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TGS SPECIAL REPORT...POST-PASPA WORLD: PART III

                                      by Bruce Marshall, Goldsheet.com Editor

"If we get this (sports gaming) wrong, this becomes pro wrestling."
--William Coley, Ohio State Senator

   Amid all of the forums and presentations made from various high-profile speakers and sectors of the sports and gaming universes at last week’s ICE Sports Betting USA conference in New York City, what stuck most with us was the above comment from Ohio State Senator Bill Coley, who is also president of the National Council of Legislators from Gaming States (NCLGS, or “Nickel Gs”).  Which should be a sobering reminder to an entire industry that seems to have fanned out in various directions since last May’s landmark decision in favor of New Jersey by the US Supreme Court that repealed PASPA, the 1992 Professional and Amateur Sports Protection Act, when select states (Nevada, Oregon, Delaware, and Montana...but not New Jersey) were “grandfathered” by federal law to accept sports wagers, though only in Nevada’s case would it include single-game wagering; it was parlay cards only for the other states.   But the Garden State’s resounding victory in SCOTUS by a near-landslide 7-2 decision effectively rearranged the sports gaming deck so that each state could now determine and establish its own regulated sports betting laws.
 
    The New York conference last week provided the best forum since the SCOTUS ruling to gauge how the industry is operating in the post-PASPA world.  After two days of meetings, roundtables, discussions, and various presentations, we left the Big Apple believing there was more than a bit of truth to what Bill Coley said in the first panel discussion of the conference, which provided an overview of legislative efforts to authorize sports wagering in the states.
 
    Talk about going down a rabbit hole!
 
    Before getting into some of the specifics, the conference started out fast last Tuesday with keynote speaker Ted Olson, a legal expert of some repute, to put it mildly.  As a former Solicitor General of the United States, Olson has held a variety of high-profile positions throughout his legal career, and headed up New Jersey’s challenge to PASPA that took several years through the court system, all of the way up to SCOTUS, a journey that was full of detours, as Olson reminded.
 
    Olson said that New Jersey’s legal strategy in the case was multifaceted, out of necessity.  Olson reminded that PASPA didn’t make betting on sports illegal. Instead, it made it unlawful for states to offer sports betting, and authorized the federal government and the major sports leagues to bring civil action to prevent the states from doing so.
 
    As also noted in CDC Gaming Reports, Olson said his firm was initially retained to defend New Jersey against a 2012 federal action challenging the state’s 2011 non-binding referendum that would have created a state constitutional amendment permitting sports gambling.  Olson deemed the proposed amendment “very sensible” and said the firm developed the opinion that PASPA was unconstitutional under the 10th amendment.
 
    “Congress could have regulated it under the commerce clause (in 1992).  It could have made it illegal,” Olson said. “It didn’t. It put the burden on the states.”  That interpretation of what PASPA did, and didn’t do, was what led to the decision to challenge the act via the tenth amendment.
 
    Underscoring the complexity of the legal maneuvering that eventually led to SCOTUS overturning PASPA, Olson described a sequence that played out in both district court and the U.S. Court of Appeals in which the appeal under the 10th amendment was rejected “in part because our opponents perceived that there was a weakness” in the 10th amendment.  In short, the federal government argued that New Jersey wasn’t required to keep its statutes prohibiting sports betting on the books, and, since the state could repeal the statutes, it therefore wasn’t an issue of commandeering.
 
    New Jersey countered with the argument that removing a prohibition equaled authorization. Once permission was granted to remove the prohibitions, the state did so.  “Many legislatures wouldn’t have had the guts to do that,” Olson said, “to call the bluff of the leagues, the court decisions and the United States government. But they (New Jersey) did it.”
 
    The federal government and the leagues then argued that they hadn’t intended for those prohibitions to be repealed “in that way.”
 
    Olson then outlined the path the case took before finally landing at the Supreme Court, saying “we lost in the district court...we lost in the court of appeals...we lost en banc.  I think we lost six or seven times,” he said.
 
    “And—I honestly believed that we were right, but when you lose seven times, you think maybe not.”  But he said he was encouraged by the nature and the tone of the justice’s questions once the case was finally heard in the Supreme Court last December 4.
 
    Olson  went on to quote a fragment of the decision, which was written by Justice Samuel Alito.  Noting that Alito had previously been the U.S. Attorney for New Jersey, Olson speculated that, although such things don’t really influence judges, Alito’s background might have “subliminally” allowed him to understand what New Jersey was trying to do.
 
