VCAT Blog

As we reported in November, it looked like there was some potential for a lame-duck Federal bill to license and regulate online poker. Senate Majority Leader Harry Reid (D-NV) made good on his promise to introduce the bill, and there was rampant speculation that it might be attached to must-pass legislation in the lame-duck session. But other legislative priorities prevailed, and the bill never made it past the proposal stage.

[In an amusing side note, Sen. Jon Kyl (R-AZ) vehemently opposed the rumored inclusion of Reid's bill in must-pass legislation, stating that it was "unconscionable to smuggle such important legislation into law." This is exactly how the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), co-sponsored by Kyl, became law - it was attached to the must-pass 2006 Safe Port Act.]

With the prospects for Federal legislation unclear, states are now taking a much more serious look at online poker as a means for raising much-needed tax revenue. As we reported in September, at least three states (Florida, California and New Jersey) are active on this front. In fact, New Jersey has passed a bill legalizing intrastate online poker, which only awaits Gov. Chris Christie’s signature. It is unclear at this writing whether Christie will sign the bill, but this is the furthest any Internet gambling bill has ever gone at the state level.

Feelings in the poker community are mixed. Online poker sites and the Poker Players Alliance strongly oppose intrastate bills, as they will severely limit the pool of players and will likely shut out the operators that have done business in the US since passage of the UIGEA. In fact, most of the state-level legislation has taken xenophobic approach to intrastate poker, explicitly limiting play to residents of the states with no provision for pooling players from those states that legalize. Players’ feelings are mixed, with some happy to have any clearly legal alternative and others concerned about the large reduction in tournament sizes and available games.

The landscape is quite unclear at the moment. It is likely that, once one state has legalized intrastate gambling, other states will quickly follow suit. If these states take the long view, they will allow for the possibility of interstate gambling among states that have legalized and regulated games. This could influence Federal legislation once enough states participate, although there is likely to be a tax backlash (with states not wanting to share tax revenue with the Fed).

In any case, 2011 will be a landmark year for online gambling and specifically for online poker. If Federal legislation fails to move forward this year, 2012 shapes up to be the Year of Intrastate Poker, as passage of a Federal bill in an election year is unlikely.

The following is from a forum post on the Two Plus Two poker forum, written by Rich Muny (“The Engineer”), a member of the board of directors of the Poker Players Alliance. The PPA is the US’ largest poker advocacy and lobbying organization, with over a million members. You can view the entire thread (with responses) here.

In the aftermath of the Reid bill discussion, it seems time for a discussion on what we can reasonably expect to get through Congress.

I’ve had the honor of working for our rights over the past four years. During that time, I’ve had a chance to analyze quite deeply the broader situation of which we poker players are a part. Data for the analysis came from stated goals of B&M interests, lawmakers, our opponents, and others.

My conclusion is that we’re not going to get 100% of what we want. No one stakeholder will, in fact. PPA can put our opinions forth, but cannot run over everyone else.

Additionally, IMO the fall of the status quo has started. WA is gone. FL, CA, NJ, WV, and other states are looking into offering intrastate only poker. We can be sure these states will criminalize offering of unlicensed poker if they pass such licensing legislation. Most importantly, U.S. based interests have publicly declared their interest in being licensed to offer services, even earning the support of the Senate Majority Leader. It’s hard to imagine Congress saying, “no….let the current reverse protectionism of offshore sites only continue.”

Meanwhile, the DoJ continues its attacks on payment processors unabated. There are also troubling signs for future enforcement. The DoJ and the Dept. of Homeland Security have seized over 80 websites for selling counterfeit goods. I’m not saying they’ll go after online poker sites, but surely the fact that there is now precedent ought to be of some concern. After all, it appears they now have all the tools they’ll need.

With that, what can we expect?

A firm, solid foundation on which to build the industry: The status quo is built on quicksand. Seriously, who in Congress would opt for a market that prohibits U.S. based interests while allowing offshore ones? It’s very hard to lobby for continuation of this.

