Global Connection - May 2013: iGaming Update

by Snell & Wilmer

More than 25 years ago, gaming in the United States faced a conundrum as Indian Tribes and States debated the legality of gambling on tribal lands. The issue culminated in a landmark decision in the United State Supreme Court, California v Cabazon Band of Indians, 480 U.S. 202 (1987), and eventually led to the passage of the Indian Gaming Regulatory Act (IGRA), Pub. L. 100-497.

The Obama Administration's 20 September 2011 opinion, made public on 23 December 2011, has now created a similar uncertainty in the realm of online gaming. The Department of Justice reversed its long-held position regarding the Wire Act of 1962. In a new opinion, the Executive Branch concluded that the Wire Act applies only to sport-related gambling activities in interstate and foreign commerce.

Many have now taken the view that virtually all federal barriers to internet gaming have been removed. The reach of the DOJ's new position, however, remains unclear. Regardless, in this brave new world without a clear federal roadblock, iGaming expansion in the United States will occur in one of two ways: (1) patchwork, state-by-state laws, or (2) a federal 'opt-in' framework.

Patchwork Legalisation
The DOJ's new memorandum opinion of the Wire Act paved the way for states to do what they want with intrastate internet gaming, and it didn't take long for states to react. Since January, bills that might legalise online gaming have been proposed in almost a dozen states, including California, Iowa, Maryland, New Jersey, Mississippi, Hawaii, Missouri and the District of Columbia. Most of these bills, however, died in session because of infighting among stakeholders.

Three States and the America Virgin Islands succeeded in their quest to legalise and regulate online gaming. On 28 June 2012, Delaware's Gov. Jack Markell signed a bill allowing the State Lottery to operate full-scale online casinos. At the same time, Nevada's Gaming Commission begun issuing licenses to internet gaming operators; on 20 June 2012, Bally Technologies, Inc. and International Game Technologies were the first to receive licenses.  Earlier this year, New Jersey’s Gov. Christie also signed a bill to allow Atlantic City casinos to offer gaming through the internet.

This type of patchwork legalization may be problematic. For one, without a federal framework, tribal gaming interests are left at the mercy of individual states, with small gaming operators unlikely to participate in any expansion. Moreover, without players from other states, states with small populations will likely struggle to create an efficient and popular cyber gaming environment. In fact, Nevada Governor Sandoval has pledged to lead the charge of interstate agreements for online gaming.  Larger states, like California, will still not agree to pool players with smaller states.  Finally, Variations in laws across the nation will also lead to a labyrinth of differing regulations for operators of online gaming. A Federal framework that allows interstate wagering is, thus, the most efficient avenue for iGaming expansion.

Failed Federal Efforts
Federal movement on iGaming has shown little promise.  At the end of 2012, the industry watched as Congress, yet again, failed to pass a law that regulates online gambling.

The House of Representatives introduced at least two bills: H.R. 1174 and H.R. 2366. Both failed to gather support to even allow for a hearing. In the Senate, during the lame duck session, Majority Leader Harry Reid (D-Nev) indicated that another bill would be introduced that was co-authored by outgoing Minority Whip Jon Kyl (R-Ariz). A few days after the elections, a draft of the Reid-Kyl online gaming bill leaked to the public and optimism that a federal framework would develop was at an all-time high.  The Reid-Kyl bill would regulate online poker, but would also ban all other forms of internet gambling. History, however, repeated itself: despite growing support from both sides of the aisle, the lame duck session of the 112th Congress mirrored the failed efforts of 111th Congress. Senate was not able to slide internet gaming into any other pending legislation or the fiscal cliff negotiations.

The biggest opposition to the bill came from the States. Because states are now free to legalize intrastate internet gaming, local and state legislators saw federal action as being unnecessary. To that end, the National Conference of State Legislatures (NCSL) on 9 August 2012, passed a policy resolution urging the federal government to respect state sovereignty. The North American Association of State and Provincial Lotteries also announced that there is now no need for federal legislation. In the waning days of the Congressional session, officials from Kentucky, Idaho, Washington state, Missouri, New Hampshire, Georgia and Iowa traveled to Washington, DC to protest the Reid-Kyl bill. On 14 December 2012, Senator Reid officially pulled the plug on the draft iGaming bill. It is now clear that legalisation of gambling in the United States can likely only occur on a state-by-state basis.

Meanwhile, the American Gaming Association remains optimistic of a forthcoming federal gaming bill. 

Prediction for the Future
Despite the benefits of a nationwide framework for iGaming, the current Congressional stalemate and state-by-state legislative progress make federal action highly unlikely. State lotteries, casino operators and game makers across the United States will likely turn to their state's legislators for any gaming expansion into cyberspace.

Legislation is currently pending in several states.  California's Sen. Wright has already introduced SB 51, to regulate internet gaming in the golden state. Similarly, Sen. Correa has introduced a “shell” bill, SB 678, that will likely move forward with tribal support. Massachusetts, Iowa, New York, and Illinois are also considering similar laws to regulate online poker, but ban other forms of internet gambling. Additionally, the state of Washington is considering proposals to repeal its criminalisation of internet gambling.

Just as the IGRA was a boon for tribal gaming, leading to over 460 Indian gaming establishments across the United States, iGaming expansion promises to lead to a proliferation of gaming across the states. The question is not if, but rather how online gaming will be legalized in the United States.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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