Efforts to pass online poker legislation in California have failed for years, in large part due to the failure to achieve consensus on the most critical issues affecting stakeholders. California is now poised to consider new Internet poker legislation for the eighth consecutive year. Assemblyman Mike Gatto prefiled AB 9 in December 2014, Assemblyman Reggie Jones-Sawyer introduced AB 167 in January 2015, and on February 19, 2015, State Senator Isadore Hall and Assemblyman Adam Gray introduced identical three-page “shell” bills in the Senate (SB 278) and Assembly (AB 431), each to be considered during the 2015 legislative session.
AB 9 and AB 167 take drastically different approaches to two of the most contentious issues in the debate: whether to allow thoroughbred horse racing facilities and so-called “bad actors” to participate in the online poker market. While AB 9 excludes racetracks and includes a bad actor provision, AB 167 includes racetracks and a loophole that could allow “bad actors” to participate in the market. As industry observers and State officials have noted, however, both bills may fail to achieve consensus yet again by taking starkly contrasting positions on the most polarizing issues in the online poker debate. Enter SB 278 and AB 431, filed just before the February 27, 2015 cutoff for introducing bills for the 2015 session. These new bills, although currently devoid of meaningful content, are already being touted as the vehicle through which online poker in California will become a reality.1
Assemblyman Gatto’s bill would allow Indian tribes with gaming compacts and card clubs to operate online poker websites for players located in California. The bill excludes thoroughbred horse racing facilities from participating, as have previously introduced bills. As originally filed, AB 9 included an in-person player registration requirement, however, a proposed amendment to the bill has removed the requirement. Additionally, in its current form, AB 9 contains a “bad actor” clause prohibiting any entity from obtaining a license to operate online poker if the company has accepted a bet or engaged in a financial transaction related to a bet after December 31, 2006 — the enactment date of the Unlawful Internet Gambling Enforcement Act (“UIGEA”).
Such bad actor language has stifled prior attempts to pass online poker legislation in California by thwarting consensus. A bad actor provision could effectively exclude PokerStars from participating in the California online poker market. PokerStars would likely fall within any bad actor clause due to the company’s involvement in the “Black Friday” federal crackdown on illegal Internet gambling in April 2011.
PokerStars, and its affiliate Full Tilt, were acquired last year by Montreal-based Amaya Gaming Group. Despite the bad actor provision, certain language in AB 9 may provide a mechanism whereby Amaya could obtain a license. Amaya would need to demonstrate by clear and convincing evidence that the use of “covered assets,” as defined by the bill (e.g., PokerStars’s trademarks, software, technology, etc.), will not adversely affect the regulation and control of intrastate Internet poker. The bill does not indicate how this standard may be satisfied.
A competing bill, AB 167, was initially lauded by some as a “compromise” to AB 9. This bill arguably removes two of the largest stumbling blocks to consensus: (1) deletion of the bad actor provisions, and (2) inclusion of the race tracks being able to participate in the online poker market. AB 167 includes a one-time licensing fee of $10 million, credited against the gross gaming revenue tax, with license terms lasting four years. Licensed operators would be taxed at 8.5 percent of “gross gaming revenue.” That term is defined expansively to include all income from licensed games before deducting the cost of operating the games except for fees to marketing affiliates and payment processing fees.
Such taxation could have a positive impact on state revenue — some reports estimate that Internet poker in California could yield as much as $729 million in gross gaming revenue in the first year alone. Indeed, both AB 9 and AB 167 are cognizant of the tremendous economic potential of legalizing some form of Internet poker in California. Both bills contain the following identical statement regarding the economic impact of Internet poker: “California players assume all risks, any negative social or financial aspects are borne by the citizens of California, and the revenues generated from online gambling are being realized by offshore operators and do not provide any benefits to the citizens of California.”
Instead of a bad actor provision, AB 167 requires the California Gambling Control Commission and the Department of Justice, in conjunction with other state agencies and tribal gaming regulatory authorities, to issue licenses to conduct Internet poker to “suitable” entities. The bill currently lacks a cutoff date for ineligible entities, although it does contain language excluding certain entities from eligibility. Specifically, entities convicted of either having accepted a bet over the Internet in violation of U.S. or California law, or having aided or abetted another entity in doing so, would be ineligible. This language would not necessarily exclude PokerStars from obtaining a license under Amaya’s ownership, garnering the gaming giant’s support for the bill.
Unsurprisingly, an approach that enables the thoroughbred horse racing industry and “bad actors” to participate alienates those stakeholders that stand to gain the most from a more exclusive licensing system. Both the Pechanga Indian Tribe and the Agua Caliente Indian Tribe have been outspoken against AB 167 and have instead advocated for limited Internet gaming. By contrast, the California PokerStars coalition — comprised of PokerStars, the Morongo and San Manuel tribes, and several card clubs — support AB 167 because it lacks a bad actor provision.
