Don't Bet on It: How Complying With Federal Internet Gambling Law Is Not Enough
| Citation | Vol. 4 No. 1 |
| Publication year | 2007 |
Constitutional & Regulatory
Cite as: Jennifer W. Chiang,
©2007 Jennifer W. Chiang
Abstract
It is disputed whether the United States has a blanket federal prohibition on Internet gambling. As a result of the lack of cohesive federal oversight, states have passed their own Internet gambling laws which, depending on the state's approach, may regulate making bets online, taking bets online and transferring money between bettor and casino. Some even extend to regulating speech and Internet casino advertisements. For example, card rooms and Indian casinos are prevalent in Washington State, but the state legislature recently made placing a bet over the Internet a Class C felony. This Article will analyze the current framework for Internet gambling regulations, with a brief overview of the federal Unlawful Internet Gambling Enforcement Act of 2006. It will detail the various kinds of regulations utilized at the state level and analyze their interplay with federal law in the United States.
Introduction
Introduction
[1] Internet gambling is legal in multiple nations,2 but in the United States placing a bet with or operating an Internet casino or sports book has never been clearly legal or illegal. Some have called the legal framework that the industry operates in a "grey zone."3 Certain forms of wagers are illegal under existing federal statutes. For example, the Wire Act prohibits betting on a sporting event over a telecommunication system, which includes the Internet.4 While the federal government maintains that the Wire Act covers all forms of online gambling, the Fifth Circuit Court of Appeals construed the statute to only apply to sports betting.5 Currently, placing a bet with an Internet casino is not illegal under federal law.
[2] The uncertain status of Internet gambling under federal law has led some states to use the police powers reserved to them by the 10th Amendment to prohibit online gambling at the local level.6 Increasingly, states are passing legislation making it illegal for an Internet casino operator anywhere in the world to take bets from a person located within the state.7 Other states make it a felony to place a bet from within the state.8 States have the ability to legalize and encourage the development of Internet gambling or "i-gaming"9 within their borders. Several states have attempted to develop their own i-gaming policies; however, the various jurisdictional issues make it a challenge to legally enforce those laws.10
[3] This Article briefly details the rise of online gambling and corresponding attempts to apply existing federal legislation, enacted prior to the advent of the World Wide Web, to Internet-based casinos. It then focuses on the issues facing both federal and state regulations such as jurisdiction, the dormant commerce clause, and federal preemption. This Article also provides an overview of current state statutes regulating Internet gambling.
Internet casinos and the industry today
[4] The first i-casino opened in August 1995.11 By 1996 there were an estimated 15 i-gaming sites that accepted wagers,12 and by the next year, approximately 200.13 Shortly after the creation of the i-casinos, Internet sports book sites, such as the World Sports Exchange, went online and were fully operational by 1997.14 By 2002, the industry had grown to 1,800 i-casinos, lotteries, bingo games, and sports books, and estimates place the total number between 2,000 and 2,500 by 2006.15
[5] The i-gaming model enjoys success as a legal activity in many parts of the world. More than 70 foreign nations license or permit some form of i-gaming.16 Americans are responsible for approximately half of the $12 to $15.5 billion wagered annually via the Internet.17 The parent companies of i-casinos are publicly traded on the London Stock Exchange,18 invested in heavily by leading global investment firms and have revenues in the hundreds of millions.19 Morgan Stanley Securities Ltd. and Fidelity Management have been some of the largest investors.20
[6] Most i-gaming companies operate offshore in countries that have legalized the business, such as Gibraltar, Alderney, the Isle of Man and Antigua.21 However, when gambling first went online, the casinos weren't all offshore unknowns. In 2001, MGM Mirage opened an i-casino on the Isle of Man.22 In order to ensure the casino preserved its gaming license in Nevada, the site only permitted visitors from six nations to make real money wagers.23 MGM hoped to demonstrate that online gambling could be regulated and profitable with a legitimate enterprise backing it.24 However, due to the political climate and hostility towards i-gaming, the venture shut down in 2003.25 Therefore, instead of money flowing from United States residents to United States companies and ultimately back to the American economy, the structure currently ensures that all i-gaming proceeds, and the associated taxation revenue from it, flows offshore to foreign markets. Just in tax revenues, regulation of i-gaming could bring in an estimated $3.3 billion annually for the federal government, and $1 billion for the states.26
Current regulatory landscape
[7] Certain forms of gambling are regulated by the federal government through the constitutional grant of power in Article One, §8, the commerce clause of the United States Constitution. For example, federal law regulates gambling acts that use the instrumentalities of interstate commerce or involve financial institutions. The Wire Act of 1961 is often promulgated as a ban on i-gaming.27 While the U.S. Department of Justice has used the Wire Act as the basis for declaring all Internet gambling as illegal, the Fifth Circuit Court of Appeals interpreted the Wire Act to cover only sporting events, leaving other casino games like poker and blackjack in a "grey area."28
[8] Obtaining jurisdiction over the casinos and their operators is a key issue for regulation of i-casinos.29 A casino that operates in a state can be sued in that state, as well as any casino that has been incorporated in the state.30 However, i-casinos are exclusively located outside of the United States.31 For individuals associated with i-casinos, personal service in the state is the biggest risk in a civil suit.32 If the casino and its operators are located out of state, a traditional "minimum contacts" analysis33 must occur based on the long-arm statute of the state in question.34
[9] Another issue is whether state statutes regulating i-gaming violate the dormant commerce clause.35 As for physical casinos, state laws range from complete prohibition on gambling - for example Utah bans all forms of gambling including commercial, tribal and charitable36 - to the extremely permissive Nevada.
[10] The dormant commerce clause prohibits "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter."37 For example, where laws allowed in-state wineries to ship directly to consumers, but out-of-state wineries were prohibited from doing so, the U.S. Supreme Court struck down the laws as a violation of the dormant commerce clause because the laws discriminated against out of state wineries.38 An example of a gambling prohibition that potentially violates the dormant commerce clause is pari-mutual horse wagering. The states that regulate this form of quasi-online gambling are open to a dormant commerce clause challenge because they tend to give in-state operators favorable treatment by blocking outside actors.
Federal legislation may make state regulations moot
[11] States have been less successful in attempting to regulate the payment systems involved in the transfer of money between bettor and i-casino. However, with the passage of the Unlawful Internet Gambling Prohibition Act of 2006, federal law now most...
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