|February 17, 2014|
Previously published on February 10, 2014
Confounding the expectation of most observers, after the December 23, 2011 reversal by the Department of Justice (the DOJ) of its long-standing interpretation of the Federal Wire Act’s (18 U.S.C. § 1084) application to non-sports betting on the Internet, Internet gaming did not immediately and rapidly grow throughout the United States. No prompt federal solution was enacted, and, despite the ongoing recession-based struggles of many states, most states did not aggressively pursue this new revenue opportunity.1
There are several reasons for this somewhat surprising slow launch of Internet gaming in the United States. Most importantly, despite concerted effort, two years elapsed without federal legislation. In fact, with the continuing gridlock and partisan divisiveness confronting Washington D.C., there is still no compelling prospect of a federal legislative answer in 2014. At the same time, states did not rush to enact legislation and initiate intrastate gaming on a widespread basis. Instead, through most of 2012 and 2013, we saw limited, incremental launches in Nevada and later Delaware. We also saw lottery-centric online sales in Georgia and Illinois.
However, Internet gaming in the United States may be changing quickly. With the decreasing likelihood of federal action and the substantial and broad-based launch of Internet gaming in New Jersey in late 2013, the attention and effort has shifted to the states. As a result, many see improving prospects for state-based launches in the near term. Consequently, 2014 may bring a surge in Internet gaming launches at the state level without a current role for the federal government.
Brief Review of the 2011 Department of Justice Opinion
On Friday, December 23, 2011, the DOJ released a memorandum signed by Virginia A. Seitz, the Assistant Attorney General for the Criminal Division, dated September 20, 2011, responding to two different inquiries — one from two state lotteries, Illinois and New York - one from two U.S. Senators about the applicability of the Wire Act to intrastate sales of lottery tickets on the Internet. In a 180-degree reversal, the DOJ memo takes the position that the Wire Act does not apply to intrastate non-sports betting to the extent authorized by and consistent with state law. This change in position has wide-ranging implications for the Internet gaming landscape in the U.S. Of particular interest, it means that the DOJ will no longer contend that states cannot license intrastate Internet gambling (other than sports betting), provide lottery games over the Internet, or compact with each other to provide interstate gaming.
Prior to this memorandum, the DOJ had long maintained that, despite the reference to “sporting event or contest”, the Act effectively prohibits any telecommunicated wager placed or received by a person located in the United States. The DOJ had also maintained that even Internet wagers placed and accepted within the same state violated the Wire Act, arguing that the publicly-switched telephone network and the Internet are inherently interstate media. (For a more comprehensive overview of the 2011 DOJ Opinion, please refer to GT Client Alert, titled “DOJ’s Reversal on the Wire Act-What It Means for Internet Gaming", dated 12/28/2011).
Long-Term Failure to Enact Federal Legislation
From 2010 through early 2014, several bills were introduced in Congress seeking to license and regulate Internet gaming and/or Internet poker on an interstate basis. While some of these saw varying degrees of legislative action, none of them were enacted. Interest in licensing Internet poker through federal legislation remains; Rep. Joe Barton (R-TX) has introduced a bill (H.R. 2666) that seeks to do so. H.R. 2666 has been the subject of one hearing in the Commerce, Manufacturing and Trade Subcommittee, but is not expected to be the subject of further action in the near future. Meanwhile, casino billionaire Sheldon Adelson has announced his launch of a multi-million dollar effort aimed at persuading Congress to prohibit all Internet gaming. There is no consensus in Congress in either direction, however; consequently, federal legislation is unlikely in the foreseeable future.
Summary of 2013-Tide Begins to Turn
Three states brought intra-state Internet gaming to the market in 2013, each with a distinct regulatory model and product. On April 30, 2013, Nevada came to market first with a poker-only offering that required all online content to be made available through and in conjunction with existing brick-and-mortar casino licensees. Currently, two sites are operating in the state. While users must be located within the state to participate in pay-to-play poker, both sites permit anyone over age twenty-one to create a profile. In February 2013, just prior to the initial launch, the Nevada legislature authorized the Nevada Governor to enter into interstate agreements relating to Internet gaming, fueling speculation of future agreements.
On October 31, 2013, Delaware became the second state in the United States to offer regulated Internet gaming. All content is offered through the Delaware State Lottery website, which has issued sub-licenses to the three racino operators in the state to serve as marketing portals. Authorized games include poker, but also bingo and casino-style games. Currently three sites are operational; however, total revenue of only $253,000 was reported for the final two months of 2013. Delaware operators may only accept play from residents of that state.
Finally, with a soft launch on November 21, 2013, New Jersey went live with the third and final regulated US-based Internet offering to come to market in 2013. With the greatest population density of any state to license so far, and the complete array of poker and casino-style game content, New Jersey’s seven Atlantic City casinos' Internet gaming websites generated $8.4 million in revenue from its launch through the end of 2013. New Jersey had projected a potential in $160 million in new state revenue to be generated in fiscal 2014, although the initial revenues and independent studies suggest that this number may be optimistic. Like Nevada and Delaware, access to the New Jersey pay to play sites is limited to those residing within the state of New Jersey.
2014-the Year of Internet Gaming?
As we begin 2014, the conditions are ripe for considerable growth in Internet gaming throughout the country. First, there is a growing acceptance that federal action is unlikely for the foreseeable future, substantially increasing the attention and engagement of these issues at the state level. Likewise, New Jersey’s broad-based launch and its substantial estimates for state revenue in 2014 have garnered significant attention in other states. In short, unlike the more limited introductions in Nevada or Delaware, New Jersey seems to be successfully demonstrating that Internet gaming is feasible in most states. For instance, after some initial challenges, New Jersey seems to be proving that geo-location and other technical requirements to implement an intrastate program are achievable.
Across the nation, several states are taking meaningful steps towards passing legislation or studying the issue, including Illinois, Louisiana, Texas, Mississippi, Colorado, Pennsylvania, and California. Most prominently, California may be close to achieving consensus on legislation that would authorize Internet poker within California. Each state that successfully launches Internet gaming and begins to generate a new revenue stream, especially the larger, more populous states, will have a catalytic effect on other states and the desire to enter this market. In particular, if California or other major states enter the market, it could create a domino effect with other states feeling growing urgency to get into the market. A critical mass of states with a reasonable and growing amount of Internet gaming activity could either generate renewed attention on the federal level or spur the creation of interstate compacts. While this alert is focused primarily on licensed, commercial gaming, state lotteries also continue to be interested in the Internet as a distribution channel and a mechanism to connect with younger players.
In the coming months, it will be important for all interested in this potentially growing market to watch closely whether states begin to move meaningfully toward the establishment of interstate compact(s). If a group of states establish a compact, there may be an exceptionally large and defining impact on this space nationally, creating a critical mass of players and liquidity. An interstate compact that includes key states likely will force those recalcitrant states to join quickly or proceed separately with an independent model.
1 As used in this document, “Internet gaming” does not include Internet bets on horse racing. Internet betting on horse racing is available in more than two dozen states, conducted pursuant to the Interstate Horseracing Act 15 U.S.C. § 3001 et seq. While Internet horse betting has been available for more than 15 years in the U.S. representatives of the DOJ have at times said that such bets violate the Wire Act; this interpretation has not been publicly reversed. As used here, “Internet gaming” means casino-style games and poker played on the Internet.