I KEY TERMS
US statutes, jurisprudence and academic literature often refer to several types of gaming, each with a distinct meaning and often with distinct legal implications, regulatory requirements and penalties for non-compliance. On one end of the spectrum are traditional gambling games such as lotteries, table games and sports betting. Gambling games vary widely but, with few exceptions,2 share three fundamental characteristics: consideration, prize and chance. These are among the most highly regulated forms of gaming in the United States and are detailed below:
- Lotteries, bingo and other house-banked games are the quintessential gambling games. All involve payment of consideration and award prizes based in whole or in part on chance. Lotteries, roulette, most slots and similar games typically depend entirely on chance. Other games, such as blackjack and craps, include elements of skill but still incorporate sufficient amounts of chance to warrant treatment as gambling.
- Poker and other peer-to-peer games, where the players compete against one another and not the casino operator or 'house', are a second type of gambling game. As these games are viewed as involving chance, they too are considered to be gambling.
- Sports betting and horse-race wagering involve – as their names imply – wagering on the outcome of live sporting and horse-racing events. Horse racing (and, in a few states, dog racing) is treated differently from other sports betting; as a result, the legal strictures involving each will vary.
On the other end of the spectrum are games whose legal status is unclear. These games (or their earlier forebears) were not traditionally considered gambling, but their meteoric rise in popularity (made possible by the internet) and the substantial revenues they generate have led regulators – and zealous plaintiffs' attorneys – to question whether they belong under the rubric of gambling laws.
i Skill games
Skill games are games that require payment to play and that award valuable prizes, but in which outcomes are determined by the skill of the participants rather than by chance events outside of their control. How much skill is required to avoid designation as gambling will vary from state to state, and some states would include at least some forms of skill games as gambling even if no chance is present.
ii Fantasy sports
Fantasy sports competitions take a variety of forms. Traditional fantasy sports revolve around a small group of people drafting a roster of real-world athletes from various real-world teams so as to create a fantasy team. Participants compete against one another by comparing the fantasy points earned by their fantasy teams. Fantasy points are awarded based on the statistical results of the underlying athletes in real-world sporting events, like passing yards, receptions and touchdowns. Participants often play for bragging rights or for side wagers, and contribute a nominal entry fee in order to participate. The biggest distinction between traditional fantasy sports and their modern cousin – daily fantasy sports – is that they take place over the course of a full season of the underlying sport. Daily fantasy sports (DFS), as their name implies, take place over a much shorter time frame. Participants still draft rosters of fantasy athletes to compete against other participants, but over the course of a week, a weekend or even a single day. Many other variants have emerged as the competitive landscape expands, such that now DFS also includes other non-roster styles of game, such as head-to-head competitions, 'pick 'ems', question-and-answer predictions and many more.
iii Social casino games
Social casino games are online or mobile games, often offered on social networks or similar platforms. They recreate casino games such as poker, slot machines and bingo. These games recreate the sounds and images of a casino but differ from the actual casino games in one important respect – the player need never pay to participate and (in most variants) can never win a prize of any real-world value. These games typically award credits or virtual 'coins' to extend gameplay or allow for purchase of special virtual features, and most operate on a 'freemium' model. Freemium games are free to play, but players have the ability to use real money to purchase additional 'credits' or features that would otherwise be earned through extended gameplay. Very few social games award cash prizes to players; those that do typically employ a 'sweepstakes' model to ensure that paying players are not given an advantage over free players.3 Outside the purview of the gambling laws are certain speculative or hedging financial transactions, such as binary options or commodity futures trading. Those types of transactions are often expressly carved out from statutory gambling prohibitions and fall outside the scope of this chapter.
ii GENERAL LEGAL BACKGROUND
Gambling is regulated at the federal, state or tribal, and local levels in the United States. States serve as the primary regulators, taking a lead role in defining the scope of permitted and unlawful activities, enforcing criminal gambling prohibitions and licensing legal gambling operators. The federal government mainly plays a supporting role in enforcing state laws and prosecuting multistate enterprises, although the federal ban on sports betting is a prominent exception.
i Relevant federal statutes
This subsection outlines the nine federal laws that address gambling most directly and includes a brief discussion of certain additional ancillary laws that may play a role in certain cases. Most of these statutes define prohibited gambling conduct by reference to state law. In other words, the activity does not violate the federal statute unless it violates an underlying state prohibition. The statutes provide a tool through which federal law enforcement authorities can pursue such unlawful conduct and impose enhanced penalties for that conduct. Congress often enacted these statutes in recognition of the fact that sophisticated criminal enterprises often do not respect state boundaries and can be difficult for state authorities to pursue.
