So Who Are These Supposed Bad Actors And What Should We Do With Them?

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Bad actor

Illinois has recently been struggling with how to handle a situation involving two daily fantasy sports providers with gambling ambitions.

Both operated in the state in direct contravention of Attorney General Lisa Madigan’s 2015 determination that FanDuel and DraftKings contests offered in Illinois constituted illegal gambling.

The Illinois bill is proposing a so-called “penalty box” (naming it this suggests it is a punitive measure and is poor legislative drafting because words matter, and deeming this a punishment as opposed to a compliance provision is legally significant.) What we are really talking about is the so-called bad actor provisions.

Bad actor provisions are commonplace in many types of regulations, but perhaps most often associated with financial regulation. The Securities Act of 1933 devotes Rule 506 to addressing individuals who are classified as bad actors, making those individuals ineligible to engage in certain transactions or hold certain positions.  

Why the bad actor controversy in Illinois?

Most of the blame likely lies with Illinois itself. Part of the problem is the structuring and language of the bad actor provision such that it intentionally targets two companies.

The second part of the problem lies with Illinois’ nonenforcement of their existing gambling laws.

Adding to the fire around this subject is a 2014 opinion on bad actor clauses contained in California online poker legislation that purportedly could be read to specifically target certain companies.

It comes from Harvard Law Professor and Constitutional law expert Lawrence Tribe. His counterpart in gaming law, I. Nelson Rose, disagreed with Tribe’s assessment, arguing that the California provisions did not violate the Constitution and were a lawful exercise of the state’s police powers.

Who is a bad actor anyway?

A recent article on The Chronicle noted the ubiquity of the term. The article traces modern uses of the term back to the 1700s (it has also been associated with aggressive unbroken horses for some time.)

But the way we commonly think of bad actors is as companies or individuals who have been found in violation of certain regulations or laws who are subsequently precluded from entering markets, often in heavily regulated industries.

The Securities Act of 1933 was amended by Dodd-Frank legislation to include disqualifications for bad actors and is perhaps the best-known use of these provisions. What is now Rule 506 disqualifies any company from raising capital (an essential of operating a business) if any “officer, director, promoter or beneficial owner of 20% or more of its equity is a ‘Bad Actor’.”

As mentioned in a white paper authored for FanDuel by law firm Jenner and Block, Nevada has had a bad actor provision in their online gaming licensing regulations since 2013, which keeps out companies who violated the law after the Unlawful Internet Gambling Enforcement Act was passed for a period of five years.

As the white paper notes, there has been no known challenge to the constitutionality of this provision.

There are a number of questions that have been raised about how several old-timey sounding constitutional clauses impact the Illinois bad actor language. The first is whether the law would be an unconstitutional Bill of Attainder.

Bills of attainder

The Constitution in Article I, Section 9, Clause 3 prohibits the federal government, and later state governments, from passing so-called bills of attainder. Historically, bills of attainder condemned people to death by legislative act, rather than judicial determination.

Since 1803 and the Supreme Court’s decision in Marbury v. Madison and the 1872 decision in United States v. Klein, courts have been responsible for evaluating evidence and making determination of the merits of claims. The legislature’s job is to pass laws, not find those in violation of them.

Modern Supreme Court jurisprudence on bills of attainder applies a three-part test to determine if a piece of legislation contains an impermissible bill of attainder:

  1. legislation singles out people;
  2. includes punishment; and
  3. lacks a judicial trial.

Do DraftKings, FanDuel fit?

FanDuel and DraftKings arguably satisfy the first requirement even if not specifically named. The second requirement, however, is more questionable.

The Supreme Court has taken a narrow view of what is a punishment. For instance, the Court has found that denial of certain government benefits like financial aid was not a punishment, nor was a legislative act requiring the turning over of materials from Richard Nixon a punishment under the second prong.

Relatedly, some sex offender registries, which appeared after Megan’s Law was passed, that require convicted sex offenders to list their residence on a searchable database were found not to be a punishment.

