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August 24, 2006

The Annuity That Changed Baseball

Hunter v. Finley

by Brent Gambill

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Most people identify Curt Flood's Supreme Court case as the precursor to free agency in baseball, while Andy Messersmith and Dave McNally are recognized as the first free agents in MLB history. Between those two milestones, however, came a series of players who nearly played out their option year, which would have provided a means of testing the reserve clause: Al Downing, Ted Simmons and Bobby Tolan. Each signed new deals before their option year ended, in part because of ownership pressure to avoid just such a case.

In the winter of 1974, however, a different set of circumstances set one pitcher free on the open market. Jim "Catfish" Hunter's freedom was the product of a unique scenario.

On February 11, 1974, Hunter signed a standard MLB player contract that stipulated a two-year agreement with the Oakland Athletics. While negotiating the contract, Hunter requested, as an addendum, that his attorney J. Carlton Cherry seek Internal Revenue Service (IRS) approval to defer $50,000 of the annual salary. The provision called for half of Hunter's salary to be paid into an insurance company fund during the season, intended for the purchase of an annuity for his benefit following his playing career.

The actual legalese of the provision stated that half of his $100,000 annual salary was to be paid "to any person, firm, or corporation." This was done in order to defer income and avoid taxation. Oakland A's owner Charles O. Finley requested some minor revisions in the wording of the contract concerning when the $50,000 would be paid--the words "to be paid during the seasons as earned" were eventually added by Finley before returning the contract unsigned to Cherry. Following the deal's signing, Finley became concerned with the tax consequences of purchasing the annuity. He soon discovered that the club could not deduct the annual $50,000 annuity payment as a business expense. He would not have use of the $50,000, as it would be in the annuity, and he could only get the tax deduction years later, when Hunter collected the money out of the annuity. Finley decided to drag his feet on making the payment.

As detailed in his biography Catfish (written with Armen Keteyian), Hunter spoke with player representative Jim Kaat prior to the 1974 All-Star Game. Kaat advised him to have his attorney write Finley a letter concerning the non-payment. Cherry sent letters to Finley in August and September asking him to sign the deferred compensation agreement. In his correspondence, Finley never gave a straight answer concerning the matter. In one reply, he stated that he was ready to commit, but feared that his wife, the secretary of the club, would not sign the paper. On another occasion, he complained that he was worried about other players wanting the same clause in their contracts. In mid-September, Richard Moss, counsel to the Major League Baseball Players' Association (MLBPA), sent a contract-violation notice to Finley. He had a ten-day grace period to meet the terms of Hunter's contract per the rules of the Basic Agreement. Those ten days passed without response.

Tired of the stalling, Cherry took the case to the MLBPA. On October 4, 1974, the following telegram arrived at the offices of Charles O. Finley & Company:

This wire is sent on behalf of James A. Hunter. Pursuant to paragraph 7(a) of contract between Mr. Hunter and the Oakland Club, please be advised that contract is terminated due to Club's default in making payments in accordance with said contract and its failure to remedy said default within ten days after receiving written notice thereof. Because of the impending playoffs and World Series, the effective date of termination shall be the day following the last game played by the Oakland Athletics in 1974.

Richard M. Moss, General Counsel
Major League Baseball Players Association

After receiving the telegram, Finley contacted the Major League Baseball Player Relations Committee, who advised him that he was not obligated to purchase the annuity, but should send the money directly to Hunter. The money was mailed the same day of the telegram's receipt. Hunter sent the money back saying, "I can't take it. I've been advised by my attorney that the check must be sent directly to the Jefferson Insurance Company." As a result, payment was not made in accordance to the contract. (Note that in his biography A Whole Different Ball Game, former MLBPA executive director Marvin Miller denies this series of events ever occurred.)

On October 8, 1974, before Game Three of the American League Championship Series, Hunter was given a message that Finley wanted to see him. Hunter entered Finley's office to find American League President Lee MacPhail and Commissioner Bowie Kuhn sitting with Finley. The owner offered to pay the $50,000 owed. Hunter refused, stating "you pay it the way the contract reads and everything will be just fine."

During the 1974 World Series, Kuhn suggested in a press conference that he was considering mediating the dispute between Hunter and Finley. He thought he had authority to act on this matter, but the union's position was that he had no right to impede a process established by collection bargaining. Moss noted that the Basic Agreement stipulated an impartial arbitrator would rule on all contract disputes between a player and owner, effectively stating that the commissioner lacked the authority to wade into the matter on his own initiative. The commissioner had effectively lost this authority in 1970, after the clubs and players agreed that all such matters would be resolved through impartial arbitration.

In 1974, Hunter led the American League in wins and ERA, going 25-12 with a 2.49 ERA, for which he was honored with the American League Cy Young Award. Oakland finished the season with their third consecutive World Series win, defeating the Dodgers. At the end of that World Series, Finley had made no payments into the fund. In response, Hunter filed a grievance against him. Finley responded by offering to pay the money to the arbitrator, who would hold it until the dispute was settled, but this suggestion was also refused.

On November 26, 1974, Hunter took Finley to arbitration to settle the dispute over his contract. Hunter was represented by Cherry and Joe Flythe (his attorneys), Moss and Miller of the MLBPA, and Jerry Kapstein, his agent. Miller states in his biography that Kapstein thought Hunter would lose his arbitration case--he was fired by Hunter's attorneys the day following the arbitration. The lone representative for Finley was John Gaherin, the chief negotiator for major league baseball owners. The first non-salary arbitration case in Major League Baseball was heard by a three-person panel headed by arbitrator Peter Seitz; the other two members of the panel were the MLBPA's Miller and MLB's Gaherin. The witnesses were Hunter, Cherry, Finley, and MacPhail. During Finley's testimony before Seitz, he claimed that he had never agreed to Hunter's demand, even stating that the signature on the contract was not his and that he never saw, read, or knew anything about the contract. His statements were refuted easily enough--Cherry brought all correspondence between the parties to the arbitration.

