New Jersey Gets Half Pregnant With Sports Betting

October 20, 2014


Late last week, New Jersey changed course yet again in its continuing quixotic crusade to legalize sports betting. The state abandoned its efforts to recast its judicially invalidated Sports Wagering Act as a "repeal" of its statutory sports betting ban (which I discussed here), Instead, the state passed a new law explicitly repealing "any rules and regulations that may require or authorize any State agency to license, authorize, permit or otherwise take action to allow any person to engage in the placement or acceptance of any wager on any professional, collegiate, or amateur sport contest or athletic event, or that prohibit participation in or operation of a pool that accepts such wagers".

The new law smooths New Jersey's fight to legalize sports betting in two ways. First, the new law removes two contentious issues from litigation: a) whether the prior Act was a "partial repeal" of sports betting prohibitions or an affirmative authorization of sports betting, and b) whether portions of the prior Act could be severed and saved from the effect of the federal court injunction. More importantly, however, the new law serves as a "clean" effort at repeal, in that the new law does not purport to subject operators of sports pools to any form of licensing or regulation (other than potentially regulation via a private industry group).

The new law does impose a number of limitations on sports betting, however, Under the new law, all sports betting must:

  • occur in a licensed casino or racetrack,
  • be permitted by the casino or racetrack operator,
  • involve only individuals 21 years of age or older, and
  • not involve games in which a New Jersey school is a participant.
Further, the new law specifically includes sports betting revenues in the definition "gross revenue" subject to taxation under the New Jersey Casino Control Act.

New Jersey is seeking to thread a tiny needle here. On the one hand, the Third Circuit held (and the Department of Justice agreed) that a state does not run afoul of PASPA if it chooses to repeal a prohibition on gaming, so long as the state does not "sponsor, operate, advertise, promote, license, or authorize by law or compact" sports betting. On the other hand, New Jersey does not want to permit sports betting generally throughout the state and without any restrictions whatsoever (otherwise every tavern or gas station could operate a sports book).

The primary fighting issue will remain one I previously discussed—does limiting sports betting to the premises of state-licensed casinos and racetracks constitute a de facto licensing requirement for or state authorization and promotion of sports betting, in violation of PASPA? The Third Circuit's decision finding New Jersey's prior Sports Wagering Act invalid provides both sides with some language to support their position, but the stronger language supports the sports leagues which oppose New Jersey's efforts to legalize sports betting.

The Third Circuit's decision does hold that New Jersey may repeal its ban on sports betting, and may determine "the exact contours of" any prohibition without running afoul of PASPA. (Ruling, pp. 78-79). But the Third Circuit also suggested that the state's choice was between maintaining a total sports betting prohibition and having completely unregulated sports betting: "Congress may have suspected that most states would choose to keep an actual prohibition on sports gambling on the books, rather than permit that activity to go on unregulated." (Id.)

New Jersey in essence is trying to become half pregnant with sports betting—repealing its sports betting ban, yet regulating sports betting by restricting it to licensed casinos and racetracks. But the Third Circuit's decision seems to foreclose this maneuver: "We do not see how having no law in place governing sports wagering is the same as authorizing it by law." (Ruling, p. 74). In other words, the Third Circuit's decision suggests that PASPA permits a state only two options for sports betting—a complete ban, or a legal and completely unregulated market.

New Jersey is certain to argue that it has inherent authority (i.e., "police power") to regulate or restrict gaming in general for the welfare of its citizens, and such general gaming regulation does not run afoul of PASPA. This argument might justify restrictions as to the age of gamblers (states routinely hold minors cannot form binding contracts, and wagers are just a species of contract), as well as the prohibition against wagers on in-state college games (the state has an interest in preventing corruption, and the bar on such wagers does not itself authorize or promote sports betting).

The requirement that sports betting occur on the site of licensed casinos and racetracks is substantially more problematic, however. Although a state might well enforce a general zoning requirement that would not run afoul of PASPA—say, a requirement that no casino, racetrack, or sports book can operate within two blocks of a school—New Jersey's new law is so narrowly drawn that it essentially makes sports books subject to the licensing and other regulatory requirements of the state's gaming regulators. After all, how would a sports book operator be able to conduct business on the site of a licensed casino or racetrack without the consent of the casino or racetrack operator who is subject to strict gaming regulations?

Let's reconsider a hypothetical I previously discussed. Imagine a licensed New Jersey casino—let's call it "Cheezers"—which wants to contract with an outside company—let's call it "GoHog"—to run its sports book. GoHog happens to have operated an online sports betting operation for years in violation of the Wire Act, UIGEA, IGBA, various state gaming laws, and probably the U.N. Universal Declaration of Human Rights. The New Jersey gaming regulators tell Cheezers it cannot associate with GoHog because GoHog is an "unsuitable" business partner. Even if GoHog is not required to be licensed directly, state regulators can nonetheless impose restrictions on its ability to operate a sports book via its authority over the licensed casino which must host the sports book operation. This indirect regulatory control over sports book operators is likely to be viewed by the court as de facto state licensing and authorization of gaming in violation of PASPA. And the regulatory entanglement becomes even more problematic if a casino or racetrack operating its own supposedly unregulated sports book should somehow get crosswise with gaming regulators over a sports book issue (e.g., an underage patron, a cheating scandal, or an employee with unsavory connections).