The Wire Act
The Wire Act is an exception to the rule. Unlike most other federal statutes dealing with gambling, the Wire Act does define what it prohibits. More particularly, the statute prohibits anyone 'in the business of betting or wagering' from:
knowingly us[ing] 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.4
The Wire Act exempts from liability any transmission:
of information assisting in the placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal.5
The only federal courts of appeals to have considered the question concluded that the Wire Act applies only to gambling on sporting events or sporting contests.6 After years of disagreement with that holding, in September 2011, the Office of Legal Counsel (OLC) for the Department of Justice (DoJ) issued a memorandum concurring with that appellate decision.7
However, in a November 2018 opinion (released in January 2019), the OLC – ostensibly at the request of the Criminal Division of the DoJ – revisited the 2011 Opinion's conclusion that the Wire Act is limited to sports gambling. Despite a strong tradition of reticence in reversing prior precedent absent intervening developments, the OLC did just that. It concluded that the Wire Act applies to all types of gambling and is not limited to sports betting. This would include poker, casino and lottery games, in addition to sports. Horse-racing also presumably would fall within the statute's ambit, although it remains subject to a separate analysis due to the federal Interstate Horse-racing Act.
State lotteries and gaming industry participants moved swiftly to challenge the OLC's newfound position. On 15 February 2019, the New Hampshire Lottery Commission and NeoPollard Interactive LLC, a New Hampshire Lottery service provider, filed two separate lawsuits against the DoJ.8 The two lawsuits seek declaratory relief that the Wire Act 'does not prohibit the use of a wire communication facility to transmit interstate commerce bets, wagers, receipts, money, credits, or any other information related to any type of gambling other than gaming on sports events or contests'9. The US District Court for the District of New Hampshire consolidated the actions, and 14 states (including the District of Columbia) and an industry trade association joined as amici (non-parties permitted to file briefs and participate in argument).
The district court issued an order in June 2019. The primary legal questions were (1) whether the 2018 OLC Opinion is subject to judicial review, and (2) whether the Wire Act applies to non-sports gambling.10
The first question is one of administrative law. When a federal agency issues an opinion (such as the OLC opinion), it is subject to judicial review if the agency action is a final and definitive statement of the agency's position, and if the opinion will directly (and adversely) affect the parties. The court found that the DoJ interpretation of the Wire Act was subject to judicial review, as the government did not challenge the Lottery Commission's argument that the 2018 OLC opinion represented the department's final position on the issue. The more contested question was whether the OLC opinion would, in fact, have an adverse legal effect on the plaintiffs. The court found that there would be such a legal effect as the plaintiffs would be forced to choose between risking criminal and civil penalties or making drastic and deleterious business changes.
The second question before the court, whether the Wire Act applies to non-sports gambling, formed the core of the dispute. In a detailed analysis, the court noted that the OLC's opinion lacked internal coherence. For example, the OLC 2018 opinion would require a clause to be read without a sports-gambling modifier, which would incongruously permit information transmissions that facilitate non-sports gambling in one clause, while criminalising transmissions that enable a person to receive payment for the same transmissions in another clause. In thus ruling for the Commission, the court agreed with the Lottery Commission and industry that the Wire Act only applies to transmissions related to bets or wagers on a sporting event or contest.
The Professional and Amateur Sports Protection Act
The now-defunct Professional and Amateur Sports Protection Act of 1992 (PASPA) purported to prohibit states from authorising betting on sporting events,11 but included three 'grandfathering' clauses. These clauses authorised continued sports betting in those states in which it was already legalised and operated, or that enacted permissive legislation within one year of PASPA.12 Only those forms of sports betting in effect in that state were permitted to continue; new forms were not authorised.13 Four states qualified for the exception: Delaware, Montana, Nevada and Oregon.14 Oregon, which had allowed betting on National Football League (NFL) games in 1989, outlawed it after the 2006–2007 NFL season. New Jersey – for whom the one-year-after-enactment grandfather clause was ostensibly written – failed to enact permissive legislation in 1993. As a result, New Jersey (not to mention all other states) was barred from legalising sports betting, despite several failed attempts to do so.15 In 2016, New Jersey challenged the constitutionality of PASPA, arguing that it should be permitted to repeal its state prohibitions on sports betting notwithstanding the federal law or, if not, that the law is unconstitutional. The federal appellate court rejected the state's challenge, but the Supreme Court agreed to hear the case. In May 2018, the Supreme Court held in Murphy v. National Collegiate Athletic Association that the statute was invalid. (The Supreme Court decision will be discussed in further detail below.)
The Illegal Gambling Business Act
The Illegal Gambling Business Act (IGBA) is more typical of federal gambling statutes. It attaches liability to anyone who 'conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business'.16 'Illegal gambling business' includes a gambling business that, inter alia, is a violation 'of the law of a state or political subdivision in which it is conducted'.17 This statute also requires an assessment of where the gambling business 'is conducted' and of who is considered to be 'conduct[ing], financ[ing], manag[ing], supervis[ing], [or] direct[ing]' the business.
The Travel Act
The Interstate and Foreign Travel or Transportation in Aid of Racketeering Act (the Travel Act) makes it unlawful to 'travel' or 'use . . . any facility in interstate or foreign commerce . . . with intent to . . . distribute the proceeds of any unlawful activity; or . . . otherwise to promote, manage, carry on, or facilitate the promotion, management, establishment or carrying on of any unlawful activity'.18 Under the Travel Act, an 'unlawful activity' is defined specifically to include 'any business enterprise involving gambling . . . in violation of the laws of the state in which [the unlawful acts] are committed or of the United States'.19 The underlying state crime need not be a felony. A violation of a state gambling law that is a misdemeanour is sufficient. In essence, the Travel Act creates a federal scheme to punish enterprises that use interstate or foreign facilities in violation of state law. It is, therefore, like the IGBA, fundamentally a federal reinforcement of state law.20 As a result, the applicability of the Travel Act turns largely on the nuances of the applicable state law and what, precisely, it defines as unlawful. Simply put, without a violation of state law, there can be no violation of the Travel Act.
