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July|August 2004

Sell Outs

Major League Baseball should tell its teams to stop scalping their own tickets.

By Doug Pappas

TICKET BROKERS, OR SCALPERS AS THEY'VE BEEN CALLED since the 19th century, have never been highly regarded. Event promoters, who detest the brokers because they scoop up thousands of tickets before fans can buy them, engage in elaborate schemes to limit the number of tickets that scalpers can get their hands on. Consumers—at least the ones who don't have unlimited funds to spend on theater or football tickets—have a similarly low opinion of them. What, other than acute ambivalence, can a consumer experience when she discovers after hours in line that although the box office is sold out, thousands of seats are still available from third parties—if she can afford to pay a generous markup?

To protect consumers from this form of price gouging, many jurisdictions have enacted laws regulating the ticket brokerage business. In New Jersey, for example, licensed ticket brokers are forbidden from charging more than a 50 percent premium over the face value of a ticket. The Internet, however, has made enforcing antiscalping laws more difficult. Scalpers can now offer tickets on eBay, or through online message boards that local law enforcers may not monitor. For years, however, one principle had remained stubbornly inviolate: Event promoters didn't scalp their own tickets. Not so anymore.

Recently, two major league baseball teams decided if they couldn't beat scalpers, they would join them. The Chicago Cubs' parent company established a corporation with the sole purpose of scalping Cubs tickets. The Seattle Mariners took a different, though similarly nefarious, approach. The team began facilitating the scalping of tickets on its website (where the team could charge a commission on the transactions) even as it hired off-duty police officers to enforce a local antiscalping law on the competition—the good old-fashioned freelance ticket broker.

THE CUBS ARE OWNED BY THE TRIBUNE COMPANY, which knows a thing or two about how to generate revenue from one of baseball's most storied, if not winningest, ball clubs. In addition to the team, the Tribune Company owns the Cubs' flagship radio station, WGN; their principal TV and national cable outlet, WGN-TV; and the team's ballpark. Wrigley Field, Major League Baseball's second oldest and third smallest ballpark, has long been a prime tourist attraction. It's also been a home away from home for the "Bleacher Bums" who have flocked to the park year after year even though the National League's Cubs haven't played in a World Series since 1945. In the summer of 2001, the Cubs' executive vice president, Mark McGuire (no relation to the former Cardinals' slugger), identified another potential income stream—tapping into the thriving secondary market for Cubs tickets.

Since its adoption in 1923, the Illinois Ticket Scalping Act has forbidden the original seller from selling tickets for more than their face value—in effect, providing a consumer protection statute intended to require the seller to honor his stated price. From 1935 until 1991, the statute also forbade the resale of tickets at a premium. But in 1991 the act was amended to regulate rather than ban scalping: Street scalping is still prohibited, but registered ticket brokers may resell tickets at a premium so long as they do so from permanent offices established for that purpose. The registration provisions, which also prescribe a set of consumer protection standards that brokers must observe, were seen as sufficient to protect the public from unscrupulous or fly-by-night scalpers.

McGuire proposed that the Tribune Company establish a ticket brokerage of its own. Like the existing ticket brokers, McGuire's would buy tickets from the Cubs at face value and resell them to the public for whatever price the market would bear. In February 2002, the Tribune Company incorporated its newest subsidiary, Wrigley Field Premium Ticket Services. Premium complied with all statutory registration requirements and opened its doors a few blocks from Wrigley Field in June 2002.

Premium was just like other ticket brokers operating in Chicago—except that it had advantages not available to competitors that weren't part of the Cubs family. It could requisition tickets directly from the Cubs' box office before they went on sale to the general public, and it did. It could obtain the most popular seats, in the boxes and bleachers, and it did. It could "pay" for these tickets with an intercompany accounting entry, not cash or a credit card, and it did. If Premium found itself with more tickets than it could sell at the desired price, it could return them to the Cubs' box office for credit. Imagine the look a street scalper would get at the ticket window if he tried to return his unsold tickets.

In June 2003, the New York Yankees made their first-ever regular season visit to Wrigley Field. The games sold out minutes after the Cubs put single-game seats on sale in February. Yet as late as mid-April, Premium still had plenty of $30 bleacher seats available—for $155 each. First-row box seats (face value: $45) could be had for a mere $1,500.

