August 23, 2012
"Well, let's not start sucking each other's dicks quite yet."
~ The Wolf (Harvey Keitel), in Pulp Fiction (1994)
As most poker players are aware, earlier this week a federal district court judge entered a ruling in United States v. Dicristina finding that poker is a "game of skill" and therefore is not "gambling" for purposes of the federal Illegal Gambling Business Act (IGBA). The lengthy decision by Senior Judge Weinstein is as thorough a discussion of the statistical evidence of the effect of skill in poker as one will likely ever see in a judicial decision. The opinion also contains an exhaustive review of practically every conceivable state or federal statute or appellate decision that addresses the regulation of poker in the context of gambling laws. Every poker player should read the decision to better understand the nature of the legal issues certain to arise as online poker continues down the path to inevitable legalization and regulation in some form.
I skimmed the decision when it was issued and Tweeted some initial thoughts (one of the advantages of being a lawyer is learning how to find the legally significant spots in a 120-page decision) (for the record, those Tweets are here, here, here, here, and here). After a more leisurely perusal of the decision, my initial thoughts remain valid, but I did pick up a few additional points of interest. Now many poker players probably just care about the bottom line—a win is a win, right? In law, however, how one wins is often more important than the case specific outcome. [FN1]
So, in no particular order, here are what I found to be the key points and interesting nuggets from the opinion:
Big win for poker players and the PPA: There is no question that this decision was a win for poker players. Having a federal judge give careful consideration to the "poker is a skill game" argument and then endorse it in a thoughtful opinion is a win, regardless of the ultimate outcome on any appeal, and regardless of whether the decision is adopted by other courts or remains a one-off outlier. The Poker Players Alliance (PPA) also deserves kudos for not merely rehashing its prior arguments, but for finding an expert economist and statistician, Dr. Randal Heeb, who provided critical analysis and testimony that formed the underpinning of the decision (more on Dr. Heeb later). This decision would not have been possible without the solid work of the PPA's attorneys, and the PPA rightfully should be proud of the decision. [FN2].
First meaningful win for poker: This decision is also important because it is the first court of consequence to issue a ruling that will have any precedential effect. To date, the handful of court "wins" for poker have all been issued by state district courts whose decisions have no binding or persuasive effect on other courts. Every appellate court to date has ruled against the "poker is a skill game" argument. But federal district courts occupy a unique spot in the legal authority realm. Federal district court decisions of consequence are "reported" (officially published) and can be cited as authority in other cases just like appellate court decisions. These district court decisions are not binding on other courts as an appellate decision would be, but they are often looked to as persuasive authority by appellate courts confronted with developing areas of the law. Having a thorough, well-crafted judicial opinion on the merits of the "poker is a skill game" argument on the books, so to speak, lends a certain gravitas to the argument which can bolster that argument if and when it is considered by other courts.
The decision has a shot at being affirmed on appeal: The obvious question on most poker players' minds is whether the decision can survive if the government appeals. An appeal is not guaranteed, but given that the decision breaks new ground and cuts against precedents from other federal courts, and considering that the government invested a lot of resources fighting this issue rather than plea bargaining what otherwise looks to be a trivially routine gambling case, I would expect there to be an appeal. Now Judge Weinstein is known for a liberal slant, and has written groundbreaking criminal decisions that were later reversed on appeal. But the Second Circuit is less conservative than most federal courts of appeal, and Judge Weinstein is well-respected as a smart judge (and former law professor at Columbia). Also, the case involves a bread-and-butter interpretation of a federal statute rather than a hot button Constitutional issue, so ideological differences among the appellate judges will have very little impact on the outcome of any appeal.
The decision is going to generate a lot of attention among the appellate court judges for several reasons. First, the sheer length of the decision will signal that something significant is occurring. The reason for the length of the decision is that Judge Weinstein spends a great deal of time going over legislative history as well as an exhaustive analysis of poker-related statutes and decisions from around the country. That kind of effort simply is not put into a routine decision, and the appellate judges will certainly note that Judge Weinstein is setting up his argument for a novel interpretation of the IGBA. The weakest part of the decision is that it conflicts with: a) prior federal court decisions related to the IGBA in which state gambling law served as the sole determining factor as to whether a predicate offense had occurred, b) prior federal court decisions in which poker was the predicate gambling activity for an IGBA offense, and c) numerous state appellate decisions and several federal court decisions that have determined poker is "gambling", including some which have considered and rejected the "skill game" argument.