OTOH, a system that allows U.S. and offshore sites to participate in the market gives us a firm, solid foundation upon which to grow and prosper. Rather than worrying if we’ll have poker in six months, we’ll be able to plan on this existing years down the road. We’ll see more advertising and more recreational players who are attracted by U.S. branding and accountability.

Steps to address the competitive playing field: The current sites have built brand loyalty by offering services in a market where U.S. based interests have not been allowed to operate. It should come as no surprise that some lawmakers and business interests would like to take steps to even this out. Possible steps include blackouts for all sites (where everyone starts on the same date, leaving players only the sites that choose to operate in defiance of new laws during this time period), penalty boxes for sites currently offering services (to give others a chance to catch up), and other possible mitigation steps. While we’d wish for Congress just to let us play, unfortunately it doesn’t work that way.

PPA will work to minimize or eliminate blackouts, as these seem to be the least effective means of addressing the issue, but we could certainly see a repeat of a blackout provision in future legislation. Again, we’re just one stakeholder of many.

Criminalization and other penalization of players: To address unlicensed sites, any bill will have some enforcement measures. PPA succeeded in keeping player penalties out of the Reid bill and will endeavor to keep them out of all future bills. We believe players ought not be targets of enforcement efforts. I am hopeful we’ll continue to be successful here, but anything is possible.

State opt-outs/opt-ins: Congress will not force online poker on states that don’t want it. IMO, the long-term solution here is to create a system that states will wish to opt into. As new business interests will lobby states to participate, our letters asking for states to opt in will be that much more effective.

Not every state will join. OTOH, we’ve already seen one state — WA — opt out, and they did so without a poker bill’s permission.

Player pools: Congress may or may not allow international players. This is due to concerns over enforcement of rules pertaining to players, but is also due to the potential of U.S. sites finding themselves competing against sites with large player bases. PPA is working to address such concerns, of course.

Enforcement provisions: Congress will likely add enforcement measures to any bill that provides for licensing. While I’m obviously no fan of this, I believe it will happen with or without us. I’d rather have it happen with provisions to allow for licensed play than as a ban.

So, that’s my take. We’ll win some battles on specific provisions, but not all. Our choices seem to be to get the best federal bill we can support, to go for intrastate bills, or to ride the status quo for as long as it holds up (and to press ahead with litigation once the status quo begins to falter).

BTW, the Reid bill could have been much worse:

Player penalties: Player penalties would be very bad. Not only would they limit competition in opt-in states, but they’d help create a federally-enforced ban in opt-out states. In other words, states opting out of poker would be opting into a ban.

Taxation: We could get stuck with high taxes on the game itself, as France has.

Permanent banning of companies currently serving the U.S. market: This one is self-explanatory.

Limited licenses: One could easily conceive of plans where only two or three licenses are awarded.

States opt-in rather than opt-out: We fought hard for the Frank bill to be opt-out, and fought hard to do the same in the Reid bill. We got a compromise in that it’s a hybrid, but even many of our Congressional allies wanted opt-in only from the outset.

Bans on advertising, promotions, and other player inducements: These have been floated in other gaming.

It’s important to remember that we have real opponents. It’s also important to remember that there are other real stakeholders.

As noted in the last post, Senate Majority Leader Harry Reid (D-NV) has been circulating a bill legalizing Internet poker. The bill is well-researched and has many of the elements that an online gambling bill should have – consumer protection, provisions to deal with underage and problem gambling, and provisions dealing with potential money-laundering.

