October 20, 2014

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.