12/23/2010 10:41 am ET Updated May 25, 2011

Happy Anniversary, Free Agency

Thirty-five years ago today, a labor arbitrator changed professional team sports forever. We have become so accustomed to multi-million dollar contracts for players in our favorite sports that we forget that it was not always so. At one time in the not-so-distant past, club owners controlled their reserved players and unilaterally determined how much they would pay them. That was before professional athletes discovered that as employees they could unionize and their union could seek to improve their working conditions.

Professional athletes were never paid subsistence wages. Even in the Nineteenth Century, they earned many times more than the average worker. By the middle of the Twentieth Century, however, salaries stagnated. In 1967, baseball players only averaged $17,000 per year. Today, that average has increased to slightly over $3,000,000. There has been a similar explosion in salaries in other sports. In 1970, NBA basketball players averaged $35,000 per year and now they earn, on average, almost $6 million. In 1970, NFL players averaged $23,000, while now it is close to $2 million per year. This remarkable turn of events all started right before Christmas in 1975 with a decision by baseball's labor arbitrator Peter Seitz.

The Major League Baseball Players Association strategically orchestrated an arbitration case that would act as the vehicle for change. Having lost before the Supreme Court in Curt Flood's case in 1972, the Players Association's brilliant executive director Marvin Miller and his equally brilliant general counsel Dick Moss filed a grievance on behalf of pitchers Andy Messersmith and Dave McNally. Messersmith and McNally had played out their option years. The union claimed that under the terms of the 1973 collective bargaining agreement between the Players Association and the owners, their clubs could exercise their options only once. Thereafter, the players would become free agents who were able to negotiate with any Major League club for a salary based on their free market value. Peter Seitz bought the argument, and the rest is history. The other sports followed suit through collective bargaining.

Arbitrator Seitz concluded that the parties had not agreed to a perpetual reserve system that could be renewed by management year-after-year. Even though the players' contract allowed for renewal "on the same terms" and one of those terms was a one-year option, Seitz says that if the parties wanted to make this a perpetual system they would have to say so explicitly. (He cited a New York real estate case for that proposition, a strange citation in the sports arbitration setting.) Much to the union's delight, Seitz ruled that the reserve system lasted only one year.

The decision was a bombshell and nothing in professional sports would ever be the same again. Baseball management tried to get the decision overturned in federal court without success. It tried to pressure the union into compromise, and Marvin Miller was ready with an alternate approach to total free agency. (Miller, a trained economist, knew that universal free agency would drive down player salaries when the market flooded with players.) The parties agreed on the current system, which allows for free agency after six years of Major League service.

The impact on player salaries was immediate and dramatic. In the next decade, average player salaries increased from $44,000 to $372,000. In another decade, the average increased to $1.1 million. Some may doubt these men are worth that amount of money for their services, but the market commands and the owners respond. They are worth that amount of money because someone will pay them at that level. They can demand that amount of money because under the terms of their collective bargaining agreement, trade for their personal services must be free.