September 13, 2021 Sports Betting

The Hard Miles

By

Gregory Gemignani, who focuses primarily on intellectual property, gaming and technology law at Dickinson Wright, chronicles the long march toward near national sports wagering.

In the wake of the 1919 Black Sox scandal, most states that didn’t expressly prohibit bookmaking and sports wagering without exception quickly did so. Only Nevada and Montana had statutory exceptions to their general gaming prohibitions to permit forms of sports wagering and bookmaking. Montana’s exemptions were for limited forms of sports wagering activities, and Nevada’s exemptions allowed for broad-based commercial sports wagering and bookmaking for those with appropriate Nevada gaming licenses.  

In the 1960s and 1970s, the federal government enacted laws such as the Wire Act to prohibit interstate sports wagering. Delaware experimented with a state run lottery based on NFL scores, but quickly abandoned it when it lost money. In 1989, Oregon also introduced sports wagering through its state-run lottery, but later abandoned it in 2007. But the Oregon move to adopt a sports wagering product caught the eye of Senators Dennis DeConcini and Bill Bradley, who were concerned with a perceived threat of state sponsored or endorsed sports wagering. In response, the Senators drafted, and in 1992 ultimately enacted the Professional and Amateur Sports Protection Act (PASPA), which prohibited states and tribes from authorizing, conducting or regulating wagering on sports contests or athletic performances. PASPA also prohibited anyone from relying on such laws enacted in violation of PASPA.

To gain support for the bill and avoid opposition from Nevada, Delaware, Oregon and Montana, PASPA had exemptions for activities permitted within these states, and allowed New Jersey to enact laws to regulate sports wagering in regulated casinos provided such laws were enacted within one year of the enactment of PASPA. New Jersey never enacted such laws within the timeframe and thus its exemption under the statute was lost.

PASPA endured with little opposition or enforcement until 2009, when Delaware sought to bring back its sports lottery, but with expanded betting offerings. Delaware was challenged by sports leagues opposed to Delaware’s plan and the Second Circuit Court of Appeals held that the exemption under PASPA applicable to Delaware only permitted Delaware to conduct the same three-game NFL parlay product it had in the '70s. In 2011, New Jersey held a referendum on regulated sports betting, which voters approved by a near 2-1 margin. Based on the referendum outcome, the New Jersey legislature enacted laws to regulate sports betting in New Jersey. That was challenged by sports leagues, and in 2013, the Federal District Court in New Jersey enjoined New Jersey from engaging in such activities as it would violate PASPA. The case and related matters moved up and down the courts until it reached the US Supreme Court in 2017. In its opinion issued on May 14, 2018, the Supreme Court held PASPA to be unconstitutional because it commandeered state governments to execute a policy that the federal government hadn't adopted.

In the wake of its opinion, 22 states have some form of legal and regulated sports wagering available, and 10 states have approved legislation or compact amendments to authorize some form of legal sports wagering imminently. In just three years, we've gone from one state with broad-based regulated sports wagering, to 32 in which some form of legal and regulated sports wagering is authorized (commercial, tribal or state lottery) and is, or soon will be, available.

This leaves 18 states in which all forms of bookmaking and sports wagering remain prohibited without exemption. States like Utah and Hawaii, with no exemptions to its gambling prohibitions, are unlikely to change. But most others have some form of regulated or exempted wagering, yet haven't been able to enact laws or reach compact amendments to permit it.

Some states have constitutional prohibitions on the expansion or authorization of gaming by the legislature.  In such states, the process for amending the constitution is often difficult and may require referendums, popular votes and multiple election cycles. For example, the California Constitution, Article 4 Section 19 prohibits the legislature from authorizing any gambling other than charitable bingo and horse racing. It also prohibits the authorization of casino gaming as is conducted in Nevada and New Jersey. There is an exemption for tribal gaming compacts to allow tribes to offer slot machines, lottery games and percentage card games, however. This apparently leaves sports wagering authorization beyond the power of the California legislature to authorize and is outside permitted tribal compacts.