Wagering Paraphernalia Act and Johnson Act
The Wagering Paraphernalia Act precludes the transportation in interstate or foreign commerce of any:
record, paraphernalia, ticket, certificate, bills, slip, token, paper, writing or other device used, or to be used, or adapted, devised or designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event; or (c) in a numbers, policy, bolita, or similar game.21
A similar statute prohibits the transport in interstate or foreign commerce of any 'gambling device'.22
The Anti-Lottery Act prohibits the carrying (or mailing) in interstate or foreign commerce of:
any paper, certificate, or instrument purporting to be or to represent a ticket, chance, share, or interest in or dependent upon the event of a lottery, gift enterprise, or similar scheme, offering prizes dependent in whole or in part upon lot or chance.23
Contraband further includes advertisements of such lotteries and lists of prizes drawn or awarded. The Anti-Lottery Act also dictates that if businesses purchase lottery tickets in-state for out-of-state buyers, it is a criminal activity, unless the two states have agreed to allow such purchases. The statute contains several exemptions from its prohibitions, including state-run lotteries,24 charitable fishing contests25 and savings promotion raffles, which award prizes to those who make qualifying deposits in savings accounts or other savings vehicles.26
Indian Gaming Regulatory Act
Tribal gaming falls under the Indian Gaming Regulatory Act of 1988 (IGRA). The IGRA grants federally recognised Native American tribes the:
exclusive right to regulate gaming activity on Indian lands if the gaming activity is not specifically prohibited by Federal law and is conducted within a state which does not, as a matter of criminal law and public policy, prohibit such gaming activity.27
The IGRA established the National Indian Gaming Commission (NIGC), whose role is to monitor gaming on Indian lands, inspect Indian gaming premises, conduct background investigations, examine and audit books and records, promulgate regulations and guidelines, and collect fees and fines. As a practical matter, the NIGC typically plays an oversight role, leaving principal regulatory authority to individual tribal gaming regulators. The IGRA divides gaming into three categories, or classes (appropriately designated I, II and III). Class I gaming is social (non-commercial) gambling with small prizes. Class II gambling encompasses bingo and other non-banking card games28 that are either expressly authorised within the particular state or not expressly prohibited by the state and played in conformity with any state laws governing card rooms. Class III gambling includes all other forms of gambling and may not be operated in the absence of a tribal–state compact.29
Tribal–state compacts may contain provisions relating to the applicability of the state's criminal and civil laws to the licensing process, the allocation of criminal and civil jurisdiction between the state and tribal lands, comparable taxation provisions for the tribal gaming activity, and standards related to the licensing and operation of gaming activities.30
To date, compacts have been formed with Arizona, California, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Washington, Wisconsin and Wyoming.31
By some accounts, tribal gaming accounts for approximately one-third of total lawful commercial and tribal gambling in the United States.32 However, many tribes do not derive substantial (or any) revenue from tribal gambling, meaning the revenue derived from tribal gambling is concentrated in a relatively small number of tribes.33
Interstate Horseracing Act
The Interstate Horseracing Act (IHA) was enacted in 1978:
to regulate interstate commerce with respect to wagering on horseracing, in order to further the horseracing and legal off-track betting industries in the United States.34
It provides that:
[n]o person may accept an interstate off-track wager except as provided in this [Act].35
The IHA was amended in 2000 to clarify that it permits remote wagering over the phone, internet or other electronic media.36 The statute now defines an 'interstate off-track wager' as a:
legal wager placed or accepted in one state with respect to the outcome of a horserace taking place in another state and includes pari-mutuel wagers, where lawful in each state involved, placed or transmitted by an individual in one state via telephone or other electronic media and accepted by an off-track betting system in the same or another state.37
Thus, an interstate pari-mutuel wager placed or transmitted by an individual customer is an 'interstate off-track wager' permitted under the IHA if it meets two requirements:
- it must be 'lawful in each state involved'; and
- it must be accepted by an 'off-track betting system'.
Such systems must be 'conducted by the state or licensed and otherwise permitted by state law.'38
The IHA also sets forth a framework for the agreements that are required with host racetracks in order to permit simulcasts of the races and the acceptance of wagers on those races.39 The IHA requires the consent of five different parties for any off-track wagering agreement.40
There has been much discussion in the academic literature and among gaming lawyers as to the relationship between the IHA, which permits interstate off-track wagers, and the Wire Act, which prohibits them (as a species of sporting event). The US Department of Justice has taken the position – although only in public statements, never in an actual prosecution – that the Wire Act prohibition continues to apply, notwithstanding the IHA.
By contrast, the consensus of most scholars and practitioners in the space – and that of the authors – is that the IHA, as both the more specific and more recent statute, trumps the Wire Act ban, so long as the wager complies with the IHA's requirements. Indeed, for quite some time, the advance-deposit-wager industry has broadly accepted online horse race wagers pursuant to the statute on precisely that premise, and the federal government has taken no steps to stop that activity.
