Detailed Legal Analysis of Reid Internet Poker Bill

Stu Hoegner, our resident international gaming attorney here at Pokerati – a.k.a. @GamingCounsel as he is well-followed on Twitter – has located a copy of a document that has been widely requested by our readers in the past 24 hours.

Check it out -> Las Vegas Review Journal has placed the following draft copy of the Reid Internet Poker Bill on the web.

Hold on to your legal hats … here\’s Stu\’s detailed analysis of this draft copy of Reid\’s bill.

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This post is based on one version of the Reid bill that is circulating. There may be others.

The top-line provisions of the Prohibition of Internet Gambling, Internet Poker Regulation and UIGEA Enforcement Act (the \”Bill\”) are as follows. This is not an exhaustive analysis – it\’s too soon for that and the participation of many others in that kind of exercise is required (and salutary).

1. Findings

The Bill acknowledges that Internet gambling has continued to flourish since adoption of the Unlawful Internet Gambling Enforcement Act (UIGEA) and that the UIGEA has been unable to stop operators from offering sports wagering and other forms of gambling. The Bill goes on to affirm the longstanding federal policy against interstate gaming on professional, scholastic, or amateur sporting events.

In the Bill, Congress finds that poker enjoys a long history and cultural tradition in the US. The Bill states that in the long run the outcome of poker is influenced by the skill of the participants and it distinguishes house-banked games (where wagers are made against a casino) from poker (where wagers are made between and among the participants).

The Findings section of the Bill clearly sets the stage for the licensing of Internet poker only, and the Bill goes on to do just that.

Congress also finds that a new federal Internet poker market \”should be regulated by entities that have an established track record of providing a well regulated gaming market to American consumers\” and \”should be limited to service should be limited, at least initially, to service providers that have an established track record of complying with a strict regulatory environment, have an established track record of providing fair games to consumers, and have significant goodwill and assets at stake, in addition to their Internet poker assets, to ensure they will comply strictly with the new regulatory regime.\”

Notwithstanding that the World Trade Organization decisions in the US-Antigua and Barbuda dispute are \”erroneous,\” the Bill asserts that the US should \”conclude\” the dispute in an orderly and expeditious fashion that respects World Trade Organization rules and the federal and State prerogative to restrict and control wagering on sporting events and games of chance.

2. Definitions

Some of the more important definitions in the Bill are set out below.

\”Bet or wager\” as used in the Bill has the same definition as under 31 U.S.C. §5362(1) (i.e., UIGEA) but excludes bets or wagers under the Interstate Horseracing Act of 1978, bets or wagers that are intratribal transactions, and bets or wagers that are a chance to win a lottery or other game authorized by a state or a tribe that is an intrastate transaction as described under UIGEA.

We have a definition of poker in the Bill. \”Poker\” means any of several card games in which success over the long run is influenced by the skill of the player and

(A) that is commonly referred to as poker;

(B) that is played by 2 or more people who bet or wager against each other on cards dealt to them out of a common deck of cards

i. including games using community cards that any player may use to make his or her hand, and

ii. including games using electronic devices that simulate a deck of cards;

(C) in which players compete against each other and not against the person operating the game;

(D) in which bets or wagers of one player are often designed to affect the decision of another player in the game; and

(E) in which the person operating the game may assess a commission fee or any other type of fee.

Poker also includes poker tournaments in which players pay a fee to play against each other, including tournaments where the licensee guarantees a minimum tournament pot.

As a threshold matter, poker must be a card game where success over the long run is influenced by skill. This is an interesting definition that will generate a lot of discussion. How long is the long run and how many hands does it contain? How much skill need be involved if the skill of the player must merely \”influence\” success? Provided any particular iteration of poker that\’s out there (and there are many) meet these various tests, it should qualify.

An \”Internet poker facility\” means an \”Internet gaming facility\” (also defined) that provides bets or wagers only with respect to a game, hand, tournament, or other contest of poker. Only persons operating Internet poker facilities under a license issued by a Qualified Body (see below) may be licensees under the Bill.

