Integrity Fees — What Are They And Why Are They So Controversial?

The next week-plus marks an important stretch for the fate of the “integrity fee,” also known as a “betting right and integrity fee,” also known as all of these things we suggested previously.

But this really is an important time. On Monday, New Jersey Governor Phil Murphy signed a NJ sports betting billthat completely spurns the leagues in their quest for an off-the-top 1-percent cut of all sports wagers in the Garden State (and every state), which will make it the third state to offer full-fledged sports betting and no direct payment to the leagues. (Remember that 1 percent off the top is actually more like 20 percent based on typical sportsbook revenue, which would more than double most states’ taxation rates of about 8 or 10 percent.) West VirginiaPennsylvania and Mississippi all passed laws that provide for  no payment whatsoever, with wagering likely to begin in each state before the end of the year.

Still wanting to cooperate? New York, the fourth most populous state in the union and a potential large hook upon which the leagues could hang their hat. The stage is set for a vote on the New York bills prior to the session’s June 20 end. And passage would give the leagues a needed win, even though the Empire State would grant a 0.25 percent cut, not the 1 percent they initially requested.

On the League-Pushed Sports Betting ‘Integrity Fee’ or ‘Royalty’: How It’s Evolved Over the Past Six Months and Where It Currently Stands.

In 1974, Congress slashed the 10 percent federal excise tax on all sports wagers (on the handle, not hold, like the “integrity fee”) to 2 percent, and lowered it  again to 0.25 percent in 1984, allowing the market to flourish without onerous taxes.

Between 1974 and 2017, the extent of the leagues’ efforts in the sports betting arena, to our knowledge, was of aiding in Congress’ passage of the Professional and Amateur Sports Protection Act (PASPA) in 1992, ruled an unconstitutional encroachment on states’ rights in 2018 by the United States Supreme Court.

In the intervening 43 years, the leagues did not attempt to directly extract money from sports wagering from Nevada-based casinos, bookmakers or regulators.

At some point in 2017, perhaps after hearing oral argument in Christie v NCAA (later Murphy v NCAA after governorship changed), the leagues read this white paper by Penn State Law Professor Stephen F. Ross and research fellows, titled “Reform of Sports Gambling in the United States: Lessons from Down Under.” The paper explores a Victorian law that outlines the type of payment from operators to leagues that the leagues are now attempting to accomplish. “The leagues could also charge sports books and casinos licensing fees to use the leagues’ data,” the authors write.

2018

On January 9, 2018, the first known piece of U.S. legislation containing the phrase “integrity fee” emerged in House Bill 1325 in Indiana, introduced by Representative Alan Morrison. We called it a “bombshell” and thought at the time that language might be hyperbole, but it wasn’t, given the magnitude and duration of this fight.

5 Sec. 3. A sports wagering operator shall remit to a sports
6 governing body that has provided notice to the commission under
7 section 2 of this chapter an integrity fee of one percent (1%) of the
8 amount wagered on the sports governing body’s sporting events.
9 The sports wagering operator shall remit integrity fees to the
10 sports governing body at least once per calendar quarter.
11 Sec. 4. The commission shall cooperate with a sports governing
12 body and certificate holders to ensure the timely, efficient, and
13 accurate sharing of information and the remission of proceeds of
14 the integrity fee to the sports governing body under section 3 of
15 this chapter.

“I did not contact anybody,” Morrison told Sports Handle regarding how the bill materialized. “They contacted me and I have not sent out any sort of request for any other leagues to be a part of this.”

On January 24, NBA Executive Vice President and Assistant General Counsel Dan Spillane testified at a hearing on sports betting before a New York State senate committee. He said in his written testimony: “To compensate leagues for the risk and expense created by betting and the commercial value our product creates for betting operators, we believe it is reasonable for operators to pay each league 1% of the total amount bet on its games.”

By February 12, Major League Baseball had publicly joined the NBA in a far-reaching lobbying effort that would eventually span about two dozen states, including Illinois, Indiana, Iowa, Kansas, New York and West Virginia. The pace of hearings and the introduction of new sports betting bills quickened.

On February 17 at the NBA All-Star Weekend, Commissioner Adam Silver was asked a question about sports betting and the so-called integrity fee. “This notion that as the intellectual property creators that we should receive a 1 percent fee seems very fair to me,” Silver said of levying a fee on potential operators. “Call it integrity fee, call it a royalty to the league.” This forced the leagues into the position of having to shift their justification for a cut. With Silver using the term royalty, Spillane and his MLB counterpart Bryan Seeley could no longer testify (with a straight face) at various hearings that the fee would finance only “integrity” measures.

[Also See: So What the Heck Is Integrity Monitoring, Anyways?]

On February 20Sports Handle published the leagues’ “Model Legislation” for sports wagering, which was distributed to Indiana and every other state where they had lobbied. Section 6(3) says: “At least once per calendar quarter, a sports wagering operator shall remit to the relevant sports governing body a sport betting right and integrity fee of one percent of the amount wagered on its sporting events.” The same language appears in bills in Kansas, Illinois and other states.

