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A Gift from the DoJ: Internet Lotteries (and Poker?) Are Legal

December 25, 2011

The United States Department of Justice (“DoJ”) has given the online gaming community a big, big present, made public two days before Christmas. President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally.

Technically, the only question being decided was “Whether proposals by Illinois and New York to use the Internet and out-of-state transaction processors to sell lottery tickets to in-state adults violate the Wire Act.” But the conclusion by the DoJ that the Wire Act’s “prohibitions relate solely to sport-related gambling activities in interstate and foreign commerce,” eliminates almost every federal anti-gambling law that could apply to gaming that is legal under state laws.

If the Wire Act is limited to bets on sports events and races, what other federal anti-gambling statutes are left? There are prohibitions on interstate lotteries, but Powerball and the other multi-state lotteries show how easily these can be gotten around, even before Congress passed an express exemption for state lotteries. And poker is not a lottery under federal law.

So, all that are left are the federal laws designed to go after organized crime. These all require that there first be a violation of another law, like the Wire Act, the federal anti-lottery statutes, or a state anti-gambling law. If a state has expressly legalized intra-state games like poker, as Nevada and the District of Columbia have done, there is simply no federal law that could apply.

If the bettors and operator are all in the same state, and the gambling does not involve a sports event or race, the Wire Act cannot be used against the operator, even if phone wires happen to cross into another state. And if the state legislature has made the online game legal, it does not violate any other federal anti-gambling law.

I suppose it is possible that the DoJ could argue that poker is a “sporting event or contest.” But the language of the Wire Act prohibits “information assisting in the placing of bets or wagers ON any sporting event or contest.” If poker is a contest, it is one where players bet IN the contest, not on it. Anyway, the DoJ held that the Wire Act was designed to go after bookies taking bets on horse races and football games, etc., not other forms of gambling. And even the DoJ would not argue that a game like blackjack is a sporting event or contest.

In a footnote, the DoJ expressed no opinion about the provision in the Wire Act that allows prosecutors to shut down phone lines where true interstate or foreign gambling is taking place. But, since the DoJ has now concluded that every other section of the Wire Act applies only to races and sports events, it would be truly bizarre to believe that Congress intended only this one section to apply to other forms of gambling.

This means there may be nothing preventing states from making compacts with other states, and even foreign nations, once they have legalized an online game, like poker. If Nevada and the District of Columbia want to take Internet poker players from each other, what federal law would they be violating? And, if they agreed that their residents could bet with licensed poker operators in, say, Antigua and England, while residents of those nations could bet with poker operators in Nevada and Washington, we know they would not be violating the Wire Act, or the anti-lottery laws, or any of the federal prohibitions which require that the gambling be illegal under a state’s laws.

The immediate beneficiaries will be the D.C. Lottery and Nevada-licensed private operators, since those jurisdictions are the furthest ahead. The state lotteries in Illinois, New York and New Hampshire will also initiate or expand their online games. After all, most of the provincial lotteries in Canada are already operating Internet poker.

I believe this will be a major incentive for the other states looking at legalizing intra-state poker and other games. First will probably be Iowa. The State Legislature mandated a report, which has already been submitted, concluding that intra-state poker can be operated safely and will raise money. The Iowa Legislature meets for a short period at the beginning of the year, so it has to act quickly, or it will be passed by other states in 2012.

Those other states are California and New Jersey. California is desperate for any source of revenue, and it has so much legal gambling that the only question is which operators are going to be the big winners. The Democratic-controlled Legislature in New Jersey approved intra-state online gaming, but the bill was vetoed by Gov. Chris Christie (R.-NJ). Christie understands his state need the money, so he will probably help put the issue on the ballot in November. Last month, the voters of New Jersey approved sports betting. There is no reason they would not also approve Internet casinos. It will be interesting to see if the main author, state senator Ray Lesniak (D.-Union), will limit online patrons to New Jersey, as his original bill stated, or, if he will accept players from any other state and nation where Internet gambling is legal.

Once these jurisdictions open their online games, even if limited to players who are physically within the state, operators will push for compacts to allows interstate Internet poker among the legal states. And other states, like Florida, will jump on the bandwagon.

What impact will all this have on proposed federal laws? Proponents are trying to spin the DoJ opinion. The Poker Players Alliance stated, “However, this ruling makes it even more important that Congress act now to clarify federal law, and to create a licensing and regulation regime for Internet poker, coupled with clear laws and strong enforcement against other forms of gambling deemed to be illegal.” But the reality is that Congressional advocates, like Barney Frank (D.-Mass.) and Joe Barton (R.-Tx.), have had some of the wind knocked out of their sails. Since states are now clearly free to legalize intra-state online poker, and perhaps even interstate, there is not as much reason to even bother with a federal law. Only the major operators, like Caesars Entertainment, need a federal law, because they don’t want to be competing with politically connected local gaming companies for limited numbers of licenses in 50 states.

