Breaking Down The Federal Sports Betting Bill Discussion Draft: Part 1

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Sports betting

We are now more than six months past the day the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) of 1992. Shortly after the fall of PASPA, there were rumblings that the federal government was interested in legislating in the sports betting area.

There is currently a bill circulating in a discussion draft format that will likely be revised and redrafted numerous times before it ever gets passed, if it ever passes. Both the Wire Act and the Unlawful Internet Gambling Enforcement Act took years before they passed.

The following are some of the key portions and points I think are likely to be important as the discussion over the federal government’s role is discussed moving forward. Here is Part 1 of my insight:

The Findings Section

The proposed bill contains a number of “findings”. This section is used to lay out Congress’ reasons for passing the bill, and will be examined to determine the intent of legislators should a bill’s content be called into question by a court. Importantly, the draft document states:

“While each State may decide whether to permit sports wagering and how to regulate sports wagering, there is an important role for Congress in setting minimum standards for sports wagering that affects interstate commerce and providing law enforcement with additional authority to target the illegal sports wagering market and bad actors in the growing legal sports wagering market.”

This section effectively means that Congress intends to use the power of the commerce clause (the same constitutional device used to enact PASPA) to regulate minimum standards for sports betting.

As Justice Clarence Thomas articulated in the Murphy v. NCAA decision, and I have suggested separately, it is perhaps possible to construct sports betting that does not impact interstate commerce. But the language here does not appear to presuppose that betting is interstate commerce.

Instead, the legislation only applies to wagering that affects interstate commerce. This will still impact most betting legislation.

The Definitions Section

This section of legislation is normally pretty mundane, unless there is a dispute over whether an activity is incorporated. There are a few items worth noting in the draft legislation, with the first being a definition for the Interstate Sports Wagering Compact and National Sports Wagering Clearinghouse, which are two terms that are new and do not appear elsewhere in any other Federal legislation.

This section also defines sports wager as:

While inclusion of these definitions is meaningful, it is the inclusion of exchange wagering here that is potentially impactful, as exchange-based wagering in particular is an activity that rides the fence between financial regulations and gambling.

While the definitions section is interesting, it is what is missing that catches my attention. There is no definition of sport. This is potentially significant for esports, as it is not immediately clear if this legislation impacts esports betting.

Title I – Sports Wagering

The first substantive section of the legislation is titled Sports Wagering and creates a federal civil prohibition on anyone accepting a sports wager.

That is not insignificant. The statute excepts transactions that are lawful under state law, including social gambling laws. This section contains no criminal penalties as drafted, only civil penalties up to the greater of $10,000 or three times the amount of the applicable sports wager.

Section 102 – State Sports Wagering Program

States seeking to offer a sports wagering scheme would be required to submit an application to the Attorney General showing:

(A) a full and complete description of the State sports wagering program the State proposes to administer under State law, including—

(i) each applicable State law relating to sports wagering; and

(ii) an identification of the State regulatory entity; and

(B) an assurance from the Attorney General or chief legal officer of the State that the laws of the State provide adequate authority to carry out the proposed State sports wagering program.

The key hangup that might potentially arise would be if the Attorney General denies an application. The federal government appears to be attempting to do what it did not do under PASPA: create a federal regulatory body capable of overseeing sports wagering.

There are likely questions that will arise regarding to what extent the federal government can get states to come on board, without commandeering the states as occurred under PASPA. With that said, the federal government sets minimum standards in a variety of other areas (e.g. environmental standards.) It is possible that a court could find this system analogous and thereby allowable.

Section 103 – State Sports Wagering Program Standards

This section of the legislation lays out some minimums, including the requirements of mandated location verification if a state offers internet wagering, as well as bans on wagers on certain amateur events. The bill also proposes a requirement that there be a mechanism to request restricting wagers, something that is presently available in Nevada.

This section further provides for a standard for:

  1. A minimum age for sports bettors – though the section does not directly establish one
  2. A national self-exclusion list
  1. A similar ban on employees of players or referee unions

Data requirements important to the sports betting draft

This section also contains the official data requirements. This requirement is almost certain to create litigation if it were to remain, but there is a sunset clause which would only require use of official data only until December 31, 2022.

This type of inclusion might be the result of some concession to sports leagues, but still raises questions about whether Congress has the power to mandate and grant preference to one sort of data over others, while seemingly recognizing viable alternatives.

The proposed bill requires books to meet certain reserve requirements and avoid targeting individuals with problem gambling tendencies or those below the legal age to wager.

Trouble for DFS companies?

One aspect of the bill likely to be overlooked is contained on page 14. It appears that both FanDuel and DraftKings may be deemed unsuitable for a license under the proposed legislation as they have operated in Texas, despite the determination that DFS is a form of illegal gambling.

There are also potential issues given the offering of single-event DFS contests. Those in violation of the provision below would be deemed unsuitable for a license under the federal scheme:

(v) on or after October 13, 2006—

(I) has knowingly participated in, or should have known the prospective sports wagering operator was participating in, an illegal internet gambling activity, including—

(aa) taking an illegal internet wager;

(bb) payment of winnings on an illegal internet wager;

(cc) promotion through advertising of an illegal internet gambling website or service; or

(dd) collection of any payment on behalf of an entity operating an illegal internet gambling website; or

(II) has knowingly been owned, operated, managed, or employed by, or should have known the prospective sports wagering operator was owned, operated, managed, or employed by, any person who was knowingly participating in, or should have known the person was participating in, an illegal internet gambling activity, including an activity described in items (aa) through (dd) of subclause (I).

This section contains a number of best practices-type requirements and supplements requirements, such as financial reporting and reporting of suspicious transaction mandates, as well as establishes monitoring, enforcement, and sharing of real-time data requirements.

The bill also appears to put some teeth behind sports protection, requiring cooperation by sportsbook operators and state regulators. However, it seems to miss a key component of protecting sport integrity, as it does not include a mandate that sports organizations cooperate similarly.

In Part 2 …

We’ll pick up tomorrow with anti-money laundering provisions and a few other key sections of the bill.