A final complicating factor for New Jersey is its state constitution, which only permits legal gambling to the extent it is "authorized" by the legislature. The Third Circuit interpreted this constitutional requirement to mean that a legislative repeal of a sports betting prohibition is insufficient, by itself, to legalize sports betting in the state. (Ruling, p. 75). Rather, the Third Circuit held that New Jersey's constitution required the state legislature to affirmatively authorize sports betting by statute—which in turn violates PASPA. Thus, the state is caught in a Catch-22. PASPA prevents the state from affirmatively authorizing sports wagering, so the legislature can only repeal its sports betting prohibition. But a mere repeal is insufficient under the state constitution to legalize sports betting, so the legislature must enact a statute authorizing sports betting. Which, of course, PASPA bars the state from doing.

As expected—at least by everyone except state Senator Ray Lesniak—the NCAA and the major professional sports leagues have already filed a complaint in federal district court seeking a declaratory order and injunction against the state to prevent any of its casinos and racetracks from offering sports wagering pursuant to the new regulatory scheme (or lack thereof, to be more accurate). Of course, the leagues' claims of "irreparable harm" from allowing sports wagering in New Jersey stink of hypocrisy. Nonetheless, considering the court has previously granted an injunction to the sports leagues finding that the leagues would suffer irreparable harm if sports betting is allowed to occur, the court is likely to grant at least a temporary injunction halting sports betting until a hearing can be held on the merits of the state's latest legislation.

If Senator Lesniak really wants to bet on football this weekend, he better head to Vegas.



Take the red pill! ... There's more to see ...

Flotsam and Jetsam in the Wake of New Jersey's New Sports Betting Scheme

September 11, 2014

As New Jersey’s latest plan to implement sports betting continues to play out this week, several news reports caught my eye and deserve brief comment.


I.  Will New Jersey Sports betting be “unregulated and untaxed”?

The Associated Press, covering Governor Christie’s Tuesday press conference, reported, “Gov. Chris Christie said the state government would have no role in either regulating or taxing sports books.”

No state role in regulating or taxing sports books? This seems inconsistent with New Jersey’s position in its motion to clarify and modify the federal district court injunction which currently prohibits New Jersey from implementing sports betting in violation of federal law (PASPA). In that filing, New Jersey clearly asserts that the state may regulate sports books via its established casino regulatory structure without running afoul of PASPA. Now, the apparent contradiction might simply be a factor of the looseness of the press conference setting. The governor may have meant that the state will not license sports books, but will still regulate them (which is consistent with the state’s court filing). But, if the governor truly means that the state will not regulate sports books (other than restricting them to licensed casinos and racetracks), that would be a significantly different proposition than what was contemplated by the Sports Wagering Act, and a change likely to create political discomfort for legislators and blowback from the public.

As for no state taxation of sports books, let’s just say it's doubtful the state will pass up such a tempting revenue stream. If sports books are limited to casinos and racetracks and subject to general gaming regulations, there is no obvious reason why sports book revenues would not be taxed like other gaming revenues. If sports books are exempted from gaming regulations (i.e., left unregulated) to avoid PASPA issues, then sports book revenues would almost certainly be taxed as business income, at least if such taxation is not deemed to violate PASPA. Either way, it’s always a safe bet that the tax man will get his cut of the action.


II.  Will there be a deal between New Jersey and the sports leagues to authorize sports betting?

Earlier this week, NBA Commissioner Adam Silver reacted to the New Jersey sports betting developments by suggesting that professional sports leagues will eventually get comfortable with sports betting because it increases interest in the leagues and provides an opportunity to enhance revenues:

“It's inevitable that, if all these states are broke, that there will be legalized sports betting in more states than Nevada. We will ultimately participate in that.”

Today, state senator Lesniak upped the ante further, suggesting that the professional sports leagues might be willing to drop their opposition to sports betting in New Jersey in exchange for a cut of the revenue, and even intimated that a deal was in the works because the leagues requested that New Jersey casinos and racetracks delay offering sports wagers for 45 days:

“It would not surprise me during this period of time if the leagues agreed to stand down for maybe a quarter point on the win for using their official statistics for sports betting purposes. We'll see if that comes to pass.”

Given the ubiquity of sports betting and the undeniable connection between sports betting and the popularity of televised sports, such a deal makes a ton of sense. But any grand deal, at least in the next few weeks, seems unlikely. The leagues have just spent two years fighting against expanded sports betting, defending the PASPA ban all the way to the U.S. Supreme Court. During that litigation, the leagues vigorously asserted that expanded sports betting would damage their public reputations. It is not clear whether the public would be comfortable with any endorsement of gambling by the leagues, and it is doubtful the leagues would take any chances on damaging their brands without extensive research and planning.

The better way to read the comments by Silver and Lesniak is as a pair of trial balloons. The fact Silver is open to exploring a business opportunity connected to sports wagering does not necessarily make his opinion the official position of the NBA. Rather, Silver’s comments simply acknowledge the obvious connection between sports and gambling, and serve to start a discussion—both publicly and within the NBA ownership—about whether the league should explore a business opportunity in that space. Similarly, senator Lesniak’s comments do not necessarily mean that any behind the scenes negotiations between the leagues and New Jersey’s casinos and racetracks are occurring or even imminent. Rather, the more likely explanation is that the senator's observation was simply an attempt to leverage Silver’s comments and float an idea for a negotiated financial settlement, or was just a byproduct of the senator's propensity for irrational exuberance when discussing sports wagering (see also Lesniak's claim today that “I would mortgage my house" on being able to place legal sports wagers in New Jersey within 45 days, or his claim that after Monday's legal maneuvering “This is all over but the shouting", not to mention promising legal sports betting at New Jersey casinos before this season's Super Bowl).