Opponents, like Jon Kyl (R.-AZ) and Frank Wolf (R.-VA), might get some leverage for their attempts to expand the Wire Act to cover all forms of gambling. But, as I have pointed out (to the consternation of some who have donated money hoping for a federal Internet gambling law), Congress has passed literally no substantive laws since the Republicans took over the House of Representatives in January 2009. There is as little chance of this Congress passing a new Unlawful Internet Gambling Enforcement Act as there is its passing a repeal of the UIGEA.

The interesting question is what the Majority Leader of the U.S. Senate, Harry Reid (D.-NV) and Kyl, the number two Republican in the Senate, will do. They had sent a letter asking the DoJ for clarification of its position on Internet gambling. They now have their answer, though it may not have been what they had wanted.

My bet is that they, and Congress, will continue to do nothing, while Internet gambling explodes across the nation, made legal under state laws.

Republished with permission © Copyright 2011, I. Nelson Rose, Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1^st and 2^nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

Politics and Gaming

August 22, 2011

It is said that politics makes strange bedfellows.

That has always been true for opponents of expanded legal gambling.

In 1998, Don Siegelman was elected governor of Alabama, one of only two Democrats to beat incumbent Republican governors that year. The center piece of his campaign was a state lottery for education.

Yet, the voters of Alabama rejected the idea the next year, 54-46.

The campaign against creating a state lottery was one of the nastiest in memory. Where did the church groups get much of the million dollars they spent telling Alabama voters about the evils of legal gambling? From Mississippi casinos.

Existing gaming operators have always been willing to team up with opponents of all gambling to stomp out competitors.

But there seems to be a new trend: Now it is proponents of expansion who are finding the most unexpected allies.

It is not hard to see why Barney Frank (D.-MA) could work with Ron Paul (R.-TX) to try to legalize Internet poker in 2008. Frank is often as much a libertarian as a liberal. He believes government should stay out of people’s homes.

And Paul is not really a conservative, like every other member of the GOP in the House of Representatives. He, also, is a libertarian. At a presidential candidate debate, he came out in favor of legalizing heroin and prostitution. So allowing people to gamble is, for him, actually rather tame.

The few libertarians and pure fiscal conservatives left in the GOP, like darkhorse presidential candidate, former New Mexico Governor Gary Johnson, naturally believe adults should be able to decide for themselves whether they want to gamble. And former Republican office holders, like the Poker Players Alliance’s Alfonse D’Amato and FairPlayUSA’s Tom Ridge, who created the silly terrorist threat levels color codes, are always available if the price is right.

But, how do we explain social conservatives supporting legal gambling? The tea party and other Big Brother types want government in the wedding chapel, bedroom and doctor’s office, particularly if you are female. Yet, Joe Barton (R.-TX) introduced a bill this year to legalize internet poker. Barton is so far right that he actually publicly apologized to BP for President Barack Obama daring to investigate BP’s disastrous Gulf oil spill.

Barney Frank signed on as a co-sponsor; probably the only time he will be working with Barton this year, or any year.

Frank also reintroduced his own Internet gambling legalization bill. Since the GOP now controls the House, he needed a Republican co-author. He found one in John Campbell (R.-CA).

Meanwhile, the leaders of both parties in the Senate sent the U.S. Attorney General a letter that many see as an indication that they also might be considering legalization. The fact that the authors could agree on even a letter is itself amazing.

Harry Reid is the Majority Leader and a moderate Democrat. He represents Nevada, which makes him pro-gambling. Jon Kyl (R.-AZ) is a conservative Republican, a redundancy since all but two Republicans (from Maine) in the Senate are conservative. He is the GOP Whip, the second most powerful Republican. More significantly, he is so opposed to Internet gambling that his name has become synonymous with efforts to outlaw it, as in “the Kyl bill.”

But reading between the lines, the only thing Reid and Kyl agree on is that Internet poker should be operated only by their constituents: Landbased casino companies (Reid) or Indian casino tribes (Kyl).

Are conservative Republicans really becoming pro-gambling? There are a few Tea-Party-types who actually believed their own rhetoric, that everything is a state issue. Rick Perry (R.-TX) said it was OK with him if New York legalized gay marriage – at least, that was his position before he entered the race for president.