Moss argued that Hunter's contract was breached by Finley, and that the pitcher should be declared a free agent. Section 7(a) of Hunter's contract explained the implication of Finley's non-payment: "The Player may terminate this contract…if the Club shall default in the payments to the Player."

On December 16, Seitz cast the deciding vote, declaring Hunter a free agent because Finley had failed to live up to the terms of the contract. According to Seitz, there was "no ambiguity" about the club's obligations, its failure to carry them out, or Hunter's right to act accordingly. Finley had defaulted on a material portion of the player's contract, and the contract predetermined that the remedy was free agency. Seitz wrote that the remedy of the player being able to terminate his contract when it had been violated was not his remedy--"It was the remedy specified in the contract itself."

The decision also ordered the Oakland team to pay Hunter the $50,000 it owed him from 1974, and to pay six percent interest on that amount from August 1 until the money was paid. Seitz's original draft opinion did not state that Hunter was a free agent; in executive session with Seitz and Gaherin, Miller pointed out the omission. The lack of clarity would have opened the door for Finley to claim that Hunter was still property of the Athletics. After a short recess, Seitz changed the wording to read "Mr. Hunter's contract for service to be performed during the 1975 season no longer binds him and he is a free agent."

"I think it was fair and just, and I knew we told the truth. I had the feeling all the time it was going to come out my way," commented Hunter following the decision. Kuhn later wrote, "To forfeit the contract over a few days' delay in paying the $50,000 was like giving a life sentence to a pickpocket…Finley clearly was a pickpocket, trying to hold the $50,000 in his own account for as long as possible, but so far as I knew, that was the worst of it." Finley immediately attempted to get a restraining order while awaiting appeal, but Judge Spurgeon Varakian of the Superior Court in Oakland refused the request. The commissioner then stepped in, as Kuhn imposed a moratorium on any dealings with Hunter until he had an opportunity to review the decision.

Hunter wasn't just the first free agent--he was one of the best pitchers in the game hitting the market coming off of what might have been his best season. He was the 28-year-old reigning American League Cy Young Award-winner, and he had four consecutive 20-win seasons under his belt. The original Oakland contract was to pay Hunter $100,000 per season for two years, but on the open market he would command many times that amount.

Once the moratorium was dropped by Kuhn, the race to sign Hunter began in the law offices of Cherry, Cherry & Flythe in Ahoskie, North Carolina. Miller first had to convince Cherry, who had no experience in baseball, not to accept Finley's offer of $200,000 before Hunter had even entertained offers from other clubs. Kansas City Royals owner Ewing Kauffman was the first to call, and was the only appointment on the first day. The next day the phone began to ring, and appointments were set up for representatives of teams to come to Ahoskie.

The New York Mets made the first offer at $2 million on December 19, 1974, and that afternoon the Boston Red Sox offered $3 million. Los Angeles Dodgers owner Peter O'Malley offered $3 million for two years. In the end, 22 teams tried to sign Hunter, with the Baltimore Orioles and Detroit Tigers the only teams not participating. Within two weeks Hunter signed a five-year, $3.7 million dollar contract with the New York Yankees. The contract included bonuses, life insurance, attorneys' fees, and appearance fees. The breakdown of the contract was $100,000 a year for five years, with half of it deferred, $53,462.67 a year in insurance annuities for ten years, a $100,000 signing bonus, 15 years at $100,000 per year until 1994, $25,000 college endowments for Todd and Kim Hunter, $200,000 in attorney fees, and a brand new Buick every year for five years. After signing, Hunter was the only player in baseball with a multi-year contract in 1975. "My family has been set up for life," Hunter acknowledged.

Even with the signing, Oakland and Finley were still intent on going to court to try to get Hunter's rights back under the reserve clause. The case was heard before Judge George Phillips, Jr. in Alameda County Superior Court in California. Neil Papiano, Finley's attorney, argued that impartial arbitrator Seitz exceeded his jurisdiction, and that the reserve system goes beyond an individual player's contract. He argued that the reserve system itself is explicitly exempt from the arbitration process. The reasoning was that even if an individual contract has been broken, the absence of a contract does not free a player from other aspects of the reserve system, and still limits the player to dealing with is original club.

The actual legal issue before the court was whether the decision of an arbitrator, agreed to by both sides in the original dispute, would be overruled. The only ground for overturning an arbitrator's decision would be that the arbitrator was "grossly irrational" in going beyond the bounds of the problem presented to him. After listening to three hours of arguments and studying voluminous briefs, Judge Phillips, Jr., refused to overturn the arbitration decision. "Reasonable men may differ on how the various clauses can be interpreted, but there is nothing unreasonable in the conclusion this arbitrator reached. The key fact is that Hunter did not get paid the way he was supposed to," stated Judge Phillips Jr. in his ruling.

While Hunter never won another Cy Young Award, he did pitch in two more All-Star Games and three World Series with the Yankees before retiring following the completion of the contract in 1979. In hindsight, the Hunter case had no direct implication on the reserve clause, but as time would tell, the decision was a sign of things to come. This case was the first to explore the arbitration and mediation process for players' disputes with ownership. If Messersmith and McNally were the test cases for the reserve system, then the Hunter case was the test of the new arbitration system. Both would be critical precedents for the subsequent establishment of free agency as we know it in 1976.

Brent S. Gambill is the Producer for Baseball Beat with Charley Steiner and Fantasy Focus for XM Satellite Radio's MLB Home Plate on XM 175. He can be reached here.

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