Are Sports Betting Companies Catching A Free Ride From Leagues?

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Free riding sports betting

Even before the Supreme Court cleared the way for legalized sports betting to be left in the hands of state legislators, the dynamic duo of the National Basketball Association (NBA) and Major League Baseball (MLB) began to reposition the leagues, from staunch opponents to partners for a price.

The push for integrity fees has been well documented, as have NBA commissioner Adam Silver’s and MLB commissioner Rob Manfred’s contentions that the leagues they oversee are owed some type of compensation, whether a royalty fee, integrity fee, or any other fee moniker a well-paid public relations consultant comes up with.

Commissioners talk intellectual property

Beginning shortly after his 2014 New York Times op-ed, Silver has been positioning basketball games as some type of intellectual property, as noted in a previous article, this is likely a mischaracterization. In a 2015 interview with ESPN’s Steve Fainaru and Mark Fainaru-Wada, Silver was quoted as saying:

“To the extent that federal or state regulators are stepping in, my reaction is, that’s very positive, and we’d like to be part of those conversations. Because it’s ultimately our game, our intellectual property and most importantly, what’s at stake is the integrity of our game.”

This position has evolved to become slightly more explicit in an argument for direct compensation from those seeking to take bets in the legal market. Adam Silver was quoted on May 31 saying:

“We feel, just in the same way a musician that receives a royalty for the music that’s being played, that we should receive some sort of royalty,”

“So call it a royalty; call it an integrity fee. We will have additional expenses, and it’s ultimately our intellectual property and we ultimately believe we should be compensated for it.”

Silver’s compatriot in this pursuit, Rob Manfred was quoted, saying:

“We spend the money to produce the product. Gambling, sports betting operations are free-riding on that product. It’s our intellectual property at the end of the day.”

He again used “free ruding” in a recent interview.

Manfred’s statement about free-riding is an intriguing shift in messaging as it is a concept that sounds reasonable, but few have examined the feasibility of this claim.

What is free riding?

Mark Lemley, who is a near-lock first ballot intellectual property scholar hall of famer, wrote in 2004:

“[T]hose who “free ride”—obtain a benefit from someone else’s investment—are undermining the goals of the property system. The professed fear is that property owners won’t invest sufficient resources in their property if others can free ride on that investment….”

Lemley went on to state that courts look to determine whether a defendant is free-riding on the plaintiff’s information when the plaintiff has argued that the defendant is misappropriating their information.

The idea behind preventing free-riding is that the federal government seeks to encourage innovation and has created various statutes (even the Constitution protects intellectual property rights) to encourage creators to develop new inventions. The fear of the founders of the country was that if people were not allowed to restrict use of their processes, they would not have an incentive to continue inventing.

As the Ninth Circuit Court of Appeals stated, in 1948, the doctrine of free-riding is essentially designed to prevent imitators from “reaping where one has not sown,” or “riding the coat-tails,” of someone else’s work for a personal benefit.

While the doctrine of free-riding and the need to incentivize invention by preventing unauthorized use of intellectual property is an important policy objective,, not all use of data is subject to intellectual property protection. Indeed, the NBA previously made an argument in federal court that companies Motorola and STATS were free-riding on their intellectual property rights to disseminate scores from NBA games. The NBA lost.

A closer look at the cases

The NBA sued the technology company Motorola and data-company Sports Team Analysis and Tracking Systems (STATS) in 1996. The NBA argued Motorola’s Sport Trax pager’s “current mode” was facilitating the distribution of data from NBA games, which the league argued constituted the tort of misappropriation.

In current mode: “SportsTrax displays the following information on NBA games in progress: (i) the teams playing; (ii) score changes; (iii) the team in possession of the ball; (iv) whether the team is in the free-throw bonus; (v) the quarter of the game; and (vi) time remaining in the quarter. The information is updated every two to three minutes, with more frequent updates near the end of the first half and the end of the game. There is a lag of approximately two or three minutes between events in the game itself and when the information appears on the pager screen.”

The NBA relied on a Supreme Court case from 1918 to advance the argument that Motorola and STATS were misappropriating “hot news.” Court’s use a multi-pronged test to determine whether a defendant is misappropriating the plaintiff’s intellectual property, two of the prongs of the test ask about free-riding.

The first is whether the defendant’s use of information constitutes free-riding, meaning that the plaintiff put in effort into generating the information and the defendant is cutting out a part of the process and using the end result of the plaintiff’s process, depriving the plaintiff of the full benefit of their efforts in development. The second prong that references free-riding states: “the ability of other parties to free-ride on the efforts of the plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.”

The Second Circuit Court of Appeals found: “a lack of any free-riding by SportsTrax ….” The key to the Court in the case was that Motorola and STATS were collecting the stats themselves, they were not relying on official NBA statistics that they were then simply repackaging. The NBA; however, had another problem with their misappropriation claim, one that is likely still a problem, in order to prevail on a “hot-news” misappropriation claim a defendant needs to be “in direct competition with a product or service offered by the plaintiffs.”

What to make of all this?

The sports leagues’ argument that they are entitled to a fee of some sort for legalized sports betting is one of those statements that sounds reasonable until you begin to dig into what they are really asking for.

More than a lump sum payment, or a fixed percentage of the amount wagered, or even a percentage of bookmaker profits, what the leagues are seeking now is for the establishment of a property right in the games that they facilitate. The case law does not support a finding that the games themselves, or the scores of the games are protectable intellectual property rights. What the NBA and MLB are asking is for state legislatures to overrule judicial precedent.

When Silver said that the NBA feels the same as a musician who should receive a royalty, he is throwing out a false equivalency (much like daily fantasy sports companies who have compared the games to everything from spelling bees to milking cows, at this point I assume DFS has been compared to every activity that requires some modicum of skill). While music is protectable by copyright, sports games are not, only the broadcast is. What Silver is asking for would be the equivalent of paying a guitar maker a royalty for every song that includes a guitar.

There is no repeatable performance element, a fundamental requirement for a copyright. Copyrights protect things that are repeatable and the same each time, like music. No matter how many times you go to an NBA game you will never see the same game, ever.