Hold Your Bets: Third Circuit Rejects Sports Betting Law

, New York Law Journal

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Ronald S. Katz
Ronald S. Katz

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 petitioned to have the case reheard en banc by the Third Circuit and have vowed that they will continue pressing the lawsuit to the U.S. Supreme Court, if necessary. 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 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 argue that the Third Circuit's decision upholding PASPA constitutes an encroachment upon state sovereignty that unfairly allows Congress to interfere in state activities. In light of 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."

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