Federal Laws Continue to Hinder State Sports Betting Trend
On Nov. 5, the voters of Colorado narrowly approved a ballot measure, Proposition DD, making the Centennial State the 19th state (plus Washington, D.C.) to legalize sports gambling in the country. Colorado thus joined a wave of gambling expansion that has grown state by state since the U.S. Supreme Court invalidated the federal Professional and Amateur Sports Protection Act, or PASPA, in May 2018.
However, while more and more states are considering authorizing sports wagering, that wave is still functionally hindered by two other federal laws: the Interstate Wire Act of 1961 and the Unlawful Internet Gambling Enforcement Act, or UIGEA.
Sports betting operators should be able to start taking sports wagers from Colorado residents on May 1, 2020, following a six-month period ordained by the Colorado legislature to allow a new department formed in the Colorado Division of Gaming to craft and enact new regulations to govern the activity.
By then, each of Colorado’s 33 licensed commercial casinos will be allowed to apply for and receive a license allowing the casinos and the sports betting operators they contract with to offer sports betting both at the casinos’ physical facilities in the fairly remote mountain towns of Black Hawk, Central City and Cripple Creek but also online, to residents of Colorado throughout the state.
The price for this right is a fairly reasonable tax rate of 10% on net sports betting proceeds, plus a biennial $125,000 license fee for each casino and operator. But with up to 33 competitors in the state, the profitability of sports wagering operations is hardly guaranteed.
By May, additional states will almost certainly have made sports betting available to their residents (including Maine, where a sports betting law is expected to go into effect on Jan. 10, 2020).
But, as in each state that has authorized sports betting to date, sports betting will only be possible within each state’s respective borders, meaning that the sports betting operators — from the nationally known name brands like FanDuel Group, DraftKings and William Hill PLC, to up-and-coming brands like Fox Bet (which is part of a joint venture with Fox Sports), Play MGM, PointsBet and Rush Street Interactive — must physically set up shop in each state if they want access to those customers.
Although more than half of the states with existing sports betting laws (including New Jersey, Pennsylvania, West Virginia, Illinois, Indiana, Iowa, Montana, Nevada, New Hampshire, Rhode Island, Tennessee and Oregon, plus Washington, D.C., and now Colorado) either allow or contemplate allowing sports betting over the internet, the Wire Act prevents these businesses from operating like any other internet business: It prevents the operators from offering sports betting to customers from systems run efficiently and cost-effectively in the cloud.
Moreover, it prevents states that are interested in authorizing online sports wagering from working together to efficiently and effectively regulate that wagering.
Although the vote to approve Proposition DD was extremely close (so close, in fact, that the vote was not officially determined until two days later, when the Colorado secretary of state confirmed that the measure passed by just under 44,000 votes) — owing apparently in large part to it being presented as a tax measure because of the requirements of Colorado’s Taxpayers’ Bill of Rights — the legalization of sports betting in Colorado actually enjoyed very broad, bipartisan support from the state’s political leaders.
The Colorado Legislature, which is split between Democrats and Republicans 41-24 in the state House of Representatives and 19-16 in the state Senate, approved H.B. 1327 which put Measure DD on the ballot by a relatively overwhelming vote in May: 58-6 in the House and 28-7 in the Senate.
Similar political support has largely been seen across the country in the sports betting measures enacted since the repeal of PASPA. The strength or weakness of the support for sports betting in each such state, however, is largely irrelevant to the Wire Act and UIGEA, which together act as a significant federal albatross hanging over the industry, increasing costs and limiting the commercial possibilities of the expansion of sports betting.
Congress passed UIGEA in 2006. That law, while expressly not making any gambling activity illegal that was not already illegal under existing federal or state law, put severe restrictions on the movement of money in support of “unlawful internet gambling.”
As a practical matter, regardless of whether gambling over the internet is legal under state law, if casinos and operators cannot effectively get money into and out of the system (i.e., for customers to place bets and receiving winnings), it is very difficult for customers to enjoy their newfound freedom to place sports bets online.
The term “unlawful internet gambling” is defined in UIGEA as follows:
to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.
The common understanding of UIGEA’s provisions is that, regardless of whether internet sports betting is legal under the laws of every state involved — i.e., where the bettor is located, where the casino is licensed and where the online operator’s servers are located (if different) — UIGEA’s prohibitions apply if a federal law, including the Wire Act, makes the betting unlawful.
The Wire Act was passed in 1961 as part of a package of bills aimed at combating organized crime. The widely acknowledged purpose of the bills was to allow the U. S. Department of Justice to assist the states in enforcing their laws relating to bookmaking and gambling. The primary prohibitions in the Wire Act are found in Section 1084(a) which prohibits anyone “engaged in the business of betting or wagering” from:
Knowingly us[ing] a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers.
