It is not often that a gambling case reaches the United States Supreme Court, but that is precisely what happened this year, with New Jersey’s challenge to the Professional and Amateur Sports Protection Act of 1992 (PASPA) (28 USC section 3702). PASPA purported to prohibit states from authorising betting on sporting events, while including three ‘grandfathering’ clauses. These clauses authorised continued sports betting in those states in which it was already legalised and operated, or that enacted permissive legislation within one year of PASPA (28 USC section 3704(a)). Four states qualified for the exception: Delaware, Montana, Nevada and Oregon. Nevada was the only state to fully take advantage of the exception; the other three states’ exemptions were more limited.
New Jersey’s first attempt to invalidate PASPA was a 2012 statute that confronted PASPA’s sports wagering ban head on by affirmatively authorising state regulators to license casinos and racetracks to conduct sports betting. The state’s position was that PASPA was unconstitutional. The courts disagreed, invalidating New Jersey’s law (National Collegiate Athletic Association et al v Christie, 730 F3d 208 (3rd Cir 2013)). Smarting from that defeat, New Jersey’s second attempt was less direct. Rather than affirmatively authorising sports betting, New Jersey simply repealed its criminal prohibition against sports betting so that engaging in such activity would no longer be considered unlawful, but only if the betting took place at a licensed casino venue. That ‘partial repeal’ was also challenged and invalidated, a decision affirmed by the Third Circuit en banc. New Jersey sought US Supreme Court review, and the Court (somewhat surprisingly to most observers) agreed to hear the case.
The landscape for sports betting in the United States changed dramatically in 2018. After several attempts, the state of New Jersey succeeded in invalidating the federal sports-betting prohibition in PASPA. On 14 May 2018, the Court issued its decision on Murphy v NCAA (584 US ___ (2018)). By a 7-2 majority, the Court held that PASPA’s bar on states’ enactment of legislation authorising sports betting unconstitutionally ‘commandeered’ state legislatures into enforcing federal policy. A principle of US constitutional law known as the ‘anti-commandeering’ principle imposes limitations on the ability of the federal government to impose such obligations. As Justice Alito, the author of the opinion, colourfully put it:
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. A more direct affront to state sovereignty is not easy to imagine.
The Court, by a somewhat narrower 6:3 vote, also invalidated a separate provision of the statute that applied its prohibitions to private actors. The Court’s rationale in doing so was potentially significant. The Court noted the ‘general federal approach to gambling’, whereby conduct violates federal law ‘only if the underlying gambling is illegal under state law’. As the Court stated: ‘These provisions implement a coherent federal policy: They respect the policy choices of the people of each State on the controversial issue of gambling.’ Among the statutes cited in support of that statement was the Wire Act (18 USC section 1084).
The Wire Act has been understood as a potential barrier to online and mobile sports betting even if PASPA were invalidated. The Court’s characterisation, if understood seriously, would seem to indicate that the Wire Act should be construed narrowly not to interfere with states’ prerogatives to regulate sports betting within their borders, however they choose to do so. In the wake of the Supreme Court’s ruling, several states have moved aggressively to legalise sports betting, including mobile and online sports betting. To date, 15 jurisdictions - Arkansas, Delaware, Illinois, Indiana, Iowa, Mississippi, Montana, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Tennessee, West Virginia and the District of Columbia - have joined Nevada in authorising sports betting, although betting has not yet commenced in certain of those jurisdictions. (Nevada’s sports betting law predated the Court’s decision, as its activities were permissible under a ‘grandfathering’ provision in PASPA.) Of those, all but five - Arkansas, Mississippi, New Mexico, New York and Rhode Island - authorise mobile or online sports betting.
More than half of the remaining states, including California, are at least considering taking a similar step. Advocates argue that legalisation and regulation are necessary to protect consumers and the integrity of sports, as prohibition has simply driven sports betting underground where it cannot be monitored.
With respect to the Wire Act, the only federal courts of appeals to have considered the question concluded that the Wire Act applies only to gambling on sporting events or sporting contests. US v Lyons, 740 F3d 702, 718 (1st Cir), cert denied, 134 S Ct 2743 (2014); In re Mastercard Int’l, Inc, 313 F3d 257, 262 (5th Cir 2002).
However, in a November 2018 opinion (released in January 2019), the OLC - ostensibly at the request of the Criminal Division of the Department of Justice - revisited the 2011 Opinion’s conclusion that the Wire Act is limited to sports gambling. Despite a strong tradition of reticence in reversing prior precedent absent intervening developments, the OLC did just that. It concluded that the Wire Act applies to all types of gambling and is not limited to sports betting. This would include poker, casino and lottery games, in addition to sports. Horse racing also presumably would fall within the statute’s ambit, although it remains subject to a separate analysis due to the federal Interstate Horseracing Act.
