Prior to the Supreme Court’s landmark decision to legalize sports betting, the New Jersey argument that NJ sports betting was safe had a flaw.
The state claimed legal sports betting does not pose an integrity threat to sports teams, yet chose to exempt NJ colleges and universities from the games being offered to bettors by bookmakers.
It is perhaps facile to argue that there is not an integrity threat and that if there is, it is confined within the territorial boundaries of New Jersey. But the plaintiff sports leagues did not really hammer away at this mistake.
The idea that match-fixers are able to travel by any known mode of interstate transportation seemed to be problematic to the New Jersey decision.
The NJ sports betting story
Nonetheless, the exemption for in-state teams was in the original legislation from 2011-12, as well as the most recent NJ sports betting regulations which state:
“prohibited sports event” means any collegiate sport or athletic event that takes place in New Jersey or a sport or athletic event in which any New Jersey college team participates regardless of where the event takes place.
A “prohibited sports event” does not include the other games of a collegiate sport or athletic tournament in which a New Jersey college team participates, nor does it include any games of a collegiate tournament that occurs outside New Jersey even though some of the individual games or events are held in New Jersey.
A prohibited sports event includes all high school sports events, electronic sports, and competitive video games but does not include international sports events in which persons under age 18 make up a minority of the participants.
Other states like Mississippi and West Virginia chose to allow sports betting on in-state collegiate teams, likely for fear of missing out on heavy betting on local teams by local bettors.
Despite the ban on New Jersey operators accepting wagers on in-state teams, at least two have been fined for doing so. Both Caesars and Golden Nugget illegally accepted wagers during the college football season on Rutgers and Princeton games.
Who can blame the state for wanting to protect in-state teams from these imaginary New Jersey-centric integrity threats?
What is the Constitutional problem?
The Constitution was the result of a compromise among the 13 states. Without some give and take, the ratification of the Constitution would never have been possible.
The Commerce Clause of the Constitution plays two roles. The first is to regulate commerce between the states, including the instrumentalities of commerce like roads, rivers, and air travel.
The second role is to prevent states from passing laws that interfere with interstate commerce; this secondary role is called the Dormant Commerce Clause. The Supreme Court has said with regard to the Dormant Commerce Clause that there must be a balancing test applied when a state law favors a local interest that burdens interstate commerce:
Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.
State laws that prefer in-state interests over out-of-state interests are generally disfavored by federal courts and often invalidated.
What 30,000 gallons of grape wine have to do with sports betting
The First Circuit ruled in 2010 that a Massachusetts law requiring wine producers generating more than 30,000 gallons of grape wine annually to choose between their wine being distributed in MA liquor stores or sold directly to consumers only.
As Massachusetts is not known for its winemaking, these regulations disproportionately affected out-of-state winemakers, forcing them to choose one means of distribution while local vintners could sell via both outlets.
The First Circuit held that despite the statute being neutral on its face, the application of the statute disproportionately made its impact on out-of-state companies and, therefore, unconstitutionally burdened interstate commerce.
Split decision at the Supreme Court
More recently, the Supreme Court addressed the collection of state sales taxes against out-of-state retailers like Wayfair and Amazon in the case of South Dakota v. Wayfair.
In a 5-4 opinion, Justice Anthony Kennedy wrote for the majority that the collection of state sales taxes did not violate the Dormant Commerce Clause as the balancing test favored the state governments stating:
Helping respondents’ customers evade a lawful tax unfairly shifts an increased share of the taxes to those consumers who buy from competitors with a physical presence in the State.
It is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions. And it is also essential to the confidence placed in the Court’s Commerce Clause decisions.
By giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes, Quill’s physical presence rule has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.
What does this mean for sports betting?
What New Jersey has done is favor in-state teams over out-of-state teams. The question that a court will ask is whether there is a justification for favoring New Jersey college teams over teams outside of the state.
Any argument in favor of a need to protect NJ teams on the basis of integrity would seem to fall apart when minutes away by car, New Jersey residents can be in Philadelphia wagering at Pennsylvania-based sportsbooks on not only Rutgers games, but also on Villanova games.
But New Jersey teams seem to have a need for protection not felt in other jurisdictions, at least according to the 2018 New Jersey law. The exemption of in-state teams is bad for integrity as it confines money being bet on those teams primarily to the illegal market (or out-of-state), but it is also likely unconstitutional favoritism.
All or nothing?
There is either a justification for a total collegiate ban or no ban at all. If sports betting is interstate commerce, which the Supreme Court concluded it was, it is difficult for any argument to be advanced that exempting betting on New Jersey-based teams while allowing betting on out-of-state collegiate teams is not disparate treatment, which violates the dormant commerce clause.
Of course, New Jersey’s regulations might violate the Dormant Commerce Clause, but until someone challenges the statute, it is unlikely any change will come. However, when the time does come, the litigation is likely to deplete the state’s gains that it has made through taxing betting on out-of-state contests.
Making the case that New Jersey and any others considering exempting in-state colleges reverse such regulations prior to an expensive, drawn-out legal challenge.