Tribes, cardroom and racetracks should get on the same page for CA sports betting
Legal Sports Report

California Sports Betting Faces Tough But Not Impossible Road

California is the fifth largest economy in the world — if you carved it out of the US — but is still in the 20th Century regarding gambling regulation.

With a projected first-year tax revenue of $100 million, one would think that California would want to have sports betting legalized as quickly as possible. But…it could be at least five years, if not longer, before sports betting is legalized in the state.

Much of the problem is the lack of understanding of the territory, and how the stakeholders interact with each other and the state government. Hopefully this article will clear some of the smoke from the room.

As this is the second industry this decade that has flipped from illegal to regulated, California already has some experience in that regard. I’ll try to decipher here what the issues are, in the hope that better understanding of those issues will help get to a win/win for all parties involved as efficiently as possible.

The lay of the land for California sports betting

Current stakeholders in CA gaming include these three entities:

The cardrooms

Cardrooms have been legal since 1936 (draw poker; hold’em and other poker games were held to be legal in 1987, player-banked table games were legal in 1988). In all three instances, the cardrooms had to go to court, challenge the state’s gambling statute, and win.

They are subject to state regulation, which has been criticized (and justly so, in my opinion) by tribal gaming interests. They are a politically powerful enough group, but pale by comparison to the political power that the tribes have in California.

Tribal gaming

Tribes originally offered bingo, then after winning the landmark Cabazon case in 1987, which led to the Indian Gaming Regulatory Act, moved on to slot machines, player-banked table games involving cards (house-banked card games in 1993), and eventually went to the electorate to have their casinos fully legal in 2000. The ballot initiative, Prop 1A, amended the California Constitution as follows:

The Legislature has no power to authorize, and shall prohibit, casinos of the type currently operating in Nevada and New Jersey. (Art. IV, Sec. 19 (e))

The tribes (or rather, their attorneys and lobbyists) have interpreted this to mean that they have a monopoly on anything which could be offered in a casino, which would include sports betting. 

Racetracks

While horse racing is generally considered to be a mature industry, with two major tracks closing in the last ten years because the land was more valuable put to housing and other uses, it is still a popular pastime for many in California, and the horsemen have political clout as well.

How they all intersect

As one would expect, the three stakeholders don’t like each other.

The real stakeholders, of course, are the people of California, who would likely see tax revenues approaching $100 million in the first year of operation, and upwards of that as the market matures.

However, the CA state budget is about $180 billion a year, so everything is relative. One would think there’s enough money to go around this time, which wasn’t the case with online poker, which a minority of California tribes managed to defeat in the legislature over a nine-year (and counting) period.

A brief legislative history of sports betting in California

Sports betting has been discussed in the legislature for almost two years now. Early in 2016, Assemblyman Adam Gray (D-Merced), who is also chair of the Assembly’s Governmental Organizational Committee (which oversees, among other things, gambling in the state) introduced AB 1573, which would create a framework for offering sports betting.

The bill was fairly vanilla in terms of regulation: service providers licensing with a stakeholder to provide services. For many reasons, including the federal sports betting ban was intract at the time, the bill never got past a reading, nor was there any sort of informational hearing on the matter.

Assemblyman Gray returned in 2017 with ACA 18, which would change the California Constitution to allow the legislature to regulate sports betting. This also went nowhere, although it’s interesting to note that Gray may or may not have had his timeline backwards.

Generally, with regards to gaming expansion in California, you need the electorate to approve a ballot proposal first, then the legislature would write and approve regulations for it. There may or may not be a suggestion here that lawmakers thought it initially wouldn’t need voter approval to promulgate sports betting regulations.

Changing the constitution?

Finally, a group called “Californians For Sports Betting” announced it would be trying to get an initiative on the 2020 ballot which would repeal the aforementioned clause approved by the electorate in 2000.

The first ballot proposal sought to strike down Article IV, Sec 19 (e) of the California Constitution. I originally thought this ballot proposal was sponsored by a sportsbook, because no one with knowledge of how California politics works would understand that the tribes would spend upwards of $100 million, and not batting an eye writing the checks, to defeat this measure and protect their property interests.

What this accomplished was the following:

  • It irritated the tribes so much, they used their political power to have any hearings canceled on the matter, thus effectively killing any legislation for 2018.
  • The measure also annoyed the cardroom industry, because it preempted anything they were trying to accomplish with sports betting, and because many tribes (wrongly) would think the cardrooms were behind the bill (they weren’t). There’s not a lot of trust right now between the cardrooms and the sportsbook operators.

