Reversing the Reversal: Creating Wire Act Chaos

Will latest DOJ memo put the brakes on iGaming?

Late in the afternoon of January 14, 2019, the U.S. Department of Justice (DOJ) released a new memo reversing its stance on the Interstate Wire Act of 1961. This 23-page memo, issued by the DOJ’s Office of the Legal Counsel (OLC) and dated November 2, 2018, stressed that the Wire Act applies to all forms of gaming. The memo reversed an earlier DOJ memo issued in 2011 which stated that the Wire Act only applied to sports betting.

The action, which at best can be described as reversing a reversal, raises several concerns for the gaming industry, especially for online gaming that occurs in the states of Nevada, New Jersey and Delaware, in addition to active online gaming startups under way in Pennsylvania. Taken in its strictest form, the decision may also have serious implications for mobile gaming, sports betting, daily fantasy sports (DFS), lottery, and potentially even internet/social media marketing programs. Global Market Advisors (GMA) had predicted for some time that the reversal of the 2011 memo would occur during the Trump administration through the efforts of the Coalition to Stop Internet Gaming (CSIG).

The memo, written by Acting Assistant Attorney General Steven Engel, states:

Based upon the plain language of the statute, however, we reach a different result… While the Wire Act is not a model of artful drafting, we conclude that the words of the statute are sufficiently clear and that all but one of its prohibitions sweep beyond sports gambling. We further conclude that the 2006 enactment of the Unlawful Internet Gambling Enforcement Act (UIGEA) did not alter the scope of the Wire Act.

The opinion also noted that the previous memo “devoted insufficient attention to the statutory text and applicable canons of construction” of the Wire Act.

The memo provides distinct conclusions on how the Wire Act should treat all forms of gaming, but it fails to provide a full analysis for several issues or spell out the implications to the existing market. It only raises further questions on how responsible operators should act in the current environment.

On the following day, Deputy Attorney General Rod Rosenstein provided limited guidance on how enforcement may occur subsequent to the initial OLC memo. While not specific, Rosenstein stated:

As an exercise of discretion, Department of Justice attorneys should refrain from applying Section 1084(a) in criminal or civil actions to persons who engaged in conduct violating the Wire Act in reliance on the 2011 OLC opinion prior to the date of this memorandum, and for 90 days thereafter. A 90-day window will give businesses that relied on the 2011 OLC opinion time to bring their operations into compliance with federal law. This is an internal exercise of prosecutorial discretion; it is not a safe harbor for violations of the Wire Act.

At the time of this article, no further guidance has been issued, although rumors still persist that some clarity will be brought to what currently seems to be a murky enforcement posture.

The effect of the memo can best be described as creating chaos within the gaming industry. As reported by the Wall Street Journal, the OLC memo was supported in part by memos and arguments made for years through the efforts of lobbyists for the chairman of Las Vegas Sands Corp., chief sponsor of the Coalition to Stop Internet Gaming. While the DOJ continues to insist that it issued the opinion in response to former Attorney General Jeff Sessions’ request to review, many continue to note the ties to the multi-pronged lobbying and political efforts led by the CSIG.

The reversal of a legal interpretation by the DOJ is not unheard of, but it is unusual. The fact that memos and arguments prepared by an outside group may have influenced the drafting and conclusions of a DOJ/OLC memo makes the situation even more unique.

 

The Wire Act and Recent Notable Actions

The United States Congress passed the Wire Act in 1961, specifically forbidding the transmission of sports wagers across state lines. The act was passed as part of a series of anti-racketeering laws, including the Illegal Gambling Business Act, the Interstate Transportation of Wagering Paraphernalia Act, and the Travel Act. It was designed to aid states in enforcing state-specific bookmaking and gambling laws focused on helping the DOJ battle organized crime and trafficking during the Kennedy Administration.

Specific language from the Wire Act included a criminal provision:

Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.

Significant technological advances have been made since the law was enacted over 50 years ago, allowing state governments to recognize legal versus illegal activities. Many have interpreted language in the Wire Act to prohibit the use of the internet for transmission of sports bets or wagers, along with information assisting in the placement of such bets or wagers, subject to certain exceptions.

It is important to note that the internet did not exist in 1961 as it does today. In addition, the Wire Act itself does not specifically discuss how it may apply to other forms of gambling. As such, the law has been open to interpretation as to whether it prohibits internet gambling. Regardless of differing interpretations, the DOJ and attorneys general from multiple states have deemed the Wire Act as applying broadly and covering all forms of internet gaming, including iLottery. This is in direct conflict to laws passed by New Jersey, Nevada, Delaware, Pennsylvania, New York, Illinois and others.

 

The 2011 DOJ Opinion Memo

In 2011, the DOJ Office of Legal Counsel released an opinion that allowed for online gaming, as it was not restricted under the Wire Act. The opinion was required by New York and Illinois to clarify whether or not they could sell lottery tickets over the internet within their own borders. At the same time, Senators Harry Reid (D-Nevada) and John Kyl (R-Arizona) asked for either the DOJ to take a position on the prohibition of internet gaming or Congress to craft legislation to address online gaming. Because of the opinion, the states of Nevada, New Jersey and Delaware have entered into pacts for online gaming, specifically poker and other casino-style games.

