I KEY TERMS
US statutes, jurisprudence and academic literature often refer to several types of gaming, each with a distinct meaning and often with distinct legal implications, regulatory requirements and penalties for non-compliance.
On one end of the spectrum are traditional gambling games such as lotteries, table games and sports betting. Gambling games vary widely but, with few exceptions,2 share three fundamental characteristics: consideration, prize and chance. These are among the most highly regulated forms of gaming in the United States and are detailed below:
- a Lotteries, bingo and other house-banked games are the quintessential gambling games. All involve payment of consideration and award prizes based in whole or in part on chance. Lotteries, roulette, most slots and similar games typically depend entirely on chance. Other games, such as blackjack and craps, include elements of skill but still incorporate sufficient amounts of chance to warrant treatment as gambling.
- b Poker and other peer-to-peer games, where the players compete against one another and not the casino operator or ‘house’, are a second type of gambling game. As these games are viewed as involving chance, they too are considered to be gambling.
- c Sports betting and horse race wagering involve – as their names imply – wagering on the outcome of live sporting and horse racing events. Horse racing (and, in a few states, dog racing) is treated differently from other sports betting; as a result, the legal strictures involving each will vary.
On the other end of the spectrum are games whose legal status is unclear. These games (or their earlier forebears) were not traditionally considered gambling, but their meteoric rise in popularity (made possible by the internet) and the substantial revenues they generate have led regulators – and zealous plaintiffs’ attorneys – to question whether they belong under the rubric of gambling laws.
i Skill games
Skill games are games that require payment to play and that award valuable prizes, but in which outcomes are determined by the skill of the participants rather than by chance events outside of their control. How much skill is required to avoid designation as gambling will vary from state to state, and some states would include at least some forms of skill games as gambling even if no chance is present.
ii Fantasy sports
Fantasy sports competitions take a variety of forms. Traditional fantasy sports revolve around a small group of people drafting a roster of real-world athletes from various real-world teams so as to create a ‘fantasy’ team. Participants compete against one another by comparing the ‘fantasy’ points earned by their fantasy teams. Fantasy points are awarded based on the statistical results of the underlying athletes in real-world sporting events, like passing yards, receptions and touchdowns. Participants often play for bragging rights or for side wagers, and contribute a nominal entry fee in order to participate. The biggest distinction between traditional fantasy sports and their modern cousin – daily fantasy sports – is that they take place over the course of a full season of the underlying sport. Daily fantasy sports (DFS), as their name implies, take place over a much shorter time frame. Participants still draft rosters of fantasy athletes to compete against other participants, but over the course of a week, a weekend or even a single day. Many other variants have emerged as the competitive landscape expands, such that now DFS also includes other non-roster styles of game, such as head-to-head competitions, ‘pick ’ems’, question-and-answer predictions and many more.
iii Social casino games
Social casino games are online or mobile games, often offered on social networks or similar platforms. They recreate casino games such as poker, slot machines and bingo. These games recreate the sounds and images of a casino but differ from the actual casino games in one important respect – the player need never pay to participate and (in most variants) can never win a prize of any real-world value. These games typically award credits or virtual ‘coins’ to extend gameplay or allow for purchase of special virtual features, and most operate on a ‘freemium’ model. ‘Freemium’ games are free to play, but players have the ability to use real money to purchase additional ‘credits’ or features that would otherwise be earned through extended gameplay. Very few social games award cash prizes to players; those that do typically employ a ‘sweepstakes’ model to ensure that paying players are not given an advantage over free players.3 Social games that award monetary prizes lie outside the scope of this chapter.
Outside the purview of the gambling laws are certain speculative or hedging financial transactions, such as binary options or commodity futures trading. Those types of transactions are often expressly carved out from statutory gambling prohibitions and fall outside the scope of this chapter.
ii GENERAL LEGAL BACKGROUND
Gambling is regulated at the federal, state or tribal and local levels in the United States. States serve as the primary regulators, taking a lead role in defining the scope of permitted and unlawful activities, enforcing criminal gambling prohibitions and licensing legal gambling operators. The federal government mainly plays a supporting role in enforcing state laws and prosecuting multistate enterprises, although the federal ban on sports betting is a prominent exception.
i Relevant federal statutes
This subsection outlines the nine federal laws that address gambling most directly and includes a brief discussion of certain additional ancillary laws that may play a role in certain cases. Most of these statutes define prohibited gambling conduct by reference to state law. In other words, the activity does not violate the federal statute unless it violates an underlying state prohibition. The statutes provide a tool through which federal law enforcement authorities can pursue such unlawful conduct and impose enhanced penalties for that conduct. Congress often enacted these statutes in recognition of the fact that sophisticated criminal enterprises often do not respect state boundaries and can be difficult for state authorities to pursue.
The Wire Act
The Wire Act is an exception to the rule. Unlike most other federal statutes dealing with gambling, the Wire Act does define what it prohibits. More particularly, the statute prohibits anyone ‘in the business of betting or wagering’ from:
...knowingly us[ing] a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers.4
The Wire Act exempts from liability any transmission:
…of information assisting in the placing of bets or wagers on a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign country in which such betting is legal.5
The only federal courts of appeals to have considered the question concluded that the Wire Act applies only to gambling on sporting events or sporting contests.6 After years of disagreement with that holding, in September 2011, the Office of Legal Counsel for the Department of Justice issued a memorandum concurring with that appellate decision.7
The Professional and Amateur Sports Protection Act
The Professional and Amateur Sports Protection Act of 1992 (PASPA) purported to prohibit states from authorising betting on sporting events,8 but included three ‘grandfathering’ clauses. These clauses authorised continued sports betting in those states in which it was already legalised and operated, or that enacted permissive legislation within one year of PASPA.9 Only those forms of sports betting in effect in that state were permitted to continue; new forms were not authorised.10
Four states qualified for the exception: Delaware, Montana, Nevada and Oregon.11 Oregon, which had allowed betting on National Football League (NFL) games in 1989, outlawed it after the 2006–2007 NFL season. New Jersey – for whom the one-year-after-enactment grandfather clause was ostensibly written – failed to enact permissive legislation in 1993. As a result, New Jersey (not to mention all other states) is barred from legalising sports betting, despite several failed attempts to do so.12
The Illegal Gambling Business Act
The Illegal Gambling Business Act (IGBA) is more typical of federal gambling statutes. It attaches liability to anyone who ‘conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business’.13 ‘Illegal gambling business’ includes a gambling business that, inter alia, is a violation ‘of the law of a state or political subdivision in which it is conducted’.14
This statute also requires an assessment of where the gambling business ‘is conducted’ and of who is considered to be ‘conduct[ing], financ[ing], manag[ing], supervis[ing], [or] direct[ing]’ the business.
