IN BRIEF
- A recent Supreme Court decision is a big step forward for the U.S. sports wagering industry, although several impediments such as the Wire Act still exist.
- Whether federal lawmakers will seriously consider repealing or modifying the Wire Act is uncertain.
- Until the Wire Act is amended or repealed, however, sports book operators will be required to undergo licensing and establish sports wagering infrastructures in each jurisdiction where they operate, among other requirements.
The U.S. Supreme Court recently ended a nearly six-year legal battle regarding the constitutionality of the Professional and Amateur Sports Protection Act (PASPA). In Murphy v. National Collegiate Athletic Association, 138 S. Ct. 1461 (2018), the Supreme Court, with Justice Alito authoring the majority opinion, joined by Chief Justice Roberts and Justices Kennedy, Thomas, Kagan, and Gorsuch, held that PASPA violated the 10th Amendment’s “anti-commandeering” principle, which provides that if the Constitution does not give power to the federal government or take power away from the states, that power is reserved for the states or the people themselves.
In essence, the Supreme Court held that “PASPA’s anti-authorization provision unequivocally dictates what a state legislature may or may not do,” and further, there is no distinction between “compelling a State to enact legislation or prohibiting a State from enacting new laws.” Rather, the basic principle of anti-commandeering applies in each case, and Congress cannot issue a “direct order to state legislatures.”
Additionally, the Supreme Court held that no part of PASPA could be salvaged because it was unconstitutional in its entirety. The Supreme Court reasoned that no provision could be severed from the provisions directly at issue—the anti-authorization provision and the prohibition on state licensing of sports gambling schemes. The remaining provisions in PASPA—(1) prohibiting states from licensing or operating sports gambling schemes, (2) prohibiting private actors from operating sports gambling schemes “pursuant to” state law, and (3) prohibiting advertising of sports gambling—were too closely intertwined with the main provisions at issue and could not survive independently.
This decision has ushered in the next gold rush for the U.S. gaming industry. Delaware, Mississippi, New Jersey, Pennsylvania, Rhode Island, and West Virginia have legalized sports betting and are taking bets. Arkansas and New York[1] have legalized sports betting but have not started taking bets. In addition, one tribe in New Mexico launched sports betting in its casino in October. With this period of unprecedented sports wagering expansion, however, comes a rapidly evolving legal landscape and important hurdles of which both gaming and nongaming attorneys must be mindful as they counsel clients.
First, although PASPA has been overturned, the decision did not result in an unbridled legalization of sports betting. In the states that have authorized sports betting, it is still unlawful for individuals to conduct their own sports betting offerings without undergoing licensure and adhering to a strict regulatory framework. Moreover, as discussed below, the parties that can even obtain operational licenses are restricted. Thus, interested parties exploring this space must understand licensing requirements and operational restrictions.
Second, although interstate sports betting would be a windfall for licensed, sports book operators, interstate sports wagering remains unlawful under the federal Wire Act, 18 U.S.C. § 1084. The Wire Act currently prohibits the knowing use of a wire communication facility to transmit in interstate or foreign commerce bets or wagers, information assisting in placing certain bets or wagers, or any information that entitles the recipient to money or credit resulting from such a wager on any sporting event or contest. Until the Wire Act is repealed or amended, sports betting will be conducted on only an intrastate basis in those states that authorize sports wagering. As a result, each operator must comply with each jurisdictions’ requirements, whether regulatory or otherwise, which itself presents a host of issues. Most notably, depending on how uniform these requirements are from state to state, a multijurisdictional operator may have to develop an independent infrastructure and product in each jurisdiction to conduct its sports wagering operations.
Federal lawmakers are currently studying the various issues related to sports betting regulation. In September, the first hearing on sports betting was held by the House Subcommittee on Crime, Terrorism, Homeland Security, and Investigations (the Committee). Chris Krepich, press secretary for Committee Chairman Jim Sensenbrenner (R-Wis.), told Bloomberg Tax in an e-mail that the Committee is considering what role Congress should have as states begin to develop policies toward sports wagering, including a potential amendment to the Wire Act.
On November 15, 2018, Sensenbrenner sent a letter to Deputy Attorney General Rod Rosenstein urging the Department of Justice (DOJ) to work with the Committee to protect the public from nefarious organizations that may use online gambling sites to launder money and engage in identify theft. The letter posed three questions to the DOJ: (1) whether the 2011 Office of Legal Counsel opinion that reinterpreted the Wire Act to permit online gambling is currently supported; (2) whether any DOJ guidance is currently provided to states interested in authorizing sports betting; and (3) whether the DOJ foresees any legal and illegal issues that may arise regarding sports betting if Congress takes no action in response to the Supreme Court’s decision. Sensenbrenner noted at the September hearing that he was presented with three viable options for Congress: (1) re-enact a federal prohibition against sports betting; (2) give complete deference to states to regulate sports betting; or (3) adopt uniform federal standards. Congress taking no action, he stated, would be the worst option.
Whether federal lawmakers will seriously consider repealing/modifying the Wire Act is uncertain. However, even if they decide to act, a complete regulatory scheme will take significant time given the current political environment and outstanding issues. For example, if the Wire Act were amended to allow interstate sports wagering, a host of questions must be addressed, such as how taxation would work if the operator is located in a state different than the bettor, and which state would be entitled to the tax revenue. In the interim, states are pushing forward with their own legalization efforts.
