January 20, 2015

Poker's Deus Ex Machina (Part II)—
How a Computer Proved Poker Is a Game of Chance

AUTHOR'S NOTE: This post is the second of two related posts. Part I is HERE.

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As discussed in my last post, the recent news that a team of researchers has "essentially weakly solved" heads-up limit hold' em poker (HULHE) should be considered significant support for the legal argument that poker is a "skill game"—i.e., a game where skill, rather than chance, is the "dominant factor" in the game. In fact, the Cepheus computer program's ability to play a non-exploitable, game theory optimal (GTO) strategy does advance the skill game argument by showing that the skill-chance analysis cannot be confined to a single hand, demonstrating the importance of making long-term strategic decisions (e.g., balancing ranges). Further, Cepheus proves that, at least for the HULHE variation of poker, a player can use a GTO strategy that is indifferent to the role of chance over the long-term (i.e., the strategy will not lose to a non-GTO strategy over a statistically significant number of hands).

So, has Cepheus resolved the skill game legal argument in favor of poker as a game of skill? Unfortunately, the opposite may well be the case. As one of Cepheus' researchers explained, an important implication of a GTO strategy is that it is designed to be impervious not only to the effects of chance, but also to any counter-strategy (emphasis added):
"Since poker is a symmetrical game, the end strategy which Cepheus plays is an unbeatable one. While chips can, of course, be won from Cepheus in the short term, there is no decision which can be made against it which will be a winner in the long term. If a perfect opponent, either human or computerized, were to play a semi-infinite number of hands against Cepheus the best possible result would be for them to break even. Any imperfect opponent, which unfortunately includes all human players, would make mistakes along the way and lose. That being said, what Cepheus cannot do is maximize its winnings against weak opponents, a skill [at] which humans excel. Cepheus is simply an invincible, immovable bunker, a Maginot Line that actually works."
Thus, if two players face each other and both play a GTO strategy, then neither player will be able to exploit the other player, neither player will have a strategic advantage, and the result of the game will be left entirely to chance. In other words, the fact HULHE has a GTO strategy necessarily implies that the game can be played in such a way that the sole determining factor in the outcome is the effect of chance (i.e., which player gets luckier).

Now the possibility of a GTO v. GTO showdown may appear only theoretical. But let's consider the opposite situation, where two HULHE novices are matched up. Assuming neither player has any knowledge of proper strategy, again the results of the match are determined solely by chance. Now, let's take the next leap—two equally experienced, talented players who try to exploit the other player's flaws. In order to exploit those flaws, each player will necessarily make flawed strategic decisions (i.e., deviate from GTO strategy). However, over time, the constant back-and-forth of play should result in a series of game adjustments by both players which leaves each of them playing a close approximation of GTO strategy, such that neither player has a significant strategic edge. Again, the long-term results of such an even-skill match would be governed mostly (predominantly) by chance.

This implication for GTO strategy—that skilled players will eventually reach a close approximation of a GTO equilibrium strategy—is real and not theoretical. As was noted by Cepheus' researchers (emphasis added):
"So what does the availability of Cepheus’ data mean to limit hold’em play, particularly in the online environment where there are no effective checks against referencing Cepheus while play is ongoing? Not a great, deal unfortunately. While Cepheus would have undoubtedly had a detrimental and traumatic effect on a competitive online environment there is effectively no environment left to traumatize. Due to the rake, which is the share of the pot which the house claims as its fee, poker is a negative sum game. As the fundamental of heads up limit hold’em became better understood and the skill gap between competitors narrowed, many players found themselves in a position where they were able to beat their opponents but not both their opponents and the rake. More and more often, competition between players began to result in both players losing and the situation was exasperated [sic—exacerbated] by the decline of the online poker industry, which shifted a large portion of competitive play to lower stakes where the rake represents a larger percentage of a player’s potential winnings. Poker players, being rational people, did the only sane thing they could do, which was decline to play anyone who appeared to be of even remotely similar skill. At of the time of writing this article on a Saturday evening there are, on Pokerstars, the current market leader, thirty-five heads-up limit hold’em tables above the one dollar level where players are waiting for an opponent and one table at which two players are actually competing. Cepheus will undoubtedly prove a valuable sparring partner and research tool for casino players and enthusiasts looking to sharpen their skills, but the heyday of heads-up cash play has, unfortunately, already passed."
This concern about relative skill between players is common within the poker community. Online poker players have long engaged in the process of "bum hunting"—looking for games with known weak players to exploit. As poker professional Paul Ratchford explains:
"Poker is a zero sum game minus a cut that the house takes. So in an environment where all players are good and everybody plays game theory optimal poker EVERYBODY loses. The house takes money out of pots at an enormous rate especially at lower games. In fact, versus a bunch of skilled regulars (with zero recreational dollars in play) it may be impossible at a 6-max or full ring table for even some of the best in the world to win…. The bottom line is that if you are a professional poker player you need to be bum hunting / table selecting."
But the bum hunting problem is not limited to online play. Going back even to the early WSOP days, elite brick and mortar poker players like Doyle Brunson and Amarillo Slim would seek out games with easy marks like Archie Karas and Jimmy Chagra. More recently, high stakes professional poker players have pursued games with "whales" like Cirque du Soleil founder Guy Lalibert√©, baseball superstar Alex Rodriguez, and Texas banker Andy Beal (immortalized in the classic book, The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time). Similarly, professional poker players Phil Ivey, Andrew Robl, Dan "Jugleman" Cates, and Tom Dwan have recently posted bail money or provided support to Paul and Darren Phua, individuals who reportedly control access to Macau's famed, whale-laden high stakes poker games. Back in Vegas, a number of poker pros jealously protect their whales from poaching by other pros:
"This game started about a week before the $1 million One Drop tournament and ran daily. Though a security guard kept gawkers and potential short-buys at bay, recognizable faces included One Drop Founder Guy Laliberte, Rick Salomon (the movie producer most famous for his Paris Hilton tape), and self-described model / actor / astronaut / asshole” Dan Bilzerian (@DanBilzerian). When this game runs, even the pros who play the regular 300-600 mix at Aria move elsewhere. 'Crazy' Mike Thorpe, who organizes many high-stakes mix games in town, says the regular 300-600 players at Aria, which include David 'Viffer' Peat and Ivey Room host Jean-Robert Bellande, have to move to Bellagio because Bobby Baldwin himself (Bobby’s Room namesake) would rather host his nosebleed no-limit game in The Ivey Room without pros."
Ironically, Bellande has himself been criticized by other poker players, including WSOP Main Event champion Greg Merson, for setting up high stakes poker games filled with whales, then excluding other poker pros from those games. Of course, this pattern of skilled "sharks" seeking out less talented "fish" to exploit isn't limited to high stakes play.