The Travel Act
The Interstate and Foreign Travel or Transportation in Aid of Racketeering Act (the Travel Act) makes it unlawful to ‘travel’ or ‘use…any facility in interstate or foreign commerce…with intent to…distribute the proceeds of any unlawful activity; or…otherwise to promote, manage, carry on, or facilitate the promotion, management, establishment or carrying on of any unlawful activity’.15 Under the Travel Act, an ‘unlawful activity’ is defined specifically to include ‘any business enterprise involving gambling... in violation of the laws of the state in which [the unlawful acts] are committed or of the United States’.16 The underlying state crime need not be a felony. A violation of a state gambling law that is a misdemeanour is sufficient.
In essence, the Travel Act creates a federal scheme to punish enterprises that use interstate or foreign facilities in violation of state law. It is, therefore, like the IGBA, fundamentally a federal reinforcement of state law.17 As a result, the applicability of the Travel Act turns largely on the nuances of the applicable state law and what, precisely, it defines as unlawful. Simply put, without a violation of state law, there can be no violation of the Travel Act.
Wagering Paraphernalia Act and Johnson Act
The Wagering Paraphernalia Act precludes the transportation in interstate or foreign commerce of any:
…record, paraphernalia, ticket, certificate, bills, slip, token, paper, writing or other device used, or to be used, or adapted, devised or designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event; or (c) in a numbers, policy, bolita, or similar game. 18
A similar statute prohibits the transport in interstate or foreign commerce of any ‘gambling device’.19
The Anti-Lottery Act prohibits the carrying (or mailing) in interstate or foreign commerce of:
…any paper, certificate, or instrument purporting to be or to represent a ticket, chance, share, or interest in or dependent upon the event of a lottery, gift enterprise, or similar scheme, offering prizes dependent in whole or in part upon lot or chance.20
Contraband further includes advertisements of such lotteries and lists of prizes drawn or awarded. The Anti-Lottery Act also dictates that if businesses purchase lottery tickets in-state for out-of-state buyers, it is a criminal activity, unless the two states have agreed to allow such purchases.
The statute contains several exemptions from its prohibitions, including state-run lotteries,21 charitable fishing contests22 and savings promotion raffles, which award prizes to those who make qualifying deposits in savings accounts or other savings vehicles.23
Indian Gaming Regulatory Act
Tribal gaming falls under the Indian Gaming Regulatory Act of 1988 (IGRA). The IGRA grants federally recognised Native American tribes the:
...exclusive right to regulate gaming activity on Indian lands if the gaming activity is not specifically prohibited by Federal law and is conducted within a state which does not, as a matter of criminal law and public policy, prohibit such gaming activity.24
The IGRA established the National Indian Gaming Commission (NIGC), whose role is to monitor gaming on Indian lands, inspect Indian gaming premises, conduct background investigations, examine and audit books and records, promulgate regulations and guidelines, and collect fees and fines. As a practical matter, the NIGC typically plays an oversight role, leaving principal regulatory authority to individual tribal gaming regulators.
The IGRA divides gaming into three categories, or classes (appropriately designated I, II and III). Class I gaming is social (non-commercial) gambling with small prizes. Class II gambling encompasses bingo and other non-banking card games25 that are either expressly authorised within the particular state or not expressly prohibited by the state and played in conformity with any state laws governing card rooms. Class III gambling includes all other forms of gambling and may not be operated in the absence of a tribal–state compact.26
Tribal–state compacts may contain provisions relating to the applicability of the state’s criminal and civil laws to the licensing process, the allocation of criminal and civil jurisdiction between the state and tribal lands, comparable taxation provisions for the tribal gaming activity and standards related to licensing and operation of gaming activities.27
To date, compacts have been formed with Arizona, California, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Washington, Wisconsin and Wyoming.28
By some accounts, tribal gaming accounts for approximately one-third of total lawful commercial and tribal gambling in the United States.29
Interstate Horseracing Act
The Interstate Horseracing Act (IHA) was enacted in 1978:
…to regulate interstate commerce with respect to wagering on horseracing, in order to further the horseracing and legal off-track betting industries in the United States.30
It provides that:
…[n]o person may accept an interstate off-track wager except as provided in this [Act].31
The IHA was amended in 2000 to clarify that it permits remote wagering over the phone, internet or other electronic media.32 The statute now defines an ‘interstate off-track wager’ as a:
…legal wager placed or accepted in one state with respect to the outcome of a horserace taking place in another state and includes pari-mutuel wagers, where lawful in each state involved, placed or transmitted by an individual in one state via telephone or other electronic media and accepted by an off-track betting system in the same or another state.33
Thus, an interstate pari-mutuel wager placed or transmitted by an individual customer is an ‘interstate off-track wager’ permitted under the IHA if it meets two requirements:
- a it must be ‘lawful in each state involved’; and
- b it must be accepted by an ‘off-track betting system’.