Of course, wherever the NBA might be on the issue, the other leagues simply don’t appear open to the idea of any expansion of sports betting. MLB has long been aggressive in stomping out any hint of gambling (think the Black Sox scandal and the still-barred-for-life Pete Rose). The NCAA is the embodiment of sanctimonious hypocrisy on financial issues. And the NFL is run by a commissioner who prides himself on imposing hefty penalties for player misconduct, and yet is currently embattled because he failed to be sufficiently harsh in doling out punishment in a domestic abuse situation. Frankly, even the NBA would need to be worried about public perception given its recent referee gambling scandal. None of these leagues seem likely to want to jump into a deal to directly license gambling on their games.

Of course, if the price is right, scruples have a way of disappearing.


III.  Why is senator Lesniak putting together yet another sports betting bill?

Today, senator Lesniak announced he is drafting yet another sports betting bill, his third on the topic (the prior bills being the Sports Wagering Act currently on the books, and his bill to explicitly repeal sports betting prohibitions which Governor Christie vetoed earlier this year). But New Jersey has argued to the federal court that the current Sports Wagering Act already has “repealed” sports betting prohibitions, so what purpose does Lesniak’s new bill serve? According to Lesniak:

“This [bill] will shore up the attorney general’s legal argument. His motion asks to court to parse my previous legislation, which it shot down by saying it implicitly repealed the state’s prohibitions on sports betting at casinos and racetracks. This bill will specifically abolish language on the books that prevents sports betting, which will give our legal motion more authority and will help withstand any challenges.”

In other words, Lesniak recognizes that New Jersey’s supposedly strong argument to the court actually has a major flaw—the current Sport Wagering Act has no language that explicitly repeals prohibitions on sports betting. As noted in my prior discussion of the state’s arguments, this flaw may well be fatal to the state’s efforts to have the injunction modified to permit New Jersey sports betting scheme to move forward. But, a new bill with clear repeal language, and possibly additional language to clarify what regulation, if any, will apply to sports betting, will undoubtedly strengthen the state’s case in court.

What the new bill really does, however, is underscore the awkward politics of the issue for Christie, who seems to lurch from position to position depending on the needs of the moment. Christie vetoed an explicit repeal bill on the grounds that the Third Circuit’s interpretation of PASPA was the law and must be respected. Then he suddenly reversed course and signed onto the plan to declare the Sports Wagering Act a “repeal” and moved to implement sports betting via some rather convoluted legal reasoning. Now, one can assume he will support and sign whatever new “repeal” bill Lesniak can get through the legislature. Apparently, Christie has decided that the failure of the Atlantic City casino industry is a bigger political liability than an explicit endorsement of expanded gaming. Christie must be gambling that more Republican presidential primary voters will vote on economic rather than social issues.

Which makes me wonder: When will senator Lesniak push for legal gambling on political races? I want to bet my mortgage against Christie being the Republican presidential nominee.

Take the red pill! ... There's more to see ...

Don't Bet the Farm on New Jersey Sports Wagering

September 09, 2014

Yesterday, the state of New Jersey launched the latest attack in its so far quixotic quest to legalize sports betting in the state. Governor Christie and the state attorney general announced that the state would refrain from taking any criminal or civil action against casinos and racetracks which offered sports wagering consistent with the state's Sports Wagering Act (passed in 2013). New Jersey also filed a motion with the federal district court for a clarification and modification of the injunction which was imposed to prevent the state's Sports Wagering Act from taking effect in the wake of a legal challenge brought by various sports leagues under the federal Professional and Amateur Sports Protection Act (PASPA). In that prior round of litigation, the Third Circuit ruled that PASPA, which essentially has prohibited states from legalizing sports betting since 1991, was a valid exercise of federal authority under the Commerce Clause and did not run afoul of "anti-commandeering" principles (i.e., PASPA did not require states to take any affirmative action to enforce federal policies).

New Jersey's latest legal maneuvering is a bit of a surprise, considering Governor Christie recently vetoed a bill (S2250) which would have explicitly repealed sports betting prohibitions and permitted casinos and racetracks to offer sports betting. Instead, New Jersey is now taking a more circuitous route to legalized sports betting via an argument that the Sports Wagering Act, subject of the prior federal PASPA litigation, provides sufficient legal basis to authorize sports betting despite the PASPA ban.

Didn't the courts already resolve this issue? Will New Jersey residents be able to wager on the Super Bowl next February as promised by state senator Ray Lesniak? Let's take a closer look at the legal arguments.


I.  The PASPA Ban

At the outset, it should be noted that there is essentially no case law interpreting PASPA, so everyone analyzing the legal merits is really hacking their way through a legal wilderness, with little but the Third Circuit's opinion as a guide. But, as always in a statutory construction case, it is important to begin with the text of the relevant statute, here PASPA's bar on sports betting (28 U.S.C. § 3702):

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.

New Jersey’s argument is focused on the first prong of PASPA—we will return to the second prong later—in particular the portion of the mandate prohibiting a state from “licens[ing] or authoriz[ing] by law” any type of sports betting. The Directive issued by New Jersey's attorney general argues that the Sports Wagering Act merely repeals a prohibition against sports betting and does not affirmatively license or authorize such wagering:

The Sports Wagering Act’s repeal of prohibitions against sports wagering in casinos and racetracks can be given effect without licensing or otherwise authorizing by law sports wagering, as prohibited by the Third Circuit’s decision, and, accordingly, must be given effect.

But, does the attorney general's argument hold water?