A \”Qualified Body\” means a State or tribal regulatory body that has been qualified by the Secretary of Commerce as provided in of section 8202(c) of the Bill (including entities qualified as a matter of law under subsection (c)(1)). This part of the Bill automatically qualifies state and tribal agencies as bodies qualified to grant licences that, among other things: currently regulate casino gaming and have done so for 5 years preceding the date of enactment of the Bill; have regulated casino gaming facilities involving gross gaming revenue of at least 5% of the total US casino gaming revenue for at least 3 out of the last 5 years preceding enactment of the Bill; are in states or on Indian lands that are opted in under section 8204 of the Bill (see below). Those not automatically qualified under section 8202(c)(1) can apply to the Secretary of Commerce for designation as a Qualified Body.

Finally, a \”Significant Vendor\” means an individual or entity that, with respect to a licensee or applicant under the Bill:

(A) knowingly manages, administers, or controls bets or wagers that are initiated, received, or otherwise made within the United States;

(B) knowingly manages, administers, or controls the games with which such bets or wagers are associated;

(C) develops, maintains, operates, the software, other system programs or hardware on which the games or the bets or wagers are managed, administered or controlled;

(D) provides the trademarks, trade names, service marks, or similar intellectual property under which the licensee identifies its Internet Poker Facility to its customers in the United States;

(E) provides any products, services, or assets and is paid a percentage of gaming revenue by the licensee in order to do so; or,

(F) with respect to an applicant, proposes to provide any of the activities, services or items identified in (A)-(E), above.

3. Regulatory Regime

The Secretary of Commerce (not the Treasury Secretary, as under the Frank bill) is charged with establishing the Office of Internet Poker Oversight (OIPO) \”with sufficient resources to exercise the functions set out in this chapter, to be led by a person with demonstrated experience and expertise in regulating gaming activities. Among other things, the OIPO can issue licenses to and regulate the provision of Internet poker services by Indian tribes, exercise oversight over regulatory bodies, and issue regulations concerning minimum standards.

The Bill makes it \”unlawful for a person to operate an Internet gaming facility in interstate or foreign commerce in which bets or wagers are knowingly initiated, received, or otherwise made by persons located in the United States without a license in good standing issued to such person by a Qualified Body pursuant to this chapter.\” On top of any other federal or state penalties, the Bill provides for punishment associated with breaching this section of a fine under Title 18 (generally, Crimes and Criminal Procedure), imprisonment for not more than 2 years, or both. Qualified Bodies are limited to issuing licences to provide Internet poker facilities. No other federal regulatory framework other than with respect to poker is being established by the Bill.

Licensees may not accept bets or wagers from persons located outside of the US and may offer play only in games and tournaments involving exclusively persons located in the US, but nothing prevents a licensee and its affiliates from operating an Internet gaming facility separate from the entity licensed under the Bill that accepts bets or wagers from people located outside of the US provided there is no comingling of players with the Internet gaming facility licensed under the Bill.

4. Current International Operators

Under section 8202(e)(1)(B), an applicant that:

(i) at any time before applying for a license was a person that owned (in whole or in significant part) an Internet gaming facility or an entity that operated an Internet gaming facility, that accepted bets or wagers from US residents and knew that the bets or wagers involved US residents;

(ii) was a significant vendor with respect to the bets or wagers from US residents for a person identified in subparagraph (i), above, and acted with knowledge of the fact that such bets or wagers involved US residents;

(iii) is a person that purchased or acquired, in whole or in significant part, a person identified in subparagraph (i) or (ii), above, or the assets, in whole or in part, of such person; or,

(iv) will use as a significant vendor a person identified in subparagraphs (i) through (iii), above,

may still apply for licensure but must apply only with a Qualified Body that is deemed to be a Qualified Body under section 8202(c)(1), i.e., with a Qualified Body that has the designation as a matter of law and without the body making an application to become a Qualified Body.

The remainder of section 8202(e) and section 8202(f) set out license materials required to be filed and standards for licensure, respectively.

Critically, however, there is an attempt to inject a 2-year blackout period for current international operators under section 8202(h) of the Bill. This provision sets out that, for 2 years from the date of the first license issued under the Bill, Qualified Bodies may issue license only to:

(A) an applicant that owns or controls a company that has operated a casino gaming facility or a qualified race track for at least 5 years prior to the date of enactment of the Bill;

(B) an applicant that is owned or controlled by a person that owns or controls a company that has operated a casino gaming facility or a qualified race track for at least 5 years prior to the date of enactment of the Bill; or,

(C) an applicant that, for at least 5 years prior to the date of enactment of the Bill, has manufactured and supplied slot machines to casino gaming facilities.

