New Jersey could take bets for NBA Finals
Legal sports betting in the U.S. is now a reality.
On May 14, the Supreme Court of the United States struck down the federal ban on sports betting, ruling that the 1992 Professional and Amateur Sports Protection Act (PASPA), which banned sports betting in all but four states, is unconstitutional.
In a 6-3 decision, the high court went beyond the basics of the case before it, which was the state of New Jersey’s appeal of lower-court rulings striking down its 2014 sports-betting law, which provided for self-regulated sports books in New Jersey casinos and racetracks, as a violation of PASPA. In a landmark decision, the court agreed with New Jersey’s attorneys, who argued that PASPA in itself is a violation of the anti-commandeering provision in the 10th Amendment to the U.S. Constitution.
“Today’s decision is a victory for the millions of Americans who seek to bet on sports in a safe and regulated manner,” wrote AGA President and CEO Geoff Freeman in a statement immediately following the ruling. “According to a Washington Post survey, a solid 55 percent of Americans believe it’s time to end the federal ban on sports betting. Today’s ruling makes it possible for states and sovereign tribal nations to give Americans what they want: an open, transparent and responsible market for sports betting.
“Through smart, efficient regulation, this new market will protect consumers, preserve the integrity of the games we love, empower law enforcement to fight illegal gambling, and generate new revenue for states, sporting bodies, broadcasters and many others. The AGA stands ready to work with all stakeholders—states, tribes, sports leagues, and law enforcement—to create a new regulatory environment that capitalizes on this opportunity to engage fans and boost local economies.”
The case—the state’s second to challenge PASPA—began in 2009 when New Jersey state senator challenged PASPA. In 2012, after New Jersey voters overwhelming approved sports betting in the state the year before, former New Jersey Governor Chris Christie signed a bill into law that followed the opinion of the former U.S. attorney general that states could vote to repeal PASPA and institute sports-betting programs, as long as there was no state or federal regulation of the books. The Justice Department subsequently rescinded that opinion, but not before New Jersey lawmakers drafted a bill that followed the logic of the attorney general’s opinion.
The law was immediately challenged in a lawsuit by the National Collegiate Athletic Association and the four major professional sports leagues—the National Football League, Major League Baseball, the National Basketball Association and the National Hockey League. Lower court rulings in Christie v. NCAA agreed with the leagues that any state sports betting program would violate PASPA. Last summer, the U.S. Supreme Court made the surprise announcement that it would hear the appeal of the U.S. 3rd Circuit Court of Appeals decision in the case, and arguments were made December 4. The case became Murphy v. NCAA with this January’s inauguration of Phil Murphy as New Jersey governor.
Attorneys for the leagues argued that the constitutionality of PASPA was not at issue in the case, only the New Jersey statute’s violation of the 1992 law. The lawsuit was rejected seven times by lower courts and New Jersey kept appealing. In June 2017, the Supreme Court surprised everyone when it agreed to hear to case.
Ultimately, the court majority agreed with the state’s lawyers that PASPA itself was an unconstitutional overreach of federal authority over the states. The court struck down the entire 1992 law, exceeding the hopes of not only New Jersey stakeholders but industry sports betting proponents led by the AGA.
“We couldn’t be more thrilled with today’s ruling,” Freeman said on a conference call the day the decision came down. He lauded New Jersey’s persistence in pursuing the issue, and the efforts of the AGA in the ultimate demise of what he has called a failed law that simply fed illegal bookmakers and funded organized crime and money laundering.
Jonathan Cohn, the partner in the Sidley Austin law firm who wrote the AGA’s amicus brief, joined Freeman on the press call. Cohn lauded what he called a complete victory for New Jersey and for sports-betting proponents who have fought to repeal PASPA.
“My quick overview is: We won,” Cohn said. “It’s a complete victory for the state, and therefore a complete victory for the industry. We had six justices who struck down PASPA in its entirety.”
The portion of PASPA dictating that states must prohibit sports betting was at the core of the decision, which the justices agreed was in violation of the 10th Amendment’s anti-commandeering provision—which states essentially that the federal government cannot command the states to prohibit any activity. “That was a welcome victory, but not a surprise victory,” Cohn said. “But in addition to doing that, the Supreme Court also struck down the remainder of the provisions in the federal statute…
“No provision is separable, the Supreme Court said, and we won everything—there’s nothing left. As a result of this, states can do a partial repeal, they can do a complete repeal—they can do what they want, because PASPA is no longer good law. It’s a comprehensive victory.”
Cohn added that the Supreme Court decision actually cited AGA’s amicus brief, adding that it was one of two amicus briefs the organization submitted in the case. The first brief urged the high court to review the case—a rarity overall, as the Supreme Court only reviews 4 percent of all cases before it.