Not surprisingly, similar to the federal legislative process, interested stakeholders have varying degrees of power and influence on a state-by-state basis. This includes the commercial/tribal gaming operators, state lotteries, local/state governments, and trade associations, just to name a few. Similar to New Jersey’s implementation of internet gaming, which requires any internet operator to partner with a land-based operator, the land-based operators who previously spent considerable capital to develop land-based infrastructure will likely demand similar partnerships for sports wagering if a third-party operator enters their marketplace. In contrast, the District of Columbia, which does not have casinos, has a bill pending that will authorize the D.C. Lottery to act as regulator and operator of mobile sports betting. Executive Director of the D.C. Lottery, Beth Bresnahan, told GamblingCompliance that of the 408 retail lottery locations, only about 20 percent are expected to participate. This may include kiosks that allow for straight bets or parlays. The current version of the bill grants the D.C. Lottery authority to offer online and mobile sports betting throughout the district, whereas private operators could offer retail betting, and any mobile betting is restricted to the confines of the establishment.
In addition to the aforementioned stakeholders, you have the professional leagues. The leagues initially pushed for their much maligned “integrity fees,” which effectively serve as a royalty fee. In short, the leagues feel entitled to receive some form of compensation from the sports book operators because authorized sports betting is based on professional league games. Although such a fee is not unprecedented, given that professional sports leagues in France and Australia receive a percentage of wagers made in those jurisdictions, the likelihood of such fees built into U.S. regulation is dwindling due to the extensive opposition received from the industry. As a result, none of the states that have enacted legislation authorizing and regulating sports betting have incorporated integrity fees.
In lieu of integrity fees, leagues have begun to partner with sports book operators for branding purposes. For instance, in August the NBA became the first major U.S. sports league to partner with a sports book operator, namely MGM, in a deal that is estimated to be worth $25 million. Pursuant to this exclusive partnership, MGM was named the exclusive official gaming partner of the NBA and receives the rights to use league highlights, logos, and a direct data feed. Additionally, to further promote sports betting integrity, stakeholders in the betting industry, including Caesars and MGM, formed the Sports Wagering Integrity Monitoring Association in November for the purpose of partnering “with state and tribal gaming regulators; federal, state and tribal law enforcement; and other various stakeholders to detect and discourage fraud and other illegal or unethical activity related to betting on sporting events.” See https://www.bna.com/nevada-sports-books-n57982093300/.
The other opportunities created by the recent decision that are often overlooked are those that have availed themselves in tribal gaming jurisdictions. In addition to the massive opportunities for commercial gaming jurisdictions, the same potential for success exists among tribal gaming jurisdictions. Some tribes have a monopoly on gaming in certain states pursuant to tribal-state compacts entered into between each sovereign nation and the state. Compacts often offer tribes within the state the exclusive right to offer gambling, with the exception of state-operated lotteries or limited amounts of racetracks. As such, many tribes have successfully operated casinos for many years and are capable of offering sports betting. Given the large amount of market share tribes hold, along with their established gaming facilities, there is great potential for sports betting success in tribal gaming jurisdictions.
These are just a few examples that highlight the significant lobbying and advocating in every jurisdiction by the stakeholders to maximize the potential benefits that each would enjoy.
Although the stakeholders and regulatory environment may vary from state to state, certain regulatory components, e.g., standards to ensure integrity, are fundamental to the make-up of an effective sports betting regulatory regime. So, although the regulations may vary based on the particular policy goals in each jurisdiction, the universal policy goal should be ensuring the operations are conducted in a fair and honest manner, and that the integrity of the industry is vital to its success. Without an effective regulatory framework, any short-term success will be followed by increasing issues that will weaken public confidence and support for the industry.
In summation, the Supreme Court’s decision is a big step forward for the sports wagering industry in the United States. That said, several impediments still exist, the largest of which is the Wire Act. Until the Wire Act is amended or repealed, sports book operators will be required to undergo licensing and establish sports wagering infrastructures in each jurisdiction where they operate. Additionally, interested operators will have to account for any interested stakeholders and their varying degrees of power and influence. For instance, in certain states such as New Jersey, sports book operators must partner with existing land-based casinos. In other states they must partner with the lottery or racetracks.
Lewis Roca Rothgerber Christie LLP’s gaming practice has been at the center of these issues in Nevada, the United States, and internationally. If you need assistance, whether it is providing advice, analysis, and/or evaluation of the numerous opportunities, regulatory frameworks, and issues that will arise in the coming years as legalized sports wagering expands, please do not hesitate to contact the authors: Karl Rutledge at krutledge@lrrc.com, Glenn Light at glight@lrrc.com, or Mary Tran at mtran@lrrc.com.
[1] Legislation to permit full-scale sports betting in New York failed in June 2018, but New York passed a law in 2013 to allow sports betting at four on-site locations. This law could be revived, and the New York State Gaming Commission is aiming to complete regulations “in the short term” for the four locations specified in the 2013 law. http://www.espn.com/chalk/story/_/id/19740480/gambling-sports-betting-bill-tracker-all-50-states.