Hold Your Bets: Third Circuit Rejects Sports Betting Law

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Explore:  Sports Betting

The four major professional sports leagues and the NCAA (the leagues) scored a significant victory in September in their ongoing lawsuit to prevent legalized gambling in the state of New Jersey. In a 2–1 decision, the U.S. Court of Appeals for the Third Circuit upheld a district court ruling striking down the state’s law legalizing sports wagering because it conflicts with a federal ban. Governor Chris Christie and other New Jersey lawmakers, defenders of the state’s law, have vowed that they will continue pressing the lawsuit to the United States Supreme Court,. They took solace in a dissenting opinion that agreed with the state’s claim, but the leagues are odds-on favorites to preserve their win.

The case, NCAA v. Christie,1 involves the leagues’ joint effort to stop a New Jersey law, enacted in 2012, that would legalize sports betting at casinos and racetracks across the Garden State. Attorneys for the state have argued that the federal Professional and Amateur Sports Protection Act (PASPA), 28 U.S.C. §3702, which prohibits states from authorizing, operating or licensing sports betting, is unconstitutional because it commandeers state officials to enforce federal law in violation of the Tenth Amendment to the U.S. Constitution. The case brings the leagues’ longtime aversion to associations with gambling into direct conflict with New Jersey’s efforts to jump-start its sagging casino industry.

The outcome has drawn national interest from casino officials and political leaders in other states looking to expand their gambling operations. Under current federal law, Nevada is the lone state in the country permitted to maintain fully legalized sports wagering. But as states confront increasingly difficult economic circumstances, many states, including New York, have taken steps to legalize commercial gambling as a source of revenue. If New Jersey’s lawsuit were to succeed, sports wagering would immediately present another avenue for states looking to expand their tax revenue.

At the same time, the case also presents legal issues with national implications. Recently, four states – Georgia, Kansas, Virginia and West Virginia – filed amicus briefs joining New Jersey in urging the Third Circuit to rehear the case en banc based on their disagreement with the court’s Tenth Amendment commandeering analysis.2 These states argued that the Third Circuit’s decision upholding PASPA constitutes an encroachment upon state sovereignty that unfairly allows Congress to interfere in state activities. The Third Circuit declined to rehear the case in late November. In light of Governor Christie’s pledge to appeal the Third Circuit’s ruling, the case may be one of the next great federalism battles to reach the U.S. Supreme Court.

Law on Sports Betting

From the 1919 Black Sox scandal to Pete Rose’s lifetime ban from baseball and the imprisonment of former NBA referee Tim Donaghy, the leagues have long sought to distance themselves from the negative connotations of sports betting. In a continuing effort to preserve the integrity of the games, the leagues have been vigilant in taking steps to avoid any perception (or possibility) that games might be fixed — such as by declining to place a professional sports franchise in Las Vegas, where betting on sports is legal. But, as offshore Internet sports wagering and entirely legal fantasy sports games have risen in popularity, it has become more challenging for the leagues to portray the idea of wagering money on sports as outside the mainstream. Now, as states increasingly turn to legalized gambling as a source of revenue in difficult economic times, PASPA may represent the final barrier preventing the floodgates from bursting open.

Enacted in 1992, PASPA prohibits states from “sponsoring, operating, advertising or promoting … a lottery, sweepstakes, or other betting, gambling or wagering scheme based directly or indirectly … on one or more competitive games in which amateur or professional athletes participate … or on one or more performances of such athletes in such games” and moreover bans states from “licensing or authoriz[ing] by law or compact” any such gambling activities.

Although essentially designed to curtail sports gambling nationwide, PASPA included three exceptions to account for states in which legalized gambling was already permitted in some form. First, the law specifically permitted Nevada to continue its legalized sports gambling activities. Second, PASPA permitted Delaware, Oregon and Montana to continue their limited “sports lotteries” but not to legalize single game betting. Finally, in recognition of the state’s casino industry, the law authorized New Jersey, if it wished, to license sports wagering in Atlantic City casinos within one year of PASPA’s enactment.

New Jersey declined to legalize sports gambling during this window, but, by 2010, the views of New Jersey voters had — in the words of the state’s court filings — “evolved.” Voters passed a referendum amending the state’s Constitution to permit the legislature to authorize sports wagering in 2011. A year later, the state enacted the “Sports Wagering Law,” N.J.S.A. § 5:12A-1, which permits the state to license sports gambling in casinos and racetracks.

Shortly thereafter, the leagues sued Christie and other state officials and entities, claiming that the Sports Wagering Law was invalid in light of PASPA. The United States also intervened on behalf of the plaintiffs. After the district court issued a ruling in February 2013 agreeing with the leagues and striking down the New Jersey law, the defendants appealed to the Third Circuit.

Third Circuit Ruling

The Third Circuit began by finding that the leagues had standing to bring the lawsuit. The court focused on the fact that the Sports Wagering Law was directed at the leagues’ activities because it was designed to “use the Leagues’ games for profit.” The court also found that the leagues’ claim of a reputational harm caused by “their unwanted association with an activity they (and large portions of the public) disapprove of — gambling” — was valid. The court pointed to congressional reports and fan studies showing that associations with sports gambling harm the integrity of major sports in the eyes of fans. In light of clear evidence that “being associated with gambling is a stigmatizing label” that would “increase some fans’ ‘negative perceptions’” of the leagues, the court determined that the leagues could reasonably claim a reputational harm caused by the New Jersey law.

