This is a guest contribution by Martin Owens is an attorney specializing in gaming law. Owens is the co-writer, along with Prof. I Nelson, of the seminal book Gambling and the Law. If you would like to submit a contribution please contact Bill Beatty for submission details. Thank you.
For a long time, American supporters of Internet gambling predicted rapid legalization and adoption by state governments. One or two key states would legalize Internet gambling, said the prophets, and that would start the avalanche. State governments would stampede toward the new revenue opportunity.
But the rosy forecasts have not come to pass (I should know; I made a couple myself).
So far, only New Jersey, Delaware, and Nevada have passed legislation to actually license legalized Internet gambling. One or two others, like California and Pennsylvania, may or may not eventually come in. But most of the other states haven’t even seriously considered it.
There are a number of reasons. Gambling is controversial, even yet, so politicians tend to shy away from dealing with it. And Internet gambling did not become the revenue windfall that its proponents promised. In New Jersey, for instance, Governor Christie estimated that I gaming would reap $180 million for the Garden State the first year alone. The actual haul was about a tenth of that. Results in Delaware and Nevada were equally unpromising. And getting more revenue was no longer the desperate priority it had been. An economic uptick improved the fortunes of many states without additional gambling. It might be nice one day, in other words, but it wasn’t strictly necessary.
Now a new wrinkle has been added. As the state legislative efforts toward legalization and licensing stall out, or never get off the ground, the Indian gambling tribes are beginning to take a serious look at operating online as well- not just under a state licensing regime, but on their own independent authority. Under US law as it now stands, could they do that? Which tribes would be most likely to try? And what would be the outcome if they succeeded?
The IGRA And the Spread of Indian Gaming
When Congress passed the Indian Gaming Regulatory Act in 1988, very few could foresee that tribal gambling in the USA would mushroom into an industry worth $30 billion today. The original idea was to encourage Native American self-reliance and lessen their chronic dependence on the government. But many tribes were located on lands and reservations with few resources. A gambling concession looked like just the thing. At the time, this was understood to be something like charity bingo, which many tribes were running anyway. About the same size, but not much bigger.
Instead, Indian gaming in the USA grew explosively. By 2012, there were tribal operations in 28 states, as 240 tribes fielded over 450 gambling operations. And not just bingo or even poker; Indian casinos coast to coast offered slots, craps,and table games as well. The law provided that any state which allowed non-Indian establishments to offer these forms of gambling had to let their tribes have a shot, too. (California has a clause in its state constitution forbidding Vegas style gambling; voters had to approve an amendment to that constitution to give California Indians what amounted to a legal monopoly on casino gaming.)
In 1988, there was no Internet, so the law envisioned land-based Indian gaming only, accessible only when a customer came into a brick-and-mortar casino located on Indian land. The IGRA divided Indian gambling into classes. Class I, traditional pastimes, are under full tribal control. Class II, bingo and non-banked card games, require a tribe to set up a system of licensing and supervision, originally under Federal oversight but eventually self-regulating. Class III, slots, table games, and everything else, requires a compact with the tribe’s home state. Even though there were occasional questions about classification (bingo is class II but keno isn’t?), the arrangement remained more or less workable.
But gambling, like other forms of entertainment, went digital, online, and global.
From about 1998 it was possible for US players to send sports bets to websites located abroad.
Online poker took off when enough broadband was available to allow person-to-person interaction and money transfer through a central Internet platform. The online gambling market is now also worth about $30 billion annually, and it grew despite Federal, state, and even tribal government opposition in the USA.
There is no such thing as a US national gambling license, and probably won’t be for the foreseeable future. Therefore, US gambling law is predicated on state law. Both states and tribes initially opposed Internet gambling in the belief that it would steal their existing clientele: so-called “cannibalization”. But like it or not, gambling’s demographics and market makeup are shifting. Baby boomers, formerly the mainstay of the industry, are passing from the scene. The millennial generation coming in to replace them sees no particular reason why gambling should be confined to certain times and places, when everything else is available 24/7 on a smart phone.
