Would a Justice Hardiman Doom New Jersey's Chances for Sports Betting?

President Donald Trump is set to announce his pick for the open U.S. Supreme Court (SCOTUS) seat this evening on prime time TV. Presumably, Trump will have the three finalists—Third Circuit Judge Thomas Hardiman, Tenth Circuit Judge Neil Gorsuch, and Eleventh Circuit Judge William Pryor, Jr.—engage in a Celebrity Apprentice-style competition where they raise funds for the Trump Foundation while creating marketing campaigns for the Trump hotel chain, all under the watchful eye of Trump's children-judges, Eric, Ivanka, and Don Jr.

Once confirmed by the Senate, President Trump's SCOTUS nominee will unquestionably have an immediate impact on the closely divided Court. But President Trump's SCOTUS pick may impact the Court even prior to confirmation of the nominee by affecting how the Court chooses cases to fill its docket for the remainder of the current Term and the beginning of the next Term. If the Court feels it is likely the new justice will be joining the Court yet this Term, the Court may well take up important cases (grant certiorari or "cert") where the current Court is likely closely divided, on the premise that the new justice will be available to serve as a decisive vote if needed. In other cases where the Court is uncertain whether to take a case, the Court may hold the case pending addition of the new justice before making a final decision as to whether to grant cert.

Two key cases which may feel the immediate effects of Trump's SCOTUS nomination are Christie v. NCAA and New Jersey Thoroughbred Horsemen’s Association, Inc. v. NCAA (collectively "Christie II"), the linked cases by which New Jersey is challenging the constitutionality of the Professional and Amateur Sports Protection Act ("PASPA"), the federal statute which bars states from authorizing legal sports betting (except for Nevada and a couple of other "grandfathered" states). New Jersey has been on a multi-year losing streak in court tilting at PASPA and the sports betting windmill. In 2013-14, the state challenged the law, losing in federal district court, losing before a three-judge panel in the Third Circuit Court of Appeals, and being rejected by SCOTUS which denied cert. Undeterred, New Jersey came right back with a new law and "new" (or repackaged) legal arguments in late 2014. Since then, the state has run its record to a Cleveland Browns-esque 0-6, adding new losses before the federal district court, a new three-judge panel in the Third Circuit Court of Appeals, and a full twelve-judge en banc panel of the Third Circuit.

New Jersey is once again appealing to SCOTUS, and this time, SCOTUS has thrown New Jersey a bit of a lifeline. In a recent order, the Court requested the views of the Solicitor General as to whether the Court should grant cert. Of course, with the recent change in Administrations, it will take some time for a new Attorney General and Solicitor General to be appointed by President Trump and confirmed by the Senate. So it remains to be seen whether the Department of Justice will continue to strongly defend PASPA against New Jersey's attacks. But the views of the Solicitor General may all be academic if President Trump nominates Judge Hardiman to SCOTUS.


I.  Justice Hardiman would be recused from Christie II, making it more likely the Court would reach a split decision, thus making it less likely the Court would grant cert.

Because Judge Hardiman participated in the Third Circuit en banc panel and joined the majority opinion in Christie II, as a SCOTUS Justice he would almost certainly recuse himself from considering any action with respect to Christie II before SCOTUS. This would include both the decision whether to grant cert and, if cert is granted, consideration of the merits of the case.

So, if Trump nominates Judge Hardiman for the Court, the current Court will have to decide whether to grant cert without his vote. Worse, the Court will also have to consider the case with only eight justices participating. Those justices tend to be closely divided, particularly on issues of ideological doctrine; as will be discussed below, commandeering is one such issue potentially dividing the Court on liberal-conservative lines. This potential for ideological divide, of course, raises the specter of a tied decision, a result SCOTUS abhors (the Court takes cases primarily to resolve major legal disputes). Added to other factors weighing against a grant of cert—the lack of a circuit split, the fact the Court previously passed on this same case with essentially the same commandeering argument—the potential for a tied decision might be the final straw in a decision to deny cert.


II.  New Jersey almost certainly needs the vote of the new justice to prevail.

New Jersey's challenge to PASPA rests on a constitutional theory known as commandeering—the idea that there are limits on the ability of the federal government to directly or indirectly force states to implement federal policy prerogatives. It's a doctrine which has been rarely invoked, and it is even rarer for the Court to find there has been unconstitutional commandeering. In fact, the Court has only struck down two laws on commandeering grounds. In 1992, in New York v. United States, the Court struck down a federal law requiring states either to regulate nuclear waste or to take title to the waste. And in 1997, in Printz v. United States, the Court found that the Brady Handgun Violence Prevention Act unconstitutionally required local and state law enforcement officials to implement federal gun policy by requiring local and state officials to perform background checks required by federal law. That's it—that's the whole enchilada of wins for commandeering at SCOTUS.

Because commandeering as a constitutional doctrine sounds in Tenth Amendment states' rights theory, commandeering is, or at least has been to date, a conservative judicial doctrine (conservatives tend to believe in strong state sovereignty while liberals tend to believe in strong federal sovereignty). Right now, SCOTUS is in a 4-4 conservative-liberal deadlock. The Court's most recent commandeering decision, Printz, was a 5-4 decision. Two of the justices in the majority in Printz—Thomas and Kennedy—remain on the Court today as part of the Court's conservative bloc (they were also in the 6-3 majority in the earlier New York commandeering decision) . Two of the dissenting justices in Printz—Ginsburg and Breyer—remain on the Court today as anchors for the liberal bloc. Justice Scalia, whose seat is being filled by President Trump, wrote the Printz majority decision.

Against this backdrop, it is difficult to see how New Jersey can find five votes out of the current eight SCOTUS justices. Although Chief Justice Roberts, and Justices Thomas, Kennedy, and Alito are likely at least sympathetic to a commandeering argument, it is difficult to imagine any of the four liberal justices—Ginsburg, Breyer, Sotomayor, or Kagan—jumping sides and providing a fifth vote for New Jersey (although Justice Kagan might change sides and provide a sixth vote if the cause is already lost, out of a concern for the Court's reputation and for strategic reasons). Of course, this assumes New Jersey can rally the votes of the four current conservative justices; PASPA is a bit of a black swan statute, and with gambling as its core topic, it's not guaranteed to be an attractive vehicle for conservatives to expand the commandeering case law. Recall that this current Court lineup with Justice Scalia already rejected consideration of nearly identical arguments in Christie I. And Judge Hardiman, viewed by most Republicans as sufficiently conservative to replace Justice Scalia, has already weighed in on New Jersey's PASPA challenge and found it lacking. So New Jersey's PASPA challenge is no slam dunk even with the Court's current conservative justices.

Given the potential votes in play, it seems likely New Jersey's best chance for prevailing requires it to pick up the vote of whatever new conservative justice is appointed by President Trump. But, if Judge Hardiman is the nominee, he will be forced to recuse himself from the case. And if Judge Hardiman is recused, New Jersey likely remains one vote shy of victory on the merits even if the state can get the four votes it needs for the Court to grant cert.