The Unlawful Internet Gambling Enforcement Act
Congress enacted the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) to attack the perceived problem of internet gambling by targeting the processing of the financial transactions necessary for the gambling to take place. The UIGEA created a federal crime: being aware of the receipt by a person 'in the business of betting or wagering' of monies in connection with participation of another person in 'unlawful internet gambling'.41 It also directed the issuance of regulations designed to require financial transaction providers to identify and block payments involving unlawful internet gambling.
Moreover, the statute defined 'unlawful internet gambling' to mean a 'bet or wager [that] is unlawful under any applicable federal or state law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made'.42 That was the first (and remains the only) time that the term has been defined as a matter of federal law.
In turn, 'bet or wager' is defined to mean:
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, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.43
The UIGEA provides an express safe harbour for fantasy sports competitions, excluding them from the definition of a 'bet or wager' under the statute if they satisfy three criteria:
- 'All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.'
- 'All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.'
- 'No winning outcome is based (i) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or (ii) solely on any single performance of an individual athlete in any single real-world sporting or other event.'44
If the fantasy or simulation sports game or educational game or contest involves a team or teams, then it must also be true that 'no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organisation.'45
The statute also excludes interstate off-track wagers that are permissible under the IHA from its prohibition,46 along with intra-state internet gambling that is:
- initiated and received within a single state;
- expressly authorised by the laws of the state; and
- does not violate any other federal gambling laws.47
The regulation issued pursuant to the statute, known as Reg GG (12 CFR 233), expands on the statutory requirements, most notably by requiring financial transaction providers to implement procedures that are designed to determine whether their commercial customers are internet gambling businesses and, if they are, to ascertain whether that gambling activity is unlawful. The regulation suggests that the provider require the customer to supply evidence of state or tribal licensure of its activities or, failing that, a reasoned legal opinion explaining why no such licensure is required.
The regulation also makes clear that participants in automated clearing house systems, card systems, check collection systems, wire transfer systems and certain types of money transmitting businesses 'may rely on a written statement or notice by the operator of that . . . payment system', and that the system's 'policies and procedures' are designed to identify and block unlawful internet gambling transactions.'48
ii Ancillary criminal laws
Several other criminal statutes can be invoked in the gambling context:
- Money laundering statutes, 18 USC Sections 1956 and 1957, prohibit knowingly engaging in certain financial or monetary transactions, or international transportation or transmission of funds, with the 'proceeds' of a wide range of predicate crimes or 'specified unlawful activities', including gambling in violation of the Wire Act or state law.49 Penalties for violation of either statute include civil and criminal penalties, forfeitures of bank assets or debtor collateral used to facilitate the offence, imprisonment and, in the case of a financial institution, possible collateral civil sanctions.
- The Racketeering and Corrupt Organizations Act (RICO) imposes substantial criminal penalties where there is a 'pattern of racketeering activity'.50 'Racketeering activity' is defined to include any 'act or threat involving . . . gambling . . . which is chargeable under state law and punishable by imprisonment for more than one year' or any act or threat involving a litany of federal offences, including violations of the Wire Act, Wagering Paraphernalia Act, Travel Act, Illegal Gambling Business Act or money laundering.51
Other potentially relevant statutes include conspiracy and bank or wire fraud.52 In all of these cases, liability arises only if the defendant is violating some other federal or state statute.
iii State laws
State laws with respect to gambling vary widely. Generally, however, gambling is prohibited unless the state passes legislation expressly permitting such conduct. Six states – Delaware, New Jersey, Pennsylvania, Nevada, Michigan and West Virginia – expressly permit and license internet gambling.53 The remaining 44 states and the District of Columbia do not allow online (non-sports) gambling – other than in a few cases some form of online lottery – although many permit gambling at bricks-and-mortar establishments or on riverboats.
In Delaware, only the state Lottery Commission is authorised to conduct internet gambling, and it has contracted with suppliers to that end. In the other five states, licences are restricted to bricks-and-mortar casino (commercial and, in the case of Michigan, tribal) licensees, and Nevada – unlike the others – only permits internet poker. Michigan and West Virginia have not yet commenced internet gambling operations as of March 2020.
Pennsylvania's 2017 law authorising internet gambling also expanded casino-style gambling to truck stops and airports.54
Georgia, Illinois, Kentucky, Michigan, New Hampshire, New Jersey, North Carolina and Pennsylvania allow online sales of lottery tickets,55 while Kentucky, Michigan, Pennsylvania, Illinois, Georgia and New Hampshire allow online game play.56
In those states where gambling is legalised, regulatory schemes are complex and comprehensive. State licensing requirements – whether for brick-and-mortar casinos or online gambling operators – are typically intrusive and require deep scrutiny of the licensee applicant and its key employees. Even certain categories of service providers are subject to scrutiny, although typically at a lesser degree of intensity. The purpose of suitability review is to ensure that licensees are honest, and of good character and integrity. In addition to determining whether a licensee's past history and associations indicate that the person will not undermine effective regulation and control of gaming, suitability review also ensures that licensees possess the qualifications necessary to run a gaming operation. For example, in Nevada, casino licences are not granted unless applicants show that they possess adequate business acumen, competence and experience, and that they have secured adequate and appropriate financing.57 Other states adopt a similar approach.