Furthermore, under the Orderly Transition provisions, no Qualified Body may issue a license under the Act until at least 15 months after enactment, so the very first possible (and at this stage hypothetical) opportunity for licensure of a currently US-facing poker operator is 39 months post-enactment.

Even after the 2-year blackout set out in section 8202(h), in order to expand the range of licensees, the Commerce Secretary must make a determination, after a full notice and comment process, that such an expansion will not significantly increase the risk that the requirements of section 8202(i)(1)-(10) (addressing consumer protection, underage gaming prohibitions, and tax compliance, among others) will not be met.

This is clearly aimed at international interactive gaming operators (whether poker sites or poker and other sites) that are US-facing. On its face, operators such as UB, Doyle\’s Room, PokerStars, and FullTiltPoker will be subject to the blackout. However, the door appears to be left open to the acquisition of US-facing sites (either through share acquisitions or asset purchases) by current US land-based gaming interests who could then become licensed by one or more Qualified Bodies. The mergers and acquisitions could presumably also take a number of forms, from outright sales to joint ventures to licensing deals, all subject to the scrutiny of the licensing process.

5. State Opt-In/Opt-Out

Section 8204(a) generally provides that Internet poker licensed under the Bill is lawful throughout the US \”except in States, Indian lands, and territories that have not opted in or have opted out, as the case may be, under this section.\”

Basically, any of the 15 states identified in section 101(7) of the Bill as permitting licensed commercial gaming or, at a minimum, poker (i.e., California, Colorado, Delaware, Florida, Iowa, Kansas, Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, and West Virginia) can opt out of the regime under the Bill by notice from the governor of such state that the state is opting out. That is, under the opt out, the provisions of the Bill would not apply to that state and Internet poker regulation would be up to that state.

Any of the other 35 states (i.e., Alabama, Alaska, Arizona, Arkansas, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Montana, Nebraska, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming) must affirmatively opt into the Bill\’s regime to have it apply in that state.

6. Indian Tribes

Any state prohibition under paragraphs 8204(b)(1) or (2) of bets and wagers authorized under the Bill shall not apply to the acceptance of a licensee of bets or wagers from persons located within the tribal lands of an Indian tribe that either: (A) elects or is deemed to participate pursuant to subsection (b) of 8204(1)(b) (the opt-in/opt-out provisions for the States); or, (B) would be entitled pursuant to other applicable law to permit such bets or wagers to be initiated and received within its territory without use of the Internet.

Subject to section 8202(b) (see above), no provision of the Bill shall have any effect on non-Internet gaming activities within the scope of the Indian Gaming Regulatory Act (IGRA), and tribal operation of Internet poker facilities under the Bill is not to impact a tribe\’s status or category or class under IGRA.

7. Unlicensed Internet Gaming Enterprises

Within 120 days of the enactment of the Bill, the Director of the Financial Crimes Enforcement Network is to submit to the Treasury Secretary a list of unlicensed Internet gaming enterprises and is to regularly update that list thereafter. The list is supposed to include: all known Internet website addresses of the enterprise; the names of any individuals conducting, financing, managing, supervising, directing, or owning a part or all of that enterprise; and, information identifying the financial agents and account numbers of the enterprise.

The Treasury Secretary is then to make a copy of certain information available on the Treasury Department\’s website and to others involved in relevant compliance activities. The remainder of section 5368 sets out procedures for investigations and for requests to add to the list by any \”federal, State, tribal, or local law enforcement official, any affected sports organization, any person directly harmed by unlicensed Internet gaming, any financial transaction provider, and any interactive computer service.\”

This formalizes and ups the game of the US government somewhat with respect to enforcing a ban on unlicensed Internet gaming, although agencies of the US government have been engaged in similar enforcement procedures for some time.

8. Licensing Fees & Costs

A licensee under the Bill is required to pay not later than 15 days after the end of each calendar month an Internet poker license fee equal to 20% of the licensee\’s Internet poker deposit receipts for that calendar month.

Furthermore, the cost of administration with respect to applicants and licensees, including costs of reviews and examinations, is to be borne by the applicants and licensees themselves; the administrative provisions of this Bill are supposed to be self-funding.

9. Conclusion

The Bill has many provisions that a number of parties may welcome, including several states and native gaming interests. Also, offshore operators have, at least conceptually, a path to becoming regulated in the United States. It\’s too soon to say where the Bill will go from here, but this is clearly an interesting and important step towards regulation of Internet poker in the US, whether it passes in the next few weeks or not.