The irony of "bum hunting" or targeting "whales" and "fish" is that these weaker players generally play a highly flawed poker style that diverges markedly from GTO strategy. Although a GTO strategy would profit off these weak players over time, a non-GTO style will actually exploit weak players faster and for greater profit. So, in essence, poker's best players generally profit off of weaker players by utilizing a non-GTO strategy. Poker professional Paul Ratchford explains this irony (albeit in the context of no-limit hold 'em):
Maximum exploitive NLHE occurs when a player chooses the most exploitive line to maximize his/her expected value. Most players do not play balanced ranges and, therefore, we should seek to maximize our edge by playing appropriately unbalanced in response. In a Rock, Paper, Scissors example, where we know that our opponent will throw rock 100% of the time, we would simply use paper 100% of the time. Even if we knew that our opponent threw rock 40% of the time, 30% paper, and 30% scissors, the maximum exploitive play would still be paper 100%. In NLHE, if you play heads up versus an opponent who folds 100% of the time to three-bets, your response would be to reraise 100%. It is important to note that if you are playing against a GTO opponent, the maximum exploitive strategy will be GTO. The appropriate response to a perfectly balanced Rock, Paper, and Scissors range is to be perfectly balanced yourself.
Or, as Cepheus' own researchers admit, "what Cepheus cannot do is maximize its winnings against weak opponents, a skill [at] which humans excel."  In other words, maximizing profits in poker requires deviation from Cepheus-style GTO poker strategy.

The analytical takeaways from the discussion above can be distilled into these Poker Postulates:
  • A poker player's relative skill advantage over his opponent matters more than his absolute skill level—i.e., "In the land of the blind, the one-eyed man is king."
  • As the difference in skill between poker players increases, the effect of chance on game results decreases, but is never eliminated altogether.
  • In poker games between players of substantially similar skill, results will be determined predominately by chance.
  • In poker games between players of substantially dissimilar skill, results will be determined predominately by skill, even though over a short period of time chance may permit a lesser-skilled player to prevail.
  • Skill in poker is more readily demonstrated by utilizing a non-GTO strategy to exploit weaker players than in utilizing a non-exploitable GTO strategy, at least insofar as success is measured by profits.
To be blunt, then, poker skill ultimately is not measured by how well a player selects starting hands, calculates pot and implied odds, or balances ranges. Likewise, poker skill is not measured by degree of similarity to or deviation from a GTO strategy. Rather, poker skill predominately turns on game selection; that is, being able to get into a game with weaker opponents whose flawed strategies can be exploited via a non-GTO strategy.

Returning, then, to the skill game legal argument, the clear implication of the Cepheus GTO strategy research is that poker advocates are left defending the awkward proposition that poker "skill" has little to do with game-related strategy and mostly means "preying on weak players" (or bum hunting, or fleecing fish—pick your own metaphor). Presented in this context, poker players begin to look less like mathematical savants and more like casino operators luring patrons to a -EV table game. In fact, for many poker players, their odds of winning money would actually be enhanced dramatically if they gave up poker for a seat at a house-run table game.

Is it any wonder the law treats poker the same as Mississippi Stud or Let It Ride?

“The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”

~~ George Orwell, Animal Farm

January 19, 2015

Poker's Deus Ex Machina (Part I)—
How a Computer Proved Poker Is a Game of Skill

One of my favorite TV shows is the CBS drama, Person of Interest. The show's plot is driven by the concept that a fully functional artificial intelligence (AI) computer program has actually been created. The AI system—known as "The Machine"—was originally created as an omnipresent surveillance tool to detect terrorist plots for the government. The Machine's creator feared those in power would abuse its abilities and went underground, programming The Machine with an ethical code and using it to predict and prevent criminal acts.