The court then analyzed the merits of the state’s arguments that Congress’ attempt to ban sports wagering in the states violates the Constitution. The court first dispensed with the state’s claim that the enactment of PASPA exceeded Congress’ authority under the Commerce Clause. The court concluded that it was “self-evident” that PASPA targeted economic activity that affects interstate commerce: “the operations of the Leagues are economic activities, as they preside essentially over for-profit entertainment.” Nor did the court have any doubt that sports and sports gambling are activities that “plainly transcend state boundaries and affect a fundamentally national industry.”

Next, the Third Circuit majority addressed the conflict between PASPA and the Sports Wagering Law. The court considered whether PASPA runs afoul of the Tenth Amendment’s anti-commandeering principle, which “bars Congress from conscripting the states into doing the work of federal officials.” The court upheld PASPA and found that the Sports Wagering Law must yield under the Supremacy Clause of the Constitution, because the New Jersey law “. . . is precisely what PASPA says the states may not do — a purported authorization by law of sports wagering.”

The court noted that in only two instances has the Supreme Court struck down federal statutes under the anti-commandeering principle. The court distinguished PASPA from the laws at issue in those cases — New York v. United States3 and Printz v. United States4 — finding that PASPA does not conscript or coerce states to act in a certain way; rather, PASPA merely prohibits states from authorizing sports gambling: “When Congress passes a law that operates via the Supremacy Clause to invalidate contrary state laws, it is not telling the states what to do, it is barring them from doing something they want to do.” As the court described in detail, such federal prohibitions on state officials have been consistently upheld in other cases.

Finally, the court addressed the state’s argument that PASPA violated the equal sovereignty of the states by singling out Nevada for special treatment. The court rejected this argument, recognizing that Congress’s exercise of the Commerce Clause power does not require geographic uniformity and, on the contrary, addressing matters of national concern “will necessarily affect states differently.” The court observed that the true purpose of PASPA was to stop the spread of legalized sports gambling, not to eliminate it where it already existed. The court noted that New Jersey could not articulate why its proposed solution — striking down PASPA and permitting sports gambling everywhere — was preferable to the much more limited solution of eliminating Nevada’s favored treatment and banning sports wagering nationwide.

The dissent, authored by Judge Thomas Vanaskie, took issue with the court’s reasoning on the commandeering issue. Relying primarily on New York v. United States and Printz, supra, the dissent stated that the key issue in the commandeering analysis is not whether a federal law commands states to take affirmative action or prohibits states from acting; rather, the issue is whether Congress’ objective is to “require states to regulate in a manner that effectuates federal policy.”

The dissent further noted that, as in New York and Printz, PASPA implicates political accountability concerns in that New Jersey citizens are likely to blame state officials for the lack of legalized sports wagering “even though state regulation of gambling has become a puppet of the federal government ….” The proper solution, suggested the dissent, is for the federal government to enact a regulatory scheme that directly governs sports gambling and with which states are required — or incentivized — to comply.

Instead, the dissent concluded, “PASPA provides no federal regulatory standards or requirements of its own” aside from prohibiting states from authorizing legalized sports gambling. In sum, Vanaskie argued that PASPA violates the Constitution because, rather than regulating commercial activity, the statute merely regulates “how states regulate sports gambling.”

Long Shot: Supreme Court

In the wake of the Third Circuit’s decision, New Jersey officials indicated that they intend to take the decision to the U.S. Supreme Court, if necessary5. Although New Jersey has yet to have a court rule in its favor in the case, a spokesman for Christie argued that the existence of a dissenting opinion adopting the state’s argument boosted the chance that the Supreme Court would agree to review the case.6

It is conceivable that many of New Jersey’s arguments would appeal to the conservative wing of the Supreme Court, which has aggressively defended states’ rights against federal encroachment and has closely scrutinized Congress’s use of the Commerce Clause. For now, legislators from New Jersey in Congress have sought to amend PASPA to add New Jersey to the list of states in which sports gambling is federally permitted,7 a course suggested by the Third Circuit at the close of its decision.

If PASPA is struck down, the landscape of sports gambling in the United States would be dramatically altered. Barring new legislation, states would be free to license and regulate sports gambling as they choose, and the leagues would be forced to confront a new reality in protecting the integrity of their sports. The leagues have succeeded to date, and, because the odds are always against Supreme Court review, New Jersey’s roll of the dice is a long shot.

Updated to reflect the U.S. Court of Appeals for the Third Circuit’s denial of a petition for rehearing en banc on November 15, 2013.

Reprinted with permission from the December 4, 2013 issue of the New York Law Journal. © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

1. __ F.3d __, 2013 WL 5184139 (3d Cir. Sept. 17, 2013).
2. Linda Chiem, “4 States Urge 3rd Circuit To Rehear NJ Betting Case,” Law360, available at http://www.law360.com/articles/486308 (last visited November 7, 2013).
3. 505 U.S. 144 (1992)
4. 521 U.S. 898 (1997)
5. See Harold Brubaker & Barbara Boyer, “Federal court rejects N.J. sports betting,” Phila. Inquirer (Sept. 19, 2013), available at: http://articles.philly.com/2013-09-19/news/42186690_1_atlantic-city-u-s-supreme-court-gambling (last visited Oct. 2, 2013).
6. See Associated Press, “Panel upholds anti-betting laws,” ESPN.com (Sept. 18, 2013), available at: http://espn.g o.com/espn/story/_/id/9684141/federal-court-denies-new-jersey-appeal-sports-betting-case (last visited Oct. 2, 2013).
7. See Brubaker & Boyer, supra note 4

Topics:  Sports Betting

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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