To be blunt, established case law weighs heavily against Judge Weinstein's decision, and it would be fairly easy for the appellate court to reverse the decision. But, many of the prior IGBA cases can be distinguished because they assumed that poker was within the scope of the IGBA rather than analyzing the issue. Also, this case has the best, most detailed factual record as to the "skill game" issue of any court challenge to date. In this regard, Judge Weinstein was a fortunate draw for poker players, as his decision does an excellent job of pointing out the flaws inherent in the legal and factual assumptions underlying the prior adverse decisions. Judge Weinstein has marked a clear legal analysis path for the appellate court, if it chooses to follow his lead.
Nonetheless, I think the deck remains stacked against poker players if there is an appeal. Despite Judge Weinstein's adept "skill game" analysis, poker is still regarded as gambling both under New York law and in the public eye. Poker's reputation in front of the appellate court will certainly not be enhanced by the highly publicized Black Friday prosecutions (and the DOJ's "Ponzi scheme" commentary), particularly given the context of the IGBA's anti-organized crime history and purpose. As I have discussed previously, poker's reputation is a tough hurdle to overcome. Poker's considerable historical and cultural baggage might well overwhelm Judge Weinstein's legal analysis. And if the Second Circuit decides it doesn't want to endorse legalized poker, existing precedents will make it easy for the appellate court to reverse the decision. The easiest and most likely analysis to be used by the appellate court to reverse the decision is to follow those federal courts which defer to state law to define "gambling", and to find that New York state law governs the issue of whether poker is "gambling".
Interestingly, if the decision is reversed on appeal, the portion of the decision analyzing the "skill game" argument would potentially still have precedential value. If the Second Circuit decides that state law controls the "illegal gambling" question and that no further analysis is required under the IGBA, then the Second Circuit would never reach the "skill game" analysis. In that situation, although the case would have been reversed, Judge Weinstein's analysis of the "skill game" argument would remain fair game for citation to other courts (lawyers refer to this by the phrase "reversed on other grounds").
If I were a betting man, I would wager that the decision is ultimately reversed on appeal. But the odds against poker players are not nearly as long as they have been in past cases, and with a favorable panel of judges the decision has at least a puncher's chance of surviving on appeal. [FN3]
The decision is limited in scope: The decision only addresses the narrow question of whether poker is "gambling" for purposes of the federal Illegal Gambling Business Act (IGBA). As I have discussed in prior posts, when it comes to statutes, definitions are critical. "Gambling" for purposes of one statute may not be "gambling" for purposes of another statute. So the mere fact that poker is regulated as gambling under New York law (or another federal or state statute) is not necessarily dispositive of whether poker was gambling for purposes of the IGBA. Likewise, merely because the court ultimately found that poker was not gambling for purposes of the IGBA does not mean that poker is no longer illegal gambling under most state laws and possibly other federal laws. Still, if the decision holds up, it would remove one weapon from federal prosecutor's anti-poker arsenal.
Poker is illegal under New York state law: Although the defense team abandoned its argument that poker is not gambling under New York state law, the court nonetheless found that the argument had no merit. The decision explicitly noted that, "New York courts have long considered that poker contains a sufficient element of chance to constitute gambling under that state's laws." Another defendant could always raise a challenge to New York's state law on poker, but it seems doubtful that such a challenge would be successful.
Poker is still illegal under most states' laws: The decision contains an exhaustive listing of state laws and appellate decisions which consider poker to be gambling subject to ban or regulation (see Section II(5), pp. 47-51). The list is pretty bleak from a pro-poker perspective. Most states either explicitly define poker as gambling, or have found poker to be within the definition of gambling, regardless of the amount of skill involved. Again, poker players must keep in mind that, even if skill predominates chance in poker, states can still define "gambling" in such a manner as to encompass poker. The decision doesn't change how any state gambling laws view poker. So if poker was illegal gambling in your state prior to the decision, it is still illegal today.
Poker may still be illegal under federal law: The decision only interpreted the IGBA. There are other federal statutes that could still be used by federal prosecutors against businesses offering poker, most notably the Travel Act. Unlike the IGBA which contained its own definition of "gambling", the Travel Act simply relies on a violation of a state gambling law to establish the predicate offense. Also, note that the Travel Act prohibits use of "the mail or any facility in interstate commerce" to "distribute the proceeds of any unlawful activity" or "otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity". This arguably could mean that merely mailing checks, promotional materials, or awards to players could be a violation of the Travel Act. So far federal prosecutors have not used the Travel Act in any poker-related prosecutions (at least not to my knowledge), but that might change if they lose the IGBA as a tool because of this decision.
House-banked game defense was rejected: The PPA and many poker players have argued that the fact that poker is not a house-banked game (like blackjack, or three-card poker) is a significant distinction in determining whether poker should be considered "gambling". Even Judge Weinstein rejected that argument, rather summarily (p. 109). This argument is one of those situations where an important factual distinction winds up having no legal significance. So legally, if money gets wagered, it's probably gambling, regardless of how the house makes it profitable.
