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Changing Course

DOJ Says Online Poker is Legal

Changing Course

In a groundbreaking ruling—a true Christmas present to the online gaming industry—the United States Department of Justice in late December released a set of documents concerning the status of the sale of lottery tickets which was interpreted by many observers as a green light to nearly all online wagering.

The letters were in response to challenges from the attorneys general of New York and Illinois to the position that the 1961 Wire Act prohibits selling lottery tickets online. It was a long-held federal position that since the Wire Act prohibited the transmission of all gambling activity and information via telephone lines, it also applied to the internet. The DOJ’s new letters, though, cited only one form of online gaming as definitely illegal: online sports betting.

While the ruling does not mention online poker or online gaming specifically, it does say that the Wire Act applies only to sports betting, allowing legal experts to interpret the ruling intrinsically as saying that online poker and gaming are legal.

As recently as 2007, the DOJ issued a statement backing up its long-held position that the Wire Act prohibited gambling of any kind over telephone lines or the worldwide web.

“The Department of Justice’s view is and has been for some time that all forms of internet gambling, including sports wagering, casino games and card games, are illegal under federal law,” then-U.S. Attorney Catherine Hanaway told Congress. “While many of the federal statutes do not use the term ‘internet gambling,’ we believe that the statutory language is sufficient to cover it.

“As we have stated on previous occasions, the department interprets existing federal statutes, including 18 U.S.C. Sections 1084, 1952, and 1955, as pertaining to and prohibiting internet gambling.”

But last month, that all changed.

“The Department’s Office of Legal Counsel has analyzed the scope of the Wire Act, 18 U.S.C.  Section 1084, and concluded that it is limited only to sports betting,” Deputy Attorney General James Cole wrote in a letter to the two states.

The memo continued, “Reading ‘on any sporting event or contest’ to modify ‘the transmission of bets or wagers’ produces the more logical result. The text could be read to forbid the interstate or foreign transmission of bets and wagers of all kinds, including non-sports bets and wagers, while forbidding the transmission of information to assist only sports-related bets and wagers. But it is difficult to discern why Congress, having forbidden the transmission of all kinds of bets or wagers, would have wanted to prohibit only the transmission of information assisting in bets or wagers concerning sports.”

Online Wired

David Schwartz, the director of gaming research at UNLV, wrote a book about the Wire Act in 2006, Cutting the Wire: Gambling Prohibition and the Internet. He says the Justice Department has been misinterpreting the legislation for many years.

“There has never been any clause in the law that applied to online gaming or even betting over phone lines on anything but sports,” he says. “It was intended to address problems with organized crime and its control over sports betting in the U.S. Ultimately, it was not successful, and resulted in the RICO laws of 1968.”

Schwartz believes this ruling opens up the possibilities for both intrastate and interstate online gaming.

“Now there is nothing to stop states from cooperating with each other and setting up a network,” he says. “If they don’t want to go to the expense of setting up a regulatory system, they could just defer to a state like Nevada, which will have all the regulations and oversight in place.”

The American Gaming Association, which has been lobbying for the legalization of online poker at the federal level, hailed the ruling and urged Congress to act.

“The Department of Justice’s interpretation regarding the scope of the federal Wire Act validates the urgent need for federal legislation to curb what will now be a proliferation of domestic and foreign, unlicensed and unregulated gaming websites without consistent regulatory standards and safeguards against fraud, underage gambling and money laundering,” the AGA statement said.

The Poker Players Alliance, which represents online poker players in the U.S., also applauded the DOJ.

“This is a much-needed clarification of an antiquated and often confusing law,” said John Pappas, PPA’s executive director. “For years, legal scholars and even the courts have debated whether the Wire Act applies to non-sporting activity. Today’s announcement validates the fact that internet poker does not violate this law. The PPA commends Assistant Attorney General Seitz for recognizing this. 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.” 

The AGA statement said federal legislation would be able to protect any state that didn’t want to get into the business as well as any person who could be harmed.

“Federal legislation that protects states’ rights can establish uniform safeguards to protect U.S. consumers, keep children from gambling on the internet, and provide the tools law enforcement needs to shut down illegal internet gambling operators,” the statement said. “Federal guidelines also would prevent fraud and money laundering, address problem gambling and ensure players aren’t being cheated. These federally mandated protections are vital no matter the interpretation of the Wire Act, and they must be enacted in order to avoid a patchwork quilt of state and tribal rules and regulations that would prove confusing for customers and difficult for law enforcement to manage.”