Premium and the Cubs defended their practice by explaining that the tickets Premium was selling weren't ones that would otherwise have ended up in the hand of Joe Wrigleyville. Rather, as they told the Chicago Sun-Times, Premium's wealth of tickets came from a special pool that Major League Baseball required the club to reserve for players and VIPs. The commissioner's office says that no such reserve rule existed.

Major League Baseball, and the owners of other clubs, had their own reasons to question Premium's operations. The league requires that each club pay 34 percent of its local revenues into a common fund that is then divided equally among all 30 clubs, as part of a revenue-sharing program designed to help poorer ones (the Minnesota Twins, for example) stay competitive with teams from bigger markets like Boston. If the Cubs could "sell" a ticket to the Yankees game for $45 to Premium, the Cubs could claim that the other clubs were entitled to 34 percent of the original sale price—$15, instead of the $500 due if the others got a share of the $1,500 that Premium charged.

The Cubs weren't quite that brazen, but they clearly weren't eager to share their take from Premium with Major League Baseball, either. They reported to the league that Premium hadn't actually made a profit, so they didn't owe any extra money to the common fund. Owners of other teams quoted anonymously in the Chicago press were livid. They pointed out that the common fund was a revenue-sharing program, not a profit-sharing one. And as the Sun-Times columnist Greg Couch noted, among the expenses that kept Premium's net from being in the black were accounting services provided by the Cubs' bookkeepers and rent paid to a building owned by—you guessed it—the Tribune Company.

It wasn't just baseball owners who were upset by the ripple effects of Premium's role in the ticket market. Many of the tickets sold by Premium would otherwise have been sold to Cubs season ticket holders, who for years have been given the opportunity to buy single-game seats before they are offered to the general public. In 2003, however, the Cubs announced that no single-game seats would be available for the three most desirable opponents: the Yankees, the crosstown rival White Sox, and the division rival Cardinals. In so doing, the club antagonized its best customers to maximize the number of seats for these high-demand games it could sell at scalpers' prices through Premium.

Angry season ticket holders complained to the club. The Chicago icon Studs Terkel called the Cubs "shameless" and compared the team to Enron. Two angry Cubs fans sued the club and Premium on behalf of a class that included everyone who had purchased a ticket from Premium for more than its face value. The plaintiffs alleged that because the "sale" of tickets from the Cubs to Premium was a sham, both companies were violating the Illinois Ticket Scalping Act. Plaintiffs also alleged fraud, unfair competition, and deceptive trade practices.

Cook County Judge Sophia Hall certified the class in May 2003 and held a bench trial that August. At trial, the defendants conceded virtually all the relevant facts, but argued that because the Cubs and Premium were legally separate subsidiaries—albeit commonly owned ones—of the Tribune Company, the sale of tickets by the Cubs to Premium satisfied the requirements of the Illinois statute and entitled Premium to resell the tickets for more than their face value.

Hall's decision came down in November. She ruled for the Cubs on every major issue, holding that the antiscalping statute was not violated so long as the Cubs received no direct financial benefit from Premium's resale of tickets at a profit. She didn't do what the plaintiffs had urged, which was to pull back the corporate veil and look behind the form of the transaction to its substance. She also ignored the fact that all revenue from both the Cubs and Premium flowed directly into a common bank account of the parent company. The plaintiffs have appealed the decision; in the meantime, Premium continues to operate.

THE SEATTLE MARINERS didn't go as far as the Cubs, but then again they couldn't. A Seattle ordinance forbids the resale of tickets in the city for more than their face value. Last season, the American League's Mariners enthusiastically enforced this ordinance against street scalpers outside their ballpark. At the same time, however, they were violating the spirit of the ordinance on their website.

Section 5.40.60 of the Seattle Municipal Code forbids the sale or resale of tickets "at a price in excess of the price printed, stamped or written thereon." The State of Washington does not have a similar law, so Mariners tickets can be freely resold at a premium so long as the sale does not take place in Seattle. Some jurisdictions have been zealous in their pursuit of Internet scalpers—the Queens D.A.'s office in New York, for instance, has gone after scalpers selling Mets tickets on eBay. But Seattle city attorney Tom Carr told The Seattle Times that even if Seattle police tried to prosecute Internet scalpers, it would be difficult to convince a jury that a transaction that took place over the Internet actually occurred "in Seattle." According to the paper, Carr also said he "has more important things to worry about—such as drunken-driving and domestic violence cases—than Seattle's scalping law."