In the bigger picture, the case has implications for many other issues, including the federal government’s declaration that marijuana is still illegal despite several states legalizing medical and recreational use of the drug, as well as many and varied gun laws mandated by Washington.
Casino company stocks soared after the announcement of the decision. Scientific Games, Boyd Gaming, MGM Resorts, Caesars Entertainment and others climbed in price after the announcement. William Hill Plc., the British bookmaking giant that already runs the largest number of sports books in Nevada and has a contract in place to run the book at New Jersey’s Monmouth Park, saw its shares rise 11 percent. Shares of Canada’s Stars Group, which owns the PokerStars brand and is buying bookmaker Sky Betting and Gaming, popped 15 percent.
Analyst David Katz of Jeffries has projected that the market for legal sports betting in the U.S. could exceed $57 billion. The AGA has estimated that 97 percent of more than $150 billion bet on sports every year has been through illegal bookies, a market that is now open to legal operators.
Fast Start
New Jersey casinos and racetracks are expected to begin offering sports books immediately, while state lawmakers work on revising a bill to regulate sports betting that was introduced at the end of April. The first wagers are expected to be accepted in time for this year’s NBA Finals.
The regulation bill is not expected to be passed so quickly. Sponsors of the bill included a controversial provision to grant the sports leagues a piece of the action. Called an “integrity fee,” it is really an annual royalty payment based on the products of the leagues, granting each league an amount equal to the lesser of $7.5 million or 2.5 percent of revenue from sports wagers. And with the leagues fighting the New Jersey lawsuit for years, it’s unlikely politicians would agree.
While the fee would be far less than the 1 percent of all wagers (gross betting numbers versus net gaming revenue) being pushed by state-level lobbyists for the leagues, many New Jersey lawmakers are opposed to any fee to the leagues, which have fought for years to prevent any expansion of single-game sports betting beyond Nevada.
While lawmakers debate over whether to implement a fee to the leagues, New Jersey operators are free under the Supreme Court ruling to simply implement the law signed by Christie in 2014. Monmouth Park has been ready for months to implement sports betting, and the Meadowlands won’t be far behind. Several Atlantic City casinos are also likely to open sports books soon—MGM announced plans last fall to build a $7 million sports book at the Borgata should PASPA be repealed.
Gaming attorney Marc Dunbar, a partner in Jones Walker LLP who teaches gaming law at Florida State University College of Law, predicts sports books will be operating long before lawmakers decide on any fees. “I don’t think (Monmouth Park CEO) Dennis Drazin is waiting,” Dunbar says. “He’s ready to go. He and William Hill were staffed up and ready to go the moment this happened. That’s what I would do. There’s money to be made in the short term.
“I’m willing to bet (New Jersey lawmakers) are about to get into session and change the law, but I’d lay odds you’ll be able to wager on the Rockets and the Celtics, as well as the Final Four in the NHL, next week.”
That view may have been premature, as the potential bill would make ineligible anyone who jumped the gun—which, however, would be legal because New Jersey passed a previous year in support of the lawsuit, that said it would pass any laws permitting sports gambling, and that casinos and racetracks could conduct sports betting without state oversight. That was a crucial element of the PASPA wording that was challenged in the suit.
Dunbar says things also are going to move quickly in other states that have sports betting legislation in place. Four other states—Mississippi, Pennsylvania, West Virginia and New York—have passed sports-betting laws in the past year, and are expected to have wagering in place by the beginning of the NFL season in September.
Joining those states is Delaware, which passed a sports-betting law several years ago, but was subsequently restricted to parlay bets after another lawsuit by the leagues. The state’s parlay football betting program generated $46.1 million in wagers last year, and the three racinos already have the facilities in place.
Sports betting legislation has been introduced in 20 other states (see the Weekly Feature for details of each state) across the country. Freeman estimated that most of them will be up and running with sports betting within a year or two.
Among the states that have betting laws in place, Dunbar says Pennsylvania faces the biggest challenge in implementing sports betting—mainly because of a 36 percent revenue tax that most view as unworkable considering the small profit margins of sports books.
“That tax rate is a joke,” says Dunbar. “It was passed by people who really didn’t have any idea what the practicalities or economics of sports wagering are.” He said none of the other states with sports-betting laws in place “has been that aggressive.” New Jersey, for instance, will impose the same 8 percent tax on sports-betting revenue that it places on casino gaming revenue.
“Pennsylvania’s law is flawed,” Dunbar says. “It’s going to have to be rewritten to practically be implemented.”
