Introduction
Legal definition of ‘gambling’What are the legal elements required for an activity to be regarded as gambling?
Gambling is defined principally by the states. As a result, the precise contours of what is considered gambling activity vary materially from state to state. Nonetheless, as a general matter, gambling involves three fundamental characteristics: consideration, chance and prize. Each element is more complex than it seems at a first glance, and this is an evolving area of law where statutes lag behind real-world developments, leading to a complex array of court decisions, state attorney general opinions and other precedents.
Consideration is typically regarded as a stake or fee paid for the privilege of pay. States differ on whether the nature of the payment matters (ie, must it be a stake or wager, or is an entry fee sufficient?), and on the circumstances under which non-monetary acts might be interpreted as ‘consideration’. ‘Free’ or ‘freemium’ games, which are games that are free to play but where players have the ability to use real money to purchase additional credits or features, are usually not considered gambling because they 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.
States differ in the legal tests they apply when evaluating the presence or absence of chance, and 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, which is the most widely embraced approach, asks courts to assess which of the two elements - skill or chance - is ‘the dominating factor in determining the result of the game’ (In re Allen, 377 P2d 280, 281 (Cal 1962)). Another legal standard is known as the ‘material element test’, where ‘gambling occurs even if skill is the dominant factor, as long as chance is material’ (Alaska AG Op 663-01-0183, 2001 WL 34047280 (22 May 2001)). Some states deem games unlawful if they entail ‘any chance’. See Tenn Code Ann section 39-17-501(1).
Last, the question of prize also is not completely straightforward. Whether a prize must be tangible (cash or merchandise) or can include intangible rewards - most notably, extended or additional play - has triggered much debate. The prevailing view tends to regard prizes as tangible and consider additional play a prize (or ‘something of value’) only where the initial game required payment.
Remote activityWith respect to remote or other cross-border activity, where is the wager deemed to take place?
In 2006, Congress enacted the Unlawful Internet Gambling Enforcement Act (UIGEA), which 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’. As a result, a wager must comply with the law of the jurisdictions of both the operator and player. The UIGEA also makes clear that the ‘intermediate routing’ of a wager is not considered relevant to a wager’s ‘location’.
Age restrictionsWhat is the minimum age for participating in lawful gambling?
All states impose a minimum age requirement of 21.
PenaltiesWhat are the penalties for offering unlawful gambling?
Unlawful gambling can be sanctioned at both the state and federal levels, with the type of punishment varying by statute. While generally, the federal statutes do not criminalise mere play, some states do criminalise gambling, often making it a misdemeanour. (Misdemeanours are ‘minor’ crimes that generally can carry monetary penalties but imprisonment, if at all, of no more than one year.) Both federal and state law apply far more severe criminal penalties against those who offer or promote unlawful gambling. As an example, at the federal level, potential penalties range from five years’ imprisonment under the Wire Act (18 United States Code (USC) section 1081 et seq), to as many as 20 years under the Racketeer Influenced and Corrupt Organizations Act (18 USC section 1961 et seq) and the federal anti-money laundering statutes (18 USC sections 1956, 1957).
Does the law penalise the gambler directly for participating in unlawful gambling?
Generally, federal law does not punish the gambler directly, whereas some states do criminalise gambling, often making it a misdemeanour.
Social and non-profit gamblingAre there exceptions for social gambling, or charitable or non-profit gambling?
Yes, states and even municipalities often exempt private gambling activities from prohibition. Although the particulars vary, those exemptions often specify that the host may not charge for services; there can be no door or seat fee, rake or other charge. States and localities will also often contain limited exemptions for charitable or non-profit-sponsored gambling, although, as with social gambling, this activity is typically subject to stringent limitations, including in many cases limitations on the permissible games and the frequency of the activity, and a requirement that some or all of the staffing for the gambling event be filled by volunteers.
Regulatory authoritiesWhat entity regulates land-based and remote gambling, and what are the regulator’s powers?
