Betting blind: problems with proposed federal regulation of online poker.

• Author: Kuznick, David B.

Cite as 12 J. HIGH TECH. L. 450 (2012)

1. Introduction

   A cowboy with a gun by his side playing poker in the Wild West is a familiar image in American culture. (1) Online poker sometimes has a similar reputation. (2) The online poker industry has grown tremendously from its beginnings in 1998. (3) This growth led to an estimated $6.7 billion in revenue for the operators of online poker sites in 2010. (4) In 2009, U.S. players generated approximately $5.4 billion for all forms of online gambling, which was about twenty percent of the worldwide total revenue. (5) Federal regulation of online gambling is desirable because the government could decrease the budget deficit by almost three hundred million dollars within the first ten years of regulation by collecting licensing fees. (6) The increase in tax revenues would be even larger at forty-two billion and thirty billion for federal and state governments respectively. (7) Regulating just online poker could lead to between fifteen and twenty billion over the same period of time. (8)

   The United States has a long history of regulating vices--gambling in particular--for both revenue and control purposes. In colonial times, lotteries generated revenue to fund public works. (9) The spread of organized crime in the 1950s led to various forms of federal regulation to stop mob-run gambling. (10) The desire to uniformly regulate horserace wagering across state lines was the impetus behind the Interstate Horseracing Act of 1978. (11)

   The rise of the Internet and online gambling in the 1990's revealed ambiguities in existing legislation. While various states have outright prohibited online gambling, the legality in other states is vague. (12) The status of federal regulation regarding online gambling is similarly unclear. (13) As a result, difficulties in enforcing online gambling prohibitions, even at the state level, against individual gamblers led Congress to pass the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) to stop the flow of money to and from online gambling sites. (14) Although the online poker industry contracted in the immediate wake of the UIGEA, the industry quickly recovered to become stronger than ever. (15) On April 15, 2011, however, the U.S. Department of Justice seized the Internet domain names of three of the largest online poker sites and brought numerous charges against them including, fraud, money laundering, and UIGEA violations. (16) Although the named sites no longer operate in the U.S., many other smaller sites still have an active domestic player base. (17)

   Congress has recently recognized the value of regulating online gambling as a potential large revenue source in the wake of the recent economic crisis. Representative Barney Frank introduced the Internet Gambling Regulation, Consumer Protection, and Enforcement Act of 2009 (Internet Gambling Act); a bill that would regulate and tax online gambling, including poker. (18) However, the Internet Gambling Act seemed dead when Frank lost his seat as Chairman of the Financial Services Committee due to the November 2010 election results. (19) Senate Majority Leader Harry Reid then put effort into introducing the Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2010 (Internet Poker Act); a bill that would regulate and tax online poker, while barring all other forms of online gambling not otherwise allowed. (20) After an unsuccessful push at the end of 2010 to enact the Internet Poker Act, Reid planned to reintroduce it in 2011.21 Representative John Campbell reintroduced Frank's Internet Gambling Act with Frank as a sponsor in March of 2011.22 Shortly thereafter, Representative Joe Barton introduced the Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2011, with Representatives Frank and Campbell as co-sponsors. (23) Senator Reid has indicated he may consider working with Barton to get legislation passed. (24) online poker contains unique factors that need to be carefully considered when enacting legislation in order not to undermine the large revenue potential for the government. one such factor is the need for an extremely large player base, which allows a player to risk a very small amount of money for a chance at a large payout. (25) A study has shown that a twenty percent decrease in the player base will lead to a fifty percent decrease in government revenue. (26) Therefore, any provisions in the proposed federal legislation that could decrease the player base must be carefully considered if revenue projections are to remain accurate.

