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From BR Bullpen
The reserve clause was a clause in player contracts that bound a player to a single team for a long period, even if the individual contracts he signed nominally covered only one season. For most of baseball history, the term of reserve was held to be essentially perpetual, so that a player had no freedom to change teams unless he was given his unconditional release. The clause was widely believed to have been overturned in the 1970s, but in practice young players today are still bound for up to 12 years (6 in the minors and 6 in the majors) before they have free agent rights.
 Origins and Early History
The earliest professional leagues, the National Association and early National League had no contract restrictions. A player who played to the end of his contract was free to negotiate with any team, a practice known as revolving. This was an obvious feature of the player-centered NA, but troubled the team-centered NL because it hurt teams' profitability and made rosters unstable. In response, after the 1879 season, the NL owners agreed to allow teams to list up to 5 players who other teams were forbidden to sign. The reserve list was originally a secret, but once it leaked out the system was written into the league rules.
After the peace agreement between the NL and the American Association, the leagues agreed to respect each other's reserve lists and to expand the size of the list. Over the remainder of the 1880s, the reserve list was expanded to cover each team's entire roster, and the formal reserve clause was added to the standard player's contract. The reserve clause gave teams the right to renew a player's contract for another year at the same salary. While apparently innocuous, the teams held that the renewed contract also contained the renewal clause, so that a team had the power to continue to renew the contract for as long as it wished. The players tried unsuccesfully to fight the growing reserve system by forming a union, the Brotherhood and founding their own Players League in 1890, but the PL lasted just one season. For the next 80 years, the reserve system ruled the game.
 The Reserve System
With the death of the PL, players were forced to accept a system built around the reserve clause. Until the amateur draft was instituted in 1966, amateur players were free to negotiate with any team interested in signing them. For most players, that was the last time in their careers that they had any control over where they played. Once signed to a professional contract, players could be re-assigned, traded, sold, or released at the team's whim. The only negotiating leverage that most players had was to hold out at contract time, refusing to play unless their conditions were met.
 The Early System
In the early years of the reserve system, teams were prevented from monopolizing major league talent by a limit on the number of players they were allowed to keep under contract. Major league teams were prevented from raiding minor league rosters because the major and minor leagues agreed to respect each others' reserve rights. Major league teams got most of their players by trading or buying them from minor league teams. They also signed a few amateur players directly, though this avenue was limited because few amateurs were ready to play in the majors without a few seasons in the minors. Many of the players who went directly to the majors came from college programs.
Minor league teams had the same power to keep players indefinitely that major league teams did. Some minor league owners, such as Jack Dunn of the Baltimore Orioles, felt that they could do better by keeping their best players than by selling them to the majors. That meant that some players with major league talent remained in the minors for far longer than they would have had they been free to sell their skills on an open market (i.e. Lefty Grove).
One response to this was a minor league draft system, in which major league teams were allowed to draft players from teams in the high minors in exchange for a fixed payment, and minor league teams were allowed to draft players from lower in the minors. The draft forced minor league teams to sell their best players before the draft, when they could get premium prices for them by getting other teams into bidding wars. The decision of whether a league should allow a draft was a critical one. The International League, for instance, long resisted a draft, and only adopted it as a way of forcing Dunn to break up his great Orioles team of the early 1920s.
 The Farm System
The early reserve system was eventually replaced by the farm system devised by Branch Rickey. Rickey realized that he could bypass the limits on the number of players a team could have under contract by taking control of minor league teams. A team could then sign a huge number of amateurs, "grow" them on the "farm", and "harvest" the best players into the majors without having to pay market prices for them in late season player auctions. Starting in the 1920s, Rickey's St. Louis Cardinals began to buy up minor league teams, a process that accelerated when the Great Depression devastated the minors. The Cards eventually developed an enormous farm system that developed many more players than the team actually needed. The Cards were free to take the cream of the crop from their minor league teams and sell any leftover players to other teams who lacked farm systems and were forced to pay Rickey's price.
The handful of teams that developed really large farm systems- notably the Cardinals, New York Yankees, and later the Brooklyn Dodgers- came to dominate the game. Teams that were late in developing farm systems were effectively prevented from doing so because there weren't any minor league teams left to buy. Because players couldn't jump to teams that lacked talent, the teams with weak or no farm system couldn't get the best prospects from the teams with large farm systems, and the second-rate prospects they could get cost more than they should have.
