Concerned, For This Country: A Response to Aaron Brogan
Can non-enforcement of laws be that easily dismissed?
Aaron Brogan put out a piece a couple of weeks ago titled What’s Going to Happen to Prediction Markets? The subtitle: Why are so many people so concerned about fairness in niche financial products?
We are concerned, because we are strong believers in enforcement. If the laws stop being enforced on a massive scale and multi-billion-dollar industries can be created not because the products are innovative but because the legal maneuvering is, that’s the beginning of the end for a country. Before you dismiss us for being extra-alarmist, let us be clear. Yes, these are long cycles. America is not going down this year or the next or the year after because of prediction markets. At the same time, what is happening is clear if you look closely: Instead of cementing its lead on financial innovation, America chooses vice under the guise of innovation. Laws are applied unevenly, or not enforced at all. From the Roman Republic to the Ottoman Empire, history tells us these episodes don’t end well.
With that framing, let’s turn to Brogan’s position. His central claim is this:
There is a panel of nine judges in Washington D.C. that is going to eventually determine whether prediction markets based on sports and entertainment are legal, and preempt state enforcement, or are illegal and do not, and every single other decision between now and the day that the Supreme Court does eventually rule is just noise. Plain and simple.
There is a lot going on in this single paragraph; much more than it appears at first glance. We have blog pieces and podcasts on the critical issues hiding underneath, but let’s start with the key framing:
Is this the choice: Federal & legal vs. illegal under state law? No, that’s a false binary.
Brogan sees one of the three Ps: Preemption. He sees that not because it’s the only question that matters, but because litigation sequencing forces that issue to the front:
The real question is more broad.
Is the Law Really Clear?
Brogan believes “the law is so clear.” In a footnote, he clarifies:
And by clear here, I mean that the core issue is already well known and there is little question that the Supreme Court is the only authority that can ultimately decide it.
Again, yes–SCOTUS will ultimately decide it, but what they decide matters most. Deciding a preemption question is very different from deciding the legality of sports gambling. Brogan seems to assume SCOTUS will only address the former, but the fact that preemption is what’s being litigated now does not mean that that is the only question the Court will consider.
So is the law clear? We agree it is, but only if you take a holistic approach and view the debate through The Lexicon Lens:
Our summary: The 3P framework is what matters most: Preemption, permissibility, and parallelism. On those three fronts, our conclusions are:
→ Federal law preempts state gambling laws.
→ Sports event contracts violate the law1:
They are impermissible under the CEA because of the “gaming” prong
They also face an additional hurdle because they are illegal under the Wire Act
→ State-regulated sportsbooks are offering illegal off-exchange swap trading.
We have no doubt whatsoever that this is the law. The real question is what happens when SCOTUS confronts it.
Will SCOTUS Fully Resolve the Issue?
Brogan’s view leans toward legal realism:
Here is what actually matters. Money. Power. That is the key to understanding this fight.
He seems to believe the highest court will not upend an entire industry, he said as much before. I’m not so sure. The Justices have their own reputations to consider. They are justices for life. They cannot think too much about this administration or the next or the one after. Confidence in the Court is at a record low and I cannot imagine that is irrelevant to them. One Justice who is seen as “deeply committed to rule-of-law principles” has publicly stated that she views her duty as to “follow the law wherever it may take [her].” I’m fairly certain that most, if not all, of the Justices subscribe to the same view.
So when SCOTUS takes the case, I believe that they will be inclined to resolve the entire framework–not just the narrow preemption issue.
Murphy didn’t really solve much. I have always believed it was one of the more inconsequential cases decided. On that note, Brogan’s characterization of Murphy is misplaced.
What Murphy Did and Didn’t Do
Brogan writes:
Historically, state gambling was illegal. But on May 14, 2018, the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association, 584 U.S. 453 (2018) legalized state sports gambling in the United States. It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment. This created an important source of state-controlled revenue, and created a new locus of power in state regulators by locally empowering them to oversee substantial gambling markets.
Well, SCOTUS obviously didn’t “legalize state sports gambling in the United States,” but we know what Brogan means, so we’ll give him a pass.
This excerpt, however, is correct:
It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment.
Right. That violation is precisely what SCOTUS concluded—nothing more, nothing less.
What Murphy didn’t do is just as important. It did not decide whether sports gambling is lawful under federal law. It did not address the CEA, the Wire Act, nor did it evaluate the permissibility of sports event contracts under either statute. It did not pave the way for states to legalize sports betting. Murphy struck down PASPA because the Supreme Court held that it violated the anti-commandeering doctrine–and left every other constraint exactly where it was.
There were two doors that looked identical but opened into completely different rooms: PASPA (violated the anti-commandeering doctrine) and the CEA (it reached sports but SCOTUS remained silent on that issue). Those two doors collapsed onto each other and somehow states were able to walk through. The CFTC did nothing and here we are. We dug into this as well:
The industry cannot have it both ways.
If federal law preempts state law today, then it did so in 2018 as well–and state-regulated sports gambling was (and continues to be) illegal under the CEA.
Or, it doesn’t preempt, and prediction markets may be criminal under the laws of states like Arizona (and why companies like Kalshi are now facing criminal charges within the state).
Which one is it? Well, we provided the long answer in our latest podcast:
The short answer: State law isn’t the problem-federal law is.
Let’s Predict
Brogan’s prediction:
My best prediction is that entertainment and sports prediction markets have a 70% chance of surviving. That assumes that the forthcoming CFTC NPRM on prediction markets liberalizes the treatment of these markets, and that the question of preemption eventually accedes to the Supreme Court. Once it gets there, all that counts, through all the sound and fury, is counting to five.
Right, under his assumption, Brogan is probably correct.
Where I differ is not whether SCOTUS will take the case–they will.
Nor is it whether prediction markets win on preemption–if that’s the question, prediction markets win.
My disagreement is about what question SCOTUS will take.
My prediction is that they will look at everything together, not just the narrow preemption issue.
And if that’s what they do, here is how we believe it will shake out:
We’ll leave it there for this week. The law is clearer than the industry wants to admit, and the sequencing is already in motion. The next stop is coming–and we’ll be here to walk you through it.
Many other event contracts, like mention markets are also impermissible but sports event contracts are the most consequential, and potentially the only ones SCOTUS will evaluate.