In the United States, the state agency or tribal commission has the authority to regulate land-based and remote gambling. The regulator’s powers are quite expansive, including licensing, rule-making and enforcement. Although many states have developed robust regulatory structures, Nevada and New Jersey, as the states with the longest tradition of casino gambling, possess the longest track records in this area. Hence, we cite to them frequently as illustrative of our broader points in this chapter. As an example, in New Jersey, the Division of Gaming Enforcement has regulatory oversight authority of New Jersey’s casino gaming industry, which includes investigations, inspection, audit and criminal and regulatory prosecution. See NJSA section 5:12-1 et seq. There is no federal entity that regulates land-based or remote gambling as states serve as the primary regulator. The federal government mainly plays a supporting role in prosecuting multistate enterprises that violate state gambling laws.
Anti-money-laundering regulationsAre gambling licensees considered financial institutions for purposes of anti-money-laundering and similar financial services regulatory requirements or are they otherwise subject to such requirements?
Yes, since 7 May 1985, the Bank Secrecy Act (BSA) has required casinos to be subject to the BSA’s recording and record-keeping requirements (50 Fed Reg 5065 (6 February 1985)). Specifically, casinos are required to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding US$10,000 as a daily aggregate amount, and report suspicious activity that might signify money laundering, among other activities. See 31 CFR Part 1021 (Rules for Casinos and Card Clubs).
Land-based gambling
TypesWhat types of land-based gambling are permitted in your jurisdiction, and is gambling regulated at a national or subnational level?
Gambling is regulated at the state or tribal and local levels in the United States. States serve as the primary regulators, enforcing criminal gambling prohibitions and licensing legal gambling operations, whereas the federal government mainly plays a supporting role in prosecuting multistate enterprises that violate state gambling laws or offer unlawful sports betting.
As of 2019, land-based commercial casinos are permitted in 18 states - Colorado, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Dakota and West Virginia - and six states permit riverboat casinos - Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. Other states host ‘racinos’, racetracks that offer gambling, and Native American tribes in several states (including California) operate casinos and card rooms. Massachusetts is expected to open its first land-based casino later in 2019.
Until early 2018, sports betting was prohibited as a matter of federal law by the now-defunct Professional and Amateur Sports Protection Act (PASPA). Only Nevada was fully exempted from the PASPA prohibition and was able to offer intrastate sports betting, while Delaware, Oregon and Montana enjoyed more limited exemptions. See 28 USC section 3701 et seq (PASPA). At present, 15 jurisdictions (in addition to Nevada) - Arkansas, Delaware, Illinois, Indiana, Iowa, Mississippi, Montana, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Tennessee, West Virginia and the District of Columbia - have either authorised or actually commenced sports betting. (In New Mexico, the Pueblo tribe of Santa Ana began offering sports betting at their casino property without need for state legislation.) Of those, all but five (Arkansas, Mississippi, New Mexico, New York and Rhode Island) authorise mobile or online sports betting. Interestingly, Tennessee’s law is mobile-only, with no land-based/retail component.
Many states also permit pari-mutuel wagering on horse racing, with a few permitting wagering on greyhound racing and one (Florida) on the game of jai alai.
Every state except Alabama, Alaska, Hawaii, Mississippi, Nevada and Utah operates a state lottery as well. Lotteries are operated by the state directly and are not offered by commercial operators.
Our focus in response to most of these questions is on casino gambling and sports betting, although, where appropriate, we refer to horse-race wagering and other gambling activities.
Establishment licensingPlease describe the licensing criteria to operate land-based gambling of each type or classification. Does your jurisdiction limit the number of available licences?
States will generally limit the number of available licences, and the licensing criteria will vary from state to state. For example, in New Jersey, licences or registrations are required for casino owners and operations, casino employees, and companies that do business with casinos. See, eg, NJAC 13:69C (Casino Licencees); NJAC 13:69J (Persons Doing Business with Casino Licencees). Nevada also has a licensing regime for, inter alia, gaming employees and locations, such as taverns, where the gaming is incidental to the main business (known as a ‘restrictive’ licence in Nevada). See Nev Gaming Reg 3 (Licencing: Qualifications).
Director, officer and owner licensingMust individual directors, officers or owners of licensees also be licensed or reviewed for suitability?