Such systems must be ‘conducted by the state or licensed and otherwise permitted by state law.’34
The IHA also sets forth a framework for the agreements that are required with host racetracks in order to permit simulcasts of the races and the acceptance of wagers on those races.35 The IHA requires the consent of five different parties for any off-track wagering agreement.36
There has been much discussion in the academic literature and among gaming lawyers as to the relationship between the IHA, which permits interstate off-track wagers, and the Wire Act, which prohibits them (as a species of sporting event). The US Department of Justice has taken the position – although only in public statements, never in an actual prosecution – that the Wire Act prohibition continues to apply, notwithstanding the IHA.
By contrast, the consensus of most scholars and practitioners in the space – and that of the authors – is that the IHA, as both the more specific and more recent statute, trumps the Wire Act ban, so long as the wager complies with the IHA’s requirements. Indeed, for quite some time, the advance-deposit-wager industry has broadly accepted online horse race wagers pursuant to the statute on precisely that premise, and the federal government has taken no steps to stop that activity.
The Unlawful Internet Gambling Enforcement Act
Congress enacted the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) to attack the perceived problem of internet gambling by targeting the processing of the financial transactions necessary for the gambling to take place. The UIGEA created a federal crime – being aware of the receipt by a person ‘in the business of betting or wagering’ of monies in connection with participation of another person in ‘unlawful internet gambling’.37 It also directed the issuance of regulations designed to require financial transaction providers to identify and block payments involving unlawful internet gambling.
Moreover, the statute defined ‘unlawful internet gambling’ to mean a ‘bet or wager [that] 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’.38 That was the first (and remains the only) time that the term has been defined as a matter of federal law.
In turn, ‘bet or wager’ is defined to mean:
…the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.39
The UIGEA provides an express safe harbour for fantasy sports competitions, excluding them from the definition of a ‘bet or wager’ under the statute if they satisfy three criteria:
- a ‘All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.’
- b ‘All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.’
- c ‘No winning outcome is based (i) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or (ii) solely on any single performance of an individual athlete in any single real-world sporting or other event.’40
If the fantasy or simulation sports game or educational game or contest involves a team or teams, then it must also be true that ‘no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organisation.’41
The statute also excludes interstate off-track wagers that are permissible under the IHA from its prohibition,42 along with intra-state internet gambling that is:
- a initiated and received within a single state;
- b expressly authorised by the laws of the state; and
- c does not violate any other federal gambling laws.43
The regulation issued pursuant to the statute, known as Reg GG (12 CFR 233), expands on the statutory requirements, most notably by requiring financial transaction providers to implement procedures that are designed to determine whether their commercial customers are internet gambling businesses and, if they are, to ascertain whether that gambling activity is unlawful. The regulation suggests that the provider require the customer to supply evidence of state or tribal licensure of its activities or, failing that, a reasoned legal opinion explaining why no such licensure is required.
The regulation also makes clear that participants in automated clearing house systems, card systems, check collection systems, wire transfer systems and certain types of money transmitting businesses ‘may rely on a written statement or notice by the operator of that...payment system’, and that the system’s ‘policies and procedures’ are designed to identify and block unlawful internet gambling transactions.’44
ii Ancillary criminal laws
Several other criminal statutes can be invoked in the gambling context:
a Money laundering statutes, 18 USC Sections 1956 and 1957, prohibit knowingly engaging in certain financial or monetary transactions, or international transportation or transmission of funds, with the ‘proceeds’ of a wide range of predicate crimes or ‘specified unlawful activities’, including gambling in violation of the Wire Act or state law.45 Penalties for violation of either statute include civil and criminal penalties, forfeitures of bank assets or debtor collateral used to facilitate the offence, imprisonment and, in the case of a financial institution, possible collateral civil sanctions.
- b The Racketeering and Corrupt Organizations Act (RICO) imposes substantial criminal penalties where there is a ‘pattern of racketeering activity’.46 ‘Racketeering activity’ is defined to include any ‘act or threat involving…gambling…which is chargeable under state law and punishable by imprisonment for more than one year’ or any act or threat involving a litany of federal offences, including violations of the Wire Act, Wagering Paraphernalia Act, Travel Act, Illegal Gambling Business Act or money laundering.47
Other potentially relevant statutes include conspiracy and bank or wire fraud.48 In all of these cases, liability arises only if the defendant is violating some other federal or state statute.
iii State laws
State laws with respect to gambling vary widely. Generally, however, gambling is prohibited unless the state passes legislation expressly permitting such conduct. Three states – Delaware, New Jersey and Nevada – expressly permit and license internet gambling.49 The remaining 47 states and the District of Columbia do not allow online gambling – other than in a few cases some form of online lottery – although many permit gambling at bricks-and-mortar establishments or on riverboats.
In Delaware, only the state Lottery Commission is authorised to conduct internet gambling, and it has contracted with suppliers to that end. In New Jersey and Nevada, licences are restricted to bricks-and-mortar casino licensees, and Nevada – unlike Delaware and New Jersey – only permits internet poker.
Georgia, Illinois, Kentucky and Michigan allow online sales of lottery tickets, while Kentucky and Michigan allow online game play.50
In those states where gambling is legalised, regulatory schemes are complex and comprehensive. State licensing requirements – whether for brick-and-mortar casinos or online gambling operators –are typically intrusive and require deep scrutiny of the licensee applicant and its key employees. Even certain categories of service providers are subject to scrutiny, although typically at a lesser degree of intensity. The purpose of suitability review is to ensure that licensees are honest, and of good character and integrity. In addition to determining whether a licensee’s past history and associations indicate that the person will not undermine effective regulation and control of gaming, suitability review also ensures that licensees possess the qualifications necessary to run a gaming operation. For example, in Nevada, casino licences are not granted unless applicants show that they possess adequate business acumen, competence and experience, and that they have secured adequate and appropriate financing.51 Other states adopt a similar approach.