The bill also clearly has the fingerprints of a bill written by, or at least heavily influenced by, Las Vegas casino gambling interests. This is by no means a shocking development, of course. Las Vegas casinos were among Reid’s biggest supporters in his recent difficult re-election campaign. And those same Las Vegas casinos have in the past year changed their stance on Internet gambling. While most were against any Internet gambling a few years ago, several have now embraced the idea. MGM Resorts has long been a supporter of legalization and regulation of Internet gambling. Caesar’s (formerly Harrah’s) Entertainment Corporation has created a separate division, Caesar’s Interactive Entertainment, and installed former PartyPoker CEO Mitch Garber as its CEO. And even Wynn Resorts, a longtime opponent, has changed its stance to neutral.

At this juncture, the bill has only a small chance of passing during the lame-duck session. Reid attempted to attach the online poker bill to pending legislation extending the Bush-era tax cuts, but was met with strong opposition from Republicans with whom he’ll have to work in the almost-evenly-split Senate starting in January.

But what if it does?

In its current form, the bill includes a provision that makes any Internet gambling not already legal (horse race betting, primarily) and not covered by the bill explicitly illegal. The online poker sites that do business in the US right now have done so because federal law does not seem to deal with any forms of gambling other than sports betting and horse racing. However, these sites have shown sensitivity to the legal situation in the US – for example, when the Washington State Supreme Court upheld the state’s anti-online poker law in September, the two largest online poker providers, PokerStars and Full Tilt Poker, began blocking players from that state. It’s safe to assume that the immediate impact of the Reid bill’s passage will be the instant withdrawal of PokerStars and Full Tilt from the US market. The only other significant US-facing player, Cereus Networks (owner of UltimateBet and Absolute Poker) may or may not choose to remain, although its funding options would be limited. Smaller players may attempt to remain in the US market, hoping to capitalize on the vacuum in the same way that PokerStars and Full Tilt did when PartyPoker left the US market in the wake of the UIGEA’s passage in 2006.

The chance of survival for smaller players is dim, though. The sites that remained in the US market after the UIGEA’s passage did so because they believed they were breaking no laws, and they were probably right. If Reid’s bill passes, they will be breaking the law. That doesn’t mean they won’t try to remain, but it strains their ability to transfer money to and from players to the breaking point. There may be some payment processing partners willing to take the risk, but they will only do so if the rewards are there – which translates into much higher costs.

This means that the US market will effectively have no online poker for at least 15 months, the moratorium proposed in the Reid bill. Because the bill also shuts out non-casino operators for an additional 2 years, it will be over 3 years before the most experienced operators return to the US market.

There will be two interesting effects from this. One is that live casino operators will benefit in the short run, whether or not they eventually participate in the online market. This will be the most obvious in California, the largest poker market in the US. While the poker boom of 2003-2005 has subsided, there are far more poker players than there were 10 years ago, and with no alternative but live play, poker rooms in states where poker is legal will realize a windfall.

The other is that the online poker market is likely to take a step backwards technologically for several years. The poker software provided by PokerStars and Full Tilt Poker is the most advanced in the world, and none of the casino providers have access to anything similar. Existing operators are barred from licensing or otherwise transferring their software, so there are in fact few options for the new range of operators besides licensing technology from non-US-facing vendors or writing new software. This will have little obvious effect on players except for a reduced level of functionality; however, the insidious issue is that these two companies have made great strides in anti-collusion and anti-bot software over the past 5 years.

If you’re a poker player, passage of the Reid bill is a double-edged sword – yes, you’ll be able to play poker online, but you’re going to need to take some time off. If you’re a casino operator, you have some busy times ahead of you. If you’re a poker room – be ready to add tables.

As we predicted in several earlier posts, there is some substantial movement towards passage of a bill to legalize online poker during the current lame-duck session. All of the rumored behind-the-scenes discussions became real today with the circulation of a proposed massive overhaul to the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) that radically changed the Internet gambling landscape in the US.

