How the Supreme Court Could Open a New Revenue Stream for MLB

The State of West Virginia – or, rather, certain legislators in the State of West Virginia – have decided that they want to legalize sports gambling. This has created a kerfuffle in the Commissioner’s office, which has lobbied hard against the bill. Said Rob Manfred last Friday regarding the bill: “Major League Baseball and the other professional sports also have a strong interest, because it is, after all, our product that people are seeking to bet on… Unfortunately in West Virginia, there’s only one interested group that has dominated the substance of this bill, and that’s the gaming industry – the people seeking to make money from sports betting.” Manfred also voiced concerns that the proposed legislation doesn’t sufficiently protect gambling addicts.

Assuming West Virginia governor Jim Justice signs this bill, West Virginia will have legalized sports gambling. For our purposes, “sports gambling” means pretty much what it sounds like — things like betting on the outcome of baseball games. West Virginia wants to legalize it to make money off of it; fees and the like appended to sports gambling are expected to generate $30 million for the state’s coffers in just the first year.

Unfortunately, if Governor Justice does sign the bill as expected, sports gambling still won’t be legal in West Virginia, thanks to a federal law called the Professional and Amateur Sports Protection Act of 1992 (“PASPA”), which says this:

It shall be unlawful for—

(1) a governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact, or

(2) a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographical references or otherwise), on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.

PASPA besically makes sports gambling illegal everywhere (except Nevada, which is exempted), no matter what state law says. That’s because of a part of the U.S. Constitution called the “supremacy clause.” The supremacy clause basically says that where a state law and federal law conflict, the federal law prevails.

A few years ago, the State of New Jersey filed a lawsuit (a case called Christie v. NCAA) saying that PASPA was unconstitutional. That’s because the supremacy clause only allows the federal government to “preempt” (or, overrule) a state law if the federal government otherwise has power to do that thing in the first place. To understand that better, a brief lesson on the structure of the United States is required.

The United States is, basically, 50 separate sovereign entities (the states) which ceded power to a unifying government (the federal government) for important stuff — things like a military, a common currency, social-welfare programs. But the federal government has (in theory, anyway) limits on its power: it can only do what the Constitution says it can do. The Supreme Court laid out some of the boundaries in a case called New York v. United States (which dealt with, of all things, toxic waste dumps). And New Jersey is saying that the federal government exceeded its authority with the passage of PASPA.

Here’s why: in New York v. United States, Justice Sandra Day O’Connor explained that, while the federal government could regulate trade between and among the states, it couldn’t regulate solely intrastate activity by requiring a state to do something. Here’s the money quote:

While the Framers no doubt endowed Congress with the power to regulate interstate commerce in order to avoid further instances of the interstate trade disputes that were common under the Articles of Confederation, the Framers did not intend that Congress should exercise that power through the mechanism of mandating state regulation. The Constitution established Congress as “a superintending authority over the reciprocal trade” among the States, The Federalist No. 42, p. 268 (C. Rossiter ed. 1961), by empowering Congress to regulate that trade directly, not by authorizing Congress to issue trade related orders to state governments.

New Jersey is hanging its hat on that holding, suggesting that because PASPA says that state governments are required to prohibit sports gambling, PASPA is unconstitutional. Says New Jersey: “One of the essential postulates derived from the structure of the Constitution, is that state legislatures are not subject to federal direction. . . . [but] PASPA compels States to regulate — indeed, prohibit — sports wagering and therefore exceeds Congress’s authority.”

There are some analysts, like Craig Calcaterra, who think that New Jersey is going to win that argument. I mostly agree.*

*Although I agree that the Supreme Court will strike down PASPA, I tend to think it’s a slightly closer call than Calcaterra does. That’s because the Supreme Court already ruled in a case called Gonzales v. Raich that the federal government can regulate solely intrastate activity. Even though recent jurisprudence has retreated somewhat from Gonzales, the Court could rule that PASPA simply tells a state what it can’t do, unlike in New York v. United States, where the Court struck down a law that told states what they must do.

In any event, the Supreme Court will be ruling on New Jersey’s case shortly. If PASPA is ruled unconstitutional, West Virginia’s law goes into effect and we have legalized sports gambling there. And that’s why MLB has lobbied so hard against the bill. In fact, MLB and other professional sports have sued before to block sports gambling in New Jersey.

But there’s one last wrinkle. You see, MLB didn’t always oppose West Virginia’s law. In fact, the Charleston Gazette-Mail reports that “Major League Baseball and the National Basketball Association had sought [in the bill] a 1 percent fee on gross wagering, to fund enhanced efforts to promote player integrity in the event that legalized sports betting expands nationwide.” That’s what is called an “integrity fee.”

