Betting on the Future of Internet Gambling Law: Always a Risky Wager

Ever since its inception, running an internet gambling website in the United States has been as high a risk as the gambling games its provides. In 2010, for example over 1.5 million players played online poker, generating over a billion dollars in revenue.[1] Those who had bet on the gambling industry’s success were lauded as visionary entrepreneurs on the forefront of a cutting-edge industry poised for long-term success.

Yet in April of 2011 those same visionaries found themselves at the mercy of the United States Justice Department. Eleven individuals, along with the three largest online gambling cites, were charged with bank fraud, money laundering, conspiracy, operation of an illegal gambling business, and violations of the Unlawful Internet Gambling Enforcement act.[2]

According to the indictment, Isai Scheinber and Paula Tate of PokerStars, Scott Tom and Brent Beckley of Absolute Poker, Raymond Bitat and Nelson Burtnick of Fill Tilt Poker engaged in a criminal enterprise that sought to “to deceive United States banks and financial institutions into processing billions of dollars in payments for the poker companies, by, among other things, arranging for the money received from United States gamblers to be disguised as payments to hundreds of non-existent online merchants and other non-gambling businesses.”[3]“The defendants bet the house that they could continue their scheme, and they lost” Janice Fedarcyk, the assistant director in charge of the FBI’s New York Field Office, told reporters in a prepared statement.[4] Yet for all these lofty words, the actual allegations contained in the indictment were vague, inconsistent and piecemeal. As with most new technologies lawmakers have thus far, failed to implement a comprehensive framework of regulation for online gambling industry.

This blog post, the first in a series of eight, will provide an overview of the current hodgepodge of state and federal law regulating the internet gambling industry. The next posts will examine those states that have decided to legalize and/or regulate internet gambling. Then, the following posts will discuss the international response to Internet Gambling. Finally, the series will conclude with a post discussing a possible framework for gambling regulation in the future.

The Federal Level

  1. The Wire Act…. Really?

As early as the 1990’s, the federal government has sought to prohibit online gambling.[5]  Somewhere along the line, the federal government got the bright idea that the best way to do through the 1961 Wire Act, an act originally intended to prevent sports betting. For instance, In 1997, a bill that sought to amend the Wire Act to prohibit all forms of online gambling was proposed to the Senate. The bill passed the Senate but died in the House of Representatives.

However, the federal government could not let the issue drop. When this effort failed to pass, the D.O.J, decided to take a hard line interpretation of the Wire Act, arguing that it already encompassed all types of online gambling, with or without the proposed amendment.

Utilizing this interpretation, the DOJ issued letters to the National Association of Broadcasters in 2003, advising them to stop providing advertisements to these websites as the D.O.J. considered it aiding and abetting illegal gambling operations.[6] Without commencing any litigation, the DOJ was able end mulit-million dollar advertising deals, crippling a major revenue source for internet gambling websites. But in August of 2004, the Internet gambling industry struck back.[7] Casino City, the largest online gambling website at the time, filed suit against the DOJ, asserting that the DOJ had violated their First Amendment rights; they argued that they had a right to accept advertising for Internet Gambling because the act itself was not illegal under federal law . Unfortunately for Casino City, the District Court dismissed the case, finding that Casino City lacked standing to sue.[8]

The DOJ’s Wire Act theory was put to the test in In Re Mastercard in a somewhat unexpected scenario.[9]  In that case, a class of plaintiffs attempted to invalidate debt they had accrued through online gambling by suing their creditors.[10] They made an interesting and persuasive argument, that the debts were the result of internet gambling activity made illegal under the Wire Act.[11] The court however, did not buy into it. According to the court, the Wire Act was clearly intended for sporting events only. [12] On appeal, the Fifth Circuit affirmed. This decision significantly weakened the D.O.J.’s position, that Internet gambling in any form was illegal under the act.[13]

  1. The Unlawful Internet Gambling Enforcement Act

Congress shocked the gambling industry world when, in 2006, they enacted the Unlawful Internet Gambling Enforcement Act.[14] The UIEGEA does not itself outlaw online gambling. Rather, it seeks to prevent the flow of money from online gamblers to the online casinos. The UIEGEA makes it a felony for a person who is engaged in the business of betting or wagering to knowingly accept money in connection with unlawful gambling. The crime is punishable by up to five years in prison.[15]

Many commentators have criticized the act because it requires gambling to be unlawful under existing federal or state law to trigger criminal liability.[16] In other words, a person may be prosecuted under the act only when that person is already in violation of a pre-existing law gambling law. Many of these existing laws also require another separate predicate offense to find liability, further complicating the matter. For example, a UIGEA allegation could require two separate predicate offenses.

However, this was not an issue for the D.O.J. in the 2011 indictments discussed above because the D.O.J. agreed to drop the charges after their respective companies agreed to a civil settlement.

Since those indictments the D.O.J. has softened its stance on Internet gambling. This is partly the result of the increase in state legislation seeking to regulate, not prohibit, internet gambling (see below.)

The State Level

  1. Express Prohibitions

Surprisingly, only a small minority of states have expressly prohibited online gambling. A chart created Chuck Humphrey for gambling-law-us.com provides an overview of the current state gambling law in the United States whether or not the state has an express prohibition against Internet gambling. (The chart can be accessed here: http://www.gambling-law-us.com/State-Law-Summary/ ).