II.  State Licensing & the Severability Issue

First, the attorney general acknowledges the obvious—pursuant to PAPSA, the state cannot require a license for sports betting. Yet the Sports Wagering Act is expressly predicated on a licensing scheme. For example, Section 5:12A-2 requires that a sports pool operator hold both a casino license and a sports pool license. Section 5:12A-3 requires that all employees be licensed, and that a licensed "key employee" be on duty at all times sports wagers are taken. Section 5:12A-6 requires that a percentage of licensing fees be earmarked "to provide funds for prevention, education, and treatment programs for compulsive gambling programs."

New Jersey seeks to avoid the licensing problem by asserting that the licensing provisions can be severed from the statute. Severability is a legal doctrine which permits a court to invalidate one section of a statute while leaving the remainder in force. In this case, the statute contains an explicit legislative endorsement of severability (Section 5:12A-2(g)), which expresses the legislature's intent to have a court attempt to enforce the statute in the event the statute was found to violate PASPA and creates a legal presumption in favor of severability.

In determining whether to sever illegal provisions of a statute or to invalidate the entire statute, federal courts will generally attempt to sever provisions where doing so does not fundamentally alter the nature of the statute, the statute can function as intended without the stricken provision, and the court is not required to significantly rewrite the statute. Further, courts will attempt to determine, where possible, if the legislature would have preferred the statute as rewritten or no statute at all (i.e., whether the legislature would have enacted the statute without the severed provisions). In this analysis, the court generally focuses on both the legislative intent for the statute as well as any evidence of the "legislative bargain" made to enact the statute. Generally speaking, the more "key" or central to the purpose of the statute a provision is, the less likely a court will be to sever the provision. (For good discussion of severability, see here and here.)

Licensing of sports pool operators appears to be a key component of the Sports Wagering Act. While it is certainly true that the Act could operate without a licensing scheme, it seems doubtful that the legislature would have wanted to permit any person or company to operate or work in a sports book without regard for suitability. Such a result would be contrary to the express purposes of the overall New Jersey regulated gaming regime:

An integral and essential element of the regulation and control of such casino facilities by the State rests in the public confidence and trust in the credibility and integrity of the regulatory process and of casino operations. To further such public confidence and trust, the regulatory provisions of this act are designed to extend strict State regulation to all persons, locations, practices and associations related to the operation of licensed casino enterprises and all related service industries as herein provided. ... (N.J.S.A. § 5:12-1(b)(6)). 

Now, New Jersey may argue that eliminating only the sports pool operator licensing scheme is workable because the statute implicitly requires operators to be licensed as casino or racetrack operators; after all, sports betting can only occur at licensed casinos and racetracks. Thus, the "public confidence and trust" issue is resolved by reliance on the casino and racetrack licensing process.

The problem with this argument is that requiring a sports pool operator to hold a casino or racetrack license (and for its employees to similarly hold casino employee licenses) appears to run afoul of the PASPA prohibition against the state's licensing of sports betting by creating a de facto licensing requirement for sports pool operators. Arguing that the state is not licensing sports betting, merely general casino gaming seems too cute by half; a court is unlikely to be swayed by such hair-splitting.

Using casino licensing as a fall back regulatory position also creates its own severability issues. Under the Sports Wagering Act, licensed casinos can contract with outside vendors to run their sports books (think of Cantor's taking over operation of many Las Vegas Strip casino sports books in the past couple of years). Under the Sports Wagering Act,

The holder of a license to operate a sports pool may contract with an entity to conduct that operation, in accordance with the regulations of the division. That entity shall obtain a license as a casino service industry enterprise prior to the execution of any such contract, and such license shall be issued pursuant to the provisions of P.L.1977, c.110 (C.5:12-1 et seq.) and in accordance with the regulations promulgated by the division in consultation with the commission. (Section 5:12A-2(f)).

Again, the Act requires licensing for the outside vendor to operate the sports book, which runs afoul of PASPA. But if the licensing requirement is severed by the court, would the legislature want the possibility of an unlicensed, unvetted vendor operating a sports book? Hypothetically, imagine a licensed New Jersey casino—let's call it "Cheezers"—which contracts with an outside company—let's call it "GoHog"—to run its sports book. GoHog happens to have operated an online sports betting operation for years in violation of the Wire Act, UIGEA, IGBA, various state gaming laws, and probably the U.N. Universal Declaration of Human Rights. Is this a result consistent with the legislative intent behind the Sports Wagering Act? Should a court sever out the licensing requirements for third-party operators if it is convinced doing so will leave a regulatory void not intended by the legislature?

The attorney general's Directive and New Jersey's brief to the court operate from a base assumption that the court not only can, but must sever the licensing provisions. In neither document does the state lay out any argument as to the merits of severability, instead jumping ahead to the legal ramifications of severability (i.e., whether the "repeal" of the sports betting ban remains in effect and provides a legal basis for permitting sports betting at casinos and racetracks). Expect the opposition's briefing and the court's decision to wrestle more thoroughly with this threshold issue of severability.


III.  State Regulation, “Authorization by Law”, and the Repeal Issue

Let's assume the court adopts New Jersey's baseline position—the sports pool operator licensing requirement is severable, the requirement for casino, racetrack, vendor, and employee licenses is not "licensing" of sports betting in violation of PASPA, and the Sports Wagering Act can be interpreted to set forth a system of state-regulated sports wagering limited to licensed casinos and racetracks. The next legal question is whether the post-severance Sports Wagering Act is merely a permissible "repeal" of a statutory ban on sports betting, or whether the Act instead "authorizes by law" sports betting in violation of PASPA.

