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Volume 21 No. 13
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States prepare for decision to open betting floodgates

Watching as state after state cobbles legislation in anticipation of a Supreme Court ruling that would pave the way for sports betting, one of the nation’s premier gaming attorneys harbors grave reservations about the piecemeal manner in which the landscape is unfolding.

In 35 years of practice, Tony Cabot has represented casino owners, gambling sites and sweepstakes operators, frequently advising them on the intricacies of gaming regulation. He co-authored a casebook on the law of gambling and regulated gaming, and its upcoming edition will include an updated chapter on sports betting.

As of last week, six states had passed laws, with 10 more considering active bills and as many as a half dozen showing indications of interest.

 

Cabot doesn’t think gaming regulators in most states are equipped to handle the oversight of sportsbooks.

 

“What is really being missed in this whole thing is that sports wagering is fundamentally different from what most casinos do,” Cabot said over breakfast at a suburban Las Vegas omelette house. “If you have a casino, everything that determines the integrity of the game is within the casino. It’s easier to regulate a confined environment.”

 

Cabot described the way regulators monitor slot machines and table games like blackjack, roulette and craps, walking casino floors and inspecting equipment to make sure the house is playing fairly, then contrasted that with the far-flung nature of sports.

 

Nevada’s Gaming Control Board, which regulates both casino games and sports betting, employs 404 people, including 121 in its enforcement division.

 

“When you start doing sports wagering, now you’re relying on the integrity of a game that is occurring in another jurisdiction that could be halfway around the world,” Cabot said. “That’s a big departure for regulators, because now you have to start relying on the integrity of something you don’t control.

 

“And that’s where they fall down.”

 

Four months removed from a Supreme Court hearing in the case Christie v. NCAA, since renamed Murphy v. NCAA to reflect the election of Phil Murphy as New Jersey’s governor, the U.S. sports industry awaits a ruling that could come as early as this week and no later than June.

 

William Hill is ready to open Monmouth Park horse track to sports betting if the Supreme Court rules in favor of New Jersey.
Photo: getty images

At stake: The fate of a sector that promises to infuse sponsor dollars and increase fan engagement at a time when the latter is of particular concern.

 

That it all could play out state by state only magnifies the complexity, and the concerns.

 

Murphy v. NCAA stems from New Jersey’s attempt to circumvent the Professional and Amateur Sports Protection Act, a federal law that since 1992 has prevented states that didn’t offer sports wagering at that time from doing so. Surprised when the court agreed to hear the case, many took it as an indication that a majority of justices were prepared to overturn PASPA, a prediction bolstered by the tenor of the December hearing.

 

But, because the constitutional questions raised in the case can affect broader policy matters such as the enforcement of federal immigration and marijuana laws, some remain skeptical that the court will deliver anything more than a narrow ruling that would clear the way for sports betting in New Jersey, but only in an unregulated and untaxed fashion. It’s unlikely that more than a handful of states would find that model appealing enough to join in.

 

That would send the casino industry back to Congress to push for a federal solution, which seems unlikely in the near term.

 

Should the court issue a full repeal of PASPA, that would open the gates on a race between states to be among the first to open.

 

“To me, it’s simply politics trumping good policy,” Cabot said. “But that’s the road we’re headed down.”

 

Cabot is not alone in that recognition. The NBA and MLB both say they would prefer a federal solution. Even the gaming industry, which is used to state regulation, sees the potential benefits.

 

“When we met the NBA initially, they said, ‘We just want a kind of one size fits all,’” said Sara Slane, senior vice president of public affairs for the American Gaming Association, the leading casino industry trade group. “In a perfect world that would be ideal. The problem is, you have 40 states that have some sort of gaming and they’ve had regulations on the books for decades.”

 

While it’s the road the leagues have anticipated since late June, when the court agreed to hear the case, it has played out more quickly than they expected. The NBA, which was the first to embrace sports wagering, and MLB, which came to accept its inevitability late last year, didn’t think many states would pass legislation ahead of a court ruling, the details of which could render all their work moot.

 

Turns out that the same appetite for tax dollars that has driven the expansion of commercial casino gaming from two states to 24 in the last 30 years also applies to sportsbooks.

 

An Oxford Economics study commissioned by the AGA estimated the potential for the U.S. sports betting market (defined as how much consumers bet) at $65 billion to $332 billion annually if wagering were allowed in all 50 states, with the number fluctuating based upon state tax rates and consumer availability — for example, whether bets could be placed on mobile devices. Gaming analyst Eilers & Krejcik set the range at $113 billion to $247 billion. Projections at the low end are for states that allow betting only at existing casinos and racetracks.

 

Examples of the impact on states: New Jersey stands to add $28 million to $50 million annually in tax revenue; West Virginia $6 million to $12 million.

 

Of course, there’s no chance that all 50 states would permit sportsbooks. But Eilers & Krejcik estimates a 14-state market in the first two years after a PASPA repeal, growing to 32 states within five years.  

 

“I think we may well find that the states are premature,” said Geoff Freeman, CEO of the AGA. “We’re excited to see the states moving forward and considering what good regulation and good policy might look like. But … all of this state action presupposes the law being declared unconstitutional, when it’s quite likely a narrow ruling is the outcome — in which case we still have work to do to repeal PASPA.

 

“And that is going to put a lot of these state efforts on hold.”