III.  Justice Hardiman would likely be a vote against future PASPA challenges.

Finally, playing the hypothetical forward, let's assume Judge Hardiman is appointed to SCOTUS, and the Court declines to hear the Christie II challenge with new Justice Hardman recused. The next litigation avenue could be for New Jerey to pass another sports betting statute and mount a new court challenge to PASPA, though this fight would be uphill against the Third Circuit's decision in Christie II. A more plausible course might be for another state in a different circuit to attempt to legalize sports betting; New York and Mississippi seem likely candidates, though more states are beginning to look at the issue. These states could then bring court actions challenging PASPA in front of different Circuit Courts of Appeal not bound by Christie II, hoping to create a circuit split and force SCOTUS to confront and resolve the conflicting decisions.

And waiting there for the challengers as the likely decisive swing vote will be Justice Hardiman, who would be the sole supreme court justice to have previously wrestled with the issue of PASPA and commandeering, and found PASPA to be a valid exercise of federal authority.

New Jersey and any other states wanting to expand legalized sports betting better root for Judge Gorsuch to be the new SCOTUS nominee.

PokerStars in New Jersey—Back to the Silver Age of Poker?

"Here I come to save the day!"

~ Mighty Mouse

American comic books have followed an interesting historical arc. The "Golden Age" spanned the era from the Great Depression through the post-World War II days, and saw the debuts of classic clean-cut All-American heroes like Superman and Captain America. After a period of decline for traditional comics, the "Silver Age" and "Bronze Age" of comics marked a resurgence of classic comic heroes and story lines. A turn in the mid-1980s toward darker and more dystopian themes and the rise of more conflicted heroes and anti-heroes marked the beginning of the "Modern Age" of comics.

Online poker has followed a strikingly similar course. The Golden Age of online poker ran from the rise of sites like Paradise Poker and Party Poker in the late 1990s and early 2000s through the passage of UIGEA in 2006. The Silver Age of online poker saw the rise of PokerStars and Full Tilt as the new heroes for poker players, and came to an end when Black Friday destroyed online poker in the U.S. in 2011. After enduring a Dark Age with no online poker, the Modern Age of online poker began with the rise of regulated online poker in a handful of states, set against a bleak landscape of poker prohibition, populated by a gallery of newly reinvented and rebooted heroes—Party Poker and 888 are back from exile, Caesars has been transformed from super-villain to crusading hero, Full Tilt is an ally of its former archenemy PokerStars, and everyone is threatened by a new cyborg super-villain named "SH3LD0N".

Online poker's historical arc came to mind this week when, after months of speculation and anticipation, the online poker world finally received some transformative news—as first reported by Dustin Gouker at Online Poker Report, PokerStars has been approved by New Jersey gaming regulators to operate an online poker site. But does this key development mark a return to the Silver Age of online poker, or is it another step forward into the Modern Age?


Market Expansion or Cannibalization?

The literally million dollar question is less whether PokerStars will be a major player in the New Jersey online poker market and more where PokerStars' market share will come from. PokerStars will inevitably draw players away from its established competitors. And many in the poker community seem to hold as an article of faith that PokerStars' entry into the market will create a new poker boom, greatly expanding the player base. Respected poker industry insider Nolan Dalla expresses what seems to be the prevalent view that PokerStars will cannibalize little of its player base from established competitors, and that PokerStars will significantly expand the market. But are these presumptions reasonable? Color me skeptical.

When regulated online poker launched in New Jersey, there was an initial surge of play, fueled by a combination of pent-up consumer demand from former online players and a wave of marketing recruiting new players to the pool. That surge, however, quickly subsided. During the heady post-launch days, online poker in New Jersey generated revenues exceeding $2.5 million per month over the first five months, with three months exceeding $3 million in revenue. Yet by six months post-launch, revenues settled into a rate of roughly $2 million per month, plus or minus 10% depending on seasonal variance. As we approach the two-year mark, those revenues are at best stable, and possibly in a slow decline when viewed on a year-over-year basis.

The bullish case for robust market expansion—summarized nicely by Steve Ruddock at Online Poker Report—forecasts PokerStars will expand the market and increase revenues to $3-$4 million per month. That would be an increase of 50% to 100% over current revenues. This optimistic vision is predicated on a combination of PokerStars' established branding and reputation within the poker community combined with an aggressive marketing campaign drawing in new players.

This rose-colored scenario seems implausible. Although the PokerStars brand remains strong among established poker players, those players are almost certainly already playing online on one of the existing poker sites. Even if PokerStars wins over many of these established players, they will be cannibalizing the market, not expanding it. Certainly a PokerStars marketing campaign could attract new players. But nearly two years post-legalization, it is questionable how large a pool there is of people in New Jersey who want to play online poker and who, for whatever reason, have not started playing on one of the existing sites. And, there is the problem of retaining new players once the initial marketing surge is past, a problem reflected in the sharp decline in online poker revenues mere months following legalization.

Ruddock and Dalla both assert that large numbers of New Jersey residents are unaware they can legally gamble online. According to Dalla:

"A recent poll in New Jersey revealed some staggering statistics that about 60 percent of the residents of the Garden State still are not aware that online poker/gambling is legal. Despite numerous marketing campaigns and a flood of advertising, a majority of citizens have no idea they can play poker legally on their computer. One expects that given PokerStars immense success cultivating and growing immature markets in numerous foreign countries over the past decade, with such vast resources they should have little trouble jump starting New Jersey’s online poker market into overdrive."

First off, Dalla doesn't specify or link to the survey he is citing. The only survey with results tracking Dalla's claims I could find dates back to November 2013, when online gaming was just beginning to launch. If this is the survey Dalla relies on, the results are understandable and irrelevant to the current state of the New Jersey market. But even if a more recent survey shows a high percentage of consumer confusion regarding online gaming, it is a mistake to conflate poker and casino gaming in this context. Online poker in New Jersey is most certainly not an "immature market". Online poker was available and heavily advertised for the better part of a decade prior to Black Friday, and has been available again and advertised again over the past two years. Online casino gaming, however, is in its infancy. So, while public knowledge of and comfort with online casino gaming may be low, there is no reason to assume that the same holds true for online poker.

Measuring PokerStars' success may well be a matter of managing expectations. There is nothing wrong with being bullish on PokerStars' impact on the New Jersey market; PokerStars has been the long-term industry leader for a reason. But, nobody should be shocked if the bulk of PokerStars' customers are cannibalized from the existing sites. This is not inherently a bad result, as healthy competition among the poker sites should benefit players. Further, in light of the currently stagnant-to-declining market, success for PokerStars might realistically mean expanding the New Jersey online poker market by 10% in the first year (average monthly revenues of $2.2 million/month), and 25% over three years ($2.5 million/month). Increasing the market by 50%—up to the $3 million in monthly revenues experienced immediately after legalized poker launched—should be considered a home run. Expecting PokerStars to double the market is setting everyone up for disappointment.


Will Regulation Change PokerStars?