Illegal gambling can be sanctioned at both the state and federal level, with the type of punishment varying by state. While generally the federal statutes do not criminalise mere play (that is, they will not punish the actual gamblers), some states do criminalise gambling, often making it a misdemeanour. By contrast, both states and the federal government apply criminal penalties against those who offer or promote gambling, often as felonies. The penalties can be severe, ranging from five years’ imprisonment under the Wire Act, to as many as 20 years under RICO and the federal anti-money laundering statutes.
III Current status and recent developments
Gambling has achieved mainstream acceptance of some form in nearly every state, with some form of gambling currently permitted in 48 states.52 The type of gambling permitted by the states varies widely. Some states only permit state-sponsored lotteries, while others have racetracks, casinos or sports wagering.53
Recent developments in gambling regulation have focused on sports betting and non-traditional gambling games. The latter includes skill games, fantasy sports competitions, social casino games and internet sweepstakes cafes. Outside of the regulatory context, e-sports have gained momentum in the United States and appear on the cusp of mainstream awareness. Whether their growth trajectory will lead them into legal difficulties like those experienced by DFS (discussed in subsection iv, infra) remains to be seen.
i Sports betting
New Jersey has twice attempted – and twice failed – to legalise sports betting within its borders in recent years. Its first attempt was a 2012 statute that confronted PASPA’s sports wagering ban head on by affirmatively authorising state regulators to license casinos and racetracks to conduct sports betting. The state’s position was that PASPA was unconstitutional. The courts disagreed, invalidating New Jersey’s law.54
Smarting from that defeat, New Jersey’s second attempt was less direct. Rather than affirmatively authorising sports betting, New Jersey simply repealed its criminal prohibition against sports betting so that engaging in such activity would no longer be considered unlawful, but only if the betting took place at a licensed casino venue. That law was also challenged and invalidated, a decision affirmed by the Third Circuit en banc.55A petition for review by the Supreme Court was sought in late 2016, and is currently pending. (Such review is discretionary; the Court may decline to hear the case.)
Outside of New Jersey, sports wagering proponents have stepped up lobbying efforts in Washington aimed at overturning the federal ban itself. Advocates argue that legalisation and regulation is necessary to protect the integrity of sports, as prohibition has simply driven sports betting underground where it cannot be monitored. Importantly, the sports leagues (which have been staunch opponents of sports betting for a long time) are starting to modify their views. Most notable is National Basketball Association commissioner Adam Silver, who has vocally supported repeal of the federal ban.56 In February 2017, Major League Baseball commissioner Rob Manfred expressed his willingness to look into embracing sports betting as a ‘form of fan engagement’.57 Other professional leagues remain more circumspect, but it is noteworthy that both the National Football League and Major League Baseball have inked deals with companies that provide statistical support services for legalised sports wagering outside the United States.58
ii Internet sweepstakes cafes
Internet sweepstakes cafes operate in a number of ways – most often, by selling internet time to patrons and sometimes by offering other copying, faxing and related services. Along with the purchase of internet time, patrons receive entry into sweepstakes. In most cases, patrons can obtain a limited number of free sweepstakes entries on a daily basis, either upon request in person or by mailing a form. (This feature is designed to remove the element of consideration from the transaction, and therefore to take the activity outside the purview of most state gambling laws.) Patrons often play simulated gambling games on their computer terminals to reveal winning sweepstakes entries.
When these cafes are prosecuted under standard gambling law principles, they are generally convicted as mere subterfuges for unlawful gambling activity, since evidence shows that patrons’ primary motivation in purchasing internet time is to play the sweepstakes, rather than to use the internet and other available services.59 Indeed, the purchased time often goes unused – not surprisingly, since wi-fi and other forms of internet access are broadly available, often without charge or fee. Nonetheless, state legislatures, alarmed by the proliferation of these cafes, in many states have passed legislation specifically targeting them. At times, those statutes are worded quite expansively and may carry with them unanticipated consequences for other, more innocuous activities.60
iii Skill games
Skill games that require payment to play and that award prizes meet two of the three traditional elements of gambling under most state laws: consideration and prize. In order to avoid the reach of gambling prohibitions, these games rely upon the fact that they have arguably eliminated the third traditional element: chance. As states differ in the legal tests they apply when evaluating the chance element, each game requires a state-by-state analysis to determine its legality.
Three main tests have emerged in the states to determine the quantum of chance that will distinguish lawful games of skill from unlawful games of chance. The ‘predominance’ or ‘dominant factor’ test asks courts to assess which of the two elements – skill or chance – is ‘the dominating factor in determining the result of the game.’61 The predominance test is used in the plurality of the states and is the most commonly invoked standard. The second most prevalent legal standard is known as the ‘material element test, where ‘gambling occurs even if skill is the dominant factor, as long as chance is a material element’.62 Still other states deem games unlawful if they entail ‘any chance’.63 A few states prohibit even pure games of skill if they require placement of a bet or wager and award a prize.64 In those states, absent extenuating circumstances, skill games will be considered unlawful.
Unfortunately, there is very little case law dealing with the types of skill games that are most prevalent online today, and therefore it is unknown how these tests would apply to those games if challenged.
iv Fantasy sports
The legality of fantasy sports has been hotly contested in the past two years. Although the UIGEA provides a safe harbour for fantasy sports, the safe harbour provides sanctuary only from the proscriptions of the UIGEA itself; it cannot absolve from liability those competitions that run afoul of state or other federal laws. Moreover, today’s DFS models, with their head-to-head competitions and variation in game play and rules, at times face difficulty in fitting within the contours of the statute’s safe harbour.
