By Daniel Wallach
April 8, 2018
The parade of voices being heard in the ongoing sports betting legalization debate in the U.S. is as diverse as it is nearly endless. Nearly every obvious stakeholder has joined the debate: state governments (some 22 of which have enacted or introduced legislation to authorize sports betting), the U.S. casino industry, the U.S. professional sports leagues, sports data companies, and even the daily fantasy sports industry.
But one of the most important constituencies has yet to be heard from (at least publicly): the thousands of professional and collegiate athletes whose performances will power the estimated $150 billion U.S. sports betting market. As the participants who can most directly impact the ebb, flow and outcomes of the games — and, of course, the wagers thereon — it will be the athletes who endure the greatest level of scrutiny in a regulated sports gambling environment. Yet the pros' representatives — the player unions — have largely remained on the sidelines as sports betting legislation is being debated in state legislatures around the country and the U.S. Supreme Court appears ready to overturn the federal ban.
The players’ reticence on this topic will soon end. With a Supreme Court decision imminent (perhaps as soon as this week) and the rollout of state-by-state sports betting moving from the realm of the merely hypothetical to now almost a near-certainty, the four major U.S. players’ associations — the NFLPA, the NBPA, the NHLPA and the MLBPA — are finally ready to engage on the issue. It is expected that the four executive directors — DeMaurice Smith (NFLPA), Michele Roberts (NBPA), Donald Fehr (NHLPA) and Tony Clark (MLBPA) — will soon issue a joint statement articulating where they, and their player constituents, stand on the subject of sports betting legalization.
Despite the potential economic upside to the players — in the form of higher salaries if additional revenues are captured by the sports leagues, not to mention new player endorsement opportunities with casinos and sports book operators — the four union bosses are not necessarily convinced that legalized sports betting is a good thing for the players. Here is where their issues of concern are likely to lie:
Is the Risk Worth the Reward?
The U.S. casino industry and the U.S. sports leagues each stand to benefit from the legalization of sports betting. For the casinos, the benefits are fairly obvious: Sports betting represents an untapped source of new gaming revenue and will also increase visitation to casino properties, where patrons will spend money on other forms of gambling and on various entertainment amenities.
For the leagues, sports betting legalization will drive fan engagement, which in turn will increase television ratings and the value of the leagues’ media rights deals. Additionally, the leagues should enjoy new revenue streams from sponsorship deals with casinos and sports book operators and, potentially, by receiving a small percentage of all legal wagers and by selling their official data to sports betting operators, as the leagues are seeking to implement under state law.
But what about the players? What do they get out of it? While the financial benefits to the casinos and the leagues have received a great deal of media attention, there has been hardly any discussion about the economic benefits that would accrue to the players from sports betting. After all, it is the athletes’ performances (both individual and collective) that will create the “result” that determines the outcome of a particular wager. Just as there would be no sports betting without the product created by the leagues, so, too, would there be no sports wagering absent the labor, sweat and athletic achievement of the players. Moreover, unlike billionaire league owners and casino magnates, the players have a limited time in which to ply their trade and earn a livelihood.
For all the obvious financial upside of legalized sports betting — at least to the gaming industry and the leagues — what benefits exactly will be flowing to the players? None of the pending state legislative measures even speak to this issue. There are those who would argue that if the leagues were to benefit financially from sports betting, so, too would the players since they would share in any increased league revenues through their collective bargaining agreements. But the devil is in the details, as I will explain below.
Even assuming that the players are able to share indirectly in the increased league revenues from sports betting, would that be enough to compensate them for the increased scrutiny (not to mention suspicion) that they will find themselves operating under in a regulated sports betting environment? Given the risk/reward scenario at play here, the athletes (especially those represented by unions) need to participate in the conversation right now to ensure that their rights are adequately protected under state law and in the CBAs.
Is the Integrity Fee a Disguised “Expense” Item for the Leagues?