Illegal gambling can be sanctioned at both the state and federal level, with the type of punishment varying by state. While generally the federal statutes do not criminalise mere play (that is, they will not punish the actual gamblers), some states do criminalise gambling, often making it a misdemeanour. By contrast, both states and the federal government apply criminal penalties against those who offer or promote gambling, often as felonies. The penalties can be severe, ranging from five years' imprisonment under the Wire Act, to as many as 20 years under RICO and the federal anti-money laundering statutes.
III Current status and recent developments
Gambling has achieved mainstream acceptance of some form in nearly every state, with some form of gambling currently permitted in 48 states.58 The type of gambling permitted by the states varies widely. Some states only permit state-sponsored lotteries, while others have racetracks, casinos or sports wagering.59
Recent developments in gambling regulation have focused on sports betting and non-traditional gambling games. The latter includes skill games, fantasy sports competitions, social casino games and internet sweepstakes cafes. Outside of the regulatory context, e-sports have gained momentum in the United States and appear on the cusp of mainstream awareness. Whether their growth trajectory will lead them into legal difficulties like those experienced by DFS (discussed in subsection iv, below) remains to be seen.
i Sports betting
The landscape for sports betting in the United States changed dramatically in 2018. After several attempts, the state of New Jersey succeeded in invalidating the federal sports-betting prohibition in PASPA. In May 2018, the Supreme Court in Murphy v. National Collegiate Athletic Association held that the statute was unconstitutional.60
The Court concluded that PASPA impermissibly 'commandeered' the regulatory powers of states, compelling them to devote state resources to enforce the federal prohibition.61 A principle of US constitutional law, known as the anti-commandeering principle, imposes limitations on the ability of the federal government to impose such obligations.62 (Note that New Jersey did not advance, and the Court did not address, an additional constitutional argument – that PASPA impermissibly discriminates among the states by granting Nevada, Oregon, Delaware and Montana certain exemptions from its prohibitions.)
Writing for the majority, Justice Alito colourfully explained:
It is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals. A more direct affront to state sovereignty is not easy to imagine. . . . [T]here is simply no way to understand the provision prohibiting state authorization as anything other than a direct command to the States. And that is exactly what the anticommandeering rule does not allow.'63
The Court could have chosen to invalidate only a portion of PASPA on those grounds –invalidating the provision that directed states to enforce federal policy, while retaining the provision prohibiting private actors from sponsoring, operating, advertising or promoting sports gaming. Six of the justices (with Justice Breyer joining Justices Ginsburg and Sotomayor in dissent on this issue) instead found that the PASPA provision prohibiting this private activity was likewise unconstitutional. The Court framed that decision and its overall approach as one that 'respect[s] the policy choices of the people of each State on the controversial issue of gambling'.64 The Court characterised federal laws addressing gambling creating a federal violation 'only if the underlying gambling is illegal under state law'.
In the wake of the Supreme Court's ruling, several states have moved aggressively to legalise sports betting, including mobile and online sports betting. To date, 20 states – Arkansas, Colorado, Delaware, Illinois, Indiana, Iowa, Maine, Michigan, Mississippi, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee and West Virginia – and the District of Columbia have joined Nevada in authorising sports betting, although betting has not yet commenced in certain of those jurisdictions. (Nevada's sports betting law predated the Court's decision, as its activities were permissible under a 'grandfathering' provision in PASPA.) Of those, Colorado, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Maine, Michigan, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Tennessee, Rhode Island and West Virginia authorise mobile or online sports betting.
More than half of the remaining states, including California, are at least considering taking a similar step. Advocates argue that legalisation and regulation are necessary to protect consumers and the integrity of sports, as prohibition has simply driven sports betting underground where it cannot be monitored.
Importantly, the sports leagues (which have been staunch opponents of sports betting for a long time) have begun to embrace the new world on the horizon. Three of the 'big four' US sports leagues – the National Basketball Association, Major League Baseball and the National Hockey League – have entered into highly publicised relationships with gaming operators.65 The National Football League remains the lone major professional hold-out, but it too has abandoned its outright opposition to legal sports betting in the United States, instead advocating for federal involvement in establishing minimum regulatory requirements.66 One of the largest points of contention remains whether and to what degree the leagues should be compensated for legalised sports betting. The leagues have advocated for an 'integrity fee', to be remitted to them ostensibly to cover additional expenses incurred in protecting the integrity of competition in the face of a legalised sports betting environment. The leagues also advocate for a requirement that sportsbooks license game data from them or their designated providers, again purportedly to ensure the accuracy and integrity of results.67
ii Internet sweepstakes cafes
Internet sweepstakes cafes operate in a number of ways – most often, by selling internet time to patrons and sometimes by offering other copying, faxing and related services. Along with the purchase of internet time, patrons receive entry into sweepstakes. In most cases, patrons can obtain a limited number of free sweepstakes entries on a daily basis, either upon request in person or by mailing a form. (This feature is designed to remove the element of consideration from the transaction, and therefore to take the activity outside the purview of most state gambling laws.) Patrons often play simulated gambling games on their computer terminals to reveal winning sweepstakes entries.