Like it or not, it became clear that the future of the gambling industry is online.
The State Problem
Problem is, most US state governments aren’t prepared to deal with that future. Quite apart from the political controversy, state legislators don’t understand that online gambling is a global market. Many of them want to cut up the US market into 50 little sub-markets, one for each state. But most of these sub-markets aren’t economically viable. Big, populous states like California (38 million) or New York (20 million) will probably have enough customers to support some sort of online gaming industry. But what about Rhode Island (about 1 million) or Wyoming (just over 500,000)? States that license Internet gambling will quickly find they have to pool their resources and customers to survive. Nevada, New Jersey, and Delaware have already discovered this, and moved toward interstate pacts.
At the same time, the states considering I-gaming are proposing pre-conditions which are more suitable to keeping potential licensees out than letting them in. California is probably the grand champion in this contest. Applicants must be prepared to deposit $5 million up front (compared to the $30 million demanded in some previous versions, this is almost reasonable). Each applicant must be able to finance its efforts from its own resources (in other words, no out-of-state investors). Licensee offices and servers must be located within the state’s territory- the customers too. Background checks of owners, key employees, major investors and even service providers are required, with no provision for accepting previous certifications from other jurisdictions. And finally there is the “bad actor clause”, forbidding the licensing of any Internet gambling business that took American action after the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). This is touted as an attempt to protect the poor vulnerable gambling public. In real life, it serves as an entry barrier both to these businesses and to any local competition who might want to partner with them for the benefit of their long experience. It comes as no surprise then, that California has yet to legalize or license Internet poker, even after seven years of trying. The various vested interests and factions are so worried about not giving the other guy a chance that they won’t give themselves one.
The Indian Future?
Meantime, America’s tribal gambling industry is struggling with overexpansion. Once again California leads the nation. The Golden State is home to 110 of the 600+ Federally Recognized tribes (the only ones legally eligible to set up casinos under the IGRA). About 70 of these have signed compacts with the state government for class III gaming. But not all of them got rich. It’s easy to get customers close to major metropolitan areas like Los Angeles. But if the tribe’s lands are located three hours out in the woods, often they’re lucky to break even. And some haven’t. There have been missed payments, loan rescheduling’s, and at least one bankruptcy. Many of the smaller tribes would like to enter the greener pastures of online gaming. But how can they get a California license when there is no such license to get? How can they make a place for themselves when the bigger players are all about keeping them out?
The answer may be that they can make their own- license their own Internet gambling on their own existing tribal authority. Can they do that? Technically the answer is yes. Any tribe which has successfully and honestly conducted class II gaming for three years can apply to become self-regulating. And most of them have.
Now one of the (many) peculiarities of tribal gaming law is that while state approval is needed in order to conduct class III gaming, the tribes can and do conduct class II gaming entirely on their own authority. And poker and bingo are both class II games. So, then, the coast is clear for any tribe that feels like it, to set up online. Right?
Well, yes and no. Tribal gaming commissions may license class II gambling on their lands without let or hindrance from state governments. But another funny wrinkle in tribal gaming law has surfaced- it is also possible to allege that online poker or bingo are not a class II but class III. In the definitions set forth in the IGRA, even a class II game can turn into a class III game if it is only an “electronic or electromechanical facsimile” of the game. Only nobody really knows the difference anymore.
Before the Internet changed all the landmarks,, the rule of thumb was: paper games like bingo cards and pull tabs and poker played with a good old Bicycle deck were class II. Games played on machines, like slots or video poker, were class III. Nevertheless, there were holes in the theory even back then. Bingo remained bingo even when”electronic, computer, or other technologic aids are used in connection therewith”. But here’s the rub, as Shakespeare might say: today every kind of gambling is electronic and computer generated, even in brick-and-mortar resorts, where banks of monitors can be changed to offer roulette for breakfast, poker for lunch, and baccarat after dinner, depending on customer demand. It’s all ones and zeros now. But according to the IGRA and the National Indian Gaming Commission (NIGC) that interprets and enforces that law, while it’s class II to use a computer to play bingo, it may or may not be class III to use that same computer to play poker, depending on how much of a “facsimile” somebody judges that poker game to be.