In the states where gambling is legalised, regulatory schemes are complex and comprehensive. As a result, state licensing regimes are typically intrusive and require deep scrutiny of the licensee applicant. The purpose of the suitability review is to ensure that licensees are honest and of good character and integrity. 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. See Nev Rev Stat section 463.170(3). In New Jersey, as another example, key employees, who include, inter alia, pit bosses, casino managers and casino operators, must undergo a rigorous licence application process that shows the financial stability, integrity and responsibility of the person, and the good character and reputation of the person for honesty and integrity. See NJAC 19:41A-5.5.
LocationMay a gambling location be part of a resort, restaurant or other multi-purpose location? What limitations apply?
Yes, but every state that has permitted gambling will have different limitations. In Nevada, an owner of a tavern can receive a ‘restricted’ licence, which permits the establishment to have 15 or fewer slot machines that are incidental to the main business - the tavern itself. Six states - Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri - permit riverboat casinos.
Passive/institutional ownershipAre there provisions for passive or institutional ownership that allow for exemption or modification of licensing requirements?
State laws in this area vary, but it is common for states to exclude from licensing requirements institutional owners of licensees up to certain specified thresholds, so long as those owners are passive - ie, they take no active role in the operation or management of the gambling enterprise. The permitted thresholds vary, with an upper range typically of 10 per cent. Importantly, institutional owners able to avail themselves of this exemption remain subject to the oversight of the gambling authorities, which can ‘call them forward’ for review in their sole discretion, should they believe it warranted.
Responsible gamblingWhat responsible gambling obligations apply to licensees?
Responsible gambling obligations for licensees will vary from state to state. In Nevada, licensees that engage in the issuance of credit, check cashing or direct mail marketing of gaming opportunities are required to implement a programme that allows patrons to self-limit their access to such marketing by that licensee. The programme devised by the licensee sets forth the standards and procedures that allow a patron to be removed from such marketing. Licensees are also required to train all employees who directly interact with gaming patrons, and the training shall consider the nature and symptoms of problem gambling behaviour. See Nev Gaming Reg 5.170. Many states require licensees to maintain their own self-exclusion lists that allow individuals to self-identify and then require the licensee to refuse service to any individual so listed. In New Jersey, the Division of Gaming Enforcement provides and maintains a centralised list of persons self-excluded from gaming activities at all licensed casinos and simulcasting facilities. See NJSA section 5:12-71.2; section 5:12-71.3. Missouri established the first such state-wide voluntary exclusion programme, which is known for its stringency. In Missouri, a person who places him- or herself on the self-exclusion list but is found at a gaming location will have a criminal complaint filed against him or her for trespassing. See 11 Mo Code of State Regulations section 45-17-010.
TaxesWhat type of tax and what tax rate applies to each form of lawful land-based gambling activity?
Land-based gambling activity is generally taxed based on gross gaming revenue (GGR). The rate varies from jurisdiction to jurisdiction. Although the definition of GGR also varies, at a high level it refers to the gross amount received from wagerers minus winnings and bonuses or promotional credits offered to the wagerer.
Remote gambling
TypesIs remote gambling permitted and, if so, what types?
Congress enacted the UIGEA to attack the perceived problem of internet gambling by targeting the processing of financial transactions necessary for the gambling to take place. ‘Unlawful internet gambling’ means 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’ (31 USC section 5362(10)(A)). The UIGEA created a federal crime - the knowing receipt by a person ‘in the business of betting or wagering’ of monies in connection with participation of another person in ‘unlawful internet gambling’ (31 USC section 5363). The statute specifically exempts intrastate wagering if authorised by state law and horse race wagering that is consistent with another federal statute, the Interstate Horse-Racing Act (IHRA). See IHRA, 15 USC section 3001 et seq. It also does not prohibit wagering between states that each authorise that activity.
Only four states - Delaware, Nevada, New Jersey and Pennsylvania - currently permit and license internet casino or poker gambling. See 29 Del Code section 4826; Nev Rev Stat section 463.745 et seq; NJ Stat Ann section 5:12-95.17 et seq; 4 PaCSA et seq. Delaware, New Jersey and Pennsylvania permit poker, casino and sports gambling; Nevada permits poker and sports. In addition, seven other jurisdictions - the District of Columbia, Illinois, Indiana, Iowa, Montana, Tennessee and West Virginia - have passed laws that permit mobile and online sports betting.
