US Lotteries Test Internet Waters

Three of the United States' 44 state lotteries--North Dakota, New York and Virginia--are offering subscription services that enable players to purchase chances online. But does that qualify as Internet gambling and, if so, how have they managed to fly under the radar?

The Unlawful Internet Gambling Enforcement Act (UIGE), signed into law on Oct. 13, 2006, bans online gambling financial transactions in the United States, but exempts from the law certain industries, such as interstate horseracing and state lotteries.

Donna Thronson, a sales and marketing specialist for the North Dakota State Lottery, explained their subscription service, which launched the day before Bush signed the legislation.

"Subscriptions can be purchased online," Thronson said. "That means you can go online, fill out your credit card information and print the form and sign up for the online game of your choice."

Sounds like Internet gambling. Lines are starting to blur.

But it's not as simple as it sounds.

The enrollment process can take up to four weeks, and most of it is completed offline.

True, a player initially signs up for the subscription service and offers his credit or debit card information, selects the game(s) of his choice, and selects the numbers of his choice and the duration of play completely online. But once this information is submitted, he must wait two to three weeks for a confirmation letter via mail to verify all of the information given is correct, then another one to two weeks to receive his subscription card, also via mail, according to Chuck Keller, director of the North Dakota Lottery.

It is important to note that subscribers are required to be at least 18 years old and have a North Dakota address.

The subscription card contains an account number for each game selected as well as the numbers selected for each game. Those numbers remain constant for the duration of play. Once the player has the card in his possession he is automatically entered into every lottery drawing for the time period which he purchased and will be notified via email if he wins. If he wins $5 or less, his subscription is automatically extended. If he wins more than $5, he is mailed a check from the lottery.

The game is funded and played online by means of credit card, which, according to gambling law expert Tony Cabot of the law firm Lewis & Roca, falls under the definition of Internet gambling.

"It's clearly Internet gambling," Cabot said. "If you can go online and you can fund your account and actually start to play and you can make decisions on when to cease play or continue to play, then that's online gambling."

Cabot sees this as part of a natural progression, especially now that state lotteries have express exemption built in to the UIGE.

"Certainly lotteries going online are an inevitability because this is the last great opportunity they have to expand revenues," Cabot explained. "And having the ability to buy Powerball tickets online is probably one of the most substantial advantages. Powerball has the highest jackpot and gets the most publicity, so therefore when you have a mega-million dollar jackpot and you see people lining up at the retail establishments to buy tickets, this type of convenience of going online and buying tickets will result in significantly higher ticket sales for those types of products."

Here's where things get even more blurry: Powerball and Mega Millions are multi-state games for which players can buy tickets across state lines. North Dakota sells Powerball tickets, and Virginia and New York participate in Mega Millions. So selling chances to win the Powerball or Mega Millions over the Internet would appear to constitute interstate gambling and violate federal law.

Not so, explains Ken Dreifach, an Internet lawyer and former chief of New York Attorney General Eliot Spitzer's Internet Bureau.

Dreifach points out that states have contracts in place among them permitting the sale of Powerball and Mega Millions tickets for which they probably divvy up the royalties pro rata. And the federal government, he adds, has no interest in getting involved in regulating interstate lottery activity.

"A provision of the U.S. Code (18 U.S.C. 1301) permits this if there are state agreements in place," he said. "And no other federal law squarely applies to prohibit it. Generally the federal government, under the commerce clause, is only supposed to be regulating interstate activity. They can often make a legal argument--even if it's a little bit of a stretch--that transactions which mostly occur in-state, nonetheless have ramifications, are intrastate and are OK under the commerce clause."

Like Cabot, Dreifach isn't surprised by state lotteries moving in this direction. He said it's similar to off-track betting facilities, some of which have been online for awhile.

"I don't think this is that new a thing," Dreifach said. "Some OTB's have online wagering. The state of New York passed a law on this. I am certain that some OTB's permit online accounts. And of course there's Youbet as well, which would say it is legal under the Interstate Horseracing Act, which is now reinforced by the new law. But the DOJ would probably say that the new law just maintains the prior status quo, which they didn't accept because they said that it still violates the Wire Act to have interstate betting because the Horseracing Act can't override the Wire Act. I'm not clear whether they really take that position for consistency or for WTO purposes."

For the most part, the U.S. government is designed to let states govern themselves, which is why the UIGE includes the lotteries exemption.

"To the extent that they are permitting online gambling intrastate, it doesn't show that much hypocrisy as if they are permitting it interstate simply because the federal government generally stays out of purely intrastate matters," he said. ". . . This gambling act is more akin to the federal government not doing anything about interstate bets."

The New York Lottery began its mail-in subscription program in the mid-1980s and went online in November 2005, offering six-month and one-year subscriptions for Lotto, according to Communications Director Jennifer Mauer.

Similar to the North Dakota system, subscribers are asked to enter their personal information and then choose their preferred Lotto subscription plan, their games and their method of payment. A two- to three-day application approval period follows.

Winnings of $10 or more are sent by check, and subscribers have the option to roll prizes of $10 or less into their subscription renewals.

Mauer said the New York Lottery has generated over $785,000 from online subscriptions.

The lottery uses third-party vendors for age verification and geo-location. It maintains that the geo-locator software, which immediately authenticates the origin of a user's IP address and blocks any user not within New York, is foolproof.

The proprietary subscriber program software was developed in-house.

The Virginia Lottery has been online the longest of the three. It went live with its online subscription service in 2004, though the program started in 1992 as a mail-in campaign. It offers subscriptions for two games: Mega Milions and Win 4 Life.

Unlike the North Dakota and New York programs, the Virginia Lottery, due to state law, does not accept credit cards; to purchase an online subscription, a customer must be a resident of Virginia and have a valid checking account.

"During our last General Assembly, one of our legislators submitted a bill saying that credit cards should never be allowed to play the lottery, and that did pass," explained Jill Vaughan, communications director for the Virginia Lottery. "However, they carved out in that bill that debit cards are allowed at retail, and we're hoping one day to accept debit cards through the Web site for this program."

Virginia's subscription program and Web site were also developed completely in-house. Virginia is one of two states that run its own lottery systems, though it will be switching platforms next year.

Through the Virginia Lottery application process, it takes a minimum of 14 days to validate a subscription.

While age verification is an imperfect art, Vaughan said they rely on educating consumers

"At this point, we strive to educate the consumers through our Web site and at the retailer and any advertising promotions about the age limit," she said. "And for any prize over $100 we require the social security number to verify the age; and anything over $250,000 you have to claim in person."

Speaking to geo-location, Allan Altholz, the lottery's product manager for online games and new products, said a subscriber must have a Virginia address. He added that a player can register whatever address he wants, but the Virginia Lottery will not mail a check out of state. It's that simple.

Two years of online subscriptions have proven profitable for the Virginia Lottery. Online subscriptions will account for approximately 2.9 percent ($4 million plus) of revenues for fiscal year 2006-'07.

For now, New York, North Dakota and Virginia are the only three states moving toward an electronic future via Internet subscription services, though there is talk of more. And while the enactment of the UIGE closed the doors for many offshore gambling companies in the United States, the built-in exemption appears to be opening doors for 44 unique business opportunities.