July 29, 2010
As the dust settles from yesterday's House committee approval of Rep. Barney Frank's online gaming bill (HR 2267), the questions on many poker players' minds are: "What about Full Tilt? What about PokerStars?" These questions arise from two "bad actor" amendments tacked on to the bill during the markup process, which purport to prohibit from qualifying for licensing those online gaming sites which have illegally operated in the United States since passage of the UIGEA. There is a wide range of opinions on the issue, with PokerStars voicing support for the bill while asserting that nothing in the bill threatens its operations, while Gambling911 reports a strong possibility that current online sites might be shut out: “ 'No one who took a bet or wager on or after the enactment of the Unlawful Internet Gaming Enforcement Act (UIGEA) in 2006, processed payments, or received "assistance" can be licensed'. ” (quoting Joe Brennan, Jr. of iMEGA).
The PPA and their friends at PokerStars, Full Tilt, and Ultimate Bet might be acting confident and unconcerned, but given the language of the bill, the old poker adage, "strong means weak" comes to mind. Why? Well, as my law school tax professor repeatedly told us, "The first rule of statutory construction is: 'Read!' " So let's take a look at the bill and amendments, and see what they say about this issue. Here's the relevant text from the original bill:
Now, here's the language from the Rep. Sherman Amendment No. 2, which is to be added to the end of the above section (ignore the bullet points—Blogger hates indenting):
"(E) fails to certify in writing, under penalty of perjury, that the applicant or other such person, and all affiliated business entities, has through its entire history:
"All entities under common control shall be considered affiliated business entities for the purpose of this subparagraph."
- "(i) not committed an intentional felony violation of Federal or State gambling laws; and
- "(ii) has used due diligence to prevent any U.S. person from placing a bet on an internet site in violation of Federal or State gambling laws.
Next we must look at the language of the Rep. Bachus-Bachmann Amendment No. 15, adopted after Amendment No. 2, implying it will take priority in any substantive difference in their terms (again, ignore the bullet points):
"(E) has, on or after the date of the enactment of the Unlawful Internet Gambling Enforcement Act of 2006-
- "(i) knowingly participated in, or should have known they were participating in, any illegal Internet gambling activity, including the taking of an illegal Internet wager, the payment of winnings on an illegal Internet wager, the promotion through advertising of any illegal Internet gambling website or service, or the collection of any payments to an entity operating an illegal Internet gambling website; or
- "(ii) knowingly been owned, operated, managed, or employed by, or should have known they were owned, operated, managed, or employed by, any person who was knowingly participating in, or should have known they were participating in, any illegal Internet gambling activity, including the taking of an illegal Internet wager, the payment of winnings on an illegal Internet wager, the promotion through advertising of any illegal Internet gambling website or service, or the collection of any payments to an entity operating an illegal Internet gambling website;
"(G) with respect to another entity that has accepted a bet or wager from any individual in violation of United States law, has purchased or otherwise obtained-
- "(i) received any assistance, financial or otherwise, from any person who has, before the date of the enactment of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, knowingly accepted bets or wagers from a person located in the United States in violation of Federal or State law; or
- "(ii) provided any assistance, financial or otherwise, to any person who has, before the date of the enactment of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, knowingly accepted bets or wagers from a person located in the United States in violation of Federal or State law.
"(H) is listed on a State gambling excluded persons list.".
- "(i) such entity;
- "(ii) a list of the customers of such entity; or
- "(iii) any other part of the equipment or operations of such entity; or
OK, there's a lot of legalese packed into these amendments. What does it all mean? First, note that the Bachus amendment, although pitched as "redundant" of the Sherman amendment, is actually much more harsh in excluding current online poker sites from licensing. The Sherman amendment states that the legal standard for judging past violations of gaming laws is "intentional" conduct, while the Bachus amendment uses the much lower legal standard of "knowingly, or should have known". The applicable legal standard for judging violations is critical, as the "intentional" standard is a high bar for government regulators to prove, while "knowingly, or should have known" is much easier to prove. For example, if it was illegal under Washington state law to accept wagers on the internet (see the pending Rousso appeal), a website might have put in place passive barriers to preclude Washington residents from using the site (e.g., a box asking users their state of residence, then barring play from Washington residents). Under an "intentional" standard, a website might not be held liable if Washington residents nonetheless played on the site by misrepresenting their state of residence. However, under a "knowingly, or should have known" standard, the website could be held liable if the website were aware that it was receiving funds from Washington residents, mailing checks to Washington residents, receiving game play from players with ISP addresses in Washington, or had in its possession any similar information or data that reasonably indicated Washington residents were placing wagers on their website.
The next striking feature of the Bachus Amendment is the laundry list of categories of disqualifying conduct:
- taking of an illegal Internet wager,
- the payment of winnings on an illegal Internet wager,
- the promotion through advertising of any illegal Internet gambling website or service, or
- the collection of any payments to an entity operating an illegal Internet gambling website.
Now, the issue of whether the current online poker sites accepting wagers from U.S. players are operating illegally is a matter of great contention, but may become relevant if regulations eventually establish that sites must have actually acted illegally themselves to merit a licensing disqualification. It seems likely under current court interpretation of the federal Wire Act that online poker sites have not violated that particular statute, so long as they have not offered online sports betting. Sites such as Bodog, however, which have offered sports betting are likely precluded from federal licensing, particularly since the committee adopted an amendment reiterating a federal ban on online sports wagering.