By giving stakeholders two drastically different pieces of legislation to support, AB 9 and AB 167 may further divide stakeholders rather than bring them together. A meeting of tribal leadership held in mid-February 2015 pitted the Pechanga Indian Tribe and the Agua Caliente tribe — who favor a bill that excludes racetracks and includes a bad actor provision — against those tribes that favor AB 167 with its softer bad actor language. The meeting has been cited as driving a wedge between the tribes that may make it impossible to achieve consensus.2
At the meeting, three powerful tribes — the Rincon Band of Luiseño Indians, the Pala Band of Mission Indians and the United Auburn Indian Community — presented the other attending tribes with a letter they delivered to Assemblymen Gatto and Jones-Sawyer, in which the three tribes soften their stance on “bad actors” and accept AB 167’s inclusion of racetracks. Specifically, the tribes advocated a bad actor approach that focuses on personal participation in unauthorized gaming, which would allow regulators to review the effect of a change in ownership in determining whether to grant a license. The new bad actor stance was a total reversal for the Rincon Band of Luiseño Indians, who last year were outspokenly against PokerStars’s attempt to enter the California online poker market.
The purpose of the letter was to provide insight into areas of consensus among tribes, but the letter seems to have had the opposite effect. Following the meeting, State officials acknowledged that the rift between the tribes supporting AB 9 and those supporting AB 167 damages the already long odds of getting a bill out of the State Legislature. In particular, both State officials and industry and capital observers have commented that the Pechanga tribe and its allies have enough political clout to block a bill, meaning without the Pechanga tribe, a bill won’t be passed in 2015.
The polarization created by the extremes between AB 9 and AB 167 seems likely to foil consensus in the absence of concessions. One industry observer’s early-February, 2015 compromise proposal illustrates the point by offering a solution somewhere between AB 9 and AB 167.3 This proposed compromise suggests a bill featuring the limited inclusion of racetracks, a bad actor time period and a tiered tax system.
Under the suggested compromise, racetracks could become affiliates and skin operators on networks. A racetrack could have a branded poker site that links to an existing network, allowing the racetrack to promote its product to its existing customer base. The racetrack operators would then get a percentage of the revenue generated by its players under this model.
With respect to “bad actors,” the suggestion is to create a temporary ban on “bad actors” of 18 months, during which time companies that did not profit from illegally offering gambling can establish their businesses and their brands before the more-established “bad actors” are allowed to enter the market. Coupled with this bad actor approach is a tiered tax rate system that taxes the most successful online poker operators at higher rates, and uses the extra funds to subsidize smaller tribes and card clubs that opt to stay out of the industry. This prevents saturating the market and gives the smaller tribes and card clubs reason to support an online poker bill.
Ultimately, in the absence of concessions, both AB 9 and AB 167 may be destined for the same fate as their predecessors. Originally, Assemblyman Gatto publicly acknowledged AB 9 “is a very difficult bill” and predicted “there is a 50-50 shot we fail spectacularly once again.”4 Assemblyman Gatto has already backed off of this prediction in light of the growing chasm between tribes divided between AB 9 and AB 167. He is now “less optimistic that it will get done this year.”
Consensus remains possible, however, with the introduction of a third bill to the mix. Both Senator Hall and Assemblyman Gray chair the Governmental Organization committee in their chamber. The Governmental Organization committee’s purview includes gambling, making the committee a gatekeeper for any online poker bill. By introducing parallel bills, Senator Hall and Assemblyman Gray have created what may very well be the legislative vehicle for finally achieving consensus on online poker in California. Furthermore, by introducing a mere “shell,” these bills have not alienated any stakeholders, making them a blank slate upon which consensus may be reached. Indeed, these bills are already being touted as the vehicle through which online poker in California will become a reality. The PokerStars coalition has already publicly announced its support for SB 278 and AB 431 and recognized the importance of Senator Hall and Assemblyman Gray’s positions as Governmental Organization committee chairs for passing an online poker bill.
Based on previous failures, a successful Internet poker bill may require the unanimous or near-unanimous support of all stakeholders. By providing a blank slate, SB 278 and AB 431 create a forum for the various coalitions of stakeholders to come together to make concessions and perhaps finally reach consensus. Without a doubt, the gaming industry will be keeping a careful eye on the State of California in 2015.
Footnotes:
1 Chris Grove, California Online Poker Momentum Builds as Hall, Gray Introduce New Bill, ONLINE POKER REPORT (Feb. 19, 2015, 10:46 AM), http://www.onlinepokerreport.com/15567/california-online-poker-new-bill/.
2 Dave Palermo, Tribal Moves on Tracks, ‘Bad Actors’ Does Not Bode Well for Online Poker, PECHANGA.NET (Feb. 15, 2015), http://www.pechanga.net/content/tribal-moves-tracks-%E2%80%98bad-actors%E2%80%99-does-not-bode-well-online-poker?utm_source=MailingList&utm_medium=email&utm_campaign=02%2F16%2F2015+--+Victor+Rocha%26%2338%3B%2339%3Bs+Daily+News+Digest.
3 John Mehaffey, California Online Poker Compromise Proposal, CALIFORNIAONLINEPOKER.COM, (Feb. 5, 2015, 2:17 PM), http://www.californiaonlinepoker.com/blog/california-online-poker-compromise-needed/1909/.
4 Marco Valerio, Assemblyman Mike Gatto: I Approach Online Poker Regulation “With An Open Mind,” ONLINE POKER REPORT (Dec. 16, 2014, 5:49 PM), http://www.onlinepokerreport.com/14858/interview-mike-gatto-california-online-poker/.
