The Supreme Court, Sports Betting, and the Future

Back in March, I wrote about a pending case before the U.S. Supreme Court concerning the Professional and Amateur Sports Protection Act of 1992 (“PASPA”). PASPA is a federal law which makes sports betting illegal — or, more precisely, requires states to make sports betting illegal. The Supreme Court weighed in on Monday, and we have an answer.

From Justice Alito’s opinion:

The PASPA provision at issue here—prohibiting state authorization of sports gambling—violates the anticommandeering rule. That provision unequivocally dictates what a state legislature may and may not do. And this is true under either our interpretation or that advocated by respondents and the United States. In either event, state legislatures are put under the direct control of Congress. It is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals. A more direct affront to state sovereignty is not easy to imagine.

This “anticommandeering” rule is what I mostly addressed back in March. Remember that the United States is, basically, 50 separate sovereign entities (the states) which ceded power to a unifying government (the federal government) for important matters — 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. And the Constitution says that the federal government can’t order the states to pass, or not pass, laws. To the Supreme Court, telling the states they couldn’t legalize sports gambling was a bridge too far.

Perhaps most importantly, however, the Supreme Court went one step farther:

[W]e hold that no provision of PASPA is severable from the provision directly at issue in these cases.

Let me explain that. When the court declares a law unconstitutional, it is, in essence, nullifying that law. That’s a principle that goes back to a 19th-century case called Marbury v. Madison. But nullifying statutes is something courts typically do very reluctantly — and so they try, whenever possible, to separate the acceptable parts of laws from unconstitutional ones. In other words, a law with both a constitutional provision and unconstitutional provision would be split in two, with the unconstitutional part nullified and the other part remaining in effect. That’s called “severing” the law. But by saying PASPA wasn’t severable, the Court decided that all of PASPA is unconstitutional, and so all of PASPA is void. That’s actually a really big deal, because part of PASPA concerned prohibiting the advertising of sports gambling, and now that prohibition is gone.

Naturally, this has caused a variety of reactions.

You get the idea.

From a legal perspective, the hysteria might be a bit overblown. There’s no doubt that some states will respond to this decision by passing laws to render sports gambling legal; we’ve seen that already in Connecticut, Mississippi, New Jersey, Pennsylvania, and West Virginia among others, and it’s already legal in Nevada. Given the potential revenue pool and the interest among states to fill depleted coffers — one study claims sports gambling could add $26 billion annually to U.S. GDP — we can expect to see more states follow suit.

That said, the Supreme Court said states could legalize sports gambling; it didn’t say states must legalize sports gambling. And in at least 30 states right now, sports gambling remains largely illegal under existing state statutes, and tightly regulated or restricted under many others. So the big question isn’t just going to be what impact the legalization of sports gambling has — it’s going to also depend on where it’s legalized, which remains a state-by-state concern. And that means that we could see a patchwork of laws with different rules in each state.

But there is another incentive for states to legalize sports betting aside from just basic tax revenue. We’ve talked about ballpark deals, particularly in the context of the Marlins. If states legalize betting at games and tax those bets, they can guarantee themselves a potentially large revenue stream out of the baseball stadiums they subsidize for teams — which suddenly makes ballparks a much more interesting investment for local governments. It wouldn’t be terribly surprising to see some ballparks look a little more like racetracks in the future, with the ability to place bets at the park itself. The idea of ballparks as entertainment centers, rather than simply sporting venues, is one which lends itself particularly well to this model.

But remember the potential for a patchwork we discussed. Let’s say that Pennsylvania and New York legalize sports betting and allow it at ballparks, and Missouri and Wisconsin don’t. Now you have a situation where big-market teams like the Phillies and Yankees have access to another revenue source, while smaller-market teams like the Brewers and Cardinals don’t. In an era of superteams, state laws could suddenly have a big impact.

On the other hand, sports gambling already happens all the time — and I’m not just talking about racetracks and off-track betting. I’m talking about websites like FanDuel. Many states, partly in response to PASPA, already either make gambling illegal or tightly regulate it, and that has led to a series of lower-profile cases arguing that daily fantasy sports are actually gambling — a proposition which courts have been debating for years. We’ve seen New York settle a case for millions of dollars against FanDuel and DraftKings, and this issue has arisen over and over again in courts throughout the Seventh Circuit, which covers Illinois, Indiana, and Wisconsin. This constant legal limbo has led to financial trouble for daily-fantasy companies. But the Supreme Court’s decision is likely to grant FanDuel and its industry peers a new lease on life.

To be fair, FanDuel hasn’t seemed to impact the integrity of Major League Baseball games, and it’s highly unlikely legalizing betting on game outcomes in other ways will either. After all, the Collective Bargaining Agreement bans conduct which creates “issues involving the integrity of, or public confidence in, the game of baseball,” and that includes people in the game betting on the game. That the Supreme Court said states can allow sports gambling doesn’t mean players, coaches, or umpires can bet on games now: nothing has changed in that regard.

But this also adds another potential revenue stream for owners from those “integrity fees.” Here’s how I characterized those back in March:

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.

This is a potentially huge revenue stream for MLB, predicated on the idea (legally anyway) that states making money off of sports gambling should pay money to the owners of the intellectual property which generates it. In other words, it’s a royalty. MLB can’t force states that pass and tax sports gambling to pay a royalty, but they certainly can lobby for it like they did in West Virginia. Notably, though, Major League Baseball doesn’t actually own a lot of the relevant intellectual property. The MLBPA does.

The MLBPA holds the exclusive, worldwide right to use, license and sublicense the names, numbers, nicknames, likenesses, signatures and other personal indicia (known as “publicity rights”) of active Major League Baseball players who are its members for use in connection with any product, brand, service or product line when more than two players are involved.

And while baseball statistics aren’t actually legally protectable, the Union has a really good argument that, to the extent royalties are being generated by player results, the MLBPA has a better claim to those royalties than the League does. When you consider potentially half a billion dollars in revenue, this could be the latest battleground in the fight between the Union and the Players. So while MLB is lobbying states to allow sports betting and pay an integrity fee, MLB also has to decide whether it will share that wealth with the Union. The smart move would be to share it, but neither side seems to be in much of a sharing mood at the moment. I can hazard a guess, however, that the MLBPA wouldn’t be too thrilled about the league pocketing a new revenue stream of that size, especially if last offseason repeats itself.

So we haven’t seen all of the fallout yet from this, and we likely won’t for a while. Major League Baseball as we know it won’t end. But it might very well change in unexpected ways, and the first sign of this brave new world might be a booth where you get to bet on the game while at the ballpark.

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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6 years ago

Thank goodness for you, Sheryl. You do a good job writing about un-exciting things in the game.

6 years ago
Reply to  radiohead

How is this un-exciting?