Delaware, Nevada and New Jersey have entered into an agreement to share liquidity by allowing gambling among the states; however, an opinion letter issued by the Department of Justice’s (DoJ) Office of Legal Counsel in early 2019 has cast doubt on the legality of that interstate agreement, and litigation arising from that opinion letter is currently pending.
In Delaware, only the state Lottery Commission is authorised to conduct internet gambling, and it has contracted with suppliers to that end. In New Jersey, Nevada and Pennsylvania, licences are generally restricted to brick-and-mortar casino licensees who obtain permission to offer wagers online. New Jersey and Pennsylvania have both announced plans to authorise mobile sports betting operations.
The remaining states and the District of Columbia do not allow online gambling, although a few states offer some form of online lottery (either sale of online tickets or even the play of online lottery games). In the wake of the invalidation of PASPA (see question 35), several other states have indicated plans to move ahead with sports betting, which in many cases may include mobile or other remote activity.
In addition, many states permit off-track telephonic or internet pari-mutuel wagering on horse-racing. The IHRA sets out the conditions under which such wagering can be offered across state lines. Among other requirements, the wagering activity must comply with the laws of the states in which the race and wagerer are located. The DoJ has historically taken the position that interstate internet horse race wagering violates the Wire Act, notwithstanding its authorisation under the IHRA. That proposition has not been tested and is widely disregarded, with numerous advance deposit wagering operators offering the service in many states across the country.
LicensingWhat are the criteria for obtaining a licence to operate remote gambling?
The licensing criteria to operate remote gambling are largely the same as for land-based gambling. The licensing regime will vary from state to state, but is typically intrusive and requires 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.
How do the licensing criteria for remote gambling operators differ from those applicable to land-based operators?
The licensing criteria are not materially different from those applicable to land-based operators. States do limit the number of available licences, either expressly or by requiring that the remote operator be a land-based licensee.
Cross-border gamblingMay operators located in other countries offer internet gambling to consumers in your jurisdiction without obtaining a licence there?
No, but US licensees may contract with service providers from other countries to support their activities. Those service providers, in turn, may obtain licences to provide that support.
May operators licensed in your jurisdiction offer internet gambling to consumers in other countries?
This issue is unresolved. State laws in certain states that have licensed internet gambling do contemplate this type of activity, but no jurisdiction that has legalised remote gambling has yet authorised the offering of remote gambling by its licensees to consumers in other countries.
TaxesWhat tax rate applies to each form of remote gambling?
Remote gambling tax rates vary among the four jurisdictions. For example, in New Jersey, there is a 15 per cent annual tax on internet gross gaming revenues plus an investment alternative tax of 5 per cent (or, instead of that investment alternative tax, actual investment of 2.5 per cent). See NJSA section 5:12-95.19. Nevada taxes internet gaming based on GGR at the same rates as it does land-based gaming. See Nev Rev Stat section 463.770. Pennsylvania has three tax rates for internet gaming:
- 14 per cent of daily gross interactive gaming revenue from peer-to-peer interactive games;
- 14 per cent of its daily gross gaming revenue from non-peer-to-peer interactive games that simulate table games; and
- 52 per cent of its daily gross interactive gaming revenue from non-peer-to-peer interactive games that simulate slot machines.
See 4 PaCSA section 13B52(a). In Delaware, internet gambling is operated by the state lottery so no tax is applied.
Intellectual property
PatentsAre gambling games - land-based or remote - patentable in your jurisdiction?
Patents directed to gaming-related technology (including gambling games) are generally permissible today, but are governed by the same requirements as patents directed to other technologies. For example, the United States Patent & Trademark Office (USPTO) will grant a patent to an application that claims technology that is useful, novel and non-obvious. However, in view of a recent Supreme Court decision, Alice Corp v CLS Bank International, 134 S Ct 2347 (2014), technology that is merely directed to the implementation of an abstract idea on a computer is typically found to be non-patentable. Since the decision in Alice, software-related technologies have received more scrutiny from courts and the USPTO. The law, however, has become more patentee friendly over the last couple of years.
TrademarksAre there limitations on how brands, logos or other types of marks may be used in promoting gambling games?