On March 2, West Virginia passed the first new law of 2018 to legalize sports wagering — pending a change in federal law. MLB Commissioner Rob Manfred himself, seeking to stave off a bad precedent, got directly involved. The bill became law after five days of sitting on Governor Jim Justice’s desk.

On March 7, New York State senator John Bonacic introduced S7900(A), which included an integrity fee of 0.25 percent, capped at 2 percent of operator gross revenue, and for which the leagues would have to apply for reimbursement. (Some math on that here.)

On March 13 at a hearing in Kansas, Seeley blamed the media for coining the term “integrity fee.”

On April 2 at a hearing in Connecticut, the leagues appeared to officially lower the bar for their ask from 1 percent to 0.25 percent. “This fee is lower than we originally asked for,” said Morgan Sword, Senior Vice President League Economics and Operations at Major League Baseball. “In spirit of compromise, we are willing to accept a 0.25% fee.

On April 4, he PGA Tour publicly aligned with the NBA and MLB on sports betting regulation.

On April 12, the players’ unions for the four major U.S. sports leagues staked a claim to the conversation and for a share of revenues.

As the date of a decision in Murphy v NCAA continued to near, the phrase “integrity fee” began to pick up steam in the mainstream media. We turned to entrepreneur and reputation expert Eric Schiffer for his assessment of the “integrity fee.” He bluntly called it “extortion.”

On May 14 the Supreme Court ruled in favor of New Jersey (Murphy), opening the door for states to legalize sports wagering — with or without any fee or payment benefiting for the leagues.

On May 21, the NFL announced its “core principles” for sports wagering, which made no mention of a fee or royalty, signaling a public break in strategy for monetization of sports wagering. There are rumors that the NFL is pursuing a strategy through Congress, for a new bill with not-yet-known concessions, or possibly carving a pathway through modification of the Wire Act.

On May 22, Seeley told The Athletic, “Obviously, some of that fee is designed to cover our costs that I talked about. But we acknowledge that the fee is going to be more than our costs, so that revenue would go to our clubs just like any other revenue would.”

On May 24, NBA spokesman Mike Bass told the Associated Press:  ”As the intellectual property creators for this content, our games serve as the foundation for legalized sports betting, providing casinos the ability to earn revenue off our games, while we bear all of the risk that accompanies sports betting and will incur additional expenses to expand our existing compliance and enforcement programs.” He continued, “As a result, we believe it is reasonable for casinos to compensate the NBA with a small percentage of the total amount bet on our games.”

On June 5, Delaware began taking full-fledged sports wagers. Governor Jay Carney placed the first wager — $10 on the Phillies to win at the Cubs, and won. The leagues collected nothing from this wager, directly, under Delaware’s regulatory framework.

On June 8, Seeley said that other states should not look to Nevada — which pays the leagues zero percent — for guidance on regulation. “It makes no sense,” he said, per Reuters. “We should adopt regulations that fit 2018.”

On June 11, New Jersey Governor Phil Murphy signed into law New Jersey’s sports betting law, which likewise does not include any payment — royalty or integrity fee or otherwise — for the leagues. No surprise there after New Jersey racked up $9 million legal fees fighting the leagues for nearly a decade in court for the ability to offer sports wagering. Monmouth Park in Oceanport, NJ announced that it will take its first legal wager on June 14.

On Dec. 1, Missouri Senator Denny Hoskin’s pre-files SB 44, a sports betting bill that includes a .5 percent integrity fee to be paid not to the professional sports leagues, but to the state for upkeep, maintenance and potentially building of sports facilities.
On Dec. 3, Missouri Representative Cody Smith prefiled HB 119, the first sports betting bill in the country to specifically earmark a payout to the NCAA. The bill calls for a .75 percent fee to be paid to the professional leagues, and a .25 percent fee to be paid to the NCAA.

2019

On Jan. 22, Massachusetts Senator Michael Rush introduced S 224, one of at least 12 sports betting bills in the state. It calls for a .25 percent integrity fee to be paid to the professional leagues and mandates the sportsbooks buy “official league data.”

On Jan. 31, Missouri’s SB 327 was introduced. It calls for a .75 percent integrity fee to be paid to the professional leagues and NCAA.

On Jan. 31, Iowa’s Committee on State Government introduces a package of bills, including SB 1081, that includes a .25 percent integrity fee to be paid to the professional leagues.

So as of Present, No Piece of Legislation Has Passed Anywhere That Pays the Leagues a Direct Cut.

Some respected industry people including Roxy Roxborough have made the case for giving the leagues a small cut. There remain many opportunities for private commercial data deals or sponsorship agreements between the leagues and state-licensed operators or state lotteries regulating sports wagering. And Congress could, at any time, drop a bill that regulates all states in one framework, forcing all to pay a percentage.

This story is very much to be continued.

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