On Your Mark, Get Set ... Go? Are You Ready To Spin The Wheel?

On Monday, the U.S. Supreme Court hit sports betting with a thunderbolt, releasing Murphy v. National Collegiate Athletic Association. The decision that will legalize sports betting in many states sent shock waves through the gaming industry and the businesses that carry their advertising.

Background

For two decades since the last gambling advertising sea change, broadcasters have been legally able to broadcast advertisements for a wide variety of gaming activities, referred to as lotteries under FCC rules. Formerly, the FCC enforced an explicit rule against the broadcast of any advertisement or information concerning a lottery or scheme offering a prize dependent in whole or in part upon chance. While it's been nearly two decades since that policy change in advertising lotteries and specifically, casino gambling advertising, many broadcasters still find the topic confusing.

One area that remained forbidden in most states was the advertising of gambling based on competitive sporting events. The prohibition stems from the Professional and Amateur Sports Protection Act (PASPA). The law was the pet project of former NBA professional basketball star and later Sen. Bill Bradley. Concerned that athletes would be turned into the equivalent of roulette chips, PAPSA prohibits state-sanctioned sports betting in every state except the few states where it was already legal and those that made it legal within one year of its date of enactment.

The state of New Jersey did not take advantage of that one-year option. Rather, it much later had a change of heart, leading to the current case to overturn PASPA so New Jersey could legalize sports gambling in Atlantic City and at horse racing tracks. The NCAA and three major professional sports leagues sued to prevent New Jersey's new law from becoming effective. New Jersey countered that PASPA violates the U.S. Constitution by taking away rights that are reserved to the states in the Constitution, and the Supreme Court agreed.

What Did The Supreme Court Decide?

Some broadcasters have concluded that "all bets are off," that the Supreme Court decision now allows all forms of sports gambling and advertising for it in all states. That is incorrect, and not the holding or the effect of the case. Rather, Murphy stands for the principle that there is a limit to federal preemption of state law, and that PASPAs prohibiting state authorization of gambling schemes violates something called the "Anti-commandeering Rule."

In short, under the Anti-commandeering Rule, the Supreme Court held that the federal government cannot "commandeer" rights reserved to the states. The Tenth Amendment states that all legislative power not specifically conferred on Congress by the Constitution is reserved to the states. The Constitution did not give the federal government the power to issue direct orders to the governments of the states. Thus "Congress may not simply 'commandeer the legislative process of the states by directly compelling them to enact and enforce a federal regulatory program.'" That's what the Supreme Court decided PASPA tried to do -- unequivocally dictate what the state legislative may and may not do in the area of sports betting. Since the Constitution "confers upon Congress the power to regulate individuals, not states," the Court held that PASPA went too far.

State Law Still Matters

As a result of the Murphy case, any determination of what lottery activities are legal, and therefore may be advertised, depends upon the analysis of state, rather than federal law. In this regard, each broadcaster must examine the gaming laws of their own state. For example, many states explicitly prohibit gaming banked by a house, and many of those same states allow government compacts with federally recognized Indian tribes. But many of those same states are not sitting still and are planning changes in their law to take advantage of the nationwide trend to permit gaming, and sports betting as well now that the Supreme Court has struck down PASPA. But it's important to note that we're not there yet. Therefore, let's take a look at what the situation is today and what is legal right now.

Casinos And Other Lottery Advertising Prohibition

In the 1997 case Valley Broadcasting Company v. USA, the U.S. Court of Appeals for the Ninth Circuit struck down the federal prohibition on advertising lotteries by broadcast stations in the states within its circuit. Two years later, in Greater New Orleans Broadcasting Assn. v. United States, the U.S. Supreme Court held that the law against the broadcast of lottery information, 18 U.S.C. § 1304, "may not be applied to advertisements of private casino gambling ... broadcast by radio or television stations located in [a state] ... where such gambling is legal." In light of that decision, the FCC adopted a policy not to enforce the federal law that prohibits the advertisement of commercial casino establishments where they are legal. The FCC expanded the Court exclusion to include lotteries conducted by a State acting under State law and broadcast in that State or any other State which conducts such a lottery and certain contests conducted by not-for-profit organizations.

In addition, the FCC rules now also contain two further broad categories of exception to the general ban. The first is any lottery conducted by a not-for-profit or governmental organization. To qualify as not-for-profit an organization must be tax exempt under §501 of the Internal Revenue Code.