Limitations will vary from state to state, but there are some limitations on the number and type of brands and logos that can be used in line with general consumer protection principles (eg, prohibitions against false advertising). For example, in Nevada, failure to conduct advertising in accordance with ‘decency, dignity, good taste, honesty and inoffensiveness, including, but not limited to, advertising that is false or materially misleading’ can be grounds for disciplinary action under Nevada’s Gaming Control Board Gaming Commission (Nev Gaming Reg 5.011(4)) (Grounds for disciplinary action). Generally, regulators will not permit advertisers to use brands or logos designed to appeal to children.
Advertising
RestrictionsWhat types of restrictions apply to advertising gambling games?
Limitations will vary from state to state, but, generally, states will set out requirements to ensure the advertisement is aligned with responsible gaming principles, and may include content and placement restrictions designed to avoid appeals to minors. Those requirements also typically mandate that casino advertising include a responsible gaming message and include a toll-free helpline number (see question 23).
Suppliers
LicensingWhat types of suppliers to gambling operators require licences?
The types of suppliers to gambling operators that are required to obtain a licence will vary from state to state. In New Jersey, for example, any enterprise that provides ‘goods or services directly to a casino, simulcast wagering, gaming activity, or internet wagering activity to, or otherwise transact business directly with, a casino applicant or licencee, its employees or agents’ must be licensed (NJAC 13:69J-1.2) (casino service industry enterprise licence requirements).
RegistrationIf licensing is not required, is there a registration or other process suppliers are subject to, and what triggers that process?
Some states - although not all - do have a registration process when licensing is not required. As discussed, in New Jersey, enterprises that provide ‘goods or servers directly to a casino’ must be licensed. Yet ‘non-gaming-related’ and ‘non-ancillary-related’ service industries that supply other goods or services related to the operation of the casinos and their associated hotels, but which do not impact game play, such as construction companies or limousine services, nonetheless must register with New Jersey’s Division of Gaming Enforcement. See NJSA 5:12-92.
Casino projects
Casino developmentWhat considerations arise in developing a casino resort project that are not typical to other resort development?
Casino resort projects must consider a slew of factors, including industry trends, gaming regulations and financing. The casino industry is a multibillion-dollar industry, and the modern trend of the ultra-luxury resort and casino has launched development costs into the billions of dollars. Of course, financing will largely depend on where the casino will be built. A riverboat casino in Mississippi will cost less than a casino resort in Las Vegas.
In the past, casino hotels at resort locations such as Las Vegas and Atlantic City derived most of their revenue from gambling. However, that revenue began to diminish on a per capita basis as tastes changed and as other destinations both within the United States and abroad (such as Macao) began attracting serious gamblers. As a result, gambling resorts have shifted to a greater focus on other sources of revenue, including food and beverages, retail, and entertainment. Room prices also have generally risen as rooms are no longer as heavily discounted to attract gamblers. Those considerations will impact financing as lenders’ criteria of evaluation have shifted more toward factors typical of non-gambling resorts.
Zoning considerations will vary from jurisdiction to jurisdiction. In a heavily gambling-focused metropolitan area, such as Las Vegas, for example, there are few, if any, zoning restrictions that will inhibit resort development within the designated gaming area. However, jurisdictions generally do maintain strict rules regarding in what areas gambling resorts may be located.
Labour and employment
Wage and hour rulesAre there particular rules governing hours and wage treatment for casino employees?
In the United States, casino employees can be paid a salary covering all hours worked only if they qualify as exempt from payment of overtime under the Federal Fair Labour Standards Act and possible laws of the state in question. In general, under the Fair Labour Standards Act, all employees are entitled to be paid time and half of their regular hourly rate for all hours worked in excess of 40 hours per week unless they are exempt as a bona fide executive, administrative or professional employee. Under the Act, for an employee to be exempt there are both duties tests and minimum salary tests that must be met. There are some limited, additional exemptions, so an employment law specialist should be consulted in evaluating the status of any particular category of casino employee.
Further, lawsuits are frequently filed against casinos in the United States alleging that non-exempt employees were wrongfully required to perform compensable functions before they were clocked in to work or after they closed out. An example would be a dealer who was asked to stop by the bank to make a deposit on his or her way home from work. In general, non-exempt employees must be paid for all work time, even if it is not a normal part of their regular job.