The UIGEA passed into law as a last-minute attachment to the Security and Accountability For Every Port Act of 2006 (known as the Safe Port Act), a ‘must-pass’ bill enacted late in the 2006 legislative session. While not explicitly making online gambling illegal, the bill created so much uncertainty that many US-facing online gaming sites left the US market, including the then-largest site, PartyPoker.com, which saw its revenues drop by 70%. Reid’s proposed bill is a massive overhaul of the UIGEA that has two purposes: (1) Clarify the UIGEA, particularly regarding definitions of “illegal Internet gambling” (definitions that were missing from the original bill), and (2) legalizing and defining a regulatory framework for Internet poker.

The key elements of the poker provision are:

1. Legalization of Internet poker, subject to opt-outs by States and Indian Tribes
2. Definition of a regulatory structure that gives authority to grant licenses to existing gaming regulatory bodies (subject to restrictions)
3. Provision of a taxation structure, taxing online poker at 6% Federal tax and 14% State/Indian Tribe tax
4. Explicit criminalization of existing offshore online poker operations

Lobbyists and other insiders we contacted believe that the bill will be subject to a massive overhaul over the next few weeks. Most assume that the bill will be attached to another ‘must-pass’ bill, a move that Republicans have strenuously objected to, despite this having been the tactic that Bill Frist and other Republicans used to enact the UIGEA. The next few weeks may well determine the landscape of Internet poker for years to come.

Text of proposed revision to UIGEA

The US midterm elections have effectively put the various Federal and state online gambling initiatives on hold temporarily. Despite half of Americans actively favoring licensing and regulation of Internet gambling (according to an Ipsos Reid study conducted earlier this year), legislators have almost always avoided being pigeonholed as ‘pro-gambling,’ primarily out of fear of alienating the far right.

It is unclear how a Republican-controlled Congress would view future Internet gambling initiatives. In the past, this issue has often been divided on party lines, with Democrats in support and Republicans opposed. However, if regulatory hurdles can be overcome (primarily the question of whether Internet gambling can be effectively regulated), Internet gambling could well become a free-trade issue, swinging at least some Republican support. A PriceWaterhouseCoopers study in 2008 estimated that regulation could generate $51.9 billion in direct and indirect tax revenues over a 10 year period, and this estimate didn’t include some indirect revenues from increased employment. Faced with continuing record deficits, numbers like this are hard to ignore on either side of the aisle.

There is a wild card that may also play out in the next few months. As we indicated in a post in August, the upcoming lame-duck session of Congress may be a perfect opportunity to pass online gambling legislation. In fact, the larger the swing in Congress, the more likely this is to happen, as there may be a very large number of unseated incumbents with less to lose by voting in favor of online gambling regulation.

There is the further hope that online gambling may spread in the US on a state-by-state basis. The Unlawful Internet Gambling Enforcement Act of 2006, which made processing of “illegal Internet gambling” financial transactions illegal, explicitly left the issue of intrastate gambling to individual states and Indian Tribes. Several states, including California (which is home to 25% of the US’ poker players) attempted passage of such legislation in the last year. California’s deficit makes the potential tax revenue of Internet gambling ever-more attractive. And the states considering such legislation know that the first at the table is the most likely to attract very significant employment opportunities, giving those states a huge edge if and when Federal Internet gambling legislation passes.

The next year promises to be an interesting one for online gambling, regardless of the composition of Congress.

With Federal legislation stalled by the upcoming midterm elections, there is a possibility that we will see at least one state legalize Internet gambling within its borders before Federal legislation passes. In fact, three states, New Jersey, Florida and California, have bills that could become law.

While many Americans believe that Internet gambling is illegal in the US, there is in fact no Federal legislation prohibiting it. The only significant Federal legislation that comes close is the Wire Act, which prohibits interstate sports betting. The Unlawful Internet Gambling Enforcement Act (UIGEA), which was attached to the Safe Port Act in 2006, does not attempt to make Internet gambling illegal. It makes the processing of transactions for “illegal Internet gambling” illegal, but since those forms of gambling are not defined in the bill, nothing really changed with respect to the games themselves. And the UIGEA explicitly permits states to license and regulate gambling within the borders of each state.