The Pennsylvania Gaming Control Board announced last week that its staff must first write regulations for any sports-betting program, and those must be approved by the seven-member board, before implementation of any sports-betting program.
By contrast, Mississippi followed the Nevada regulatory model for sports betting. “I suspect they’ll be in play and ready to go for the college football season,” Dunbar says. “Mississippi is the one state I think is going to be poised to jump in, follow Vegas and benefit immediately.”
Fee or No Fee?
In the weeks leading to the Supreme Court decision, lobbyists from the NBA, Major League Baseball and others argued that they are entitled to some payment in exchange for the use of their “product” for sports wagering. After initially calling the fee necessary to ensure the integrity of their games, NBA officials now describe it simply as a “royalty” payment.
Initial lobbying efforts calling for 1 percent of wagers have been modified, with West Virginia considering a 0.25 percent tax on all wagers to go to the leagues whose games are the subject of bets.
Still, the fee is a hard sell for most. None of the four that have final laws in place has passed any type of integrity fee for the leagues as part of their sports betting bills.
“The integrity fee is a horrible idea,” says Dunbar. “It shouldn’t be put in legislation. It should be something that’s worked out contractually. And let’s call it what it is—it’s a profit center; it’s not an integrity fee.”
Freeman has pledged to work with the leagues as partners in sports betting operations.
“The leagues are a potent force,” he said on the AGA conference call. “We’ve seen that in West Virginia, we’ve seen it in Indiana and other markets. It will be important to work with the leagues. I think the leagues can be powerful partners when it comes to putting the illegal market out of business, when it comes to speed to market, when it comes to creating consistency across state lines…
“We’ve had good discussions to date; I expect those discussions will continue, to see if we can find common cause.”
The leagues certainly have much to gain from the legalization of sports betting, and some team owners are enthusiastic about the development.
“I think everyone who owns a top-four professional sports team just basically saw the value of their team double,” Mark Cuban, the billionaire owner of the NBA’s Dallas Mavericks, said in an interview on CNBC last week. “It can finally become fun to go to a baseball game again. It’s easy to see how you’ll have fun at the stadium, at the arena or while you’re watching, whether it’s online or a traditional platform.”
Dunbar agrees on the need to work with the leagues, but not through a fee imposed by legislation. He says fees should be negotiated between the leagues and operators, with input from representatives of the players. He offers the payment of horsemen and tracks under the 1978 Interstate Horse Racing Act (IHA) as a perfect working model.
“The IHA is a perfect model to follow here,” he says. “It balances everybody: the state regulators, the state hosts and guests—in this situation the leagues and their teams—as well as the players, and makes sure everybody’s fairly compensated in contractual negotiations, as opposed to a fee imposed by the government.”
He notes that IHA requires only that no one can wager on a horse-racing signal without the approval of the racetrack and the horsemen involved. “It doesn’t set the commercial terms; it just says you have to have their approval, and it’s worked out once a year at the simulcast conference,” Dunbar says. “For the revenue share to work out between the players and sports books on both ends, you’re going to need to have some federal umbrella over top—not a regulator, but something like the Interstate Horse Racing Act, which is the only interstate wagering act that exists in the U.S., and has worked very well since it passed in 1978.”
Within the industry, it’s well known that sports books have a narrow margin. In the legal Nevada industry, the casino “win”—money retained after all bets are paid, and not counting the costs of employees, rent and business expenses—is well less than 5 percent. That fact is often lost when discussing the huge illegal pool of sports betting wagers.
Renowned Las Vegas oddsmaker Jimmy Vaccaro appeared on the “PoscastOne Sports Now” podcast to give a warning to potential operators in the newly legal sports-betting market: Bookmaking margins are thin.
Vaccaro said bookmaking is a low-margin business in which the people taking the bets aren’t always guaranteed a profit.
Vaccaro, who operates the sports book at the South Point in Las Vegas, said in a typical year sports books win 4 percent to 5 percent of the total money wagered, but must pay state and federal taxes out of that win. Other expenses including employee salaries and betting systems also eat into that profit.
In Nevada, the only state currently with legal full sports betting, bettors wagered $4.87 billion last year and the sports books won a record $248.8 million, or 5.1 percent of the money bet.
Vaccaro said other states legalizing sports betting will hurt Las Vegas some but could also be good for the city because more people will regularly bet sports.
Congress’ Next Move
After the court decision, the National Football League quickly issued a statement calling on Congress to enact a common regulatory framework for U.S. sports betting, not trusting that negotiations between the states will be productive.
“The NFL’s longstanding and unwavering commitment to protecting the integrity of our game remains absolute,” the statement said. “Congress has long recognized the potential harms posed by sports betting to the integrity of sporting contests and the public confidence in these events.