According to his chart, of all fifty states, only Indiana, Illinois, Loiusina, Montana Nevada, Oregon, South Dakota, and Washington have such provisions. [17]

  1. Regulation/Legalization: The New Trend

While the number of states prohibiting online gambling is decreasing, the number of states that are legalizing and regulating online gambling is rapidly increasing. One commentator has even predicted that online gambling will be legally in every state by the end of this decade.[18]

Leading this charge into legalization is New Jersey, the first state to full “legalize” gambling. Governor of New Jersey, Chris Christie, an major advocate for the new law, had this to say: “This was a critical decision, and one that I did not make lightly, but with the proper regulatory framework and safeguards that I insisted on including in the bill, I am confident that we are offering a responsible yet exciting option that will make Atlantic City more competitive while also bringing financial benefits to New Jersey as a whole.” A year later, New Jersey is seeking now to legalize online sports betting.

Currently, eight states have pending legislation that if passed, would allow internet gambling in some form.

Conclusion

We have seen the lackluster prohibition efforts from the federal government and the federal government. We have seen that the trend amongst the states is regulation and legalization of online gambling. There is little doubt that internet gambling is, once again poised to explode across the United States. However, many questions remain. What might full legalization look like? Will gambling amongst minors increase? Will the U.S. learn from experience of other countries with respect to online gambling? These questions and more will be explored in future posts. Stay tuned!

[1] Ingo Fiedler & Ann-Christin Wilcke, The Market for Online Poker, 16 UNLV Gaming Res. & Rev. J., no. 1, 2012, at 7, http:// digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=1008&context=grrj.

[2] Jeffrey S. Moad, The Pot’s Right: It’s Time for Congress to Go “All in” for Online Poker, 102 Ky. L.J. 757 (2014)

[3] Jason Ryan, FBI Cracks Down on Internet Gambling Companies, April16, 2011, http://abcnews.go.com/Technology/internet-gambling-companies-indicted-fraud-money-laundering/story?id=13389751

[4] id.

[5] See Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[6] id.

[7] id.

[8] Casino City lacked a judicially cognizable injury. According to the Court, Casino city would have standing if they had received a cease and desist letter or a subpoena from the DOJ.

[9] See Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[10] See In Re MasterCard Int’l. Inc., 132 F.Supp.2d 468, 479–481 (E.D. La. 2001).

[11] id. at 475

[12] id.

[13] Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[14] id.

[15] 31 U.S.C. §§ 5363, 5366 (2006).

[16] See Allyn Shulman, Legal Landscape of Online Gaming Has Not Changed, October 5, 2006 http://www.cardplayer.com/poker-news/1446-legal-landscape-of-online-gaming-has-not-changed

[17] Going into detail about each state’s law is beyond the scope of this introductory blog post. See future posts for a more in depth discussion about how States are regulating the online gambling industry.

[18] Jon Nathanson, Gambling is the Next Wave in Mobile Gaming, http://www.slate.com/articles/business/the_bet/2014/03/when_will_gambling_be_legal_in_the_u_s_by_the_end_of_this_decade.html

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~ by rzlatkin on October 7, 2014.

3 Responses to “Betting on the Future of Internet Gambling Law: Always a Risky Wager”

  1. Good introductory post. The 5th Circuit’s ruling on the Wire Act did press D.O.J. into a very weak position. Last year it issued a new advisory regarding gambling and the The Wire Act. I suspect as you get deeper into your discussion of gambling you will reach the new advisory.

    In a way, it is refreshing that the states are re-examining the online gambling issue. Tight economic times will cause legislators to look for new sources of revenue. The recession has certainly helped people who want to engage in online gambling because now states see this form of activity as a viable source of new tax revenue. The only draw back will be that the state by state approach will still leave us with a patchwork set of laws, perhaps making it difficult for a company who would like to provide online gambling service, to know for certain that their product complies with the varied different laws. That is good for lawyers, but we will have to see whether in the end, a comprehensive federal policy will be more effective.
    Looking forward to the future posts.

  2. Robbie, great first post. The in re Mastercard case is fascinating. The U.S. Court of Appeals delved into a deep analysis of relevant state and federal law in search of prohibited conduct on behalf of the creditors. The plaintiffs could not show, under any civil or criminal state or federal statute, that the defendants’ conduct was against the law. The plaintiffs in that case tried to bring action under RICO, by alleging state law, the Wire Act, and the federal Mail and Wire Fraud violations.

    The Court looked at New Hampshire and Kansas statutes and determined that defendants’ conduct was insufficient to satisfy prerequisite elements of the offense to be chargeable under RICO. It’s funny, really, that the plaintiffs here thought they could prevail under a RICO claim. The legislative intent was clearly to punish corrupt, criminal enterprises, not legitimate credit card companies who neither condone nor influence the conduct of their debtors.

    True, credit card companies incentivize consumers to spend at certain locations by offering promotions and various cash back deals, but that is hardly to say that a Mastercard logo on the checkout screen of an internet gambling website constitutes some sort of advertisement for internet gambling. Thus, not only did plaintiffs fail to allege any prohibited conduct on behalf of defendants, they also proffered a ridiculous argument that the betting site’s acceptance of a certain version of payment for virtual currency constituted some sort of solicitation on behalf of the credit card companies.

    Chris

  3. Great post. To me, the information about the state legalization attempts makes me wonder whether such attempts are futile. I think it’s an easy argument that online gambling falls within the commerce clause. It’s nonlocal economic activity. Even online gambling that takes place between two computers in the same state would probably fall within that ambit (see, e.g., United States v. Lewis, 554 F.3d 208 (1st Cir. 2009), holding that the intrastate transmission of child pornography over the Internet constituted interstate commerce because the data packets containing the pornography were split up and sent through an uncertain path that likely went out of the state in order to reach the destination). Moreover, in the New Jersey gambling example that you give, a federal judge issued a preliminary injunction against sports betting despite a state statute allowing it.

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