When these cafes are prosecuted under standard gambling law principles, they are generally convicted as mere subterfuges for unlawful gambling activity, since evidence shows that patrons' primary motivation in purchasing internet time is to play the sweepstakes, rather than to use the internet and other available services.68 Indeed, the purchased time often goes unused – not surprisingly, since Wi-Fi and other forms of internet access are broadly available, often without charge or fee. Nonetheless, state legislatures, alarmed by the proliferation of these cafes, in many states have passed legislation specifically targeting them. At times, those statutes are worded quite expansively and may carry with them unanticipated consequences for other, more innocuous activities.69
iii Skill games
Skill games that require payment to play and that award prizes meet two of the three traditional elements of gambling under most state laws: consideration and prize. In order to avoid the reach of gambling prohibitions, these games rely upon the fact that they have arguably eliminated the third traditional element: chance. As states differ in the legal tests they apply when evaluating the chance element, each game requires a state-by-state analysis to determine its legality.
Three main tests have emerged in the states to determine the quantum of chance that will distinguish lawful games of skill from unlawful games of chance. The 'predominance' or 'dominant factor' test asks courts to assess which of the two elements – skill or chance – is 'the dominating factor in determining the result of the game.'70 The predominance test is used in the plurality of the states and is the most commonly invoked standard. The second most prevalent legal standard is known as the 'material element test, where 'gambling occurs even if skill is the dominant factor, as long as chance is a material element'.71 Still other states deem games unlawful if they entail 'any chance'.72 A few states prohibit even pure games of skill if they require placement of a bet or wager and award a prize.73 In those states, absent extenuating circumstances, skill games will be considered unlawful.
Unfortunately, there is very little case law dealing with the types of skill games that are most prevalent online today, and therefore it is unknown how these tests would apply to those games if challenged.
iv Fantasy sports
The legality of fantasy sports has been hotly contested in the past few years. Although the UIGEA provides a safe harbour for fantasy sports, the safe harbour provides sanctuary only from the proscriptions of the UIGEA itself; it cannot absolve from liability those competitions that run afoul of state or other federal laws. Moreover, today's DFS models, with their head-to-head competitions and variation in game play and rules, at times face difficulty in fitting within the contours of the statute's safe harbour.
Beginning with New York in late 2015, 2016 saw a number of state attorneys general issue written opinions asserting DFS to be illegal gambling under state laws, and that DFS operators were in violation of state law.74 New York's attorney general went so far as to initiate civil suits alleging false advertising and unlawful gambling, and seeking to enjoin the operation of the two most prominent DFS operators – FanDuel and DraftKings – in that state. (FanDuel and DraftKings later settled the gambling aspects of those suits in March 2016,75 and the false advertising aspects in October 2016 for $6 million each.76) These negative opinions usually claim that DFS are not contests of skill within the meaning of their respective state laws, since outcomes are ultimately determined by the athletic performance of others, over whom the participants exert no control. By contrast, only a handful of attorneys general have taken the opinion that DFS is legal under state gambling laws.77
Since then, however, a number of states have moved to regulate fantasy sports, including through licensing, taxation and consumer-protection-focused disclosures; even New York, whose attorney general was one of the earliest opponents of DFS, legalised and now regulates DFS.78
Notwithstanding 2015's flurry of attorney-general activity, there is little case law addressing the legality of fantasy sports. In February 2016, the Judicial Panel on Multidistrict Litigation consolidated nearly 80 individual putative class actions against FanDuel and DraftKings. The class alleges, in part, that DFS constitute unlawful gambling. At the time of writing, the case remains in the early stages, with the most recent update being a December 2018 hearing, where the plaintiff's attorney argued that FanDuel and DraftKings 'chose to obscure the terms' of the user agreement.79
A court challenge to daily fantasy sports in New York has cast a cloud over its legality in that state.80 Individuals opposed to gambling filed suit in October 2018, arguing that the state's authorisation of interactive fantasy sports contests violated the state constitution's prohibition on gambling. The state supreme court – which is, confusingly, the state's trial, not highest, court – sided with the plaintiffs. It reasoned: '[Interactive fantasy sports contests] involve, to a material degree, an element of chance, as the participants win or lose based on the actual statistical performance of groups of selected athletes in future events not under the contestants [players] control or influence.'81 As a result, the court concluded, it cannot be authorised absent a voter referendum approving an amendment to the state constitution. In February 2020, a New York appellate court affirmed the lower court's ruling, and the state has appealed to the highest court, the Court of Appeals, for a final determination.82
Aside from that current activity, only two pre-existing federal district court decisions address fantasy sports in any detail – Humphrey v. Viacom Inc et al, No. 06-2768, slip opinion, 2007 WL 1797648 (DNJ 20 June 2007), and Langone v. Kaiser, No. 1:12-cv-02073, slip opinion, 2013 WL 5567587 (ND Ill 9 October 2013).
