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The Law of Internet Gambling (Page 1)

28 October 1999

Gambling and the Law
The Law of Internet Gambling

I. Gambling online.

    A. Individuals may make wagers from any computer with a modem.

      1. Greatest concern are the use of a personal computer ("PC") from home or office.

        a. Can the operator be trusted?

          (1) Is the game honest?

          (2) Is the financial transaction secure?

          (3) Has the operator connections with organized crime?

        b. Gambling creates dangers for society. Can the law --

          (1) Minimize lost work and school time?

          (2) Protect players from themselves, especially

            (a) Problem gamblers?

            (b) Minors? Mark Griffiths, Adolescent Gambling (1995).

          (3) The Internet itself may be addicting, as are video games. Engaging gambling games compound the problem. Mark Griffiths, Presentation to National Research Council (Sept. 1, 1998).

        c. Are criminal laws being broken by the bettor? Operator? Server? Financier? Site developer?

        d. Older, established gambling businesses, especially the slower forms, such as pari-mutuel wagering on races, have difficulty competing with technologically advanced gaming machines.

          (1) States have direct financial interests -- legal gaming paid $16.8 billion in state taxes in 1996.

          (2) The livelihood of hundreds of thousands of workers depends upon legal gaming.

          (3) Does government have a legitimate role in keeping alive obsolete businesses? The gaming market is almost never a true free market, due to artificial government barriers.

      2. Most operators have sites on the World Wide Web and are contacted by dialing a server, such as America Online, using the PC's modem.

        a. The best list is Rolling Good Times Online, www.rgtonline.com.

        b. Restrictions range from mere written warnings to "check you local laws" and "you must be over 18" to Finland's requiring players have a local bank account (besides being entirely in Finnish).

        c. Some computerized wagering systems, such as YouBet!'s arrangement with Pennsylvania's tracks, avoid servers and the Web -- bettors' modems call the off-track betting operators' computer direct.

        d. Other technology is being developed, such as stand-alone Internet terminals that accept cash. A Burger King restaurant in New York's financial district installed 20 computers and a T1 line and is giving 20 minutes of time for a minimum purchase of $4.99 ($3.29 for breakfast). Philip Greenberg, New "Combo" Meal: Dine and Surf, N.Y. Times (July 30, 1998) (emailed, no page available).

        e. Even the PC can be eliminated: MonaCall allows cybercasino gaming from a touch-tone phone.

      3. Gambling requires consideration, so only sites that accept money wagers are included in this discussion.

        a. Internet gambling sites require players to deposit "front money," i.e., payment in advance, by credit/debit card, wire transfer, snail-mailed check or money order, or Internet funds, like CyberCash.

        b. Credit card transactions may take days: Operators sometimes wait until payments have cleared to prevent players canceling after losing.

          (1) Gambling debts are usually not legally collectable; courts leave the parties as they find them; if the transaction has cleared, players usually cannot sue to get their money back, even if the gambling was illegal.

          (2) A player who lost $70,000 in 18 months online has filed a counter-claim against Visa and MasterCard, alleging the bets were illegal in California, and asking for an injunction. Providian National Bank v. Haines, Case No. V980858 (Superior Court, Marin County, California) (Cross-complaint filed July 23, 1998) Courtney Macavinta, Net Gambler Sues Credit Firms, CNET NEWS.COM, www.news.com/News/Item/ 0,4,24561,00.html (July 24, 1998, 4 a.m. PT).

      4. Some operators claim they are licensed by foreign governments.

        a. Smaller countries, often island nations in the Caribbean and South Pacific, have issued licenses, usually to Americans and other foreigners.

          (1) Government background checks of these gaming operations are often spotty or non-existent.

            (a) Grenada sold an exclusive license to one operator, Sports I nternational, and allowed that operator to sell sub-licenses. It appears the government did not check license applicants' backgrounds.

            (b) However, Antigua uses the FBI, Interpol and Scotland Yard for background checks on all applicants.

          (2) Government oversight of these gaming operations are also often spotty or non-existent.

            (a) Players have little guarantee that the games are run honestly, they will be paid if they win, or even that they can get their front money returned.

            (b) Again, there are exceptions. Antigua has set up an anti-fraud division to investigate players' complaints, funded by its annual fees of $75,000 for sports betting and $100,000 for cybercasinos.

        b. Some operators claim that they are licensed by First World Countries, including the United Kingdom, Austria and states in Australia, to accept bets over the Internet.

          (1)In most cases the laws of these jurisdictions are either silent or would seem to prohibit such bets.

          (2) However, some larger jurisdictions, including the U.K., have allowed their licensed operators to accept telephone wagers from the U.S. for about 10 years.

        c. Some governments run Internet games themselves: Online lotteries are owned by the Principality of Liechtenstein, Finland and the Coeur d'Alene tribe in Idaho.

        d. The operator's computer may be on American soil, even if it claims to be operating overseas under a foreign license.