New Jersey's attempt to re-frame the Sports Wagering Act as a mere repeal of a sports wagering ban has its genesis in the Third Circuit's anti-commandeering analysis. There the Court noted that, although PASPA prohibits states from affirmatively legalizing sports betting, states are nonetheless free to repeal bans on sports betting:

Thus, under PASPA, on the one hand, a state may repeal its sports wagering ban, a move that will result in the expenditure of no resources or effort by any official. On the other hand, a state may choose to keep a complete ban on sports gambling, but it is left up to each state to decide how much of a law enforcement priority it wants to make of sports gambling, or what the exact contours of the prohibition will be.

We agree that these are not easy choices. And it is perhaps true (although there is no textual or other support for the idea) that Congress may have suspected that most states would choose to keep an actual prohibition on sports gambling on the books, rather than permit that activity to go on unregulated. But the fact that Congress gave the states a hard or tempting choice does not mean that they were given no choice at all, or that the choices are otherwise unconstitutional.  (NCAA v. Governor of New Jersey, 730 F.3d 208, 233, *78-79 (3rd Cir. 2014) (emphasis added)).

Although New Jersey focuses on the Court's holding that states are free to repeal sports betting prohibitions or to set the "exact contours of the prohibition", New Jersey's brief fails to note that the Court immediately thereafter suggested that the options available to New Jersey were to maintain a sports betting prohibition or "permit that activity to go unregulated". At a minimum, the Court suggests that state regulation of sports betting may violate PASPA, a point ignored by New Jersey's brief.

The Third Circuit's discussion above grew directly out of the Court's analysis of the distinction between "repealing" a prohibition on sports betting (permissible under PASPA) and affirmatively "authorizing" sports betting (impermissible under PASPA):

Under PASPA, “[i]t shall be unlawful for ... a governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact” a sports wagering scheme. 28 U.S.C. § 3702(1) (emphasis added). Nothing in these words requires that the states keep any law in place. All that is prohibited is the issuance of gambling “license[s]” or the affirmative “authoriz[ation] by law” of gambling schemes. Appellants contend that to the extent a state may choose to repeal an affirmative prohibition of sports gambling, that is the same as “authorizing” that activity, and therefore PASPA precludes repealing prohibitions on gambling just as it bars affirmatively licensing it. This argument is problematic in numerous respects. Most basically, it ignores that PASPA speaks only of “authorizing by law” a sports gambling scheme. We do not see how having no law in place governing sports wagering is the same as authorizing it by law. Second, the argument ignores that, in reality, the lack of an affirmative prohibition of an activity does not mean it is affirmatively authorized by law. The right to do that which is not prohibited derives not from the authority of the state but from the inherent rights of the people. Indeed, that the Legislature needed to enact the Sports Wagering Law itself belies any contention that the mere repeal of New Jersey’s ban on sports gambling was sufficient to “authorize [it] by law.” The amendment to New Jersey’s Constitution itself did not purport to affirmatively authorize sports wagering but indeed only gave the Legislature the power to “authorize by law” such activities. N.J. Const. Art. IV, § VII, ¶ 2(D), (F). Thus, the New Jersey Legislature itself saw a meaningful distinction between repealing the ban on sports wagering and authorizing it by law, undermining any contention that the amendment alone was sufficient to affirmatively authorize sports wagering—the Sports Wagering Law was required. [cite]. Congress in PASPA itself saw a difference between general sports gambling activity and that which occurs under the auspices of state approval and authorization, and chose to reach private activity only to the extent that it is conducted "pursuant to State law.” (NCAA v. Governor of New Jersey, 730 F.3d 208, 233, *74-76 (3rd Cir. 2014) (italics in original) (bold added)).

Although the Third Circuit's analysis does provide New Jersey with a basis to contend that a repeal of New Jersey's sports betting prohibition would be permissible under PASPA, the Court's analysis does not support a repeal of sports betting prohibitions coupled with state regulation of sports betting. As noted before, the Court drew a distinction between a permissible repeal (described as "having no law in place governing sports wagering") and an impermissible authorization of sports betting. Even more devastating to New Jersey's argument, the Court specifically found that the Sports Wagering Act was not merely a repeal of the state's sports betting prohibition, but rather was enacted—and indeed was "required"—to "affirmatively authorize sports wagering".

It is difficult to square New Jersey's Sports Wagering Act with a mere repeal of a sports betting prohibition. A repeal would essentially require nothing more than passing a bill stating: "New Jersey Revised Statute § 2A:40-1 is repealed" or "Nothing in New Jersey Revised Statute § 2A:40-1 shall be construed to prohibit wagers made upon the outcome of a sporting event." (Section 2A:40-1 currently reads "All wagers, bets or stakes made to depend upon any race or game, or upon any gaming by lot or chance, or upon any lot, chance, casualty or unknown or contingent event, shall be unlawful."). Frankly, the recently vetoed Lesniak bill was substantially closer to a true repeal than the regulatory behemoth that is the Sports Wagering Act,

Instead of a straightforward repeal of the state's sports betting prohibition, New Jersey's Sports Wagering Act instead specifically states that it is expanding the scope of regulated gaming in the state by adding sports wagering to other currently regulated casino games:

In addition to casino games permitted pursuant to the provisions of P.L.1977, c.110 (C.5:12-1 et seq.), a casino may operate a sports pool upon the approval of the division and in accordance with the provisions of this act and applicable regulations promulgated pursuant to this act. In addition to the conduct of parimutuel wagering on horse races under regulation by the racing commission pursuant to chapter 5 of Title 5 of the Revised Statutes, a racetrack may operate a sports pool upon the approval of the division and the racing commission and in accordance with the provisions of this act and applicable regulations promulgated pursuant to this act.  (Section 5:12A-2(a) (emphasis added)).

