TorteDeForm

Jordan Fogal

The Argument Against Arbitration: Extra Bases

As we near Spring Training, many of baseball's young stars will be going through a little something called arbitration. One of the more mysterious institutions in baseball, few fans know what arbitration really is. Sure, they have a vague idea of what it is and maybe even what it is supposed to do, but nobody knows what really goes on in those hearings. Well, I am here to help educate you guys about one of sport's worst contract systems.

So what was the cause for arbitration? Well, originally, it was put into place for two main reasons. One was to put an end to the old method of how players got raises: holding out. It also established a good middle ground so that young players could get contracts that were close enough to market value that they deserved, while owners were able to keep these rising stars on their team without having to deal with these players outrageous contract demands that were simply based off of potential. Sounds good, right? In theory, it sounds great. However, due to certain failures that we will talk about later, it has produced poor results, and sometimes downright hideous results.

So who is eligible for arbitration? Any player who has less than six years of service under their belts, but more than at least three can file for arbitration. In addition to these players, players known as "super-twos" are also allowed to file. This is where it gets a little confusing, so see if you can follow this. "Super-twos" are players with two full years of service, plus at least 86 days more. These players are then ranked in descending order based on their extra days of service after the two years. The top 17% of these players are considered "super-twos". Don't ask me to tell you why they have this system for "super-twos" in place; some things are just beyond explanation.

Now on to how arbitration works. After a player files for arbitration, both the player and the team submit how much they think the contract should be for. These numbers are based off of the contracts that similar players have gotten in arbitration in years past, also called comparables. This is one of the rare times that clubs can talk amongst themselves about player salaries, which is a fun fact about arbitration.

All of this sounds good and dandy, but in practice there are a couple of big problems with the system. The case is not presented to a baseball official, but a professional arbitrator. Many of these arbitrators have little, if any, knowledge of baseball. So the arguments are almost solely based around the simple stats. Things like batting average, runs batted in, wins, and ERA. There are none of the new, more refined stats like VORP or even OPS. As a result, great players that are unlucky and don't have players on base in front of them or have their games blown by the team's closer will probably not earn the money they deserve. On the opposite side, a terrible pitcher who pitches for a team that scores a lot of runs and thus gets a lot of wins, will be likely to get overpaid.

The other flaw with the system is that there is no definition of who can be used as a comparable. Do the players have to play the same position? Or do they just have to put up similar statistics? What about being in the same year? The list goes on. Suffice it to say that teams and players will often stretch the meaning of "comparable" to its limits. And this also branches off into the argument for whether or not arbitration players can count regular free agents as comparables. This argument will usually only work for fifth year arbitration players, who will see a raise similar to the free agents of the year, only slightly pared down. The next year, fourth year arbitration players will use fifth years as comparables, and so on until every single player has seen a raise. I hope you are seeing at what I am getting at. In arbitration, one bad decision by an arbitrator or a GM signing a free agent has a trickle down effect through the whole arbitration system. And unfortunately, there is nothing in place to correct these bad decisions, unless every arbitrator begins ruling in favor of the teams and thereby cuts the contracts down.

So now you see hope for the system. You are saying, "Eventually there will be a profound change in the arbitrators that will fix this mess." Ah, but not so fast. For you see, Major League Baseball has thought of every possible way to prevent a solution from arising. Either the player's union or MLB can remove an arbitrator from the pool at anytime without reason. So if these arbitrators start ruling only in the favor of the owners, then pretty soon the player's union will be sending them packing, bringing in a fresh set of naïve arbitrators that will only allow this terrible system to continue on.

There really is no bright side to this, at least as far as I can see. The only nice thing is that it means that I will always have overpaid players to boo when I go to the games. But there is almost no chance that arbitration will be eliminated any time soon. For the most part, it works, at least as far as producing predictable outcomes. The owners are afraid of making a change because it could end up allowing the players to make too much money. Likewise, the player's union worries that a change will remove the raise that players who file for arbitration are assured of getting. Plus, the arbitration is a business itself. Lawyers who take a case all the way from the original filing to the hearing itself can make somewhere around $100,000 dollars. That's for one case. You might wonder why the agents don't do it, and while I'm sure some do, this is a time consuming process that requires tedious work in order to win. Sounds like it's right up a lawyer's alley to me. We will probably never see a change, at least not for a good long while. Even my beloved salary cap might not be able to vanquish arbitration.

