The Mouthpiece


By Martin Owens
Contributing Editor


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    Martin Owens

    National versus State in Regulating Internet Gambling

    "If government were a product, selling it would be illegal."
    P.J. O'Rourke

    The odds don't look good for the latest attempt to regulate and license online poker in the USA at the national level. As usual, the House and Senate have much more important things to attend to. And even if Senator Harry Reid, chief proponent of the measure, is the majority leader in the Senate, that is no guarantee of passage. Democratic control of the Senate falls short of a filibuster proof majority, and Reid's scorched-earth partisan style has earned him dedicated enemies. As a bill, the proposed measure probably wouldn't make it out of committee.

    Speculation has therefore arisen that an attempt will be made to hook Internet poker legislation onto a must-pass, popular bill, as was done with the UIGEA in 2006.but that performance will be very hard to repeat. Appending the UIGEA onto the Safe Ports Act was a last-minute maneuver that no one saw coming. This time, as I overheard a lobbyists say, "there are too many eyeballs".

    But the question has to be resolved sooner or later- should Internet poker, and Internet gambling generally, be controlled at the state or the Federal level? And who would benefit from which system?

    The States

    Right now, each State controls the gambling that takes place within its borders, and most State governments want to keep it that way. The National Governors Association opposes the Reid bill. A nationwide licensing system would mean sharing both money and power with the Federal government. Governor Sandoval of Nevada supports it. This is not surprising, as the big Vegas-based companies like Caesars and Harrah's would be very strong players in a nationwide market.

    But it is not as though America's state governments are preparing a wave of licensing on their own. So far only New Jersey, Nevada, and the Virgin Islands have enacted the fundamental enabling legislation which would allow licensing program at all. The position of the American states, then, seems to be: "if and when the decision is made to legalize/license Internet gambling here, WE will be the ones to make it."

    The Operators

    US-based gambling companies, particularly the big resorts, favor a national system by and large. Operating on a national scale, their brand recognition would be a tremendous advantage, and they could draw on very, very extensive databases of players and customers.

    Foreign-based operators also hope for a national system, mainly from the point of view of business efficiency. If Internet gambling were placed under Federal jurisdiction, there would be one set of rules nationwide. If Internet gambling remains the prerogative of the states, then that means anything up to 50 different state authorities to deal with, 50 different legislatures to woo, 50 different sets of tax rates, statutes and regulations to worry about. Moreover, state law has not kept up with the technological changes of the Internet and the digital revolution. To this day, 16 states and the District of Columbia don't even have a working definition of what "gambling" is or is not, on their statute books. Only nine even mention the Internet in connection with gambling laws. Poker, to give but one example, is defined as a game of chance by law in Ohio and Oklahoma; in other states it may be interpreted as a game of skill. In many if not most cases then, the powers that be would be making up the rules as they go. And what happens when one state says yes, and another says no? I Gaming executives get grabbed in the airports, as with David Carruthers and Peter Dicks. Or a couple of hundred URLs are placed under arrest as "gambling equipment", as Kentucky did not long ago. The prospect of being whipsawed between competing state governments is not a great encouragement for long-term investment.

    Another problem is that state legislators, by and large, don't understand Internet-based businesses in general and Internet-based gambling in particular. Every state that looks at licensing I gaming seems to want the operators to locate their principal server within the boundaries of that state. It may make sense from a local jurisdiction point of view, but in Internet terms it's crazy. The whole idea of the Internet is to build a global market- use one server to reach multiple locations at once. What the operators want is to get permission to simply plug the new customers from State X into their existing worldwide systems. Only a national system will allow them to do that.

    The Feds

    The national government, naturally, would prefer that everything be controlled at the national level, including Internet gambling. Federal control has already been exerted over Internet gambling's money supply through the UIGEA. And a national licensing system would go a long way to eliminate conflicts arising from different requirements in different places

    On the other hand, federal anti-gambling laws, including the UIGEA itself, depend on an underlying violation of state law to trigger them. Either existing laws would have to be adjusted, or "workarounds" and "grandfather clauses" inserted into the statutory language. This would make general agreement even harder to get than it already is.

    The current Senate bill simply outlaws all Internet gaming except poker (and, of course, horse racing- already here we go with the workarounds). But the problem of sports betting will have to be addressed sooner or later. Over $350 billion is wagered on sports in the USA every year, most of it illegal, and Uncle Sam hasn't a hope of stopping it. The same thing goes for the market in table games and slots online. At the moment they are not nearly as big as sports betting- but they may very well expand as mobile gaming, based on smart phones, comes into its own.

    The logical thing to do, then, would be to figure out a licensing system for all Internet gaming that would allow a national system while incorporating state government participation. In fact, the current Reid bill would do just that, detailing the US Department of Commerce to select regulatory bodies, including departments of various state governments. And then license it wherever the licensing would be acceptable, and collect taxes which would be cheerfully paid in order for official recognition. But logic and politics, alas, rarely intersect.

    Summary

    The Internet poker bill currently proposed by Senators Reid and Kyl has little if any chance of becoming law, and quite bluntly doesn't deserve to. It is a vindictive attempt to kill all Internet gambling in the USA apart from online poker, and seize control of that at the Federal level in the obvious hope that Nevada-based gambling giants will get the lion's share of it. Since billion-dollar markets for all online gambling formats already exist in the teeth of everything that all the governments in the world could throw at them, and are expanding into mobile phones and social networks, this attempt is about as realistic as the ban on women drivers in Saudi Arabia.

    It's up to the states to bring change, if and when they make up their minds to do it.

    In the meantime, the "gray area" has never been greener. The offshore Internet gambling operations are indeed giving thanks this Thanksgiving. They continue to laugh all the way to the bank.

    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 Comments and inquiries welcome at to mowens@trade-attorney.com.

    Copyright 2012


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