A lot to lose
Pennsylvania is heavily involved with online gambling. The state has expanded its lottery offerings into the online space in a big way and has also legalized online casino gaming that is set to launch sometime between now and spring. They have sold $94 million worth of online gaming licenses to local casinos and expect MGM and Golden Nugget to pony up another $18 million for online gaming licenses very soon. PA has also sold $70 million worth of sports betting licenses whose value is definitely enhanced by the legal ability to offer online (mobile) betting they convey to license-holders.
These license fees plus the iLottery proceeds and the expected tax revenues from all this online gambling activity all add up to some very important income streams for the Pennsylvania government.
All this activity has been thrown into chaos because of a new opinion issued by the US Department of Justice (DOJ) Office of Legal Council (OLC) this Monday.
Legally, what has changed?
The legal history of online gambling in the US is a rocky one.
The Wire Act
The nationwide regulatory environment pertaining to gambling and communications is governed largely by the 1961 Wire Act. This law was enacted by Congress to prevent black market bookmakers from using “wires” (they had in mind primarily telephone and telegraph) to cross state lines when taking bets or information pertaining to bets on “sporting events and contests”. The wording of the legislation is considered by most to be a garbled mess.
In the late 1990’s, the Internet brought us a host of online gambling operators offering many gambling opportunities including online versions of slots, table games, and poker. The newness of the technology combined with the sloppy wording of the Wire Act led to a legal “gray area” in which operators (and customers) really didn’t know if they were flouting the law or not. Also, since the relevant servers were usually located overseas, whether the activity even occurred under the jurisdiction of US law was in question.
In 2006, the US Congress battled back against online gambling by passing the Unlawful Internet Gambling Enforcement Act (UIGEA) which targeted the payment processors (banks, credit card companies, etc) who help facilitate transactions between gambler and gambling site. This led most gaming operators to exclude US players and drove the remaining companies further underground, using circuitous and shady methods to circumvent the law. The UIGEA references and alters the Wire Act and interestingly, carved out exceptions for some skill-based games, some intrastate gaming and Daily Fantasy Sports (DFS) from the prohibition.
The power of US DOJ opinions
In December 2011, the DOJ issued an opinion stating that the Wire Act (and therefore the UIGEA) pertain only to sports betting. Again, the original legislation is so poorly written as to allow a multitude of interpretations, especially given how different the modern Internet is to 1960’s era telephone wires.
The new opinion emboldened many states to expand their lotteries into the online space, both selling traditional tickets online as well as creating whole new categories of lottery games only available online. In addition, many states moved to allow regulated and taxed online gambling within their states.
Pennsylvania has done both, and in a big way.
This new DOJ opinion throws all this activity in disarray. Specifically, the new opinion contains two crucial elements:
- The opinion holds that the Wire Act applies to all forms of gambling, not just sports betting.
- The opinion holds that the UIGEA did not modify or alter the UIGEA
What’s the impact?
If it seems strange to you that the DOJ can come along and alter the presumed meaning of laws enacted by Congress, you’re not alone. One thing to remember is that this DOJ opinion is just that – an opinion. It doesn’t carry the force of law. In theory, only Congress can make laws (though they seem to be delegating a shocking amount of power to the executive branch in recent decades).
Theory aside, it’s clear that these opinions, which reflect how the DOJ may decide to enforce the laws, can be critically important. It was the 2011 DOJ opinion that made all these US states comfortable enough to legalize online gaming in various respects and it’s difficult to imagine this 2019 reversal won’t have some major effects in the opposite direction. What impacts can we expect?
Chilly and destructive
As mentioned above, the PA government has millions of dollars in license fees, tax revenues, and online lottery revenues riding on online gambling being legal. This new DOJ opinion throws all these income streams into disarray. Will they continue? Will they cease? Will PA have to refund tens of millions of dollars? What happens to state-funded projects and programs that rely on these funds? The DOJ has created chaos.
Perhaps more pervasive is the chilling effect the new DOJ opinion has created. Many states have moved to legalize online gambling and many more were considering following suit. These state legislators have now been frozen into inaction. Also frozen are the casino operators who now don’t know how to allocate capital going forward. Hiring and firing decisions are impacted. Families are disrupted.
Legal uncertainty freezes economic actors and disincentivizes the allocation of capital. It’s a sure sign of a poorly functioning legal regime.
What does intrastate vs. interstate mean with the modern Internet?
While the impact of the DOJ’s new opinion is hazy, it is clear that explicitly interstate activities have more exposure than online gaming activities that are (ostensibly at least) confined within the boundaries of one particular state.
The most immediate activity threatened is the online player pool agreement between Nevada, Delaware, and New Jersey. These states have agreed to merge their player pools. This mostly impacts online poker. It allows players in these three states to all play with (and against) one another, rather than being restricted to only in-state opponents.
This detail might seem trivial, but actually impacts the online poker industry in huge ways. Small player pools make it more difficult to start and maintain poker games. The amount of games, the size of games, and the duration of games are all severely retarded with small player pools.
It was hoped that as more and more states legalized online gaming, larger and larger player pools could be created. The holy grail endgame of all this would be US online poker players to be able to play against anyone in the world just as they could during the “golden age” of online poker that reigned since the industry was created in the late 1990’s until the DOJ shut it all down on poker’s “Black Friday” in April of 2011.
Explicitly intrastate online gaming isn’t safe either, because of the way the modern Internet works (and because the legislation is a Byzantine mess). The question of intermediate routing (incidental transmission of bets or associated information as a result of the structure of the Internet) will be central to the next phase of the debate.
We literally don’t know what online activity does or does not violate the law now. What does it mean if a PA player bets with a PA casino on a server located in PA if (due to the vagaries of the Internet) some of the data packets unintentionally cross state lines?
The courts will weigh in
Given how legally uncertain this all is and how many big players have big money riding on the outcome, this mess is sure to land in court in the near future. That’s a good thing. The legal structure of the US relies heavily on the separation of powers. The executive branch isn’t supposed to be able to unilaterally decide how to interpret the haphazardly constructed legislation that comes out of Congress depending on how office-holders feel from one day to the next. In the end, the court system gets to have its say.
If you support online gambling there is good news (and precedent) to be found in the federal courts. The new DOJ opinion is at odds with several recent decisions. Both the 1st and 5th Circuit Courts of Appeal have issued rulings declaring the Wire Act applicable to sports betting only.
To enforce or not enforce
Of course it’s also possible (in our current bizarro regulatory environment) that the DOJ won’t bother to enforce their new decree at all. Consider the nationwide issue of marijuana. It has been legalized by several states but is still illegal federally. Despite this, Washington hasn’t done much to try to stop it. Will online gaming be similarly ignored despite being ostensibly illegal?
Pennsylvania’s online lottery has a good chance to be unaffected
Of all the online gaming activity going on in Pennsylvania, the PA iLottery is probably the safest from this new threat. It’s not invulnerable of course, that’s the whole point of this murky legal landscape we have been thrown in, but it’s on much more solid footing than other forms of online gaming and it will have big players defending it.
In most cases, bets are placed and accepted within the borders of the state between players and servers located within the state. Also, consider that many states now operate online lotteries completely distinct from their traditional lotteries. Even more states now sell traditional lottery tickets online. They won’t give up all this revenue without a fight.
All this makes the Pennsylvania’s online lottery relatively secure in a relatively insecure legal space.
Pennsylvania’s online lottery also has some great bonuses right now. First time sign-ups receive $5 free to play by entering bonus code “WINNER”. The PA iLottery also is offering a 50% bonus up to $50 on initial deposits. There are a ton of fun games to choose from.