Beginning with New York in late 2015, 2016 saw a number of state attorneys general issue written opinions asserting DFS to be illegal gambling under state laws, and that DFS operators were in violation of state law.65 New York’s attorney general went so far as to initiate civil suits alleging false advertising and unlawful gambling, and seeking to enjoin the operation of the two most prominent DFS operators – FanDuel and DraftKings – in that state. (FanDuel and DraftKings later settled the gambling aspects of those suits in March 2016,66 and the false advertising aspects in October 2016 for $6 million each.67) These negative opinions usually claim that DFS are not contests of skill within the meaning of their respective state laws, since outcomes are ultimately determined by the athletic performance of others, over whom the participants exert no control. By contrast, only a handful of attorneys general have taken the opinion that DFS is legal under state gambling laws.68
Since then, however, a number of states have moved to regulate fantasy sports, including through licensing, taxation and consumer-protection-focused disclosures; even New York, whose attorney general was one of the earliest opponents of DFS, legalised and now regulates DFS.69
Notwithstanding 2015’s flurry of attorney-general activity, there is little case law addressing the legality of fantasy sports. At the time of writing, a multi-district consolidated class action litigation against FanDuel and DraftKings (also alleging, in part, that DFS constitute unlawful gambling) remains pending. The action consolidates nearly 80 individual putative class cases and remains in early stages. Aside from that current activity, only two pre-existing federal district court decisions address fantasy sports in any detail – Humphrey v. Viacom, Inc et al., No. 06-2768, slip opinion, 2007 WL 1797648 (DNJ 20 June 2007), and Langone v. Kaiser, No. 1:12-cv-02073, slip opinion, 2013 WL 5567587 (ND Ill 9 October 2013).
Humphrey is the more significant of the two, as it reinforced the centrality of ‘risk’ in evaluating whether consideration for purposes of gambling is present. The plaintiff in Humphrey sought civil recovery under the qui tam laws of several states, which required him to show that money had been lost by a wager, bet or stake upon a game of chance.70 He pointed to the entry fees and prizes as evidence of money lost in a wager upon a game of chance. Without deciding whether fantasy sports are games of skill or chance, the New Jersey court noted three central elements common to the fantasy leagues at issue:
- a the entry fee was paid unconditionally;
- b prizes (of predetermined amounts, not dependent on the fees received) were guaranteed to be awarded; and
- c the operators of the leagues did not compete and could not win the prizes themselves.71
Together, those factors led the court to conclude that the entry fees were not bets or wagers that would violate the gambling laws of the identified states.72 The fact that the operator did not participate in the contest – and, in fact, was indifferent to the outcome – was central to the Humphrey court’s analysis.
The Langone court principally involved a claim under Illinois’s gambling loss recovery statute to recover ‘losses’ suffered by participants on an online fantasy sports site operated by a major fantasy sports provider, FanDuel. The court ruled for FanDuel after finding that plaintiff was unable to identify purported losers and amounts of loss with sufficient particularity, and because FanDuel’s role in hosting contests and collecting entry fees did not make it a ‘winner’ in any particular wager. The court did not reach the question of whether FanDuel’s contests would be considered ‘gambling’ or otherwise in violation of state laws.
Whether the Humphrey analysis would apply squarely to today’s DFS variants may yet be determined in the context of the New York litigation or other potential, future cases. At the same time, state moves to clarify fantasy sports’ legal status will likely result in a very different landscape for fantasy sports over the coming years.
v Social casino games
Legal disputes over social casino games also erupted for the first time in 2015, with a spate of litigation, brought predominantly by one particularly active plaintiffs’ firm, alleging that the games are unlawful. Each game challenged relies on the above-described ‘freemium’ model whereby players can play for free or opt to spend real money to play more quickly or for other in-game perks, but not one of the games offers monetary or other ‘real-world’ prizes. The suits were all predicated upon plaintiffs’ purported ‘losses’ stemming from amounts voluntarily spent to play the games. Claims were brought under gambling loss recovery statutes, for common law unjust enrichment, and sometimes under the auspices of consumer protection laws. All have been dismissed, although at least one appeal remains pending.73
vi Internet gambling
Almost since the Department of Justice reversed its position on the applicability of the Wire Act to internet gambling, efforts have been underway to try to reverse the impact of that ruling and to prohibit states from regulating internet gambling. Those efforts have encountered difficulty in the face of objections that such legislation would intrude upon state prerogatives and of the general paralysis that has gripped Congress in recent years.
In 2016, however, Republican Senator Lindsey Graham of South Carolina reportedly caused to be inserted into a committee report for an unrelated Senate funding bill language that implicitly rejected the Justice Department’s interpretation (ignoring the fact that the Department’s memorandum accords with the highest federal courts to have considered the issue).74 Although the funding bill to which the committee report was attached was not enacted, Senator Graham remains focused on the issue. During the January 2017 Senate confirmation hearing of current Attorney General Jeff Sessions, Senator Graham asked for Sessions’ view on the 2011 Department of Justice Office of Legal Counsel memorandum, which (in his description) ‘allow[s] online video poker, or poker gambling’.75 (Notably, he similarly questioned Obama Attorney General Loretta Lynch during her confirmation hearing in 2015.76) Sessions responded that he was ‘shocked’ at the memorandum and ‘criticized it’ at the time, and he expressed his willingness to ‘revisit it and… make a decision about it based on careful study’.77 Sessions did acknowledge that ‘some justification or argument... can be made to support the Department of Justice’s position’ and admitted that he hadn’t studied the issue enough to articulate a firm view during the hearing.78
As a result of that exchange and Sessions’ own prior opposition to internet gambling while a senator, observers are closely watching for a reversal of the 2011 Office of Legal Counsel memorandum. Meanwhile, there is every reason to believe that Senator Graham, along with Representative Jason Chaffetz (R-Utah) and perhaps others, will continue pressing for legislative reversal, as they have previously.79
As their name implies, e-sports are competitive games played with the aid of computers, video game consoles or other electronic means. In robust markets such as South Korea, e-sports are played by well-compensated professional teams with corporate sponsors, and tournaments attract thousands of spectators. E-sports have gained traction more slowly in the United States, although they appear poised to enter mainstream consciousness. Streaming platform Twitch.tv, where players livestream their game play, ranks number four in peak internet traffic in the US (behind Apple, Google and Netflix, and ahead of Facebook).80 Las Vegas has played host to a number of e-sports tournaments in recent years. Indeed, in March 2017, a dedicated e-sports arena opened at the Neonopolis complex in downtown Las Vegas.81
But with recent prize pools reaching as high as $20 million,82 and the staggering revenue earned from ancillary products such as advertising and streaming subscriptions (Amazon acquired Twitch in 2014 for nearly $1 billion), e-sports may soon be on the radar of state and federal regulators. At least one recent lawsuit reveals that it is already in the crosshairs of plaintiffs’ attorneys and concerned parents.83 Whether e-sports promoters, players, fans and video game makers will learn from the daily fantasy sports experience is an open question.
