As the last days of 2011 came to a close, the Department of Justice issued a bombshell opinion changing its longstanding interpretation of the Interstate Wire Act of 1961 (“Wire Act”), one that paved the way for the legalization of Internet poker, and other online casino games, in the United States.1 While industry insiders and players across the country had hoped that federal legislation would soon follow, establishing a uniform, nationwide Internet poker legal framework, the relevant federal bills have repeatedly stalled in Congress leaving local governmental bodies to make progress on a state-by-state basis.
Lacking federal legislative guidance, several states, from coast to coast, are in various stages of exploring legalized online gaming. Slowly, the states are opening up portions of a domestic market that already (prior to legalization) boasts upwards of 10 million players wagering approximately $35 billion annually on Internet poker alone (not including other online casino games). Suffice it to say, legalized online gaming has the potential to be a dynamic, high-growth, tech-based industry within the next decade and beyond. This article will examine the background legal issues, as well as provide a snapshot of the varying progress that has been made in various states of the Union as they grapple with shifting federal guidance in the online gaming arena.
Tripping the Wire
For the past 50 years, the Justice Department has consistently interpreted §1084(a) of the Wire Act to “ban the interstate transmission of bets or information assisting in the placing of bets or wagers, even where the wire communication, such as a telephone call or Internet transmission, occurs between a sender and receiver in the same state but is routed out-of-state before the recipient receives the transmission.”2 Historically, in other words, it has been illegal to use technology such as telephones or, later, the Internet, to place wagers or engage in gambling activity on an interstate or intrastate basis.
However, in 2006, the passage of the Unlawful Internet Gambling Enforcement Act3 (“UIGEA”), limited the Wire Act’s seemingly extensive interstate and intrastate scope. Under UIGEA, the use of certain technology, such as the Internet, would be permissible for gambling activity that takes place entirely within a given state even if communications are routed across state lines. Thus, UIGEA began to open the door for online gambling activity on an intrastate basis.
Because of the apparent tension between the Wire Act and UIGEA, the States of Illinois and New York (who were each interested in conducting intrastate online lotteries) requested that the Department of Justice, Office of Legal Counsel (“OLC”) provide clarification on how to interpret the federal-state online gaming legal framework. What came next was both unexpected and groundbreaking: the OLC concluded that the Wire Act applies to the transmission of bets or wagers, and information assisting in the placing of bets or wagers, relating “only” to sporting events or contests. This guidance meant that any gambling activity that is not related to sporting events or contests, such as poker and other casino games, is not regulated by the Wire Act at all.
It is important to note that the OLC letter opinion did not have the effect of legalizing non-sports gambling under federal law, but it did remove some prior restrictions which gave lawmakers on a state and federal level more leeway to attempt different legislative approaches to allow for online gaming that might pass legal muster.
State Race
The emerging consensus among proponents of online gaming legislation is that legalization should provide impetus to a wellspring of economic activity that will generate much needed tax revenue in an era of lean budgets and fiscal uncertainty.
Against the stagnant economic backdrop, with the passage of UIGEA opening up the possibility of intrastate online gaming, and the new interpretation of the Wire Act removing past federal obstacles on all forms of non-sports gambling, several states have begun the process of establishing legal online gaming parameters for operations within their respective jurisdictions.
Nevada, Delaware, New Jersey, and the Curious Case of Washington, D.C.
The early leaders in the push toward online gaming legalization are Nevada, Delaware, and New Jersey which have already passed laws permitting various forms of online gaming within their respective state borders. Like almost all proposals before the various state legislatures on this subject (and other than the limited exception described below), the Nevada, Delaware and New Jersey statutes only permit residents of (or visitors to) those states to partake in that state’s gaming offerings – they do not allow residents of one state to participate on Internet gaming websites operated from another state.
However, Nevada recently passed an amendment that permits the governor to reach agreements with other states that legalize online gaming to allow for joint player pools with residents of those states. Likewise, Delaware online gaming officials have expressed interest in establishing joint player pools with other states and, even, European nations that permit online gaming (but legislative action permitting such player pools has not been passed as of the date of this article).
