Online Gambling’s ‘Bad Actor’ Debate Reignites As Sports Betting Spreads

An old, familiar friend made an appearance during a March 27 subcommittee hearing on Illinois sports betting: Bad actors.

When I reference bad actors I’m not talking about Pauly Shore.

In gambling parlance a bad actor provision generally points to some law that has been violated, like UIGEA, as a reason to prohibit certain operators from applying for an online gaming license.

With another hearing scheduled for Thursday, Online Poker Report spoke to people on both sides of the bad actor debate.

Bad actor provision surfaces in Illinois

During the Illinois hearing in March, Rep. Robert Rita offered up an amendment that would disqualify certain daily fantasy sports companies from applying for a sports betting license in the state.

As was the case during the online poker debates in California, the bad actor issue quickly became a point of contention.

The Illinois bad actor amendment, proposed by Rep. Rita, reads:

“No sports wagering operator license or Internet sports wagering vendor license shall be granted to an applicant that has accepted, that has or had an affiliate that has accepted, or that has officers or directors who are or have been officers or directors of another party that accepted wagers through the Internet in contravention of any United States law, Illinois law, or any substantially similar laws of any other jurisdiction before the application date…”

There’s little subtlety to the language. The amendment clearly targets two DFS operators, DraftKings and FanDuel. The bad actor language was, to no one’s surprise, supported by the state’s casinos and racetracks.

“Without language barring bad actors from the licensing process, the proposed legislation would ignore DraftKings’ and (FanDuel’s) pattern of criminal conduct and reward bad actors who to this day refuse to comply with the laws,” Paul Gaynor, a representative for Rivers Casino told the committee.

The state’s casinos and racetracks are concerned, and rightfully so, that the two DFS companies will replicate their New Jersey online sports betting dominance in Illinois.

A gaming license is a privilege

OPR recently spoke with Gaynor, to get a better understanding of Rush Street’s bad actor prerogative.

“Rush Street doesn’t have a problem with competition,” Gaynor said. “Rush Street has a problem with companies that gained a running head start by acting illegally.”

Gaynor went on to say that following the Illinois AG’s declaration that DFS is illegal gambling, and DraftKings and FanDuel made calculated business decisions to stay in the market. (It’s important to note that there’s never been a finding that DFS is actually gambling in the state, and the AG’s opinion does not carry the force of law).

Gaynor noted that other DFS companies pulled up their Illinois stakes, and still others — like Rush Street — decided not to launch.

“We could have rolled out our product, but we didn’t,” said Gaynor.

As Gaynor pointed out, DraftKings and FanDuel chose to stay in Illinois, but left the smaller, less lucrative markets where the legality of DFS was called into question. Gaynor believes this demonstrates that the two companies knew precisely what they were doing. “They filed a lawsuit [the lawsuit was eventually voluntarily dismissed] and continued to operate in the market while they lobbied to have DFS legalized and their past conduct decriminalized.”

“A gaming license is a privilege, not a right, and that privilege could have been lost had we operated illegal online gambling pools like these companies. Rush Street has spent a lot of time, money and effort to comply with the law,” said Gaynor. “Why are we going to reward bad actors?”

Suitability is a job for regulators not lawmakers

Even though they’re written in a general way, bad actor clauses are designed to do one thing, expressly forbid certain companies from operating in the market.

“Bad actor arguments are always targeted at specific companies. In poker, it was PokerStars, in DFS its DraftKings and FanDuel,” Jeff Ifrah, founding partner of Ifrah Law and the online gambling trade group iDEA Growth told Online Poker Report. “Suitability is about good character, honesty, integrity and financial well being. These are roles for regulators to investigate free of political pressures.”

As Ifrah notes, suitability is typically left up to regulators, but in some cases a thumb can be placed on the scale, and regulators might bow to political pressure and approve a contentious operator in order to maximize revenue. Illinois regulators could find DraftKings or FanDuel unsuitable, but bad-actor clauses are a failsafe when existing gaming operators are unsure if regulators will find a company unsuitable.

Proponents of such language argue that operators that fall within the parameters of the bad actor provision are unsuitable for a gaming license. Full stop. As such, these companies should be expressly disqualified from participating in regulated gaming.

A bad actor clause was enacted

Of the five states that have legalized online poker, only Nevada online poker law contains a bad actor clause.

Other states flirted with bad actor clauses, but they were either stripped out (New Jersey and Pennsylvania) or the legislation failed.

In the case of California, legislative efforts failed largely because of bad actor clauses.

Nevada’s bad actor clause prevents companies from applying for an online poker license for a period of five years if they offered online poker services after December 31, 2006. The language of the Nevada bad actor clause also extends to certain “covered assets” in perpetuity. That makes the prohibition more or less permanent.

According to Ifrah:

“The Nevada 2013 poker bill implements bad actor laws by defining covered persons as anyone who after December 31, 2006, intentionally provided interactive gaming to customers in the US. The Nevada law also prohibits anyone who acquired assets such as trademarks, customer lists or software that was used after December 31, 2006 to offer interactive gaming to US customers.”

For poker, Dec. 31, 2006 is used as a bright line (albeit, an arbitrary one) to distinguish between operators who left the US market following the passage of UIGEA and those that didn’t.

“This is now being argued in the context of sports betting and daily fantasy sports regarding operation during a time when legality of DFS was unclear or when a state actor, like an AG, actually argued such activity was illegal,” Ifrah said.

Are bad actor clauses legal?

Even though Nevada’s bad actor clause has gone unchallenged, Ifrah believes there are legal questions.

“Forcing an operator out of the market through a bad actor clause will only delay implementation of the law as litigation erupts and that litigation will likely result in a finding that such clause is unconstitutional,” Ifrah told OPR.

Ifrah listed three legal arguments against bad actor provisions:

• Bill of Attainder. Article I, Section 9 of the constitution prohibits a legislative determination of guilt and the imposition of punishment without a trial.
• Due Process. Similar to above, there must be due process prior to assuming criminal behavior and imposing punishment.
• Takings Clause of the 5th Amendment. The government generally cannot restrict how property can be used. There are of course exceptions to this, but they may not apply here.

Who wins when a state bars so-called bad actors?

Even if a state can include a bad actor provision, Ifrah explained why they’re bad for business.

“Bad actor provisions are anti-competitive and bad for consumers,” he said. “Consumers receive the best and most price competitive product when the competitive market is open and strong.”

Rush Street isn’t buying the argument that a bad-actor clause would be anti-competitive, or hold back online gambling expansion in Illinois.

“Rewarding companies that haven’t played by the rules is anti-competitive,” Gaynor told OPR. He went on to note that companies that fall into the bad-actor web not only were operating illegally, they’ve gained an unfair branding and database advantage.

Is bad actor-lite a solution?

As was the case in California, bad actor clauses could sink Illinois’ sports betting efforts if a compromise isn’t reached.

Over a period of several years, California toyed with several options, from a sitting-out period to fines, but the state was never able to bring both sides together.

If the two sides are willing to compromise, Illinois could also explore repayment of back taxes, a customary penalty for operating an illegal gambling establishment.