Kiran S. Raj, Drawing a Line in the Sand: How the Federal Government Can Work With the States to Regulate Internet Gambling

• Jurisdiction: United States,Federal
• Publication year: 2007
• Citation: Vol. 56 No. 3

DRAWING A LINE IN THE SAND: HOW THE FEDERAL GOVERNMENT CAN WORK WITH THE STATES TO REGULATE INTERNET GAMBLING

INTRODUCTION

The new American dream. Invest $39 and walk away with $2.5 million. The aptly named Chris Moneymaker did just that in 2003.¹Moneymaker entered an online poker tournament hosted by PokerStars²and was able to win a seat at the 2003 World Series of Poker.³He subsequently won the entire tournament and in the process helped accelerate an already growing industry.⁴

Online poker is the fastest growing component of the Internet gambling industry.⁵As an industry, Internet gambling has grown by leaps and bounds over the past few years. Although estimates of the size of the industry vary, in

2005, revenues reached approximately $10 billion.⁶Americans generated almost $5 billion of those revenues.⁷

Internet gambling brings in a modest sum compared with the revenues generated by traditional brick-and-mortar casinos. In 2003, the United States gambling industry grossed over $72 billion.⁸Gambling is so prevalent in the United States that all but two states have legalized some form of gambling such as slots or lotteries.⁹In fact, more than twenty states have land-based, riverboat, or Native American reservation casinos.¹⁰

Internet-based casinos have many advantages over brick-and-mortar operations. Traditional hotels and casinos can cost billions of dollars to construct,¹¹whereas online casinos require only a few million.¹²Internet casinos are easily accessible from the home and do not require traveling considerable distances. This ease of access plays an enormous role in the vitality and growth of online gambling.¹³As one former gambling addict remarked, the Internet is the "crack cocaine of gambling."¹⁴

One of the biggest challenges facing state and federal governments is to create a cohesive framework that addresses concerns from both authorities. Traditional gambling, in general, always has been an area reserved for state regulation.¹⁵The federal government, however, has decided to treat Internet gambling differently and deny states the right to regulate and create online casinos.¹⁶

In 2002, the chairman of the Nevada Gaming Control Board sent a letter to the Department of Justice (DOJ) to inquire into whether federal law would allow Nevada to legalize Internet gambling within its jurisdiction.¹⁷Assistant Attorney General Michael Chertoff replied that Nevada regulators could not allow "interactive gaming" from outside the state under current federal law.¹⁸

Chertoff's letter interpreted federal law to prohibit all types of Internet gambling.¹⁹Under this interpretation, the DOJ would presumably find any type of Internet gambling illegal even if both the state where the bettor originated and the state that operated the online casino had legalized Internet gambling.

The federal laws that govern gambling were passed by Congress pursuant to its Commerce Clause power.²⁰There is no question whether the regulation of gambling, especially Internet gambling, is within the scope of Congress's power.²¹The ultimate issue is whether Congress should use its Commerce Clause power to regulate Internet gambling irrespective of the needs and wants of the individual states. This Comment argues that the only way to deal effectively with Internet gambling is for the federal government to respect and, if necessary, enforce individual state policies.

Part I provides an overview of state and federal law governing Internet gambling. Rather than providing a comprehensive analysis of the law in all fifty states, this Comment will categorize the various approaches states have taken to Internet gambling. Part I will also discuss four federal laws and their applicability to Internet gambling: the Wire Act,²²Travel Act,²³Illegal

Gambling Business Act,²⁴and the Unlawful Internet Gambling Enforcement

Act of 2006.²⁵

Part II focuses on the social and economic harms commonly associated with gambling. The discussion will focus on how and to what extent Internet gambling either alleviates or aggravates these harms. Furthermore, this Part will argue that effective state tax policy may offset any negative costs associated with Internet gambling.

Part III discusses the various attempts by lawmakers to take a heavy- handed approach to regulation in other areas of quasi-illegal activity. This Part argues that Congress should not make the same mistakes in the Internet gambling context as it made trying to regulate Internet pornography. Specifically, Congress should avoid a "one-size-fits-all" approach to Internet gambling regulation.

Part IV deals with the hurdles both state governments and the federal government face when trying to curb Internet gambling. This Part focuses on the difficulties these governments have encountered when trying to enforce their existing laws with Internet technology.

This Comment ultimately concludes that the federal government should allow each state to decide whether to ban or regulate online gaming.

