PA Online Gaming Threatened By New DOJ Opinion On Wire Act

Online gaming is set to launch in Pennsylvania very soon – most likely in the latter end of the first quarter of 2019. However, the US Department of Justice (DOJ) Office of Legal  Council (OLC) has just issued an opinion concerning the 1961 Wire Act that has thrown the online gaming industry across the entire nation into uncertainty and disarray. Perhaps it will be “no big deal”. Perhaps online gaming will end completely. Right now nobody knows.

What happened?

Here’s a quick recap of how we got here:

It usually begins with the Wire Act

The history of the legal status of “technology enhanced gambling” has been one of mostly prohibition. In 1961, the US Congress passed the Wire Act, an extremely poorly worded piece of legislation aimed at preventing black market sports books from using the telephone to facilitate their operations – specifically the use of “wires” that cross state lines when transmitting bets or information about bets that relate to “sporting events or contests”.

The “wild west days” of online gambling

In the late 1990’s, the Internet brought us many online gambling sites offering many wagering opportunities including casino games, sports betting, and online poker. Due to the newness of the technology (and the poorly worded language of the Wire Act), these sites operated in a legal “gray area” as far as US law was concerned. In addition, most of the relevant servers were located oversees, further separating the new industry from US jurisdiction.

The UIGEA

In attempt to curb the practice, in 2006 the US Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA) which targeted the payment processors (banks, credit card companies, etc) that helped facilitate transactions related to gambling. The act had the the effect of driving some online gaming operators away from the US market and driving others further underground where they had to resort to inventive and somewhat shady methods of financially transacting with their customers. Interestingly, the UIGEA specifically carved out Daily Fantasy Sports (DFS), skill-based games, and certain legal intrastate gaming as exceptions to the prohibition.

The “good” US DOJ opinion of 2011

The industry hobbled along in this manner for a while (with US participation severely limited) until 2011 when the US DOJ issued an opinion stating that the Wire Act (and therefore the UIGEA) pertained only to sports betting. This opinion emboldened over a dozen states to expand their lotteries into the online space. Further, many states (including Pennsylvania) have enacted legislation allowing regulated and taxed online gaming within their state borders.

Slam on the brakes?

This new US DOJ opinion could slam the brakes on all this new activity. Or it could change very little. Isn’t US law fun?

In analyzing the new opinion, two elements appear crucial:

  1. The opinion holds that the Wire Act applies to all forms of gambling, not just sports betting
  2. The opinion holds that the UIGEA did not modify or alter the Wire Act.

This has opponents of online gaming grinning from ear to ear. The Coalition to Stop Internet Gambling (supported by Las Vegas Sands Chairman Sheldon Adelson) immediately issued a press release cheering the opinion.

Those in favor of online gambling are at the very least concerned.

What does this all mean?

It’s important to remember that the OLC opinion is just that – an opinion. It does not carry the force of law. In theory at least, only Congress can make laws. However, the opinion reflects how the DOJ may enforce law, and as we have seen, that is very important.

It was the 2011 OLC opinion that made all these states more comfortable in legalizing online gambling so it’s hard to imagine that this reversal won’t have the opposite effect. What other impact will this opinion have?

Is it getting chilly in here?

The first and most obvious impact of the opinion will be a chilling effect on other states that may have been considering following the leaders and enacting online gambling legislation in their jurisdictions. Any plans to do so will certainly be put on hold until it becomes more clear what the final effect of all this will be. Legal uncertainty freezes economic actors and is a sure sign of a poorly functioning legal regime.

Disruptions of existing operations

Many states are already operating various kinds of online gaming and have more expansions into this arena in the pipeline. Many states have legalized and regulated DFS,  online lotteries, and online gaming. Pennsylvania specifically has collected $94 million in online license fees thus far while MGM and Golden Nugget are set to apply for another $18 million in licenses at the next meeting of the Pennsylvania Gaming Control Board (PGCB). Further, PA has sold $70 million worth of sports betting licenses. Some of the “value” of these licenses is their online (mobile) element.

All this activity is being thrown into legal, financial, and operational chaos due to the new OLC opinion.

Intrastate vs. Interstate

Online gaming products that are explicitly interstate have much more to fear than intrastate operations (though those aren’t secure either). The most obvious online gaming arena at risk is the agreement between Nevada, New Jersey, and Delaware in which they have merged their online poker player pools so that the players can all play with one another.

This seemingly minor detail actually packs a big punch. Small player pools (such as those found intrastate) severely retard the formation and longevity of poker games. It was hoped that as more US states worked to legalize gambling, more player pool sharing agreements would be created, leading US online poker to have larger and larger player pools. The ideal end result, of course, is that US online poker players would be allowed to play with players all across the world as was the practice in the “golden age” of US online poker from its inception in the late 1990’s untilBlack Friday in April of 2011.

What does “crossing state lines” even mean in today’s world?

The way the modern Internet operates makes all of these laws (and DOJ opinions) very confusing. The question of intermediate routing (incidental transmission of bets or associated information as a result of the structure of the Internet) will be central to the next phase of the debate. As of now, we literally do not know what online activity violates the law. What does it mean if a player in PA bets with a PA casino through its local server but due to the vagaries of the Internet, some of the data packets unintentionally cross state lines?

We’ll see you in court!

This whole mess is almost certain to soon end up in court. There are far too many very important issues that are unclear and the effected players have millions of dollars (and jobs and tax revenues, etc) at stake.

That brings up an important aspect of legal structure in our country – the separation of powers. The executive branch isn’t free to unilaterally decide how it will interpret the bizarrely constructed legislation that comes out of Congress. The court system gets its say on the matter in the end.

The good news for proponents of online gaming is that the DOJ’s new proclamation flies in the face of recent rulings in federal courts. Both the 1st and 5th Circuit Courts of Appeal have judgments declaring the Wire Act being applicable to sports betting only.

Maybe it’s just a bluff?

One weird possibility is that the DOJ won’t actually do anything about the enforcement powers it has just delivered to itself with this OLC opinion. Consider the situation in the many US states that have legalized marijuana. Everything about this practice is still illegal federally, yet to this point Washington hasn’t “rolled the tanks” to stop it. Will online gaming be similarly ignored by the powers that be in Washington?

While it’s disconcerting to invest in and operate online gaming with this allegorical hammer hanging over ones head, it’s certainly conceivable that the DOJ is just blowing smoke and doesn’t actually intend to do anything.

What about PA online lottery?

Of all the online gaming activity going on in Pennsylvania, the PA iLottery is probably the safest from this new threat. It’s not invulnerable of course, that’s the whole point of this murky legal landscape we have been thrown in, but it’s on much more solid footing than other forms of online gaming.

In most (perhaps all) cases, bets are placed and accepted within the borders of the state between players and servers located within the state. Also, consider that many states now operate online lotteries completely distinct from their traditional lotteries. Even more states now sell traditional lottery tickets online. They won’t give up all this revenue without a fight.

All this makes the Pennsylvania’s online lottery relatively secure in a relatively insecure legal space.

 Pennsylvania’s online lottery also has some great bonuses right now. First time sign-ups receive $5 free to play by entering bonus code “WINNER”. The PA iLottery also is offering a 50% bonus up to $50 on initial deposits. There are a ton of fun games to choose from.