Contributed By Dickinson Wright PLLC
US Gaming Trends 2017 – Sports Wagering in the Sessions Era
In a universe where gaming executives are trying mightily to appeal to millennials and find new ways to make table gaming more exciting, there is one area of gaming whose popularity grows by the minute: sports wagering. Unfortunately for most states, the only sports wagering in their jurisdictions is occurring outside the law. With estimates of a USD400-450 billion illegal sports wagering market in the United States (compared to a mere USD4 billion in Nevada, the only state with fully fledged legal sports wagering), this is a market that the gaming industry and many states are eager to tap.
If sports wagering is legalised and regulated throughout the USA, as it is in Nevada, the growth potential for legitimate sports wagering is tremendous. This would be a significant change in gaming in the USA and could benefit states, consumers and even sports leagues. But will any real change in this market occur in 2017?
The Current Legal Status of Sports Wagering in the USA
Currently a mix of state and federal law restricts sports wagering activity in the USA. At the federal level, the Federal Wire Act (FWA) and Professional and Amateur Sports Protection Act (PASPA) are the primary laws directed specifically at sports wagering. Additionally, the Illegal Gambling Business Act (IGBA) and the Unlawful Internet Gambling Enforcement Act (UIGEA) also impact federal policy regarding sports wagering and cross-border wagering.
Under its current interpretation, the FWA prohibits electronic communications in interstate or foreign commerce when such communication is (i) a bet or wager on a sporting event or contest, (ii) information assisting in the placement of a bet or wager on a sporting event or contest, or (iii) a communication entitling the recipient to money or credit based on a bet or wager. The FWA has a narrow exemption aimed solely at the transmission of information assisting in the placement of a sports bet or wager when the transmission is between jurisdictions where such sports betting or wagering is legal.
The FWA has been the topic of some debate in the last seven years regarding whether the FWA applies to all wagers or only sports wagers. Prior to 2011, the published statements of the United States Department of Justice (DOJ) indicated that it was the DOJ’s opinion that the FWA applied to all forms of sports wagering and other contest wagering. This original DOJ view is rooted in the phrase “bets or wagers on any sporting event or contest,” which the DOJ interpreted to mean that the Act applied to two separate forms of wagering: sporting events and a separate category of “contests." In 2002, the Fifth Circuit Court of Appeals rejected the DOJ interpretation of the FWA and held that the word “sporting” modified the full phrase “event or contest,” thus making the FWA apply only to sports wagering and not to casino-style games or wagering activities that were not sports-related.
In December 2011, the DOJ changed its position and issued an opinion that the FWA applies only to sports wagers because the word “sporting” modifies both “event” and “contest” (“2011 DOJ Opinion”). In the wake of the 2011 DOJ Opinion, the "pay to play and win" casual and social game companies experienced explosive growth.
Since the 2011 DOJ Opinion, senior Republican members of Congress have sought to reverse the opinion through modifying the FWA or through legislation directly aimed at the opinion letter. On 10 January 2017, the new US Attorney General Jeff Sessions stated in his confirmation hearings that he would revisit the 2011 interpretation of the FWA.
Although it remains to be seen how the FWA will be interpreted and enforced under a new DOJ with Sessions at the helm, any change in interpretation and enforcement is likely to present significant risk to any "pay to play and win" contests that occur through communications that cross state or national boundaries. Specifically, any "pay to play and win" games played over the internet or cellular phone networks will be at risk if the FWA is interpreted to apply to all forms of wagering.
There is no question, under any reasonable interpretation of the FWA, that the FWA applies to sports wagering and will continue to do so. Although the FWA prohibits the conduct of sports wagering in interstate and foreign commerce, it does not prohibit states from authorising and regulating the intrastate conduct of sports wagering. However, another act, PASPA, does prohibit states that do not currently have legal and regulated sports wagering from legalising and regulating sports wagering within their states.
When PASPA was enacted in 1991, only five states had operating commercial casinos (Colorado, Illinois, Iowa, Nevada and New Jersey), only two states had lotteries that offered a sports wagering product (Delaware and Oregon), one state had a limited charitable form of charitable and state sports wagering (Montana), and only one state had broad-based sports wagering (Nevada). In this environment, PASPA had broad national support and PASPA effectively outlawed legal regulated sports wagering for all but four states (Nevada, Montana, Oregon and Delaware).
Today, the landscape and perceptions are changing. Some form of legal and regulated gaming can now be found within the borders of 48 states. Gaming provides billions of dollars of revenue to fund state and tribal governments, and further expansion may be limited because many regions have reached a saturation point. The combination of limited expansion opportunities, successful state gaming regulation and some resentment that only four states enjoy the privilege of regulating and earning revenue from sports wagering is causing many states to rethink their support for PASPA. In addition, the federal prohibition on state regulation has not stopped the rampant growth of illegal wagering, leaving states to shoulder the social costs of illegal betting without any mechanism to protect consumers, protect the integrity of sporting events, or generate tax revenue to offset the social costs of wagering.
