The Supreme Court Changes Everything

Late last year, I wrote a blog about the then pending sports betting case, entitled, “The Most Important Case of the Century.

It turned out to be even bigger than that

In the coming days and weeks, I will be discussing in detail what this major change in the law means. But here is a summary of what happened and why, and what questions remain.

For most of my readers, the major holding is that states are now free to legalize sports betting, or any form of gambling they want.

But the Opinion was much bigger than that. For the first time in American history, the U.S. Supreme Court expressly held that the federal government cannot order states, or state officials, to do anything.

The federal government still has enormous power. But Congress, federal courts, administrative agencies, and even the President can only take action against individuals, not local governments. And the federal government only has powers that were given it in the U.S. Constitution.

During the American Revolution, 13 colonies succeeded in winning their independence from the king of England. They were now independent sovereign nations, with unlimited powers within their own borders. But they realized they could not survive militarily against the great world powers of that era, England, France and Spain, so they created a federation for their common defense. The states gave up some, but by no means all, of their sovereign powers when they created the federal government.

The United States is a government of “enumerated powers,” meaning that if it is not in the U.S. Constitution, the power remains with the states. As Justice Alito wrote, “And conspicuously absent from the list of powers given to Congress is the power to issue direct orders to the governments of the States.”

The problem arose because Congress passed a ridiculous law, the Professional and Amateur Sports Protection Act (“PASPA”), which prevented any state from legalizing any form of sports betting it did not already have in 1991. Nevada and a dozen other states had some form of sports betting, including lottery parlays, jai alai and calcutta auctions, which they could continue. But every other state was frozen out.

Imagine a statute passed in 1928, declaring that it was a felony to offer movies with sound, but exempting states that were already showing talking pictures. Regardless of whatever changes occurred in technology or in the way society viewed films, only a few states could have talkies.

The New Jersey Legislature passed a ridiculous law in an attempt to get around PASPA, the ridiculous federal statute. PASPA bans states “authorizing” sports betting, so the Legislature approved a bizarre bill eliminating all criminal laws against such wagers. There were some limits, like the bets had to take place in a racetrack or casino. But the state purposely did not “authorize” but only decriminalized sports betting. Accepting wagers on sports events was now legal and unregulated, even if the sports book was run by the Mob.

The collision of these two ridiculous laws resulted in one of the most ridiculous court decisions of all time. The U.S. Third Circuit Court of Appeals ruled that PASPA was not only constitutional, but that it prevented New Jersey from changing its criminal laws. In other words, the federal government required the state to keep something a crime, even when the voters and state legislature want to make it legal.

As I have written many times, PASPA was the first federal law in history that openly interfered with states’ rights to set their own public policies about gambling. I thought the Supreme Court would limit the reach of the federal government, but only when a state police power issue was involved. The police power is the almost unlimited right of states to protect the health, safety, welfare and morality of their residents. But police powers are usually limited to such areas as fire, disease, and gambling.

The Court said Congress telling New Jersey that it could not change its sports betting laws was exactly the same as if it had an agent in the state legislature commanding the state to only enact laws that the federal government wanted. And it did not limit its decision to state police power issues.

In later blogs I will discuss what this means for the other hot topics of our times, including marijuana and immigration – short preview: Attorney General Sessions cannot order state officials to do anything about marijuana, and Pres. Trump cannot order state law enforcement to help round up illegal aliens.

For now, what does this mean for the legal gaming industry?

Winners

Obviously, New Jersey and other states that have casinos and racetracks and don’t yet have heads up sports betting will be able to attract more bettors and tourists. Delaware, for example, has sports books with gaming devices, but it lost a court decision under PASPA limiting the state to parlay bets. So Delaware is in the best position to be the first state other than Nevada to take heads-up sports bets. Full Disclosure: I was a legal consultant for Delaware when the state reopened its sports books.

Some Indian tribes will be big winners. Some tribes have entered into compacts with their state governments to give the state hundreds of millions of dollars, but only if no new Class III gaming is allowed. The Indian Gaming Regulatory Act divides all gambling into three Classes. Class III is casinos, lotteries, parimutuel betting and sports betting. So some states will be faced with either giving their tribes monopolies on sports wagering or face the loss of very large amounts of money. But, even with a monopoly, tribes that are far from population centers will have to get their states to approve bets by phone and computer.

Even though the professional and collegiate sports leagues fought this case to the Supreme Court, they are the immediate big winners. Even without their proposed 1% of handle “integrity fee,” (which I will discuss more in future Blogs and have previously covered here), leagues and teams benefit from a tremendous boost in interest in any sport that anyone can bet on. Which means broadcasters of those games will also be able charge more for commercials.

Legal bookmakers in other countries will benefit from the increased interest in sports betting. Canadians have been betting on the Kentucky Derby for decades, and one night, years ago, I saw the Hollywood Park card club take bets on races about to be run in Hong Kong. The federal Wire Act does not permit such cross-border wagers on races or sports events, but nobody cared. It is far from certain whether Atty. Gen. Sessions will be so lax in enforcing the Wire Act’s prohibitions against interstate and international bets on National Football League games.