Collective labourMust casino employees be members of labour unions or similar organisations?
No, in the United States an employer has an obligation to negotiate with a union over the terms and conditions of employment only if the union is properly selected, normally at a government-conducted secret ballot election, by a majority of the employees in the bargaining unit. Many, but not all, casino employees are unionised.
Acquisitions and changes of control
Change of controlHow are licensee changes of control, and substantial changes in shareholdings of licensees, addressed?
Each state has adopted a threshold for the amount of shareholding an individual or entity can hold in a casino licensee before the acquirer itself may be subject to statutory regulation and be required to apply for licensure or what is commonly referred to as a ‘finding of suitability’. The statutory threshold varies depending on whether an individual or entity acquires a direct interest in the casino licencee (ie, the entity that actually operates or owns the casino or that supplies casino gaming equipment to the casino) or whether the equity interest is obtained at the holding company or parent company level.
At the direct casino company level, any transfer of interest is subject to regulation and a finding of suitability of the transferee. At the holding level or parent company level, an investor needs to own or obtain a controlling interest (as defined by each state) in the casino company before close scrutiny will apply. The definition of ‘controlling interest’ varies from state to state and may also vary depending on whether one is acquiring stock from a publicly held company, a privately held company, or an interest in a partnership, limited partnership or limited liability company. For example, in Illinois, having more than a 5 per cent interest will give a ‘controlling interest’ in both a publicly held and privately held company, whereas in Nevada, having more than 10 per cent interest will create a ‘controlling interest’ in a publicly held company, and having any interest in a privately held company will give a ‘controlling interest’.
BankruptcyHow are gambling licences treated in bankruptcy?
How gambling licences are treated in bankruptcy is one of the thorniest issues for a creditor of a company holding such a licence. In general, bankruptcy disfavours anti-alienation provisions in contracts that seek to thwart a debtor’s ability to monetise or restructure its assets. There are important distinctions, however, and gambling licences are one such distinction, where the bankruptcy code upholds the validity of such provisions if the underlying law (here state or federal gambling laws) holds them to be valid. As such, a lender should expect that state gambling regulatory approval will be necessary before a creditor may take possession of a gambling licence or gambling assets. Regulatory approval will rest almost entirely upon the creditor going through the same extensive approval process that any applicant for a gaming licence must undergo. To mitigate this risk, a lender may want to obtain a licence prior to the transaction or affiliate itself with an entity that already holds a licence to operate the gaming collateral.
Quasi-gambling
RegulationHow are forms of ‘quasi-gambling’ regulated? Are any treated as ‘gambling’, and what triggers such treatment?
Every state regulates ‘quasi-gambling’ differently, but, as a general matter, quasi-gambling is not treated as gambling and is not regulated in any other way except pursuant to the same general consumer protection principles that apply to other forms of activity.
LicensingDoes your jurisdiction license quasi-gambling operators?
The legality of daily fantasy sports (DFS) has been hotly contested in the past few years in which, beginning with New York, a number of state attorneys general issued written opinions asserting DFS to be illegal gambling under state laws. See, for example:
- Ga Atty Gen Op (26 February 2016);
- Haw Atty Gen Op (27 January 2016);
- Ill Atty Gen Op No. 15-006 (23 December 2015);
- Md Atty Gen Op (15 January 2016); and
- Ms Atty Gen Op (29 January 2016).
New York’s attorney general initiated 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 New York. (FanDuel and DraftKings later settled the gambling aspects of those suits in March 2016 and the false advertising aspects in October 2016 for US$6 million each.)
At least one state attorney general has issued a formal opinion finding DFS not to constitute gambling (RI Atty Gen Op (4 Feb 2016)), although most are silent on the issue.
In an effort to clarify the legal environment surrounding DFS, at least 14 states have moved to regulate DFS as non-gambling activity, while requiring licensing or registration, taxation and consumer protection-focused disclosures. Even New York now regulates DFS. See NY Racing, Pari-Mutuel Wagering and Breeding Law, section 1400 et seq. Notably, DFS regulation, because the activity is not regarded as gambling in those states that have regulated it, is substantially less onerous than traditional gambling requirements.