Since moving from the dingy, concrete-roofed Kingdome to the modern, retractable-domed Safeco Field in the middle of the 1999 season, the Mariners have been one of Major League Baseball's hottest tickets. In 2001 (when they set an A.L. record by winning 116 games) and in 2002, the Mariners played to over 90 percent of capacity in a stadium that holds 47,116 spectators. The strong demand for tickets created opportunities for scalpers. Some sold their seats beyond the Seattle city limits, outside the net cast by the Mariners and by Seattle law. Others, however, were more brash, offering tickets to fans as they approached Safeco Field. In an effort to rid Seattle of scalpers, the Mariners hired off-duty Seattle police officers to patrol nearby streets, referring for prosecution anyone caught offering Mariners tickets for more than their face value.

It was a classic "do as I say, not as I do" scenario. In 2001, the ball club had partnered with LiquidSeats, a web-based ticket vendor, to establish the Mariners Ticket Marketplace. The Marketplace, connected directly to the club's website through a link on its homepage, allowed season ticket holders to resell single-game seats at any price a buyer was willing to pay. Some offered their seats for as much as eight times their face value.

The site was marketed as a service to the Mariners' best customers, but it soon became a profit center for the club. The Mariners charged a 10 percent commission to the buyers and a 15 percent commission to the sellers—eBay, by contrast, charges sellers closer to 6 percent, and buyers nothing. In 2003, the Marketplace earned the club over $100,000.

The Marketplace warned its users that Seattle law forbade city residents from offering their tickets for more than face value, and ostensibly prevented those season ticket holders who receive their tickets at a Seattle ZIP code from reselling them for more than face value. According to the site's critics, however, that restriction is easily dodged thanks to a function that allows sellers to establish an alias, complete with a false address. What's more, the site takes no measures to prevent its users from paying for and delivering surcharged tickets within the city, even though such practices violated Seattle's ordinance.

Citing these facts, attorneys for two men—one charged with scalping Mariners tickets near Safeco Field in 2003, and another convicted for scalping tickets in 2002—sought dismissal of the charges on the grounds of selective prosecution. They alleged that the Seattle police had singled them out for prosecution while ignoring the identical violations being committed on the Mariners' website. In January 2004, Judge Jean Rietschel of the Seattle Municipal Court agreed. She held that enforcing the antiscalping laws only against street scalpers was "not rationally related to a legitimate government purpose." Rietschel added that by refusing to prosecute Marketplace scalpers while allowing the Mariners to hire off-duty officers to enforce the same law outside Safeco Field, the Seattle Police Department engaged in "disparate treatment [that] is intentional, purposeful and deliberate."

Although the Seattle City Attorney's Office described Rietschel's decision as "flat-out wrong," the precedent will complicate any future attempt to prosecute scalpers outside Safeco Field. But the Mariners continue to operate Marketplace through their website, with no further safeguards against violation of the Seattle antiscalping ordinance.

The Mariners are hardly the sole pro sports team that facilitates scalping on its website—some 25 other teams provide similar services through Ticketmaster or StubHub, as LiquidSeats is now known. Yet what's disturbing about the Mariners is the hypocrisy of their attempt to muscle out the local scalper competition. Like the Cubs, the Mariners have let their focus on the bottom line get the better of their scruples. If the Cubs had wanted to charge hundreds of dollars for their best seats, they could have done so by raising ticket prices. Instead they've tried to pull the wool over the eyes of their fans—and of the accountants who enforce baseball's revenue-sharing rules—by finding an indirect means to the same end.

The Mariners and the Cubs are perpetrating these schemes even as they charge some of baseball's highest ticket prices. The average ticket to a Cubs game costs a National League high of $28.45, while in the American League, the Mariners' $24.01 trails only the prices of Red Sox and Yankees tickets. With these clubs able to collect such sums through their box offices, there's no excuse for the Cubs and the Mariners to be boosting their profits through scalping. If the law won't stop them, Major League Baseball should.

Doug Pappas died in May at the age of 43. An attorney and a contributor to Baseball Prospectus, he was one of the most influential writers about the business of baseball.

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