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Electronic Commerce & Law Report™

Reproduced with permission from Electronic Commerce & Law Report, 19 ECLR 917, 7/16/14. ஽ 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

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The authors summarize the current state and federal frameworks governing online gam- ing and provide an update on recently introduced federal legislation. They conclude with compliance and best practices tips for companies operating in the online gaming space.

U.S. Gambling Laws: An Update

BY MARCUS A. ASNER,CATHERINE BARNARD AND American state had legalized online gaming, Americans gambled nearly $3 billion at offshore – almost IAN JAY 10% of the entire worldwide online gaming market. n February 25, 2014, Delaware and en- Freeman emphasized the need for a regulatory frame- tered into the country’s first multistate online work that would prevent illegal activity and ensure the O gambling compact, which will allow players integrity of . in both states to wager against each other at the same Another witness, Professor Kurt Eggert of the Chap- virtual table. While the expansion of Internet gambling man University Dale E. Fowler School of Law, stressed is mostly occurring at the state level, the federal frame- the importance of a robust consumer protection work governing online gambling is also a shifting land- scheme, noting the increasing sophistication of auto- scape, as highlighted by the recent Congressional hear- mated poker bots – computer programs designed to ing on ‘‘The State of Online Gaming.’’ play automatically against other players, some of which The Congressional hearing included testimony from utilize sophisticated algorithms capable of beating the gaming industry leaders, social advocates, and academ- vast majority of casual players. ics. Though the witnesses offered differing views on the Andrew Abboud of the Las Vegas Sands Corporation merits (and perils) of expanding online gaming in the (which operates brick-and-mortar casinos) urged the , both supporters and critics alike empha- panel to reject any expansion of Internet gaming, citing sized the need for a strong regulatory regime that ‘‘the potential for , terrorism financ- would protect minors, minimize the incidence of gam- ing, fraud and other criminal activity; underage betting; bling addiction, and ensure that all gaming is conducted exploitation of those with gambling addictions, and the fairly and lawfully. impact on jobs and economic growth.’’ Many of the is- Geoff Freeman, President and CEO of the American sues raised at the hearing are addressed in pending leg- Gaming Association, observed that, in 2012, before any islative proposals. This article summarizes the current state and federal frameworks governing online gaming and provides an Marcus Asner is a trial lawyer in Arnold & update on recently introduced federal legislation. We Porter LLP’s New York Office. He can be conclude by offering a few thoughts that companies reached at [email protected] or might consider when operating in the online gaming 212.715.1789. Ian Jay is an associate in the space. Litigation practice group of Arnold & Porter’s New York office. He can be reached at [email protected] or 212.715.1083. Cath- Intrastate Gaming Laws erine Barnard is an associate in the Litigation practice group of Arnold & Porter’s New York Currently, only two states, Delaware and , office. She can be reached at have legalized a full range of online gaming, [email protected] or such as electronic versions of , , and 212.715.1156. slot machines, as well as . Nevada, for its part, permits only online poker. The three states permit