      5. Some operators do not even claim to be licensed.

    B. Types of gambling.

      1. Sports betting -- May still have the greatest dollar volume, though there are now more casino sites online.

        a. Betting on professional and college sports events was the first form of Internet wagering; though, operators used their websites primarily to advertise toll-free or 900 telephone numbers. Even today, more money is bet with licensed overseas sports books by phone than by computer.

        b. Players can bet ($11 to win $10) on real games against the bookie, or participate in fantasy sports leagues.

        c. Sports betting is one of the most attractive forms of at-home g ambling.

          (1) Bettors trust the results more than playing against an unseen computer and the outcome of wagers can be independently verified.

          (2) Most Americans live in a state with a state lottery and casino gaming is legal in 29 states and U.S. territories; but, legal sports betting is not readily available.

          (3) Sports betting is already associated with at-home gambling: placing a bet by phone (although with an illegal bookie) and watching the game on T.V. Sports betting, legal and illegal, began to boom with the broadcasting of Monday Night Football.

      2. Casinos -- Blackjack, video poker and virtual three-reel slot machines, craps, roulette, baccarat, keno, pai gow poker and Caribbean Stud.

        a. Software quality, especially speed, graphics and sound quality, vary widely.

          (1) Many games are painfully slow, because of the time needed to d ownload illustrations like playing cards.

          (2) Most sites allow front-loading, putting images on the PC's hard drive with a CD or by downloading before play begins. These games play as fast and are nearly as entertaining as their counterparts played in a live casino.

          (3) Some sites allow chats, so players may have social interactions with other players.

          (4) The best sites turn the PC screen into a virtual duplicate of a casino video slot machine.

        b. Minimum and maximum limits on wagers also vary widely. Even with low stakes, the fastest games can run through hundreds of dollars an hour.

        c. Remote live play is now possible -- a patent was issued in 1998 for a casino with video cameras connected to the Internet.

      3. Casinos with "no purchase necessary" -- Dozens of sites allow players to obtain small number of chips for free.

        a. Most play is with chips purchased by credit cards.

        b. But the free alternative means of entry may make the games n on-gambling "sweepstakes" under some state laws and maybe under federal law. See, Fed. Communications Com'n. v. American Broadcasting Co., 347 U.S. 284 (1954).

      4. Lotteries -- The largest operators are the Principality of Liechtenstein and the Coeur d'Alene Indian tribe of Idaho.

        a. Games vary from passive, once a week drawings to instant tickets, indistinguishable from slot machines.

        b. Unlike traditional lotteries, many games do not have a pooling of players' funds to create the prize.

      5. Bingo -- Often connected with an Indian bingo hall.

        a. True bingo -- at-home players play their cards online with and for money against other player online, or conceivably against other players both online and in real bingo halls.

        b. Proxy play -- at-home players are represented by a player or computer acting as their agent in a live game played in a bingo hall.

          (1) Future play -- Players buy a card, which is then played on their behalf in a live game.

          (2) Past play -- Players buy a card and watch a bingo game on T.V., which was actually played hours before. A tribe obtained an injunction allowing it to offer at-home proxy play of Megabingo, on the theory the game is being played on Indian land, as required by federal law, and the televised game was not relevant, because players did not have to watch or participate.

        c. Free -- Like other games, bingo may be played with no purchase necessary, if the prize is put up by a sponsor, similar to a promotional sweepstakes. In January, 1999 one site reported having 2,849 players competing for a $700 jackpot. www.gamesville.com, reported at w ww.rgtonline.com/gamespage/artlisting2.cfm/3069 (Feb. 18, 1999).

      6. Off-Track Betting ("OTB") -- Players may bet on horse races and dog races.

        a. OTB, in its broadest definition, is betting on a race not taking place where the bettor is. Simulcasting allows the bettor to see the distant race live.

        b. OTB was the first legal gambling by wire. It began with intrastate intertrack wagers only when both tracks had races, then betting was allowed at fairgrounds and other tracks which were not having races, then intertrack interstate and finally stand-alone OTB parlors.

        c. Live horse racing is slow, with 20 minutes between races. Allowing bettors to wager on races taking place at other tracks creates non-stop betting action.

        d. There is no reason for bettors to be physically present; although, they like to see the races on a screen.

        e. Computers have been connected with handicapping races for decades.

        f. As with sports betting, the outcome of wagers can be independently verified.