The second is any lottery conducted as a promotional activity by a commercial organization that is clearly occasional and ancillary to the primary business of that organization. Thus, aside from casino commercial contests and promotions, the type of contests broadcasters are frequently confronted with by their regular merchant advertisers are unlikely to be considered to constitute a lottery even though they contain the three elements of prize, chance and consideration, since they are conducted as a promotional activity that is clearly occasional and ancillary to the primary business of the merchant.

However, be careful. Both exceptions apply only if the activities are either authorized or not otherwise prohibited by the state in which they are conducted. (Additional exceptions cover most non-profit fishing contests and state lotteries.)

Where the occasional and ancillary test is not met, a question frequently arises whether having to go to a store or other location constitutes consideration such that the consideration element of the three-part lottery test is met. The answer to this question is found in an FCC staff letter in response to a request for a declaratory ruling following the Greater New Orleans case. The staff ruled that, although entrants were required to travel 40 to 90 miles from the New Orleans area to Biloxi to obtain a game card from a booth outside the casino, this travel did not constitute "consideration." Rather, the staff held that consideration is present when the contestant must pay money or give something of value for the chance to win a prize. Thus, an entrant who must travel a certain distance to appear at the promoter's place of business in order to enter the contest has not provided any "money or thing of value," even if the travel takes an hour or two of the entrant's time.

Indian Casinos

Increasingly, broadcasters are presented with advertising for Indian casino gaming on Indian reservations. According to the website 500Nations, Indian casinos are now operated in 28 states by 243 of the nation's 566 tribes with the total number of Indian casino and bingo halls approaching 500. A further exception to the lottery prohibition is found in the Indian Gaming Regulatory Act ("IGRA"), 25 U.S.C. §2720, which allows the advertising of casino gambling conducted by Indian tribes on Indian Tribal lands. The statute specifically provides that the lottery prohibition "shall not apply to any gaming conducted by an Indian Tribe pursuant to this Act." The FCC implemented that law by making such advertising an exception to the general prohibition in its own lottery rule.

In relying on these Indian gaming exceptions it is important to understand how the IGRA classifies gaming into three classes and how those classes relate to the exemption.

• Class I gaming is defined as social games solely for prizes of minimal value or traditional forms of Indian gaming connected to tribal ceremonies.
• Class II gaming includes (1) bingo, including pull-tabs, lotto, punch boards, tip jars, and instant bingo, and (2) card games that are explicitly authorized by the state, or otherwise not explicitly prohibited, including gambling played exclusively against other players and not banked.
• Class III includes all other forms of gambling and generally includes banking card games such as baccarat and blackjack (21), as well as roulette, craps, and slot machines.

The IGRA permits the advertising and depiction of casino gambling conducted by Indian tribes under the following conditions:

• Gaming must occur on tribal land and be operated by the tribe.
• The gaming must be allowed by state law.
• State law is not preempted.
• If bingo is completely forbidden in the state, then bingo also cannot be played on the Indian reservation located in the state and, thus, cannot be advertised.
• Class III gaming must be conducted pursuant to a "tribal-state compact" between the state and the tribe, approved by the National Indian Gaming Commission. Broadcasters can search for applicable state compacts at the website of the Department of Interior, Office of Indian Gaming, www.bia.gov/as-ia/oig/gaming-compacts .

The Valley and Greater New Orleans cases did not rule on any state laws restricting such advertising. Therefore, in the case of Indian gaming it is important to note that section §2720 of the IRGA exempts advertising about tribal casino gambling even if the broadcaster is located in or broadcasts to a jurisdiction with anti-gambling laws and policies. In situations other than Indian gaming, however, broadcasters must still look to state law to assure that their advertisements are legal. Many such state statutes are confusing at best, and at worst seem to prohibit this form of advertising.

What Now?

The Supreme Court case leaves a lot on the table; many uncertainties remain. Justice Alito's opinion notes that the decision to legalize sports betting is "an important policy choice" that is not for the Court to make. Rather, "Congress could choose to regulate sports gambling directly." Indeed, on the same day that Murphy was released, U.S. Sen. Orrin Hatch (R-Utah) announced he would introduce a bill to supersede the states, stating that "a state-based industry would create a "patchwork race to the regulatory bottom." And existing federal restrictions on interstate and Internet sports betting, including the Federal Wire Act, remain in place despite invalidation of PAPSA. Note though, that Justice Alito's opinion cryptically notes in dicta that the Federal Wire Act and other similar federal laws, "apply only if the underlying gambling is illegal under state law." So, again, we're back to analyzing existing law regarding the specific activity before moving forward on a request for broadcast of gaming or sports betting advertisements.

This column is provided for general information purposes only and should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.