One issue that has already arisen is ‘skin gambling’. ‘Skins’ do not affect game play but are collectible in-game items that affect the look and feel of the game, and can be bought, sold and traded. This transferability makes them ripe for use as virtual currency to facilitate gambling – both on e-sports tournaments and more traditional forms of online gambling such as casino games. In 2016, game developer Valve, which owns popular game Counter Strike: Global Offensive and operates online trading platform Steam, was the subject of two civil lawsuits alleging that it facilitated an unlawful gambling market.84 Soon after, the Washington State Gambling Commission also demanded that Valve take steps to prevent skin gambling through the Steam platform or face civil or criminal repercussions.85 Valve prevailed in the civil suit86 and has thus far resisted Washington regulators’ demands to disable features of Steam that would prevent skins from being traded on third-party sites.87
Beyond the skin gambling issue, e-sports are susceptible to other potential hurdles, including cheating. Because the stakes involved in winning e-sports continue to rise, the consequence of cheating has grown, as have the incentives to make the attempt. The nature of most e-sports games also can make cheating more difficult to detect. Riot Games recently achieved some success in pursuing organised cheating, extracting $10 million from a software developer whose product purportedly enabled cheating in League of Legends.88
Separately, unlike fantasy sports, where the underlying athletic competitions themselves are widely accepted as skill-based, the skill-chance ratio in the video games underlying e-sports – games like League of Legends and StarCraft – is not as well-understood or established. That creates complications for those hoping to replicate the DFS model in which observers are able to win prizes of real value based on the performance of e-sports participants and can even have ramifications for contests that limit prizes to the participants.
Because much of the revenue in e-sports comes from non-controversial streams such as advertising, sponsorships and streaming subscriptions, the e-sports industry may be able to avoid the interstices of gambling law in which DFS has been caught up, but the experience of Valve shows that it is worth monitoring developments in this space in the months and years ahead.
If the recent past is any indication, we expect that 2017 and beyond will continue the trend toward expansion of commercial and tribal gambling at the state level. We also think the debate over sports betting will gain momentum in Congress, with greater movement toward elimination of the federal prohibition. Nonetheless, we envision that as a multi-year effort and doubt we will see repeal of the ban this year.
The debate over internet gambling continues, with a few states – notably, California, New York and Pennsylvania – actively considering its legalisation, and opponents in Congress pressing for a nationwide ban. The new Trump administration remains a wild card. On the one hand, President Trump’s past involvement with the gaming industry (having owned a casino in Atlantic City and with prior casino relationships in Nevada) may predispose him to sympathy with gambling proponents. On the other hand, one of his more prominent election supporters, Sheldon Adelson (himself a prominent gambling magnate), vociferously opposes internet gambling, and the president’s attorney general has also been antagonistic.
DFS and other fantasy sports will continue to garner much attention – through litigation, enforcement and legislative activity – and even Congress is considering stepping in. In a similar vein, we expect e-sports to continue to grow and to encounter inevitable legal and regulatory growing pains as an incident to that growth.
Although we doubt we will see any congressional legislation of consequence on these subjects this year, we do think 2017 will witness additional states taking action on fantasy sports and possibly some moves toward legalisation of internet gambling. Federally, we expect support for repeal of the federal ban on sports betting to grow but not quite reach fruition this year. At the same time, we are sure there will be additional litigation surrounding the plethora of new forms of games that are offered to fascinate and entice new players.
In sum, we expect a busy year ahead in gaming law.
1 Behnam Dayanim is a partner, and Kathleen K Sheridan and Noah N Simmons are associates, at Paul Hastings LLP.
2 Some states will find a game to be gambling even if it lacks one of these criteria – most often, chance. A review of state laws lies outside the scope of this chapter.
3 Sweepstakes generally avoid gambling prohibitions by providing a free alternative method of entry (AMOE) that is of ‘equal dignity’ to the paying method – in other words, that affords the AMOE entrant an equal opportunity to the paying participant to win the prizes awarded.
4 18 USC Section 1084(a).
6 US v. Lyons, 740 F.3d 702, 718 (1st Cir.), cert. denied, 134 S. Ct. 2743 (2014); In re Mastercard Int’l, Inc, 313 F3d 257, 262 (5th Circuit 2002). But see US v. Lombardo, 639 F Supp 2d 1271, 1291 (D Utah 2007) (concluding that Section 1084(a) is not confined to sports betting or wagering).
7 See Virginia A Seitz, Assistant Attorney General (20 September 2011). Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transaction Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act. Available at www.justice.gov/sites/default/files/olc/opinions/2011/09/31/state-lotteries-opinion.pdf.
8 28 USC Section 3702.
9 28 USC Section 3704(a).
10 28 USC Section 3704.
11 Nat’l Collegiate Athletic Ass’n v. Christie, 926 F Supp 2d 551, 556 (DNJ 2013) (‘PASPA’s ‘grandfather clause’ resulted in exceptions for four states: Delaware, Oregon, Montana and Nevada.’).
