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Saturday, November 26, 2016
Nevada's eSports Betting Scheme Not a Gamble Under PASPA

The inevitable partnership between eSports and the U.S. casino industry cleared another major hurdle earlier this month when the Nevada Gaming Control Board—the state agency which oversees the regulation and licensing of Nevada’s gaming industry—approved William Hill's and the Downtown Grand Hotel & Casino's application for a license to accept wagers on eSports tournaments, starting with the League of Legends Tournament at IEM Oakland. This represents the first time that wagering on eSports has been legally offered in the United States, and, given the trajectory of eSports, it certainly won’t be the last (especially in Nevada, where sports betting is legal and unencumbered by the Professional and Amateur Sports Protection Act [“PASPA”], the federal law which prevents states from licensing or authorizing sports wagering schemes).

Nevada is uniquely positioned to become the eSports betting capital of the United States, largely due to PASPA. Although PASPA prohibits States from authorizing or licensing betting or wagering schemes based, directly or indirectly, on one or more “competitive games” in which “amateur or professional athletes” participate, it also contains several exemptions from its application, the most important of which are two “grandfathering” provisions (28 U.S.C. §§ 3704(a)(1)-(2)) which preserve preexisting sports wagering schemes in Nevada, Delaware, Oregon, Montana, and “possibly a few other states.” (Senate Report 102-248, 102nd Cong., 1st Sess. 4, reprinted in 1992 U.S.C.C.A.N. 3553). But of the four states presently known to qualify for either of the exemptions, only Nevada has the ability to expand its sports betting offerings without limitation by virtue of § 3704(a)(2), whereas Delaware, Oregon and Montana can only offer those sports betting schemes that were actually in effect between 1976 and 1990 by virtue of § 3704(a)(1). Thus, even if it is determined that a video gamer is an “amateur or professional athlete” for purposes of triggering PASPA’s application, Nevada would still be entitled to offer eSports wagering by virtue of its unlimited exemption under § 3704(a)(2).

There is considerable confusion about the parameters of PASPA’s grandfathering provisions. A review of the statutory language and legislative history should clear that up. Paragraph (1) of subsection 3704(a) expressly provides that PASPA does not apply to any lottery, sweepstakes, or other betting, gambling, or wagering scheme in operation in a State or other governmental entity “to the extent” that such scheme was actually conducted by that State or other governmental entity” between January 1, 1976 and August 31, 1990. (28 U.S.C. § 3704(a)(1)). This “grandfathering” clause was intended to permit states like Delaware, Oregon and Montana to continue the limited “sports lotteries” that they had previously conducted (National Collegiate Athletic Ass’n, Inc. v. Christie, 730 F.3d 208, 216 (3d Cir. 2013)). The § 3704(a)(1) exemption, however, is limited to those sports wagering schemes that were in existence between January 1, 1976 and August 31, 1990, but only “to the extent” that they were actually conducted during that timeframe. This is the principal reason why Delaware, Oregon and Montana—while recognized as being “grandfathered” under PASPA—are nonetheless prohibited from authorizing single-game sports betting. Delaware and Oregon operated only “sports lotteries” (involving multi-game parlay bets) prior to August 31, 1990, whereas Montana operated a sports betting pool (known as “Montana Sports Action”) where the winner was determined by the performance of individual football players in games or professional stock car drivers in races. The exemption under § 3704(a)(1) preserved these sports lotteries and sports pools, but did not allow for any expansion beyond that. (Senate Report, at 10 [“paragraph (1)[a] does not intend to allow for the expansion of sports lotteries into head-to-head betting.”]).

The State of Delaware tested the limits of this exemption in 2009 when it attempted to expand its sports lottery (which had been limited to multi-game parlay bets on NFL teams) to include point-spread bets and “over/under” bets on major professional and college sporting events. In Office of the Commissioner of Baseball v. Markell, 579 F.3d 293 (3d Cir. 2009), the United States Court of Appeals for the Third Circuit held that Delaware’s proposed lottery expansion violated PASPA, as the exemption provided under § 3704(a)(1) for preexisting sports wagering schemes only applied “to the extent” that such schemes were actually conducted between January 1, 1976 and August 31, 1990. (Id. at 304). The Third Circuit explained that, “whatever the breadth of the lottery authorized by Delaware state law in 1976, PASPA requires us to determine ‘the extent’– or degree – to which such lottery was conducted.” (Id. at 309) (italics in original). The Third Circuit found that the only form of legal sports wagering “conducted” by Delaware between 1976 and 1990 involved multi-game parlay bets on NFL teams. Accordingly, the Court held that Delaware was barred from offering single-game sports betting since it had not conducted such wagering during § 3704(a)(1)'s relevant statutory timeframe. As a result of the Markell decision, Delaware’s version of legal sports betting remains limited to multi-game parlays involving only NFL teams.

The second relevant “grandfathering” exemption—paragraph (2) of subsection 3704(a)—provides that the PASPA prohibition does not apply to a lottery, sweepstakes, or other betting, gambling, or wagering scheme in operation in a state or other governmental entity where both (A) such scheme was authorized by a statute in effect as of October 2, 1991, and (B) such scheme actually was conducted in that state or other governmental entity during the period beginning September 1, 1989 and ending August 31, 1990, pursuant to the law of that state or other governmental entity. This “grandfathering” provision was intended to release Nevada from PASPA’s clutches. (See Christie I, 730 F.3d at 216). Under subparagraph (2), single-game wagering on sporting events was permitted to continue in Nevada because it was actually conducted in Nevada between September 1, 1989 and August 31, 1990 pursuant to Nevada state law. (Senate Report, at 10). PASPA’s legislative history reveals that the reason for the unique treatment of Nevada was to protect Nevada’s economy, although political considerations were also a factor. (138 Cong. Rec. S7274 & 7278 (daily ed. June 2, 1992) (statement of Sen. Hatch) (Congress had “no choice” but to grandfather in the four states in order to “resolve the problems surrounding getting an important bill like this through. . . . Compromise is frequently necessary around here, of course, in order to enact legislation.”). The Senate Judiciary Committee explained that it had no “desire to threaten the economy of Nevada, which over many decades has come to depend on legalized private gambling, including sports gambling, as an essential industry, or to prohibit lawful sports gambling schemes in other States that were in operation when the legislation was introduced.” (Id. at 8).

A key distinction between the two “grandfathering” provisions is that § 3704(a)(2) does not “freeze in time” the sports betting schemes that qualify for that exemption. This is in marked contrast to the paragraph (1) exemption, which, by virtue of the “to the extent” limiting language, prevents qualifying states from expanding their sports betting offerings beyond those actually conducted between 1976 and 1990. This is underscored by the Senate Report’s express acknowledgement that Nevada will be able to expand its sports betting options under the paragraph (2) exemption. The Senate Report clarifies that “[p]aragraph (2) is not intended to prevent Nevada from expanding its sports betting schemes into other sports so long as it was authorized by state law prior to the enactment of [PASPA].” (Id.). It also makes clear that “sports gambling covered by paragraph (2) can be conducted in any part of the state in any facility in that state, whether such facility is currently in existence.” (Id.). This explains why Nevada has been able to more than double the number of licensed sports books in the state since the 1992 enactment of PASPA. More importantly, it also explains why Nevada can offer eSports wagering, whereas Delaware, Montana Oregon and other states may not (barring, of course, a successful argument that PASPA does not apply to eSports competitions). Because it is the only state that is presently known to qualify for the § 3704(a)(2) exemption, Nevada will likely be able to monopolize the growing eSports wagering market until such time as PASPA is amended or repealed.

-- Daniel Wallach


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