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NEW TGS COVER STORY...DOWN A RABBIT HOLE IN NEW JERSEY?

                                     by Bruce Marshall, Goldsheet.com Editor

Well, the moment of truth has arrived for New Jersey’s challenge to federal sports gaming law as represented by PASPA, an acronym we have used almost as much as our TGS moniker on these pages over the past five years. The Garden State’s latest attempt to legalize single-game, Nevada-style sports betting (chronicled in depth on these pages since 2012) has been road-blocked in federal court, but after its latest rejection by the Third Circuit, New Jersey connected on a Hail Mary pass when the US Supreme Court decided in June to hear the case on appeal. New Jersey’s challenge to PASPA (“Christie 2") is thus on the SCOTUS docket for Monday, December 4, with a decision likely to be rendered by next spring.
  
To refresh memories, PASPA refers to the 1992 Professional and Amateur Sports Protection Act, when select states (Nevada, Oregon, Delaware, and Montana...but not New Jersey) were “grandfathered” by federal law to accept sports wagers. Only in Nevada’s case would it include single-game wagering, it was parlay cards only for the other states. (Indian casinos were not included.) Originally, Gov. Chris Christie and other New Jersey pols decided that they wanted in on full-scale sports betting action that could help prop up its sagging economy (and casino business) within the state. In 2011, Garden State voters approved a referendum to allow sports betting in hopes the state could legitimize what is currently a black market industry, thereby tapping into billions in annual bets to produce a new source of revenue for the state budget, Atlantic City, and the horse racing industry. The State Legislature then passed a law legalizing sports betting, and Christie signed it in January 2012.
 
Christie went so far as to begin the process of issuing sports gaming licenses and proclaimed the state would begin to accept bets at its various casinos and race tracks. However, he knew he would encounter trouble along the way. Not that Christie wasn’t prepared for his legal challenge to PASPA. Still, to no one’s surprise, the pro leagues and the NCAA blocked Christie in US District Court (“Christie I”), and when the US Supreme Court denied to hear the original case, New Jersey appeared to have hit a roadblock.
 
Back to the drawing board in 2014, Christie decided to endorse a new measure introduced by State Senator Raymond Lesniak that would circumvent an apparent loophole in federal law and allow the state to repeal its long prohibitions on sports gaming. By removing itself from licensing and regulating the sports wagering activities, New Jersey, according to the Lesniak proposal, would not be in conflict with PASPA, and could allow privately-run sportsbooks to operate in the state.
 
Of course, the sports leagues challenged once more and in the Federal District Court were awarded an injunction for a second time by the same judge, Michael Shipp. Again, as in its original challenge, New Jersey would appeal to the Third Circuit, and was defeated for a second time by the same 2-1 vote in US Court of Appeals, effectively saying the latest New Jersey attempt (“Christie II”) still ran afoul of PASPA. (The two votes against New Jersey were cast, rather surprisingly, by judges Marjorie Rendell, whose husband, former Pennsylvania Governor Ed Rendell, has been a big gaming proponent and brought casino wagering to the Keystone State, and Maryanne Trump Barry, sister of none other than now-President Trump).
 
Christie and his cohorts in Trenton were not finished, however, and in October of 2015 scored their first significant court victory. In a rather unexpected move, the same US Court of Appeals for the Third Circuit motioned for a rare “en banc” rehearing, which brings at least 12 of the 23 circuit judges to the panel instead of only three, and is considered a rarity, as it forces a majority of judges to question a legal decision made by their fellow bench mates and ultimately voids earlier interpretations. Thus, while granting the rehearing, the Third Circuit also vacated its August 2015 verdict in favor of the sports leagues and the NCAA.
 
Though legal observers have noted that New Jersey unquestionably scored a significant procedural victory in getting the court to order rehearing en banc, in the end the status quo remained. The Garden State was rejected for a third time, this time by a 9-3 count en banc, in August of 2016.
 
Thus, the Third Circuit appeared to be a permanent blockade for New Jersey, unless, by luck of the draw, it could get two of the dissenting justices on a three-person panel. The Third Circuit seemed to make it clear that it was going to move the goal posts as needed and uphold PASPA no matter how convoluted its reasoning might be.  
 
