Online Gambling in America

Three states have recently passed legislation authorizing online gambling within their borders.  Proponents of online gambling are drafting similar legislation in other states and even in Congress.  In addition to examining these recent legalization efforts, this post takes a look at the complicated history of online gambling in the United States and speculates as to its future.

The History

In 1999, there were over 250 websites accepting money bets from US players on card games, sporting events, and lottery tickets.  Was any of it legal?  There isn’t a clear answer to this question.  These websites frequently advised players to check the laws in their jurisdiction to ascertain the legality of participation.  As of 1999, only two states had statutes explicitly forbidding online gambling.  Roughly half of the remaining states had laws—usually passed sometime before the invention of the light bulb—making it a crime to place a bet.  The most pertinent federal legislation was the Federal Wire Act of 1961.  This act banned interstate and foreign wagering with the use of a wire device like the telephone.  It was passed primarily to prevent bookies from getting the results of horse races before bettors.  Many believed the government might use this act to punish online gambling operators.

Enter into this uncertain legal landscape the Unlawful Internet Gambling Enforcement Act (UIGEA).  In 2006, Congress passed the SAFE Port Act, an anti-terrorism bill regulating port security.  Thanks largely to the efforts of Tennessee Senator Bill Frist, an unrelated, last minute amendment was added to this bill: the UIGEA.  The UIGEA made it a federal crime to operate an Internet gambling business that accepted money for “unlawful” transactions.  However, because “unlawful” was defined as violating some other federal or state law, the UIGEA did little to clear up what forms of online gambling were actually prohibited.  The UIGEA was an enforcement statute—it didn’t make any gambling activity illegal by itself.  What it did was allow the government to bring additional felony charges against gambling businesses (but not players) that violated any other gambling law.  Following the passage of the UIGEA, every publicly owned online gambling provider left the US market.  The operators that remained were smaller, less reputable, and less regulated.

For the first five years of its life, the UIGEA was largely ignored by prosecutors.  Then, on April 15, 2011, in an event now known as “Black Friday” throughout the poker world, the Department of Justice unsealed an indictment against the chief executives of the three largest online poker providers in the US market.  The indictment set forth charges of violation of the UIGEA, conspiracy, bank and wire fraud, and money laundering.  Unsurprisingly, most of the charges were premised on the underlying activity, online poker, being illegal.  Since no federal statute expressly forbade online gambling, the government relied on a New York gambling misdemeanor to support the other charges.  Based on this underlying crime, prosecutors were able to bring felony charges under the UIGEA and a similar enforcement statute.  As a result of Black Friday, almost all online gambling providers stopped accepting US players.

Notably, the Black Friday indictment did not mention the Wire Act—the 1961 statute that many believed the government could use to punish online gambling operators.  A few months after Black Friday, the DOJ released a memorandum with its new interpretation of the statute.  The memorandum stated that the Wire Act only applied to wagers placed on a “sporting event or contest.”  This was an abrupt change from the DOJ’s long held position that Wire Act applied to all gambling information crossing state lines.

Recent Legalization

States interpreted the DOJ’s new position on the Wire Act as giving them a green light to legalize online gambling.  Facing substantial budget deficits, some states began to look to legalization and taxation of online gambling for a new source of revenue.  Three states—Delaware, Nevada, and New Jersey—have since legalized forms of online gambling within their borders.  Delaware and New Jersey authorized a full range of online casino-style gambling while Nevada only authorized poker.

While small states like Delaware can successfully operate games like blackjack and slots—where players bet against the house—they may not have the population necessary to sustain games like poker—where players compete against one another.  The number of Delaware players online at any given time may not be sufficient to provide the variety of games and stakes that poker players want.  However, this does not pose a problem because states are free to enter into pacts with other states and foreign countries to combine their player pools.  Thanks to the new interpretation of the Wire Act, nothing prevents a Delaware resident from sitting at a virtual poker table across from a Nevada resident, if the states so choose.  However, since the Wire Act still applies to sporting events, a Delaware resident can’t place an online bet on an event like the Super Bowl against a Nevada resident.  Indeed, even intrastate gambling on sporting events is only permitted in four states, although New Jersey is currently fighting this restriction in court.

Future of Online Gambling in America

Will online gambling spread outside of Delaware, Nevada, and New Jersey?  Almost certainly.

The success of online gambling in these three states may well determine whether legalization will occur elsewhere in the U.S.  But while some states will gauge the success of these programs before acting, others aren’t willing to wait.  At least five states are currently considering some sort of online gambling legislation.  The U.S. is still recovering from the financial crisis and politicians are anxious to find new ways to raise revenue.  Even though online gambling is not yet established in America, it is a $35 billion industry in the 85 countries where it is legal.  Furthermore, very few states are entirely opposed to gambling today—43 of them operate state-run lotteries.  The lure of added tax revenue has even spurred movement towards a federal bill legalizing online poker throughout the US.  It has been estimated that such a bill would create 10,000 new jobs and bring in $2 billion in tax revenue per year.

While proponents of online gambling are pointing to the benefits of legalization, opponents are fighting back.  In addition to attacking the job creation and revenue projections as inflated, opponents point to the addictive potential of gambling, the cost of lost work and study time, as well as moral and religious reasons for opposition.  Indeed, at least one recent opinion poll found that more Americans oppose legalization than support it.

Despite significant opposition, it seems probable that advocates for online gambling will eventually prevail.  Legal gambling, whether in the form of Indian casinos, card clubs, or state sponsored lotteries, is already within the reach of many.  And despite government opposition, Americans still engage in an estimated $4 billion of online gambling each year, of which $0 currently goes to the state.  The increased access that will accompany legalization will surely create new problems, but the promise of much needed tax revenue will entice many politicians to support it nonetheless.

Cite as: Stuyvie Pyne, Online Gambling in America, Berkeley Tech. L.J. Bolt (April 22, 2013), http://btlj.org/?p=2715.
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