“Given that history, we intend to call on Congress again, this time to enact a core regulatory framework for legalized sports betting. We also will work closely with our clubs to ensure that any state efforts that move forward in the meantime protect our fans and the integrity of our game.”
“Sports are played on a national and sometimes international stage, crossing state borders and involving residents of numerous municipalities,” said Rummy Pandit, a gambling analyst with New Jersey’s Stockton University, in an interview with the Associated Press. “From that standpoint, federal regulation of sports betting makes sense. But the federal government has not historically been involved in the day-to-day regulation and oversight of gaming.”
Dunbar agrees that some federal framework is necessary for sports betting to thrive in the U.S. “There’s going to be a lot of pressure on Congress, because if you do this state by state, it’s going to be a mess,” he says, “and it’s also probably going to create situations where arbitrage players are able to take advantage of poorly written state laws. In order for this to be truly successful, you need to have the ability for states to comingle into a national pool.”
Again, he says the model solution is horse racing’s IHA.
“The leagues control their signal, there’s no question about that,” he says. “As such, no one’s going to be able to display that (signal) and move it around without compensating the leagues. But the leagues are already distributing all over, as well as on the internet. So, access to the actual signal is not going to be the issue. It’s going to be the wagering dollar, and whether or not someone is legally authorized to wager on it in a state regime without the league’s permission.”
In the end, he says, sports betting stakeholders will have to work with the leagues—through negotiations, “but you shouldn’t have commercial terms in a statute; that’s the problem.”
Those negotiations, he adds, will have to include the state lotteries, which he calls the “wild card” in federal implementation of sports-betting rules.
“If lotteries are excluded, they’re not going to be able to pass anything, because lotteries have significant influence on Capitol Hill,” Dunbar says. “The lotteries are going to have to be brought into the mix.”
Freeman said on the media call that he doesn’t expect any congressional action on sports betting, either for a regulatory framework or to block or restrict state programs.
“We believe congressional action is unlikely,” he said. “We will be forced to play a bit of defense as some consider federal action, but it’s very unlikely Congress is going to engage in an area where states have proven to be effective regulators.
“Had states not proven to be effective regulators over the past 25 years—regulating lotteries, regulating table games, regulating machines—maybe there would be a need for the federal government. But I simply don’t see a need for the federal government at this point, and I don’t see the federal government playing a role in what could be considered the largest expansion of gaming in the nation’s history.”
The day after Freeman said AGA may have to “play defense,” U.S. Senator Orrin Hatch said he will pursue a bill to create a national regulatory framework for sports betting. Saying a state-by-state regulatory system would create a “patchwork race to the regulatory bottom,” Hatch—the Senate president pro tempore, who is retiring in January—noted that the Supreme Court ruling made it clear that Congress can regulate sports betting if it so chooses.
Hatch, who represents one of the two states that offer no legal gambling, did not reveal what the legislation will look like, but Hatch said in a statement that they would be designed to address issues that did not exist when PASPA was passed 25 years ago, in particular the “rapid rise of the internet.”
Hatch was one of the four authors of PASPA.
Giant Opportunities
Las Vegas-based gaming giants Caesars Entertainment and MGM Resorts International say they expect to be at the top of the heap nationwide as states move to legalize sports betting.
With the floodgates to regulation thrown open last week by the U.S. Supreme Court’s abolition of a decades-long federal ban, Caesars Chief Executive Officer Mark Frissora said his company is positioned to “set up very quickly.”
Las Vegas-based Caesars sold its online operation, known as Playtika, during the Chapter 11 restructuring of its largest casino subsidiary, but it still has the core capabilities in-house, Frissora said.
“We’ve been very focused on digital and mobile as platforms that we want to incorporate in our business model, and this plays right into that,” he told CNBC last week.
Echoing the current wisdom that a wave of legalization is about to break, he said, “It could hit every single state in the country, because everyone needs what I would call these tax revenue dollars that come from this.”
Right now, some 20 states either have a regulatory framework in place or are considering or planning to consider authorizing legislations.
MGM Resorts International CEO James Murren estimates the profit potential for his company in the “hundreds of millions of dollars.” He said MGM expects to be “a very significant player, if not the largest player in this market” thanks to its “decades of relationships” with the sports leagues.
Caesars operates in 13 states, including Nevada, under the Caesars, Harrah’s, Bally’s and Horseshoe brands. In addition to Nevada, MGM is in Maryland, Mississippi, Detroit and Atlantic City and is opening a major resort in western Massachusetts later this year. Both also have a sizable online footprint.