There has been a great deal of hand wringing over the leagues’ request for an “integrity fee” to be included in state legislation. Such a fee, if enacted, would guarantee the leagues a small percentage (perhaps 0.25%) of all legal sports wagers. The casino industry has opposed such a fee on the basis that it would make operating a sports book less profitable (or even unprofitable) because of the low profit margins associated with sports book operations — typically around 5% — and the premise that a 1% fee on the handle would equate to roughly 20% of a sports betting operator’s revenues. And that, in turn, would result in a much lower tax payment to the states and also prevent operators from pricing their betting products competitively with those offered by illegal offshore bookmakers.
But the players have an entirely different concern over the “integrity fee” — namely, that the leagues might refuse to share it with the players. Ever wonder why the NBA and MLB have latched on to the “integrity fee” nomenclature when proposing what is essentially a rights fee or a royalty payment? The reason for that particular word choice may have less to do with persuading state lawmakers than with the minutiae of how revenue sharing works under the leagues’ collective bargaining agreements with their players.
The characterization of a particular source of revenue has ramifications under each league’s agreement. Under these CBAs, the leagues are required to share game-related “revenues” and “income” with the players (via spending limits on player salaries) according to specified percentages that differ slightly by league. For example, the NBA CBA (a new one was just signed in 2017) uses the words “Basketball-Related Income” (BRI) to describe the bucket of direct and ancillary revenues that are used to calculate the threshold (or maximum) that can be spent on player salaries. The older NFL CBA (signed in 2011 and with three years still to run) uses the broader concept of “All Income” (or “AI”), although the concept is similar.
But what constitutes “revenue” or “income” under these deals for purposes of calculating each team’s salary cap (which sets the limit on what each team can spend on player salaries) is determined by the fine print of each league’s CBA. That raises two basic questions:
Consider, for example, the definition of “basketball-related income” under Article VII of the new NBA CBA. That definition includes, among other myriad revenue sources, the “proceeds” received by the league from “gambling on NBA games or any aspect of NBA games." But critically, as seen below, that definition also allows the NBA to deducts “reasonable and customary expenses” from gambling-related BRI:
(1) “Basketball Related Income” (“BRI”) for a Salary Cap Year means the aggregate operating revenues (including the value of any property or services received in any barter transactions), accounted for in accordance with Section 1(b)(1) below, received or to be received for or with respect to such Salary Cap Year by the NBA, NBA Properties, Inc., including any of its subsidiaries whether now in existence or created in the future . . . .
BRI shall include, but not be limited to, the following revenues: . . .
(xiii) All proceeds, net of Taxes, less reasonable and customary expenses ... from gambling on NBA games or any aspect of NBA games, subject to appropriate treatment of categories of excluded revenues or other amounts, if applicable, under Section 1(a)(2) below and allocations for multi-element deals. BRI shall exclude revenues from gambling on NBA games or any aspect of NBA games generated by casinos or other gambling businesses, owned or operated by a Team, Related Party, or a League-related entity, whose total revenues are not predominantly from gambling on NBA games or any aspect of NBA games;
Given the deductibility of “reasonable and customary expenses,” the NBA could conceivably take the position that the integrity fee is an “expense” item needed to defray the league’s increased monitoring and compliance costs associated with legalized sports betting. Along those lines, Dan Spillane, the NBA’s senior vice president and assistant general counsel, testified at a recent New York Senate Hearing that “if sports betting becomes legal in New York and other states, sports leagues will need to invest more in compliance and enforcement, including bet monitoring, investigations and education.” He urged lawmakers to include an “integrity fee” in the New York legislation in part “to compensate [the] leagues for the risk and expense created by betting.”
Based on the leagues’ stated justification for an integrity fee — e.g., to offset increased monitoring and investigative costs — the players could end up receiving nothing even if the leagues are successful in securing an “integrity fee” from sports gambling operators as part of any future state legislation. This would be a significant lost revenue opportunity for the players. In a hypothetical $150 billion U.S. sports betting market, where let’s say only $100 billion migrates over from the illegal black market, the leagues’ share of that based on a 0.25% integrity fee (without taking into account caps on GGR) could amount to as much as $250 million annually, with roughly half of that going to the players (assuming there are no deductions for “expenses”). Of course, this is a very rough estimate, but the point is that whatever the amount is, it’s worth fighting for.