There’s a fear among both some tribes and some cardroom operators that the sportsbooks could just sweep in and dominate the gaming industry, and want to know more before deciding how to proceed. Whether that fear is rationally based isn’t relevant.

A rewrite of the ballot measure

The promoters did rewrite the initiative a couple of months later, which left Art IV, Sec 19 (e) unchanged, but restricting the governor from negotiating compacts with tribes who want to conduct off-reservation gaming (which many tribes probably would support), and directly authorizing the legislature to regulate sports betting, in the manner proposed by Gray’s 2016 AB 1573.

So, the current version of the ballot initiative looks more like it was written by a party with some sophistication as to how gaming works in California, or at least got some help on the issue.

Finally, I would expect some version of the previous ACA 18 or AB 1573, or perhaps both, to reappear shortly after the legislature reconvenes after the holidays.

Who will get to divide the money, and when?

The stumbling block in all of this is an unnecessary battle as to who gets to own the game.

The tribes originally tried to play the monopoly card, but realizing that the tracks are just too strong to be excluded, enlisted them in an alliance against the cardrooms.

Moreover, it’s not a good look to say you’re against sports betting, as some tribes and tribal advocates have stated, when you’re not only remodeling your unprofitable off-track-betting facility, you’re advertising the reopening of it as well. In fairness, tribal interests aren’t necessarily aligned on this issue, depending on the tribe. As you’re going to see, there’s going to be something here for everyone who’s invested in this to hate.

The biggest problem, as I see California, is that you have two major entities who operate gaming businesses with substantial political power, but really don’t understand either gaming nor the casino business.

Cardrooms and tribes stand to benefit

Cardrooms can’t have any interest in the outcome of any deal in their cardroom. Moreover, although some operators fantasize about being able to bank their own games (and hence eliminate the (Third-Party Providers of Proposition Player Services or TPPPS), the reality is that particular learning curve is going to be steep and likely very expensive. Game protection is a totally different animal when it’s your bankroll at stake.

Tribal members get a check, and if they’re lucky, a healthy check, each month from gaming revenues, but don’t really understand how that check is generated. So, you have two related, regulated industries which are essentially mom and pop businesses, no matter the size of them, that generally rely on others to advise them how to run their businesses.

The tribes generally are happy with the status quo and leary of anything but, and that’s certainly understandable.

There are no visionary Jack Binion or Terry Lanni clones in tribal gaming or the cardroom industry. What confusion which comes from that is certainly understandable. Unfortunately, this brings in a number of actors that don’t always have their clients or investors best interests at heart.

No shortage of unsympathetic parties

The tribes, for the most part, rely on their corporate attorneys and lobbyists, who, for the most part, oblige them by treating them like ATM machines, selling unneeded, unnecessary, and most importantly, unwinnable conflict.

The most recent development is a lawsuit filed last month by two Southern California tribes against a number of cardrooms, asserting they are running banked table games in violation of their so-called monopoly on table games.

The first problem is that if this is true, they’re suing the wrong people; their beef is with the state. The second problem is that if you are going to sue the State over breach of compact (the proper filing and cause of action here), that lawsuit necessarily is heard in federal court. As there’s a failure to join a necessary party to the litigation (the State of California) which likely won’t consent to be sued in state court, the most likely result is probably that the matter will be dismissed on procedural grounds.

Effective regulation?

On the other hand, you have a number of “old school” cardroom investors who keep score by not how much they can make, but by how much they can get over. You have a couple of operators who frankly should not, in my view, hold gaming licenses, and the tribes’ complaints to the state about their inability to regulate (read “discipline”) these operators is a legitimate one.

It also fairly begs the question whether or not the state is properly equipped to actually enforce bad behavior (as opposed to letting the miscreants write a check to “settle” the accusations). If they can’t revoke a licensee for egregious anti-money laundering violations, it makes one wonder if they can fairly regulate a business which handles substantially more cash.

The tribes have fought the cardrooms for a number of years on the so-called player-banked game issue. Cardrooms, due to California law, can offer table games, as long as the players bank the games and not the house. Services called TPPPS will bank the games when no one wants to. The existence of these companies is at root the heart and soul of the beef the tribes have with the state.

They assert that they have a “monopoly” on table games and slot machines, where the reality is they probably have neither. They know this, too. For years, they have threatened all kinds of litigation.

The problem is, any litigation against the State of California would necessarily take place in federal court, and not state. Why is this important? With a US District Court judge, which is an appointed for life position, the ruling is going to be on the law, and just the law, instead of the political triangulation elected state court judges frequently offer as a guise to interpreting the law.