The Nevada statute,4 which passed in June 2011, amended the Nevada Gaming Control Act, NRS Ch. 463, and gave the Nevada Gaming Commission the authority to adopt regulations for Internet poker. The statute, and subsequent regulations adopted in December 2011, only permits the licensing, operation and playing of Internet poker, not other online casino games in Nevada. Under the Nevada law, operators of Internet poker websites must be Nevada State brick and mortar casino companies. Other entities can apply under a separate licensing category to partner with those casino companies in order to provide software, marketing or other related services. Nevada has already begun issuing licenses to operators, game manufacturers and marketers, and the expectation is that Internet poker will go live by the end of 2013.
The Delaware statute,5 popularly called the Delaware Gaming Competitiveness Act of 2012, passed in June 2012. The Delaware law places online gaming under the purview of the Delaware Lottery Office, but differs from the Nevada law primarily in that it allows a much broader menu of online gaming options. Specifically, Delaware-based brick and mortar casinos will be able to offer online poker, table games and slots, while dozens of other physical retail establishments can apply for licenses to offer online keno to their patrons. In addition, bars and restaurants that get approval from the Director of the Delaware Lottery Office will be permitted to offer certain sports gambling propositions to customers. The Director of the Delaware Lottery Office has set September 30, 2013 as the target, go-live date for online gaming in the State of Delaware.
In early February 2013, for the second time in roughly a year, New Jersey Governor Chris Christie vetoed a bill that would have legalized online poker (as well as other online casino games) to be played by individuals within the State of New Jersey. However, this veto was conditional—meaning Governor Christie only objected to certain parts of the bill, while endorsing others. The New Jersey State legislature rushed to make relatively minor recommended changes and an amended bill was signed into law[1] in late February, just a couple of weeks later. Under the New Jersey law, operators of online gaming websites must be New Jersey State brick and mortar casino companies located in Atlantic City. New Jersey will likely still require several months before actual online gaming is up and running. It is worth noting that the New Jersey law will only remain in effect for a period of ten years, at which point the New Jersey legislature will have to revisit and renew, amend or let the law expire.
Washington D.C. actually beat Delaware, Nevada, and New Jersey to the punch when it passed its iGaming program back in 2009, paving the way for legalized online poker, blackjack and bingo within the District’s limits.6 However, because the bill was passed as an unheralded amendment to a budget bill, its passage sparked immediate controversy, as opponents claimed it was not properly debated and that its proponents were unduly influenced by industry leaders. As a result of the ensuing firestorm, the Council of the District of Columbia repealed the iGaming program in February of 2012. It remains unclear if Washington D.C. legislators will attempt to revisit this topic in the near future.
California, Hawaii, Iowa, Massachusetts, Mississippi, Pennsylvania, and Washington
Other than the big three (Nevada, Delaware and New Jersey), a number of states are currently considering bills that would legalize Internet poker and other online gaming.
California was expected to be an early mover in this space, but has thus far been unable to enact enabling legislation. A bill (referred to as the Internet Gambling Consumer Protection and Public-Private Partnership Act of 2010) that, if passed, would extend beyond just poker and allow several traditional casino games such as blackjack and baccarat to be played online, was previously abandoned due to powerful competing interests that have different viewpoints on key aspects of the final bill.7 These interests include horse racing facilities and Native American tribes – entities that already have a stake in California’s legal gambling regime. Notwithstanding the foregoing, California State Rep. Lou Correa has, once again, recently introduced a bill that would legalize online poker (but not other casino games), in the State.[2] It remains to be seen whether the particulars of this bill will be sufficient to satisfy the various stakeholders, and whether the actions in Nevada, New Jersey and Delaware will provide added impetus.
The State of Hawaii is slated to consider legalizing online poker, and possibly other casino games, in the coming legislative session. While a similar bill was defeated in the Hawaiian House in March 2012,8 State Sens. Donovan M. Dela Cruz, Gilbert Kahele and Malama Solomon introduced a new bill in late January 2013.9 Of note, the draft bill would allow for joint player pools with other states that have legalized online gaming.