California has already seen one bill, The Internet Gambling Consumer Protection and Public-Private Partnership Act of 2010, introduced, although it is unlikely to have much traction this year. California is in the midst of a financial crisis of unprecedented proportions, and this, combined with the indictment earlier this week of Rod Wright, the bill’s sponsor, makes passage of this bill highly improbable.

New Jersey has talked about Internet gaming for quite a while, and earlier this year, State Sen. Ray Lesniak successfully passed an Internet gaming regulatory bill out of committee. The fate of the bill is uncertain because of wrangling within the state about jurisdiction over casinos, but the bill has momentum, and at the very least, its successful passage to the Senate floor bodes well for an intrastate Internet gambling bill in the next legislative session.

In January, Florida’s Rep. Joseph Abruzzo introduced the Internet Poker Consumer Protection & Revenue Generation Act of 2010, and this legislation generated considerable interest before dying in committee in April.

Since intrastate Internet gambling violates no Federal law, and has the potential for generating significant revenues for the states as well as creating thousands of jobs, it seems only a matter of time before one or more states takes the lead in explicitly legalizing and regulating intrastate online gambling. The technology hurdles have already been dealt with, and each of these states already has a regulatory body in place that can be extended to regulate this new industry. While it’s still just a gaze in the crystal ball, the financial windfall will, sooner or later, be irresistible to one state. Once this happens, the dominoes will begin to fall as they did with casino gaming between the 1980s and now.

Barney Frank’s (D-MA) Internet gambling bill, the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, passed out of the House Financial Services Committee on July 29 on a 41-22 vote.

Where the bill goes from here is unclear at present. The House session resumes on September 10 with a very busy schedule, and a target adjournment date for the midterm elections on October 8. Industry best guesses are that Chairman Frank will not bring the measure to the House floor for a vote during this period. While there seems to be momentum and support for HR 2267, all 435 House members are up for re-election, and historically, the period immediately before elections is not often used for controversial measures like this one.

This does not, however, mean that HR 2267 is dead. There is an additional legislative session following the midterm elections, often called a lame-duck session. There has been considerable speculation that Chairman Frank could use the lame-duck session to pass HR 2267, when support for a gambling bill can’t be used to portray a candidate negatively. As an alternative, Frank may attach HR 2267 to another bill, in the same way that the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA) was attached to the Safe Port Act. Chairman Frank has been opposed to this approach in the past, since it limits debate on the issue, but has recently indicated that he would consider such a move if it would allow HR 2267 to pass during this legislative session.

Regardless of how it moves forward, HR 2267 has a steep uphill climb for this year. The measure does not propose a taxation structure; this is contained in companion legislation (HR 2268, The Internet Gambling Regulation and Tax Enforcement Act) that has not yet been marked up or passed. Both of these pieces of legislation would need to pass both the House and the Senate, a tall order in troubled times. If we were gamblers, we’d put the chances of legislation passing into law at 10% for this year. However, it clearly has momentum, and the chances of passage in the next Congress are in the 50% range.

Barney Frank’s Internet gaming bill, HR 2267, The Internet Gambling Regulation, Consumer Protection, and Enforcement Act, was marked up and passed a House Financial Services Committee vote by a surprisingly wide 41-22 vote on July 29. The last vote on this bill ended in a 32-32 tie. The climate surrounding legalization of Internet gambling has clearly changed dramatically since the last vote in 2008. The full text of the bill is available here.

One of the interesting questions raised by this vote is the fate of the largest Internet gambling sites. Rep. Brad Sherman (D-CA) introduced an amendment that restrict licensing of any entity that committed a felony violation of Federal or State gambling laws (text here). Upon first reading, many have assumed that this restricts the industry giants, PokerStars and Full Tilt Poker, from obtaining licenses to operate in the US, while allowing the former #1 online poker site, PartyPoker, back in the US game. What will ultimately happen is unclear; however, it’s entirely possible that the opposite of this is true.