Poker players expecting the same online experience at the new PokerStars as they had with the Silver Age PokerStars are likely to be disappointed (Chris Grove, editor of Online Poker Report, highlights many of the key issues facing PokerStars). Between being purchased by a publicly traded company (Amaya Inc.) and being licensed by New Jersey to offer online gaming, PokerStars is now subject to a host of regulations which will inevitably change how it operates. Some of the more obvious changes:

• Ring-fencing and liquidity:  The most obvious change from the Silver Age is that players will not have access to PokerStars' global network of players. For that matter, players won't even have access to the broader U.S. market. Being limited to an in-state pool means PokerStars will likely not offer the same broad array of cash games and tournaments as in the Silver Age.
• Age verification:  In the Silver Age, PokerStars nominally had a minimum age for players of 18, though the age requirement seemed more a guideline than a rule. The current regulatory environment means strict enforcement of the minimum age of 21 for players, which will require PokerStars to shift from those parts of its prior marketing models directed at younger players. Frankly, the age 21 requirement will make it more difficult for PokerStars to attract new players on a long-term basis, as potential players are exposed to competing games such as e-sports and daily fantasy sports which do not have the same minimum age requirements.
• Payment processing:  Operating in a regulated environment will make moving money onto and off of PokerStars easier and more secure than in the Silver Age. But, PokerStars will have to comply with anti-money laundering and tax reporting regulations which may affect players used to the previous shadow economy of the unregulated Silver Age poker world.
• Speed to market:  Deployment of new software and innovative games (e.g., Rush Poker, and Spin 'N Go Tournaments) may be delayed by the regulatory approval process.
• Financial market pressures:  PokerStars' new owner, Amaya, will face pressure from its shareholders to meet certain financial benchmarks for revenues and earnings. This will impose limits on the amounts PokerStars will be able to invest in marketing campaigns, tournament guarantees, and player rewards. This is true even if PokerStars views New Jersey as worth running short-term losses to establish a strong market presence, and even if spillover effects such as improving its standing in other states are factored into the equation. At some point, even PokerStars has to worry about return on equity from its New Jersey operation.

Of course, in the regulated New Jersey market, every poker site will have to contend with the same set of regulatory issues. There is no reason to think PokerStars will have trouble adjusting to the new market conditions. But players expecting a return to the Silver Age may be unhappy about some aspects of the regulated version of PokerStars.


End of the Line for "Bad Actor" Laws?

One important effect of the New Jersey decision to approve PokerStars is that the "bad actor" debate may finally be put to rest. Immediately after Black Friday, there were strong policy reasons for legislators to cite in support of keeping PokerStars out of the U.S. market. After all, PokerStars had arguably (unquestionably, outside the poker community echo chamber) offered unlicensed gaming in violation of many state and federal laws, and had allegedly engaged in legally questionable practices in processing player fund deposits, all of which gave it an unfair advantage over companies which had followed the law strictly and stayed out of the U.S. market.

Nearly five years post-Black Friday, those arguments are obsolete, having been overtaken by events. PokerStars' competitors have enjoyed a two-year advantage in establishing a presence in the New Jersey market. More importantly, the sale of PokerStars to Amaya marked the exodus of indicted PokerStars founder Isai Scheinberg and other top executives. Consistent with how Nevada and New Jersey regulators have treated other gaming licensees with connections to individuals with sketchy legal issues, Amaya's clean record should make PokerStars a suitable operator in every state ... but for the impact of politics.

The bad actor (and related "tainted assets" provisions) have been incorporated into Nevada law and have most recently played a pivotal role in blocking passage of an online poker legalization bill in California. Such provisions have rightly been criticized as being economic protectionism for brick-and-mortar and tribal gaming interests dressed up in consumer protection and suitability clothing. But such arguments carried the veneer of legitimacy so long as the company founder remained under federal indictment. Now, with a respected state gaming board having investigated and given its stamp of approval to the new Amaya version of PokerStars, the bad actor bluff has effectively been called. The bad actor issue has always been more a political than a legal issue, but those seeking bad actor provisions will find it difficult to continue to argue that PokerStars is unsuitable in the face of the New Jersey DGE licensing decision.


Conclusion

The return of PokerStars to the United States market is unquestionably good for poker. Yet, PokerStars is burdened with the unrealistic expectation of returning online poker to the Silver Age, when million dollar tournament guarantees fell like manna from heaven, and rakeback flowed like milk and honey. It's simply unfair to saddle PokerStars with such a fevered vision. Far better to appreciate the return of PokerStars for what it is—an important step forward as online poker moves into the Modern Age as a regulated, legitimate, and accepted part of the American gaming experience.

Setting the Line for Sports Betting Revenue

EXECUTIVE SUMMARY

Recently, the sports betting legalization movement has gotten some welcome traction, with legislatures in several states taking a fresh look at the issue, and the commissioners of the professional sports leagues showing signs of increasing comfort with the legalization concept. In much of the media coverage of the issue, sports betting advocates use a financial pitch touting the massive revenue streams that could be realized from regulating the currently illicit sports betting market. Most of these financial projections seemed rather large, often claiming hundreds of billions of dollars in wagers would generate hundreds of millions in tax revenues. With the recent New Jersey online gaming boondoggle—where actual online gaming revenues have fallen woefully short of the projections touted by legalization supporters—I set out to research a short post analyzing the assumptions behind the sports legalization effort. As will come as no surprise to my dozen or so regular readers, my research resulted in a much longer piece.

In Part A—Introduction, I review a few examples of the common revenue projections touted by sports betting advocates. In Part B—Guesstimating the Illegal Sports Betting Market, I look at the common projections of the scope of the current illegal sports betting market and discover the most widely cited estimates are essentially bogus. In Part C—Conflating Amounts Wagered with Gaming Revenues and Tax Revenues, I analyze the common mathematical errors riddling many sports betting revenue projections, errors which generally result in a significant overestimate of potential revenue streams.

In Part D—Estimating the Potential Size of the Legal Sports Betting Market, I take a stab at generating my own back-of-the-envelope, wild-ass guess at the potential size of a legalized sports betting economy, and provide a couple of handy-dandy interactive spreadsheets so readers can generate and bedazzle their own revenue estimates. One interesting conclusion is that data from Nevada, currently the nation's only mature and saturated sports betting market, suggests that estimates for sports betting revenues in New Jersey and nationally may be wildly overstated (spoiler alert): "Applying the Nevada ratio to these historical revenue numbers would suggest New Jersey might reasonably expect somewhere between $59.8 million and $107.2 million in annual sports book revenues, which translates into $4.8 million to $8.6 million in additional annual tax revenues (applying the current 8% gaming tax rate)." Finally, in Part E—Market Issues: Expansion, Conversion, and Competition, I explore a few factors which further complicate any attempt to estimate the potential revenue streams from legalization of sports betting.

I enjoy placing the occasional recreational sports wager, usually in Vegas, sometimes with a friend, and occasionally through more traditional back channels. I am firmly in the Legalize-Regulate-Tax camp. But if sports betting legalization is going to be sold as a revenue generator, we owe it to the public to use solid data where available, and to appropriately flag and hedge estimates and assumptions which lack rigorous underlying research. Let's sell sports betting legalization on its merits, not like a bunch of carnival hucksters.

* * * * *

A.  Introduction

As the movement to legalize sports betting on a national basis gains momentum, an increasing number of public figures are finding ways to voice their support. NBA commissioner Adam Silver has led the charge, penning a New York Times op-ed piece and sitting for a prominent ESPN: The Magazine interview to advocate for a "realistic" debate about legalizing and regulating sports betting. The new MLB commissioner, Rob Manfred, similarly seems open to a discussion of legalized sports betting.