Pennsylvania recently passed online gaming, and has over 10 operators that each paid a $10 million license fee and are trying to see what the next steps may be to launch operations. Other states like Michigan continue to push forward efforts to legalize online gaming.

In 2017, Sessions said that he would review the 2011 opinion by the Justice Department once he was sworn into office. However, Sessions recused himself on the online gaming issue because of a potential conflict of interest. The conflict arose when Sessions hired attorney Charles Cooper to represent him for congressional investigations relating to the firing of former FBI Director James Comey. Cooper had also been hired by the Coalition to Stop Internet Gambling to lobby on their behalf. This left any review of the 2011 opinion up to the deputy attorney general.

Many took the 2011 memo to mean that states could band together to allow gambling across state lines. Opponents of online gaming will contend that Congress needs to clarify what is, and is not, allowed under the Wire Act, especially as it relates to modern-day telecommunications. Those opposed to the current interpretation of the Wire Act continue to push legislation in the Restoration of America’s Wire Act (RAWA), which has been advocated by several members of Congress over the years. As previously proposed, the bill would grant an exemption to online activities like fantasy sports.

 

The Post-PASPA World

Since May 2018, the gaming industry has rejoiced over the judicial repeal of the Professional and Amateur Sports Protection Act (PASPA) because it created an opportunity for sports betting to expand across the United States on a state-by-state basis. The ruling subsequently allowed mobile wagering within the geofenced borders of each state, as had been done in Nevada before the Supreme Court ruling. However, some believe that this, too, could be in danger because of the most recent interpretation of the Wire Act.

In September 2018, a hearing was held by a subcommittee of the U.S. House of Representatives, where former Nebraska Attorney General Jon Bruning delivered his testimony stating that the U.S. Supreme Court decision on PASPA created an opportunity for criminal organizations and potential exploitation of individuals.

Bruning, who represented CSIG, said that Congress needed to act on the issue to provide federal guardrails that would work in conjunction with states to put protections in place while allowing states to earn revenue from legal online sports books and gambling. Through his testimony, he continued to advocate for the Wire Act to be restored, as well as the enforcement of other federal acts, including UIGEA, to combat the illegal market. Bruning highlights this by stating:

“Even though the Supreme Court tossed the federal sports betting ban, online sports betting is still illegal. The Wire Act applies to all forms of gambling, and even under DOJ’s current interpretation, the Wire Act applies to sports betting. This means sports books wanting to hedge their risk by establishing a national pool, creating interstate compacts, or laying off bets across state lines—all would do so in violation of the Wire Act.”

Bruning compared the emergence of sports betting to the existing marijuana market and the ability to regulate within states that have legalized, as well as neighboring states that do not have it legalized in any form. It should be noted that the current DOJ also issued a memo about one year ago regarding the enforcement of marijuana, which put the legal market of each state into question.

It would be complete irony, in the wake of the chaos created by the memo, that some would seek federal legislation that would derail the existing state-by-state gaming setup, which has been in place for decades. Murphy v. NCAA was joined by over 20 states because PASPA overstepped the rights granted to states. Yet, there is one group stepping forward to try to establish guardrails that would take these same states’ rights away.

 

Potential Impact on the Gaming Industry

As the gaming industry reaches this crossroads, there appear to be two initial next steps: either an official court interpretation of the Wire Act as it relates to the modern world, or legislation that would be enacted at the federal level. As legal scholars continue to lean against the most recent interpretation, the latest memo asserts itself as the new “governing view” for the gaming industry. It only continues to bring ambiguity to a process that has allowed states to craft online, mobile and DFS legislation for nearly the last eight years.

The opportunity for federal legislation seems challenging at best for a government that has had difficulty agreeing on a budget, operates off of continuing resolutions, and has been unable to come to terms on important issues like immigration policy. Plain and simple, the federal government should not govern by executive order or interpretation through memoranda. It is time to actually legislate policy and let the courts reach conclusions on the laws that are on the books.

While there is federal legislation floating in regard to sports betting, it may also serve as a tool to address any potential revisions to the Wire Act. However, the gaming industry, which has long been divided on online gaming and now even on sports betting, will have to be focused on what this may do to operations in their existing jurisdictions and beyond. As with any piece of legislation, the good comes with the bad, and it may take years to address this issue through legislation or through lawsuits within the judicial system.

The gaming industry in the early 2010s was not able to find consensus with Congress on how to enact a federal framework to regulate online gaming. It will be more challenging for that to occur now, not only because of the current political climate but also because of division within the gaming industry. The involvement of other stakeholders, such as professional leagues and the NCAA, also adds several new voices and competing interests to the debate.

While some have suggested the implementation of federal guardrails, this may ultimately interfere with state sovereignty over their existing gaming regulations. However, modernizing the existing Wire Act and UIGEA seems the best decision to craft a compromise. There will be differing views as to how this can be done to bring further compliance, and to allow operators to continue to act with integrity as technology continues to advance.

There may be several chapters left to write in this ongoing saga of interpretation of the Wire Act, but resolution will come only through education and advocacy on the benefits of modernization, as well as the impact that archaic regulations may have on the modern industry. Bringing the issue out of the shadows while tackling the illegal market should be the first and foremost priority, as opposed to punishing those that have operated diligently and in good faith over the last couple of years.

The story is far from over, and the industry needs to push forward a movement to bring clarity to the issue and allow responsible consumers to play online and through mobile apps in a strictly regulated environment.

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