 Drafts and Bonus Babies
The eventual solution to the worst abuses of the farm system was the Rule V Draft. Under Rule V, teams were required to promote minor league players to their 40 man roster within a set time after signing them. Players who weren't promoted were eligible to be drafted by any team willing to give the player a spot on the team's 25 man major league roster. The Rule V draft effectively prevented teams from stockpiling more minor league players than they could use, and caused teams with very large farm systems to shrink them to more manageable size. This also gave the remaining teams with very weak farm systems a chance to develop them.
Teams also competed vigorously for top amateur players. Because a team had perpetual rights to any amateur player it signed, teams were willing to pay enormous signing bonuses to untested players. Essentially, the money teams saved by using the reserve clause to underpay their major league players wound up being spent on the only players with a strong negotiating position - amateurs. In an attempt to keep signing bonuses in check, the majors instituted the bonus baby rule, which required amateurs receiving large signing bonuses to be placed on the signing team's major league roster immediately. The bonus baby rule wasn't very effective in reducing signing bonuses, but it did succeed in stunting the careers of many of the bonus babies. Many bonus babies lost critical development time sitting on the bench in the majors instead of playing full time in the minors. The obvious problems of the bonus baby rule lead teams to develop the Amateur Draft instead.
 Flood, McNally, and Messersmith
The reserve clause had been sporadically challenged by players since it was first instituted. Some players had even succeeded in winning in court, but such cases had limited effect. Because the players were always acting individually, the teams were eventually able to buy them off before a court reached a definitive ruling on the reserve clause.
That changed with Curt Flood. Flood, an outfielder for the Cardinals from 1958-1969, was traded to the Philadelphia Phillies after the 1969 season. Flood was outraged, both because he had put down roots in St. Louis and because the team hadn't even told him about the deal; he found out about it over the radio. Instead of submitting, Flood challenged the trade in the courts with the backing of the MLBPA. This time, the players were acting together and refused to be bought off. The suit eventually reached the U.S. Supreme Court, where Flood and the players lost.
Although the players lost the Flood case, they were still able to make progress. In the 1972 strike, they were able to convince the owners to accept binding arbitration for contract disputes. Several players then tried to refuse to sign contracts, play through one season under the reserve clause, and then demand free agent rights in arbitration. The owners, understanding that the reserve clause was under threat, were able to convince several players to relent, but in 1975 both Dave McNally and Andy Messersmith played through the season without a signed contract (actually, McNally retired partway through the season, then refused to accept a proposed salary increase in order to see his case reach arbitration).
Arbitrator Peter Seitz ruled for McNally and Messersmith. In essence, Seitz ruled that since the owners had written the contract, it was their responsibility to spell out its terms exactly. Because the reserve clause didn't explicitly state that it would be applied to the season played without a signed contract, he had to accept the players' interpretation that the clause only extended for one season and not in perpetuity. The owners challenged Seitz's ruling in court, but it was upheld, ending over 80 years of the reserve system.
 Free Agency
In response to Seitz's ruling, the owners locked the players out, arguing that the end to the reserve clause would destroy the business of baseball. Eventually, the owners and players reached an agreement that significantly revamped but did not entirely eliminate the reserve system. The exact rules of free agency and salary arbitration have been changed over time, but the basics of the system have remained essentially the same. Teams retained reserve rights for players only in the first 6 years of their major league careers. A player not under contract after 6 or more seasons of major league service could demand to be made a free agent. Players with some major league service time but less than 6 years were allowed to ask for salary arbitration so that teams couldn't set their salaries arbitrarily. Only in the first two or three seasons of a player's major league career is his team given complete control over his earnings (although the collective bargaining agreement sets a minimum for salaries for first, second and third-year players).
Under Rule V, minor league players had to be moved to the major league 40 man roster after 3 years for players first signed when they were very young and 2 years if they were signed when they were older. Players who weren't moved to the majors after 3 years on the 40 man roster were granted minor league free agency, as were minor leaguers with sufficient service time who had never been placed on the 40 man roster. That meant that a player might possibly be kept under reserve for 12 years (3 years not on the 40 man roster, 3 years on the 40 man but not the 25 man roster, and 6 years in the majors) but still gave the hope of free agency to every player.
 Further Reading
- Neal F. Flynn: Baseball's Reserve System: The Case and Trial of Curt Flood V. Major League Baseball, Walnut Park Group, Springfield, IL, 2006.
- David Mandell: "Danny Gardella and the Reserve Clause", in The National Pastime - A Review of Baseball History, Society for American Baseball Research, Cleveland, OH, number 26 (May, 2006), pp. 41-44.
- Stew Thornley: "The Demise of the Reserve Clause: The Players' Path to Freedom", in The Baseball Research Journal, Society for American Baseball Research, Cleveland, OH, # 35 (2007), pp. 115-123.