U.S. Supreme Court Paves the Way for Legalized Sports Betting

May 2018

In a highly anticipated decision on May 14, the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act (“PASPA”), a federal statute that prohibited gambling in all but four states.[i] In doing so, it paved the way for potentially hundreds of billions of dollars in wagers to move from underground and offshore sportsbooks to legalized, taxed establishments in the U.S.

The following day, Herrick hosted a New York State Bar Association discussion moderated by Bloomberg sports business reporter Eben Novy-Williams, featuring Herrick lawyers Dan Etna and Audrey Sheetz; Anthony Dreyer, counsel to the NCAA, NBA, NHL, NFL and MLB in the litigation; and Bennett Liebman, former New York deputy secretary for gaming and racing. The discussion focused on recent sports gambling developments in the United States, including the one-day old Supreme Court decision. While the size of the market and the regulatory framework are not entirely clear, one thing is certain – the implications of Murphy v. National Collegiate Athletic Association[ii] are far reaching and can be expected to drastically change the makeup of the sports industry.

The History of PASPA

Congress enacted PASPA in 1992 making it unlawful for any “government entity” or “person” to “sponsor, operate, advertise, promote, license, or authorize” sports gambling.[iii] PASPA did not make sports gambling a federal crime, but instead allowed the U.S. Attorney General and professional and amateur sports leagues to bring civil actions to enjoin violations -- which is precisely what happened 20 years later. In 2012, when New Jersey enacted legislation allowing licensed sports gambling at racetracks and casinos, the NCAA and the four major professional sports leagues filed suit arguing that the 2012 law violated PASPA. The lower courts agreed, causing New Jersey to go back to the drawing board. In 2014, New Jersey passed a new law that repealed the existing bans on sports betting in casinos and racetracks [iv]), and subsequently the NCAA and the leagues again argued the law was in violation of PASPA.

The Court of Appeals for the Third Circuit agreed and ruled against New Jersey. However, the Supreme Court agreed to hear the State’s constitutional challenge to PASPA, arguing, among other things, that it infringed upon the State’s sovereign authority to end its sports gambling ban and was therefore in violation of the Tenth Amendment’s prohibition on federal action commandeering the states.

Supreme Court Ruling

In a 7-2 majority decision by Justice Alito, the Court reversed the Third Circuit after finding PASPA unconstitutional. The Court held that because PASPA bars states from authorizing sports gambling, it “unequivocally dictates what a state legislature may and may not do” and, therefore, violates the anticommandeering principle embodied within the Tenth Amendment. The majority decision forcefully stated that “it is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals” and that, “a more direct affront to state sovereignty is not easy to imagine.”

Next, the court rejected the argument made by the leagues and the federal government that PASPA does not commandeer the states because it is a valid preemption provision. The Court explained that pre-emption is “based on a federal law that regulates the conduct of private actors,” but, “not an independent grant of legislative powers to Congress.” Ultimately, the Court held, “there is simply no way to understand the provision prohibiting state authorization as anything other than a direct command to the States. And that is exactly what the anticommandeering rule does not allow.”

Finally, the Court addressed the question of severability, and determined that PASPA’s other provisions similarly violated the Tenth Amendment. Explaining that, if the bar on states authorizing or licensing sports betting were invalid, it is “most unlikely” that Congress would have wanted to also prevent the states from running sports lotteries, especially since they were regarded as “far more benign than other forms of gambling.” Similarly, if Congress had known that the bar on state authorization or operation of sports betting was struck down, it would not have wanted the parallel ban on the operation of sports-betting schemes by private entities to continue.

The Court acknowledged that the legalization of sports gambling is controversial and “requires an important policy choice.” But, the majority concluded, the choice “is not ours to make. Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.”

Implications Across the Sports Industry

As Justice Alito points out, “Americans have never been of one mind about gambling.” The Court’s decision has the potential for widespread legalization of sports gambling across the country. And, as the opinion notes, unless Congress decides to regulate sports directly, “each State is free to act on its own.”

Following the ruling, as many as 32 states are prepared to move forward with legislation that will legalize sports gambling. While this will not occur immediately in most states, New Jersey will almost certainly be the first to open its doors. William Hill, a leading British gaming company with a prominent sportsbook in Nevada, indicated that the infrastructure for its sportsbook at New Jersey’s Monmouth Park is almost complete. Pennsylvania, Connecticut, Missouri, and West Virginia have also passed bills in anticipation of the Supreme Court decision, largely because of the amount of money at stake.

The American Gaming Association (AGA) estimates that $150 billion is wagered annually on sporting events through illegal bookmakers and offshore websites. This is 30 times greater than the $4.9 billion legally wagered on sporting events in Nevada in 2017. With such a large black market, AGA estimates potential legal wagering to range between $65 to $332 billion annually depending upon state tax rates and whether gambling is limited to casinos and racetracks.

The leagues are concerned with protecting the integrity of their games, yet certainly also expect to receive a significant stream of revenue from legalized sports gambling. The NBA and MLB have lobbied for months in states with pending legislation. However, following the Court’s decision, many of the major leagues are now calling for Congress to create a uniform regulatory and legal framework applicable to all states.

The NCAA, on the other hand, remains highly opposed to legalized sports betting as it has significant integrity concerns, compared to those of the leagues. Unpaid student-athletes are more susceptible to bribery and more incentivized to participate in point shaving scandals than highly paid professional athletes. With vulnerable student-athletes, the NCAA, collegiate conferences and universities must now develop a regulatory structure that protects its players and ensure compliance -- all of which could prove to be very expensive. 

The potential size of the legal sports gambling market has certainly dictated the large number of players involved in the discussion. Not only are states developing legislation, but now leagues, teams, players associations, legal sports book operators, off-track betting platforms, colleges, fantasy sports companies, media outlets and data analytics companies, to name a few, are all demanding a seat at the table. However, with so many stakeholders involved, the “billion-dollar question” is how they will all work together with lawmakers to develop a regulatory framework that will satisfy all parties.

[i] At the time of PASPA’s adoption, some forms of sports gambling were legal in a few jurisdictions. A grandfather provision exempted Nevada – which allowed sports wagering in casinos – and Delaware, Oregon, and Montana which permitted much more limited forms of sports gambling. See 28 U.S.C. § 3704(a)(1)-(2).

[ii] This case was formerly Christie v. National Collegiate Athletic Association

[iii] 28 U.S.C. § 3702(a) 1-2

[iv] 832 F.3d 389, 394 (3d Cir. 2016) (en banc) (Christie II)

For more information on this or other sports matters, please contact:

Irwin A. Kishner at [email protected] or +1 212 592 1435
Daniel A. Etna at [email protected] or +1 212 592 1557

© 2018 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.