By Aalok K. Sharma
In the summer of 2018, the United States sports betting market drastically shifted when the U.S. Supreme Court ruled that the Professional and Amateur Sports Protection Act (PASPA) was unconstitutional under the 10th amendment.
1 PASPA prohibited state and local legislatures from enacting laws that favored sports betting. However, the U.S. Supreme Court ruled that PASPA was unconstitutional because it “dictates what a state legislature may and may not do.” PASPA’s fall turbocharged state legislatures to begin passing laws to create a framework for regulated sports wagering.
To date, dozens of states and Washington D.C. have enacted regulatory and statutory schemes for legal sports wagering. There remain significant ambiguities, though, including how legalized sports wagering intersects with amateur and professional video game contests (“esports”). As a result, sports betting operators, consumers, and esports enthusiasts have been left in the dark about how to operate in this novel arena.
Defining “Esports” and “Sport” Under Federal Gaming Laws
For decades, there has been an ongoing controversy about whether esports should be considered a sport. While some consider this a trivial issue, it is critically important in the context of legalized sports wagering.
2 Two federal laws apply to legalized sports wagering: the Federal Wire Act and the Sports Bribery Act.
In the 1960s, President Kennedy signed the Federal Wire Act and the Sports Bribery Act into law. Both statutes were designed as a tool to suppress organized crime, though they accomplished this task by different means. The Federal Wire Act focuses on the transmission of sports wagers or information connected to sports wagering.
3 By its express terms, the Federal Wire Act
4 creates criminal liability for those who use a wire to transmit sports information
5 in connection with a bet or wager, or alternatively, use a wire to transmit a bet or wager. Similarly, the Sports Bribery Act
6 makes it a crime to “influence by bribery” any “sporting contest.” The statute carries heavy penalties, including imprisonment and fines.
Esports contests, involving teams or individual athletes, are highly entertaining and competitive events.
Esports contests, involving teams or individual athletes, are highly entertaining and competitive events. Athletes on a team will train for hours a day, and it is undisputed that many are physically gifted in how quickly they can process information and make critical decisions. Esports organizations, however, profit from activities other than competitive matches. Indeed, many esports organizations generate revenue from other business activities, including creating content on streaming services such as Twitch or YouTube. As such, it is arguable whether “esports” is a sport or another form of entertainment. However, there is little guidance about what constitutes a “sport” under the Federal Wire Act or the Sports Bribery Act. Under the Sports Bribery Act, there are less than two dozen reported decisions, and almost all of those relate to horse racing. And while the Federal Wire Act’s scope and reach have been regularly litigated, none of the decisions touch on what constitutes a “sport.” This ambiguity in federal law creates real risk because both statutes could be relevant depending on the interpretation of the statute, and whether esports is considered a “sport.”
Maintaining Match and Game Integrity
During the 1919 World Series, several Chicago White Sox baseball players were credibly accused of tanking against the Cincinnati Reds. The scandal rocked Major League Baseball, which later became known as the "Black Sox Scandal." After the scandal, Major League Baseball and others, including betting operators, took significant steps to ferret out corruption. Similar to traditional stick-and-ball sports, esports betting markets can be influenced by match-fixing, improper tampering, and cheating. Unlike baseball, and other traditional sports, there is generally no central authority (i.e., a commissioner) to regulate and prevent these types of scandals, which can cross over to different video game titles, such as Fortnite (created by Epic Games), NBA2K (created by 2K Sports), or Counter-Strike (created by Valve Corporation). However, many esport tournament organizers have worked closely with the Esports Integrity Commission (ESIC), a nonprofit that works with some stakeholders to eliminate bad actors from esports.
As an example into some of the corruption in esports, in 2021, the FBI and other criminal authorities launched an investigation into competitions involving the popular first-person-shooter game, Counter-Strike. Counter-Strike is an established video game title, and is played at esports tournaments all over the globe. The Counter-Strike criminal investigation examined match-fixing and bribery. Similar to baseball’s Black Sox Scandal, several criminal enterprises approached players and convinced them to throw their contest for the benefit of the criminal enterprise. This investigation is reportedly ongoing, though ESIC and others have taken independent steps to improve match integrity.
This type of match-fixing and cheating harms legalized betting operators, who may have accepted wagers involving esports contests that have been fixed. Unless there is assistance from regulators, the betting operator may have to absorb costs associated with those contests. Unfortunately, those costs will eventually be passed on to consumers.