The Sports Wagering Act then outlines an extensive regulatory regime to govern who may operate a sports betting pool, and how they must operate the pool. Unquestionably the state has gone beyond a mere repeal of a sports betting prohibition.

New Jersey, however, argues that the regulatory framework required by the Sports Wagering Act does not rise to the level of the state authorizing sports betting in violation of PASPA:
"[M]erely applying laws and regulations of general applicability does not constitute licensure or authorization of sports wagering." (NJ Brief, p. 9). As New Jersey views it:

These restrictions on who may gamble (e.g., no cheats or underage persons), where they may gamble (e.g., only at specified facilities), and under what conditions (e.g., only if specified facilities and alcohol service requirements are met) do not “authorize” gambling. The plain meaning of “authorize” is “[t]o give formal approval to; to sanction, approve, countenance.” Oxford English Dictionary 798-99 (2d ed. 1989). The fact that some individuals are prohibited from gambling does not mean that the State is “sanction[ing]” or “approv[ing]” gambling for everyone else. (NJ Brief, p. 10).

The problem with New Jersey's argument is that it ignores the host of statutory requirements related specifically and solely to sports betting, without which sports betting would not be permitted in New Jersey regardless of the purported repeal of the sports betting prohibition:

In developing rules and regulations applicable to sports wagering, the division shall examine the regulations implemented in other states where sports wagering is conducted and shall, as far as practicable, adopt a similar regulatory framework. The division, in consultation with the commission, shall promulgate regulations necessary to carry out the provisions of this act, including, but not limited to, regulations governing the:

(a) amount of cash reserves to be maintained by operators to cover winning wagers;
(b) acceptance of wagers on a series of sports events;
(c) maximum wagers which may be accepted by an operator from any one patron on any one sports event;
(d) type of wagering tickets which may be used;
(e) method of issuing tickets;
(f) method of accounting to be used by operators;
(g) types of records which shall be kept;
(h) use of credit and checks by patrons;
(i) type of system for wagering;
(j) protections for a person placing a wager; and
(k) display of the words, "If you or someone you know has a gambling problem and wants help, call 1-800 GAMBLER," or some comparable language approved by the division, which language shall include the words "gambling problem" and "call 1-800 GAMBLER," on all print, billboard, sign, online, or broadcast advertisements of a sports pool and in every sports wagering lounge.  (Section 5:12A-4 (emphasis added)).

"The operator of a sports pool shall establish or display the odds at which wagers may be placed on sports events."  (Section 5:12A-2(c) (emphasis added)).

There is little question that New Jersey's Sports Wagering Act has gone far beyond the mere repeal of a sports betting prohibition which would have passed muster under the Third Circuit's ruling. Whether the state's regulatory scheme for sports betting is authorization of sports betting in violation of PASPA is an open question for the Court. My bet is the Court finds New Jersey is out of bounds.


IV.  PASPA Ban on Private Action

Neither the Directive issued by New Jersey's attorney general nor New Jersey's brief to the court mention the second prong of PASPA, a ban on private action related to sports betting:

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. (28 U.S.C. § 3702).

Notice here that there is no parallel language related to "authorization" by law as is found in the first prong. Rather, the second prong of the statute bars a person from operating a sports betting pool "pursuant to the law" of a state (for purposes of PASPA, "person" includes a company or corporation; see 28 U.S.C. § 3701). Here, if a casino were to operate a sports book in New Jersey "pursuant" to a New Jersey regulatory scheme promulgated in accordance with New Jersey's Sports Wagering Act, would that casino be violating PASPA? If so, then that casino would be subject to a civil action for an injunction (see 28 U.S.C. § 3703). In effect, New Jersey's adoption of a regulatory scheme governing sports betting, even if not itself "authorization" of sports betting, may create an environment where as a practical matter no casino or racetrack could actually offer sports betting "pursuant" to that regulatory scheme.

Finally, on a more practical level, many of the casinos in New Jersey are owned by corporations which are licensed in other jurisdictions, notably including Nevada. So long as the legality of New Jersey's Sports Wagering Act is unclear, it is doubtful any of those casinos would risk inquiries from other state gaming regulators regarding their acceptance of sports wagers in potential violation of PASPA.


V.  Conclusion

New Jersey's latest tilt at the sports betting windmill is certainly creative. But, so long as New Jersey tries to limit sports betting to licensed casinos and racetracks in a highly regulated environment, the courts are likely to find they still run afoul of PASPA. Ironically, New Jersey would have better luck getting around PASPA by merely repealing the sports betting prohibition and permitting any person or business to take sports wagers, free of state gaming regulations. But it's highly doubtful that Governor Christie or the legislature would have the stomach for such an approach given the likely public resistance and political fallout. So, unless Congress amends PASPA in the next few months, if Senator Lesniak plans to bet on the Super Bowl this season, he better book a trip to Vegas.

* * * * *

NOTES:  An article today by John Brennan (a required follow of his news blog and twitter feed for New Jersey gaming law updates) contains some commentary by another attorney, Daniel Wallach, who is also skeptical of New Jersey's chances. I saw this article after writing my post, but wanted to recommend it as another point of view.

Also, noted gaming law authority Professor I. Nelson Rose shared his skepticism of the new New Jersey maneuvering in comments here.

Take the red pill! ... There's more to see ...

Garnishing a Turd (Part IV)—DiCristina Ends, Not With a Bang, But a Whimper

February 24, 2014

Today, the United States Supreme Court (SCOTUS) entered its much-anticipated ruling on the Petition for Writ of Certiorari ("Petition") filed in the DiCristina poker litigation. As expected, SCOTUS declined to hear the appeal ("denied certiorari" or "denied cert") without comment (the Court's denial is reflected on page 5 of today's lengthy Orders List). Here are a few quick points to keep in mind about both SCOTUS' ruling and the ultimate impact—or lack thereof—of the DiCristina litigation.


