By Martin Owens
Getting it at last:
U.S. state regulators and pooling Internet poker
You can always count on Americans to do the right thing -
after they've tried everything else.
by Winston Churchill
Iowa has taken the lead in Internet poker policy. Not in approving it- Nevada was first here, announcing in December that it was now taking applications for in-state Internet poker operations (the actual enabling legislation was passed 10 years ago in 2001). Not in operating it - the District of Columbia took the plunge earlier this year and was in fact ready to open before political pushback froze the operation in place. Not in the studying of it - California has been holding informational hearings on the subject for years.
The Reasons Against
No, where Iowa has made its breakthrough is in realizing that state gambling policies have to adjust to the realities of global Internet gambling as a worldwide market, rather than the other way around. Iowa is studying the possibility of interstate compacts to allow states to pool their I-gambling. In all seriousness, this was quite an accomplishment.
To begin with, it's unusual to see new thinking on Internet poker from state lawmakers, most of whom know little about it. Even more so from conservative Iowa, where almost 80% of people polled aren't so sure about online poker ( the Republicans don't begin their nominating race over there for nothing). Then, too, it's natural for state legislators to see things through a narrow lens; our state first and the rest, nowhere. Offering gambling as a new source of revenue may be a hard sell. But convincing the lawmakers to even consider sharing it outside state lines is a really hard sell.
The Reasons For
There are, however, some factors that are pushing in favor of online poker. The first is money. Iowa , like most states, is projecting a deficit for fiscal 2012. Their shortfall will be $600 million - a mere pittance compared with catastrophic California, which is looking at a $13 billion gap ( an improvement, so help me, from last year's galactic black hole of $26 billion). Still, it is significant in a state whose population is just over 3 million. Moreover, the Hawkeye State already licenses racetracks, a state lottery, Indian gambling, and even riverboat casinos, so they're already deriving an income here. Iowa's Racing and Gaming Commission completed a study at the end of this past year, which indicated that intrastate online poker could deliver between $3 million and $13 million in revenue, without raising anybody's taxes or cutting anybody's budget. These days that's a powerful persuasion.
The second is the recent "reversal" (actually a capitulation) by the US Department of Justice. For years the DOJ had proclaimed - wrongly - that all Internet gambling of any kind violated the Wire Act ( 18 USC 1084). Not only was there no support for this position in the actual language of the statute itself, but the only available case law, a matter known as In Re Mastercard in the Federal Fifth District Court Of Appeals, clearly affirmed that the Wire Act covered sports betting only.
But something else happened instead. There is no other way to put this: the DOJ decided to make its own law on this subject. A comprehensive campaign of intimidation was launched against online gambling in any form. State governments considering enabling legislation received "don't-you-dare" letters from DOJ. Actually the Department has no more right to dictate state gambling policy than it does to decree the colors of a state's flag. The Tenth Amendment to the Constitution says so.
Executives of foreign I gambling corporations were arrested in US airports, as were officers of online payment companies that serve those corporations. Expensive and humiliating "settlements" were extorted under the threat of criminal prosecution, but no prosecution was ever actually made. Show trials without the trial. When the Unlawful Internet Gambling Enforcement Act ( UIGEA) sneaked into the Federal Code in 2006, a further fabrication was launched that "Internet gambling had been outlawed". In fact, the UIGEA nailed open the door to state legalization by specifically identifying state licensed I-gambling as outside the definition of "Unlawful".
It all came to a head last year when the Governors of New York and Illinois asked for an advisory opinion as to why they couldn't sell their respective state lottery tickets online. At about the same time, Senators Kyl and Reid posed essentially the same question: "Does the Wire Act really ban all kinds of internet gambling?" For whatever reason, this time the answer is "No".
This answer has had an impact far beyond answering the question. It is being taken as a sign that the DOJ is no longer interested in persecuting Internet gambling, and especially Internet gambling operators and service providers. At the very least, diehard opponents of all gambling can no longer murmur "the DOJ says it's illegal" - unless, of course the topic of conversation is sports betting, which is still taboo.
Liquidity and the Letter of the Law
But even if states started legalizing and licensing Internet poker right and left, there would still be a problem for most . It is called liquidity, and what it means is that the customer base needs to be big enough so that when somebody signs on to the state-sponsored site, there will be enough other gamblers there for him to play with. It's a matter of sheer numbers. California, with 37 million people, will probably have enough poker players online at any given time to make a game (rule of thumb: about 10% of a given population will play poker on a regular basis; between 3% and 4% will be online). Iowa, with 3 million? Not so much.
Furthermore, business is not steady 24/7 when, as in most states, everybody lives in the same time zone. An online gambling site can expect its day to look something like this: from midnight onward, the late-night crowd thins out as folks go to bed. A few night owls and early birds will linger until about 6 or 7 AM. Then everybody has to get up and go to work. There might be a flutter of action from commuters with handheld devices, but by 9 AM, almost everyone is on the job. Another flutter comes at about noon, but the heavy custom comes after quitting time- roughly from 4 PM onward, getting stronger after dinner up until about midnight again. So for a solely in-state site there are times of slow business, perhaps no business, doldrums. By comparison, a site which takes customers from a broad geographic area will probably find enough players at any given time to make operation worthwhile. So, obviously, it would be very advantageous for the smaller states if they could link their sites and then take action across state borders, as they already do with Internet horse bets and state lottery ticket sales.
But, legally speaking, can they? Well, actually, yes. You see, next to the section of the UIGEA which specifies that state licensed gambling is not "unlawful" (31 USC s.5362 (10)(B)), there is another section which says a bet is illegal - where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made." ( 31 USC s 5362 (10) (A)). Therefore, if a given bet or wager is legal at Point A, and legal at Point B, it is logically legal between Point A and Point B.
Which is why Powerball, MegaMillions, and simulcast are all legal.
And so this is why Iowa State Senator Jeff Danielson is on to something when he proposes multi-state compacts for online gambling. The big-population states can stand alone Internet-poker-wise, but the smaller ones need to stand together. There might not be enough poker night owls in, say, Idaho to ring the cash register- but add in the early
birds from Florida and Maine, maybe Rhode Island, and it might amount to something. And so goes the nation. The USA spans a continent, after all. The principle is known as the Long Tail Effect: since the Internet and the digital revolution have made communication instantaneous and practically free, it is now possible to assemble specialized markets will over great geographic distances, in a way that simply was not practical before.
How will the various states cut up the pie? How will they figure out who gets what percent of which bet, and where jurisdiction lies? Why, the way they already do with the simulcast bets and mega-lottery tickets. That's the beauty of it. Those bets have been crossing state lines for decades. Which means there is already an existing model on how to handle online poker when it comes, and a body of experience, and experienced administrators to boot.
Is State licensed Internet poker a bold pioneering move? Are compacts between states a new and dangerous departure? Take a closer look. You just might find that all we're doing is reinforcing an existing success.
Mr. Owens is a California attorney specializing in the law of Internet and interactive gaming since 1998. Co-author of INTERNET GAMING LAW with Professor Nelson Rose, (Mary Ann Liebert Publishers, 2nd ed 2009) ; Associate Editor , Gaming Law Review & Economics; Contributing Editor, TSN. Com
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