In December 2012, the chairman of the Iowa Racing & Gaming Commission announced that his department is ready to regulate online poker should the legislature enact such a law. Seemingly in response, a draft online poker bill was reintroduced in committee before the Iowa Senate in January 2013.10 The bill mirrors, in many respects, a bill that passed the Iowa Senate in March 2012, but was tabled in the more conservative Iowa House.11
Although an online casino gambling bill failed in the Massachusetts Senate after passing in the House in 2012, Massachusetts is considering an online gaming law that would, initially, allow only for online lottery activity, but which many observers (including Mass. State Treasurer Steve Grossman) see as a stepping stone to Internet poker and other online gaming.
Roughly a year after an almost identical measure failed to get out of committee, Mississippi State Rep. Bobby Moak re-introduced an online gaming bill that would legalize online poker in the State of Mississippi.12 That bill is still in committee as of the date of this article.
Pennsylvania State Rep. Tina Davis has announced plans to introduce an online gaming bill that would legalize online poker in the Commonwealth of Pennsylvania. The bill would legalize poker, and possibly other casino games, to be played online by individuals physically present in the Commonwealth.
In early February 2013, Washington State Rep. Paul Harris introduced a bill that would decriminalize online poker – at least for individuals playing for their own account, and not as part of any larger enterprise – including operating an actual Internet poker website, which would remain illegal.13 Currently, playing Internet poker in the State of Washington is a felony. If this bill becomes law, however, the punishment for playing online poker will be dropped down to a “class 3 civil infraction” – with a maximum fine of $50.00 and other “statutory assessments.”
The Backlash
While several states have either legalized online gambling or are moving in that direction, the recent flurry of activity has also induced a backlash in some jurisdictions. The State of Utah, for one, has taken an alternative approach by passing a law that specifically prohibits – and criminalizes – Internet poker and other online gaming within its borders. As drafted, Utah’s prohibition is intended to survive even if the federal government eventually passes a law permitting Internet gaming on a nationwide basis.14 Other states, such as Arizona, Illinois, Indiana, Louisiana, Montana, Oregon, South Dakota and Washington (subject to the possible modification mentioned above), have statutes on the books that explicitly prohibit Internet gaming. Thus far, there is no significant legislative momentum in the aforementioned states to repeal such prohibitions.
The States of Missouri and New York have anti-gambling provisions in their respective State Constitutions that would need to be repealed before online gaming could become law, but that prospect remains uncertain.
A bill has been introduced in the legislature of the State of Texas that would legalize poker games conducted in certain physical locations, with considerable State regulation.15 Interestingly, this bill specifically prohibits online gaming.
Conclusion
As more states adopt legalized online poker and other online gaming options, the tax revenue generated from such activities in those states (as well as the gaming revenue siphoned off from brick-and-mortar casinos in neighboring states) will likely create momentum for other states to get on board in order to share in the economic boon. There will likely also be an increased sense of urgency for US Senators and Representatives to pass a federal law in order to create uniform standards, and avoid a confusing patchwork of differing state approaches.
Such a federal law could preempt some state statutes, and specifically address the legality of interstate player pools (as permitted by the Nevada amendment, and contemplated by Delaware lottery officials and the Hawaii bill, respectively). Regardless of the eventual interplay between federal and state law, the future is now for the online gaming space, a sector that promises to be one of the most dynamic, and potentially lucrative, new Internet-based markets.
Please note that this is only a brief overview of some of the legal issues surrounding Internet poker and online gaming. Remember to obtain guidance from a licensed and experienced legal professional prior to launching a venture in this sector.
1 Letter from Ronald Weich, Assistant Attorney General, U.S. Department of Justice, to Harry Reid, United States Senator for Nevada (Dec. 23, 2011).
6 A2578, 2012-2013 Leg. Sess. (N.J. 2013).
6 Also known as the Lottery Modernization Act of 2010, the iGaming program was enacted as part of the Fiscal Year 2011 Supplemental Budget Support Act of 2010, codified at D.C. Code §3-1313.
[2] SB 678, 2013-2014 Sess. (Ca. 2013).