12 Nat’l Collegiate Athletic Ass’n v. Christie, 926 F Supp 2d 551 (DNJ 2013) (finding New Jersey’s sports wagering law preempted by PASPA), aff’d 730 F3d 208 (3d Circuit 2013); Nat’l Collegiate Athletic Ass’n v. Christie, 61 F Supp 3d 488 (DNJ 2014) (finding New Jersey’s proposed sports betting law preempted by PASPA), aff’d 799 F3d 259 (3d Circuit 2015), aff’d en banc 832 F.3d 389 (3rd Cir. 2016), petition for cert. docketed, N.J. Thoroughbred Horsemen’s Ass., Inc. v. Nat’l Collegiate Athletic Ass’n (U.S. Oct. 12, 2016) (No. 16-477).
13 18 USC Section 1955.
15 18 USC Section 1952.
16 Id. at Section 1952(b). The statute encompasses a variety of other state crimes as well. In fact, it has figured prominently in the news of late as the basis for the much-publicised indictment of Atlanta Falcons quarterback Michael Vick in connection with unlawful dog-fighting.
17 Perrin v. United States, 444 US 37, 50 (1979).
18 18 USC Section 1953.
19 15 USC Section 1172.
20 18 USC Sections 1301 and 1302.
21 18 USC Section 1307.
22 18 USC Section 1305.
23 18 USC Section 1308.
24 25 USC Section 2701(5).
25 A ‘banking’ (or ‘banked’) card game is one in which the player is playing against the ‘house’. Blackjack is an example of a banking card game. Non-banked card games, by contrast, are played against other players, and the operator typically makes its revenue by collecting a percentage or ‘rake’ of the pot of player funds. These games are thus commonly called ‘percentage’ games. Poker is a classic example.
26 25 USC Section 2710(d)(1)(C).
27 25 USC Section 2710(d)(3)(C).
28 US Dept of the Interior, Gaming Compacts, available at www.indianaffairs.gov/whoweare/as-ia/oig/compacts/index.htm.
29 American Gaming Association (2015). When Gaming Grows, America Gains: How Gaming Benefits America. Available at: www.americangaming.org/sites/default/files/research_files/aga_ei_report_final.pdf (total commercial and tribal gaming revenue in United States is $81 billion a year); Alan Meister (2015). Indian Gaming Industry Report. Available at: www.nathaninc.com/sites/default/files/pub%20pdfs/indian_gaming_industry_repor_2015_executive_summary.pdf (gaming at tribal casinos accounts for US$28 billion a year).
30 15 USC Section 3001(b).
31 15 USC Section 3003.
32 Conference Report on HR 4942, 146 Cong Rec H11265, 11271 (2000); see also 146 Cong Rec H11230, 11232 (2000) (remarks of Rep. Frank Wolf (R-VA)) (explaining that the amendment was intended to ‘codify [the] legality of placing [horseracing] wagers over the telephone or other electronic media like the internet’).
33 15 USC Section 3002(3).
34 15 USC Section 3002(7).
35 For a more detailed explanation of how these agreements operate, see Churchill Downs Inc, 605 F Supp 2d at 874–75.
36 Those parties are: (1) the applicable authorised horsemen’s group; (2) the host racing association; (3) the host state racing commission; (4) the off-track racing commission; and (5) all currently operating tracks within 60 miles of any off-track betting office, or, if there are none, then the closest such track in an adjoining state. 15 USC Section 3004.
37 31 USC Section 5363.
38 31 USC Section 5362(10)(A).
39 31 USC Section 5362.
40 31 USC Section 5362(1)(E)(ix).
42 31 USC Section 5362 (10)(D).
43 31 USC Section 5362 (10)(B).
44 12 CFR Section 233.5.
45 The statute defines the term ‘financial transaction’, in part as ‘(A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree.’ 18 USC Section 1956(c)(4).
46 18 USC Section 1962.
47 18 USC Section 1961.
48 18 USC Sections 371, 1344, 1843.
49 29 Del Code Section 4826; NJ Stat Ann Section 5:12–95.17 et seq; Nev Rev Stat Section 463.745 et seq.
50 Nathan Vardi (Forbes, 12 January 2016). ‘Why You Can’t Buy a $1.5 Billion Powerball Ticket Online’. Available at www.forbes.com/sites/nathanvardi/2016/01/12/why-you-cant-buy-a-1-4-billion-powerball-ticket-online/ (reporting on Georgia and Illinois); Michigan Lottery, ‘Buy Online,’ www.michiganlottery.com/ilottery_lobby?; Ky. Lottery, ‘How to Play Online,’ https://play.kylottery.com/en-us/playnow/about.html.
51 Nevada Revised Statutes, Section 463.170(3).
52 Marie-Cecile O Tidwell et al. (2015). Gambling Modes and State Gambling Laws: Changes from 1999 to 2011 and Beyond. Gaming Law Review and Economics 19:13–26 (2015).
54 National Collegiate Athletic Association et al. v. Christie, 730 F3d 208 (3rd Circuit 2013).
55 NCAA v. Governor of N.J., 832 F.3d 389 (3d Cir. 2016).
56 James Herbert (20 April 2015). Silver: Gambling ‘Good for Business, I Don’t Want to Hide From That,’ CBS Sports. Available at www.cbssports.com/nba/eye-on-basketball/25155791/adam-silver-on-gambling-its-good-for-business-i-dont-want-to-hide-from-that.
57 Matt Snyder (8 Feb. 2017). Commissioner Manfred admits MLB is revisiting its view on sports betting, CBS Sports. Available at www.cbssports.com/mlb/news/commissioner-manfred-admits-mlb-is-revisiting-its-view-on-sports-betting/.
58 Steve Fainaru et al (28 January 2016). Betting On the Come: Leagues Strike Deals With Gambling-Related Firms, ESPN. Available at http://espn.go.com/espn/otl/story/_/id/14660326/nba-nfl-mlb-nhl-striking-
59 See, for example, US v. Davis, 690 F3d 330, 339–320 (5th Circuit 2012).
60 Hest Technologies, Inc v. State ex rel Perdue, 749 SE2d 429 (NC 2012) (upholding a state law that prohibited the operation of an ‘electronic machine or device’ to conduct a sweepstakes through the use of an ‘entertaining display’).
