The Mouthpiece: Legal challenges of expanded sports betting

This is The Mouthpiece, a guest contribution by Martin Owens. If you would like to submit a contribution please contact Bill Beatty for submission details. Thank you.

Part one: Why Legislators Need Horse Sense

The big problem with widely publicized Supreme Court decisions is that people insist on reading all sorts of things into the decision. Things that would be nice to have, but simply aren’t there.

mouthpiece-legal-challenges-expanded-sports-betting2The first thing to remember about the Supreme Court decision in Murphy v NCAA ,is that it did not, repeat NOT actually legalize sports betting throughout the United States, as some seem to be claiming. What the decision did is to remove a Federal obstacle to states legalizing sports betting, if they so wish. That bears repeating: if they so wish. No state has to license sports betting. State governments maintain their plenary power over gambling. English translation – state governments can do anything they like with, to, or about gambling, so long as they don’t actually violate established constitutional protections in doing so.

A National Betting Regime?

But the Justices were careful to leave open the possibility that the Federal government can at any time choose to promulgate a national gambling policy and regulatory structure. In which case, the Federal rules would take precedence over most if not all state rules on the subject. Such an arrangement would be very appealing to both domestic and foreign gaming operators, and overseas regulators as well. For it would mean only one set of rules to follow, rather than threading a path through the vagaries of dozens of different state laws.

And such Federal intervention is still possible. Sen. Orrin Hatch (R-UT) is already working on legislation that will put legalized sports betting under Washington’s supervision. Political handicappers hold out little hope that such a bill would pass this year, however. Control of the House of Representatives is at stake, with many races predicted to be close. No candidate is liable to risk bad PR over a bill about Wicked Gambling, one of the stock boogie-men of American political theater. Sports betting in very particular has a bad history. The scandal involving baseball players taking payoffs to throw the World Series is still vividly remembered, even though it took place all the way back in 1919. It is an article of faith among proponents of public virtue that gambling is corrosive to the purity of American sport, and needs to be tightly controlled where it cannot be forbidden altogether.

Nevertheless, the door has been opened. And any state that wishes to walk through will have to depend on its legislators to get it right. And that means a series of decisions on policy, logistics, and everything else related to sports betting will have to be made, mostly under very challenging circumstances.

The format

The first choice that legislators will have to make is: what format of sports betting will be allowed? Essentially the choice is between fixed odds and the pari-mutuel system, which is the standard for America’s thoroughbred racing. From the point of view player protection, i.e. preventing the gullible and impetuous members of the gambling public from betting themselves into the poor house, pari-mutuel betting has distinct advantages. Without going into great detail, the mechanics of pari-mutuel betting create a pool which prevents both giant killer jackpots, and giant killer losses. In a horse race, for instance, the more popular a given entry is, the shorter the odds. It is not unheard of for a hugely favored horse to go off at odds of 1:1 or even less. Betting under these conditions help to ensure that it is looked on as a past time rather than an investment program.

Another plus for pari-mutuel is that it has been around for generations. Everybody knows about it. There are plenty of experienced people to help organize and run such a gambling regime. Likewise there are no less than 30 state governments that can supply experienced supervisors and administrators for a state- approved sports betting program.

The biggest argument against using pari-mutuel systems is that Nevada, currently the only state with genuine sports betting apart from horses, uses a fixed odds model. Many of the big operators in Vegas will be looking to expand into other states. And these other states are liable to follow the Nevada model for two reasons. First, it tends to be more exciting and appealing. Second, fixed odds is pretty much the world standard. In the very likely event that states seek to increase liquidity by sharing their respective pools of bettors, any state that chooses pari-mutuel for this expanded sports betting is making sure that it cannot interconnect two other states which used fixed odds. And we cannot forget that gambling is now a global phenomenon. An operator which can feature overseas events such as the World Cup of soccer is looking at a new (for America anyway) and potentially huge market. But that will likely require coordination with overseas operators and supervisors. And the pari-mutuel system is essentially confined to the English-speaking world, a few European countries, and Japan. Moreover, its principal use is for horse racing. Tackling other sports might require more innovation, whereas fixed odds is more or less immediately available.

What events?

It’s easy to predict that American states would legalize betting on America’s Big Three: football, basketball, and baseball. But to what extent? Would the NCAA versions of these sports also be bet on? What about minor leagues, like baseball’s AAA? Pro Golf? Pro tennis? Track and field events- again mostly NCAA? What about the Olympics? There are even professional circuits for such things as bass fishing. State lawmakers are going to have to pick and choose which events and games will be available for the gaming public to bet on.

Linkage and Liquidity

And this leads to the twin questions of jurisdiction and liquidity. Liquidity, as used here, means a steady supply of local customers, such that a state licensed operation would turn a profit. Larger, more populated states such as California and Texas would have no trouble generating a paying clientele from the residents located within their own borders. Smaller states, however, are liable to run into a problem. Rhode Island’s population is only about a million- probably not enough, by itself, to generate anything like a steady, worthwhile income stream, especially after the “newness” and novelty of the thing wear off. And this is also the case with large but thinly settled Western states such as Montana and the Dakotas.

There is also the ever-popular jurisdiction question. If a resident of State X gets on the Internet and visits the webpage of a licensed gambling operator of State Y (let’s call him Gamble Bug) , does that, without more, grant State X jurisdiction over Gamble Bug, physically located and licensed in State Y? That him has not been seriously analyzed or adjudicated, 17 years after the first Internet betting sites came into being. Note also that it may be possible for State X to claim it is protecting its residents from unscrupulous operators if Gamble Bug is located abroad, in some jurisdiction with loose licensing laws and very tight bank secrecy. But claiming that Gamble Bug is a fly-by-night operation is very different when Gamble Bug is licensed by State Y next door . The Full Faith and Credit clause of the US Constitution (Article Iv, section 1) essentially requires that state governments respect each other’s judgments, laws, and regulations.

Using a Little Horse Sense

mouthpiece-legal-challenges-expanded-sports-bettingSo have we reached the point of Catch 22? Where we know what we need (a big enough pool of players, involving several jurisdictions) but the rules prevent us from getting there?

Happily, the answer is no. Not only have many American state governments figured a way out of the liquidity/jurisdiction dilemma, but it is already being applied.

Earlier this year, the three US states offering online poker-Nevada, Delaware and New Jersey- agreed to pool their customer resources, allowing access back and forth through membership in the Multistate Internet Gambling Association (MIGA, not to be confused with MAGA). This way, both the early birds and the night owls will be able to find a game essentially whenever they need it, and therte is much less risk of unprofitable “dead air”., where nobody is playing.

And in fact, the technique has been in use for decades by the horse racing industry. Online services such as TVG and BetAmericatake bets on horse races from all across the country- in fact, all over the world. Who is in charge, who gets paid, how much, who can play-all these questions have been answered.

Now horseracing uses the pari-mutuel system, mentioned above, so it is an open question how much of the structure of the interstate and international horse betting network can be transferred directly to sports betting generally.

But, the fact remains, that it can be done, and it has been done. There is no need for a Federal gambling law regime here. All we need to do is remember the successes we have had before.

Mr. Owens is a California attorney specializing in the law of Internet and  interactive gaming  since 1998. Co-author of INTERNET GAMING LAW with Professor Nelson Rose, ( Mary Ann Liebert Publishers , 2nd ed 2009); Associate Editor, Gaming Law Review & Economics; Contributing Editor, TSN. Comments/inquiries welcome at