As New Jersey’s challenge had previously lost in court every step of the way, the vast majority of legal experts considered it very remote that the high court would hear the Garden State’s case, which it had rejected at earlier stages. Especially since this past May, Solicitor General Jeffrey Wall submitted an opinion advising the SCOTUS to pass on the case. (This had surprised some onlookers, as President Trump, before taking office, was on record saying he was in favor of legalized sports betting, though his Justice Department seemed to be saying otherwise in May.) Since the court normally follows DOJ recommendations, the Garden State once again figured to be met with a roadblock.

New Jersey’s chances of a SCOTUS review appeared further hampered by the absence of any “circuit split” on the issue of the constitutionality of PASPA. Since the Christie/New Jersey line of cases were only the federal court decisions addressing the constitutionality of PASPA, the all-important “circuit split” was lacking.   Thus, getting SCOTUS to hear the latest appeal was the judicial equivalent of Doug Flutie’s long-ago prayer pass to Gerard Phelan for Boston College to defeat the Miami Hurricanes on the last play in 1984.

Now, however, thanks to SCOTUS, New Jersey has its biggest chance yet, though many observers and legal experts believe that even if the Garden State doesn’t get a favorable ruling in the high court, it will continue to re-package the sports gaming argument and act as the ice-breaker for a movement whose momentum is not likely to be stopped until some sort of change is mandated. The question now is not as much if, but when, the change in federal law will take place.
 
 
POSSIBLE SCENARIOS
 
In mid-November, many of the “players” in this saga convened in New York City for the Sports Betting USA conference, which drew an overflow crowd mostly because of the pending PASPA challenge in front of SCOTUS. TGS was present as well, along with a group whose attendance is rare for gaming-related events. But the number of state legislators, either speaking on panels or there to absorb the considerable info available at the conference, suggests that this time, New Jersey’s challenge is serious, and that various political machinery across the country is gearing up to help implement the pending change in gaming laws. (More on the potential various pitfalls of those changes in a moment.)

Among the myriad of topics discussed in New York were possible scenarios of the pending SCOTUS ruling, as also reported recently by GamblingCompliance.com.

1) New Jersey loses and PASPA is upheld. Such a ruling would mean sports betting cannot expand beyond PASPA-exempt states unless or until Congress votes to repeal or amend the statute.

2) New Jersey wins and PASPA is overturned. This would open the door for all 50 states to have sports betting.

3) SCOTUS refuses to overturn PASPA, but find New Jersey state law removing prohibitions regarding sports wagering is permissible and self regulated. This would carve out a temporary exemption for New Jersey, but no other state, and would be a short-term solution at best and likely to invite similar challenges from other states in the near future.

4) SCOTUS partially repeals portions of PASPA, but keeps in place prohibitions for, say, college sports.   Considered unlikely but possible and an undesirable outcome for New Jersey and other states wishing to implement full scale sports betting.

5) PASPA is ruled unconstitutional and SCOTUS disallows the existing exemptions that allow Nevada and the other three states to have sports betting. This would be a worst-case scenario that could even threaten Nevada’s current sports gaming marketplace.   Considered highly unlikely, but just in case, Congress would have to act quickly to rectify the situation or it would invite economic disaster to the state’s gambling economy.

6) SCOTUS could strike down PASPA, but only the part of the statute that prohibits states from adopting sports betting laws; a second part, preventing companies from operating sports wagering under such laws, would be left untouched. In this scenario (as well as a couple of others listed above), SCOTUS effectively punts the argument back to Congress, which would thus be required to fully outlaw PASPA.   Considered a highly undesirable outcome for all involved, and unlikely, but a possibility that must be considered.

Now, what might SCOTUS do? Michael McCann, a professor at University of New Hampshire School of Law and gaming consultant, and a speaker at the New York conference, believes the Garden State has a good chance, simply because of the dynamics involved. “At least four (of the nine) justices had to approve this for appeal,” said McCann. “Absent of a circuit split, which often invites further review, it means there is real interest at SCOTUS to look closely at the New Jersey case.”