COPYRIGHT ஽ 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 1098-5190 2

who should not be gaming.’’ Del. Code Ann. tit. 29, § 4801(c)(1). Author Suggestions for Online To that end, Delaware permits self-acknowledged problem gamblers to exclude themselves from gaming Gambling Businesses activity for periods of one year or more. Id. § 4834(a). Gaming operators are required to prevent self-excluded s Reexamine operations to ensure that you have established and maintain robust compliance and individuals from engaging in any gaming activity, re- due diligence measures. Plans should include move such individuals from lists of those receiving any measures to ensure compliance with the laws of form of and promotion, and are prohibited all jurisdictions in which you operate. from providing such individuals with services such as casino credit, check cashing services, or complimentary s Payment processors should test merchants’ on- benefits. Id. § 4834(c). going compliance with gaming policies. Refuse to Moreover, each online gaming must include set up accounts you suspect are being created for ‘‘an advertisement for and link to additional informa- illegal purposes or at least ensure heightened tion for services for the treatment, and assis- oversight. Immediately terminate accounts that tance of compulsive gamblers and their families.’’ Id. breach your procedures or controls. § 4834(d). Delaware’s Internet gambling law assigns re- s Take steps to help protect consumers prevent sponsibility for developing consumer protection rules and manage gambling addiction. and regulations to the Director of the Delaware State Office. Id. § 4826(c)(7). s Develop methods to determine whether any New Jersey’s Internet includes a similar players may be bots playing formulaically or ac- requirement for the maintenance of self-exclusion lists cording to automatic instructions. by online casinos. N.J. Admin. Code § 13:69G-2.1, et s Use geolocation technology to minimize the risk seq. New Jersey’s Internet gaming law is more specific of processing illegal transactions occurring be- in its warning requirements, however, mandating that a yond state boundaries. message stating ‘‘If you or someone you know has a gambling problem and wants help, call 1-800-Gambler’’ be displayed at the log-on screen and at the conclusion wagering only by individuals physically located within of each Internet gambling session. Id. § 13:69O-1.2(b). their borders. The same message must be included on a ‘‘patron pro- tection page’’ accessible to patrons during all gaming licenses in New Jersey are limited to sessions; such page must also include a direct link to existing traditional casino licensees, though licensees the Council on Compulsive Gambling New Jersey, Inc., may use the brand name of their casino, of the online as well as at least one additional organization dedicated casino licensee, or other related trade names (18 ECLR to helping individuals with gambling problems. Id. 461, 3/6/13). For example, the Borgata Hotel Casino & § 13:69O-1.2(l)(14). Spa, whose online casino is operated by .Party Moreover, New Jersey requires its casinos to gener- Digital Entertainment, uses the domain names www- ate weekly reports ‘‘identifying potential problem gam- .borgatapoker.com and www.borgatacasino.com, as blers, including those patrons who self-report,’’ though well as www.NJ.partypoker.com. Bally’s, which is the law does not specify actions that must be taken on owned by Caesars Entertainment (owner of the the basis of these reports. Id. § 13:69O-1.9(k). In addi- Harrah’s and trademarks) and tion, New Jersey goes beyond the general consumer has its online casino operated by , utilizes protection requirements imposed in Delaware and spe- the domain names www.HarrahsCasino.com, www.W- cifically bars the use of any automated computer soft- SOP.com, us.888.com, us.888poker.com, and ware, including poker bots or similar mechanisms. Id. us.888casino.com. § 13:69O-1.2(l)(3)(v). New Jersey also requires all elec- Delaware similarly permits online gaming only at tronic systems to be designed to automatically detect sites operated by its existing racetrack casinos: Dover potential cheating or collusive activity by players. Id. Downs Hotel & Casino, Delaware Park, and Harrington § 13:69O-1.5(h). Raceway and Casino. Nevada, unlike New Jersey and Delaware, permits Nevada, which permits casino gaming through the online gaming operators to offer only poker. Notably, state, authorizes the issuance of online gaming licenses the Nevada statute itself contains very little detail as to to resort hotels with non-restricted gaming licenses, al- the specifics of gaming operations, instead delegating though the only sites launched to date, Ultimate Poker, much of the authority to the Nevada Gaming Commis- WSOP.com, and Real Gaming, are all owned by estab- sion. Nev. Rev. Stat. § 463.750; Nev. Gaming Comm’n lished casino operators with substantial holdings in the Reg. 5A. Las Vegas area (Station Casinos, Caesars Entertain- However, pre-existing Nevada law contains provi- ment, and Michael Gaughan/South Point, respectively). sions regarding , with a state- Several of the concerns raised at the congressional sponsored regime for problem gambling prevention, hearing, in particular those relating to consumer pro- treatment, and research, which is funded by gaming li- tection and problem gaming, are addressed in existing cense fees. Nev. Rev. Stat. § 458A.900. In addition, state regulatory frameworks. For example, Delaware’s regulations promulgated by the Commission require all Internet gambling law is intended to offer casino gam- sites offering online gambling to include an active link ing ‘‘in a well-regulated and secure system designed to to a ‘‘problem gambling website that is designed to of- create a positive customer experience that limits access fer information pertaining to responsible gaming.’’ Nev. to minors, those with gambling problems, and others Gaming Comm’n Reg. 5A.150(6)(b).