Real Ramifications

So it would appear that the race is on, and the first to open an online casino will have a huge advantage. Not so fast, say some experts.

“Whether intended or not, the DOJ memorandum presents dramatic opportunities for the internet gaming industry in the United States and finally (albeit belatedly) presents the opportunity for the world’s largest potential internet gaming market to start catching up with an internet gaming industry that is already far down the road in Canada and many parts of Europe,” wrote Robert W. Stocker II, a Michigan attorney with Dickinson Wright, in a newsletter post about the decision.

I. Nelson Rose, a gaming law professor at the University of California’s Whittier Law School, says the ruling is a smack at online gaming proponents in Congress.

“The reality is that congressional advocates, like Barney Frank and Joe Barton, have had some of the wind knocked out of their sails,” Rose wrote on his Gambling and Law website. “Since states are now clearly free to legalize intrastate online poker, and perhaps even interstate, there is not 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 a limited number of licenses in 50 states.”

The decision was roundly criticized by the usual anti-gaming voices in Congress. Some have speculated that the decision will spur new legislation designed to clarify that online gaming is indeed illegal. Rep. Frank Wolf (R-Virginia) is likely to take that stance. In a letter to Senator Jon Kyl (R-Arizona), the Justice Department responded to an earlier communication requesting that it clarify what is considered illegal. The anti-gaming Kyl is unlikely to appreciate the DOJ’s stance.

Greg Gemignani, an attorney with Lionel Sawyer & Collins in Las Vegas, recommends caution.

“You need to take a step back and look at this in context,” he told the Las Vegas Review Journal and Reuters. “This is not a green light to fire up the online poker servers by any means. This is just an opinion of the Department of Justice and only reflects what the Obama administration would bring charges on. Future Departments of Justice could interpret the Wire Act differently.”

While she doesn’t think a future DOJ ruling would reverse the one issued last month, Linda Shorey, a partner at K&L Gates LLP in Harrisburg, Pennsylvania, says a court case could trump everything.

“Under the U.S. Constitution, only the courts have the authority to determine whether the Wire Act applies to poker wagers,” she said. “The Department of Justice memo is not binding on the courts.”

Federal Focus

With online gaming legalization likely to proceed at the state levels, some are pressing for federal legislation to move forward.

“If there is not a federal bill then you will see individual states each passing unique sets of rules,” Caesars Entertainment Chairman Gary Loveman told Reuters. “It’s obviously a far less rational way to proceed and it runs the risk of not addressing the illegal operators in any way.”

Nevada Senator and Majority Leader Harry Reid remains committed to passing federal legislation to allow online poker. But political pressures have intervened and are expected to increase in this, a presidential election year. Some harbor expectations that Reid will try to attach an online poker provision to the next attempt in February to extend the payroll tax cuts, but since he avoided that strategy back in August when President Barack Obama agreed to a compromise to raise the national debt ceiling, it would be a stretch to place all your eggs in that basket.

Congressman Barney Frank (D-Massachusetts) says he feels vindicated that the Justice Department affirmed his long-held opinion, but holds out little hope for the bill he introduced earlier in the session. He now believes that state-by-state legalization will proceed, which he considers better than nothing.

The American Gaming Association is going to continue lobbying for a federal bill legalizing online poker. Even before the DOJ decision, the AGA was characterizing the bill as a “law enforcement” measure that would protect American consumers from unscrupulous fly-by-night operators and deliver them into the security of recognized casino brands online. That message hasn’t changed. The only thing that has changed is the urgency the association is citing now. Frank Fahrenkopf, AGA president and CEO, says the new DOJ position makes it questionable how the federal government can stop the operation of illegal online gaming sites. A federal bill is needed, he says, to clarify what is legal and what is not.

“I think that this ruling creates more confusion than clarity in the internet gambling debate,” Fahrenkopf told the National Journal.

Congressman Joe Barton (R-Texas) submitted a bill to legalize online poker last year, but saw it go nowhere when hearings on the bill late last year only determined that more hearings were needed. Barton says he’s not giving up.

“If Congress doesn’t act soon we could end up with fractured rules and regulations that vary state to state, leaving more opportunity for fraud and fewer safeguards for players,” Barton said. “I plan to keep moving forward with my efforts to move H.R. 2366 through the committee process, and I am confident it will be passed by the House and Senate—hopefully in this session.”

Reid, meanwhile, is reported to be meeting with Kyl in an effort to reach a compromise that would result in a bill that could pass the Senate, at least.