A.  We Do NOT Know Why SCOTUS Denied Certiorari

The Court did not indicate why it denied cert. This is standard practice for the Court. All we know for certain is that the Petition failed to attract four Justices interested in considering the appeal. So, we can only speculate as to why cert was denied. Likely, some of the reasons playing into the decision included the lack of a split among the lower courts over the interpretation of the Illegal Gambling Business Act (IGBA), various procedural issues related to preservation of error (discussed here and here), and the relatively low profile of the IGBA, which is not used often by the federal government, and rarely against poker operations.

Also, no Justice filed an opinion dissenting from the denial of cert, explaining why they felt cert was appropriate. Contrary to PokerNews' coverage of the case, it is simply not true that "If the petition is declined but there were justices who wanted to take it, the outvoted justices often write short opinions on why the Supreme Court should have taken the case." In fact, opinions dissenting from the denial of cert are exceedingly rare, probably happening only a handful of times per Term out of thousands of denials of cert. The lack of a dissenting opinion doesn't mean that no Justice voted to grant cert, it merely means that the denial of cert was routine.


B.  A Denial of Certiorari Is NOT a Ruling on the Merits

Often following a denial of cert, the press will say something like, "The Supreme Court today ruled that poker is covered by the IGBA." This sort of comment is not just technically incorrect, but is false in a legally significant manner. A mere denial of cert means nothing more or less than that SCOTUS did not take the case. It does not mean that SCOTUS agrees or disagrees with either the conviction of DiCristina or the Second Circuit's reasoning in its decision. It does not mean that the Second Circuit's decision has some kind of SCOTUS stamp of approval. It does not indicate any kind of implicit endorsement of Judge Weinstein's ruling finding poker is a game of skill. All SCOTUS' denial of cert means is that the Second Circuit's decision is the final word on the matter in this case, at this time.


C.  DiCristina Is a Significant Blow to the "Skill Game" Argument for Poker

Because the Second Circuit's decision stands as written, it will be difficult for any future attacks on federal poker prosecutions under the IGBA. Although DiCristina technically only is controlling authority in the Second Circuit, case law cited in the DiCristina decision suggests that most, and likely all, of the other Federal Circuits would follow DiCristina or find it persuasive authority if confronted with a poker prosecution under the IGBA. In fact, a federal district court in Guam has already rejected Judge Weinstein's opinion and adopted much the same reasoning as used by the Second Circuit's decision in finding the IGBA applies to poker. Although a "skill game" challenge to the IGBA is theoretically possible in another Circuit, any such challenge would be like trying to swim with an anchor tied to one leg.

Further, even though the Second Circuit completely passed on any analysis of Judge Weinstein's finding that poker is a game of skill, it is difficult to see where Judge Weinstein's opinion will be of any real benefit in future poker litigation. Although the case can be cited with respect to the skill game analysis, pragmatically speaking, Judge Weinstein's opinion will have little or no influence. In most states, poker's status as gambling is already established by statute or case law. In the few states where poker's status as gambling is arguably undecided, it is doubtful that an appellate court would adopt the skill game argument. After all, since 2007, appellate courts in North Carolina, Pennsylvania (my discussion), Kansas (the "Kandu case"), and South Carolina (my discussion) have all considered and rejected skill game arguments for poker. Appellate courts in Colorado and Virginia have declined to rule on the skill game issue. On the federal front, other federal criminal statutes potentially applicable to poker—e.g., UIGEA, the Travel Act, and the RICO Act—all look to state law to determine the definition of illegal gambling, without the ambiguous language found in the IGBA.

The skill game argument for poker legalization is revered as unquestionable dogma within the echo chamber occupied by poker partisans. But out in the real legal world, the argument is oh-fer in all of the appellate courts to consider the issue. As I often tell younger attorneys and law clerks who work with me on significant motions and appeals: "It doesn't matter how brilliant your argument is. Sometimes, the court just isn't buying what you're selling."


D.  At Best, DiCristina Is Merely a Symbolic Victory for Poker Players

I presume the poker media will be filled with quotes and analysis from the PPA and other poker partisans expressing disappointment with SCOTUS' denial of cert. These comments and analyses will all be qualified by reminders that Judge Weinstein found poker to be a game of skill, which the poker community will latch onto as the important feature of the DiCristina litigation. Such a mindset is as predictable as it is misguided.

As I noted after the Second Circuit entered its decision, the legacy of Judge Weinstein's DiCristina ruling will most likely be as the Baxter v. United States of the modern poker era. Baxter, decided in 1986, is another federal district court case which held that poker was a game of skill for purposes of federal law, albeit a federal tax statute. Within the poker community, Baxter has long been touted as a significant legal victory. The reality is that Baxter was actually an obscure decision of little or no consequence to the issue of poker's legal status. Like Baxter, Judge Weinstein's ruling in DiCristina is ultimately nothing more than a nice little vanity award, soothing the bruised egos of poker players who crave mainstream respect.


E.  The Fight for Poker Legalization Is—and Always Has Been—an Issue for State Legislatures

One silver lining in SCOTUS' denial of cert in DiCristina is that it might finally drive home to poker players that the poker legalization fight—whether for home games or online poker—cannot be won magically with a simple pronouncement by a court. Instead, poker legalization can only be won by changing state law via new legislation. Even if a miracle federal online poker bill would materialize, there would necessarily be an opt-in/opt-out fight in every state. Pursuing the "game of skill" litigation strategy has not advanced the cause of poker legalization at all. It's time to take the legalization fight to where it matters—the state legislatures.