It remains far from a certain proposition that exclusion, especially temporary exclusion from a highly regulated market, would constitute punishment for purposes of a bill of attainder analysis.

Of course, Illinois could easily resolve any shadow of a doubt about this not being an impermissible bill of attainder by satisfying the third prong of the test and simply prosecuting FanDuel and DraftKings if they believe, as the Madigan letter states, they are in violation of Illinois law.

Ex post facto laws

A fairly basic translation of the constitutional ban on passing ex post facto laws is that legislatures cannot pass laws punishing individuals for conduct that has occurred in the past. Our criminal justice system is built on the principle that individuals have knowledge of what conduct is prohibited.

Alexander Hamilton fought for the inclusion of the ban on ex post facto laws in the Federalist papers. However, now there remains something of a dispute as to whether the ex post facto clause of the Constitution applies only to criminal legislation and not civil legislation.

Justice Clarence Thomas is perhaps the most vocal opponent of this view, having articulated a broader view of the ex post facto clause as incorporating all retrospective laws, but this opinion appears to remain in the minority.

If for argument’s sake, the Illinois law were somehow found to evade the deformity of not being criminal legislation, the next question would be whether there is a punishment being imposed.

Penalty box language is not a good choice

This question requires an analysis more in-depth than reviews of media reports, but needless to say referring to the bad actor provision as a penalty box is not doing Illinois lawmakers any favors in the argument this is not a punishment.

Like the findings upholding sex offender registries as not being impermissible bills of attainder, the Supreme Court held that requiring sex offenders to register and notify community members of their presence was not a punishment. To make this determination, the court looks at the intention of the legislature:

If the intention of the legislature was to impose punishment, that ends the inquiry. If, however, the intention was to enact a regulatory scheme that is civil and nonpunitive, we must further examine whether the statutory scheme is “’so punitive either in purpose or effect as to negate [the State’s] intention’ to deem it ‘civil.’”

The Court looks to the stated intent of the legislature to determine intent. In Illinois, it is likely that the intent is to punish FanDuel and DraftKings, which may violate the ex post facto clause, except for the fact that this is not criminal legislation and is thus unlikely to trigger the ex post facto clause under the majority view.

Property rights and takings

In order for the government to take property from an individual (corporations count too), they must afford that individual due process.

Think of due process as the right to know what is being taken and why it is being taken, as well as the opportunity to contest what is being taken.

There remains an open question as to whether a property right is implicated in Illinois. As no licenses have been issued, there is currently no property to be taken, thus no need to provide due process for such a taking.

It’s like driving a car …

Licensing by nature is permissive. This means not everyone gets a license. Consider a driver’s license: this requires a test, a fee, a driving test, and adherence to certain conditions. A failure to satisfy these requirements means that an individual loses their license.

Licensing for gaming is similar: regulations and conditions can be put in place and those who do not meet those requirements may be ineligible for a license. This, however, is subject to the regulations not being arbitrary.

Again, Illinois, every other state, and the federal government too could do itself a bunch of favors and enforce its existing gaming laws, allowing the judicial process to make determinations of bad acts. The big question regarding a taking analysis at this stage is if there is even anything being taken, which appears somewhat unlikely.

What to make of this?

Bad actor provisions have gotten a bad rap. While there is certainly some evidence that members of Illinois legislature may have specifically sought to target two companies, bad actor provisions are commonplace in a variety of industry segments, even the federal gaming bill introduced by Senators Orrin Hatch and Chuck Schumer contained a bad actor provision.

Intending to keep consumers safe is a legitimate interest of state lawmakers; this is who lawmakers have typically enacted these provisions to protect. There are real conversations that lawmakers need to be having not only about FanDuel and DraftKings but also whether companies who operated offshore will ever be allowed into the regulated market.

The two are often discussed differently, but both have allegedly violated many of the same laws. The constitutional infirmities cited as being a problem in the Illinois case would likely require courts to find a lot of aspects to be present that it’s not clear are.

But Illinois could likely save its taxpayers some money if it created a more generalized bad actor provision that made ineligibility determined by a judicial ruling.