One of the primary arguments used by sports betting advocates is that legalization will lead to a gusher of tax revenues for cash-strapped state governments. In that vein, Florida sports talk show host and writer David Moulton penned an article in the News-Press asserting that legalization of sports betting would raise, "conservatively", $750 million in annual state tax revenues for Florida. In New Jersey, state officials have touted annual tax revenue projections ranging from $100 million to $120 million, and up to $166 million. Certainly these are eye-popping figures which might persuade skeptical voters to take a flyer on sports betting.

The problem with the tax revenue argument for gaming is that it is easy to promise revenues, but hard to deliver. New Jersey Governor Chris Christie famously promised new tax revenues of $200 million in the first year of legalized online gaming. As has been well-documented, actual revenues fell more than $150 million short of projections. Even worse, gaming industry analysts have revised their best-case long-term revenue projections to fall significantly below the projections used by online gaming advocates to support their case for legalization.

The New Jersey online gaming revenue debacle is a cautionary tale as the sports betting legalization debate heats up. Yet sports betting advocates repeatedly cite financial figures which are confusing at best and misleading at worst. How can we present the public with more accurate revenue estimates?


B.  Guesstimating the Illegal Sports Betting Market

Sports betting advocates fail to distinguish between estimates of illegal wagering activity and the potential casino revenue and tax revenue streams which might be realized if that illegal wagering were instead captured via a regulated sports betting regime. There are actually two separate errors in play here: a) accurately estimating the size of the illicit sports betting market, and b) determining how much of the illicit market could be converted to the regulated market. For the moment, let's focus on estimating the size of the current illegal sports betting market.

Sports betting advocates often tout figures such as the American Gaming Association's estimate that Americans illegally wagered $3.8 billion on this year's Super Bowl (a figure widely adopted by the general media). Or, there's the common assertion that Americans illegally wager up to $400 billion per year on sports. The problem with these estimates is that the figures are presented without any supporting data or underlying assumptions. As my high school math teacher might say, the groups touting these estimates never "show us their work".

Let's take a look at that $400 billion estimate for the amount Americans supposedly wager illegally each year on sports. That figure seems to be a rounding up of an estimate of an annual illegal sports betting market of $80 billion to $380 billion as reported in the 1999 final report of the National Gambling Impact Study Commission (NGISC), generated at the request of Congress. Sure, the data might be a little dated, and the figures are less robust than claimed, but it's still a pretty solid number, right?

Actually, wrong. The NGISC report is pretty easy to find, and sure enough, right there on Page 2-14, the report states: "Estimates of the scope of illegal sports betting in the United States range anywhere from $80 billion to $380 billion annually, making sports betting the most widespread and popular form of gambling in America." The problem arises when you look at the footnotes for that assertion. The NGISC report cites as support for this estimate a Las Vegas Review-Journal newspaper article on a proposed college sports betting ban. Try looking for that article, and the trail grows cold. However, Jordan Weissmann at Slate was enterprising enough to run that footnote to ground. Weissmann discovered that the Las Vegas Review-Journal article in question relied upon estimates given by various individuals to the NGISC during its hearings, with the $380 million figure apparently "pull[ed] out of thin air" by one of the commissioners. Thus was born a supposedly reliable statistic repeatedly cited as authoritative in support of a wide range of important policy decisions. In reality, the $380 billion statistic is, at best, a scientific wild-ass guess ("SWAG").


C.  Conflating Amounts Wagered with Gaming Revenues and Tax Revenues

Another common tactic used by sports betting advocates is to throw out a figure for the amount being wagered on sports betting without clarifying that the amount cited is not the same as the actual revenue being generated for the casino industry, nor is it the amount of tax revenue realized from the casino revenues. Although the gross amount wagered (referred to as the "handle") is usually a huge, attention-grabbing figure, the reality is that the amount retained by the sports book as operating revenue (the "hold") is only a small fraction of the handle. Yet it is the hold that matters most when making policy decisions regarding sports betting.

The David Moulton News-Press op-ed noted earlier makes a particularly egregious hash of this issue. Moulton asserts that the state of Florida will retain 10% of the handle as tax revenues. Moulton's claim is based on the 10% commission (a/k/a "vigorish" or "vig") traditionally imposed by bookmakers on sports wagers. Moulton makes two egregious, fundamental errors here.

First, Moulton fails to recognize what any casual sports bettor knows—sports books refund the commission on all winning wagers and only keep the commission on losing wagers. Sports books want to operate much like a stockbroker and match buyers and sellers (winners and losers), taking a commission along the way for a small but steady piece of the action. Lines on games are set and adjusted to keep the action on both sides as even as possible, minimizing risk to the sports book of being overly exposed to heavy action. Traditional straight bets like point spread and totals (over/under) bets do usually require the bettor to lay 11/10 odds (i.e., bet $11 to win $10, or $110 to win $100), giving the sports book a house edge of roughly 4.76% on the wager (not the 10% edge claimed by Moulton). Other common bets like moneyline wagers will have a similar house edge around 5%, while more exotic wagers like parlays, teasers, futures, and props may have a house edge exceeding 30% (which is why sports books drool when a sucker approaches the counter with a parlay wager).

To get a feel for a reasonable expected hold for traditional sports books, it's easiest to simply see how Nevada sports books have historically performed. Taking the Nevada statewide sports book revenue statistics for the past five years, individual sports bets averaged a hold of 4.9%, parlays averaged a hold of 31.2%, and sports books overall averaged a hold of 5.4%.

Nevada sports book revenues 2010-2014 (all dollars in thousands (add 000)).

Data source: Nevada Gaming Control Board "Gaming Revenue Reports"

Full spreadsheet with individual year data available via web and Google Docs.

UPDATE (28 June 2015):  Via Billy Polcha, Nevada gaming revenue data
for 1984-2014 have been compiled in a user-friendly format 
by the UNLV Center for Gaming Research. 

If one dives into the year-by-year data, the individual sports bets will fluctuate from the expected 4.76% hold depending on sport and how well favorites perform. It is well-known that most sports bettors (so-called "squares") are less sophisticated and will tend to bet on favorites and overs, so sports books often hedge their lines in those directions, padding their edge slightly on those bets. Parlay bets have a house edge of 25%-35%, but the handle on those bets is small relative to individual bets (because of the higher payouts, parlay bettors generally bet smaller amounts). Still, parlay bets consistently add 50 to 60 basis points (0.5% to 0.6%) to the overall house hold each year.

Based on Nevada's actual data, it appears a reasonable assumption that the typical sports betting hold is around 5.5% of the handle. So, just like that, nearly half of Moulton's projected tax revenues evaporate.

But Moulton has made another egregious error—conflating the casino hold (gross gaming revenues) with tax revenues. Assuming the State of Florida is offering sports betting through casinos and racetracks (as is the case in Nevada and is being proposed in New Jersey), the hold from sports wagers represents the gross revenue stream for the casinos and racetracks. The sports books need to pay overhead and expenses, and make a reasonable profit from the hold in order to operate. Actual tax revenues would only be a percentage of the hold.