      7. Poker -- Players play against each other online, either for play money, AOL has a poker room, or for real money.

      8. Day trading - at least one Internet gaming site ( http://www.Bestbetsports.com) is making book on the Dow Jones average. Daniel Schiffman, New York Roundup in The Gaming Lawyer submitted August 13, 1999 (to be published). the Seventh Circuit ruled on August 10 that transportation and utility stock average futures are permissible "investments," as are disguised bets on the Dow. Id. [get cite]

    C. Size of the industry.

      1. 282 sites were listed on Rolling Good Times on February 13, 1999, as accepting real-money wagers. However, this includes dozens which may appear to be independent, but may actually be operated by a single company or its affiliates. See, Bigham's Viewpoint, "Internet Clogging Up With Casinos," at www.wheretobet.com/index.html (April 22, 1998). Many of these are "no purchase necessary" casinos.

      2. The figure most frequently heard is $10 billion a year in revenue for online gaming by shortly after the turn of the century.

        a. The number comes from two sources:

          (1) Frank Feather, futurist, 1996 World Gaming Congress & Expo keynote speech, predicted that alternative delivery methods like the Internet could reach 20% of the industry's $50 billion North American revenue within ten years.

          (2) Jason Ader, a senior gaming analyst with Smith Barney, May 1995, quoted by the Chicago Tribune as estimating at-home wagering could become a $10 billion industry.

        b. To generate $10 billion in revenue would require that $100 billion be wagered each year.

        c. Although the rate is constantly increasing, the current volume of gambling on the Internet appears to be in the range of less than $2 billion, generating revenue of no more than $200 million. I derived this estimate from the little public information available from Internet operators.

          (1) Although growing exponentially, commerce on the Internet as a whole is still not very large, yet, compared to traditional markets.

            (a) Online sales to Americans of all products and services first topped $1 billion in 1997. Newsweek (Jan. 12, 1998). The Home Shopping Network, a comparable media, passed the $1 billion mark in phone-in orders two years earlier.

            (b)The Los Angeles Times reported Internet sales rose from $2.4 b illion in 1997 to $8 billion in 1998. L.A. Times at C11 (Feb. 16, 1999). But, it is unclear whether this represents worldwide sales, or only the U.S.

            (c) Even if the $8 billion is U.S. only, it is "less than 1% of the country's total retail sales. Id.

          (2) eLottery, Inc., f.k.a. UniStar Entertainment (being spun off from Executone Information Systems Inc.), spent millions developing the Coeur d'Alene's US Lottery. On April 28, 1998, this Internet game had a registered customer base of about 22,000, with about 4,200 active players. Actual ticket purchases equaled approximately $600,000 during the third quarter of 1997. By comparison, the Home Shopping Network had 4.6 million active customers.

          (3) In confidential conversations I had with international lottery executives in June 1997, I was told the biggest online lottery, Liechtenstein's InterLotto, has sales of approximately $50 million per year. This is consistent with published statements.

          (4) Sports International, now called Interactive Gaming & Communications Corp., is publicly traded and thus, one of the few companies that has to disclose its finances. The handle for 1996, the amount wagered by all customers, totaled $58,482,731. 10-K, filed Ap. 4, 1997 with the S.E.C. Revenues from net wins totaled $2,752,252. Because its costs are so great, especially its phone bills, the company actually lost money in 1996. By comparison, $2,428,600,000 was bet with licensed sports books in Nevada in 1 995.

          (5) When the federal government filed its first prosecutions of Internet sports betting, the U.S. Attorneys estimated that "on-line sports betting had garnered $600 million in gross revenues last year, up from about $60 million in 1996." "14 Are Charged With Taking Sports Bets Over the Internet," N.Y. Times at A1 (Mar. 5, 1998). The definition of "gross revenues" is unclear.

      3. Problems -- Internet gaming is relatively small and likely to stay that way for at least the next few years.

        a. Technology -- The Internet does not meet the Americans' high e xpectations of what modern technology is supposed to deliver, based on their experiences with telephones, televisions, radios, microwave ovens, etc.: easy to use, reliable, instantaneous, high quality sound and graphics.

        b. Accessing the Internet currently requires a player to expend large amounts of money and time on computer hardware and learning how to use the accompanying software.

        c. Playing games, especially downloading images, is a slow, almost painful, process, with constant computer crashes.

        d. Players do not trust revealing their credit card numbers on the Internet, let alone giving the numbers to some unknown gaming operator in a foreign country.

        e. Bettors do not know if operators, or they themselves are breaking the law.

        f. Players have no way of knowing if they are being cheated. Rolling Good Times Online has a "Dog Doo Awareness" section listing, at the time of this writing, four sites it has investigated, and found wanting, as well as a dozen more reported in players' uninvestigated complaints. Claimed cheating includes:

          (1) Operators not paying off when players win. Thompson v. Handa-Lopez, Inc., 998 F.Supp. 738 (W.D.Tex. 1998) (suit alleges Internet site refused to pay $193,728.40).

          (2) Operators refusing to return players' front money.