Maybe it is wrong to view legal gaming as a partisan issue. After all, the liberal Democrat Kathleen Kennedy Townsend — and you can’t get more Democratic than a Kennedy — ran and lost the governor’s race in 2002 in Maryland in part by opposing slot machines at racetracks.Ironically, the Republican candidate, Robert Ehrlich, who strongly backed racinos to solve the state’s budget crisis, never succeeded. For eight years, the Maryland State Legislature kept killing the proposal. But it wasn’t due to any anti-gambling ideology. The fights were always about who was going to get the money.

Money is, of course, what is driving the latest pushes for legalization. Gambling is seen as a voluntary tax. Every time there is an economic crisis, lawmakers and governors turn to authorizing more gambling as an easy way to raise revenue.

There is so much legal gambling that proposals that would have been considered outrageous just a few years ago don’t even raise eyebrows. Remember when there was no legal gambling in any major American city, other than Las Vegas? Then came the temporary casino in New Orleans in 1995 and the passage of Proposition E in 1996, allowing three casinos in Detroit.

The Michigan election was historic. Never before had the voters approved high-stakes casinos in the face of active opposition.

Now there are casinos in Philadelphia and Pittsburgh, put there by the state legislature. Most significantly, casinos are being built in the four largest cities in Ohio, approved by votes of the people.

There is so much legal gambling in the U.S. that it is easy for politicians to say, “We’ve already got casinos, racetracks and a state lottery. What’s the big deal about Internet poker?” Of course, there is so much legal gambling in the U.S. that those casino and racetrack owners, and even the state lottery, respond, “Internet poker is fine, as long as we get to run it.”

Today, the major opposition to expanding legal gambling comes from existing operators, and they don’t particularly care which political party is in power. That is not to say that ideology plays no role.

One-third of the electorate will always be against legal gambling. They are mostly from the religious right, and they always vote. So, special and off-year elections spell doom for proposals for new gaming.

As Kathleen Kennedy Townsend and Ralph Nader demonstrate, the far left also has a few gambling opponents. They are mostly paternalistic, believing poor people should not be gambling or drinking beer or buying hamburgers.

Although the country is growing ever more polarized, the good news for proponents is that gambling is becoming a non-issue. Those of us who are involved in it every day can lose sight of the fact that most politicians don’t know or care about the issue. And, apparently, even the religious right is losing interest.

On November 2, 2010, the voters in Iowa removed three sitting justices of the State Supreme Court, because they had ruled in favor of same sex marriage. How did this religious conservative landslide affect legal gaming? Votes in favor of casinos went up in all 14 counties in Iowa, from an average of 74% in 2002 to 78.8% in 2010.

Joe Barton has not been condemned for coming out in favor of Internet poker. Conservative groups like Focus on the Family used to instantly orchestrate mass letter-writing campaigns against any proposal for expansion of gambling. It was unthinkable that a conservative Republican would actually author such a bill.

Today, the states are desperate for money. And gambling is increasingly being seen as just another way to raise revenue, without raising taxes.

From Land Based to Online Poker

July 27, 2011

The question is not if, but when: What will happen when the biggest land-based gaming companies start competing for real on the Internet?

We already know the answer, from looking at what has happened in every other industry. There is a natural progression, starting with any new invention. It does not matter if it is automobiles at the dawn of the 20^th century; radio, movies and television from the 1920s to the 1960s; or computers, more recently. And it makes no difference if the invention is a “true” patented contraption, like the camera or the photocopier, or merely an idea whose time has come, like casinos on land or poker on the Internet.

Inventors and entrepreneurs are the first to grab onto any breakthrough. The first efforts of these garage inventors are not always the most graceful. For example, the first computerized bingo machines were raw cathode-ray tubes with wires. I was sure I would get electrocuted if I touched it.

Once the invention is shown to not actually kill people, partnerships and small companies, commonly called mom-and-pop operators, hop onboard. These small start-ups grab a large share of the market, because the big boys have not yet caught on.

If the idea is a good one, and the execution is competent, these small companies start making money and growing. But, soon, corporations, with greater access to capital for expansion and marketing, begin to dominate the business. Sole proprietorships and partnerships are consigned to niche markets.

At some point the business finally attract the attention of large international companies. They have the means to buy up their competitors. It’s called consolidation, but what it really means is, if the law allows, conglomerates will take over just about everything, leaving only crumbs for smaller, local operators.

Land-based gaming has already gone through its waves of consolidation. There are 30 major casinos on the Las Vegas Strip. Most are owned by only two companies: MGM Resorts International (more than a dozen casinos) and Caesars Entertainment (nearly as many). It’s a long way to the next level of ownership. The Las Vegas Sands (“LVS”) and Wynn Resorts each own two casinos on the Strip. Only a few are independent, if you can call it that, when, for example, it is a bank that got stuck with a casino: Deutsche Bank, which ended up with the Cosmopolitan.