Amending the California constitution requires either a citizen initiative and a popular vote, a legislatively referred amendment subject to a popular vote, or a constitutional convention subject to a popular vote. Each is time consuming and difficult to bring to a successful conclusion. But there's an initiative that will likely be on the ballot in November 2022 to allow federally recognized tribes with tribal-state compacts to offer sports wagering subject to compact amendments, and to allow race tracks in certain counties to offer on-site sports wagering. While the measure has popular support, many licensed card rooms in California are opposed to it as are some tribes, and thus enactment is far from certain. As anyone seeking legislative change knows, there are few ways to get legislation enacted, and thousands of ways to kill it.

Earlier this year, a legislative bill to enact a sports wagering lottery product failed in the Georgia legislature. As such legislation would also include a constitutional amendment; a two-thirds affirmative vote was required by the legislature. Staunch liberal democrats refused to back the bill unless bills limiting voting rights were abandoned and funds from the sports lottery were in part used for needs-based scholarships. Conservative republicans also opposed the bill on social and moral grounds. Rep. Randy Nix stated: “I don’t think we have to put our official stamp on it and say this is great stuff to do. We’re going to sugarcoat it and fund all these things. I just don’t think it is a great idea.”

In addition to state constitution issues, California provides a good example of how competing stakeholders can influence, stall and kill legislation. In California, there are Indian casinos, commercial card rooms and pari-mutuel race tracks that all have an interest whether and how sports wagering becomes legal for regulated operators. As sports wagering in the US is traditionally a business with margins of 4.5 to 6% before taxes, it represents a form of wagering with substantially lower margins and higher risks than others. So some operators are opposed to any legalization and regulation as it represents competitive, operational and revenue risks for comparatively modest returns. Even those in favor aren't in total agreement on who should be allowed to operate sports wagering and in what manner. Many Indian gaming operators are concerned that permitting retail-only sports wagering that allows card rooms to participate will create significant competitive disadvantages because many tribes have land far from large population centers while card rooms operate within population centers. Likewise, many operators with gaming facilities near population centers are opposed to legal and regulated mobile sports wagering as it would allow rural operators to compete in population centers without the costs and overhead associated with operating in high-cost population centers. So in jurisdictions with competing stakeholders, obtaining a consensus is difficult and may prove impossible. Despite the obstacles, 32 states have enacted legislation or entered into compacts to permit regulated sports wagering. In these jurisdictions several drivers led to the success of such efforts. 

Whether state regulated, state run or tribal, the key driver for regulation of any form of gaming is revenue. For commercial gaming, it flows as taxable GGR. For state run gaming, revenue flows from traditional lottery sources with increased wagering options. For Indian gaming, sports wagering represents another form of gaming that provides revenues to Indian tribes for nation building. Ultimately, the drive to find new sources of revenue for funding governments and commercial profits is a strong motivator for the continued expansion of legalized regulated sports wagering.

Even though states uniformly prohibited sports wagering after the Black Sox Scandal, sports wagering continued to flourish with illegal bookmakers. Sports betting infiltrated bars, barbershops, pool halls and other locations and today, the pay-per-head industry offers illegal bookies the ability to provide sports betting apps, web sites and research tools to their players. The corner bar bookie now has access to systems that are every bit as sophisticated as many regulated sports wagering operators. But illegal bookmakers create social costs and present risks to the integrity of sporting events. Despite these costs and risks, enforcement is sporadic and infrequent at best.

Legal and regulated gaming offers the ability to provide legitimate competition to illegal operators. As regulated entities, legal bookmakers are subject to audits, investigations, and suitability reviews. In the event a regulated bookmaker would cheat customers or influence sporting events, this would be quickly caught in well regulated environments, and the bookmaker would face regulatory and possible criminal consequences. Additionally, regulated bookmakers are subject to laws that ensure fairness to bettors and legitimate avenues to redress actual or perceived wrongs.

The march toward near national regulated and legal sports wagering continues. But it’s likely that legalization of regulated bookmaking will slow down. The states where obstacles are relatively easy to overcome already have legalized regulated sports wagering. In the remaining states, those obstacles have stymied efforts and are likely to continue to slow the pace of adoption.

Jurisdictional expansion of sports wagering may slow, but expansion within existing jurisdictions is likely to grow as the national market matures and adapts to changes in social norms, technology and player preferences.

You are reading the Sept/Oct 2021 issue | View Contents


Advertisement