     With Olson as an effective ice-breaker, the conference quickly hit high gear.
 
    In our last Post-PASPA update in October, we noted the handful of states (New Jersey, Delaware, Mississippi, and West Virginia) that had introduced Vegas-style sports betting since the SCOTUS ruling in May. Pennsylvania and Rhode Island have since joined those ranks.  Of that group, New Jersey, which was at the forefront of the entire debate, has not surprisingly emerged as the leader of the pack, and had a strong presence at the conference, as could be expected.  NJ’s Gaming Enforcement Director David Rebuck told the conference that he expects at least 12 more states to move “very aggressively” to legalize sports betting in early 2019.
 
    New Jersey also seems to have a leg up on most of the other states, partly because of forward-thinking sorts such as Rebuck and Dennis Drazin, the president of Monmouth Park Racetrack who was quick to get his track ready to begin accepting sports wagers as soon as PASPA was overturned.  Drazin was early to the game, having set up a partnership with William Hill at Monmouth in advance of any rulings...as early as December of 2012.  Drazin was thus ready to go almost immediately at Monmouth when the repeal finally registered last May.  As part of the same panel with Rebuck, Drazin also made a strong point about the hypocrisy of the major sports leagues that were quick to join in the suit against the Garden State yet have been eager to saddle up to the gaming world post-PASPA as they hammer away with their “integrity fees” (more on that in a moment).
 
    There was also another panel devoted almost exclusively to the Wire Act, and the recent alarms sounded by Rep. Jim Sensenbrenner (R-Wisc.), who wants to reintroduce a updated form of the Wire Act with “RAWA” (“Restoration of America’s Wire Act”) as noted in a recent discussion at a Congressional hearing on sports betting in late September.  “RAWA” was something not considered by the Justice Dept. under AG Jeff Sessions, but since Sessions’ departure, it could conceivably resurface.  Sensenbrenner has sent a letter to Deputy AG Rod Rosenstein on the subject that could yet cause problems for the industry regarding transfers of moneys, though the SCOTUS opinion from Justice Alito suggested any interpretations would be up to state law predicates.  There appears sufficient safe harbor in the Wire Act in that info can be transmitted across state lines but not wagers themselves.  The Sessions Justice Department, like most of its predecessors, had no stomach to seriously enforce the Wire Act, which still is open to various interpretations.  Whether a Matthew Whitaker Justice Department, if his interim tag is removed, or the next full-time AG similarly non-prioritizes Wire Act doings remains to be seen.
 
    But as the conference meandered forward, it became quite evident that the biggest obstacle for the states to overcome would be the vast illegal market, much of it offshore.  Estimates to its size range from $150-500 billion (with a “b”) annually, but nobody knows for sure a specific number, other than its vastness.  Some of the most sensible commentary came from old friend Vic Salerno, a Nevada legend who formerly ran the LeRoy’s Sports Books and is now president of USBookmaking, who warned all of how long it would likely take the industry to convert the offshore business back to domestic, due to he competitive advantages of the offshores, including the more-favorable odds and pricing, and especially the ease of making wagers via mobile units.
 
    Ahhh, the mobile business.  Such an obvious winner for the sports gaming industry.  Nevada realized as much, with Salerno one of the pioneers, back in 2010.  New Jersey, too, has capitalized upon the mobile business.  But not all states are moving in that direction, at least not yet.  Mississippi is one that has introduced mobile wagering, but with a proviso; it must be done on-site at any sports books/hotel/casino premises.  So much for customers being able to make their legal wagers in front of their TV sets in Mississippi.  Another example of something that only politicians would dare think is a good idea.
 
    And therein would lie one of the takeaways from the conference.  Legislators, regulators, and various pols present only seemed to address the offshore marketplace from a restrictions basis; how to  convert the offshore business back onshore via some sort of limitations and barriers to be placed in the way of the offshore operators.  Not a one of those ever articulated about perhaps developing a product mix that would compete with the offshore market.  Of course, there will be some advantages always held by the offshores, especially tax-wise.  But there is a “home team” edge in the process, too; Sara Slane from the American Gaming Association told the assembled masses in New York that more than 7 in 10 sports bettors would rather do business onshore.  But they’d likely only do so with a product delivery system as easy and efficient as their offshore alternatives.  Only those like Salerno with a bookmaking background seemed to understand a basic tenet; try to make your product as good or better than your competitor. What a novel business idea!  Yet an approach that legislators and regulators seem to routinely ignore.
 