I. OVERVIEW OF STATE AND FEDERAL LAW

A. Various State Approaches

Gambling has traditionally been an activity regulated by the states.²⁶

Antigambling laws were common in early America when gambling was "a topic that could not be mentioned in polite society."²⁷As the law developed, the states took various approaches to regulating gambling. Some states prohibit all forms of gambling while others allow land-based casinos to offer all types of different games.²⁸State regulation falls into four broad categories:

(1) Absolute prohibition: No games of chance allowed.

(2) State-run or state-sponsored gambling: Lotteries, raffles, and other games run by the state.

(3) Nontraditional forms of gambling: Horse racing, bingo, and other games that do not involve a "house."

(4) All forms of gambling: Land-based casinos, sportsbooks, and more.

Only two states fall into the first category of absolute prohibition: Utah and

Hawaii.²⁹Utah's ban on all forms of gambling is codified in its Constitution.³⁰

Utah's statutes are also very clear that regardless of whether the participant is the bettor or the "house," any gambling-related activity is illegal under State law.³¹Hawaii's statutes are less clear as they seem to apply only to those who engage in "promoting gambling."³²A literal reading of the statutes banning gambling in these two states shows that any Internet-based gambling is prohibited.³³

The second category includes more states than the first. Tennessee, until recently a resident of the first category, moved into the second category at the turn of the century.³⁴In 2001, an amendment to the Tennessee Constitution allowed the legislature to authorize a state lottery.³⁵The voters approved the amendment in November 2002.³⁶The constitutional amendment specifically allocates the net proceeds from the lottery to school-related projects.³⁷In total, approximately forty states have a lottery.³⁸There is some speculation that the prevalence of state lotteries is due in large part to the notion that it is a

"painless tax."³⁹

The third category includes states that have lotteries and other forms of gambling. For example, Massachusetts has legalized dog and horse racing.⁴⁰

Massachusetts' state lottery contains many games under the umbrella of lottery. These games include "statewide lotteries, scratch tickets, pull-tabs, beano, raffles by certain organizations, and keno."⁴¹New York also fits into this third category. New York has legalized state lotteries and certain types of pari-mutuel betting on horse races⁴²and local games of chance.⁴³With the exception of these types of games, betting or gambling is illegal in New York.⁴⁴

The fourth category includes states that one normally associates with gambling, such as Nevada and New Jersey. Nevada has many traditional brick-and-mortar casinos,⁴⁵a reality that is in line with its state public policy: "[The] gaming industry is vitally important to the economy of the state and the general welfare of the inhabitants."⁴⁶Nevada is concerned with the strict regulation of the gaming industry to ensure that "public confidence and trust" is maintained.⁴⁷In New Jersey, land-based casinos are allowed only in Atlantic City.⁴⁸New Jersey also allows state lotteries, horse racing, and bingo.⁴⁹To legalize additional games of chance, a voter referendum is required.⁵⁰

The number of states in each category shows that the states have different approaches to the legalization of gambling. Some states only allow a few games, whereas others, like Nevada, legalize almost every form of gambling. The disparity in treatment of land-based casinos indicates that a demand exists for states to choose how to regulate Internet casinos individually.

B. The Federal Regime

Despite this demand, the federal government clearly interprets its laws to outlaw all forms of online gambling within the United States.⁵¹Online casinos operated by a U.S. citizen are contrary to the laws of the United States as well.⁵²However, it is equally clear that an individual bettor cannot be prosecuted for gambling on an offshore casino under federal law.⁵³Before the Unlawful Internet Gambling Enforcement Act of 2006, the federal laws banning most forms of gambling were enacted as part of a regime to deter organized crime.⁵⁴However, the organized crime rationale does not apply today.⁵⁵In fact, by 1976 the influence of organized crime on the gambling industry was "significantly reduced" because of the influx of legitimate corporate investors and the efficacy of federal regulation.⁵⁶To understand the organized crime rationale for, and the reach of, federal law, this section will focus on the four main laws that are applicable to Internet gambling: the Wire Act, the Travel Act, the Illegal Gambling Business Act, and the Unlawful Internet Gambling Enforcement Act.

1. The Wire Act

The Wire Act, enacted in 1961, prohibits gamblers from using a wire communication facility to receive bets or to send gambling information.⁵⁷Two elements must be present for a violation of...