7-16-14 COPYRIGHT ஽ 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ECLR ISSN 1098-5190 3

The Nevada regulations, like the New Jersey frame- to ‘‘promote, manage, establish, carry on, or facilitate work, require sites to take steps to prevent player collu- the promotion, management, establishment, or carrying sion, as part of the overall mandate to ensure that gam- on, of any unlawful activity.’’ 18 U.S.C. § 1952(a). The ing is conducted ‘‘fairly and honestly.’’ Id. 5A.070(7). Travel Act defines ‘‘unlawful activity’’ in relevant part as ‘‘any business enterprise involving gambling . . . in violation of the laws of the State in which they are com- Current Federal Framework mitted or of the United States.’’ While the state laws discussed above govern intra- A recent case, Ponte v. Chase Bank USA, N.A., No. state online gaming, the emergence of interstate gam- 12-13901, 2013 WL 5818560 (E.D. Mich. Oct. 29, 2013), ing compacts (19 ECLR 306, 3/5/14) (and with them, the reiterates that liability under the Travel Act requires a likelihood that gambling will be conducted across state showing of underlying unlawful activity. Thus, in the lines) implicates federal law as well. absence of underlying unlawful activity, gambling op- A number of federal laws apply to Internet gambling erators and payment processors would not face liability – most notably: under the Travel Act. s the Wire Act, 18 U.S.C. § 1084; The Illegal Gambling Business Act (IGBA). s the Travel Act, 18 U.S.C. § 1952; The IGBA punishes any person who ‘‘conducts, fi- s the Illegal Gambling Business Act (IGBA), 18 nances, manages, supervises, directs, or owns all or U.S.C. § 1955; and part of an illegal gambling business.’’ 18 U.S.C. s § 1955(a). An ‘‘illegal gambling business,’’ for purposes the Unlawful Internet Gambling Enforcement Act of the statute, is defined as a gambling business that (i) (UIGEA), 31 U.S.C. § 5361-5367. is illegal under the law of the state in which it is con- Historically, the U.S. Department of Justice (DOJ) ducted; (ii) has five or more managers, supervisors, or took the position that any company that offers Internet owners; and (iii) is in operation for more than 30 days wagering to persons within the United States violates or has gross revenue of $2,000 in any single day. 18 federal criminal law. However, the trend at the federal U.S.C. § 1955(b)(1). level is moving away from prosecuting Internet gam- bling per se and more toward prosecuting collateral il- In August 2013, the U.S. Court of Appeals for the Sec- legal conduct, such as bank fraud, money laundering, ond Circuit held that poker qualifies as ‘‘gambling’’ for and Ponzi schemes. purposes of the IGBA. See United States v. DiCristina, Although there is general momentum towards legal- 726 F.3d 92 (2d Cir. 2013), cert denied, 2014 WL 684077 ization and regulation of Internet gaming, potential li- (Feb. 24, 2014). In DiCristina, the Second Circuit con- ability under federal statutes such as the Travel Act and cluded that the IGBA does not independently define the IGBA remains to the extent that any transactions ‘‘gambling;’’ rather, the relevant inquiry is whether ‘‘the violate underlying state laws. Therefore, legitimate gambling business violates the law of the state in which companies operating in the online gaming space typi- the business is conducted.’’ DiCristina, 725 F.3d at 102. cally will devote considerable effort to ensuring compli- This holding is in line with several other recent fed- ance with the laws of any state in which they seek to eral court decisions, which have highlighted the neces- provide or facilitate intrastate gambling. sity of proving an underlying violation of state law in or- der to establish liability under the IGBA. The Wire Act. The federal government has prosecuted a number of The Wire Act prohibits any person ‘‘engaged in the payment processors under the IGBA, including the In- business of betting or wagering’’ from ‘‘knowingly ternet payment services company Neteller, which led to us[ing] a wire communication facility’’ for purposes of the 2007 arrest of Neteller’s founders, the company’s gambling. 18 U.S.C. § 1084(a). Until recently, DOJ took eventual forfeiture of $136 million, and its founders’ the position that the Wire Act applied to all forms of In- personal forfeiture of $100 million. ternet gambling, and it initiated a number of high- profile investigations and prosecutions of companies and individuals engaged in non- (e.g., casino- The Unlawful Internet Gambling Enforcement Act style) wagering. (UIGEA). DOJ changed its position, however, when it an- The UIGEA makes it unlawful for any person ‘‘en- nounced in a September 2011 opinion that ‘‘the [Wire] gaged in the business of betting or wagering’’ to ‘‘know- Act’s prohibitions relate solely to sports-related gam- ingly accept, in connection with the participation of an- bling activities in interstate and foreign commerce.’’ other person in unlawful Internet gambling,’’ credit, an Since then, New Jersey, Nevada, and Delaware have le- electronic fund transfer, a check, or other forms of fi- galized intrastate online gambling, and legalization leg- nancial transactions. 31 U.S.C. § 5363. islation has been introduced in several other states. Re- The statute defines ‘‘unlawful Internet gambling’’ as cently, Forbes reported that in New Jersey alone, online gambling by means of the Internet that is unlawful un- gaming generated $8.3 million in the first five weeks af- der any federal or state law in the state where the bet is ter legalization. ‘‘initiated, received, or otherwise made.’’ 31 U.S.C. § 5362(10)(A). However, as courts have noted, liability The Travel Act. under the UIGEA can be found only if a payment pro- The Travel Act prohibits the use of any facility of in- cessor has actual knowledge and control of bets and terstate or international commerce – which has been in- wagers and owns or controls (or is owned or controlled terpreted to include telephone lines and the Internet – by) a person who manages an illegal Internet gambling to ‘‘distribute the proceeds of any unlawful activity’’ or website.