    It all reminded us of long-ago days of working in the financial world in the ‘80s, when major brokerage houses were raising holy heck at the presence of Charles Schwab and its discount brokerage model entering the marketplace.  Were it up to the “big boys” like Merrill Lynch, Dean Witter, Paine Webber, and others of the day, they would have preferred to legislate Schwab out of business.  But the entire discount concept was a winner in the marketplace; eventually, the big firms had to begin competing with Schwab and the various other discount brokers that entered the market.  Improved product mix, convenience, and effective promotions were the result that would greatly benefit the consumer class simply because the marketplace dictated so. 
 
    It’s much the same thing with the offshore books, many of which having developed a product of great appeal to the marketplace.  That so few on the regulatory side seem determined to drive the offshores out of the marketplace with a better business model (good old American ingenuity!) is indicative of the public vs. private differences; government types just don’t get the commercial marketplace, and probably never will.
 
    More examples abounded of states going in different directions.  Pennsylvania, looking to squeeze as much juice out of the sports gaming orange, has not only imposed a $10 million one-time license fee upon any sports book operators, but it slapped a 36% tax rate on top of that.  Realizing the obstacles to return the level of profits it might normally expect, William Hill has been one high-profile sports book operator that decided it was better off not doing business in the Keystone State.
 
   Meanwhile, the sports leagues keep hammering away at the “integrity fee” concept, a topic that was raised consistently at the conference.  New York, which is hopeful of introducing sports betting within the next 12-18 months, has already figured out a way to accommodate the leagues, but not other states (at least not yet), and certainly not New Jersey.  According to the aforementioned David Rebuck, if the leagues were to convince New Jersey operators to cut them in on an “integrity fee,” the Garden State would consider the league as operators, and subject them to the normal vetting process.  Which, according to Rebuck, none of the leagues would be keen to endure.  But New York and other states seem willing to create loopholes for the leagues.
 
    So much haughtiness from the leagues and related entities as well!  After listening to NBA General Counsel Dan Spillane, an intelligent fellow, rail about the “integrity fee” his league is seeking, NBA Players Association Counsel David Foster went one step further.  He suggested the players themselves should get a separate cut of the sports wagering golden goose, while at the same time acknowledging that all revenues for the league go into a big pie that is part of the CBA, of which the players are already entitled to their share.  We related to Foster that perhaps his concept has some merit, but in a different sense; much like licensing, and merchandisers who want to make money with their products affixing them to sports teams, perhaps the fact the sports books making money off of the teams and players as the basis for their business should require some sort of license as well.  (We don’t necessarily agree, but it might be a valid question). Neither Foster, nor NHL counterpart Steve Fehr, nor NFL counterpart Casey Schwab knew how to respond when we posed to them a hypothetical, that if this “integrity fee” could be used as a precedent, why couldn’t, say, providers of products to the commodity exchanges, or any employee of a publically-traded company, or, for example, the United Auto Workers deciding to organize and demand a small cut of every stock brokerage commission paid on sale of stock in General Motors, Ford, etc. in a massive class-action suit?  Maybe retroactively? Using the NBA’s integrity fee as an example?  One rogue judge could then make a ruling that could have far-reaching implications.  To which the NBA or its Players Association would then become a Robin Hood of sorts to hundreds or maybe thousands of people.  The moderator of the panel, University of New Hampshire Law School dean Michael McCann (also the author of Court Justice, a book detailing Ed O’Bannon’s battle with the NCAA), said it sounded like an LSAT question, but found it intriguing, even if he didn’t know the answer.
 
    All far-fetched hypotheticals, perhaps, but no more far-fetched than New Jersey’s notion of overturning PASPA several years ago.  And maybe a reminder to the various hands in the cookie jar of this burgeoning sports gaming industry that they don’t live in a vacuum and there could be various implications to their actions beyond the small spheres in which they exist.  But unless the federal government wants to get involved and set some over-arching guidelines for the sports wagering industry (of which Congress would much rather seem to punt back to the states), there will continue to be these wide variations and interpretations on a state-by-state basis.  How this all sorts out in the next 3-5 years remains to be seen.
 
   For the moment, the happiest guys in the sports gaming world probably remain the offshores; as many of the states choke themselves in red tape as they look to get sports gaming off of the ground, the alternative markets will continue to hum along.  And any speakers five or so years down the road at future sports betting conferences like last week’s in New York will probably be asking the same questions about how to pull money back from the offshores! 


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