A royalty? More like a tax

When They Say Integrity Fee, Are Pro Sports Leagues Really Asking For A Private Tax?

Integrity fee

Since January, some professional sports leagues, most notably the National Basketball Association (NBA) and Major League Baseball (MLB), have sought payment from states who seek to license sports betting. The first utterance of an integrity fee appeared in an Indiana House Bill:

A sports wagering operator shall remit to a sports governing body that has provided notice to the commission under section 2 of this chapter an integrity fee of one percent (1%) of the amount wagered on the sports governing body’s sporting events. The sports wagering operator shall remit integrity fees to the sports governing body at least once per calendar quarter.

While the leagues have largely failed to articulate what an integrity fee would pay for, it could conceivably be tied to fund investigations of corruption related to gambling. To date, the leagues have failed to provide an accounting that would justify any fee, let alone a fee such as 1 percent of the handle.

Is there really any more threat than before?

The sports leagues established security departments that operated since before the PASPA decision in Murphy, which allowed the leagues to investigate a variety of allegations of impropriety, including maintaining relationships with bookmakers so that they are aware of irregularities in the betting market.

What remains unclear is if there is any greater threat in a legalized betting market that would necessitate increased costs. While not supported to date by the leagues’ filings at the state or federal level, it is not beyond the realm of possibilities that there could be legitimate expenses that leagues incur as a result of legalized sports betting.

A little over a month after the integrity fee surfaced in Indiana, the sports leagues were asking for a reduced fee in New York, now 0.25 percent of the handle. The inclusion of the reduced fee, again, did not specify a required use for the funds that would be directed toward the leagues. Like the bill in Indiana, it failed to pass.

The marketing shift: a royalty

In May, New York Assemblyman Gary Pretlow began referring to the previously named integrity fee as a royalty, in a revised piece of legislation. The fee remained the same, but Pretlow changed its designation.

Following reports by a variety of different research agencies that saw projected revenue for the leagues increase as a result of the potential widespread legalization of sports betting, MLB representatives began referring to the fee they would receive as a royalty, as opposed to an integrity fee.

MLB Executive Vice President Kenny Gersh argued for a royalty at the 2018 Global Gaming Expo, stating that:

“If the Yankees weren’t playing the Red Sox last night, the casinos don’t have that game to offer bets on.”

NBA on board with royalty as well

This position echoed NBA General Counsel Dan Spillane, who according to CDC Gaming Reports reported as early as April, that the NBA “doesn’t call it an integrity fee.”

Spillane continued at the National Indian Gaming Association convention:

“It’s a royalty in a way … These are our games. (They) are the backbone of the whole business of sports betting, and we think it makes sense for us to be compensated. We’ve invested billions of dollars in creating this product. You can’t have sports betting without our game. We generate a lot of fan interest … that translates into people participating in sports betting. We think it’s reasonable for us to be compensated for that input just like every other supplier.”

NBA Commissioner Adam Silver then went back to the term integrity-fee in October of 2018, stating on ESPN Radio:

“I think when there’s been discussion about an integrity fee that we’ve proposed to state legislature — and we haven’t gotten a great response to that — and some people say ‘why are you calling it an integrity fee?’

And my view is once we have all that additional information, we’re going to have significant additional costs, because we need to monitor that information, we need to monitor line movements we need to monitor aberrational bets on games, things that we have learned from international soccer, that operates in a legal jurisdiction.”

The interview with Silver occurred one day after Spillane said what the leagues want is a royalty.

What exactly is a royalty?

An “integrity fee” is a fictional moniker created to justify a payment for something that the NBA and MLB believe they are entitled to. A royalty, by contrast, is a term of art, which has a very specific meaning in law.

The Law Dictionary definition of royalty:

“A payment reserved by the grantor of a patent, lease of a mine, or similar right, and payable proportionately to the use made of the right by the grantee.”

“Royalty also sometimes means a payment which is made to an author or composer by an assignee or licensee in respect of each copy of his work which is sold, or to an in-ventor in respect of each article sold under the patent.”

The term “royalty” was interpreted by the First Circuit Court of Appeals in 1903 in Western Union Telephone Company v. American Bell Telephone Company, to mean:

‘Royalty.’ In its more ordinary meaning, it would not literally include the shares of stock for which an accounting is demanded. In some of its uses it is a broader word than ‘rentals,’ and yet in other aspects ‘rentals’ is a broader word than ‘royalties.’ Rentals in their ordinary signification are not limited as royalties in their ordinary signification; that is, to something proportionate to the use of the patented device. The word ‘ordinarily’ means specific sums paid annually, or at other stated periods, for the right to use a patented device, whether it is used much or little or not at all.

So are they asking for a royalty?

Contrary to the NBA and MLB’s executives’ assertions, what they are asking for is most certainly not a royalty. Royalties are attached to the right to use something that belongs to someone else; normally, that’s intellectual property.

At Legal Sports Report, we have examined at length the argument that the sports leagues have an intellectual property interest in the information used by gambling operators. That argument is not supported by precedent outside of extremely narrow circumstances.

As absurd as the term integrity fee might have been, it was likely more accurate than a request for a royalty, which, short of states mandating the use of official league trademarks and mandating the use of league logos, the leagues would likely not be entitled to.

If it isn’t a royalty, what are the leagues asking for?

What the NBA and MLB appear to be asking for is a private tax, one that requires the government to impose a fee on operators for the use of information derived from games produced by professional and amateur sports leagues.

A royalty, by definition, has a connection to ownership of rights in intellectual or physical property, and a tax is most often connected with a service. While far less catchy than ‘integrity fee,’ private tax is a more accurate term for what the sports leagues are requesting, though likely less popular with state legislators and citizens.

John Holden
- John Holden J.D. / Ph.D. is an academic. His research focuses on policy issues surrounding sports corruption.