In last week's episode—the aptly titled "If-Then-Else"—the show's protagonists were caught in a conundrum, needing both to hack into a computer system to prevent a stock market crash while also escaping a trap meant to capture or kill them. The show flashed back to when The Machine was first created and its creator was teaching it to play chess. The Machine would calculate thousands of possible moves ahead, and when a chosen line of attack ultimately failed, would alter its strategy for future games, thereby learning how to play the game better. The rest of the show involved watching The Machine run through multiple alternative game plans for the team of heroes, with many of them ending in the team's demise. The Machine ultimately found a solution which gave the team a slim but real chance of survival. Of course, the show ended in a shocking cliffhanger—the apparent death of one of my favorite characters—which initially angered me, but ... well, as they say, "Spoiler Alert".

Just a few days after watching that Person of Interest episode, news broke via Science magazine that a team of scientists in Canada had "essentially weakly solved" heads-up limit hold 'em poker (HULHE). The methodology used to develop the Cepheus poker program is uncannily similar to that used with Person of Interest's fictitious Machine. Essentially, Cepheus played billions of billions of hands of poker against an identical program, beginning with random trial and error as to the proper strategy—bet, raise, call, or fold—at each decision point. Once the hand concluded, Cepheus would assign a "regret factor" to each decision based on the hindsight knowledge of the actual hand results. As tens of thousands of similar hands and situations accumulated, Cepheus would adjust its strategy to lessen or avoid decisions with higher regret factors, instead pursuing the balance of decisions which, overall, caused the least regret. For example, Cepheus might initially only check or call on most flops with a pocket pair higher than any card on the board, but would over time learn that betting or raising a high percentage of the time is a better (i.e., more profitable) strategy. Eventually, the program reached a point where further adjustments created more regret, meaning that the program had developed a non-exploitable, Game Theory Optimal (GTO) strategy.

The announcement that HULHE has been solved has been widely covered by both the tech/science media and the general media, generally in a positive light (see, e.g., FiveThirtyEightBloomberg, Yahoo News, The Washington Post, The Verge, Gizmodo, Nature, and Spectrum). One article, however, took a more skeptical view. Chris Hall, writing for The Guardian, claimed to have played Cepheus and found it to be flawed:
"At first, I was roundly stuffed by the computer’s non-stop aggression. Any bluffs I made failed miserably. To counteract this, I became more aggressive preflop and stopped bluffing almost entirely. Cepheus’s game did not adapt to my play and it made what I would consider several questionable plays. The program was reluctant to ever give up any sort of hand in a large pot making it easier to get lots of value from moderately weak hands."
Hall's claim is utterly at odds with the claim that Cepheus has solved HULHE, and reflects a lack of understanding of what GTO strategy means in game theory. If Cepheus in fact is playing a GTO strategy, then by definition Hall cannot play a style which attacks a flaw in Cepheus' strategy because GTO strategy has no flaws to exploit. As Cepheus' creators explain (emphasis added):
"Since poker is a symmetrical game, the end strategy which Cepheus plays is an unbeatable one. While chips can, of course, be won from Cepheus in the short term, there is no decision which can be made against it which will be a winner in the long term. If a perfect opponent, either human or computerized, were to play a semi-infinite number of hands against Cepheus the best possible result would be for them to break even. Any imperfect opponent, which unfortunately includes all human players, would make mistakes along the way and lose."
Rather than exposing a supposed flaw in Cepheus, Hall's short-term positive results were purely a matter of short-term variance—that is, Hall got lucky. Now, this is not to say that Hall's change in tactics had no effect; either:
  1. Hall originally was playing sub-optimal poker and correctly adjusted toward GTO strategy, improving his results (which were augmented by short-term variance); or,
  2. Hall incorrectly adjusted away from GTO strategy to exploit a perceived (but illusory) flaw, won over the short-term because of variance, but would in fact lose over the long-term utilizing that strategy.
To be fair, Hall acknowledged that the 400 hands he played—essentially one or two decent cash game sessions—were an insufficient sample size to evaluate Cepheus. Still, Hall doubled-down on his irrational doubting of Cepheus:
Perhaps the best way to show off Cepheus would be to issue a challenge over a fixed amount of hands to a world-class professional player like Daniel Negreanu or Phil Ivey. This could create poker’s own version of Deep Blue v Garry Kasparov and would certainly be interesting for poker junkies like myself. I’d probably still take man over machine, though.
Assuming a statistically significant number of hands were played, Hall picking a human to defeat a computer playing GTO strategy? GTFO!

Hall's article did indirectly point out one crucial distinction between the Cepheus GTO strategy and the strategies employed by skilled human poker players: Human players will often deviate from GTO strategy in specific situations against specific opponents in order to maximize their profits through exploitation of weak players' worst errors, even though that particular non-GTO strategy would lose money over the long run against most opponents. As Cepheus' creators readily admit (link added):
"[W]hat Cepheus cannot do is maximize its winnings against weak opponents, a skill at which humans excel. Cepheus is simply an invincible, immovable bunker, a Maginot Line that actually works."
Although Cepheus is an impressive achievement in its own right, my thoughts immediately turned toward how Cepheus would play in the legal world. Does the development of a computer program capable of GTO poker play decisively prove that poker is a game of skill rather than a game of chance?