So what about the poker-only sites, like Full Tilt, PokerStars, and Ultimate Bet? Because the UIGEA itself does not make any online gambling illegal, its intent was to permit states to enforce their gambling laws. The legislative committee members supporting the "bad actors" amendments seemed under the impression that sites currently operating in the U.S. would be ineligible for licensing, creating an inference that online poker sites currently operating in the U.S. are in fact violating state gambling laws. Although PokerStars seems strangely confident it is in compliance with state gaming laws, and the Poker Players Aliance (PPA) seems to feel the same way, the issue is far from clear. PokerStars' reference to "legal opinions" assuring that its operations are in full compliance with state laws is of little relevance to the debate. An "advice of counsel" defense is difficult to maintain in criminal law, and generally only goes to the issue of "willful" violation of law, which is not always an element of state gaming laws.
Further, state gaming laws in many cases appear to ban online poker. Several states explicitly ban online gaming, while poker is explicitly regulated as gambling in many states. In states which use a "skill vs. chance" analysis, any "good faith" argument that poker is legal as a game of skill has been dashed, after the PPA's "poker is a game of skill" litigation strategy backfired, resulting in appellate court decisions in several states which explicitly hold that poker is a game of chance subject to gambling laws. This leaves online poker sites with only two legitimate possible arguments—they are beyond state jurisdiction, and state regulation of online gaming is barred by the Commerce Clause.
These two arguments are related, each arguing that states cannot regulate commerce beyond their borders. The first argument, related to state jurisdiction, is not particularly compelling. States already use "long arm statutes" to pursue criminal and civil actions against companies located outside the state; examples in the consumer protection field include state suits against tobacco companies and Microsoft. Given that online poker sites unquestionably do business within states that regulate poker as gambling, states arguably can assert jurisdiction over online sites.
Now the online gaming sites might argue that they are domiciled outside the state, and the gaming transaction takes place entirely on servers located outside the state, and thus the state has no jurisdiction. This distinction might be significant in states that bar only taking or accepting wagers, but seems unpersuasive for states that prohibit the making a wager (e.g., Washington). Although one federal court has declined jurisdiction in a civil lawsuit between a poker player and a foreign-based online poker site, there is no reason to expect a similar decision in the context of a state asserting its jurisdiction in a criminal law matter.
Looking at the Commerce Clause argument, those issues have been raised in the Rousso appellate challenge to the Washington internet gambling ban. But the key point to remember is that a law is fully enforceable until declared unconstitutional. In other words, internet gambling is illegal in Washington until a court rules otherwise, and internet poker sites violate the law every time they take wagers from Washington residents. A company can't simply declare they feel a law is unconstitutional and flout it; instead, they are bound by the law until they (or someone) succeeds in a challenge the law.
Turning to the licensing ban for companies that have engaged in "the promotion through advertising of any illegal Internet gambling website or service", this provision potentially encompasses ".net" advertising if the ".net" company is too closely connected to an illegal ".com" company. Indeed, the Nevada Gaming Commission recently pronounced that it would be closely examining these kinds of business affiliations, causing the Venetian to drop its relationship with the PokerStars.net sponsored NAPT. If federal regulations similar to the NGC's views are implemented, this provision could be a major roadblock for online poker sites currently operating in the U.S., as all of the major players utilize ".net" advertising.
Some poker industry and poker media individuals have wondered if Full Tilt or PokerStars could simply create a new "U.S. only" skin or affiliated site, or create a new corporation to transfer their assets to which would be eligible for licensing. These types of shell game maneuvers appear to be prohibited by subsection (G) of Amendment 15 (the Bachus amendment), which disqualifies from licensing companies which have bought a disqualified company, or its assets. So, if Full Tilt or PokerStars were disqualified from licensing in the U.S., then they would be too toxic for another license-eligible company (say Google or Las Vegas Sands) to purchase. This is a significant poison pill provision with financial consequences beyond the licensing debate.
A final interesting provision is that the bill would permit state and tribal gaming boards to license online gaming companies on a national basis under certain conditions. The Secretary of the Treasury could reject the state or tribal license, but the state or tribal license provision would enable companies like Full Tilt or PokerStars to "forum shop" for a favorable jurisdiction that would grant them a license, presumably in return for significant licensing fees, tax payments, or locating of business operations. Nevada would be the logical home court for licensing the brick and mortar giants (notably Harrah's and MGM, likely Wynn and Las Vegas Sands), but there are likely a number of states or tribes that would be open to certifying current online sites for the right kind of financial incentive. Alternatively, current online sites, if unable to obtain a federal license, could still seek licensing in states which opt out of the national online gaming system. This would only further balkanize the poker playing world, which is detrimental to the growth of the game.
Now, there are two major caveats to keep in mind at this stage. First, there may be additional amendments to this bill in the House, and there remain almost certain amendments to be proposed in the Senate (home of UIGEA architect and supporter, Jon Kyl, who just happens to sit on both the Finance and Judiciary committees—good luck, PPA). These differences will need to be hammered out if a final bill is ever passed, and the bill may contain stronger or weaker language related to online gaming sites currently operating in the U.S. Second, if and when a bill ever becomes law, the Treasury Department will need to promulgate regulations to help enforce the law. These regulations tend to be very important, and will be the subject of additional lobbying and political wrangling. So, the final interpretation of the law will depend to a potentially significant degree on the views of Treasury Department bureaucrats, who can strengthen or soften the impact of Congress' statutory language.
Personally, I would prefer a licensing system that would permit sites like Full Tilt and PokerStars to operate legally in the U.S., as they have proven to be reliable sites enjoyed by millions of players (Ultimate Bet / Absolute Poker should have to do some serious explaining to regulators before getting a license). If other sites started by Harrah's, MGM, Google, or other newcomers want to compete for the poker dollar, they should certainly jump into the fray and try to offer a superior product. But I find rather distasteful the use of pious "fairness" rhetoric to justify gaining an economic advantage by disqualifying competing companies through an Act of Congress. However, if sacrificing some current sites leads to legalization, licensing, and regulation, then I won't mourn the passing of Full Tilt or PokerStars.