Federal Sports Betting Proposals: The Sports Wagering Market Integrity Act of 2018

This alert is the seventh in a series of alerts discussing updates and potential developments in light of the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association. The first installment outlined the Murphy decision itself, and the second installment focused on potential state and federal legislation following Murphy. The third installment identified potential revenue opportunities that may emerge following Murphy. The fourth installment outlined risks related to money laundering and key aspects of an anti-money laundering compliance program as they apply to established businesses that may now expand into sports betting as well as to those that may be new entrants into the market post-Murphy. The fifth installment focused on the right to publicity in a post-Murphy landscape, where sportsbooks and sports betting platforms may seek to use athletes’ likenesses in connection with their enterprises, in light of the Indiana Supreme Court’s guidance in Daniels v. FanDuel, Inc. The sixth installment focused on the unique consumer data privacy issues that may arise in connection with legalized sports gambling post-Murphy. This installment analyzes the recently released proposed federal legislation regarding sports betting following Murphy.

The Supreme Court’s decision in Murphy v. National Collegiate Athletic Association (Murphy) invalidated the Professional and Amateur Sports Protection Act of 1992 (PAPSA), the federal legislation that effectively prohibited sports betting in the United States. Almost immediately following the Supreme Court’s decision in Murphy, former Senator Orrin Hatch (R-Utah), an original sponsor of PAPSA, indicated that he intended to introduce federal legislation governing sports betting to prevent a state-by-state approach, resulting in rampant cross-state betting with uneven enforcement resulting in a “patchwork race to the regulatory bottom.”¹ To date, seven states and the District of Columbia have legalized sports betting within their borders,² with more anticipated to follow.³ In the waning days of 2018 and the 115th Congress, Senators Hatch and Chuck Schumer (D-NY) introduced a federal sports betting bill entitled the “Sports Wagering Market Integrity Act of 2018” (the “Bill”).⁴ This alert analyzes key provisions of the Bill and its potential implications.

Implementation of Sports Wagering under the Proposed Bill

As outlined in the Bill’s findings, the proposed legislation seeks to strike a balance between allowing the continued regulation of sports betting at the state level while using federal regulation to “set standards for sports wagering and provide law enforcement with additional authority to target the illegal sports wagering market and bad actors in the growing legal sports wagering market.”

To that end, the Bill continues the broad prohibition on sports betting unless it is (1) conducted by a licensed sports wagering operator in a state that has laws permitting that activity or (2) conducted by an individual under state law allowing “social gambling” (i.e., as part of a social activity and not conducted as a business).

In a striking new requirement, states that have yet to legalize sports betting would be required to seek approval from the United States Attorney General before being able to establish a state sports wagering program. Under the proposed legislation, the Attorney General would be required to approve a state’s application for a sports wagering program if it includes a “full and complete description of the State sports wagering program” the State proposes to implement and meets certain standards outlined in the legislation, including the establishment of a state regulatory entity, specific limitations on the types and locations of wagering allowed, and assurance from the attorney general or chief legal officer of the state that the state’s laws are sufficient to carry out the state’s proposed sports wagering program. Notably, approval by the Attorney General would require a state to commit to prohibiting wagering on amateur athletic competitions and by certain groups of individuals based on age, affiliation, or potential conflict of interest. Any state sports wagering program approved by the United States Attorney General would have to be renewed every three years. These requirements may raise 10th Amendment concerns under the anti-commandeering doctrine. States may seek to challenge such requirements, asserting that such requirements improperly force states to adopt or enforce federal law.

To the extent a state has already authorized sports betting within its borders prior to enactment of the Bill, that state is exempt from the federal application procedures as outlined above. This may incentivize states to push through their own state legislation legalizing sports betting so as to avoid any further federal requirements, including the three-year renewal requirement. Indeed, the very introduction of a centralized approach to sports betting could spur an even wider patchwork of state regulatory framework governing sports betting.

Online Sports Wagering

In addition to in-person sports wagering, the proposed Bill permits states to authorize online and mobile app sports wagering, including intrastate sports wagering, in certain circumstances.⁵ Specifically, the legislation allows internet sports wagering for individuals located in a state with a wagering program and would also allow interstate sports wagering, but only with respect to individuals located in states that enter into an interstate sports wagering compact approved by the United States Attorney General. In order to enforce these limitations, the Bill mandates that online sports wagering platforms implement location verification methods. Most states engaged in sports betting already have geographic limitations in place, and many online and mobile sports wagering operators accordingly implement geolocation verification methods. Thus, the proposed federal approach would reinforce state regulations regarding intrastate sports wagering.