Ah, yes, our old friend, the "skill game argument", which you might recall from such classic crAAKKer posts as: "Tilting at Poker Windmills", "Why Poker Litigation Fails", and "Garnishing a Turd (Part IV): DiCristina Ends, Not With a Bang, But a Whimper". The foundation for the skill game argument is that, for purposes of gaming law in some states, "gambling" is determined by an evaluation of whether skill or chance is the "dominant factor" in determining the outcome of the game in question. The skill game argument seeks to prove that poker is a game in which skill predominates over chance, and therefore is not illegal under applicable state gaming laws. Unfortunately, every appellate court to have considered the skill game argument to date has rejected the argument or found it irrelevant (see Section E and FN3 of my discussion of the DiCristina appellate decision for the full summary of this litigation futility).

The skill game argument reached its apex in the DiCristina litigation, where a federal district court judge found poker to be a game of skill for purposes of the federal Illegal Gambling Business Act. As discussed in my analysis of the DiCristina district court decision, the court's analysis of the skill game issue was driven in large part by Dr. Randall Heeb's sophisticated statistical analysis of millions of online poker hand histories. Dr. Heeb was able to demonstrate that winning players displayed a skill edge greater than expected variance within a few thousand hands of play, and also that winning players won more money than losing players even when playing the same starting hands.

Cepheus advances the skill game argument by demonstrating that there is a theoretical strategy for playing HULHE which is optimal, in the sense of being non-exploitable over a sufficiently large number of hands. In fact, Cepheus' creators note that there may be multiple GTO strategies for HULHE: "different Nash equilibria may play differently". (p. 9).

Cepheus makes two significant contributions to the skill game argument. First, Cepheus demonstrates that individual poker decisions must be evaluated in the aggregate, over time. To this point, many of the examples of poker skill used to support the skill game argument have focused on individual or tactical poker plays—for example, how pot odds, stack size, or starting hand strength can be used to determine correct game decisions. Cepheus shows that the game is substantially more complex than any one play or hand, and that a strategic approach to game decisions is both necessary and possible. Although successful poker players recognize the importance of long-term strategic game theory concepts such as range-balancing, Cepheus is a rigorous mathematical and logical proof of the importance of poker players thinking beyond the immediate play or hand. In other words, Cepheus is a refutation of the superficial legal argument that poker is a game of chance because, regardless of skill, players are still "subject to defeat at the turn of a card" in a particular hand.

Cepheus also makes another, more significant contribution to the skill game argument. Some of the legal arguments made in favor of poker as a skill game overreach, trying to establish that nearly nothing in the game is beyond the control of the player; these arguments fall flat against the easily observable elements of chance in play. Cepheus, however, takes the element of chance head on and renders it irrelevant. Cepheus does not deny the presence of a significant element of chance in the game. Cepheus simply is indifferent—impervious even—to the effects of chance over the long-term. Regardless of what cards may fall by chance, Cepheus will over the long-term win against opponents playing a non-GTO strategy. For purposes of the legal skill game argument, Cepheus serves as the embodiment of the triumph of skill over chance.

So, does Cepheus mean that the legal skill game argument is over? Hardly. Cepheus is a proof of HULHE only. One of the Cepheus researchers, Neil Burch, is participating in a couple of threads in the Two Plus Two poker forums where he describes some of the limits of the Cepheus results. First, Burch does not think heads up no-limit poker is solvable using current methods and technology because of the exponentially greater number of decision points in play. Second, Burch points out that moving from a heads up to even a three-person game adds significant layers of complexity to the analysis, including the interesting possibility that two players could collude to exploit a third player, even if that third player was playing an equilibrium strategy. Consequently, Cepheus is better viewed as a "proof of concept" of the degree of skill involved in poker, not a proof that every version or permutation of poker has a GTO strategy impervious to the effects of chance.

Unfortunately, what Cepheus giveth, Cepheus also taketh away. Like a demon from a bad horror flick, Chance does not want to stay dead and buried. Stay tuned, true believers, for our next episode when Cepheus resurrects Chance to haunt the skill game argument once again.

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AUTHOR'S NOTE: This post is the first of two related posts. Part II is HERE.

December 29, 2014

Pocketed Pocket Cards at Mirage

Last night, I was playing some poker at Mirage when our table was confronted with the following novel and somewhat bizarre poker rules question that took the concept of "pocket cards" way too literally. How would you rule?

A new player had just joined the game. On his second hand, he went all-in, lost, and was felted. The player stood up to pull more money from his front pants pocket as the dealer pushed the pot, moved the button, and began dealing the next hand. The player pulled out a wad of bills and peeled off three one-hundred dollar bills for his rebuy. The player also happened to be the big blind. After finishing the deal, the dealer took two of the one-hundred dollar bills from the player and converted them into chips. As the dealer was doing so, the under the gun player called the $2 big blind, and the next player raised to $10.