          (3) Games programed with unfair in favor of the operator, that do not match regulated live casinos, slots and lotteries. A separate issue is whether the free games most sites supply have odds that favor players, raising expectations that are dashed when the same type of games is played for money.

          (4) Operators disappearing with investors' money.

    D. What type of gambling is it?

      1. History -- Over the centuries, governments came to realize that different forms of wagering required different controls. Until recently, the primitive state of technology made this rather easy.
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        a. Casino games are the most dangerous. The games are fast and the stakes can be high. Even without the extension of easy credit, players can destroy their financial lives. So, states and countries almost always completely banned casino games; although, there were sometimes exceptions for remote spas, open only to foreigners.

        b. Wagering on sports events and horse races was not a widespread social problem when bettors had to be physically present at the event. The invention of the pari-mutuel machine, telephone & telegraph led to the creation of "pool rooms" in the hearts of cities, and the need for off-track and phone betting to be outlawed.

        c. Lotteries depend on large numbers of customers and can raise large amounts of money, so governments either licensed or ran the games. The games took weeks before enough tickets were sold to have a drawing. Bettors had to have paper tickets to know whether their numbers had been drawn.

      2. Jurisdictions are free to define gambling terms as they wish. For example, courts have defined "lottery" as:

        a. A "widespread pestilence," meaning available throughout a society, and thus much more dangerous than casino games. Stone v. Mississippi, 101 U.S. 814 (1880) (roulette is not a lottery).

        b. A gambling game of pure chance. Harris v. Missouri Gaming Com'n., 869 S.W.2d 58 (Mo. 1994) (roulette, among other casino games lacking skill, is a lottery); Boasberg v. U.S., 60 F.2d 185 (5th Cir. 1932) (bookmaking not within federal anti-lottery statutes).

        c. A gambling game where players need not be present to win; player participation does not affect the results. Ex parte Pierotti, 42 Nev. 243, 184 P.209 (1909) (slot machines are lotteries).

        d. A game where the prize is formed by pooling players' bets and not banking games. Western Telcon, Inc. v. California State Lottery, 13 Cal.4th 375, 53 Cal.Rptr.2d 812, 917 P.2d. 651 (June 24, 1996) (keno is not a lottery).

        e. Schemes, which people of today would recognize as being lotteries, and not gambling games. Knight v. State ex rel. Moore, 574 So.2d 662 (Miss. 1990) (bingo is not a lottery).

        f. "Any game, scheme or plan compromising prize, chance and c onsideration," meaning "lottery" is synonymous with "gambling." Kayden Industries, Inc. v. Murphy, 34 Wis.2d 718, 150 N.W.2d 447 (1967). A federal court ruled that Indian tribes in Wisconsin could operate casinos, because the state was operating a state lottery. Lac du Flambeau Band of Lake Superior Chippewa Indians v. State, 770 F.Supp. 480, appeal dismissed for lack of jurisdiction, 975 F.2d 515 (7th 1992).

      3. Courts are having to decide, for purposes either of legalizing or prohibiting, whether statutes dealing with one form of gambling, say "lotteries," apply to more recently invented forms, say blackjack played on a video screen. E.g., West Virginia v. Mountaineer Park, Inc., 190 W.Va. 276, 438 S.E.2d 308 (1993).

Continue to Page 2

The Law of Internet Gambling (Page 1) is republished from iGamingNews.com.
I. Nelson Rose

Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.

Professor Rose is the author of more than 300 books, articles, book chapters columns. He is best known for his internationally syndicated column, "Gambling and the Law ®," and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.

A consultant to governments and industry, Professor Rose has testified as an expert witness in administrative, civil and criminal cases in the U.S., Australia and New Zealand, and has acted as a consultant to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, Illinois, Michigan, New Jersey, Texas and the federal governments of Canada and the United States.

With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the F.B.I., National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.

He is the author of Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials.

I. Nelson Rose Websites:

www.gamblingandthelaw.com

Books by I. Nelson Rose:

> More Books By I. Nelson Rose

I. Nelson Rose
Professor I. Nelson Rose is an internationally known scholar, public speaker and writer and is recognized as one of the world's leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.

Professor Rose is the author of more than 300 books, articles, book chapters columns. He is best known for his internationally syndicated column, "Gambling and the Law ®," and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.

A consultant to governments and industry, Professor Rose has testified as an expert witness in administrative, civil and criminal cases in the U.S., Australia and New Zealand, and has acted as a consultant to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, Illinois, Michigan, New Jersey, Texas and the federal governments of Canada and the United States.

With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the F.B.I., National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.

He is the author of Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials.

I. Nelson Rose Websites:

www.gamblingandthelaw.com

Books by I. Nelson Rose:

Gambling and the Law

> More Books By I. Nelson Rose