Safe Harbor for Prediction Markets in SAFE Port Act

Congress recently passed a law, the Unlawful Internet Gambling Enforcement Act of 2006, that aims to restrict access to certain forms of online gaming. It has not, contrary to some reports, been passed into law. The House and Senate passed the UnInGEn-ious Act (as I style it) as subchapter IV of the SAFE Port Act, H.R. 4954, 109th Cong., 2nd Sess. (2006), which as yet lacks a presidential signature. Let's assume that it will get one, though. What will the enactment of the SAFE Port Act, and thus of the UnInGEn-ious Act, portend for prediction markets? Nothing very scary.

Appropriately, given the title of the larger bill into which it got tucked, the UnInGEn-ious Act creates a safe harbor that prediction markets can probably take shelter in. The Act targets only "unlawful internet gambling," which it defines as the knowing transmission of "a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law . . . ." Section 5362(10)(A). If prediction markets do not involve bets or wagers, therefore, they escape the reach of the UnInGEn-ious Act.

Helpfully, the Act defines "bet or wager" to not include

participation in any . . . educational game or contest . . . that meets the following conditions:

(I) All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.

(II) All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.

(III) No winning outcome is based--

(aa) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or
(bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.

Id. section (1)(E)(ix).

Does that definition of "bet or wager" exclude prediction markets? Probably. It certainly seems that most prediction markets—even real money ones—establish payoffs in advance of any game or contest (i.e., you stand to win the face value of any certificates you hold at the expiry of trading in the associated claim), and those payoffs are not determined by the number of participants or the fees they've paid. That takes care of section 5362(1)(E)(ix)(I).

Whether or not prediction markets satisfy 5362(1)(E)(ix)(II), which was evidently written with fantasy sports teams in mind, poses a closer question. Certainly, the winning outcomes on a prediction market reflect the relative knowledge and skill of the participants. Are they also "determined predominantly by accumulated statistical results of the performance of individuals . . . in multiple real-world . . . events"? In the case of prediction markets in elections, almost certainly. In the case of prediction markets in science claims, possibly. Claims on such markets would, to play it safe, have to relate not to mere abstract phenomena but rather to the performance of particular scientists. Write claims that treat science (or movie making, or anything else) like a spectator sport, in other words, and you will probably satisfy the requirements of UnInGEn-ious Act section 5362(1)(E)(ix)(II).

The last condition, in section 5362(1)(E)(ix)(III), presents no problem for prediction markets.

Even if prediction markets do not qualify for safe harbor in UnInGEn-ious Act section 5362(1)(E)(ix), moreover, it does not follow that the Act renders them illegal. Recall, after all, that the Act reaches only bets or wagers. As I've argued elsewhere, prediction markets generally do not deal in bets or wagers as defined in applicable state or federal laws. Even the UnInGEn-ious Act makes that clear; section 5362(1)(A) defines "bet or wager" as, in relevant part, "the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance . . . ."

Bottom line: The UnInGEn-ious Act does not expand U.S. law to outlaw prediction markets and offers a safe harbor expressly exempting properly structured prediction markets from the Act's reach.

[Crossposted, in part, at Midas Oracle.]