Jordan Fogal: Author Bio | Other Posts
Posted at 2:28 PM, Jan 30, 2007 in
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Comments

Couldn't agree more. This provides a good critique of arbitration schemes proposed by many tort reformers. You also make an interesting point at the end:

"Plus, the arbitration is a business itself. Lawyers who take a case all the way from the original filing to the hearing itself can make somewhere around $100,000 dollars."

Jordan, do you think there are any inefficient/unfair parts of our current justice system that are perpetuated by the lawyers and others who profit from them?

Posted by: Drew Drytellar | January 31, 2007 2:46 PM

As both a reformer and a writer in the original Baseball Prospectus (see, for example, my article about baseball salaries and arbitration in the 1997 Baseball Prospectus), I am particularly well-suited to refute this completely wrong post.

"Many of these arbitrators have little, if any, knowledge of baseball. So the arguments are almost solely based around the simple stats. Things like batting average, runs batted in, wins, and ERA. There are none of the new, more refined stats like VORP or even OPS."

This simply isn't true. I personally know many sabermetricians who make a pretty penny consulting with teams and/or agents on how to present advanced sabermetric data to baseball arbitrators. Anyone with a basic familiarity with sabermetrics knows this, too, because it's hardly a secret: see, e.g., this AP piece on Bill James. With millions of dollars at stake, owners and agents aren't going to leave important arguments on the table just because they can't be found on the back of a baseball card.

This is one of the rare times that clubs can talk amongst themselves about player salaries

False. The Collective Bargaining Agreement prohibits teams from talking about the offers they make in arbitration. The comparables are based on the publicly available salary information, and are used equaly by both players and owners.

"Don't ask me to tell you why they have this system for "super-twos" in place; some things are just beyond explanation."

The explanation is simple: the players wanted players with two years of experience to have arbitration rights; the owners wanted to restrict it to players with three years of experience; the two sides compromised.

Amazingly, Fogal left out the main identifying feature of MLB arbitration, which is that it is single-offer arbitration: the arbitrator is not allowed to compromise, but must either vote for the player's proposal or the team's proposal. As a result, players and teams are forced to try to be as reasonable as possible in their offer, because they know the arbitrator won't split the baby. (Indeed, more than once, the team actually made an arbitration offer higher than the player made, and the arbitration didn't have to take place at all, because the player simply accepted the team's offer.)

Note that no team has to arbitrate anything. If a team thinks that the arbitrator will require the team to pay "too much" to the player, it can refuse to tender a contract, release the player and make him a free agent, and then offer a market-based contract. (The fact that no team actually does this demonstrates that it simply isn't true that arbitrators make systematic mistakes in overvaluing players more than the market would pay them.) Note further that no player has to arbitrate anything: he can choose to simply hold out. (No player ever does so, because arbitration is clearly a superior alternative.) Arbitration only comes into play when the two sides can't agree on a contract, and often the mere act of triggering arbitration creates the final impetus to settle.

The owners and the union freely negotiated to create an arbitration system as part of collective bargaining to compromise on the splitting of the pie of baseball revenue. Why do you find this free exercise of choice problematic?

This provides a good critique of arbitration schemes proposed by many tort reformers.

Actually not. There's not a single scheme proposed by a reformer that this post, which refers only to the sui generis MLB system, has any relevance to.

As I've previously discussed, Fogal's critique of arbitration in general is stunning in its obliviousness: every criticism she makes of arbitration is that of a problem that is even worse in litigation. Her financial problems stem not from her arbitration, but from an attorney who failed to advise her to obtain a surety bond when negotiating her contract. Fogal would be better served if she stopped writing ill-informed screeds about arbitration and instead focused on finding an attorney who might be able to recover her losses from her previous attorney before the statute of limitations expires.

Posted by: Ted Frank | January 31, 2007 8:08 PM

Apologies for the last paragraph, where I apparently confused Fogal with Sharon McCann.

Posted by: Ted | January 31, 2007 8:51 PM

In addition to Ted's comments about Fogal's completely wrong analysis of baseball arbitration, the analysis if true would an even better argument against the tort system. If baseball arbitrators are denigrated because they don't know anything about baseball -- not clear where Fogal gets that idea -- then how on earth can one defend med-mal litigation decided by jurors who know nothing about medicine?

If "comparables" are ill-defined, then how can one defend the system of allowing jurors to assess non-economic damages (or punitive damages), which are a completely arbitrary concept, unrelated to anything except the whim of a jury?

Posted by: David M. Nieporent | February 1, 2007 3:29 AM