So, the actual tax revenues depend on what gaming tax rate is applied to the hold, a rate which is likely to vary widely by state. In Nevada, the top marginal tax rate for gross gaming revenues is currently 6.75% (with additional local, county, and state assessments which may add up to an additional 1% to the effective tax rate). In New Jersey, the top marginal tax rate for gross gaming revenues is currently 8.0% (with an additional 1.25% community investment assessment). In Florida, the the top marginal tax rate for slot machine revenues is currently 35% (the state has a compact with the Seminole tribe permitting the tribe exclusive rights to offer certain table games in exchange for a flat annual payment).

It is not clear, however, that Florida would apply its high slot revenue tax rate (35%) to sports book revenues as sports books are more expensive to operate. As one casino industry study noted, there is a direct correlation between lower gaming taxes and higher employment rates in the casino industry. Further, the study notes that many states have adopted lower tax rates for table game revenues in recognition that table games have higher overhead and expenses than do slot machines. The study suggests (p. 29) that 40% of gross revenues is the maximum tax rate for table games to operate profitably. One would suspect that sports books have even greater expenses relative to revenues than table games and cannot operate profitably at such a high tax rate.

So let's do the math. Moulton used an assumption—frankly, a decidedly unscientific wild-ass guesstimate—of $7.5 billion in sports betting handle, and projected tax revenues for the state of Florida of $750 million (10% of the handle). In reality, even if Florida were to have $7.5 billion in handle, the resulting gross revenues would be roughly $412.5 million (assuming a 5.5% hold), with maximum tax revenues of $144.4 million (applying the current 35% tax rate). In other words, even using Moulton's gross gaming handle assumption, and even applying the current 35% tax rate, the actual projected tax revenues for Florida are less than 20% of what Moulton promised. 

It's hard to tell if Moulton is merely cosmically awful at math, too lazy to do basic research about sports betting, or intentionally fudging the numbers with some sleight of hand to create a more palatable illusion of the benefits of sports betting legalization. Whatever the case, Moulton's revenue projections are likely wildly overstated. Still, even $415 million or so in annual gross gaming revenues can create a lot of jobs and economic development. And another $145 million or so in annual tax revenues is nothing to sneeze at, even if it is a rounding error in relation to Florida's $77 billion state budget.

Although not as laughably wrong as Moulton, other sports betting advocates often make similar errors in calculating gaming revenue and tax revenue projections off of gross wagering data. For example, one news story from New Jersey reported that one study projected "sports betting would be a $6.7 billion industry in New Jersey, bringing in $166.2 million in tax revenue." But the numbers don't add up. Assuming $6.7 billion refers to the gross amount wagered (the handle), casino gross revenues would be roughly $368.5 million (assuming 5.5% hold). For the $166.2 million tax revenue projection to hold up, a tax rate of 45% would have to be applied to the gross revenues, rather than New Jersey's current 8% tax rate (which would result in only $29.5 million in tax revenue). Clearly something doesn't add up here.

Or, for another example of overreach by sports betting advocates, New Jersey state senator Ray Lesniak, a vocal advocate for sports betting legalization, has reportedly claimed that sports betting could bring in more than $100 million per year in tax revenue for the state. But simple reverse-calculation shows that $100 million in tax revenue necessarily implies gross casino revenues (hold) of $1.25 billion (assuming 8% tax rate), and gross amounts wagered (handle) of $22.7 billion (or roughly six times Nevada's 2014 sports betting handle) (assuming 5.5% hold). If the $166.2 million tax revenue handle estimate noted above is reverse-calculated, the predicate numbers are $2.1 billion in gross casino revenues (hold) and gross amounts wagered (handle) of $37.8 billion (roughly ten times Nevada's 2014 sports betting handle). These figures may be defensible, but considering New Jersey only has roughly three times the population of Nevada, it is clear these tax revenue projections are incredibly optimistic.

As noted earlier, sports betting financial projections are going to carry a large degree of uncertainty. But if legislators and ultimately voters are to weigh the costs and benefits of sports betting legalization, it would be helpful if the financial projections weren't riddled with obvious and avoidable errors.


D.  Estimating the Potential Size of the Legal Sports Betting Market

In the absence of quality market research (based on scientifically and statistically sound sampling and modeling techniques), is there any way to derive a useful, or at least better informed, estimate of the potential size of the American sports betting market?

Moulton attempts to buttress his estimates of the Florida sports betting market by reference to the amount of sports bets handled by a local bookie. In fairness to Moulton, other sports betting advocates occasionally make the same argument. But the problem with this approach is that there is no way to scale one bookie's business into meaningful statistics for a state or the entire country. The density of bookies in a given community, the number of customers per bookie, the average amount bet by each customer, and other important details will inevitably either vary so widely or be so opaque to verification as to render it impossible to draw any meaningful conclusions beyond the individual bookie's business. As the old saying goes, the plural of "anecdote" is not "data".

1.  Extrapolating from known data (Nevada)

One potential approach to estimating sports betting revenues would be to extrapolate from known data. Unfortunately, with Nevada as the sole data point, extrapolation is likely subject to a high degree of variance. For starters, Nevada is the sole location in the United States offering a full slate of sports betting, and is a mature industry established for several decades. Tourists are a major part of the gaming economy, and are probably much more likely to be inclined to wager on sports than average Americans. Nevada also draws heavily from the wealthy population of neighboring California, skewing direct demographic comparisons to other states. Further, Nevada's major population centers are heavily saturated with casinos, not to mention statewide mobile sports betting, making it more likely legal sports betting has displaced a high percentage of illegal sports betting options (e.g., offshore internet sites and traditional bookies). At best, Nevada can be viewed as a best-case upper boundary on sports gaming revenues in other states (i.e., if a state like New Jersey has roughly three times the population of Nevada, it is unlikely New Jersey will exceed three times the gross sports betting revenues of Nevada, at least in the short-term).

Nevada had gross sports wagers (handle) of $3.9 billion in 2014, and in view of trends over the past five years, can reasonably be projected to exceed $4.0 billion in 2015. Extrapolating to New Jersey, to meet the projections of $100 million in annual tax revenues, if the state had gross sports wagers of $12 billion (three times Nevada, proportionate to population), the state would need to double its gaming tax rate to 16%. Conversely, the state could hold its tax rate at 8% and double the sports wager volume to $24 billion (six times Nevada). The assumption New Jersey will generate six times the gross sports betting handle of Nevada seems somewhat far-fetched, even if New Jersey is the only legal East Coast sports betting venue. [FN1].

Gaming revenue and tax revenue table (all dollars in thousands (add 000)).

Interactive spreadsheet available via Google Docs; download spreadsheet
(second tab) into Excel or your own Google sheet to use interactive feature.

One other way to potentially extrapolate meaningful data from Nevada is to look at the ratio of sports betting revenue to overall casino revenue. It's no surprise to anyone familiar with the casino industry that slot machines and table games are the primary gaming revenue drivers. Looking back at the 2014 year-end data for Nevada, the state's casinos had total slot revenues of $6.7 billion, and total table game revenues of $4.2 billion. Sports book revenues, however, were "merely" $227 million. Running the math, sports book revenues represented roughly 2.02% of total gaming revenues (slot, table game, and sports book revenues combined). And again, Nevada is a mature, highly saturated gaming market.