The DOJ’s interpretation of the Wire Act, and the extent to which it applies to wagers placed over the internet, has varied quite a bit over the years. Prior to Dec. 23, 2011, the publicly stated DOJ position on the Wire Act was that it “prohibits all type of gambling over the Internet [and] Section 1084 does not contain any exceptions for bets placed with a gambling business licensed or authorized by a State.”
On Dec. 23, 2011, the Office of Legal Counsel within the DOJ released a memorandum opinion dated Sept. 11, 2011, concluding that the Wire Act’s prohibitions on the interstate transmission of bets and wagers applied to only sports wagering and not to other types of gambling.
In November 2018, however, the DOJ issued a memorandum opinion reversing the position articulated in its 2011 opinion and concluding that the Wire Act does, in fact, apply to other forms of wagering other than sports wagering.
Although the 2018 opinion is the subject of ongoing litigation by New Hampshire among others, consistent across all of these positions is the DOJ contention that the Wire Act prevents states from enacting laws make interstate, internet sports wagering legal.
To cope with the Wire Act and avoid the impact of UIGEA’s strangling of the money flow into state-authorized online betting systems, Colorado’s new sports betting law and every similar law passed in other states since PASPA was repealed includes express provisions to ring-fence the state, ensuring that betting transactions both originate from customers physically located within the state’s boundaries and are received by sports betting operators (i.e., their computer servers) on equipment physically located in within the state’s boundaries.
This is because UIGEA contains an intrastate transactions exception to the definition of unlawful internet gambling under which placing, receiving or otherwise transmitting a bet or wager where, among other requirements:
(1) the bet or wager is initiated and received or otherwise made exclusively within a single state; (2) the bet or wager and the method by which the bet or wager is initiated and received or otherwise made is expressly authorized by and placed in accordance with the laws of such State, and the State law or regulations include (i) age and location verification requirements reasonably designed to block access to minors and persons located out of such State, and (ii) appropriate data security standards to prevent unauthorized access by any person whose age and current location has not been verified in accordance with such State’s law or regulations.
By invoking this exception, the states hope to keep their new online sports betting programs away from UIGEA’s stifling prohibitions.
Because of the fear that the Wire Act would trigger application of UIGEA’s restrictions, therefore, each of the states authorizing online sports betting (including Colorado) have effectively mandated that an expensive technology stack be located within the physical boundaries in the state where gambling is authorized.
That also means that operators must maintain personnel within each state, just to run that equipment. For an operator that hopes to offer sports betting to customers nationwide as states individually enact enabling laws, that means modern internet commerce tools like cloud computing, remote systems management and highly centralized operations management are largely unavailable.
For states that might wish to coordinate such regulatory functions as testing and monitoring of the operators’ online systems or preventing corruptive influences in their sports-betting ecosphere, or that might see the advantage to their residents being able to bet into sports pools combined across state lines, the Wire Act effectively prevents most such coordination with their sister-states.
The law which was designed to “assist the various States and the District of Columbia in the enforcement of their laws pertaining to gambling, bookmaking, and like offenses” has become a tool to prevent states from enacting modern laws making interstate, internet sports wagering legal.
“Federal Laws Continue to Hinder State Sports Betting Trend,” by Dennis Ehling was published in Law360 on November 13, 2019.
 18 U.S.C. § 1084.
 31 U.S.C. §§ 5361-5366.
 see 31 U.S.C. §§ 5362(10)(A), 5363.
 31 U.S.C. § 5362(10)(A).
 See e.g. H.Rep. No. 967, 1961 U.S.C.C.A.N, pp. 2631, 2632.
 18 U.S.C. § 1084(a).
 Letter from William E. Moschella, Assistant Attorney General, to Rep. John Conyers, Jr. (July 14, 2003).
 See e.g. Colo.Rev.Stat. § 44-30-1506(6) and (8) (specifically citing UIGEA).
 31 U.S.C. § 5362(10)(B).
 Fantasy sports operations, by way of comparison, have no such geographic operation requirements in any of the states that have chosen to specifically authorize fantasy sports. This is in large part because fantasy sports enjoy their own exemption under UIGEA (see 31 U.S.C. § 5362(1)(E)(ix).
 The forced segmentation of the states and duplication of online sports systems is not required to maintain effective state-level regulation of what gambling can be legally offered within their borders. Where federal law is not an impediment, a state can license and set requirements for taking wagers from residents within that state and, at the same time, rely on the fact that a sister-state has licensed and is overseeing the technology that the operators use in connection with wagers placed across the country. Various state horse racing regulators (including in Colorado) have experience with just this type of collaborative regulatory approach in their programs licensing and regulating online advance deposit wagering operators (“ADWs”) taking online wagers on horse races from residents of those states. There, given authorization provided by the federal Interstate Horseracing Act, 15 U.S.C. §§ 3001-3007, operators generally operate from just one (or a limited number of) technology stack(s), most frequently in Oregon, and horse racing regulators in other states (including Colorado) rely on the fact that the Oregon Racing Commission oversees ADWs’ operation of those systems.
 1961 U.S.C.C.A.N, at p. 2631.