The Dormant Commerce Clause is a fairly complex area of constitutional law somehow recently thrust into an Arkansas sports betting discussion.
Despite that, it has recently become en vogue for various groups to suggest that various laws violate the Clause, including this month in Arkansas sports betting.
The NCAA, for instance, asserted that California’s name, image, and likeness law would violate the Dormant Commerce Clause. Despite its bluster, the college sports organization never did anything, perhaps because the claim was not very strong.
What did Arkansas do now?
Earlier this year, Arkansas approved rules that would facilitate the launch of mobile sports betting in the Razorback State. As LSR reported, there was a hangup over the new rules that centered on a rule that Arkansas casinos must retain 51% of revenue from a contract with any third-party vendor.
At the February 17 hearing, John Burris of Capitol Advisors Group, who represents a variety of gaming operators including FanDuel and DraftKings, said that the proposed rule, if it were adopted, could violate the Dormant Commerce Clause.
According to Arkansas-based ABC affiliate 4029, Burris said:
What we’re asking for is to be able to go negotiate our own contract with those casinos to be a subcontractor and a third party vendor, without the state putting their finger on the scale dictating a profit margin. You can’t write a rule that says out of state not allowed, in-state allowed. They’re written in a way that’s facially valid but has a discriminatory purpose.
What is the Dormant Commerce Clause?
The Dormant Commerce Clause is dormant because the Constitution’s Commerce Clause implies it. The (non-dormant) Commerce Clause permits the federal government to:
“regulate commerce with foreign nations, and among the several states, and with the Indian tribes.”
Over the years, this has become quite expansive, giving Congress the power to regulate many things because of its impact on commerce, such as roads, trucking, etc.
The Dormant Commerce Clause is a legal principle that states are prohibited from discriminating against out-of-state businesses. States are not allowed to favor in-state businesses in a way that discriminates against out-of-state businesses simply because they are from out of state.
Breaking it down
One example of the Dormant Commerce Clause in action was the case of Family Winemakers of California v. Massachusetts.
In the case, out-of-state winemakers sued Massachusetts over a state law that forced large wineries to choose between using a wholesaler to bring wines into the state or applying for a large winery shipping license. Large winemakers could only do one.
At the time, 98% of U.S. wine production occurred in California; Massachusetts had no wineries that would classify as large. The First Circuit Court of Appeals held that Massachusetts’s law violated the Dormant Commerce Clause in preferencing the in-state vendors by keeping the large winemakers out of the distribution channels.
The Supreme Court held similarly that a Massachusetts law that required all dealers who sold milk in the state to pay a monthly premium, which would be distributed amongst the state’s dairy farmers, discriminated against interstate commerce because even though all dealers were taxed, the benefit of the tax was reserved for the in-state farmers.
So what about Arkansas sports betting?
If we look at what is proposed in Arkansas, we see that the state requires that casinos retain at least 51% of any revenue from a contract with a third-party vendor. Arkansas has three casinos: the Saracen Casino Resort is owned by the Quapaw Nation, Delaware North owns the Southland Casino, and the Cella family of St. Louis owns the Oaklawn Racing Casino Resort.
While all three casinos are located in Arkansas and stimulate the economy, none of the three casino operations are Arkansas-based. The Quapaw Nation is a sovereign tribe, Delaware North is based in Buffalo, NY, and the Cella family is from Missouri.
Are in-state businesses being favored over outsiders?
A benefit to in-state businesses does not automatically mean a Dormant Commerce Clause violation.
If FanDuel and DraftKings decided that Pine Bluff or Fayetteville would make a great location for a new headquarters, would the law treat them any differently? No.
As Mr. Burris highlighted, facially, the rule does not discriminate against out-of-state operations. Indeed, the rule treats all third parties equally regardless of whether they are from Arkansas or anywhere else.
If there is a discriminatory effect, then what?
Even if a rule or law favors in-state actors and is discriminatory against out-of-state actors, a state can show that it is necessary to advance a legitimate local purpose.
Where a law is nondiscriminatory, a court will look to determine if the burden on interstate commerce outweighs the state’s interest. In doing, so, courts look at what alternatives were available to the state.
What to make of this for Arkansas sports betting?
It seems unlikely that anyone will file a federal lawsuit challenging this new rule. If a lawsuit were filed, it would likely face fairly long odds.
The rule is facially non-discriminatory. While the casinos are located in Arkansas, they are multi-state operators and a sovereign tribe. This is far different from Massachusetts dairy farmers receiving what amounted to a tariff or a clear benefit for Massachusetts wine producers for selling their wine in the state.
When Delaware North turns a profit at its Arkansas casino, that money is not staying in Arkansas; it is going to New York. Perhaps a sympathetic court would find for a group of plaintiffs challenging this rule, but it would seemingly be a significant expansion of the Dormant Commerce Clause’s scope.