Internet gambling is following the pattern. Mergers and acquisitions (M&As) first gave Party Gaming the World Poker Tour and then created the giant, awkwardly named bwin.party digital entertainment. Eventually, there will be only a few dominant online gaming companies in the world.

Who the survivors will be is not only unknown, but unknowable, due to the uncertainties created by shifting laws and even faster changing technology.

Caesars Entertainment, formerly Harrah’s, would be the largest Internet gambling company in the world, if only it did not have to worry about keeping its Nevada license. The company bought Binion’s Horseshoe in 2004 just to get the World Series of Poker brandname; it also kept the Horseshoe brand, but sold the actual hotel and casino. Caesars created a subsidiary, Caesars Interactive Entertainment, headquartered in Montreal, combining both its poker and online activities. It chose as its first CEO Mitch Garber, former CEO of Party Gaming. But it can’t take interstate bets from Americans, and it can’t buy up existing operators who do.

Predictions are also difficult, since some of the biggest potential players either did not exit ten years ago, or don’t exist today. Technology creates stock bubbles, which can lead to strange combinations, like AOL and Warner Bros. I would not be surprised to see M&As involving Facebook and Google, perhaps buying bwin.party or Caesars.

Powerful individuals throw in another variable, when they control giant companies. It will be entirely up to Sheldon Adelson and Steve Wynn to decide whether their multinational landbased casino companies, LVS and Wynn, are going to get into the field of online gaming, or not.

Of course, having one person in absolute control can cause problems beyond missing opportunities. LVS was hit with civil suits and criminal investigations, all involving allegations of wrongdoing by Adelson. Meanwhile, Steve Wynn’s announcement of his company’s earnings was lost in the uproar caused by his knocking Obama as a socialist, while praising the government of China – that’s the Communist government of the People’s Republic of China.

The land-based operators are gearing up for when they can take Internet bets from Americans. The easiest way to instantly gain expertise is to buy it. International Game Technology, one of the largest manufacturers of slot machines, paid about $115 million for Entraction Holding AB of Stockholm, Sweden. The M&A was textbook: Entraction has one of the world’s largest online poker networks and is one of the leading suppliers to the industry. Most importantly, it had never taken bets from the U.S., and will thus not cause IGT any problems with its dozens of regulators.

Caesars is more aggressive. It entered into a partnership with subsidiaries of 888 Holdings. In March, both the Nevada Gambling Control Board and the Nevada Gaming Commission declared 888 suitable. This was a significant departure from Nevada regulators’ former position, that any company that had taken bets from the U.S. was violating the law. Now 888 is considering applying for a Nevada license and planning a strategic partnership with Caesars to operate online poker, once the law allows.

Wynn took this trend to the limit, by announcing he was going to work with PokerStars to set up PokerStarsWynn.com. It was a gutsy move, since, unlike 888, PokerStars was still taking bets from the U.S. How gutsy was seen a few days later, when the federal DoJ indicted PokerStars’ principals. Naturally, Wynn cancelled his plans.

The large land-based operators understand how important it will be, to be the first online with 100% legal poker targeted at Americans. This means not only getting all regulatory approvals. The operation has to have no glitches, since players can move to a new poker room with the click of a mouse.

If laws are changed to clearly allow U.S. betting, the eventual winners will be the land-based gaming companies, or whatever conglomerate owns them at the time. The reason is simple: Success on the Internet is almost entirely due to marketing. There is nothing magical about the words Party Poker that would guarantee that it would end up with 40% of the world market, before it pulled out of the U.S. Why did Party Poker succeed, while so many other online poker companies went under? It was among the first, it had technology that worked, and it bought the rights to have its name in the middle of every table on the televised World Series of Poker.

Could even a pre-Black Friday PokerStars have competed with the brandnames and loyalty of a Caesars Palace or Harrah’s? The land-based gaming companies have player data bases with millions of names. They can offer players a lot more than free T-shirts. And, if they can’t win, they can raise corporate money to simply buy off their competitors.

But land-based operators, particularly casinos, have one enormous disadvantage: They have all the expenses connected with massive real estate holdings and tens of thousands of employees. Online casinos are cheaper to set up and cost less to maintain, even including the costs of acquiring and keeping patrons.

The big money understands that Internet gambling is simply a better investment, if it is legal. If the land-based operators can’t beat their online rivals, they can buy them.

So, welcome to the future world of mgm.bwin.party and Zynga-Caesars-888.