Official League Data Requirement

In response to concerns expressed by sports leagues, the Bill also mandates that, with respect to any sports wager accepted on or before December 31, 2024, a sports wagering operator must use official league data.⁶ The provision, though likely to find support from sports leagues and teams, many of whom have already entered into lucrative official data partnerships with casinos, may give rise to First Amendment concerns. Courts have generally found that entities such as fantasy sports providers need not provide compensation for use of such publicly available data in their fantasy games.⁷ Should the Bill become law, it may face similar challenges in court from sports betting operators unless leagues offer proprietary official league data uniquely packaged by the leagues.

The Wire Act

The Murphy decision led some to question whether the Supreme Court reinterpreted the applicability of the Wire Act, 18 U.S.C. § 1084, to interstate sports wagering in reaching its decision. In the majority opinion, Justice Alito cited other anti-gambling legislation, including the Wire Act, for the principle that relevant federal legislation does not render illegal conduct that has been permitted by valid state laws, suggesting to some that the Supreme Court did not see the Wire Act as a complete bar on interstate sports betting where sports betting is legal in the underlying states involved.⁸ In order to clear up any potential ambiguity, the Bill includes a section entitled “Wire Act Clarification and Authorization of Civil Enforcement,” which would revise the Wire Act to expressly permit interstate sports wagering under certain conditions where both states involved have entered into a sports wagering compact.⁹ The Bill creates a process for states to enforce violations of the Wire Act, representing a significant delegation of federal authority to states, though the federal government may intervene in these actions.¹⁰

In addition, the Bill amends the Wire Act’s provision regarding intermediate routing of electronic data, stating that intermediate routing of electronic data “shall not determine the location or locations in which a bet or wager, or information assisting in the placing of a bet or wager, is initiated, received, or otherwise made.” This provision would be of significant value to online sports wagering operators who may seek to route information outside a given state’s borders due to internal system requirements and could otherwise be considered to be conducting intrastate wagering activity.

The Bill also amends the Wire Act to include new provisions targeting unlicensed offshore sports wagering operators. Generally, these provisions permit enforcement actions against unlicensed international sports wagering operators seeking to accept bets from American bettors.

The revisions to the Wire Act come just as the Department of Justice released an updated opinion applying the prohibitions of the Wire Act to all online wagering and not just sports betting. One key implication of this updated opinion is that the DOJ could find all forms of online wagering illegal, including those that are wholly intrastate and permitted by state law. This new opinion will likely be tested in federal courts, creating even more uncertainty as to the interpretation of the Wire Act.

National Sports Wagering Clearinghouse

The Bill envisions the creation of an independent, non-profit organization, the National Sports Wagering Clearinghouse, with a wide-ranging set of responsibilities on behalf of operators, state regulators, law enforcement, and the public.¹¹ Specifically, the Bill designates the National Sports Wagering Clearinghouse to serve as an information center for market participants regarding sports wagering integrity, responsible betting, and responses to gambling disorders. The National Sports Wagering Clearinghouse would also receive reporting from sports wagering operators, including anonymized data and suspicious transaction reports, that it would in turn provide to state regulatory bodies and federal or state law enforcement authorities.

The Bill provides that the Attorney General, after seeking public comment, shall make an initial designation of the identity of the National Sports Wagering Clearinghouse. Such a designation will be reviewed at least every five years. The decision-making process behind the identity of the National Sports Wagering Clearinghouse is thus a political decision, based on the judgment of the Attorney General at the time, and may lead to some concerns from market participants.

Though the Bill contemplates significant oversight responsibilities for the National Sports Wagering Clearinghouse, the Bill suggests that Congress should not be the sole or primary source of funding to operate the National Sports Wagering Clearinghouse. Instead, the Bill states that the National Sports Wagering Clearinghouse “should primarily be funded through voluntary contributions by, or reasonable fees assessed by the National Sports Wagering Clearinghouse to participating entities, such as sports wagering operators, sports organizations, law enforcement, and State regulatory entities.”¹² The Bill also contemplates that other individuals who, in the judgment of the Attorney General, represent the interests of the public in the National Sports Wagering Clearinghouse may be invited to participate. This catch-all provision could allow for a more diverse set of participants, including members representing colleges and universities, the Olympics, and non-traditional sports. The efficacy of any federally created National Sports Wagering Clearinghouse would largely be left up to sports betting market participants, including operators, leagues, and states.

Sports Wagering Trust Fund

The Bill anticipates that the federal government will generate $12 million from the federal excise tax due to legalized sports wagering. The Bill contemplates that a portion of the funds collected as part of the federal excise tax will be transferred to a newly established Wagering Trust Fund.¹³ The Bill mandates that, of the revenue accumulated in the Wagering Trust Fund, at most $5 million be set aside for the Secretary of Health and Human Services to monitor gambling under the Public Health Service Act, as well as at most $3 million for the National Sports Wagering Clearinghouse, without further appropriation. To the extent it is determined that these specific efforts require more than $5 million and $3 million, respectively, Congress will need to authorize such expenditures.