Suddenly, the player who was rebuying said loudly and with some heat, "Why didn't you deal me in?" The dealer assured the player he had been dealt in. The player, however, pointed to the table and said, "Where are my cards?" The dealer halted the action, and after a few moments of confusion, the source of the problem became clear:

The player, when putting away his wad of money, had also picked up his cards and put them in his front pants pocket with his cash.

As the player pulled his cards out of his pocket, debate broke out amongst the other players as to what should be done. Several players felt the hand should be declared a misdeal because of the concern as to game integrity. Other players felt the hand should continue because "significant action" had occurred, albeit while the dealer was focused on breaking the bills and dealing with the confusion over missing cards rather than on the hand action. The dealer promptly (and correctly) called for the floor.

If you were the floor, how would you have ruled and why?

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SPOILER ALERT (Ruling below):

The floor ruled that the hand of the player who removed his cards from the table was dead. However, the rest of the hand was played out in the normal course. Then, the floor had a new set-up (new cards) brought to the table.

At the time, I was mildly supportive of the idea of declaring a misdeal of the entire hand, based on a concern for the integrity of the game. However, on reflection, I think the floor handled the situation correctly. The cards in play on the table and in the dealer's deck remained untainted by the cards taken off the table once that hand was declared dead. Regardless of the significant action rule, there was no real reason to re-deal the entire hand so long as the hand taken off the table was dead. Also, bringing in a new set-up was wise simply to be certain nothing inappropriate was happening. Declaring a misdeal of the entire hand would permit potential angle-shooting mischief between partners at the table who could kill an opponent's good hand merely by taking their cards off the table and putting them in their pocket or dropping them on the floor, etc.

So, altogether I think the Mirage floor handled this wacky issue quite well. And I expect never to see that situation occur again. Never ever.

November 26, 2014

Why New Jersey Can't Have Nice Things—
Like Sports Betting

Last Friday, Federal District Court Judge Michael Shipp entered a ruling ("Christie II") finding that New Jersey's most recent legislative attempt to legalize sports betting by means of a "partial repeal" of its sports betting prohibitions still violated the federal Professional and Amateur Sports Protection Act (PASPA). Judge Shipp determined that New Jersey's attempt to "repeal" its sports betting ban, but only for wagers placed at licensed racetracks and casinos, was impermissible under the prior Third Circuit ruling striking down an earlier effort by New Jersey to legalize sports betting. ("Christie I"). Judge Shipp also entered a permanent injunction barring New Jersey from implementing its sports betting scheme.

The district court's ruling in Christie II was entirely expected. Good analysis of the decision has been offered by John Brennan (analysis and reaction), Michael McCann (with a big assist from sports and gaming law attorney Daniel Wallach), and Darren Heitner. New Jersey state officials have already filed a notice of appeal to the Third Circuit Court of Appeals, which is something of a last gasp Hail Mary to salvage any chance of legalizing sports betting without asking Congress to amend or repeal PASPA.

New Jersey state officials and their attorneys have been selling the partial repeal law to the media as a legal scheme that was explicitly permitted by the Third Circuit's Christie I decision. So why did the state lose? The Christie II district court opinion really turns on three key points, not all of which are strictly "legal" in nature.

I.  Third Circuit Language Cut Against New Jersey

The current litigation is a rare situation where the relevant legal authority is essentially one statute (PASPA) and one appellate decision (Christie I). Because the text of PASPA suggests a complete ban on sports betting, New Jersey's partial repeal law has to satisfy the narrow carveout established by the Third Circuit in Christie I:
On the one hand, a state may repeal its sports wagering ban, a move that will result in the expenditure of no resources or effort by any official. On the other hand, a state may choose to keep a complete ban on sports gambling, but it is left up to each state to decide how much of a law enforcement priority it wants to make of sports gambling, or what the exact contours of the prohibition will be.
Now, as previously discussed, that particular quote is buried in a lengthier passage in the Christie I opinion, and to be fair to the state and its attorneys, the Christie I opinion is not a model of clarity. Still, the district court read that passage as offering New Jersey exactly two options:  a) a complete repeal of the sports wagering ban, or b) maintaining a complete ban on sports wagering, but with the ability to set lower penalties for violations of the law or to show broader prosecutorial discretion in enforcing the ban. As the district court noted, this "all or nothing" approach where a state has only two choices—complete deregulation or regulation in conformity with federal standards—is consistent with long-standing federal case law in the area of federal preemption of state regulations. And, as the district court noted in a footnote dismissing New Jersey's severability argument, the New Jersey legislature gave no indication that it intended or desired completely unregulated sports betting. [Christie II, p. 27, FN 15].

New Jersey's argument for a partial repeal of the sports wagering ban rests on the Third Circuit's language in Christie I which declares the state may establish "the exact contours" of any sports betting prohibition; the state argues this passage means it can also establish the "exact contours" of a repeal of its sports betting prohibition (i.e., the state can limit the scope of any repeal). The problem with this argument is that the language cited by the state—"exact contours"—appears only in connection with the second option offered by the Third Circuit—"a complete ban on sports gambling". The Third Circuit did not suggest that a state had similar latitude to shape the "exact contours" of a repeal, implying that a repeal had to be absolute rather than limited or "partial".

