September 09, 2014

Don't Bet the Farm on New Jersey Sports Wagering

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is a bit of a surprise, considering Governor Christie recently vetoed a bill (S2250) which would have explicitly repealed sports betting prohibitions and permitted casinos and racetracks to offer sports betting.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.

5 comments:

  1. long time no blog. glad to c u back,bro.

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  2. There's another issue: taxes. New Jersey might be surprised with how this will work.

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  3. @angerisagift: Been busy with work, running, life ... and had gotten a little disillusioned with the poker echo chamber. But the break was good. Hope to be back posting more regularly.

    @Russell Fox: I suspect there will be tax complications, but I know enough not to wade into those waters!

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  4. well glad to c u back,sir. now if only the person that use to blog( aimlessly chasing amy) would blog again. my life would b complete. LOL. running??? from the law?? r u D.B.Cooper??

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  5. This NJ legal sports-betting saga has a few dramatic turns ahead, it is nowhere near a final act. Commentary thereon reminds me more of Rosencrantz & Guildenstern Are Dead than of Hamlet.

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