Integrity

In order to preserve the integrity of sporting events, the Bill would also prohibit certain sports-related individuals from placing wagers involving sporting events with which these individuals are affiliated, such as athletes, coaches, officials, or affiliates of a players’ union.¹⁴ The Bill also contemplates the creation of a national self-exclusion list, through which an individual may restrict himself or herself from placing a sports wager.

As part of this larger effort to promote the integrity of sporting events in a post-Murphy landscape, the Bill also revises portions of the Sports Bribery Act.¹⁵ Specifically, the Bill adds extortion and blackmail to the list of prohibited activities that may influence a sporting event. The Bill also prohibits sports wagering based on non-public information in an effort to help safeguard against concerns of match-fixing. Finally, the Bill amends the Sports Bribery Act to increase protections for whistleblowers who inform law enforcement or other regulators of violations of the Act, such as match-fixing.

Books and Records Requirement

Consistent with other federal legislation and regulations, the Bill imposes specific recordkeeping requirements on sports wagering operators.¹⁶ Specifically, for wagers exceeding $10,000, sports wagering operators would generally be required to both secure and maintain: (1) personal identifying information pertaining to an individual bettors or prospective bettors, which the sports wagering operator must verify; (2) the amount and type of the sports wager; (3) the date and time at which the sports wager was placed or attempted to be placed; (4) the location at which the sports wager was placed or attempted to be placed, including any applicable IP address; and (5) the outcome of the sports wager. Sports wagering operators must also engage in suspicious-transaction reporting and provide appropriate suspicious-transaction reports to both state regulators and the National Sports Wagering Clearinghouse. Given the volume of personal information proposed to be collected, the Bill also requires that sports wagering operators and the relevant state regulator take “reasonable steps” to prevent unauthorized access to or dissemination of sports wagering and customer data.

The Bill also ensures that sports wagering operators are subject to certain provisions of the Bank Secrecy Act (BSA), 31 U.S.C. § 5311 et seq., dealing with anti-money laundering compliance. Although sports wagering is arguably already covered by BSA requirements applicable to casinos, the Bill amends the BSA to clarify that sports wagering operators will be treated the same as casinos, subject to certain anti-money laundering regulations, as outlined by O’Melveny here.

Consumer Protection Provisions

The Bill also contains limitations on the types of sports wagering that may be conducted for purposes of consumer protection.¹⁸ For example, the Bill generally prohibits sports wagering on amateur sports, though state regulatory entities may approve sports wagering on the Olympics, Paralympics, Pan-American Games, or intercollegiate sports. Moreover, the Bill prohibits participation in wagering activity by anyone under the age of 21.

Along these lines, the Bill devotes significant attention to consumer protection and ensuring that sports wagering operators implement appropriate safeguards. Under the Bill, sports wagering operators may not impose a minimum or maximum withdrawal limit for an individual bettor’s account or otherwise penalize a bettor for inactivity or rate of betting. Further, the Bill requires that sports wagering operators allocate a percentage of sports wagering revenue to treatment for gambling disorders and education on responsible gambling.

Conclusion

There remains much uncertainty as to the Bill’s path forward in the Senate. Senator Hatch has retired, and Senator Schumer will likely need to find a new co-sponsor for the Bill and reintroduce it in the new session of Congress. Lawmakers and market participants have also expressed concerns with the Bill. Rep. Dina Titus of Nevada stated that the Bill would “inject uncertainty into an established and regulated industry” and “risk causing bettors and operators to leave the regulated market.”¹⁹ The American Gaming Association cautioned that the Bill represents an “unprecedented and inappropriate expansion of federal involvement in the gaming industry.”²⁰ However, the Bill has garnered some support, including from the NFL. In a statement following the release of the Bill, the NFL cautioned that “[w]ithout continued federal guidance and oversight, we are concerned that sports leagues and state governments alone will not be able to fully protect the integrity of sports contents and guard against the harms Congress has long recognized as being associated with sports betting.”²¹

Though its passage is unlikely in the near-term, the Bill ignites further debate and discussion in Congress as to devising a federal approach to sports betting, particularly as state legislators across the country continue to push for legalized sports gambling within their borders. Though a healthy debate over the role of federal oversight is anticipated, at a minimum there seems to be a need for some legislative action to address certain areas of existing law to account for the changing legal landscape following Murphy, ranging from the Wire Act and Bank Secrecy Act requirements and regulation to federal legislation regarding official league data and intellectual property rights.