Unstacking the deck: the legalization of online poker.

Author:Romoser, James
 
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  1. INTRODUCTION

    As long as Americans have been playing poker, the government has tried to stop them. During the nineteenth century, when the game first became popular, legislatures tried to banish it, (1) but poker flourished anyway on the rough-and-tumble frontier. (2) Its evangelists were thieves and cheats; (3) its outposts were seedy saloons; (4) its sanctuaries were lavish riverboats that could leave their docks to evade the law of the land. (5)

    From these shadowy roots, a game evolved that embodies the American ethos, with its freewheeling individualism, its veneration of risk, and its capitalist system of keeping score. (6) Far from just a gambler's vice or a swindler's hustle, poker slowly straightened out--and as it did, it filtered upward into polite society. It has been enjoyed in the White House by the likes of Ulysses S. Grant, (7) Dwight Eisenhower, (8) Richard Nixon, (9) and Barack Obama. (10) For thirty-three years, Chief Justice William Rehnquist played in an elite monthly game. (11) Mark Twain was an avid card shark; (12) so is U.S. Olympian Michael Phelps. (13) And a young Bill Gates used poker winnings to help start up Microsoft. (14)

    Today, tens of millions of Americans play poker at casinos and around kitchen tables. (15) They also play on the Internet--the twenty-first century equivalent of the lawless frontier.

    Located offshore, walled off from U.S. regulation or taxation, the online poker industry emerged in 1998. (16) It began to boom in 2003, when an amateur player--prophetically named Chris Moneymaker--turned a $40 entry in an online tournament into a $2.5 million first prize in the world championship of poker. (17) His success inspired casual players to flock to poker web sites, and by 2011, more than two million Americans played online, with $20 billion at stake. (18)

    But online poker in the United States has always operated in a digital underworld, carefully calibrated to evade efforts by federal authorities to eradicate the industry. The federal crackdown began in earnest in 2006, when conservative lawmakers used legislative gamesmanship to criminalize some financial transactions related to Internet betting. (19) It culminated five years later, when the Department of Justice unleashed a flurry of criminal indictments and seized the domain names of the largest poker web sites operating in the United States. (20) The day of the indictments--April 15, 2011, known as Black Friday in the poker world--quashed the poker boom. (21) Still, a number of unregulated and unsavory foreign companies operate poker web sites in America to this day. (22)

    Given these prosecutorial actions, most American players might not realize that no federal law makes online poker illegal. Although the industry has lingered for years in a legal gray zone, two recent developments--a surprising reversal at the Department of Justice and a pivotal ruling in the Eastern District of New York--clarify the legal status of the game. Together, these developments under- mine the suppression of online poker under federal law. And they illuminate a clear path for federal or state lawmakers to shut down poker's online underworld by bringing the game into the light.

    This Note analyzes the current legal landscape of online poker and argues that a safe, well-regulated, and properly taxed regime of online poker is both feasible and desirable. Part II examines how state laws have traditionally treated poker as illegal gambling, despite mounting evidence that poker should be considered a game of skill, not a game of chance. Part III evaluates three federal statutes that potentially implicate online poker, and it explains how a recent Department of Justice opinion and a federal court case limit the reach of those statutes. Part IV proposes three potential paths for federal or state regulation of online poker and argues that a system of interstate compacts is the best way forward. Part V concludes.

  2. SKILL VERSUS LUCK: POKER AT THE STATE LEVEL

    Gambling policy is primarily a state concern. (23) Under the Tenth Amendment of the U.S. Constitution, states can use their police power to permit or prohibit various forms of gambling within their borders. (24) All states and the District of Columbia take advantage of this power, and their policies vary widely--from the gamblers' paradise of Nevada to its neighbor, Utah, one of only two states to ban all gambling. (25) In general, states criminalize gambling activities unless expressly authorized by statute, as in the case of state-run lotteries or state-regulated casinos. (26)

    In the vast majority of states, a common threshold inquiry determines whether a given activity constitutes "gambling" at all. (27) Simply put, if the activity involves risking money on a "game of chance," it is gambling. (28) But if the activity is considered a game of skill, gambling laws generally do not prohibit risking money on it. (29) Chess is the classic example of a purely skill-based game. (30) The polar opposite is a game like roulette, in which the outcome of a spinning wheel is subject solely to random chance.