State lotteries and gaming industry participants moved swiftly to challenge the OLC’s newfound position. On 15 February 2019, the New Hampshire Lottery Commission and NeoPollard Interactive LLC, a New Hampshire Lottery service provider, filed two separate lawsuits against the Department of Justice. The two lawsuits seek declaratory relief that the Wire Act ‘does not prohibit the use of a wire communication facility to transmit interstate commerce bets, wagers, receipts, money, credits, or any other information related to any type of gambling other than gaming on sports events or contests’. The US District Court for the District of New Hampshire consolidated the actions, and 14 states (including the District of Columbia) and an industry trade association joined as amici (non-parties permitted to file briefs and participate in argument). On 3 June 2019, the court entered an order rejecting the OLC position and holding that in its view the Wire Act only applies to sports betting. The ruling only applies to the New Hampshire Lottery and NeoPollard, as the plaintiffs in the case. As a result, the DoJ is technically able to seek a different ruling with different parties before a different court. Moreover, the government is almost certain to appeal the decision to the First Circuit; however, as of this writing, the DoJ has not publicly stated its next steps.
For quasi-gambling, notwithstanding 2015’s flurry of attorney-general activity, there is little case law addressing the legality of fantasy sports. In February 2016, the Judicial Panel on Multidistrict Litigation consolidated nearly 80 individual putative class actions against FanDuel and DraftKings. The class alleges, in part, that DFS constitute unlawful gambling. At the time of writing, the case remains in the early stages, with the most recent update being a December 2018 hearing, where the plaintiff’s attorney argued that FanDuel and DraftKings ‘chose to obscure the terms’ of the user agreement.
A court challenge to daily fantasy sports in New York has cast a cloud over its legality in that state. Individuals opposed to gambling filed suit in October 2018, arguing that the state’s authorisation of interactive fantasy sports contests violated the state constitution’s prohibition on gambling. The state supreme court - which is, confusingly, the state’s trial, not highest, court - sided with the plaintiffs. It reasoned: ‘[Interactive fantasy sports contests] involve, to a material degree, an element of chance, as the participants win or lose based on the actual statistical performance of groups of selected athletes in future events not under the contestants [players] control or influence.’ As a result, the court concluded, it cannot be authorised absent a voter referendum approving an amendment to the state constitution. New York has since appealed the court’s decision.
Other than the issues surrounding the legality of DFS discussed above, social casino games have seen a litany of litigation over the past few years. Each game challenged relies on the freemium model, whereby players can play for free or opt to spend real money to play more quickly or for other in-game perks, but not one of the games offers monetary or other ‘real-world’ prizes. The suits have all been predicated upon plaintiffs’ purported ‘losses’ stemming from amounts voluntarily spent to play the games. Claims have typically been brought under gambling loss recovery statutes, for common law unjust enrichment, and sometimes under the auspices of consumer protection or unfair trade practices laws.
Five have been dismissed. See:
- Mason v Machine Zone, 140 F Supp 3d 457 (D Md, 20 October 2015), aff’d 851 F3d 325 (4th Cir 2017);
- Ristic v Machine Zone, Case No. 15-cv-8996, 2016 WL 4987943 (ND Ill, 19 September 2016);
- Phillips v Double Down Interactive LLC, 173 F Supp 3d 731 (ND Ill, 25 March 2016);
- Dupee v Playtika Santa Monica, Case No. 1:15-cv-01021-CAB, 2016 WL 795857 (ND Ohio, 1 March 2016); and
- Soto v Sky Union LLC, 159 F Supp 3d 871 (ND Ill, 29 January 2016).
A sixth raising similar issues remains in early, procedural stages: Fleet v Trion Worlds Inc, Case No. C 15-04721 WHA, 2016 WL 122855 (ND Cal 12 January 2016).
Nevertheless, against that unbroken track record of dismissal, one contrary decision stands out - Kater v Churchill Downs Inc, which found that because virtual chips extend the ‘privilege of playing the game without charge’, they are a ‘thing of value’ under Washington state law. Because the virtual chips were a ‘thing of value’, the court found that the Big Fish social casino game fell within the state’s definition of gambling (Kater v Churchill Downs Inc, No. 16-35010, 2018 US App LEXIS 7739 (9th Cir 29 March 2018)).
The court’s analysis appears to have rested on the erroneous premise that users of Big Fish must purchase additional chips if they exhaust their initial supply and wish to continue playing. In fact, players receive periodic allotments of free chips with which to play, rendering any purchase unnecessary so long as the player is willing to wait the designated interval to resume play. The court noted the defendant’s assertion to that end but refused to consider it given the procedural posture of the case. (The case was before the court on defendant’s motion to dismiss. Typically, in considering such a motion, a court must accept the well-plead allegations of the plaintiff’s complaint as true.) The court remanded the case for further proceedings in the trial court. On 2 November 2018, the US district court for the Western District of Washington denied the defendant’s motion to compel arbitration. Following the Ninth Circuit’s decision in Kater, a number of lawsuits were filed against other social casino companies alleging that similar ‘freemium’ games also constitute unlawful gambling in Washington. Defendants in those cases filed for dismissal, which the Western District of Washington rejected in late 2018. The cases all remain pending as of this writing.
It is too early to tell how the Ninth Circuit’s decision will reverberate, if at all, with other courts, or, for that matter, whether the trial court, once a proper factual record is made, will rely on that full record to reach a different conclusion. How this plays out remains to be seen, but, for the moment, the Ninth Circuit’s unprecedented ruling appears to have created a new sense of uncertainty concerning the status of these games. In fact, in the wake of the decision, several additional suits have been filed against other social casino game operators, alleging that their games violate Washington state law.
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