Still, New Jersey presents a bit of an oddball case to the high court, with normal political lines blurred. The state’s contentions related to “commandeering” from the federal government would normally resonate with the court’s conservative wing, and the justices could divide along ideological lines. That happened in 1997, when the court struck down a requirement that local law enforcement agencies run background checks on would-be gun buyers. The vote was 5-4, with Anthony Kennedy, the court’s most frequent swing justice, in the majority.

But the New Jersey case is also dividing conservative groups. Some are backing the state and aiming to rein in the federal government while other strains further to the right are decidedly anti-Garden State as they stick rigidly to outdated beliefs that sports gambling would lead to crime and threaten the well-being of children.

It’s also splitting top lawyers who once served in the George W. Bush administration. Ted Olson, Bush’s first Solicitor General, will argue for Christie/New Jersey. Paul Clement, Olson’s successor, will argue for the sports leagues. It will mark the first time the two have ever directly squared off in a Supreme Court argument.

The battle lines have thus been drawn.

And what about the sports leagues themselves? Didn’t NBA commissioner Adam Silver (alone among all US sports commissioners, save for Don Garber of Major League Soccer) all but endorse a repeal of PASPA and a change in the national sports betting laws a few years ago? And if so, why does the NBA continue to join the NFL, NHL, MLB, and NCAA in fighting New Jersey?

Dan Spillane, NBA counsel who was also a speaker at the recent Sports Betting USA conference, had a plausible explanation. “Right now, PASPA is federal law, and New Jersey is trying to circumvent it.   That’s our (NBA’s) stance,” said Spillane, “But the NBA is very open to discussion on changes in federal gaming law.” (When asked if the NBA might itself consider some day becoming an “operator” in a post-PAPSA world of relaxed sports gaming laws, and the audience and panel perked up to hear his reply, Spillane navigated adroitly. “If I say ‘no comment’ you guys will all say that we’re planning on it,” said a smiling Spillane. “Let’s just say we haven’t yet thought that far down the road.”)

DOWN THE RABBIT HOLE?

What the national gaming landscape could look like in a post-PASPA repeal world was another topic addressed in-depth at the New York conference. While almost all believed that some sort of overarching new federal law would be preferable, more than likely the administration and implementation of sports gaming would be on a state-by-state basis, with wide differences in application. Operational issues need to be addressed in a hurry by any states wishing to follow behind New Jersey’s lead-blocking into the world of sports gaming. Hence the attendance of so many legislators who will be at the forefront of implementation that likely comes on a state-by-state basis. Not that it is something that many states are looking forward to with relish.

Bill Coley, an Ohio State Senator, perhaps summed up the approach of pols the best. “Legislators would rather have a root canal than deal with a gaming bill,” Coley said, “because gaming bills last longer. It’s always a 52-48 issue.” Ohio would not count itself among the states that would immediately follow New Jersey into the sports gaming marketplace should PASPA be repealed, though neighboring West Virginia would open for sports gaming business “on day one” after a favorable ruling for New Jersey, said Shawn Fluharty from his state’s House of Delegates. “We’ll welcome customers crossing the (Ohio) border,” Fluharty added. “It’s a budget issue, it raises revenues, which our state and many others could use.”

New York would soon follow as well, said Assemblyman Gary Pretlow, adding that Albany was “on board” to push forward with a favorable New Jersey ruling. “There is unimaginable income involved,” added Pretlow.

Most of the states, like West Virginia, New York, Connecticut, Pennsylvania, and Mississippi, that are willing to immediately jump into the sports gaming pool, already have various related mechanisms in place and have been preparing for this eventuality. States that haven’t laid that sort of groundwork or gaming infrastructure (which in some, but not all, cases can be easily adapted into the sports gaming model) will be facing a steep learning curve.

At least 11 states have announced intent to follow New Jersey immediately into the sports gaming marketplace, with more likely to trail close behind. But the mechanics and operations are likely to look very different from state-to-state, with some likely to come under the purview of their lottery commissions, others dealing with brick-and-mortar casinos and racetracks, some others likely to involve Indian gaming locales. All of the politicians present, however, believed that some minimum standards should be set federally, and warned of the potential pitfalls of too much de-centralization, and how PASPA repeal won’t eliminate many of the “dark areas” that sports gaming now occupies.