 

“I’m not here to tell you not to legalize and I’m not here to tell you to legalize. I’m here to tell you that if you want to legalize sports betting, here are the things that are important to us.” — Bryan Seeley SVP, investigations, and deputy general counsel, MLB
Photo: AP images

Though that may be the case, two of the leagues aren’t taking any chances. Realizing that states were moving on legislation, in December the NBA and MLB agreed to work together to present state legislators with their vision of what a regulated sports betting market should look like. While the most wagered upon league in the country, the NFL, has remained conspicuously absent from the public process at the state level, the NBA and MLB have lobbied actively, appearing at hearings whenever invited.

 

“I don’t know how much there’s a change in our position vis-à-vis whether sports betting should be legalized or not,” said Bryan Seeley, senior vice president of investigations and deputy general counsel at MLB, who since late last year has overseen the matter for the league. “What I think has changed in terms of our approach is the reality of where the law is headed. 

 

“The calculation we were making was, do we want to just sit back and let this play out, or do we want to come to the table … What I’ve been saying in the states is: I’m not here to tell you not to legalize and I’m not here to tell you to legalize. I’m here to tell you that if you want to legalize sports betting, here are the things that are important to us.”


In conversations with state legislators, the leagues have focused on five key pillars:

 League access to transactional betting data, along with other protections that they argue are needed to detect corruption.

 

Ability for leagues to opt out of betting on certain games and to block sportsbooks from offering certain types of bets that they say increase the risk of corruption.

 

Integrity fee

While many states are undecided about including an integrity fee in their bills, some have already addressed the issue. So far, New York is the only state in which legislation featuring an integrity fee has begun to advance.

Proposed integrity fee/State(s)

1% Indiana, Illinois, Kansas, Missouri

0.25% New York


0%Delaware, Iowa, Maryland, Michigan, Mississippi, New Jersey, Pennsylvania, Rhode Island, West Virginia*

* In March, West Virginia passed legislation that allows casinos to offer land-based and online sports wagering in the event that PASPA is overturned. The law excluded an integrity fee.

Collection of royalties and fees, including a now controversial  1 percent “integrity fee” nominally tied to the increased cost of policing an expanded sports betting landscape.

 

A requirement that sportsbooks only use game stats provided by the leagues, especially for in-game bets.

 

The inclusion of mobile wagering, allowing fans to bet without visiting a casino or racetrack.  

 

The mobile wagering provision is the only one on which the leagues and casino operators agree entirely. Though both say it’s crucial that they preserve the integrity of the games, they have disagreed on the manner in which transactional betting data would be shared and on the need for opt-outs (see story, Page 1).

 

The way sportsbooks use in-game stats to resolve bets is another active fight. 

 

“To say we have to pay the leagues for data, and this is a legislated mandate — it’s just a money grab,” said Joe Asher, CEO of the U.S. operation of leading sportsbook William Hill, which operates in Nevada and stands ready to open at Monmouth Park horse track if New Jersey wins its case. “There’s plenty of money to be had for the leagues. If the bookmakers want to offer in-play [betting], they’re better off getting the feeds from a league-approved source because it’s faster. The ability to stream video into our app — we’d pay big money for that. … But we have to have the ability to say no.”

 

Throughout the hearings, there has been no greater kerfuffle than the debate over what has come to be known as the “integrity fee,” a 1 percent tax levied on bets, the proceeds of which would go to the leagues based upon how much wagering they brought in.

 

Now widely seen as a royalty, the fee has been complicated by the leagues’ desire to base it upon the amount bet rather than on revenue, which is what the casinos come away with after paying the winners. 

 

The point, the casinos say, is that the vast majority of what sportsbooks do amounts to transferring money from losers to winners. When you consider that over the last 10 years Nevada sportsbooks have handed 94.7 percent of all money bet back to the bettors, the league’s ask of 1 percent of handle turns out to be about 20 percent of revenue.

 

“They say 1 percent and it doesn’t sound like much,” said Jay Kornegay, manager of the Westgate Superbook in Las Vegas. “If they said 20 percent, everyone would realize it’s a lot.”

 

That margin becomes particularly relevant when tacked atop the licensing fees and tax rates that states will require, all for a sportsbook segment that last year accounted for only 3.5 percent of the money wagered at Nevada casinos and only 2.1 percent of gaming revenue. Thus far, only three states — Indiana, Illinois and Missouri — have included payment to the leagues in their bills. 

 

“The question is, how much is too much?” said Dan Spillane, senior vice president and assistant general counsel at the NBA, who has been the league’s point person on gambling. “Clearly, any form of taxation or regulation of a business puts businesses at a disadvantage to illegal operators who are operating in another country. They have lower costs and minimal to no regulations to comply with. Whatever happens, you’re going to have that kind of dynamic. The key is to make sure that whatever limits and taxes and fees are required of gaming operators are not excessive and still allow those operators to compete. We think that what we’re proposing is in harmony with that goal.”

 

While they continue to differ on specifics — several of which could present significant hurdles — both the leagues and the casino industry appear to be coming to similar conclusions about a path to successful regulation.

 

“My goal is that leagues and the gaming industry can find common ground,” Freeman said. “And I don’t think finding that common ground is going to happen in some public forum in Indianapolis or some other state capital. I think that common ground is going to come behind closed doors, where we can work through some of these issues. And I am optimistic that we are working our way down that path.”

 

The man who hopes to be among the first to take a bet on a game in Atlantic City hopes so.

 

“I’d love to get past all this,” Asher said, “so that we can get to the point of trying to make money together.”