   Neither Frank's nor Reid's bill adequately solves the problem of generating large amounts of revenue for the government. Various provisions contained in each bill could destabilize the online poker player base: what determines the states that automatically opt in to federal regulation; (27) an express prohibition against players competing against foreign players in Reid's bill; (28) and a blackout provision that prohibits all online poker for a fifteen month period in Reid's bill. (29) Furthermore, Frank's bill legalizes all online gambling that is not otherwise illegal while Reid's bill just legalizes online poker. (30) A bill that legalizes all forms of online gambling may be a harder sell to those states that have moral objections to gambling. (31) In order to best meet the goal of increased government revenue, a hybrid of the two bills may provide the best balance between economic and socio-political interests while giving the best chance for legislators to enact regulation. (32) The hybrid legislation should only legalize online poker, should opt in all states that already allow commercial poker or interstate horserace wagering, should allow U.S. players to compete with others from around the world, and should not contain a blackout provision. (33) Barton's bill, while not perfect, goes a long way towards meeting these objectives. (34)

   Section II of this Note discusses Congress's power to regulate gambling because of the Commerce Power. (35) Section II also examines the general history of gambling legislation from its origin in English law, through state lotteries, organized crime, and finally, as applied to the Internet. (36) Section III examines the rise of online poker and its attraction. (37) Section III also provides a summary of the current state of online gambling regulation. (38) Section III then looks at two recent proposals for Federal online gambling regulation. (39) Finally, section III provides an overview of how some states have begun enacting intrastate gambling regulation. (40) Section IV analyzes the older Federal proposals and shows why neither is sufficient. (41) Section IV ends with a proposal for hybrid legislation that addresses the problems in the proposed Federal bills and how the recent bill meets most of those goals. (42) Section V concludes by tying all the themes together. (43)

2. History

   The origin of Congress's ability to regulate online gambling is found in the U.S. Constitution. (44) The Commerce Clause grants Congress the power to regulate interstate commerce. (45) In the early nineteenth century, the U.S. Supreme Court clarified that Congress's power in this area is virtually absolute. (46) In the same decision, the Court held that States are not allowed to regulate interstate commerce where Congress has chosen to do so. (47) The Court examined limits of the activities Congress could regulate by its commerce power in a series of decisions culminating in the holding that Congress could regulate the use of the channels of interstate commerce, the instrumentalities of interstate commerce, and an activity that has a substantial effect on interstate commerce. (48) Therefore, Congress can regulate Internet gambling because it affects interstate commerce. (49) Finally, because Congress has the power to regulate interstate commerce, it can choose to totally confer its authority in an area to the States. (50)

   1. Gambling Law

      Gambling law has its roots in English law. (51) The Thirteen Colonies used lotteries extensively to fund public works. (52) Betting on horseracing was another early form of permitted gambling. (53) The Statute of Anne, (54) enacted in 1710, put a damper on many forms of gambling by declaring that gambling debts over ten pounds were uncollectable. (55) The period from the Revolutionary War to the Civil War saw increased public disfavor with lotteries, resulting in a complete lottery ban by the late 1800s. (56) There was little legalized gambling and no state-run gambling until 1964 when New Hampshire re-introduced staterun lotteries. (57) Today, the majority of states have lotteries and several states have other forms of licensed gambling. (58)

   2. Organized Crime

      As the new technologies of radio and television developed in the 1930s, Congress acted to ensure that people could not use over-the-air broadcasting to circumvent the interstate commerce ban, beginning with the Communications Act of 1934. (59) Nevertheless, gambling began spreading again as states responded to the Depression with casinos and other licensed forms of wagering. (60) As gambling spread, so did organized crime, and Congress passed the Wire Act of 1961 primarily to prevent illegal sports betting. (61) The Wire Act criminalized using a

      wire communication facility" to "plac[e] ... bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers.... (62) A similar response to organized crime was the Travel Act, passed the same year. (63) The Travel Act prohibits the use of "any facility in interstate ... commerce, with intent to ... distribute the proceeds of ... or ... otherwise promote ... any unlawful activity." (64) "'[U]nlawful activity' [in this context] means...