Hurdles still face states wishing to legalise online gambling

The implications of the US Department of Justice’s dramatic U-turn on online gambling and the Wire Act continued to stimulate industry observers Wednesday.

Californians were reminded that the change of direction was a policy development that still presented states wishing to legalise with hurdles before initiatives could be achieved.

Important among these was clarification on states’ rights – whether federal law and the constitution permits legalisation of such a controversial issue. The Unlawful Internet Gambling Eenforcement Act in particular appears to allow states to approve intrastate online gambling, but this requires certainty, as state lawmakers making the assumption that such legislation would not violate federal law was a risky course to adopt.

The question of tribal compacts with First Nation tribal authorities was also raised, with suggestions that breaching those contracts could be a costly business for states unwise enough to do so.

In California, the state coffers are enriched to the tune of around $263 million each fiscal year, and lawmakers need to decide what games to allow on the Internet, as some factions want to authorise more than just poker.

Key to that aspect is who among the many different vested interests will be given the authority to run online games and reap the substantial profits.

The real returns to the state from legalisation are also being debated, with some observers pointing out that historically, politicians often hype up the possibility of new revenue when promoting a measure, but the reality rarely matches the rhetoric.

Examples given included lottery proponents who sold the California state lottery to voters in 1984 as a windfall for education, but the lottery provides only about 1.5 cents of every education dollar.

And in 2007, Gov. Arnold Schwarzenegger claimed that new tribal gambling compacts he had negotiated would bring in an extra $500 million a year to state coffers – the actual income never reached that level.

One observer summed up the situation by writing: “Internet gambling is likely inevitable at some point. But legislators should ensure that the state’s approach carefully considers all the consequences, and is not merely a rush to help wealthy special interests reap larger profits.”

Across the country in Connecticut, Gov. Dannel Malloy appeared optimistic about intrastate prospects for internet activity, telling the Harford Courant that online lottery ticket sales, even online poker, could become a reality if Connecticut lawmakers approve new forms of Internet gambling during next year’s legislative session.

“It appears that [online] interstate and intrastate gaming is going to be allowed,” Gov. Malloy said Wednesday in an interview with The Courant. He welcomed the DoJ change of direction, which he felt opened the doors to in-state online gambling, giving Connecticut the opportunity to remain competitive in a region where gambling options are multiplying.

“Obviously, gaming is an important part of our economy,” Malloy said. “… It appears that the only thing the Justice Department has ruled is off the table is sports betting, with the exception of horse betting. So with that one exclusion, everything is up for consideration by the states.”

To remain competitive, he said, Connecticut must consider a plan that includes online gaming, or risk losing revenue to other states. Connecticut lawmakers are nervously eyeing the introduction of casino resorts in neighbouring Massachusetts as a threat to the state’s two land casinos and the state revenues flowing therefrom.

It may be two or more years before the first Bay State casino opens, but the drain of customers and dollars from Connecticut’s tribal casinos could mean a 15 percent to 20 percent decline in revenue for them.

Connecticut’s Foxwoods Resort casino in Mashantucket and Mohegan Sun casino in Uncasville pay 25 percent of their slot revenue to the state’s general fund. This past year, those revenues averaged about $15 million per casino per month.

Chuck Bunnell, a spokesman for the Mohegan Tribe, said that the tribe had been closely monitoring the developments in online gambling.

“We’ve been anticipating that the United States would move into this arena,” Bunnell said, adding that the Mohegans have had numerous meetings with the Malloy administration to discuss “how to remain competitive in an ever-expanding gaming environment.”

“The Justice Department has made the path clearer for us,” Bunnel opined. He noted that in Connecticut, the two tribes have exclusive rights to offer casino games. Therefore, Internet gaming could have “something online that’s run by one or both tribes.”
Rick Bronson, chairman of internet gambling technology provider U.S. Digital Gaming, said the change would give states the ability to legally operate online gambling beginning with poker and also sell lottery tickets on the Internet.

He said that poker would likely generate $12 billion a year in revenue for states and that the lotteries — already a $60 billion to $70 billion business — would continue to grow. He estimated that tax revenue for the states would be about 25 percent. He said online gaming would likely bring more visitors to casinos.

Legal academic I. Nelson Rose of the Whittier Law School called the Justice Department move a “major Christmas present for the Internet gambling community.”

“We are about to see this explosion of Internet gambling sweep across the nation,” he said. “All we’re seeing is every single state proposing more and more legal gambling. … Gambling is seen as a painless, involuntary tax so it is an easy way to raise revenue without raising real taxes.”

“It’s money and [states] can’t raise taxes anymore and they can’t cut services anymore so they need a way to raise money and gambling seems to pay more tax,” Rose said.

The ruling by the Justice Department hands the states the power to make decisions about what forms of online gambling, if any, are legal, Professor Rose said. If they permit it, then states could reach pacts to allow their residents to play online in each other’s jurisdictions as well.

Keith Whyte, the executive director of the National Council on Problem Gambling, said there were a half a million youths ages 12-17 with gambling problems. He said that youths were already gambling online and that the industry was not doing a good job preventing it.

“In some ways, we’re concerned that when these existing industries expand [under the new Justice Department rule] they’re going to do the same shoddy job of enforcing that they’re already doing,” Whyte said.

He advised states looking to jump into online gambling to first do a study on the current rate of gambling addiction among youth and gambling adults to see whether there would be a spike.

“States are looking to maximize revenue from gambling, but they also need to minimalize the social costs,” Whyte said.

Adding a note of pessimism to the generally upbeat reaction to the DoJ switch was a Reuters article that stressed the need for the DoJ view to be substantiated in law by Congress.

Without such substantiation, the next US presidential incumbent could reverse the DoJ position and send the industry back to the drawing board.

“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,” Greg Gemignani, a Las Vegas lawyer and expert in Internet gaming told the news agency.

There is precedent for reversing a president Gemignani pojnted out, quoting a situation at the beginning of the Obama term of office, when the Justice Department took the rare step of withdrawing opinions that the Office of Legal Counsel issued during the Bush administration related to interrogations of terrorism suspects by the Central Intelligence Agency.

Fellow lawyer Linda Shorey confirmed his view, saying: “An opinion of the Office of Legal Counsel can be withdrawn or changed, although it is not often done. 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.”

The U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, has ruled in favor of the poker industry on the Wire Act, saying it only applied to sports betting, but a federal judge in Utah has ruled against it.

Republican Representative Frank Wolf, who heads the panel that oversees the Justice Department’s annual budget, said he was puzzled by the decision to reverse the long-standing position and planned to ask for an explanation.

Meanwhile, a senior US land gambling exec reiterated that the solution is federal legalisation.

Caesars Entertainment chairman Gary Loveman told Reuters that state-by-state legalisation was a “far less rational way to proceed; it runs the risk of not addressing the illegal operators in any way. If there is not a federal bill then you will see individual states each passing unique sets of rules.”

A Justice Department spokeswoman said online poker did not constitute betting on a sporting event under the Wire Act, but said that other state and federal laws will still apply to online gambling.

“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 Alisa Finelli, a spokeswoman for the Department.

On the UK, stock market analysts were keeping tabs on the generally positive impact on online gambling groups, with Numis Securities noting: “This is a major change in the position of the US DoJ. At the very least it clears the way for state level online poker legislation. Potentially it opens the way for gambling services to be provided from offshore and this may encourage the US Congress to legislate before the floodgates open.”

Simon French, an analyst at Panmure Gordon, added: “In effect this will make state online lottery, casino and poker legal, where appropriate state regulations exist and lay the foundations for interstate, non-sports gambling.”

Related and similar