Challenges to the Sports Wagering Status Quo
Recent actions in New Jersey and industry efforts to reassess the current regime of state and federal sports wagering prohibitions mean sports wagering will remain a trending gaming topic in 2017.
New Jersey, which has been at the forefront of challenging PASPA, will have its day before the US Supreme Court with oral arguments set for December 4, 2017. The issue before the Court is whether the enactment of PASPA violates the US Constitution and amounts to the federal government commandeering state governments to enforce federal policy. Although arguments are set for December, a written opinion of the court is unlikely to be published before the spring.
In the meantime, the American Gaming Association (AGA) is lobbying hard on this issue for the gaming industry and is hopeful that the new US President and Congress will repeal and replace PASPA.
To understand where we are, it is important to look at the history of challenges to PASPA. When PASPA was enacted there was a specific exemption in the act to permit sports wagering in New Jersey casinos, provided that New Jersey enacted enabling legislation and the activity took place within one year of PASPA’s enactment. New Jersey did not meet the deadline and its exemption became meaningless.
In 2011, the New Jersey electorate voted in a state referendum to have legal and regulated sports wagering in New Jersey. Shortly after the referendum, the New Jersey legislature passed enabling legislation. Before legal and regulated sports wagering occurred, the state was sued by the National Football League (NFL) and other sports leagues under PASPA to prevent legal regulated sports wagering from occurring in New Jersey.
In the court filings, New Jersey revealed that an estimated USD400-450 billion is wagered on sports in the USA annually. Later studies have estimated the market is between USD100-150 billion. Whichever estimate is more accurate, given that Nevada, the only state with legal and regulated broad-based sports wagering, handles less than USD4 billion in sports wagers annually, this is an industry where 96% to 99% of the activity is being conducted by those operating outside the law. In other words, the current sports wagering market is alive and well, and being shaped, run and conducted primarily by those that have no regard for current state and federal criminal prohibitions. The result is that this growing market is continuing to create social costs without states having any ability to generate tax revenue to offset such costs.
New Jersey was not alone in its challenge to PASPA. In its most recent court battle with the sports leagues, several states and interest groups filed Amicus Briefs in support of New Jersey’s position. As described above, given the expanded acceptance of legal gaming throughout the USA in recent years, many states that once supported PASPA are now interested in seeing it overturned.
Traditionally, a major source of opposition has been US sports leagues. However, there has been some movement among those who regulate sports in the USA and beyond towards recognising that regulation may serve to protect the integrity of their sports.
For example, the International Olympic Committee (IOC) recently endorsed the idea that legal and regulated sports wagering was not only acceptable, but was helpful in preserving the integrity of Olympic sporting events. Upon examining the issue, the IOC believes that illegal wagering presents a clear danger to the integrity of its events because the activity is conducted by criminals and, because the activity is not conducted in the light of day, irregular betting patterns will not be discovered that indicate an event has been compromised. Conversely, legal and regulated sports betting gives bettors a legitimate outlet to meet demand and, because the activity is legal and regulated, betting anomalies can quickly be discovered that can alert officials to scrutinise events more carefully. In other words, regulated sports betting enhances the integrity of the games. Finally, legitimate regulated sportsbooks also have no incentive to compromise the integrity of events and, in fact, rely on the integrity of the events to maintain their businesses. Therefore, the IOC and legal and regulated sportsbook operators have a common goal and the IOC sees such operators as valuable partners in the effort to preserve the integrity of its events.
News reports have also indicated that the National Basketball Association (NBA) commissioner, Adam Silver, has acknowledged that there is a huge underground market for sports betting and that the integrity of the game would be better served by bringing the activity under scrutiny in the light of day. In February 2017, Major League Baseball commissioner Rob Manfred indicated in multiple news reports that baseball may follow the lead of the NBA in reassessing its opposition to sports betting. Finally, at the time this article is being written, at least a dozen states have introduced bills in their respective state legislatures to permit some form of regulated sports wagering.
Not all signs point to success, however. Silver’s view is apparently not shared by the NFL, whose commissioner, Roger Goodell, has reaffirmed his league’s policy as being opposed to legal sports wagering (even though an NFL team will be moving to Las Vegas, the centre of legal sports wagering in the United States). Also, as discussed above, a Republican-majority Congress could make good on their long-term efforts to reverse the 2011 DOJ Opinion, especially with Jeff Sessions as US Attorney General.
So what does this mean for sports wagering in the USA in 2017 - 2018 and beyond? Certainly this will remain a hot topic for the AGA, New Jersey and an increasing number of states that are looking to pave a new path to legal sports wagering across the USA. Whether they will be helped or hindered by the new Trump administration, however, is yet to be seen.