Skill gaming and social casino gaming are not currently subject to licensing or similar requirements.
Other restrictionsDoes your jurisdiction impose other restrictions on the conduct of quasi-gambling activity, including restrictions on advertising, age of participation, limitations on prizes, etc?
DFS is the only quasi-gambling activity with an age limit, which varies from state to state. For example, Maryland, Indiana, Colorado, Missouri, New York, Tennessee and Virginia set the minimum age to enter DFS contests at 18, whereas Massachusetts mandates DFS participants be at least 21. However, other than the DFS age restrictions, ‘quasi-gambling’ activities face the same considerations as non-gaming activities that are subject to consumer protection principles (eg, false advertising).
Note that gambling licensees that engage in quasi-gambling offerings (such as social casino games) remain subject to the oversight of their gambling regulators and, hence, must ensure that their advertising and marketing, for example, is not seen to promote their regulated gambling activity without complying with the requirements applicable to that activity.
Litigation
Recent casesWhat, if any, significant litigation involving the gambling or quasi-gambling sectors has your jurisdiction seen in recent years?
It is not often that a gambling case reaches the United States Supreme Court, but that is precisely what happened this year, with New Jersey’s challenge to the Professional and Amateur Sports Protection Act of 1992 (PASPA) (28 USC section 3702). PASPA purported to prohibit states from authorising betting on sporting events, while including 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 (28 USC section 3704(a)). Four states qualified for the exception: Delaware, Montana, Nevada and Oregon. Nevada was the only state to fully take advantage of the exception; the other three states’ exemptions were more limited.
New Jersey’s first attempt to invalidate PASPA was a 2012 statute that confronted PASPA’s sports wagering ban head on by affirmatively authorising state regulators to license casinos and racetracks to conduct sports betting. The state’s position was that PASPA was unconstitutional. The courts disagreed, invalidating New Jersey’s law (National Collegiate Athletic Association et al v Christie, 730 F3d 208 (3rd Cir 2013)). Smarting from that defeat, New Jersey’s second attempt was less direct. Rather than affirmatively authorising sports betting, New Jersey simply repealed its criminal prohibition against sports betting so that engaging in such activity would no longer be considered unlawful, but only if the betting took place at a licensed casino venue. That ‘partial repeal’ was also challenged and invalidated, a decision affirmed by the Third Circuit en banc. New Jersey sought US Supreme Court review, and the Court (somewhat surprisingly to most observers) agreed to hear the case.
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. On 14 May 2018, the Court issued its decision on Murphy v NCAA (584 US ___ (2018)). By a 7-2 majority, the Court held that PASPA’s bar on states’ enactment of legislation authorising sports betting unconstitutionally ‘commandeered’ state legislatures into enforcing federal policy. 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. As Justice Alito, the author of the opinion, colourfully put it:
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.
The Court, by a somewhat narrower 6:3 vote, also invalidated a separate provision of the statute that applied its prohibitions to private actors. The Court’s rationale in doing so was potentially significant. The Court noted the ‘general federal approach to gambling’, whereby conduct violates federal law ‘only if the underlying gambling is illegal under state law’. As the Court stated: ‘These provisions implement a coherent federal policy: They respect the policy choices of the people of each State on the controversial issue of gambling.’ Among the statutes cited in support of that statement was the Wire Act (18 USC section 1084).
The Wire Act has been understood as a potential barrier to online and mobile sports betting even if PASPA were invalidated. The Court’s characterisation, if understood seriously, would seem to indicate that the Wire Act should be construed narrowly not to interfere with states’ prerogatives to regulate sports betting within their borders, however they choose to do so. 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, 15 jurisdictions - Arkansas, Delaware, Illinois, Indiana, Iowa, Mississippi, Montana, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Tennessee, 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, all but five - Arkansas, Mississippi, New Mexico, New York and Rhode Island - 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.
With respect to the Wire Act, 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. US v Lyons, 740 F3d 702, 718 (1st Cir), cert denied, 134 S Ct 2743 (2014); In re Mastercard Int’l, Inc, 313 F3d 257, 262 (5th Cir 2002).
