Progress towards the regulation of online gaming in the US may be slow, but two developments - the opinion of the Office of Legal Counsel on the scope of the Wire Act and a ruling in a New York District Court on the status of poker as a game of skill - have caught the attention of those hoping for a change in the regulatory landscape. Scott Greenberg and Michael J. Cohen of Cadwalader, Wickersham & Taft LLP, discuss the developments.

While investors, operators and technology providers eagerly await opportunities that are beginning to appear on an intrastate basis in jurisdictions such as Nevada, a holistic interstate legal solution for internet poker has yet to emerge Stateside, though two developments have sparked interest: the memorandum opinion issued by the US Department of Justice Office of Legal Counsel (OLC) in 20111 and a judicial opinion in US v. Dicristina2 by Judge Jack B. Weinstein of the US District Court for the Eastern District of New York.

Both opinions are rooted in principles of statutory interpretation and construction and address specific federal statutes. Nevertheless, the opinions reveal a willingness to depart from conventional wisdom surrounding the legality of online gaming in the US and give hope to those waiting to seize this business opportunity.

Given the uncertainty regarding federal regulation of online gaming, it is unsurprising that the President of the American Gaming Association stated that 'it's no longer a matter of if online gambling will be legalised in the US, but when, where and how' and has called for the passage of a new federal regulatory scheme to regulate online poker. Nevertheless, many large gaming companies are not waiting for the federal government to act and have begun seeking state licences to offer online poker within such states.

The OLC opinion

Prior to September 2011, the Criminal Division of the US Department of Justice had historically taken the position that the Wire Act3 is not limited to sports-related wagering and can be applied to other forms of gambling involving interstate information or funds transfer in order to regulate online gambling. In September 2011, the OLC issued an opinion concluding that 'interstate transmissions of wire communications that do not relate to a sporting event or contest' fall outside the reach of the Wire Act.

Addressing proposals by the New York and Illinois state lottery systems that would allow the instate purchase of lottery tickets online, the OLC concluded that the inclusion of the term 'any sporting event or contest' in the Wire Act modified all of the Wire Act's prohibitions on bets and wagers. Because the states' proposals were unrelated to sporting events or contests, the OLC determined that states could permit such lottery purchases without violating the Wire Act.

US v. Dicristina

In December 2011 federal prosecutors in New York charged Lawrence Dicristina with operating an illegal gambling business in violation of the IGBA. His business consisted of two poker tables in a warehouse, where poker games were held twice a week. Dicristina collected a five-percent 'rake' of the amount bet on each hand, and employed dealers and waitresses. Following a jury trial, Dicristina was found guilty on all three counts in his indictment, and immediately sought to overturn the verdict.

In his motion for a judgment of acquittal, Dicristina argued that poker was not 'gambling' under the IGBA, which defines 'gambling' as 'includ[ing] but . . . not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein.'4 Dicristina argued that gambling under the IGBA was limited to the games explicitly listed in the statute or substantially similar games, and attempted to differentiate poker as 'a game of skill rather than chance and thus outside the purview of the statute.' The US government argued in response that any form of gambling illegal under state law could be prosecuted under the IGBA.

Judge Weinstein agreed with Dicristina and held that poker did not fall within the IGBA's definition of gambling. Judge Weinstein's conclusion was premised on his finding that neither the text of the IGBA nor its legislative history clearly indicated that Congress intended for the IGBA to cover poker. Because the court found that both Dicristina's and the government's interpretations were plausible, it invoked the 'rule of lenity' to resolve the statute's ambiguity in favour of the defendant.

Judge Weinstein held that to constitute an illegal gambling business under the IGBA, a business must either operate one of the nine types of games specifically listed in the statute or 'a game that is predominately a game of chance.' In finding that poker was predominately a game of skill, Judge Weinstein relied heavily on 'persuasive evidence' presented by Dicristina's expert witness, including the following considerations: (1) [P]oker involves a large number of complex decisions, which allow players of varying skill to differentiate themselves; (2) Many people play poker for a living and consistently win money over time; (3) Players who obtain superior results with other starting hands tend to obtain superior results with any given hand, indicating that the players' abilities, not the cards, are responsible for the results; and (4) The published studies are all consistent with [these] conclusions.

On 15 September 2012, the government appealed Judge Weinstein's decision to the US Court of Appeals for the Second Circuit. The government's brief is due on 20 December and it is expected the court will set oral argument in the first quarter of 2013.

Impact on online poker

The direct impact of Dicristina appears to be somewhat limited. As Judge Weinstein noted in the opinion, his analysis did not affect whether poker constitutes gambling under New York state law, which separately regulates gaming activities. Additionally, the federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which has a scope distinct from IGBA and currently prohibits online interstate gambling in the US, defines 'bet' or 'wager' as '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.'5 Additionally, UIGEA does not include the list of nine games included in IGBA. Accordingly, it is unclear whether Judge Weinstein's finding that poker is 'predominately' a game of skill for the purposes of interpreting the IGBA would render poker outside of UIGEA's definition of 'bet' or 'wager.'

Although the OLC opinion and Dicristina reached their conclusions by interpreting specific federal statutes, taken together the results appear to form a trend that is slowly eroding the once powerful tools used by federal regulators and prosecutors to regulate and prevent internet gaming. Faced with this uncertain landscape, industry participants appear to be divided over the future of internet gaming regulation. In recent reports, the CEO of a gaming technology provider stated that the economics of state-by-state regulation may be challenging, while the CEO of a casino operator indicated that future regulations should be left to the states. The American Gaming Association has stated that it supports the rights of states to license and regulate online poker, but believes the US government should provide minimum standards for consumer protection, preventing underage gambling and promoting responsible gambling. Recent speculation has focused on potential legislation that would reverse the impact of the OLC opinion and amend the Wire Act to prohibit all forms of internet gambling with a carve-out for horse racing, poker and state lotteries. The poker carve-out would allow states to voluntarily opt into the new regulatory regime, and would establish the regulatory framework and fee structure for obtaining online poker licences. Additionally, credit card providers would only be allowed to process payments from licensed entities. However, the majority of analysts do not anticipate passage of federal legislation by the end of 2012.

Many states are not waiting for the federal government to enact comprehensive internet gambling regulation. More than a dozen states have begun considering legislation to legalise various forms of internet gambling, and Nevada has already enacted legislation governing internet poker, granting its first online gaming operator license in August. Additionally, over 30 industry participants have applied to the Nevada Gaming Control Board to obtain the necessary online gaming licences.

Conclusion

While the OLC opinion and Dicristina are focused on specific federal anti-gaming statutes, their effects are already being felt.

Market participants and observers agree that a new regulatory scheme for online poker is inevitable, but it is still unclear whether the new scheme will be primarily a creature of federal or state regulation or a combination of both. In the interim, many states appear to be extending their embrace of landbased gaming to the online area, offering licensing opportunities to technology providers and gaming companies, which are ready to launch poker sites. We are on the precipice of change in the online gaming space here in the US, but without clear and consistent regulatory and legislative guidance, most investors, operators, and technology providers will take a slow and cautious approach.

Recent speculation has focused on potential legislation that would reverse the impact of the OLC opinion and amend the Wire Act to prohibit all forms of internet gambling with a carveout for horse racing, poker and state lotteries.

Originally published in World Online Gambling Law Report - October 2012

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