The district court opinion in Christie II noted that the dissenting judge from Christie I also seemed to view the state's options as being a complete repeal or a complete ban, with no room for a "partial repeal"—in other words, there was no legal way for New Jersey to be "half pregnant" with sports betting. The district court also called out New Jersey for misquoting Christie I:
Defendants go to great lengths to recast this passage in a light contrary to its meaning. The entire passage is included in full so that its context can be examined. [Christie II, FN 9, p. 18].
The district court likely took this unusual step because the New Jersey legislature explicitly cited the "exact contours" language in the explanatory comments to the partial repeal bill. Look for the leagues to emphasize both of these points to the Third Circuit in their Christie II appeal briefs.

II.  New Jersey's "Partial Repeal" Statute Was Too Clever By Half

Building on its preemption analysis, the district court seemed singularly unimpressed with New Jersey's attempt to characterize its most recent legislative fix as a "partial repeal":
In the context of a preemption analysis, federal courts have been unwilling to allow states to do indirectly what they may not do directly. ... While styled as a partial repeal, the 2014 Law would have the same primary effect of the 2012 Law—allowing sports wagering in New Jersey’s casinos and racetracks for individuals age twenty-one and over but not on college sporting events that take place in New Jersey or on New Jersey college teams. This necessarily results in sports wagering with the State’s imprimatur, which goes against the very goal of PASPA—to ban sports wagering pursuant to a state scheme. The Third Circuit recognized that the choice PASPA left states might be a hard choice, but here New Jersey is not making that hard choice, and the Court cannot ignore Congress’s intent in enacting PASPA just because New Jersey carefully styled the 2014 Law as a repeal. [Christie II, p. 24].
The district court further noted in a footnote that, legally speaking, any purported "repeal" of a statute that falls short of a full repeal is actually to be treated as an amendment to the statute. [Christie II, p. 27, FN 14]. "As a consequence, the State Defendants’ attempt to fit the 2014 Law into one of the options left by the Third Circuit is even more attenuated." [Id.].

Here, the district court seemed to be bothered by what I refer to as the "too clever by half" syndrome. Although lawyers are popularly viewed as sharp operators who try to seize on any technicality or ambiguity to advance their clients' argument, in reality judges tend to view attempts to exploit such linguistic loopholes with skepticism. For example, in the past Term, the United States Supreme Court (SCOTUS) considered a copyright case in which a company, Aereo, tried to exploit a legal loophole prohibiting re-transmission of network broadcasts by installing tens of thousands of mini-antennae, each of which was dedicated to one individual receiver, and thus was arguably a legally permissible "private" transmission. SCOTUS found that, although Aereo's scheme might technically comply with the law as a matter of form, its actual effect was a violation of the primary purpose of federal copyright law and thus was illegal. Stripped of its business model and facing numerous copyright infringement lawsuits, Aereo recently was forced into bankruptcy.

This too-clever-by-half syndrome has also affected prior gambling cases. For example, the Kansas Court of Appeals shot down a scheme in which businesses tried to circumvent state bans on poker by adding a purported "skill" element to traditional Texas Hold 'Em (illegal under Kansas law) in which the deck is exposed to players for several seconds prior to the deal, providing a chance for players to memorize the position of some of the cards (see Poker Grump's analysis of and link to the court decision on "Kandu Challenge" poker). Similarly, the Washington Supreme Court rejected a business scheme in which "eBay-style" online sports gambling was asserted to be legal because the Betcha.com website explicitly permitted gamblers to "welch" on bets, allegedly making the bets legally unenforceable and thus arguably beyond anti-bookmaking laws (see my prior discussion of the case here and here).

Here, the district court looked past the New Jersey legislature's formal label of the recent bill as a "partial repeal" to the pragmatic effect of that statute. The court found that the most recent legislation, practically speaking, had the same effect as the 2012 bill found invalid in Christie I—sports betting was legalized only in state-licensed racetracks and casinos, only available to individuals over age 21, and not applicable to New Jersey-based collegiate teams:
New Jersey’s attempt to allow sport wagering in only a limited number of places, most of which currently house some type of highly regulated gambling by the State, coupled with New Jersey’s history of attempts to circumvent PASPA, leads to the conclusion that the 2014 Law is in direct conflict with the purpose and goal of PASPA and is therefore preempted. [Christie II, pp. 26-27].
Based on these similarities between the invalidated 2012 statute and the 2014 partial repeal statute, the district court rejected New Jersey's label of "partial repeal" for its current statute and found that it was still an impermissible de facto state authorization of sports betting:
“Abraham Lincoln once asked: If Congress said that a goat’s tail was a leg, how many legs would a goat have? Four. Calling a tail a leg does not make it so.” City of Houston v. Am. Traffic Solutions, Inc., No. 10-4545, 2011 WL 2462670, at *3 (S.D. Tex. June 17, 2011). [Christie II, FN 13, p. 25]. 