Humphrey is the more significant of the two, as it reinforced the centrality of 'risk' in evaluating whether consideration for purposes of gambling is present. The plaintiff in Humphrey sought civil recovery under the qui tam laws of several states, which required him to show that money had been lost by a wager, bet or stake upon a game of chance.83 He pointed to the entry fees and prizes as evidence of money lost in a wager upon a game of chance. Without deciding whether fantasy sports are games of skill or chance, the New Jersey court noted three central elements common to the fantasy leagues at issue:
- the entry fee was paid unconditionally;
- prizes (of predetermined amounts, not dependent on the fees received) were guaranteed to be awarded; and
- the operators of the leagues did not compete and could not win the prizes themselves.84
Together, those factors led the court to conclude that the entry fees were not bets or wagers that would violate the gambling laws of the identified states.85 The fact that the operator did not participate in the contest – and, in fact, was indifferent to the outcome – was central to the Humphrey court's analysis.
The Langone court principally involved a claim under Illinois's gambling loss recovery statute to recover 'losses' suffered by participants on an online fantasy sports site operated by a major fantasy sports provider, FanDuel. The court ruled for FanDuel after finding that the plaintiff was unable to identify purported losers and amounts of loss with sufficient particularity, and because FanDuel's role in hosting contests and collecting entry fees did not make it a 'winner' in any particular wager. The court did not reach the question of whether FanDuel's contests would be considered 'gambling' or otherwise in violation of state laws.
Whether the Humphrey analysis would apply squarely to today's DFS variants may yet be determined in the context of the New York litigation or other potential, future cases. At the same time, state moves to clarify fantasy sports' legal status will likely result in a very different landscape for fantasy sports over the coming years.
v Social casino games
Legal disputes over social casino games also erupted for the first time in 2015, with a spate of litigation, brought predominantly by one particularly active plaintiffs' firm, alleging that the games are unlawful. Each game challenged relies on the above-described 'freemium' model whereby players can play for free or opt to spend real money to play more quickly or for other in-game perks, but not one of the games offers monetary or other 'real-world' prizes. The suits were all predicated upon plaintiffs' purported 'losses' stemming from amounts voluntarily spent to play the games. Claims were brought under gambling loss recovery statutes, for common law unjust enrichment, and sometimes under the auspices of consumer protection laws. Five have been dismissed,86 and a sixth raising similar issues remains in early, procedural stages.87
Against that unbroken track record of dismissal, one contrary decision stands out. On 29 March 2018, the US Ninth Circuit Court of Appeals in Kater v. Churchill Downs Inc found that because virtual chips extend the 'privilege of playing the game without charge', they are a 'thing of value' under Washington state law. Because the virtual chips were a 'thing of value', the court found that the 'Big Fish' social casino game fell within the state's definition of gambling. The court's analysis appears to have rested on the erroneous premise that users of Big Fish must purchase additional chips if they exhaust their initial supply and wish to continue playing.88 In fact, players receive periodic allotments of free chips with which to play, rendering any purchase unnecessary so long as the player is willing to wait the designated interval to resume play. The court noted the defendant's assertion to that end but refused to consider it given the procedural posture of the case. (The case was before the court on the defendant's motion to dismiss. Typically, in considering such a motion, a court must accept the well-pleaded allegations of the plaintiff's complaint as true.) The court remanded the case for further proceedings in the trial court. On 2 November 2018, the US district court for the Western District of Washington denied the defendant's motion to compel arbitration.
Following the Ninth Circuit's decision in Kater, a number of lawsuits were filed against other social casino companies alleging that similar 'freemium' games also constitute unlawful gambling in Washington.89 Defendants in those cases filed for dismissal that the Western District of Washington rejected in late 2018. The cases all remain pending at the time of writing, but the Kater decision already has had repercussions. In one of the related cases, the district court further extended the Ninth Circuit's holding to include even games where additional free coins are allotted. The court reasoned:
The additional free coin allotments thus do not remove Scientific's app from the 'thing of value' definition. Kater did not predicate its holding on whether the privilege of playing was permanently lost, but instead explained that the privilege was lost when a player 'must buy more chip' to keep playing . . . It therefore does not matter that a player may obtain more free coins after an hour because, until that time, they cannot play Scientific's games free of charge. Furthermore, although Scientific makes much of how frequently coins are awarded, the size of these awards and the speed at which coins can disappear mean that playing Scientific's apps requires payment much of the time. Purchasing coins is therefore not only necessary to 'enhance' gameplay, but is also required to 'extend' it.90
How this ultimately plays out remains to be seen, but, for the moment, the Ninth Circuit's unprecedented ruling appears to have created a new sense of uncertainty concerning the status of these games.
vi Internet gambling
Almost since the (now-reversed) 2011 DoJ opinion on the applicability of the Wire Act to internet gambling, opponents have made efforts to convince Congress to pass legislation that would prohibit states from authorising internet gambling. Those efforts consistently have faced objections that such legislation would intrude upon state prerogatives and of the general paralysis that has gripped Congress in recent years.