And now you’re wondering: “what’s an integrity fee?”

An integrity fee is a 1% tax that goes to the sport on which the bet is being made. While 1% doesn’t sound like a lot, remember if PASPA falls, sports gambling could become legal everywhere if states allow it. An integrity fee is a way for the leagues to get a piece of the action, as it were. It’s not a small piece, either: one estimate had MLB’s annual cut at $480 million in integrity fees nationwide. Integrity fees are industry standard in France and Australia. It’s called an integrity fee because — in theory, at least — the funds would be used to guarantee the integrity of the game isn’t compromised by the wagers.

The problem is that MLB and NBA, who created the idea, have been remarkably vague on what, exactly, those integrity-ensuring procedures would be. In fact, Adam Silver, commissioner of the NBA, admitted that the integrity fee was “a royalty to the league” for use of the league’s “intellectual property.” Despite this, as anticipation for the Court’s ruling in Christie grows, more and more states are passing or introducing legislation with integrity fees built in. So if PASPA is nullified, it seems another large revenue stream will open to MLB owners.

Sheryl Ring is a litigation attorney and General Counsel at Open Communities, a non-profit legal aid agency in the Chicago suburbs. You can reach her on twitter at @Ring_Sheryl. The opinions expressed here are solely the author's. This post is intended for informational purposes only and is not intended as legal advice.

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OddBall Herrera
4 years ago

Let’s just add another checkbox to the broad nonsense the term interstate commerce now encapsulates. Failure to narrowly define the interstate commerce clause is really high on my list of near-fatal flaws in how our constitution was drafted, since Congress has been more than happy to grant itself huge amounts of unintended license by power of this clause, and for the most part the Supreme Court has played along.

I find it an extremely hard sell that the framers, when they envisioned the federal government as the arbiter for making sure states ‘played fair’ with each other in commerce, were giving the federal government the right to implement nationwide, primarily moral driven, bans on sports gambling,. Structurally, this seems like the exact type of thing that’s really intended for states to decide.

4 years ago

They did anticipate that they wouldn’t get everything perfect, and that’s why they included multiple constitutional amendment pathways. They expected future leaders to fix things as necessary.

OddBall Herrera
4 years ago
Reply to  Hughes

Yep! Pathways that are neglected today because we seem to totally lack the patience for, or in some cases basic interest in, consensus building.

Heck, we’re getting to the point where we’re even giving up on passing basic legislation, much less amendments.

4 years ago

The problem is that modern society is so interlinked in electronic communication and high-speed transport that basically all commerce is now inter-state.

The designation is meaningless; almost no commerce is strictly confined within the boundries of a single state, and even then it will affect neighboring states.

With that said, that’s why individual state regulation of most commerce is a waste of time; you need look no further than Chicagoans buying huge numbers of guns in lax-law Indiana instead of strict-law Chicago to see that, regardless of whether the law should be lax or strict, it should be universal.

OddBall Herrera
4 years ago
Reply to  mikejunt

If we want it to be universal, we should pass an amendment, not hand the government far reaching and ill-defined powers. Yes, the world has changed, but that’s actually cause for more caution with the definition of interstate commerce, not less, because the broader interpretation in today’s world implies nearly unlimited jurisdiction as long as something vaguely commercial-ish is occurring.

4 years ago

What’s wrong with that? We don’t need to waste our time passing Constitutional Amendments for every little thing when a federal law will suffice in most cases as long as it doesn’t contradict the Constitution itself. Amending it is mainly intended as a way to change parts of the document itself or otherwise clarify how the national government works, not as a direct means of legislation.

For example, it would’ve been so much simpler if passing and repealing the Volstead Act had been all that was needed to handle Prohibition instead of needing two separate Amendments due to the issue of intrastate commerce.

Anthony Princeton
4 years ago
Reply to  mikejunt

The notion that Chicagoans are purchasing firearms in any meaningful amount in Indiana is one of the many lies from local politicians and anti gun activists.

Why would someone from Illinois go to Indiana, purchase a firearm and then have to pay the FFL transfer when they can simply go to the burbs and purchase a firearm? Preferably outside of Cook county so they don’t have to pay the ridiculous tax. Every time I get ammo in Indiana I am asked to produce an ID and when they see I am from Chicago, they then ask for my FOID card. Every single time. Now if they trace a firearm used in a crime back to Indiana or another state odds are it was stolen at some point in between.

One last point, Chicago politicians and activist judges refuse to enforce the local gun laws as they exist today. Last spring a suburban Chicago woman was charged with straw purchases. She was providing firearms to Chicago gangbangers. Do you want to guess the punishment? ….. A fine, community service and probation.