State Stories

Nevada has already legalized online poker and created regulations to oversee online operations. Last month’s DOJ ruling fulfilled the last requirement of the bill setting up online gaming sites—the opinion of the federal government that it is not illegal. The Nevada Gaming Control Board has drawn up the regulations and has begun accepting applications to operate online poker sites and the sell technology to operators.

Governor Brian Sandoval signed the bill last summer legalizing intrastate online casinos with the stipulation that the DOJ rule on its legality. On December 22, the Nevada Gaming Commission adopted regulations for the new internet poker industry. Commissioners say they will iron out internal control standards before considering applications for licensing. And the DOJ decision—released the following day—seems to permit a launch at any time.

Meanwhile, the slot manufacturing sector is lining up to participate in the new business with web poker content. Aristocrat Technologies recently became the latest supplier to apply for a license to participate, joining six other firms—International Game Technology, Bally Technologies, Cantor Gaming, 888 Holdings, Shuffle Master and South Point Poker.

South Point Casino is the only entity to apply for an operator’s license, while the other companies will be on the technology end and have to do business with an existing brick-and-mortar casino.

In New Jersey, Senator Raymond Lesniak (D-Union) sponsored a bill to allow Atlantic City casinos to accept online wagering on games such as poker, blackjack and baccarat, restricted to residents of the state age 21 or older. Governor Chris Christie vetoed a similar bill last year, but the new measure has been reworked to address his concerns.

“We could be the Silicon Valley of internet gaming and it could mean billions of dollars in revenue for Atlantic City, and thousands of jobs,” said Lesniak.

It is a position Christie now seems to support, though the governor is taking a more cautious approach. Lesniak originally pushed to have the bill fast-tracked to be voted on in early January, the last day of the legislative session. But that effort was delayed as all factors in clearing the way for online gaming are being addressed. The bill is now expected to reach the governor’s desk when the legislature reconvenes in April.

“I think we should be an epicenter for that business, but I want to do it right,” Christie said. “I do not want to rush and get legislation that either doesn’t pass state constitutional muster, or creates other problems for us.”

If the bill were to pass, it would allow the state Casino Control Commission to issue licenses to casinos to operate computer servers based in Atlantic City. Gamblers would have to set up online wagering accounts with the casinos. Computer software would then determine if the player was a New Jersey resident, whether the game was being played in New Jersey and if the player was at least 21.

Only card and slot games currently offered in Atlantic City casinos would be featured. Bars, restaurants and similar places would be prohibited from advertising that they offered online gambling, a concession to Christie to keep it in Atlantic City. Lesniak said the new bill contains safeguards to address the governor’s concerns, including fines of $1,000 per player per day for running an illegal internet betting parlor, and $10,000 for advertising illicit operations.

The measure still includes a provision giving a portion of the revenue to the state’s horse racing industry, a subsidy that Christie opposes. The casinos once had to pay $30 million a year to the tracks in return for keeping slot machines out of the tracks. Lesniak said he would be willing to drop that provision if it were the only obstacle to passage.

Although Nevada and New Jersey by themselves might not contain the critical mass to make online poker sites successful, some experts believe the DOJ ruling also permits interstate online gaming, in addition to intrastate. Nevada and New Jersey could join with other states to create a pool of online gamblers within the legal jurisdictions to bring a critical mass of players to the table. With a population of only 7 million, Nevada would be hamstrung, but in combination with other states, it could become a powerhouse.

The ruling will not in any way affect cases brought by the DOJ last year charging various online poker and online sports betting sites with bank and wire fraud and money laundering under terms of 2006’s Unlawful Internet Gambling Enforcement Act (UIGEA), but, tellingly, not with any violation of the Wire Act. The ruling will not hamper the prosecutions already under way—or future prosecutions, said the DOJ.

“In states that ban various forms of gambling—including internet poker—the department will be able to investigate and prosecute those gambling businesses under the Unlawful Internet Gambling Enforcement Act and other sections of the criminal code,” said Justice Department spokeswoman Alisa Finelli.

On the other side of the coin, Utah could be the first state to actually “opt out” of online gaming. Utah state Rep. Stephen Sandstrom has introduced a bill to make it illegal to gamble online within the state.

“We want to keep Utah free from the negative impacts of legalized gambling,” said Sandstrom. “Without courageous leadership to block internet gambling, Utah could once again be forced to allow Indian casinos.”

He attacked the DOJ decision as being politically inspired, demonstrating why Congress may want to keep hands-off on the issue.

“The U.S. Department of Justice’s conveniently issued legal opinion is a desperate attempt to try and fix today’s recessive economy,” he charged. “It’s clear that President Obama’s fiscal policies have been a complete failure. This latest move by the DOJ will only serve to harm all Americans economically and socially in the long run.”

