Bet on it: Department of Justice’s legal opinion may open door to more internet gambling

DWT Media Law April 2, 2012 Comments Off on Bet on it: Department of Justice’s legal opinion may open door to more internet gambling
Bet on it: Department of Justice’s legal opinion may open door to more internet gambling

By Jimmy Nguyen

Last December, the U.S. Department of Justice raised both eyebrows and excitement by abruptly changing its legal stance about some forms of internet gambling.  Previously, the DOJ interpreted the Interstate Wire of Act of 1961 to prohibit all forms of online wagering.  But on December 23, 2011 (perhaps trying to minimize attention with a pre-Christmas announcement), it released a legal opinion concluding that the Wire Act prohibits only the transmission of communications related to bets or wagers on sporting events or contests.  The opinion responded to inquiries by New York and Illinois state officials who want to sell lottery tickets over the Internet, and should clear the road for intrastate online lotteries.  Some industry watchers believe the DOJ opinion does not significantly alter the landscape, because the government was not relying on the Wire Act to prosecute online poker companies.  But others believe the government’s position-change may perhaps open the door more quickly to a regulated world of poker, casino games, and other forms of gambling over the Internet (except for sports betting).  For businesses operating in the Internet, game, media and technology sectors, will this latest development one day yield transformational business opportunities? One way or another, you can bet on it.

The Wire Act was originally aimed at combating organized crime, and is therefore not particularly current for the digital era.  By its terms, the statutory scheme prohibits interstate wire transfers of gambling-related communications that involve “any sporting event or contest.”  It has not yet been expressly held to reach beyond sports betting.  Furthermore, the Wire Act was historically applied to sports betting operations conducted by telephone or wire.  Nevertheless, the DOJ previously took the position that Wire Act prohibits forms of online gambling beyond just sports betting.

At the state level, several states have enacted statutes outlawing Internet gambling in any form.  But more recently, lobbying forces and legislators in some states have begun proposing legislation to permit and regulate online poker and other forms of internet gambling.

This move to legalize online gaming at the state level is driven, in part, by dollar signs.  This business presents a large potential revenue sources for states – either directly from state-run online lotteries, or indirectly from taxes collected from revenue earned by private companies.  State officials in New York and Illinois wanted to sell lottery tickets over the Internet to residents of their states.  But given the possibility that online lotteries could trigger Internet transmission crossing New York or Illinois state lines, state officials wanted to be sure online lotteries do not violate the federal Wire Act.  In 2009, they asked the DOJ to examine the issue (pushing their belief that the Wire Act was not implicated).  That resulted in the opinion prepared last September but released publicly in December by the DOJ’s Office of Legal Counsel.  Examining the statutory language and legislative history, the DOJ concluded that the Wire Act only reaches bets or wagers on sporting events or contests and thus does not prohibit the proposed New York and Illinois state-run online lotteries.

While the DOJ’s opinion was delivered in the context of state lotteries, its conclusion about the Wire Act could be definitive enough to open the door (at least in many observers’ eyes) to other forms of online gambling – such as online poker and casino games.  Some observers believe this is a remarkable evolution in position, given the DOJ indictments unsealed just 8 months earlier on “Black Friday” against foreign online poker companies.

But others believe Justice Department’s opinion may be much ado about nothing because the government has not been relying on the Wire Act, and it may be risky to assume the DOJ will stop pursuing Internet gambling operators.  In what became known in industry circles as “Black Friday’’ last April, the government unsealed indictments against leading foreign online poker companies Absolute Poker, FullTilt Poker and PokerStars, and their founders.  Notably, those indictments did not make charges based upon the Wire Act; they instead relied on the illegal Gambling Business Act, the Unlawful Internet Gambling Enforcement Act (UIGEA), bank fraud, and money laundering.

The UGIEA law, enacted in 2006, creates federal liability for violating a state, tribal, or federal law outlawing gambling when such violation is conducted over the Internet.  UIGEA targets payment processors, making it illegal for financial institutions to process illegal transactions originating from or directed toward any online gambling sector.  But it requires violation of an underlying state, tribal, or federal law – without itself defining what is unlawful gambling.  So at most, after the DOJ’s new position, the Wire Act should no longer be useable to trigger a UIGEA violation against online gaming businesses unrelated to sports betting.  Violations of other federal, state or tribal gaming laws would be needed to trigger UIGEA.

Indeed, online gaming operators still need appropriate licenses to operate (whether in other countries or in applicable U.S. states or jurisdictions).  And the government can still prosecute online gaming operators for violations of other laws besides the Wire Act (as the Justice Department did in its “Black Friday” indictments).

Despite these hurdles, the DOJ’s new position could lead to expansion of the Internet gambling field in the United States in several ways (beyond, of course, blessing states to take expand lottery business to the Internet).  First, foreign online gambling operators may be emboldened to again market directly to U.S. players.  Some operators had taken a reprieve from targeting advertising dollars to the American market but their promotional efforts may come back.

Second, U.S. companies across diverse sectors will be more open to consider entering the online wagering market – either by launching new games or by converting existing casual games to a “pay-to-play” wagering model.  Casual games are already a hot trend for Internet sites, social media and mobile devices.  Rather than depending on download fees and advertising revenue, casual game operators will probably look for ways to expand their revenue pie by getting licensed to take wagers or by partnering with existing gambling license holders (such as Harrah’s Entertainment and MGM Grand).  For example, imagine casual game dynamo Zynga creating a paid wagering version of its popular “Zynga Poker” game or allowing betting in Farmville.  While betting via online games of skill is arguably already permissible, the DOJ’s opinion can open the door to wagering for online games of chance.  Even simpler promotional games, such as a premium SMS “text to win” sweepstakes to promote a television series, may proliferate without fear that the Wire Act prohibits such activity (although they still must mind state gambling and sweepstakes laws).

Third, media companies may feel comfortable again taking advertising buys from online gaming operators – at least if the game providers are properly licensed in an appropriate jurisdiction.  For a period of time, cable television networks, newspapers, magazines and online advertising networks took advertisements from Internet gambling companies (whether for an operator’s “pay-to-play” sites or their free-to-play sites operated under a “.net” domain).  In 2003, the Justice Department sent a warning letter to the National Association of Broadcasters to advise that it considered Internet gambling and online sports book companies (even if they were offshore) to be illegal.  The point was to warn broadcasters and other media companies to avoid taking advertisements from offshore online gambling companies.  Since that letter to the NAB, online gaming advertisements in U.S. media have dropped sharply (though there remains some in the marketplace).  The DOJ has not retracted that 2003 letter to the NAB.  But its December 2011 opinion letter signals a position-shift that may lead media companies to consider again accepting such advertisements to add much-needed revenue (though more cautious media businesses may prefer to wait a while to first see how the landscape unfolds).

Despite all the interest around the DOJ opinion, it does not mean that any company can just run out to start Internet gambling operations.  Gambling operators typically still need a license from states or tribal jurisdictions, giving advantages to existing land-based casino companies and tribal groups who already seek to enter the digital “pay-to-play” space.  (Offshore, Internet gaming operators are typically licensed by various foreign authorities.) Certain states – in particular Nevada, California, and New Jersey – already have lobbyists and legislators pushing to legalize at least some forms of internet gaming either within or crossing their borders.  In Washington D.C., an online intrastate gambling bill was passed in 2010 but has not yet been implemented and is the subject of repeal efforts.  More likely than not, it will be intrastate online gaming that will be regulated first by certain states.

Until that day comes, this tremendous field of opportunity is being watched anxiously.  If your company or clients are interested in making money from online gambling, now may be a good time to bet big.

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