However, in a November 2018 opinion (released in January 2019), the OLC - ostensibly at the request of the Criminal Division of the Department of Justice - 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 Horseracing 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 Department of Justice. 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’. 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). On 3 June 2019, the court entered an order rejecting the OLC position and holding that in its view the Wire Act only applies to sports betting. The ruling only applies to the New Hampshire Lottery and NeoPollard, as the plaintiffs in the case. As a result, the DoJ is technically able to seek a different ruling with different parties before a different court. Moreover, the government is almost certain to appeal the decision to the First Circuit; however, as of this writing, the DoJ has not publicly stated its next steps.
For quasi-gambling, 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.
A court challenge to daily fantasy sports in New York has cast a cloud over its legality in that state. 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.’ As a result, the court concluded, it cannot be authorised absent a voter referendum approving an amendment to the state constitution. New York has since appealed the court’s decision.
Other than the issues surrounding the legality of DFS discussed above, social casino games have seen a litany of litigation over the past few years. Each game challenged relies on the 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 have all been predicated upon plaintiffs’ purported ‘losses’ stemming from amounts voluntarily spent to play the games. Claims have typically been brought under gambling loss recovery statutes, for common law unjust enrichment, and sometimes under the auspices of consumer protection or unfair trade practices laws.
Five have been dismissed. See:
- Mason v Machine Zone, 140 F Supp 3d 457 (D Md, 20 October 2015), aff’d 851 F3d 325 (4th Cir 2017);
- Ristic v Machine Zone, Case No. 15-cv-8996, 2016 WL 4987943 (ND Ill, 19 September 2016);
- Phillips v Double Down Interactive LLC, 173 F Supp 3d 731 (ND Ill, 25 March 2016);
- Dupee v Playtika Santa Monica, Case No. 1:15-cv-01021-CAB, 2016 WL 795857 (ND Ohio, 1 March 2016); and
- Soto v Sky Union LLC, 159 F Supp 3d 871 (ND Ill, 29 January 2016).
A sixth raising similar issues remains in early, procedural stages: Fleet v Trion Worlds Inc, Case No. C 15-04721 WHA, 2016 WL 122855 (ND Cal 12 January 2016).
Nevertheless, against that unbroken track record of dismissal, one contrary decision stands out - Kater v Churchill Downs Inc, which 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 (Kater v Churchill Downs Inc, No. 16-35010, 2018 US App LEXIS 7739 (9th Cir 29 March 2018)).
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. 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 defendant’s motion to dismiss. Typically, in considering such a motion, a court must accept the well-plead 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. Defendants in those cases filed for dismissal, which the Western District of Washington rejected in late 2018. The cases all remain pending as of this writing.
It is too early to tell how the Ninth Circuit’s decision will reverberate, if at all, with other courts, or, for that matter, whether the trial court, once a proper factual record is made, will rely on that full record to reach a different conclusion. How this 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. In fact, in the wake of the decision, several additional suits have been filed against other social casino game operators, alleging that their games violate Washington state law.
Update and trends
Recent developmentsHighlight any noteworthy developments or trends in the gambling or quasi-gambling sectors (legal or business) and their potential implications.
Developments36 Highlight any noteworthy developments or trends in the gambling or quasi-gambling sectors (legal or business) and their potential implications.There are three overriding developments on which to keep watch in the coming year:
- the outcome of the US DoJ’s newfound hostility toward internet gambling and whether the challenge to the department’s newly expansive interpretation of the Wire Act succeeds. If the department prevails, much will turn on how it chooses to approach its new authority and how industry reacts. The immediate implication would be for interstate poker and casino internet and mobile gambling, which the department has asserted is prohibited, but the consequences could extend to all forms of mobile and internet gambling, whether interstate or intrastate, and including sports betting;
- continued, historically rapid expansion of sports betting, as additional states legalise sports betting (whether land-based or remote), and new entrants from other industries - sports, media, entertainment and telecommunications - become more engaged. The growth to date has exceeded any past gambling precedent, and that is likely to continue into 2019-20; and
- continuing litigation around social casino ‘freemium’ games and other social games with ‘loot box’ or similarly random components. Plaintiffs continue to target these games, and state legislatures are beginning to evince some concern over these features - particularly in games targeting children and adolescents - raising at least the possibility of new restrictions in the future.