In fact, an entire panel discussion (“Optimal Routes”) addressed how implementation might work, and pitfalls involved, in a post-PASPA repeal world. MGM Resorts International VP of Race and Sports Jay Rood was a speaker as he was en route to his company’s Borgata resort in Atlantic City to “scout what we’re going to do down there” with regards to a sportsbook.

“We’re in line with thinking that there’s going to be some sort of movement on this,” Rood said . “We’re preparing for all the different scenarios. Everyone is going to have to explore how it’s going to fit into (the) business model of their existing operations.”

On the same panel was Dennis Drazin, chairman of New Jersey’s Monmouth Park racetrack, which in 2013 spent $1 million to build a sportsbook room at the facility (as chronicled in TGS four years ago) when the state first challenged PASPA. Monmouth’s partnership with William Hill US enabled the construction of the sportsbook, that has sat dormant. Drazin said that plans are underway for a second room on Monmouth’s 300-acre property. Drazin, however, was quick to point out that a “win” for New Jersey in the upcoming SCOTUS hearing might not necessarily be a case for outright celebration.

“I do believe we’ll win,” Drazin said, “But there’s more than one way to win. What does it look like? Is it (an affirmation of) the 2014 New Jersey partial repeal? Or is it a complete declaration that PASPA is unconstitutional?” And what if the Garden State loses? Drazin added that if SCOTUS upholds PASPA, “New Jersey has introduced another total repeal. I’m certain there can be a challenge.”

Several panelists raised the issue of how to convince players that currently use illegal, offshore accounts to wager on sports to convert to legal, domestic wagering when it’s offered.

Panelist Vic Salerno, longtime operator of the LeRoy’s chain of sportsbooks in Nevada (which sold to William Hill a few years ago) and now the president of USFantasy, called PASPA “the best thing to happen to illegal bookmakers 25 years ago.” Salerno also warned a repeal “could be the best thing to happen to them since then.”

Salerno reminded all that the challenge of competing directly with the illegal markets was that “illegals don’t have regulations, overhead, take the line from wherever without paying for it, and they do it all over the Internet.”

Rood admitted there will be challenge in bringing customers who bet with off-shore operations into the legal fold. “The biggest competitor is converting the illegal player to play legally,” Rood said. “You’re going to have to scare the end-user, because now, there are no repercussions, except maybe his credit card being declined.”

Meanwhile, outsourcing the race and sports book business to outside operators was viewed as suboptimal but inevitable by several panelists, and something that the many states that intend to follow right behind New Jersey must address. Ed Malinowski, race and sports book director at the Stratosphere Hotel in Las Vegas, said outsourcing would help control aspects of the growing sports betting industry.“There’s stuff we have to outsource,” he said. “We don’t have teams sitting in a room doing in-game wagering. We just don’t have the staff.”

Similarly, Rood said MGM, which has sports books at all the company’s Las Vegas resorts, has begun utilizing a hybrid approach, pricing out the top markets in-house, determining what to offer and what hold percentage to set. The company contracts with SportsRadar to use their proprietary algorithms to handle everything else. “We do have our operators who have the ability to take over and adjust, but (sometimes) you’re going to get beat,” Rood said. “The real art to what we do is managing the liability.”

Rood spoke also of the need to “Americanize” systems that might be European in design. The parameters of inline game wagering, for example, need adaptation due to the potential for broadcast delays in America. Salerno agreed. “We’re dependent on algorithms built by people who don’t really know American sports,” Salerno said.

Salerno also addressed another angle that indirecly applies to the all-important Internet. “What are we going to do about the Wire Act? (State boundaries and considerable gray areas perhaps worthy of more discussion on these pages.)  This (PASPA repeal) isn’t going to be a big windfall. It’s going take a hell of a long time to put out.”