“In many cases, MGM may not have a casino in that state but certainly we’ll have a major presence,” Murren said. “That’s the big opportunity that we see.”
According to the American Gaming Association, at least $150 billion a year is gambled illegally on sports in the United States. Don’t expect most of that to end up in the legal markets, however. Morgan Stanley believes the take will likely represent less than 2 percent of the $120 billion a year currently generated nationwide by all forms of gaming. That conforms roughly to Bank of America’s forecast of a $5 billion-$10 billion industry in five years.
The major regional operators also will be angling for their share.
Boyd Gaming and Penn National Gaming “are likely the biggest beneficiaries in our coverage given their smaller market caps and exposure to numerous states,” Morgan Stanley analysts wrote in a client note last week.
“We expect operator margins to be low but see upside for all of regional gaming, while gaming tech could be a key beneficiary,” Bank of America’s Shaun Kelley said.
The Redcoats Are Coming
Gaming investors in the UK are looking across the Atlantic and seeing streets paved with gold.
Bookmakers listed on the London stock exchange—William Hill, 888, Paddy Power/Betfair (see iGaming for reports about the possible merger with FanDuel) among them—saw their combined share value soar more than £1.5 billion last week on the expectation that their experience and operational expertise will buy them lucrative seats at the table as sports betting markets begin opening in U.S. states eager to cash in on New Jersey’s Supreme Court victory last week over a decades-old federal ban.
888 Chief Executive Itai Frieberger said his company, which operates poker networks in three states, is “uniquely positioned to exploit the potential growth opportunities”.
For operators like William Hill and Ladbrokes, which still maintain sizeable bricks-and-mortar operations in the UK, the news was especially welcome in the aftermath of a government decision to slash the maximum bet on electronic table games to £2 in what amounts to an all-out assault on the largest source of revenue for betting shops across the country.
“Now, all attention shifts to the states, where steps have already been taken to prepare for this day,” said William Hill CEO Philip Bowcock. “We expect to be operational in New Jersey as soon as responsibly possible. We are also actively working on opportunities in a number of other states.”
UK analysts, meanwhile, are closely monitoring the various legislative processes to get a feel for the real scale of the opportunity. It’s expected that some states will restrict sports betting to land-based casinos or racetracks rather than permitting it online, while others have proposed tax rates experts say are unworkable.
Investment broker Goodbody said, “It could take a number of years before we see wide-scale U.S. sports betting, and significant investment may be required to develop a meaningful business in the U.S.”
The iGaming Question
The big remaining question mark on sports betting is whether and to what extent wagers will be accepted online and via mobile phones. Industry observers have long predicted that legalization of sports betting would be followed by a rapid succession of states approving online gaming programs.
Freeman said the AGA’s position is to promote the Nevada model, which augments casino sports books with mobile betting inside the state. “The Nevada model has proven to be effective,” he said on the media call. “We would like to see intrastate mobile betting considered in all of the states that take a hard look at sports betting.”
So far, he said, most of them have. “Nearly every state that introduced legislation this year included intrastate mobile betting. Only a couple didn’t go down that road—most notably Mississippi. When I was in Mississippi for the Southern Gaming Summit (in early May), I did make the comment that Mississippi will regret that decision. By avoiding intrastate mobile, they’ve handed a major victory to the illegal market.
“The illegal market obviously relies on mobile activity. If we’re going to compete with that market, we also need to be able to provide the customer with the product they’re looking for. I would hope Mississippi and any other state would revisit that decision. We certainly believe that mobile is a critical component to sports betting.
Tournament Time
And the NCAA last week “temporarily” lifted a ban on holding tournaments in Nevada, which had be imposed years ago because the state permitted betting on collegiate games. The ban could go away permanently with a vote of the organization’s board of governors.
The removal was a result of the Supreme Court decision and good news for Las Vegas, which now could host a Final Four in the new stadium currently under construction that will be used by the Las Vegas Raiders of the NFL and the UNLV football team, or even preliminary rounds of the March Madness basketball tournament. The ruling also signals that the NCAA will not impose a similar punishment on states that also legalize sports betting.
”Our highest priorities in any conversation about sports wagering are maintaining the integrity of competition and student-athlete well-being,” NCAA President Mark Emmert said in a statement, while urging federal regulations be imposed on sports betting.
The NCAA has also refused to hold tournaments in New Jersey because of its challenge to PASPA, but should be back in consideration.
“We’re going to be back in the rotation, there’s no question about it,” said former governor and current state senator, Richard Codey told the Asbury Park Press. “Hopefully it can start with the first weekend (coming to Newark) and eventually it’ll get the regional. The last time we had it, the crowds were great, the games were great and everybody loved it.”