The Nevada sports betting ratio provides us a second useful upper boundary for checking the validity of sports betting revenue estimates. For example, New Jersey gaming revenues were $2.9 billion in 2013, down from a peak of $5.2 billion in 2006. Applying the Nevada ratio to these historical revenue numbers would suggest New Jersey might reasonably expect somewhere between $59.8 million and $107.2 million in annual sports book revenues, which translates into $4.8 million to $8.6 million in additional annual tax revenues (applying the current 8% gaming tax rate). 

On a national basis, the calculation is more complicated because many states have gaming markets which are substantially less mature and less saturated than Nevada and New Jersey. The AGA reports national gaming revenues of $37.34 billion in 2012, nearly equaling the historical revenue high point of $37.52 billion in 2007. Let's assume total gaming revenues increase by roughly 20% by the end of 2015, for total national gaming revenues of roughly $45 billion. Applying the Nevada ratio would suggest we might reasonably expect roughly $930 million in annual national sports book revenues, which translates into annual tax revenues of roughly $139 million (at a 15% tax rate) to $325 million (at a 35% tax rate).

Despite its small population, Nevada accounts for more than one-quarter of national gaming revenues ($10.70 billion of the $37.34 billion in national gaming revenues in 2012). No state has ever outperformed Nevada in gaming revenues in absolute terms, let alone on a population proportional basis. If sports betting advocates want to float sports betting revenue estimates for their state which are greater than Nevada's historical sports betting revenues, it's a fair question to those advocates why they think their state will outperform Nevada in sports betting revenues when they have never done so with respect to other casino gaming revenues.

2.  Extrapolating from demographic data

Acknowledging the limitations of extrapolating from Nevada to other states, is there any way to estimate national figures for sports betting revenues based on something other than a just a wild-ass guess pulled from thin air? One way economists or actuaries might approach the problem would be to estimate gambling habits by demographic group and extrapolate against known populations. Of course, no such rigorous study has been conducted to date. So we are left to attempt what might be best described as a slightly scientific wild-ass guess analysis.

First off, it's important to note that sports betting is an overwhelmingly male-oriented endeavor (one sports book operator in Delaware estimates men are over 90% of his clientele). Next, it's safe to say that there is a significant segment of the male population who either do not gamble at all, or do not gamble on sports. So, let's work with an assumption that roughly 1-in-8 (12.5%) men gamble on sports, along with a small percentage of women. Next, let's assume most men who gamble on sports wager around $5,000 per year on sports (essentially $100-$200 per week during football season, and $1,000 or so during the NCAA basketball tournament), with a smaller group of men being more regular, hardcore sports gamblers who wager greater amounts. We will also reduce the average bet size for the youngest population, commensurate with their lower average earnings. These assumptions (using 2013 Census data) result in gaming revenues and tax revenues as set forth in the following table:

Interactive spreadsheet available via Google Docs; download spreadsheet

into Excel or your own Google sheet to use interactive feature.

Essentially, the use of the above set of assumptions results in total national sports wagers (handle) of $215 billion, with gross casino revenues (hold) of $11.8 billion, and tax revenues of $1.7 billion to $3.5 million (assuming a tax rate of 15% to 30% of gross gaming revenues). Note that these assumptions result in an estimate that there are roughly 16 million potential sports bettors nationally, each wagering (not losing—just placing total bets) roughly $13,500 per year on average (the Totals row contains the weighted average for wagers placed given the initial assumptions used). If the estimates of total sports bettors or average wager seem high or low, one must question the validity of the underlying assumptions. Frankly, considering this estimate is an order of magnitude (roughly 12 times) larger than the national projections based on the Nevada ratio, this estimate most likely overstates the potential gaming revenues to a significant degree. Certainly the oft-cited $380 billion illegal sports betting market statistic looks increasingly dubious even under this more optimistic analysis.

Of course, the above set of assumptions were conjured out of the ether, with only the flimsiest of tethers to reality. If one downloads and plays with the spreadsheet, it quickly becomes obvious that the bottom line handle, hold, and tax figures are highly sensitive to the initial assumptions used. But without more rigorous data from scientifically validated surveys, these kinds of guesstimates are about as good as we can get, which means every estimate of gaming revenues and tax revenues from sports betting legalization has to be accompanied by large asterisk noting a significant margin of error.


E.  Market Issues:  Expansion, Conversion, and Competition

As if the difficulty of estimating the potential sports betting market size weren't already difficult enough, there are a number of issues which further complicate the process.

First, there is the issue of market expansion. There is likely a decent group of potential sports bettors who are currently not betting because they lack a connection to an illegal gambling option or choose not to use such a gambling option. Legalization of sports gambling would give these individuals an outlet to pursue sports gambling, expanding the sports betting market.

Next, there is the issue of market conversion. There is unquestionably a thriving illicit sports gambling market being utilized by sports gamblers in those states without a legal sports gambling option (essentially everywhere except Nevada, for sports gamblers who either live in or can easily travel to Nevada). The interesting question is how much of the illicit market will migrate to the legal market once sports betting is legalized in additional states. Although the legal market would superficially seem to offer significant advantages for sports gamblers, that assumption is not without major caveats.

Sports gamblers in recent years have become accustomed to immediate, around-the-clock, online access to sports betting. Some of this action is via direct wagering on offshore internet sports gambling sites, while much of the illicit action is mediated by local bookies who use offshore sites as a method for booking wagers. For example, a sports bettor might approach a bookie about betting on games. The bookie sets up an offshore account with a small deposit. The bookie makes the account available to the bettor, and they agree to a proportional betting scheme; e.g., $1 bet on the site equals $10 bet in real life. The bettor then makes small wagers online, which translate into larger real life bets with the bookie. Periodically, the bettor and bookie meet up to "square up" the account in real dollars.

Additionally, highly aggressive tax rates on sports book revenues are likely to be passed through to consumers in the form of higher commissions or surcharges. Further, legalized sports books will be forced to do tax reporting on larger bets and payouts. Sophisticated and higher volume sports bettors might well find that legalized sports betting is impossible to beat once higher taxes and commissions are taken into account, and will instead make the rational economic decision to continue utilizing illicit gaming channels.

Given the realities of modern, online sports betting, there is a significant question as to how much illicit sports betting will migrate to legal options post-legalization. In a highly saturated gaming market like Nevada where both the brick-and-mortar casinos and mobile sports book options make sports betting convenient and ubiquitous, the conversion rate from illicit to legal sports betting will be a fairly high percentage. But in states where legal sports books are limited geographically and there is no online or mobile betting option, the conversion rate might be significantly lower. Certainly there is no basis to assume that all or even most currently illicit sports betting will necessarily move to legal options post-legalization.

Finally, there is the issue of market competition. Spurred in part by a UIGEA carveout, online fantasy sports competitions have boomed in the past decade. The relatively recent innovation of "daily fantasy sports" (DFS) contests on sites such as FanDuel and DraftKings has driven explosive financial growth in the fantasy sports market, with industry experts projecting revenues exceeding $2.5 billion by 2020. As Chris Grove of Online Daily Fantasy Report notes, the potential impact of DFS-style gaming on traditional casino gaming could be significant:

Social [gaming] and DFS don’t have to make a dollar to cost casinos a dollar of revenue.