This difference is enormously important to the tribes, because if Internet poker and bingo are class II, they can run it all by themselves, owing no duty of being supervised by, or splitting the profits with, the state authorities. If it’s class III, the compacts with the respective home states have to be rewritten. Which means it’s going to cost. For while the IGRA specifically forbids state authorities to tax the proceeds of tribal gaming, it does allow the state and the tribe to make an agreement regarding “amelioration” costs: the costs of regulating and supervising, the impact of a casino on the roads, water supply, and other infrastructure of nearby communities, and so forth. The state of Connecticut has shown particular skill in extracting millions in such support from the Foxwoods and Mohegan Sun operations, and it’s a sure bet that other states with tribal gaming inside their borders would like to figure out how.
Also, the state governments have never really accepted the notion that somebody inside their boundaries should have independent authority to regulate gambling- or, for that matter, anything else. They are jealous of their prerogatives, and what they have lost to the doctrine of tribal sovereignty, they want to get back.
Toward that end, a number of states, California once again leading, have proposed that tribal and nontribal applicants for Internet gambling be thrown into one common pool, all governed by state law (that is, any tribe wishing to participate in such an online gambling program must waive its rights of tribal sovereignty, at least as far as Internet gaming is concerned). Since the status of a limited or domestic sovereign is any tribe’s most prized political possession, this proposal is a nonstarter for most of them.
Rather, more and more tribes are now saying, they already possess the legal power to go online with class II at each individual tribe’s discretion. And at least one tribe, the Iipay Nation of Santa Ysabel, down San Diego way, has done just that, opening online bingo and preparing an online poker business. The State of California promptly sued for an injunction, claiming that going online instantly and automatically transformed those games from class II to class III- that is, requiring state approval to operate. Never mind that in the same document they allege those identical games, if offered via a state licensing program, will retain their virginity and remain class II. Also never mind that it is not the state’s job to classify games in the first place. [Full disclosure: I was retained by the Santa Ysabel to provide legal opinions on this matter].
But wait ! Why does the classification make a difference anyway, when the gaming can only be offered on Indian land ?Now the other shoe drops. Technological change has made it possible for the players in a poker game, let’s say, to all be in different locations, and the server actually offering the game is nowhere near any of them. So who has jurisdiction? This is a legal question that has not been meaningfully addressed in the 15 or so years that Internet gambling has been a going concern. But it is now being resolved as a practical matter. The new international standard, held by the UK in its revised Gambling Act, New Jersey, Delaware, Nevada, and most other places that offer Internet gambling, is that the bet or wager is deemed to take place in the computer server of the business offering the gambling services. So where the server is located is where the gambling takes place. Does that mean the gambler can be anywhere else? It just might.
That is why, the Indians say, that an Indian gaming operation located in, let’s say, California, should be able to take class II online gambling action from anywhere in the state. In fact, if the server location doctrine is taken literally, that tribal operation might be able to take action from all over the world.
The consequences of such a result would be far-reaching, to say the least. If a given tribe could use Internet gambling law act on its own in the world economy, not only would American state governments lose both power and revenue. An independent source of international income might end up changing the status of American Indian tribes from one of limited trbal sovereignty to something much closer to actual independence. The US Federal government would probably be driven- at last! – to promulgating a national gambling policy. And what rights and powers a recognized Indian tribal government does and does not have will finally have to be cogently and coherently defined.
Where the path will lead, and how long it will take, are still hidden. The best advice seems to be for us all to watch closely, assume nothing, and be ready for sharp, sudden turns.
Mr. Owens is a California attorney who has specialized in Internet and interactive gaming since 1998. Co-author of INTERNET GAMING LAW With Prof. Nelson Rose, America’s senior authority on the subject; Associate Editor, Gaming Law Review and Economics, and frequent contributor to trade publications for the industry. Questions and inquiries welcome at [email protected]