Politicians and lobbyists will be big winners, especially on the state level. The NFL is pushing for national regulation. But gambling has always been a state issue, which is why Nevada and Utah can share a border and have completely divergent views. And this Congress never passes any substantive laws.

Internet poker will see a boom. Pres. Obama’s Department of Justice and federal courts have ruled that the Wire Act is limited to wagers on sports events and races. But all states, other than Nevada, Delaware and New Jersey, have been slow to recognize that all other forms of gambling can, with a little creative legal work, be conducted with bettors in different states and even nations. Once state lawmakers realize that the door really is wide open, they will look for more online gaming to authorize and tax.

Losers

Nevada casinos, especially its largest sports book operator, Caesars, will probably actually do well for years. It will take months, and in some cases years, for new state laws and regulations. Meanwhile, more and more people will be hearing about the coming wave of legalization. It should be easy for Las Vegas to capitalize on the growing interest in wagering on sports events.

Eventually, Nevada will be hurt by nationwide competition. Why drive five hours to make a bet if a local sports book is down the block, or available by phone or computer.

Fantasy sports is already taking a big hit. In Europe it never really got off the ground, because there was real sports betting.

Illegal bookies may see an increase in business in states that have not yet legalized. Underground operators don’t have to pay state fees and taxes, although the smarter ones do pay the federal excise tax. They can offer bettors easier credit. But I think the legal books will prevail, assuming they do not have to give all of their profits away in an “integrity fee” to the leagues. Legal books will be able to cut some of their expenses when they are given the right to take bets by computer. They also will be able to advertise, including on TV and online. Some big bettors may stick with off-shore operators who will not report their big winnings to the IRS. But most casual bettors will prefer licensed operators, where they know they will get paid.

Many questions remain

Which states will be first? My money is on Delaware, since it had straight-up sports betting that it had to stop only because federal courts said it was limited to parlay betting under the now-discredited PASPA. But other states, including New Jersey, Pennsylvania and West Virginia have passed innovative contingency laws, which made sports betting legal if the Supreme Court ruled as it now has ruled.

Who will get the licenses? Some states are looking at their state lotteries operating the games. But most will go with a licensing system. The problem is political: There is so much legal gambling that legalizing one more form is politically no big deal. But there is so much legal gambling that almost every state has politically powerful local gaming operators. If those operators, for example the racetracks and casinos in New Jersey, are the ones getting the right to now take sports bets, the legislation will sail through. But in a state like California, the gaming tribes, cardclubs and racetracks each have the political power to kill a proposal they do not like, but do not have enough influence to get one passed that cuts out their competitors.

Will Congress do anything? The NFL would love to see national regulations, and a big share of the wagers to go to the leagues. This is not going to happen, mainly because all but three states are already regulating legal gambling.

But Congress should amend the Wire Act to allow interstate and international sports bets. Unfortunately, this also won’t happen, because Congress no longer passes any substantive laws. This could change, if the Democrats win both the House and Senate in November 2018.

Can territories have sports betting? The most immediate concern is Puerto Rico, with 3.4 million residents. But the U.S. Virgin Islands and the Commonwealth of the Northern Marianas have casinos and would like to take internet wagers from the rest of the world. The legal issues are tricky, because the Supreme Court focused on the sovereignty of states. But there are precedents and good arguments why territories should be treated like states, especially when issues like preemption and constitutional rights are involved.

Do existing legal arrangements prevent sports betting from being offered? Besides tribal/state compacts, which sometimes give gaming tribes monopolies, some casinos have contracts with the NFL. Federal taxes were lowered years ago for legal sports books, but there are also issues of existing state tax laws and fees.

Most state constitutions do not prohibit “gambling,” only “lotteries.” But some courts and state attorneys general have declared that all forms of gambling are lotteries. The first question here is who decides what is a “lottery” and will the state supreme court give deference to the state legislature if it defines sports betting as not being a “lottery.”

Will the sports leagues get their “integrity fee”? Teams have the rights to their games; but, they do not have any rights to the statistics generated by their games. You cannot copyright facts. So, the leagues have no real bargaining power, because they have nothing to sell. Still, it would be a good idea to have teams as active partners for issues like standardizing the timing of the announcement of results and, yes, increased integrity.

Are there ways around the Wire Act? Even before the Supreme Court’s announcement, operators were devising schemes to allow sports bets across state lines. These include calling wagers “risk management.” There might even be a direct court attack on the Wire Act, because it was designed to help the states enforce their public policies. It should not apply to state-legal sports bets.

Unexpected consequences. Is eSports a sport? Up until a few weeks ago, eSports supporters were urging states to legalize eSports as a sport; Nevada did, and limited bets to in-person parimutuel pools. But now advocates should argue that eSports is not a sport, as long as the Wire Act prevents cross-border bets on sports events.

Conclusion

By the beginning of 2020, we will have more than a dozen states with legal sports betting. We may not see that many bills to legalize sports betting become law before November 2018: it is late in the legislative year and also an election year. But following the November elections, it will be wide open season for state lawmakers looking for another painless way to raise revenue.

The one question that the Supreme Court is going have to address soon is “Can sports bets be taken by phone and over the internet?

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