To address this apparent inequity, the various players’ associations could take one of two approaches. The most obvious would be to begin lobbying state lawmakers in those states where an integrity fee is currently in play and urge that it be re-characterized as a “rights fee” or “royalty.” But that still wouldn’t eliminate the possibility of the leagues subtracting their investigative and monitoring expenses from any corresponding payout to the players. So regardless of the label, the players may still end up in the exact same place — SOL.
Should the Player Unions Begin Lobbying State Legislatures?
A more effective approach, I believe, would be for the unions to negotiate with the leagues right now and offer to work with them collaboratively in lobbying for appropriate state legislation. For all of their considerable lobbying heft, the leagues are essentially the “road team” in those states where the well-entrenched brick-and-mortar casino industry enjoys greater influence with state lawmakers, particularly in those states where casinos are among the state’s largest taxpayers and the leagues are relative newcomers. The optics of a well-known player or former player testifying before a state legislative body or schmoozing with lawmakers (think LeBron James in Ohio, or Jerry West in West Virginia) could resonate with state lawmakers in ways that a pinstripe-suited league official could never hope to replicate.
While the leagues have had some recent success persuading state lawmakers in Connecticut, Kansas and New York to include an integrity fee and other league-friendly provisions (such as data rights, veto power and real-time access to account-level betting information) in proposed legislation, those battles are from over. By the time the dust settles, the leagues could end up losing on those issues in a majority of states that enact sports betting legislation. Wouldn’t they rather win them all, or, just as important, avoid losing most of them?
Perhaps this represents an opportunity for player associations to work closely with the leagues in furthering their mutual interest, which is, of course, maximizing revenues. This is one area where the leagues and the unions — which are often in an adversarial posture with each other — can work together to advance their shared interest.
For example, the unions could offer to publicly support the leagues’ legislative proposals in exchange for assurances that the players will share equally (or at least equitably, with minimal offsets) in the gambling-related revenues received by the leagues from any legislatively mandated rights fees and the licensing of official league data.
Persuading the leagues to drop the “integrity” moniker from the rights fee could also benefit the players in one other important area: state law rights-of-publicity. Any future sports gambling regime will undoubtedly include proposition betting on individual player performances, such as wagering on which player will catch the first touchdown pass or score the most points in a quarter. The players — through their union representatives — could take the position that the players should be compensated for the use of their names, images, likenesses or performances associated with such betting.
To enhance that prospect, which also might depend on the outcome of the Daniels v. FanDuel case pending in the Seventh Circuit, the unions could begin lobbying state legislatures (alongside the sports leagues) to include a “rights fee” (rather than an “integrity fee”) in any sports betting legislation. That could help bolster the players’ argument down the road that they are entitled to compensation for the use of their names, images, and statistical performances in the context of individual player prop bets.
But it’s not just about revenues from the vantage point of the players. Perhaps no issue is as important to the players as due process rights and procedural fairness. As the leagues begin to ramp up their investigative teams in anticipation of legalized sports betting, there will undoubtedly come a time when a player is suspected of participating in a match-fixing scheme, either by altering his performance on the field or by providing material, non-public information to gamblers. In those circumstances, a mere accusation has the potential of ending a player’s career. If an established and in-his-prime NFL player has difficulty seeking employment for kneeling during the National Anthem, one can only imagine the future career prospects of a player accused — falsely or not — of participating in match corruption. Perhaps this is one area where the unions can extract some meaningful concessions on process right now from the leagues, when the unions are in a position to potentially help the leagues in lobbying for favorable sports betting legislation.
This article was originally published in Forbes.com on April 8, 2018.