61 In re Allen, 377 P2d 280, 281 (Cal 1962).
62 Alaska AG Op 663-01-0183, 2001 WL 34047280 (22 May 2001).
63 Tenn Code Ann Section 39-17-501(1).
64 See, for example, Town of Mount Pleasant v. Chimento, 737 SE2d 830 (SC 2012) (‘Whether an activity is gaming/gambling [under South Carolina law] is not dependent upon the relative roles of chance and skill, but whether there is money or something of value wagered on the game’s outcome.’); see also Ark Code Ann Section 5-66-113 (prohibiting ‘bet[ting] any money or valuable thing on any game of hazard or skill’).
65 Ga Atty Gen Op (26 February 2016); Haw Atty Gen Op (27 January 2016); Ill Atty Gen Op No. 15-006 (23 December 2015); Md Atty Gen Op (15 January 2016); Ms Atty Gen Op (29 January 2016); RI Atty Gen Op (4 February 2016); Tenn Atty Gen Op No. 16-13 (5 April 2016); Tex Atty Gen Op No. KP-0057 (19 January 2016).
66 ‘Statement From A.G. Schneiderman On Agreements With FanDuel And DraftKings’, New York State Office of the Attorney General (21 March 2016), available at https://ag.ny.gov/press-release/statement-ag-schneiderman-agreements-fanduel-and-draftkings.
67 Zachary Zagger, ‘DraftKings, FanDuel Pay $12M To Settle NY False Ad Claims’, Law360 (25 October 2016), available at www.law360.com/articles/854771/draftkings-fanduel-pay-12m-to-settle-ny-false-ad-claims.
68 Associated Press, ‘West Virginia attorney general: Select fantasy sports legal’, Washington Times (11 July 2016), available at www.washingtontimes.com/news/2016/jul/11/west-virginia-attorney-
general-select-fantasy-spor; Press Release (4 February 2016). ‘Attorney General Kilmartin Finds Daily Fantasy Sports Legal in Rhode Island’. Available at www.ri.gov/press/view/26769.
69 N.Y. Racing, Pari Mutuel Wagering and Breeding Law, Section 1400 et seq.; Va Code Section 59.1-556 et seq.; Ind Code Section 4-33-24; see also Mont Code Section 23-5-801 et seq. (authorising limited forms of fantasy sports but expressly prohibiting play online).
70 Humphrey, 2007 WL 1797648 at *5.
71 Humphrey, 2007 WL 1797648 at *7, *9.
72 Humphrey, 2007 WL 1797648 at *8-9.
73 Mason v. Machine Zone, Case No. 1:15-cv-01107-JKB, 2015 WL 6335771 (D Md 20 October 2016); Kater v. Churchill Downs Inc, Case No. 2:15-cv-00612-MJP, 2015 WL 9839755 (WD Wash 19 November 2015); Phillips Double Down Interactive LLC, Case No. 1:15-cv-04301, 2016 WL 1169522 (ND Ill 25 March 2016); Soto v. Sky Union, LLC, Case No. 1:15-cv-04768, 2016 WL 362379 (ND Ill 29 January 2016); Dupee v. Playtika Santa Monica, Case No. 1:15-cv-01021-CAB, 2016 WL 795857 (ND Ohio, 1 March 2016).
74 S. Rep. No. 114-239, at 59-60 (2016). Senator Graham has also repeatedly introduced so-called ‘RAWA’ bills – i.e., Restoration of America’s Wire Act – most recently in 2015. S 1668, 114th Cong. (2015).
75 Hearing on Confirmation of Atty. Gen. Nominee Jeff Sessions Before the Senate Judiciary Committee, 2017 WL 106885 (10 January 2017) (question of Sen. Lindsey Graham).
76 Hearing on Confirmation of Atty. Gen. Nominee Loretta Lynch Before the Senate Judiciary Committee, 2015 WL 353332 (28 January 2015) (question of Sen. Lindsey Graham).
77 Hearing on Confirmation of Atty. Gen. Nominee Jeff Sessions Before the Senate Judiciary Committee, 2017 WL 106885 (10 January 2017) (statement of Sen. Jeff Sessions).
79 S. 1668, 114th Cong. (2015); H.R. 707, 114th Cong. (2015); H.R. 4301, 113th Cong. (2014); S. 2159, 113th Cong. (2014).
80 Drew Fitzgerald and Daisuke Wakabayashi, ‘Apple Quietly Builds New Networks’, The Wall Street Journal (3 February 2014), available at www.wsj.com/news/articles/SB10001424052702304851104579361201655365302.
81 Mick Akers, ‘E-sports enthusiasts get boost with Neonopolis arena’, Las Vegas Sun (22 February 2017), available at https://lasvegassun.com/news/2017/feb/22/millennial-esports-arena-set-to-open-in-neonopolis.
82 Kevin Knocke, ‘Why Prize Pools Don’t Matter in Esports Anymore’, IGN (9 August 2016), available at www.ign.com/articles/2016/08/09/why-prize-pools-dont-matter-in-esports-anymore.
83 See, e.g., McLeod v. Valve Corp., Case No. C16-1227, 2016 WL 5792695 (W.D. Wash. 4 October 2016).
84 Shaun Assael, ‘Skin in the Game’, ESPN (20 January 2017), available at www.espn.com/espn/feature/story/_/id/18510975/how-counter-strike-turned-teenager-compulsive-gambler.
86 McLeod v. Valve Corp., Case No. C16-1227, 2016 WL 5792695 (W.D. Wash. 4 October 2016) (granting motion to dismiss).
87 Assael, supra foonote 86.
88 Kat Greene, ‘Riot Games Nets $10M in ‘League of Legends’ Cheating Deal’, Law360 (2 March 2017), available at www.law360.com/articles/897724/riot-games-nets-10m-in-league-of-legends-cheating-deal.