III.  The Judge Falls Down the Sports Leagues' Slippery Slope, Gets Trampled by a Parade of Horribles

In analyzing PASPA, the district court paid particular attention to the sports leagues' argument that New Jersey's partial repeal of its sports betting prohibitions would potentially lead to a rapid spread of legalized sports betting throughout many other states:
The Court is guided by the Third Circuit’s determination of the congressional purpose of PASPA —“to ban gambling pursuant to a state scheme . . . because Congress was concerned that state-sponsored gambling carried with it a label of legitimacy that would make the activity appealing.” Christie I, 730 F.3d at 237. In 1992, when Congress enacted PASPA, it was aware that all but one state had broad prohibitions on sports wagering. As the Third Circuit found, Congress sought to make it harder for states “to turn their backs on the choices they previously made.” Id. at 234. Congress knew states, including New Jersey, were considering whether to allow some form of sports wagering and was concerned that the spread of sports wagering on “a piecemeal basis” would ultimately result in “an irreversible momentum” of sports wagering in the country. S. Rep. 102-248, at 5. In this Court’s view, the Senate Report and the Third Circuit’s finding of congressional purpose support the conclusion that PASPA preempts the type of partial repeal New Jersey is attempting to accomplish in the 2014 Law, by allowing some, but not all, types of sports wagering in New Jersey, thus creating a label of legitimacy for sports wagering pursuant to a state scheme. [Christie II, p. 24 (emphasis added)].
Although consideration of the future impact of a ruling is fair game in court, lawyers are prone to make arguments in which an adverse decision is asserted to be the first step on a slippery slope, which will inevitably open the floodgates to an undesirable parade of horribles. Here, the district court was clearly concerned about giving the judicial stamp of approval to New Jersey's partial repeal scheme because doing so would provide a road map for other states to similarly sidestep PASPA's sports betting ban, effectively thwarting Congress' intent to limit the spread of sports betting.

These types of slippery slope arguments have been used to successfully derail arguments attempting to strike down state poker bans. For example, in the PPA's ill-considered challenge to Washington state's online gaming ban, the Washington Supreme Court was swayed by both a slippery slope argument and a parade of horribles argument. First, the court expressed concern that authorizing online poker would necessarily require them to authorize other forms of online gaming. Further, the court was concerned that legalizing online poker would lead to a wide array of social ills, including gambling addiction, organized crime, and money laundering. Similarly, the South Carolina Supreme Court, in considering the PPA's equally ill-considered challenge to a state poker ban, declined to strike down an archaic, vague anti-gambling statute applied to a low-stakes home poker game in large part because the decisive judge feared doing so would open the floodgates to all manner of gambling.

Here, the district court's concerns about the effect of its decision reappeared in its ultimate conclusion:
New Jersey’s position on sports wagering is not unique. In fact, many states are currently rethinking their prohibitions on sports wagering. In Christie I, this Court indicated that it could not judge the wisdom of PASPA but only speak to PASPA’s legality as a matter of constitutional law. The Third Circuit made a similar recognition in Christie I. The Court is yet again faced with similar constraints in Christie II and still may not judge the wisdom of PASPA. To the extent the people of New Jersey, or any state, disagree with PASPA, their primary remedy is through the repeal or amendment of PASPA in Congress. [Christie II, p. 27 (emphasis added)].
Considering that a ruling in favor of New Jersey would, as a practical matter, render PASPA effectively toothless, it is hardly surprising that the district court ultimately enforced PASPA in light of the Third Circuit's finding that PASPA was a valid use of Congress' constitutional authority.

New Jersey state senator Ray Lesniak says that New Jersey is "even money" to win on appeal. The smart money is on the Third Circuit again affirming the district court's decision.

* * * * *

October 20, 2014

New Jersey Gets Half Pregnant With Sports Betting

Late last week, New Jersey changed course yet again in its continuing quixotic crusade to legalize sports betting. The state abandoned its efforts to recast its judicially invalidated Sports Wagering Act as a "repeal" of its statutory sports betting ban (which I discussed here), Instead, the state passed a new law explicitly repealing "any rules and regulations that may require or authorize any State agency to license, authorize, permit or otherwise take action to allow any person to engage in the placement or acceptance of any wager on any professional, collegiate, or amateur sport contest or athletic event, or that prohibit participation in or operation of a pool that accepts such wagers".

The new law smooths New Jersey's fight to legalize sports betting in two ways. First, the new law removes two contentious issues from litigation: a) whether the prior Act was a "partial repeal" of sports betting prohibitions or an affirmative authorization of sports betting, and b) whether portions of the prior Act could be severed and saved from the effect of the federal court injunction. More importantly, however, the new law serves as a "clean" effort at repeal, in that the new law does not purport to subject operators of sports pools to any form of licensing or regulation (other than potentially regulation via a private industry group).

The new law does impose a number of limitations on sports betting, however, Under the new law, all sports betting must:
  • occur in a licensed casino or racetrack,
  • be permitted by the casino or racetrack operator,
  • involve only individuals 21 years of age or older, and
  • not involve games in which a New Jersey school is a participant.
Further, the new law specifically includes sports betting revenues in the definition "gross revenue" subject to taxation under the New Jersey Casino Control Act.