The language in the Sherman amendment states that an entity is ineligible to apply for a license if it “fails to certify in writing…that the applicant…has through its entire history…not committed an intentional felony violation of Federal or State gambling laws…”. Both PokerStars and Full Tilt have throughout their history maintained that their status as poker-only sites means that they have not violated Federal anti-gambling laws. And they may be right, although the US Department of Justice has long held that all forms of Internet gambling fall under the 1961 Federal Interstate Wire Act. (It should be noted that the US Fifth Circuit disagrees.) This is a matter that will clearly need to be dealt with prior to HR 2267 passing into law, as PokerStars and Full Tilt account for well over 60% of the online poker business in the US.

The situation for PartyPoker is even trickier. In December 2008, one of PartyPoker’s founders and a longtime executive, Anurag Dikshit, signed a statement admitting that he violated the Wire Act, and forfeited $300 million in return for all charges against him being dropped. Five months later, PartyGaming (PartyPoker’s parent company) signed a non-prosecution deal with the DOJ, stating that the company had targeted US customers and agreeing to pay $105 million over four years.

Neither of these constitutes conviction of a felony; however, that’s not what the language of the Sherman amendment states. It requires that the potential licensee sign a statement that it has not committed a felony. It’s not out of the question that PartyPoker, which withdrew from the US market in the days following passage of the Unlawful Internet Gaming Enforcement Act, may be the only one of the former top 3 online poker sites to be shut out of the US market, while the two that remained may be granted licenses.

HR 2267 has a long way to go before it passes into law, and the landscape of the US market once it does is entirely unpredictable. It will be up to the authors of the Act, along with their Senate counterparts, to establish what is sensible regarding past market players; without clear direction in the law itself, there could be years of wrangling in the courts before licenses are granted.

The constantly evolving landscape for US Internet gaming is preparing for another turn on July 21, when the House Financial Services Committee will hold a hearing on HR 2267, The Internet Gambling Regulation, Consumer Protection, and Enforcement Act. HR 2267 was proposed by Committee Chairman Barney Frank (D-MA) in June of 2009 and has attracted 69 co-sponsors. A hearing was held in December that gave some limited airing to concerned parties, but the health care bill and other legislative priorities have kept hearings on HR 2267 off the legislative agenda until now.

US gambling policy has been schizophrenic since Internet gambling first surfaced in the mid-1990s. Every state in the US except two (Hawaii and Utah) permit some form of gambling. 46 states and territories (including the District of Columbia, the US Virgin Islands and Puerto Rico) have lotteries. According to The Economist, nearly half of the US population bet on something in 2007 (“Shuffle Up and Deal,” July 8, 2010). Yet while Great Britain, France, Canada, Australia and 60 other countries have legalized and regulated Internet gambling, the US continues to lag behind. It’s clear that Americans want to gamble online, having generated in excess of $6 billion in online gambling revenues in 2009 (according to H2 Gambling Capital’s “Global Gambling Data Annual 2009″).

Even now, the legal status of Internet gambling in the US is unclear. There is no question that wagering on sporting events violates the Wire Act, but it’s equally clear that the Wire Act does not cover Internet poker and other games of chance – US courts have repeatedly held this to be the case. The Department of Justice would have us believe otherwise, but lacking further legislation, only sports betting is explicitly illegal under Federal law. Even the Unlawful Internet Gambling Enforcement Act of 2006 makes no effort to criminalize Internet gambling; it simply makes it illegal to fund “unlawful Internet gambling” transactions without defining what constitutes unlawful Internet gambling.

Goldman Sachs predicted in 2009 that the US would indeed legalize and regulate online gambling, and it seems to be just a matter of time at this point. Rather than preventing Internet gambling, the US’ conflicted attitudes have until now served only to allow questionable operators, as well as the legitimate ones, to function in the US. Legalization, with a regulatory regime to support it, is the most reasonable way to protect consumers.