Op-Ed: Fight Bad Actor Clauses Now – Not Later

Op-Ed: Fight Bad Actor Clauses Now – Not Later

us ONLINE POKERThere’s been lots of focus this week on bad actor provisions in state online gambling bills. As various states dip a toe into the water of potential legislation, many are including clauses that would prohibit companies that took bets in the U.S. after December 31, 2006 – so-called “bad actors” – from being eligible to be licensed for some period of time (typically five or ten years). Nevada enacted such a clause last month; the current bill pending in Illinois contains one. California is reportedly considering one; New Jersey removed its bad actor clause before enacting its online gambling legislation.

Generally, the argument goes, bad actors reached their dominant market positions by offering unregulated, potentially illegal games in the years from 2007 to 2011. These companies – and in online poker, it’s really only PokerStars and Full Tilt that we’re talking about – should not be rewarded for their impertinence by being eligible to be licensed at the same time as everyone else.

That argument is window dressing for the true motives behind bad actor clauses. They protect the interests of established brick-and-mortar casino groups, who have been unable to offer online gaming previously due to fears of jeopardizing their existing brick-and-mortar gaming licenses. By shutting out companies with a well-established U.S. market presence, the casinos will have an easier time capturing market share.

Some in the industry have pointed out that the Poker Players Alliance commissioned former U.S. Solicitor General Paul Clement to opine on the constitutionality of such provisions in November 2012. Not surprisingly, Clement believes that such clauses amount to an exercise of the government’s eminent domain power at best and a bill of attainder – a law that adjudges someone guilty of a crime without due process of law – at worst.

Clement’s argument is convincing. But no matter how unconstitutional a bad actor clause may be, saying so won’t help Rational Group (parent company of PokerStars and Full Tilt Poker) if such a clause makes it into a state’s final, enacted online poker legislation. By then, the damage is done. To understand why, we need only look at the ongoing New Jersey sports betting legislation.

New Jersey’s law that permits sports betting was enacted in January 2012. The law is in direct violation of a federal statute, the Professional and Amateur Sports Protection Act of 1992, which prohibits any state that didn’t already allow sports betting from legalizing it. New Jersey believes that PASPA is unconstitutional and argued as such after several sports leagues, including the NFL, sued in August 2012 to enforce PASPA.

Due to procedural motions, the case didn’t reach the oral argument phase until early February. The presiding judge issued his decision two weeks later. He sided with the NFL, finding PASPA constitutional and enjoining New Jersey from allowing sports betting. New Jersey Gov. Chris Christie has said the state will appeal the decision. It will likely be at least a year before an appellate court issues its decision, and from there the loser will likely try to appeal to the U.S. Supreme Court.

Even without an appeal to the Supreme Court, however, the total elapsed time from the filing of the suit by the sports leagues to getting PASPA declared unconstitutional (if New Jersey were to win on appeal) will be a minimum of 18 months – and when you add in the six months it took the leagues to file the suit, the elapsed time will expand to two years. That’s the minimum. Adding another round of appeals would drag out that timeframe further.

That’s the danger for bad actors from bad actor clauses. Just because those clauses presumably are unconstitutional doesn’t mean that an organization like Rational Group will be able to have them invalidated quickly. States are likely to defend their laws (at the urging of local casino interests) through at least one round of appeals.

Meanwhile, it’s not at all certain that the online gaming law’s implementation would be delayed while the issue is litigated. Unlike the New Jersey sports betting case, where the basic purpose of New Jersey’s law conflicted with a federal statute, bad actors would only be seeking to invalidate a small portion of the law. Courts may be reluctant to prevent implementation of the rest of the law in the meantime.

In that case, state gaming regulators could easily be hard at work drafting gaming regulations while the case makes its way through the courts. Operators may file for licenses and begin to offer games. By the time a bad actor mounted a successful challenge to a bad actor clause, two or three years could have elapsed. By then, the local market in that state might already be well-developed.

That’s why litigating the issue of constitutionality is a losing strategy. If players hope to see PokerStars and Full Tilt Poker return to their states when those states enact online poker laws, the best strategy is to make sure the bad actor clause never makes it into law.

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