Corruption, match-fixing, bribery, and other misconduct have existed in traditional stick-and-ball sports for centuries. Given the meteoric growth in the esports marketplace, it was inevitable until this industry faced similar misconduct. However, given that esports crosses over different types of games, which may be created by different rights holders, the strategy for eliminating this type of wrongful conduct will be more challenging than its traditional sports counterparts.
Complying with a Patchwork of State Laws
In enacting legalized esports wagering, state legislatures took several approaches. Some states specifically authorized esports wagering, while others banned it entirely. The vast majority of states, however, did not address esports wagering, leaving some to evaluate whether it was permissible under state law that regulated sports wagering generally. Additionally, in states that passed esports wagering laws, additional regulations could impede the growth and scope of esports wagering.
The vast majority of states, however, did not address esports wagering, leaving some to evaluate whether it was permissible under state law that regulated sports wagering generally.
For example, New Jersey law permits wagering on “electronic sports” and “competitive video games, though it prohibits wagers on competitions if the majority of the competitors are under the age of 18.”
7 Some video game titles skew towards younger participants (i.e., Fortnite), and operators will now have the burden of ascertaining the age of the esports competitors. It also reduces the number of potential opportunities to wager on esports, since some competitions cannot be wagered upon. Similarly, Tennessee law permits esports wagering, though with the caveat that the competition must depend upon “the superior knowledge, training, experience, and adroitness of the players.”
8
However, that standard could be ambiguous depending on the type of video game, because some games could skew more towards chance as a predominant factor. Operators will have to accept some risk if they decide to accept those wagers with little guidance from the state legislatures or regulatory bodies.
Operators will have to accept some risk if they decide to accept those wagers with little guidance from the state legislatures or regulatory bodies.
Understanding the challenges in providing for esports wagering, the Nevada Gaming Commission sought to directly tackle these issues. In 2022, the Commission enacted an eight-person technical advisory group to examine the issue of esports wagering and to create a framework to permit online and retail sports books to accept wagers on esports competitions without seeking prior approval from regulators. The technical advisory group, consisting of stakeholders with esports experience, crafted a set of clear regulations that legalized operators could easily understand and apply to several video gaming titles. If passed, Nevada’s new esports wagering framework could serve as a model to other states.
Currently, the state-by-state patchwork of statutes, regulations and inconsistent interpretations have impeded the expansion and growth of the legalized esports wagering marketplace. For progress to be made, states will have to agree on a more consistent model that will satisfy consumers and operators.
Conclusion
When PASPA was ruled unconstitutional, new sports betting laws were passed by state legislatures across the country at breakneck speed. In this rush, esports wagering became a lucrative opportunity for operators. However, the market will need additional guidance from federal and state legislators and assistance from interested parties to maintain integrity within esports competitions. If successful, the esports wagering marketplace could flourish and become a regular source of revenue and entertainment across the country.
1 Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461
2 Whether “esports” is considered a sport is important for other reasons, including whether esports are governed under state specific talent agency acts.
3 Legislation Relating to Organized Crime Hearings on H.R. 468, H.R. 1246, H.R. 3021, H.R. 3022, H.R. 3023, H.R. 3246, H.R. 5230, H.R. 6571, H.R. 6572, H.R. 6909, H.R. 7039 Before Subcommittee No. 5 of the Committee of the Judiciary, 87th Cong. at 22 (1961).
4 The Federal Wire Act only applies to sports wagering, and does not impact other interstate gaming, including lotteries. See N.H. Lottery Commission v. Rosen, 986 F.3d 38 (1st Cir. 2021).
5 The statute maintains a safe harbor provision that protects information that is transmitted for its newsworthiness, or if information is being transmitted from one state where it is legal, to another state where it is legal.
6 18 U.S.C. § 224(a),
7 N.J. Stat. Ann. § 5-12:A-10.
8 Tenn. Code Ann. § 4-49-102(8).
By Aalok K. Sharma
aalok.sharma@stinson.com
Aalok K. Sharma is a partner at Stinson LLP and chair of the firm’s Esports, Sports Technology & Wagering practice group. Outside of Sharma's role at Stinson, he is co-chair of the Sports Section of the American Bar Association’s Forum on Entertainment and Sports. Sharma is also a former NCAA Division I athlete.