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Federal Legislative Proposals amend the Wire Act to prohibit most forms of online gambling, reversing the DOJ’s 2011 opinion. Mean- The federal framework governing online gaming may while, Sens. Harry Reid (D-Nev) and Dean Heller (R- well evolve further in coming months, in light of poten- Nev) are reportedly planning to introduce legislation tial legislative activity in both the House and the Senate. that would ban most types of online gambling, with the The State of Online Gaming hearing focused primar- exception of poker and interstate wagers. ily on H.R. 2666, the Internet Poker Freedom Act of 2013 (IPFA) (18 ECLR 3108, 12/18/13). The bipartisan Some Observations bill, introduced on July 11, 2013 by Rep. Joe Barton (R- Tex) and co-sponsored by Rep. Robert E. Andrews (D- Congress is famously divided these days, and it re- NJ), would establish a federal framework for legal, mains to be seen whether any of the new federal online regulated online poker. gambling legislation ultimately will be enacted. That Specifically, the IPFA would require the Department said, the various proposals, if enacted, would result in a of Commerce and the National Indian Gaming Commis- number of dramatic changes to an already complex le- sion to implement an interstate licensing program for gal landscape. Internet poker operations, run by ‘‘qualified regulatory In the meantime, there are a number of things that authorities’’ at the state and tribal levels. Licensees businesses operating in the online gambling space can would be prohibited from accepting bets or wagers for start doing now (if they aren’t doing them already). any activity other than Internet poker and from indi- Businesses in the gaming space will want to scrub their viduals residing in a state or Indian reservation with compliance programs to ensure that they have in place specific gambling prohibitions — that is, states and adequate, state-of-the-art controls and are complying tribes could ‘‘opt out’’ of the federal program. with state laws and avoiding the possibility of conduct- The IPFA also would provide some clarity to payment ing or facilitating wagering activity in jurisdictions processors hoping to operate in the Internet gaming where Internet gambling is currently illegal. Some of world. The IPFA seeks to amend the UIGEA to expand the things that companies should consider include: the safe harbor for financial transaction providers, in- s Reexamining their operations to ensure that they cluding payment processors, by precluding liability for have established and maintain robust compliance and engaging in a transaction in connection with activity due diligence measures, to minimize the risk of expo- permitted by the IPFA or the Interstate Horseracing Act sure to liability for facilitating illegal Internet gambling. of 1978, unless the provider has actual knowledge that Specifically, companies should implement detailed the activity or transaction was conducted in violation of compliance plans, providing an account of the mea- federal or state law. sures they will take to ensure that they act in accor- The IPFA also would preclude liability for blocking a dance with the laws of the jurisdictions in which they transaction based on a good faith belief that the partici- operate. Payment processors should implement compli- pants are acting in violation of federal law. Licensees ance procedures, either directly or through third party would be prohibited from accepting deposits via credit vendors, to test merchants’ ongoing compliance with card, a payment method currently utilized by many on- gaming policies. If a payment processor suspects that a line casinos and poker