What FINRA Can Learn from Major League Baseball

Pepperdine Dispute Resolution Law Journal Volume 12 | Issue 2 Article 4 4-15-2012 What FINRA Can Learn from Major League Baseball Ben Einbinder Follow this and additional works at: https://digitalcommons.pepperdine.edu/drlj Part of the Dispute Resolution and Arbitration Commons, Entertainment, Arts, and Sports Law Commons, and the Securities Law Commons Recommended Citation Ben Einbinder, What FINRA Can Learn from Major League Baseball, 12 Pepp. Disp. Resol. L.J. Iss. 2 (2012) Available at: https://digitalcommons.pepperdine.edu/drlj/vol12/iss2/4 This Article is brought to you for free and open access by the School of Law at Pepperdine Digital Commons. It has been accepted for inclusion in Pepperdine Dispute Resolution Law Journal by an authorized editor of Pepperdine Digital Commons. For more information, please contact , . Einbinder: What FINRA Can Learn from Major League Baseball [Vol. 12: 333, 2012] PEPPERDINE DISPUTE RESOLUTION LAW JOURNAL What FINRA Can Learn from Major League Baseball Ben Einbinder* I. INTRODUCTION For over 150 years, baseball has captivated Americans and has cemented its place as the national pastime. 1 When the game was invented in the early decades of the nineteenth century, it was played “on a strictly amateur basis.”2 By the mid-1850s, the baseball craze hit the New York metropolitan area, and professionalism inevitably found its way into the sport.3 In 1869, the Cincinnati Red Stockings became the first fully professional baseball club, and the National Association of Base Ball Players became the sport’s first professional league in 1871.4 In 1875, The National Association of Base Ball Players became the National League of Baseball Clubs, the predecessor of today’s National League.5 Since the 1870s, professional baseball’s rising popularity, combined with the implementation of free agency and arbitration, has turned the game into a multibillion-dollar industry.6 Today, Major League Baseball (MLB) consists of thirty teams made up of over 700 players.7 Over the years, MLB has dealt with its fair share of employment disputes. * Ben Einbinder is a J.D. candidate at Pepperdine University School of Law. 1. Kevin A. Rings, Baseball Free Agency and Salary Arbitration, 3 OHIO ST. J. ON D ISP. RESOL. 243, 244 (1987). 2. See id. 3. BENJAMIN G. RADER, BASEBALL: A H ISTORY OF AMERICA’S GAME 9 (3d ed. 2008). 4. DEAN SULLIVAN, EARLY I NNINGS: A DOCUMENTARY H ISTORY OF BASEBALL, 1825–1908, 73-87 (1997). The National Association of Base Ball Players lasted from 1871 to 1875. Id. at 8384. 5. See Rings, supra note 1, at 244. 6. See Nancy Kercheval, Major League Baseball Revenue Reaches Record, Attendance Falls, BLOOMBERG (Oct. 1, 2008, 9:13 PM), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asFEMjfiKA5s. 7. See Complete Baseball Team and Baseball Team Encyclopedias, BASEBALLREFERENCE.COM, http://www.baseball-reference.com/teams (last visited Mar. 6, 2012). There are 30 teams with 25 players on each team. Id. 333 Published by Pepperdine Digital Commons, 2012 1 Pepperdine Dispute Resolution Law Journal, Vol. 12, Iss. 2 [2012], Art. 4 The securities industry is no different, and in 1986 the securities employment arbitration program was established. 8 In the first twelve years of the program, roughly 3,200 employment awards were issued. 9 In 2007, the Financial Industry Regulatory Authority (FINRA) was established and assumed control of the dispute resolution programs formerly administered by the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE).10 “[FINRA] is the largest independent regulator for all securities firms doing business in the United States.”11 FINRA has over 3,000 employees that oversee nearly 4,500 brokerage firms, about 163,470 branch offices, and approximately 634,385 registered securities representatives. 12 In the securities industry in the United States, FINRA administers the largest dispute resolution forum for investors and registered firms.13 This article analyzes MLB’s final-offer arbitration system (the arbitration system) and advocates for its adoption in employment disputes in the finance industry. Part II discusses the history and evolution of the arbitration system. Part III analyzes the current state of the arbitration system and Part IV discusses its effects on player salaries and the implications of those affects on MLB organizations. Part V discusses criticisms of the arbitration system, while Part VI discusses defenses of the system. Part VII examines FINRA’s arbitration model for disputes in the securities industry. Part VIII advocates for the use of final-offer arbitration to determine the amount of the awards for employment disputes in the securities industry. Lastly, Part IX discusses the impact of implementing final-offer arbitration in FINRA employment disputes. II. HISTORY AND EVOLUTION OF FINAL-OFFER ARBITRATION In 1879, following a dispute over a uniform, Jim O’Rourke decided to quit the Boston Beaneaters and sign on with the Providence team. 14 In response, the owners of the major league teams met secretly and devised the 8. David B. Lipsky, Ronald L. Seeber & J. Ryan Lamare, The Arbitration of Employment Disputes in the Securities Industry: A Study of FINRA Awards, 1986-2008, J. D ISP. RES., Feb.-Apr. 2010, at 54. 9. See id. 10. See id. 11. About the Financial Industry Regulatory Authority, FINRA.ORG, http://www.finra.org/AboutFINRA (last visited Mar. 6, 2012) [hereinafter FINRA]. 12. Id. 13. Id. 14. See Rings, supra note 1, at 245. 334 https://digitalcommons.pepperdine.edu/drlj/vol12/iss2/4 2 Einbinder: What FINRA Can Learn from Major League Baseball [Vol. 12: 333, 2012] PEPPERDINE DISPUTE RESOLUTION LAW JOURNAL “reserve system” to prevent players from “jumping” from team to team. 15 Initially, the reserve system was simply a gentlemen’s agreement between owners that allowed each owner to produce a list of players that were “offlimits” to the rest of the league. 16 Several years later, the reserve system was formalized and a “reserve clause” was written into the contracts of all professional baseball players. 17 Under the reserve system, if a player had a reserve clause in his contract, he was bound to that team for the duration of the contract and the succeeding season as well. 18 If the player had a dispute with his employer, he was unable to seek employment with another team. 19 Many players likened the reserve system to a form of slavery; however, the system satisfied the owners’ desire to retain players as long as they were of value to the team, while also maintaining the freedom to release the players when they had lost their value. 20 The reserve system gave the owners complete leverage over of the players. The unrest surrounding the reserve system led to three separate legal challenges, all of which made it to the U.S. Supreme Court. 21 In Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, the reserve c (...truncated)