One state that may not take the plunge was actually a trailblazer, North Dakota. State Rep. Jim Kasper, a Fargo Republican, recently said he does not plan to revive the internet poker licensing bill he sponsored in the 2005 legislature. Kasper, who is running for re-election in the fall, said he is “just worried about getting endorsed and getting re-elected. I am not talking about promoting internet poker and I have not made any decision to do anything at all.”

Kasper’s bill barely passed the House, and then was overwhelmingly defeated in the Senate. At the time, the Justice Department stated in a letter to North Dakota Attorney General Wayne Stenehjem that federal law barred internet gambling, including casino-style gambling.

Taking a Chance on the Lottery

Let’s not forget that the decision didn’t really cover online poker or gaming. It was a memorandum issued at the request of the attorneys general of New York and Illinois for a legal opinion about online sales of lottery tickets.

“All state lotteries are looking at how we can expand our base and sell tickets,” said Andi Brancato, a spokeswoman for the Michigan Lottery.

But this could become about much more than tickets for lotteries.

Rose, speaking with the Los Angeles Times, said the DOJ reading of the Wire Act could lead to quick adoption of online games by several state lotteries. “It undoes the single obstacle that was preventing the states from authorizing all forms of internet gambling,” Rose said. “I think we’re going to see an explosion in the next couple of years.”

Since lotteries are a major source of revenue for states, they could be some of the first organizations to experiment with online gaming. California, New York, Massachusetts and many other states are examining the DOJ decision to determine if it will allow them into the game immediately.

The AGA’s Fahrenkopf is aware of this possibility.

“It’s now clear that not only can lotteries sell tickets online, but also games that look like slot machines and poker,” Fahrenkopf told Bloomberg. “That’s where they want to go.”

Other interpretations of the ruling also focus on the possibility that wide-area linked progressive slot machines could be legal across state lines, creating jackpots of up to $100 million or more. Those systems are currently limited to single jurisdictions. Under the new ruling, slot manufacturers could potentially set up these WAP systems that would link multiple casinos in multiple jurisdictions. Or a large casino company such as Caesars or MGM could link slots at all their properties, creating one large jackpot.

Tribal Trouble?

For Native Americans, the DOJ decision just added to the dilemma tribes already faced when considering the legalization of online gaming. The diversity of opinions on the wagering method is vast in Indian Country, and there were no fewer differences when considering the options now available.

Some tribal officials believe nothing has changed. Joe Valandra, a member of the Sicangu Lakota tribe, and owner and president of VAdvisors, told Indian Country Today that there was always the assumption that intrastate online gaming was legal.

“I don’t think (the opinion) is a big deal for the tribes because there’s only one state that has enabling legislation and that’s Nevada,” he says. “Other states have talked about it, but haven’t passed anything. It has to go through a whole legislative cycle before any state besides Nevada will be able to offer intrastate online poker. It’s something I’m sure the tribes in general are looking at but I don’t think it has any particularly negative implication in and of itself.”

Valandra believes, nonetheless, that the decision is going to create an urgency for the tribes that will force them to come to an agreement on the role of Native Americans in online gaming. It will become obvious to tribes currently opposed to all online gaming that it’s a losing battle, Valandra believes.

One of the states likely to consider online gaming in the next legislative session is California, where the division of opinion in Indian Country is most on display. Last year, a group of tribes joined with the card rooms in the state to form the California Online Poker Association, and supported a bill that would have legalized online poker in the state. Other tribes were dead-set against it, and a standoff resulted in no action. Since then, the association launched, an online free-play poker room. And the Barona Band of Mission Indians—always an innovator—started its own online card room.

One of the sponsors of the California bills, state Senator Rod Wright, says there are talks under way to consolidate the bills, bringing all the diverse elements in the state together, including card rooms and gaming tribes. The key element is that any bill will be limited to online poker, which has much less impact on land-based casinos than full online gaming.

Tribes have stubbornly resisted the suggestion of a state or federal tax on any revenues they may obtain via online gaming, citing tribal sovereignty, but some believe that position will begin to erode and the intrastate operations will get off the ground.

“They are going to be left behind if they don’t compromise on this point,” one source told Global Gaming Business. “When they realize that states legalizing online gaming can join together with other states in the same situation, they’ll realize commercial ventures will be the only way they can participate. There are plenty of precedents, such as the Mohegan tribe’s commercial casino in Pennsylvania, so it’s not something they’ve never done before.”

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.