Myriad jurisdictional issues must be ironed out, which relates to Salerno’s point about the Wire Act, which would also have to be reviewed at some point soon; New Jersey’s current challenge would not overturn that 1961 law. The Internet, though the preferred mechanism for off-shore outlets, comes with its own twists and turns, and will have to be explored further and likely addressed either in federal court or Congress before being an outlet for any US-based operators. Jurisdiction also relates to service issues regarding mobile apps, which have proven popular in Nevada and New Jersey but come with their own unique issues. Drazin said Monmouth has needed to implement geo-tracking on its mobile offerings, since intrastate regulations don’t allow a player to check the status of his New Jersey-based account while in New York. Monmouth has also implemented geofencing around the park, so that, even on mobile bets, the park retains 100 percent of the revenue generated at the site. Various similar safeguards would have to be introduced by states, respectful of boundaries, entering the sports gaming marketplace.

Drazin also sounded a final warning. “What’s happened in New Jersey as it relates to sports betting, there’ s a question of how does this roll out?” Drazin said, “If the 2014 repeal is valid, there are no regulations.”
 
INTEREST EVERYWHERE

Interest in the New Jersey case has now spilled over to the traditional media as well. Even the estimable George Will, whose forays into sports usually are limited to baseball and his beloved Cubs, devoted an entire op-ed piece in the Washington Post last week to the subject of the PASPA challenge.   And, in usual Will fashion, summing up developments quite concisely.

“American democracy’s comic opera frequently features collaborations of ‘bootleggers and Baptists.’ These entertainments are so named because during Prohibition, Baptists thought banning Demon Rum would improve public morals (oh, well) and bootleggers favored the ban because it made scarce a commodity for which there was a demand that they could profitably supply. On Monday, the Supreme Court will listen— with, one hopes, a mixture of bemusement and amusement —to arguments concerning another prohibition,” said Will.

“This one concerns a law (PASPA) banning what many millions of Americans do anyway —illegally betting between $150 billion and $400 billion annually on sports events. Illegality prevents precise knowledge, but if the sum is just $150 billion, that sum exceeds the combined revenues of Microsoft, Goldman Sachs and McDonald’s. The Baptists in this case are those who consider gambling a vice that state governments should discourage. The bootleggers are those who supply illegal gambling services on the internet and elsewhere.

“An amicus brief supporting New Jersey argues that federalism precludes the national government from forbidding a state to pass a law ‘that neither violates the Constitution nor addresses any matter pre-empted by federal law.’ Congress has not chosen, as it could, to prohibit sports betting; instead, Congress has paralyzed states, preventing them from changing laws that such betting violates, and effectively commandeering state resources to enforce a policy that the state dislikes.

“The brief also says: ‘Depriving the body that enacted a law of the ability to repeal or amend that law defeats the purpose of representative democracy.’ It is indisputable that Congress cannot ‘directly compel New Jersey to enact a prohibition on sports betting.’ Therefore Congress may not prevent the state from repealing such prohibition. In either case, the state is being forced to regulate behavior it would prefer to deregulate or to regulate in its own manner.

“As currently construed, PASPA requires states to disregard an emerging consensus: In 1993, 56 percent of Americans disapproved of legalizing sports betting. Now, 55 percent approve. Twenty states have joined an amicus brief supporting New Jersey, and legislation has been introduced in a dozen states to legalize sports betting if New Jersey wins. The professional sports leagues are recalibrating their thinking, partly because legalizing and regulating sports betting would make it easier to detect suspicious surges of bets that might indicate rigged competition, and partly because wagering expands and intensifies fans’ engagement. For example, bettors watch more NFL games, and watch for longer, than non-bettors.

"Besides, the NFL is moving the Oakland Raiders to a city built by gambling, Las Vegas, where an NHL franchise has just begun its first season. The outcome in the Supreme Court is difficult to predict. It is, however, legal to bet on it,” Will concluded.

Since we’re into the business of predictions at TGS, we happen to agree wholeheartedly with Will’s conclusion that the nine fine minds of SCOTUS need not and should not trouble themselves with the question of whether this particular prohibition is sensible. They should, however, defend federalism by telling the national government to stop telling state governments what laws they cannot change.

As always, we will continue to follow this intriguing New Jersey storyline. Stay tuned...we’re sure there’s more to come. Bet on it!


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