Tuesday, January 10, 2006

Ticket Reserve's Legal Strategy

Most of you readers of Agoraphilia probably also read Marginal Revolution, (if you don't, you should!) You've thus probably read Tyler Cowen's recent, brief reference to the Ticket Reserve. Fans of prediction markets (a.k.a. "decision markets," "idea futures markets," etc.) will want to give the Ticket Reserve careful consideration, as it points toward a viable legal model for a real-money exchange.

The Ticket Reserve basically operates as a prediction market for sports playoffs. It allows members to buy and sell "Event Fan Forwards," defined in paragraph one of the User Agreement (available on the registration page) as "an instrument which: (i) gives the holder the right to purchase a ticket to a possible Fan Forward event the occurrence of which is contingent upon one or more factors and (ii) obligates the holder to purchase the ticket if the event is scheduled to occur."

Essentially, then, when you buy an Event Fan Forward you predict that a particular sporting event will happen. Guess wrong and you lose your investment. Guess right and you get a very valuable right—one you can sell for a nice gain—to buy a ticket to that sporting event at its face value (i.e., a value almost assuredly well below its market price).

The Ticket Reserve makes quite plain that it merely facilitates such exchanges. Paragraph one of the User Agreement offers a fairly succinct description of what Ticket Reserve does:
The Ticket Reserve is a venue where members can purchase and sell tickets, Event Fan Forwards and other ticket-related products relating to sports contests, concerts and other world class events. . . . The Ticket Reserve facilitates the purchase and sale of those rights but does not act as a principal to either the buyer or seller. We simply provide an independent marketplace where interested buyers and sellers can meet to transact at prices established by them in a fair and open market.
This exchange function distinguishes Ticket Reserve from Yoonew.com, a competing service that presently offers only the right to purchase tickets. (Yoonew notes, however, that it plans to offer a secondary market someday; look in its FAQ under "Purchasing Fantasy Seats/Q: Are my Fantasy Seats transferable?")

Does Ticket Reserve operate as a sports gambling establishment? It evidently thinks not, as it nowhere tout a gaming license. At all events, even if some state had issued Ticket Reserve a license to offer sports gambling services, Ticket Reserve would assuredly violate a wide variety of state and federal laws in offering its services across state borders.

Yet Ticket Reserve embraces the fact that many people will use it not to secure tickets to see their favorite teams in the playoffs, but rather to parlay accurate sports predictions into money. It's FAQ explains the "game-within-the-game" thusly:
Since The Ticket Reserve market is driven by supply and demand for Fan Forwards, prices tend to change dynamically based on a number of factors including things such as team performance, player injuries, etc. This dynamic nature of the marketplace provides an opportunity for individuals to profit from price movements in Fan Forwards. The "game-within-the-game" is to purchase Fan Forwards based on the chance to make money in the marketplace, as opposed to securing a seat to the event. In most cases, these market participants have no interest in the team or the event, but rather think a given Fan Forward is under priced and will provide them with the opportunity to profit down the road when they put it back into the market. Many fans that are large supporters of their team will purchase Fan Forwards to both guarantee attendance at events, as well as to speculate on other teams in the hopes of making a profit.

For many people, of course, Ticket Reserve's "game-within-the-game" will be the game. Would we call those people gamblers? Generally speaking, chance must predominate over skill in making the sort of prediction that qualifies as gambling. Roulette thus plainly counts as gambling, whereas engineering reports plainly do not. Sports predictions fall in the middle, raising thorny epistemological—and not inconsequentially, legal—questions.

With regard to sports predictions in particular, however, federal law has simplified those questions. The Wire Act, 18 U.S.C. 1084(a), threatens criminal sanctions against anyone involved in the business of "placing [] bets or wagers on any sporting event or contest . . . ." Suffice it to say that I salute the bravado of the parties who operate the Ticket Reserve. I wish them luck, too. If the Ticket Reserve can escape prosecution, the sort of prediction exchange in science claims that I want to legalize should have an easy go of it.

Since they don't think they're engaged in gambling, how do those responsible for the Ticket Reserve classify their enterprise? Not as a market subject to regulation by the CFTC or SEC, apparently. The only allusions to federal regulations I've seen Ticket Reserve make remain just that: allusions. They describe their service, for instance, in these terms: "The Ticket Reserve marketplace uses the same type of bid/ask technology as traditional stock exchanges to arrive at market based pricing."

The Ticket Exchange apparently regards their service a straightforward matter of contract law. Being based in Illinois, the chose the contract law of that state (see Paragraph 23 their User Agreement). I salute the Ticket Reserve for that bit of legal daring, too, as I'd like for state and federal regulators to apply only contract law to the Simon Exchange. But, again, I must say that I also feel compelled wish Ticket Reserve luck—good luck and a lot of it.

[Update: I found the (in hindsight, obvious) links to the people behind the Ticket Reserve, and so struck a description of them as "mysterious."]


Jason Ruspini said...
This comment has been removed by a blog administrator.
Jason Ruspini said...

Funny thing in the Illinois Gambling Laws:


(a) A person commits gambling when he:
(1) Plays a game of chance or skill for money or other thing of value, unless excepted in subsection (b) of this Section


(b) Participants in any of the following activities shall not be convicted of gambling therefor:


(2) Offers of prizes, award or compensation to the actual contestants in any bona fide contest for the determination of skill, speed, strength or endurance or to the owners of animals or vehicles entered in such contest;

Unclear and seems to need work

Tom W. Bell said...

Good work, Jason! All told, though, I don't think that the Illinois statute differs much from the general, common law test of gambling that I described. It (probably) boils down to a question of whether chance predominates in determining the accuracy of a guess. (I throw in that hedge--"probably"--because I have not researched Illinois case law interpreting the statute.)

Jason Ruspini said...

Thanks, yes and whatever "bona fide contest" means.. But apart from the general question of gambling and skill, wouldn't the wire act cover this case anyway as it specifically names sports betting, as you pointed out?

What would their argument be then? Is the fact that the participant is obligated to purchase the thing of value instead of being given the ticket important? Likewise with reselling, the player doesn't technically *receive* something valuable -- rather what they previously purchased appreciates in the eyes of some third party due to the outcome of a sporting event? Can they actually escape the Wire Act with these sorts of semantic issues when it seems that they are violating the spirit of the law?

Tom W. Bell said...


Yes, the Wire Act would apply here if what Ticket Reserve does counts as gambling. State law would have to apply first, though. In a part of the Act I didn't quote, the Wire Act exempts from liability gaming transactions sent to or from a state where that transaction is illegal. 18 USC 1084(b).

But that's a no-brainer. If you put up a universally-accessible sports gaming website, you're going to get hits from Utah and the like. Even Illinois, for that matter, outlaws sports betting. See § 720 ILCS 5/28-1 (2005) (the section I think you quoted).

So, as you ask, what is Ticket Reserve's out? Good question. As you apparently realize, the dodges you've cooked up look a little wobbly. But what else they can count on?

Maybe they would argue that, because skill predominates over chance, the transactions in question don't really qualify as "gambling." But on that reasoning, almost all sports predictions would become exempt. And courts have emphatically not read the statute that way.

Maybe they could claim that, unlike a gambling establishment, they offer hedging functions.

Or maybe they think it's easier to ask forgiveness than permission.

Anonymous said...

Then oil, pork belly and the rest of the US options markets should be shut down. It is the same thing.


Anonymous said...

Then oil, pork bellies and the rest of the US futures markets should be banned as well.

Anonymous said...

Have you seen yoonew.com's interface? It definitely looks a lot more legit than ticketreserve's.