Instead, they can (in theory) offer consumers an experience similar to gambling but at a lower cost. So the increasing popularity of DFS, for example, could have an outsized negative impact on casino revenues, one that isn’t properly communicated by the pure revenue number of the DFS industry.

It doesn't take a rocket scientist to project that DFS-style gaming is potentially a bigger threat to traditional sports betting than it is to, say, slots or blackjack. Currently, DFS holds two significant advantages over traditional brick and mortar sports betting—DFS is legal and DFS is mobile. People who are interested in sports betting (particularly younger people) may find that DFS satisfies their sports betting needs, and may well find the DFS experience superior to traditional sports betting.

Of course, it would be absurd to think DFS will single-handedly destroy traditional sports betting in the short-term. The markets for DFS and traditional sports betting may not overlap to a significant degree. DFS might actually expand the traditional sports betting market by creating new sports bettors. Brick and mortar casinos could also offer DFS wagering, as is currently permitted in New Jersey casinos. But fifty years ago, who would have anticipated the decline of the horse and dog racing industries, once the centerpiece of legalized gambling in most states, now mostly kept afloat via subsidies from other casino revenue streams? It would be folly not to at least consider the possible effects of DFS on traditional sports betting revenues.

The issue of market competition also applies in state-by-state analyses of the sports betting market. As an example, the New Jersey casino market has been decimated in recent years by expanded gaming competition in nearby markets. Even if New Jersey were to legalize sports betting, there is no guarantee neighboring states would not escalate the gaming wars and likewise legalize sports betting, siphoning off a huge chunk of New Jersey's anticipated sports betting revenues. Consequently, any state-specific sports betting revenue projections must be accompanied by significant caveats and qualifications regarding anticipated competition from nearby markets.


F.  Conclusion

So, after all of this jibber-jabber, how much casino and tax revenue can we reasonably expect to be generated by widespread legalization and taxation of sports betting?

Your guess is as good as mine.*

* But I'm betting the under.

-----------------------------------------------------------------------------------------

[FN1] Applied to Florida which has seven times the population of Nevada (and its own healthy tourism industry), the upper boundary for sports betting gross wagers (handle) is $28 billion, with gross gaming revenues (hold) of $1.54 billion, and annual tax revenues of $539 million (assuming a 35% tax rate). In other words, still well short of David Moulton's estimated $750 million in annual tax revenues.

Why New Jersey Can't Have Nice Things—Like Sports Betting

Last Friday, Federal District Court Judge Michael Shipp entered a ruling ("Christie II") finding that New Jersey's most recent legislative attempt to legalize sports betting by means of a "partial repeal" of its sports betting prohibitions still violated the federal Professional and Amateur Sports Protection Act (PASPA). Judge Shipp determined that New Jersey's attempt to "repeal" its sports betting ban, but only for wagers placed at licensed racetracks and casinos, was impermissible under the prior Third Circuit ruling striking down an earlier effort by New Jersey to legalize sports betting. ("Christie I"). Judge Shipp also entered a permanent injunction barring New Jersey from implementing its sports betting scheme.

The district court's ruling in Christie II was entirely expected. Good analysis of the decision has been offered by John Brennan (analysis and reaction), Michael McCann (with a big assist from sports and gaming law attorney Daniel Wallach), and Darren Heitner. New Jersey state officials have already filed a notice of appeal to the Third Circuit Court of Appeals, which is something of a last gasp Hail Mary to salvage any chance of legalizing sports betting without asking Congress to amend or repeal PASPA.

New Jersey state officials and their attorneys have been selling the partial repeal law to the media as a legal scheme that was explicitly permitted by the Third Circuit's Christie I decision. So why did the state lose? The Christie II district court opinion really turns on three key points, not all of which are strictly "legal" in nature.


I.  Third Circuit Language Cut Against New Jersey

The current litigation is a rare situation where the relevant legal authority is essentially one statute (PASPA) and one appellate decision (Christie I). Because the text of PASPA suggests a complete ban on sports betting, New Jersey's partial repeal law has to satisfy the narrow carveout established by the Third Circuit in Christie I:

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.

Now, as previously discussed, that particular quote is buried in a lengthier passage in the Christie I opinion, and to be fair to the state and its attorneys, the Christie I opinion is not a model of clarity. Still, the district court read that passage as offering New Jersey exactly two options:  a) a complete repeal of the sports wagering ban, or b) maintaining a complete ban on sports wagering, but with the ability to set lower penalties for violations of the law or to show broader prosecutorial discretion in enforcing the ban. As the district court noted, this "all or nothing" approach where a state has only two choices—complete deregulation or regulation in conformity with federal standards—is consistent with long-standing federal case law in the area of federal preemption of state regulations. And, as the district court noted in a footnote dismissing New Jersey's severability argument, the New Jersey legislature gave no indication that it intended or desired completely unregulated sports betting. [Christie II, p. 27, FN 15].

New Jersey's argument for a partial repeal of the sports wagering ban rests on the Third Circuit's language in Christie I which declares the state may establish "the exact contours" of any sports betting prohibition; the state argues this passage means it can also establish the "exact contours" of a repeal of its sports betting prohibition (i.e., the state can limit the scope of any repeal). The problem with this argument is that the language cited by the state—"exact contours"—appears only in connection with the second option offered by the Third Circuit—"a complete ban on sports gambling". The Third Circuit did not suggest that a state had similar latitude to shape the "exact contours" of a repeal, implying that a repeal had to be absolute rather than limited or "partial".

The district court opinion in Christie II noted that the dissenting judge from Christie I also seemed to view the state's options as being a complete repeal or a complete ban, with no room for a "partial repeal"—in other words, there was no legal way for New Jersey to be "half pregnant" with sports betting. The district court also called out New Jersey for misquoting Christie I:

Defendants go to great lengths to recast this passage in a light contrary to its meaning. The entire passage is included in full so that its context can be examined. [Christie II, FN 9, p. 18].

The district court likely took this unusual step because the New Jersey legislature explicitly cited the "exact contours" language in the explanatory comments to the partial repeal bill. Look for the leagues to emphasize both of these points to the Third Circuit in their Christie II appeal briefs.


II.  New Jersey's "Partial Repeal" Statute Was Too Clever By Half

Building on its preemption analysis, the district court seemed singularly unimpressed with New Jersey's attempt to characterize its most recent legislative fix as a "partial repeal":

In the context of a preemption analysis, federal courts have been unwilling to allow states to do indirectly what they may not do directly. ... While styled as a partial repeal, the 2014 Law would have the same primary effect of the 2012 Law—allowing sports wagering in New Jersey’s casinos and racetracks for individuals age twenty-one and over but not on college sporting events that take place in New Jersey or on New Jersey college teams. This necessarily results in sports wagering with the State’s imprimatur, which goes against the very goal of PASPA—to ban sports wagering pursuant to a state scheme. The Third Circuit recognized that the choice PASPA left states might be a hard choice, but here New Jersey is not making that hard choice, and the Court cannot ignore Congress’s intent in enacting PASPA just because New Jersey carefully styled the 2014 Law as a repeal. [Christie II, p. 24].