Take the red pill! ... There's more to see ...

Garnishing a Turd (Part III):
Will SCOTUS Grant Certiorari in DiCristina?

February 21, 2014

We could know as early as this afternoon, and certainly by early next week, whether the U.S. Supreme Court (SCOTUS) will grant certiorari ("cert") in the DiCristina poker case. After reviewing DiCristina's Petition and the Department of Justice's Brief in Opposition, the big question remains: What will SCOTUS do?

My prediction:  SCOTUS denies cert without comment.

Now, I may well be wrong. In fact, as a poker player, I actually hope I am wrong. But as a lawyer whose day job requires me to monitor appellate cases, I just think the deck is stacked against DiCristina, and a grant of cert is a serious longshot.


I.  Why SCOTUS Will NOT Take DiCristina

A.  Pure numbers:  As I have noted previously, SCOTUS only takes 80 or so cases per Term. Even after weeding out cases with little or no chance whatsoever, SCOTUS still only takes roughly 4% of cases. The 4% grant rate is still somewhat misleading. There are in every Term a certain number of high profile cases which SCOTUS will almost certainly take. That means the number of open slots is reduced for the remaining set of cases from which the Court will select its remaining docket. And the Court has four additional conferences this Term, as well as several conferences early next Term from which to select the cases to fill its docket for the 2014-2015 Term.

B.  Subject matter:  Take a look at just a few of the notable cases to be considered today in the judicial conference. DiCristina will be competing against cases raising issues involving the Confrontation Clause of the Constitution, police use of force, Fourth Amendment search and seizure, ERISA plan litigation, anti-trust law, the Federal Rules of Evidence, immigration law, securities law, Second Amendment gun rights issues, class action litigation issues, administrative agency law, and death penalty appeals. Cases in which SCOTUS recently granted cert raise issues related to copyright and patent law, international law, environmental law, First Amendment law in the context of elections, and federal tax law. These topics are the bread and butter of SCOTUS' docket.

Certainly interpretation of a federal criminal statute such as the issue raised in DiCristina would fit within SCOTUS' normal range of cases. But to get the Court's attention, such a case generally has to present a pressing concern that requires the Court's intervention. After all, a grant of cert to DiCristina makes it less likely the SCOTUS will take other potentially important cases. So, SCOTUS usually selects cases where there is a split in how the lower federal courts are interpreting the relevant statute, which is a sign that SCOTUS needs to resolve the split in interpretation. Or the case needs to present a pressing federal concern that requires immediate resolution by SCOTUS. Neither of these factors are present in DiCristina.

To be blunt, the Illegal Gambling Business Act (IGBA) has been around a long time. It has been previously applied to poker operations. The arguments raised in DiCristina are novel, but the Second Circuit's decision does not break with any established interpretation of the IGBA. There simply do not appear to be many IGBA cases in general being litigated, and few of them concern poker. Even if SCOTUS thinks the Second Circuit was wrong, or was right for the wrong reasons, nothing about the case really requires the Court to take the case and resolve the issue immediately, as opposed to waiting for further challenges to percolate their way through the system to see if other appellate courts agree or disagree with the Second Circuit.

C.  Procedural issues:  As noted in my prior discussion of the parties' SCOTUS filings, there are potential procedural issues related to whether DiCristina preserved error on his main issue—whether the Second Circuit erred in failing to follow the Nardello line of cases. DiCristina did not cite to or argue this line of cases in the District Court or before the Second Circuit. DiCristina argues the DOJ waived the issue, though the Second Circuit disagreed with that contention. SCOTUS is less likely to take a case where the underlying appellate court decision did not even analyze the main issue raised in the Petition for Certiorari. Further, SCOTUS does not like to take cases with significant procedural issues, because those issues may prevent the Court from reaching the merits of the case. Although SCOTUS could look past these procedural issues, the case is certainly far from "clean".

D.  The facts are not compelling:  Although many Americans play and enjoy poker, poker simply lacks a certain gravitas that is typically associated with SCOTUS cases. Also, DiCristina is not about small stakes home games, it's about a for-profit poker room, complete with armed guards and video surveillance, taking in thousands of dollars, and admittedly operating illegally under state law. Although SCOTUS focuses on the legal issues rather than factual issues in making cert decisions, DiCristina does not present a compelling story of grave injustice to catch the Court's eyes.


II.  Why SCOTUS Might Take DiCristina

A.  Government overreach:  SCOTUS has shown an interest in recent years in reining in the scope of the federal government in a number of areas. Here, where the DOJ is arguing in favor of a broad interpretation of a federal criminal statute, and where a federal criminal statute is being used to prosecute a fairly small scale gambling operation, some of the Justices might want to consider the case.

B.  DiCristina's counsel:  DiCristina is represented by Neal Katyal, a former U.S. Solicitor General, and a federal appellate court judge nominee. Counsel for the supporting amicus curiae include other legal heavyweights, such as Paul Clement (another former U.S. Solicitor General), and Thomas Goldstein (founder of SCOTUSblog). Given this array of attorneys, the DiCristina Petition will certainly garner more attention among the Justices than a typical case. In law as in life, it pays to travel in the right company.


III.  Conclusion

We will know fairly soon whether SCOTUS will grant cert in DiCristina. Whether cert is granted or denied, however, what the Court's cert decision means is a topic for another post. Just a rule of thumb: Never believe the hype from either side to litigation. Oh, and manage your expectations.

Take the red pill! ... There's more to see ...

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