New Jersey is seeking to thread a tiny needle here. On the one hand, the Third Circuit held (and the Department of Justice agreed) that a state does not run afoul of PASPA if it chooses to repeal a prohibition on gaming, so long as the state does not "sponsor, operate, advertise, promote, license, or authorize by law or compact" sports betting. On the other hand, New Jersey does not want to permit sports betting generally throughout the state and without any restrictions whatsoever (otherwise every tavern or gas station could operate a sports book).

The primary fighting issue will remain one I previously discussed—does limiting sports betting to the premises of state-licensed casinos and racetracks constitute a de facto licensing requirement for or state authorization and promotion of sports betting, in violation of PASPA? The Third Circuit's decision finding New Jersey's prior Sports Wagering Act invalid provides both sides with some language to support their position, but the stronger language supports the sports leagues which oppose New Jersey's efforts to legalize sports betting.

The Third Circuit's decision does hold that New Jersey may repeal its ban on sports betting, and may determine "the exact contours of" any prohibition without running afoul of PASPA. (Ruling, pp. 78-79). But the Third Circuit also suggested that the state's choice was between maintaining a total sports betting prohibition and having completely unregulated sports betting: "Congress may have suspected that most states would choose to keep an actual prohibition on sports gambling on the books, rather than permit that activity to go on unregulated." (Id.)

New Jersey in essence is trying to become half pregnant with sports betting—repealing its sports betting ban, yet regulating sports betting by restricting it to licensed casinos and racetracks. But the Third Circuit's decision seems to foreclose this maneuver: "We do not see how having no law in place governing sports wagering is the same as authorizing it by law." (Ruling, p. 74). In other words, the Third Circuit's decision suggests that PASPA permits a state only two options for sports betting—a complete ban, or a legal and completely unregulated market.

New Jersey is certain to argue that it has inherent authority (i.e., "police power") to regulate or restrict gaming in general for the welfare of its citizens, and such general gaming regulation does not run afoul of PASPA. This argument might justify restrictions as to the age of gamblers (states routinely hold minors cannot form binding contracts, and wagers are just a species of contract), as well as the prohibition against wagers on in-state college games (the state has an interest in preventing corruption, and the bar on such wagers does not itself authorize or promote sports betting).

The requirement that sports betting occur on the site of licensed casinos and racetracks is substantially more problematic, however. Although a state might well enforce a general zoning requirement that would not run afoul of PASPA—say, a requirement that no casino, racetrack, or sports book can operate within two blocks of a school—New Jersey's new law is so narrowly drawn that it essentially makes sports books subject to the licensing and other regulatory requirements of the state's gaming regulators. After all, how would a sports book operator be able to conduct business on the site of a licensed casino or racetrack without the consent of the casino or racetrack operator who is subject to strict gaming regulations?

Let's reconsider a hypothetical I previously discussed. Imagine a licensed New Jersey casino—let's call it "Cheezers"—which wants to contract with an outside company—let's call it "GoHog"—to run its sports book. GoHog happens to have operated an online sports betting operation for years in violation of the Wire Act, UIGEA, IGBA, various state gaming laws, and probably the U.N. Universal Declaration of Human Rights. The New Jersey gaming regulators tell Cheezers it cannot associate with GoHog because GoHog is an "unsuitable" business partner. Even if GoHog is not required to be licensed directly, state regulators can nonetheless impose restrictions on its ability to operate a sports book via its authority over the licensed casino which must host the sports book operation. This indirect regulatory control over sports book operators is likely to be viewed by the court as de facto state licensing and authorization of gaming in violation of PASPA. And the regulatory entanglement becomes even more problematic if a casino or racetrack operating its own supposedly unregulated sports book should somehow get crosswise with gaming regulators over a sports book issue (e.g., an underage patron, a cheating scandal, or an employee with unsavory connections).

A final complicating factor for New Jersey is its state constitution, which only permits legal gambling to the extent it is "authorized" by the legislature. The Third Circuit interpreted this constitutional requirement to mean that a legislative repeal of a sports betting prohibition is insufficient, by itself, to legalize sports betting in the state. (Ruling, p. 75). Rather, the Third Circuit held that New Jersey's constitution required the state legislature to affirmatively authorize sports betting by statute—which in turn violates PASPA. Thus, the state is caught in a Catch-22. PASPA prevents the state from affirmatively authorizing sports wagering, so the legislature can only repeal its sports betting prohibition. But a mere repeal is insufficient under the state constitution to legalize sports betting, so the legislature must enact a statute authorizing sports betting. Which, of course, PASPA bars the state from doing.

As expected—at least by everyone except state Senator Ray Lesniak—the NCAA and the major professional sports leagues have already filed a complaint in federal district court seeking a declaratory order and injunction against the state to prevent any of its casinos and racetracks from offering sports wagering pursuant to the new regulatory scheme (or lack thereof, to be more accurate). Of course, the leagues' claims of "irreparable harm" from allowing sports wagering in New Jersey stink of hypocrisy. Nonetheless, considering the court has previously granted an injunction to the sports leagues finding that the leagues would suffer irreparable harm if sports betting is allowed to occur, the court is likely to grant at least a temporary injunction halting sports betting until a hearing can be held on the merits of the state's latest legislation.

If Senator Lesniak really wants to bet on football this weekend, he better head to Vegas.