 1933, federal judges are barred from issuing injunctions to lift a lockout. In essence, the decision prevented NFL players from successfully suing the NFL on antitrust grounds. While MLB players could hope for a better outcome in a different federal circuit, the Brady case would be persuasive precedent in favor of MLB.

At the end of the day, the best path for MLB and MLB players is to reach a deal before Thursday. If they fail to do so, the hot stove season might soon be frozen.

Michael McCann, SI's legal analyst, provides legal and business analysis for The Crossover. He is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law.

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