To get past motion in federal court, you’re going to have to prove you’ve been injured; in other words, you’re going to have to prove you actually have a monopoly. Hanging your hat on a vaguely written section of the state constitution is a surefire way to jeopardize what monopoly may exist in your own mind.

While courts have used the word “monopoly” in their opinions regarding tribal gaming in California, there has been no explicit grant of a monopoly by the electorate. The constitutionality of Art IV Sec 19 (e) has never been challenged, in my view the clause is murky, especially in light that the tribes could have choosen more direct language in writing the ballot proposal.

Moreover, in the litigation which has previously taken place, it has been by individual members of tribes suing as individuals, using some creative methods for getting their grievances aired in (state) court. So, looking at things from a purely historical manner, the tribes probably know exactly where they’re at with all of this.

The reality for CA sports betting

There are four issues that are real and static.

The convenience factor

First, cardroom customers are almost invariably customers of convenience. Think about the person who’d rather shop at 7-Eleven (poor selection, high prices) than the Safeway, because the 7-Eleven is across the street and he has to drive ten minutes to the Safeway.

Most gamblers just want to be in action as soon as possible. That’s why a gambler who lives in Alhambra, east of downtown Los Angeles, which is maybe 45 minutes from San Manuel, one of the best locals casinos anywhere, would rather drive the 15 minutes to Commerce Casino, even though the amenities are inferior and the cost of gambling is much higher.

As such, even if some of the table games went away tomorrow, the cardroom customer would likely just go back to playing the traditional player-banked games (i.e. Pai gow tiles, Pai gow poker, etc) or poker. Yes, cardroom revenues would decrease somewhat but the tribes would get very little of that. Certainly not any the millions they’ve invested with the lawyers and lobbyists on this particular issue so far, for sure.

Geography

Second, the real complaint that the tribes have with the cardrooms on sports betting, is about the real estate. The cardrooms, which the larger ones are almost exclusively in metropolitan areas, the real estate favors the cardrooms.

With any introduction of sports betting, it is likely the path will duplicate what some other jurisdictions have done previously: roll out the product as land-based only to start. This is concerning to the tribes, but perhaps they have no reason to be concerned.

Let’s take the person who lives in West LA, would he prefer to drive 20-30 minutes to Hollywood Park (or a little longer to Gardena or the Bicycle Casino in Bell Gardens) or at least double that time to San Manuel, Pechanga or Chumash to make a bet?

This isn’t really business the tribes are getting anyway, and you’re almost certainly losing business because of it. Very similar to the table games issue, in my view.

What’s the plan?

Third, it’s pretty clear the sportsbooks don’t have a plan for California, at least yet. Exhibit A would be the first ill-advised ballot proposition, which effectively killed any chance of getting the matter to the voters in 2018, and certainly didn’t help things for 2020 and perhaps beyond.

Some European operators are online only; the thought of doing retail (walkup, traditional) mortifies some of them. However, they are also natural partners for the cardrooms, as in any legislation that goes through, the cardrooms likely wouldn’t be able to take bets themselves, and would be consigned to charging rent to their operator-tenant.

So, some of this delay in the process is technology-driven, or rather the inability of some modern online operators to operate a “traditional” sportsbook. However, some operators have walkup books in Nevada, the UK, and other jurisdictions and can certainly use their experience to a competitive advantage if and when California opens for business.

Finally, and most importantly in my view, unlike the struggle to get online poker legalized, there’s more than enough money to go around. Pretax revenue for a mature California market, retail books only, has been estimated to approach $1 billion, or roughly 40 times what online poker was estimated to bring in.

At a ten percent tax rate, which is a reasonable one for all parties involved, tax revenue could approach $100 million.

Suggestion box

While the legislature has traditionally deferred to the stakeholders to hammer out their own deal and get back to them, perhaps its time for the legislature to legislate more aggressively instead of defer, because of the amount of potential tax revenue involved.

As stated in the beginning, the real stakeholders in this are the people of the State of California, and as such they’re owed a duty by the people who represent them in Sacramento to get this matter to ballot as efficiently as possible. Especially as there will be layers in this, because of the underlying previous disputes, the legislature would be well advised to be more proactive this time around.

Vincent Oliver
- Vincent Oliver is an attorney whose primary area of practice is gaming law with emphasis on development and emerging markets. He is a member of the California bar and consults with clients in CA, NV and FL. He is based alternatively in Los Angeles and Las Vegas, and can be reached at [email protected]

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