rooms. Also, licensees would be merchant may use its account for any unlawful pur- required to ensure, to a reasonable degree of certainty: poses, the payment processor should either refuse to set the exclusion of underage players and players located up the account or ensure that it is monitored with a in jurisdictions that have prohibited such bets or wa- heightened level of oversight. If a merchant at any point gers; the prevention of fraud, money laundering, and breaches the payment processor’s procedures or con- terrorist financing; the protection of the privacy and on- trols, the payment processor should immediately termi- line security of players; and the collection or reporting nate that merchant’s services. of all relevant taxes. s Another bipartisan House bill, the Internet Gambling Taking steps to protect consumers, as recent leg- Regulation, Enforcement, and Consumer Protection Act islation and Congressional hearing testimony have fo- of 2013 (H.R. 2282), was introduced on June 6, 2013 by cused on issues such as preventing and managing gam- Rep. Peter King (R-NY) and is co-sponsored by Rep. Mi- bling addiction and protecting consumers from bots chael Capuano (D-Mass) (18 ECLR 2016, 6/12/13). Un- (sophisticated software programs designed to play like the IPFA, H.R. 2282 would permit a variety of types poker automatically against human players) and other of non-sports-related online gambling, provided that unfair practices. As noted above, all three states that players are located in states and Indian lands that have currently permit Internet poker within their borders re- opted-in for participation in such gaming. quire that operators establish mechanisms for detecting H.R. 2282 would establish an Internet gambling li- unfair practices, and New Jersey specifically mandates censing and enforcement framework within the Depart- processes for the detection of poker bots. The technol- ment of the Treasury. Both the IPFA and H.R. 2282 ogy behind bots is developing rapidly, to the point would require the development of a responsible gaming where some programs are reportedly able to defeat all and self-exclusion program, to be implemented by each but the most advanced poker players in the world. Even licensee. in the absence of a specific prohibition such as New Jer- A third House bill, the Internet Gambling Regulation sey’s, online casino operators would be well served to and Tax Enforcement Act of 2013 (H.R. 3491), would develop methodologies, including analysis of player ac- impose certain taxes on Internet gambling licensees. tivity, to determine whether any players appear to be playing formulaically or according to automatic instruc- Taking a different approach, Sen. Lindsey Graham tions. (R-SC) and Rep. Jason Chaffetz (R-Utah) introduced the Restoration of America’s Wire Act (S. 2159, H.R. s Taking advantage of available technology, such as 4301) on March 26, 2014. The bipartisan bill would geolocation mechanisms, to minimize the risk of pro-

7-16-14 COPYRIGHT ஽ 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ECLR ISSN 1098-5190 5 cessing any illegal transactions that occur beyond state The regulatory landscape governing online gaming is boundaries. Companies should monitor not only the lo- evolving quickly. Arnold & Porter will continue to moni- cation of individual players, but also the type of wager- tor developments and plans to issue advisories to keep ing taking place (especially in light of the variation in companies up to date. In the meantime, please reach the types of gambling permitted in different jurisdic- out if you want to discuss any of these matters or how tions). they might impact your business.

ELECTRONIC COMMERCE & LAW REPORT ISSN 1098-5190 BNA 7-16-14