September 13, 2019

Online Gaming and Sports Betting in the United States: A Moving Target

On May 14, 2018, the United States sports betting landscape changed dramatically with the Supreme Court holding in consolidated cases Murphy v. National Collegiate Athletic Association and New Jersey Thoroughbred Horsemen's Association, Inc. v. NCAA.[1]  In Murphy, the Supreme Court held that the Professional and Amateur Sports Protection Act of 1992 (PASPA) was unconstitutional and therefore invalid.  The primary basis for the Court's ruling was that the federal law violated the anti-commandeering principle of the Tenth Amendment of the United States Constitution, by requiring the individual states to affirmatively execute PASPA's federal mandate.

Leading the charge in invalidating PASPA was the State of New Jersey. Why was New Jersey so eager to wage a legal battle over a twenty-five year old federal statute?  Because it was estimated that at least $150 billion was illegally wagered on sports betting in the United States each year.  And New Jersey, with its longstanding gaming and horseracing industry, saw an opportunity.

Before May 2018, only one state in the United States authorized and regulated widespread sports gambling—Nevada.  This is because PASPA effectively limited the individual states' abilities to allow sports betting within their borders.  It expressly excluded from its reach pari-mutuel sports betting (horseracing, dog racing, and jai alai), and also grandfathered in those states which already had some form of authorized sports gambling on their books, specifically not prohibiting them from continuing to regulate and authorize those pre-existing operations. This state-by-state carve-out resulted in the federal authorization of licensed sports betting pools in Nevada, and sports lotteries (i.e., parlays) in Oregon, Delaware, and Montana.

New Jersey set out to change that, through judicial means.  With the goal of legislating sports gambling within its borders, New Jersey (along with its thoroughbred horseracing industry) challenged the constitutionality of PASPA, claiming the act unlawfully restricted the several states' abilities to legislate and regulate sports betting within their own individual borders. This years-long judicial battle finally reached the Supreme Court on December 4, 2017.

The matter boiled down to whether PASPA, an act of the federal government, preempted state law in the sports gambling arena pursuant to the proper utilization of the Constitution's Supremacy and Commerce Clauses, or whether PASPA in reality commandeered the individual states to do the federal government's bidding.  On May 14, 2018, the Supreme Court handed down its opinion, with the majority ultimately concluding that PASPA was unconstitutional.  

Murphy's repeal of PASPA did not automatically legalize full-scale sports betting across the United States.  Instead, the decision removed the federal prohibition that for a quarter of a century had prevented states from authorizing sports betting.  With that federal ban erased, legislatures now can—on a state-by-state basis—decide whether and how they want to legalize, regulate, and tax sports betting within their borders.  Indeed, in just one year after PASPA was struck down, the American Gaming Association (AGA) calculated that almost $8 billion was legally wagered on sports within the United States, with $3 billion of that figure representing wagers made outside of the State of Nevada.  In addition, the AGA reported that more than 35 business partnerships have been formed between leagues, teams, and gaming companies in the year since the repeal of PASPA, and that number continues to grow.  With a multi-billion dollar backdrop for sports betting, lawmakers in many states continue to be eager to consider the opportunities now available to them for the first time since 1993.

As a result of the Murphy decision, sports betting is currently being legislated on a state by state basis.  In a matter of mere months since the Supreme Court handed down its decision, state-approved sports books opened in several states.  Commercial operations, state-run lotteries, as well as tribal casinos authorized by the Indian Gaming Regulatory Act of 1988 (IGRA) have opened sportsbooks or are otherwise offering sports betting opportunities for people located within the allowed geographic locations.

The authorization, operation, and regulation of sports betting in each state varies.  For example, in Delaware and West Virginia sports betting is regulated and operated by the state lotteries, not private gaming entities.  Additionally, in New Jersey, Nevada, Pennsylvania, and West Virginia, sports betting is lawful not only in licensed bricks and mortar facilities, but also on the internet.  In New Mexico, sports betting is currently only offered on tribal land.  While some states had already allowed some form of online gaming, with the infusion of sports betting into several new states' regulatory schemes has come a sort of resurgence of online gaming. 

Indeed, though Murphy dealt with sports betting specifically, online gaming immediately became the next topic or challenge for the gaming industry.  Due to other federal laws aside from PASPA that limit interstate sports betting, sports betting must be conducted on an intrastate basis, even where it is lawful to be offered through online and mobile avenues.  Importantly, how the term "intrastate" is defined has been put at issue in a federal lawsuit initiated in New Hampshire by the lottery, due to the federal government's shift in its position and approach to online gaming generally, as announced in a November 2018 memorandum published by the Office of Legal Counsel of the Department of Justice in January 2019.[2]  

As the several states consider and shape their legal and regulatory structures in authorizing sports betting, there are myriad variables for consideration in implementing the scheme that works best for the states, their respective existing and/or potential operators, and their residents.  In addition to the federal considerations still at play and warranting analysis, states must also determine for example, the applicable tax rate, eligibility requirements and fees for licensure, the number of available licenses, whether to allow online or mobile betting, the impact of or interplay with existing IGRA compacts, and how to protect consumers and ensure responsible gaming.  And these issues, limitations, and regulations must be deeply understood by operators in the space and their counsel, in order to remain compliant and to ensure their costly and valuable licenses remain in good standing.

 

[1] 138 S. Ct. 1461, 200 L. Ed. 2d 854 (2018) (hereinafter Murphy).  Notably, when the case began, Christopher Christie was the governor of New Jersey and the named party in the suit; however, by the time the Supreme Court handed down its opinion, Mr. Christie's term was expired and Phil Murphy had been elected governor.  Thus, Mr. Murphy's name was substituted in Mr. Christie's place.

[2] Reconsidering Whether the Wire Act Applies to Non-Sports Gambling, 42 Op. O.L.C. 1 (2018).

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