    Of course, people risk money on all sorts of pursuits that involve a complicated mixture of skill and luck. To analyze betting games in which both skill and luck play a role, most states apply a "dominant factor" test. (31) Under this test, a court "asks whether chance dominates skill in determining the outcome of a game." (32) If chance is the dominant factor, then betting on the game is deemed impermissible gambling. (33) The dominant factor test has been applied to a motley line-up of gaming endeavors, including slot machines, raffles, archery, checkers, cockfighting, pinball--and poker. (34)

    Obviously, the game of poker involves a significant element of chance due to the random shuffle of the cards. In any single hand, a player might start with inferior cards but get lucky and end up the winner once all of the cards are dealt. Or the player might start with high-value cards and a strong probability to win the hand but take an unlucky "bad beat." (35) On occasion, the player might be dealt unbeatable cards, making it easy to win the hand no matter what the other players do. This inherent unpredictability is part of what makes poker fun.

    At the same time, it takes only a few minutes at a poker table to see that successful players, rather than passively waiting to hit a stroke of lucky cards, employ a variety of sophisticated skills at all stages of the game. These skills include patience and self-discipline; strategic, analytical thinking; the calculation of mathematical odds; the understanding of human psychology; the observation of opponents' betting patterns and other tendencies; and, of course, the art of deception. (36) Strong players use these skills to manipulate aspects of the game that are not determined by chance. One simple way they do this is by carefully choosing when to bluff at the pot, thereby allowing players to win hands despite being dealt weak cards. (37) A more complicated strategy some players employ is to use sophisticated principles of game theory to ensure that their opponents cannot exploit their play. (38)

    Few recreational poker players possess all of these skills, but a small percentage of players, after intense study of the game, hone them to a sheen. (39) And over the course of many hands, a player's eventual success (measured, of course, by the amount of money won or lost) is unquestionably correlated with that player's overall ability. (40) This phenomenon dramatically distinguishes poker from conventional gambling games, like roulette or slot machines or the lottery, where skill plays no role. (41)

    Despite the clear strategic features ingrained in the game of poker, state courts have generally found them insufficient to be considered the "dominant factor" in the game's outcome. (42) For instance, the North Carolina Court of Appeals acknowledged in 2007 that "a skilled player may give himself a statistical ad vantage" in poker, but held that chance predominates over skill because the means of winning any given hand of poker are not entirely under a player's control. (43) "No amount of skill," the court noted, "can change a deuce into an ace." (44) Similarly, in (2010), a Pennsylvania appellate court reversed a trial court's ruling that poker was not "unlawful gambling" under state law. (45) The appellate court held that chance predominates over skill despite the fact that "skill can determine the outcome in a poker game." (46) Although no published state court decision has applied the dominant factor test to online poker specifically, the reasoning that courts have historically used to evaluate in-person poker games would apply equally to online poker.

    Economist Steven Levitt--of Freakonomics fame--and two co-authors argue persuasively in a new paper that this reasoning is wrong. (47) State courts, they argue, consistently commit a series of logical and legal errors when applying the dominant factor test. (48) One key mistake courts make (a mistake that appears in the recent decisions from North Carolina and Pennsylvania) is the use of a single hand of play as the relevant frame of reference, even though poker is typically played in sessions that last hundreds of hands. (49) Analyzing the relative roles of skill and chance in poker by looking at a single hand is akin to comparing the relative skill of two golfers based on a single hole of golf. If a competent amateur golfer and a top professional golfer each played a single hole, the amateur might, out of luck, manage to finish the hole in fewer strokes. But if the two golfers competed in a standard four-round tournament (consisting of 72 holes), the pro would always defeat the amateur. That it takes a sufficient sample size for skill to become definitive does not mean that golf--or poker--is a game of chance. (50)

    A second flaw in many state court decisions on poker is that courts tend to allow a...

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