Revenge of the nerds: As noted earlier, it is obvious that Judge Weinstein was impressed by Dr. Heeb's statistical and economic research. Although there have been a number of studies that purported to prove that poker was a "skill game", those studies merely demonstrated that skill had an effect on the game, and none of those studies really reached any meaningful conclusions as to the relative effects of skill and luck on the outcome of the game. Dr. Heeb did some really interesting and persuasive analysis directed to that specific issue. One analysis showed that the "long term" required to allow skill to overcome chance is not nearly as long as might be imagined, perhaps as low as 1,000-3,000 hands (rates that can be seen over the course of a long, deep-stacked tournament or a relatively short period of cash game sessions). Another analysis attempted to isolate the skill element of poker by cleverly demonstrating how winning and losing players showed significantly different win rates even when playing the same hand (the examples Dr. Heeb used were K9o and QJs). Any fan of Freakonomics-style analysis would enjoy the court's discussion of Dr. Heeb's testimony. I don't think it is an overstatement to conclude that Judge Weinstein's decision likely would have turned out differently without Dr. Heeb's analysis.
The court's discussion also noted that most online players in the large dataset used by Dr. Heeb were losing players, with 90-95% of players showing net -EV. This statistic was somewhat higher than I would have expected. This statistic could also be used on appeal to argue that, since most players are expected to lose, poker is no different than house-banked games. Judge Weinstein dismissed this argument as irrelevant to the issue of whether poker is a "skill game", and I agree that it is not relevant. But that fact still is one that might be of interest to an appellate court.
The decision is probably not a game-changer: Even if the decision is affirmed on appeal, its impact on the poker legalization fight is likely to be minimal. In many states, whether poker is a game of skill is utterly irrelevant as poker is explicitly regulated as gambling. In other states where poker's status is not defined by statute, courts have already ruled that poker is gambling, and those courts are unlikely to reverse course after having decided the issue. The decision probably has little application to other federal gambling statutes because the decision is based on the IGBA's particular definition of "gambling". The decision is unlikely to affect federal or state poker legislation efforts as legislation is mostly a political issue which will not be swayed by one court's technical legal analysis of one federal law; poker simply isn't the kind of hot button legal-political issue like abortion or health care where a court ruling matters to legislators. It is possible that anti-gambling groups will use the decision to press for an explicit ban of online poker, but nothing I've read suggests that anti-gambling groups would have any better success passing a poker ban than pro-poker groups have had in passing poker legalization; those issues appear to be in stalemate at least through the upcoming elections. Most likely, the decision will ultimately have only symbolic value.
PokerStars may be the hidden winner: Because the decision is from a different court, it does not change the pending DOJ Back Friday criminal or civil forfeiture cases other than to make it marginally easier for the remaining defendants to leverage a better plea bargain or settlement because the DOJ's IGBA and associated money laundering charges are now in a somewhat weaker position. The Black Friday cases are ultimately more about the banking and financial shenanigans of those involved than the underlying poker businesses themselves. But the decision certainly strengthens the argument to be made by PokerStars to state gaming regulators that merely running an online poker business did not violate federal law. Even if the decision is reversed on appeal, PokerStars could still argue that if a respected federal judge thought that poker was not regulated by the IGBA, then they certainly had a good faith belief they were not violating the IGBA. Of course, there would still be the matter of PokerStars allegedly violating state gambling laws, the UIGEA, federal money laundering laws, and federal banking laws. But if the applicability of the IGBA and the Wire Act can now be called into question, it becomes easier to raise doubts about some of the other laws in the mix.
[FN1] Think of the recent U.S. Supreme Court kerfuffle over the Affordable Care Act; although the Act was upheld, the legal reasoning in the decision placing limits on Congress' Commerce Clause authority may ultimately prove critical in decisions far removed in time and subject matter from the health care debate.
[FN2] The PPA's success in this case, however, does not change my prior critiques of the PPA's "legalization by litigation" strategy. The discussion of whether the damage done by the PPA's earlier legal blundering is redeemed by this decision is better reserved for a separate post.
[FN3] Thinking way down the road, if the Second Circuit affirms Judge Weinstein's decision, it could potentially set up a U.S. Supreme Court appeal to resolve a conflict among the various circuit courts of appeal as to how the IGBA is interpreted. This would be most likely if the Second Circuit finds that state law does not control the determination of what constitutes "illegal gambling". A lot of stars would need to align for poker to have a day in that Court, but these are the types of issues that are SCOTUS' bread-and-butter cases (i.e., interpretation of a federal statute, and resolving conflicts among the circuits).