The district court further noted in a footnote that, legally speaking, any purported "repeal" of a statute that falls short of a full repeal is actually to be treated as an amendment to the statute. [Christie II, p. 27, FN 14]. "As a consequence, the State Defendants’ attempt to fit the 2014 Law into one of the options left by the Third Circuit is even more attenuated." [Id.].

Here, the district court seemed to be bothered by what I refer to as the "too clever by half" syndrome. Although lawyers are popularly viewed as sharp operators who try to seize on any technicality or ambiguity to advance their clients' argument, in reality judges tend to view attempts to exploit such linguistic loopholes with skepticism. For example, in the past Term, the United States Supreme Court (SCOTUS) considered a copyright case in which a company, Aereo, tried to exploit a legal loophole prohibiting re-transmission of network broadcasts by installing tens of thousands of mini-antennae, each of which was dedicated to one individual receiver, and thus was arguably a legally permissible "private" transmission. SCOTUS found that, although Aereo's scheme might technically comply with the law as a matter of form, its actual effect was a violation of the primary purpose of federal copyright law and thus was illegal. Stripped of its business model and facing numerous copyright infringement lawsuits, Aereo recently was forced into bankruptcy.

This too-clever-by-half syndrome has also affected prior gambling cases. For example, the Kansas Court of Appeals shot down a scheme in which businesses tried to circumvent state bans on poker by adding a purported "skill" element to traditional Texas Hold 'Em (illegal under Kansas law) in which the deck is exposed to players for several seconds prior to the deal, providing a chance for players to memorize the position of some of the cards (see Poker Grump's analysis of and link to the court decision on "Kandu Challenge" poker). Similarly, the Washington Supreme Court rejected a business scheme in which "eBay-style" online sports gambling was asserted to be legal because the Betcha.com website explicitly permitted gamblers to "welch" on bets, allegedly making the bets legally unenforceable and thus arguably beyond anti-bookmaking laws (see my prior discussion of the case here and here).

Here, the district court looked past the New Jersey legislature's formal label of the recent bill as a "partial repeal" to the pragmatic effect of that statute. The court found that the most recent legislation, practically speaking, had the same effect as the 2012 bill found invalid in Christie I—sports betting was legalized only in state-licensed racetracks and casinos, only available to individuals over age 21, and not applicable to New Jersey-based collegiate teams:

New Jersey’s attempt to allow sport wagering in only a limited number of places, most of which currently house some type of highly regulated gambling by the State, coupled with New Jersey’s history of attempts to circumvent PASPA, leads to the conclusion that the 2014 Law is in direct conflict with the purpose and goal of PASPA and is therefore preempted. [Christie II, pp. 26-27].

Based on these similarities between the invalidated 2012 statute and the 2014 partial repeal statute, the district court rejected New Jersey's label of "partial repeal" for its current statute and found that it was still an impermissible de facto state authorization of sports betting:

“Abraham Lincoln once asked: If Congress said that a goat’s tail was a leg, how many legs would a goat have? Four. Calling a tail a leg does not make it so.” City of Houston v. Am. Traffic Solutions, Inc., No. 10-4545, 2011 WL 2462670, at *3 (S.D. Tex. June 17, 2011). [Christie II, FN 13, p. 25]. 

III.  The Judge Falls Down the Sports Leagues' Slippery Slope, Gets Trampled by a Parade of Horribles

In analyzing PASPA, the district court paid particular attention to the sports leagues' argument that New Jersey's partial repeal of its sports betting prohibitions would potentially lead to a rapid spread of legalized sports betting throughout many other states:

The Court is guided by the Third Circuit’s determination of the congressional purpose of PASPA —“to ban gambling pursuant to a state scheme . . . because Congress was concerned that state-sponsored gambling carried with it a label of legitimacy that would make the activity appealing.” Christie I, 730 F.3d at 237. In 1992, when Congress enacted PASPA, it was aware that all but one state had broad prohibitions on sports wagering. As the Third Circuit found, Congress sought to make it harder for states “to turn their backs on the choices they previously made.” Id. at 234. Congress knew states, including New Jersey, were considering whether to allow some form of sports wagering and was concerned that the spread of sports wagering on “a piecemeal basis” would ultimately result in “an irreversible momentum” of sports wagering in the country. S. Rep. 102-248, at 5. In this Court’s view, the Senate Report and the Third Circuit’s finding of congressional purpose support the conclusion that PASPA preempts the type of partial repeal New Jersey is attempting to accomplish in the 2014 Law, by allowing some, but not all, types of sports wagering in New Jersey, thus creating a label of legitimacy for sports wagering pursuant to a state scheme. [Christie II, p. 24 (emphasis added)].

Although consideration of the future impact of a ruling is fair game in court, lawyers are prone to make arguments in which an adverse decision is asserted to be the first step on a slippery slope, which will inevitably open the floodgates to an undesirable parade of horribles. Here, the district court was clearly concerned about giving the judicial stamp of approval to New Jersey's partial repeal scheme because doing so would provide a road map for other states to similarly sidestep PASPA's sports betting ban, effectively thwarting Congress' intent to limit the spread of sports betting.

These types of slippery slope arguments have been used to successfully derail arguments attempting to strike down state poker bans. For example, in the PPA's ill-considered challenge to Washington state's online gaming ban, the Washington Supreme Court was swayed by both a slippery slope argument and a parade of horribles argument. First, the court expressed concern that authorizing online poker would necessarily require them to authorize other forms of online gaming. Further, the court was concerned that legalizing online poker would lead to a wide array of social ills, including gambling addiction, organized crime, and money laundering. Similarly, the South Carolina Supreme Court, in considering the PPA's equally ill-considered challenge to a state poker ban, declined to strike down an archaic, vague anti-gambling statute applied to a low-stakes home poker game in large part because the decisive judge feared doing so would open the floodgates to all manner of gambling.

Here, the district court's concerns about the effect of its decision reappeared in its ultimate conclusion:

New Jersey’s position on sports wagering is not unique. In fact, many states are currently rethinking their prohibitions on sports wagering. In Christie I, this Court indicated that it could not judge the wisdom of PASPA but only speak to PASPA’s legality as a matter of constitutional law. The Third Circuit made a similar recognition in Christie I. The Court is yet again faced with similar constraints in Christie II and still may not judge the wisdom of PASPA. To the extent the people of New Jersey, or any state, disagree with PASPA, their primary remedy is through the repeal or amendment of PASPA in Congress. [Christie II, p. 27 (emphasis added)].

Considering that a ruling in favor of New Jersey would, as a practical matter, render PASPA effectively toothless, it is hardly surprising that the district court ultimately enforced PASPA in light of the Third Circuit's finding that PASPA was a valid use of Congress' constitutional authority.

New Jersey state senator Ray Lesniak says that New Jersey is "even money" to win on appeal. The smart money is on the Third Circuit again affirming the district court's decision.

* * * * *

New Jersey Sports Betting Opinion Nov. 21 2014 by Grange95

New Jersey Gets Half Pregnant With Sports Betting

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.