In 2016, Republican Senator Lindsey Graham of South Carolina reportedly caused to be inserted into a committee report for an unrelated Senate funding bill language that implicitly rejected the Justice Department's 2011 interpretation (ignoring the fact that the Department's memorandum accorded with the highest federal courts to have considered the issue).91 Although the funding bill to which the committee report was attached was not enacted, Senator Graham remained focused on the issue. During the January 2017 Senate confirmation hearing of then-Attorney General-nominee Jeff Sessions, Senator Graham asked for Sessions' view on the 2011 Department of Justice Office of Legal Counsel memorandum, which (in his description) 'allow[s] online video poker, or poker gambling'.92 (Notably, he similarly questioned Obama Attorney General Loretta Lynch during her confirmation hearing in 2015.93) Sessions responded that he was 'shocked' at the memorandum and 'criticized it' at the time, and he expressed his willingness to 'revisit it and . . . make a decision about it based on careful study'.94 Sessions did acknowledge that 'some justification or argument . . . can be made to support the Department of Justice's position' and admitted that he hadn't studied the issue enough to articulate a firm view during the hearing.95
Of course, subsequently, in November 2018, the department did reverse its position. The impact of that reversal on federal legislative efforts remains to be seen.
As their name implies, e-sports are competitive games played with the aid of computers, video game consoles or other electronic means. In robust markets such as South Korea, e-sports are played by well-compensated professional teams with corporate sponsors, and tournaments attract thousands of spectators. E-sports have gained traction more slowly in the United States, although they appear poised to enter mainstream consciousness. Streaming platform Twitch.tv, where players livestream their game play, ranks number four in peak internet traffic in the US (behind Apple, Google and Netflix, and ahead of Facebook).96 Las Vegas has played host to a number of e-sports tournaments in recent years. Indeed, in March 2017, a dedicated e-sports arena opened at the Neonopolis complex in downtown Las Vegas.97
But with recent prize pools reaching as high as US$20 million,98 and the staggering revenue earned from ancillary products such as advertising and streaming subscriptions (Amazon acquired Twitch in 2014 for nearly US$1 billion), e-sports may soon be on the radar of state and federal regulators. At least one recent lawsuit reveals that it is already in the crosshairs of plaintiffs' attorneys and concerned parents.99 Whether e-sports promoters, players, fans and video game makers will learn from the daily fantasy sports experience is an open question.
One issue that has already arisen is 'skin gambling'. 'Skins' do not affect game play but are collectible in-game items that affect the look and feel of the game, and can be bought, sold and traded. This transferability makes them ripe for use as virtual currency to facilitate gambling, both on e-sports tournaments and more traditional forms of online gambling such as casino games. In 2016, game developer Valve, which owns popular game Counter Strike: Global Offensive and operates the online trading platform Steam, was the subject of two civil lawsuits alleging that it facilitated an unlawful gambling market.100 Soon after, the Washington State Gambling Commission also demanded that Valve take steps to prevent skin gambling through the Steam platform or face civil or criminal repercussions.101 Valve prevailed in the civil suit102 and has thus far resisted Washington regulators' demands to disable features of Steam that would prevent skins from being traded on third-party sites.103
Beyond the skin gambling issue, e-sports are susceptible to other potential hurdles, including cheating. Because the stakes involved in winning e-sports continue to rise, the consequence of cheating has grown, as have the incentives to make the attempt. The nature of most e-sports games also can make cheating more difficult to detect. Riot Games recently achieved some success in pursuing organised cheating, extracting US$10 million from a software developer whose product purportedly enabled cheating in League of Legends.104
Separately, unlike fantasy sports, where the underlying athletic competitions themselves are widely accepted as skill-based, the skill-chance ratio in the video games underlying e-sports – games like League of Legends and StarCraft – is not as well-understood or established. That creates complications for those hoping to replicate the DFS model in which observers are able to win prizes of real value based on the performance of e-sports participants and can even have ramifications for contests that limit prizes to the participants.
Because much of the revenue in e-sports comes from non-controversial streams such as advertising, sponsorships and streaming subscriptions, the e-sports industry may be able to avoid the interstices of gambling law in which DFS has been caught up, but the experience of Valve shows that it is worth monitoring developments in this space in the months and years ahead.
The lead story of the past year has been the steady expansion of sports betting. When measured from the date of the Supreme Court's May 2018 decision in Murphy, the growth – to 22 jurisdictions that have now legalised the activity – is stunning. We expect that growth to continue, although likely at a somewhat slower pace due to the covid-19 interruption to state legislative calendars and likely re-ordering of legislative priorities.
Close on the heels of that trend has been one other development with potentially enormous implications for gaming of all types: the litigation challenging the DoJ's newfound expansive view of the federal Wire Act. The industry victory before the district court was welcomed by nearly all industry stakeholders, including the states worried about potential harm to their lottery operations. The DoJ's appeal of that decision, if successful, would threaten the legality or continued viability of online poker, casino and even sports betting (depending on the decision's breadth). At the same time, online and multistate lottery operations – for popular games such as Powerball and Mega Millions – could also be affected. It is for that reason that so many states have weighed in to oppose the DoJ's position before the federal appellate court.
Lastly, the status and proper regulatory approach toward social casino betting – and to add-on, chance-based purchases in social games more generally – remains a subject of consideration at both the state and federal levels. The Federal Trade Commission solicited comments from stakeholders on the potential regulation of 'loot boxes' in digital games and conceivably could make recommendations, issue guidance or take enforcement or other action on in-game loot boxes this year. States also are considering legislative action, principally to limit those types of games or activities to adults or to require more fulsome disclosure of odds and related factors. How the ongoing litigations in Washington state are resolved may further impact that debate.