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Are Internet Gambling Businesses Illegal?:
The Internet gambling giant PartyGaming went public in London this week, and the IPO was a big success. The current stock price values the company in the neighborhood of $10 billion. PartyGaming is an odd company, at least in a geographic sense. It is based in Gibraltar and went public in London, even though most of its customers are in the United States. The reason the company isn't based in the United States is pretty simple: the business may very well be illegal under U.S. law. Indeed, it turns out that the legality of most Internet gambling businesses under U.S. law hinges on an interesting and unsettled question of statutory interpretation.

  First, a bit of background. Most gambling law in the United States is state law. Each state gets to decide whether gambling is legal or illegal within that state. Nevada can legalize most gambling, and other states can ban it outright. The result is a patchwork of state laws, and it means that at least in theory, the basic answer to whether Internet gambling is illegal turns out to be mostly a question of state law. In practice, however, states have relatively little means of regulating online gambling. Their powers to investigate activity beyond the geographic confines of their states is quite limited, and efforts to regulate gambling activities outside their boundaries are likely to run into legal problems under the dormant commerce clause. So while state laws regulate Internet gambling in form, it's the federal laws that matter more in the real world. (A possible exception is New York law, as New York state AG Eliot Spitzer has been interested in this issue for a while now.)

  The primary federal gambling law is the Wire Act, 18 U.S.C. 1084, which states:
  (a) Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of 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, shall be fined under this title or imprisoned not more than two years, or both.
  (b) Nothing in this section shall be construed to prevent the transmission in interstate or foreign commerce of information for use in news reporting of sporting events or contests, or for the transmission of information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal into a State or foreign country in which such betting is legal.
  The general regulatory strategy behind the Wire Act is to regulate only the business of betting, not betting itself, and to provide an exception when a wire communication is used between between two jurisdictions where that betting is legal.

  Notably, however, the text of the Act is ambiguous in an important way. We can break down the three prohibitions in 18 U.S.C. 1084(a) as follows:
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility
  [1] for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or
  [2] for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or
  [3] for information assisting in the placing of bets or wagers.
  Here's the question: Should the limitation "on any sporting event or contest" in [1] be read to extend to prohibitions [2] and [3] above, or is it limited only to [1]? If the former, then the law only prohibits sports betting businesses, and Internet sites that offer poker and other casino games do not violate federal law. If the latter, then the law generally prohibits Internet gambling businesses of all types because the prohibitions in [2] and [3] are general to "bets and wagers" rather than specific to bets and wagers on sporting events.

  So which interpretation is correct? A district court in the Fifth Circuit concluded that the former interpretation is correct in a civil case brought by gamblers against credit card companies for facilitating their Internet gambling practices. On appeal, the Fifth Circuit agreed, albeit only in a very cursory analysis:
The district court concluded that the Wire Act concerns gambling on sporting events or contests and that the Plaintiffs had failed to allege that they had engaged in internet sports gambling. [FN20 — In re MasterCard, 132 F.Supp.2d at 480 ("[A] plain reading of the statutory language [of the Wire Act] clearly requires that the object of the gambling be a sporting event or contest.").] We agree with the district court's statutory interpretation, its reading of the relevant case law, its summary of the relevant legislative history, and its conclusion.
In re Mastercard International, 313 F.3d 257, 262 (5th Cir. 2002).

  Why doesn't that settle the matter? Because the Justice Department looks at this differently. DOJ believes that the Wire Act does not only regulate sports betting, but also regulates Internet gambling more generally. In other words, DOJ reads the limitation of [1] as applying only to [1], and not extending to [2] and [3]. Because the Wire Act is a criminal statute, DOJ can bring a criminal prosecution outside of the Fifth Circuit for running an Internet gambling site and it won't be settled whether DOJ or the Fifth Circuit's interpretation applies until the appeals are settled years later.

  PartyGaming's response to this uncertainty is to acknowledge both the potential illegality of its operation in and the difficulty of enforcing those laws so long as PartyGaming keeps its key players and assets outside the United States. From a press report:
[I]n its offering documents, PartyGaming makes no secret of the fact that even if the company's view of the law proves wrong, it is banking on its executives' belief that there is little that law enforcement can do - or will do - to prosecute. "In many countries, including the United States, the group's activities are considered to be illegal by the relevant authorities," PartyGaming says in its offering document. "PartyGaming and its directors rely on the apparent unwillingness or inability of regulators generally to bring actions against businesses with no physical presence in the country concerned."
  No doubt they are also relying on the possibility that Congress will change the law in the future and make clear that their service is not illegal — something that a $10 billion publicly-traded company can try to bring about more effectively than a secretive group operating out of a closet in Antigua.

  UPDATE: More from Christine Hurt.
mkl:
Party Gaming are very well served by the current uncertainty over their status. Should Congress make internet gambling clearly legal, they would likely face well-heeled and well-positioned domestic competitors (eg Yahoo) and a significant tax and regulatory burden comparable to domestic casinos. They and their shareholders are making a good bet that Congress is unlikely to act to clarify the legality of their business in either direction.
6.29.2005 1:25pm
Anonymous:
The other interesting question under the Wire Act is whether professional gamblers, ie, those who make their living from placing bets on the internet (and live in a state where gambling is illegal) are criminally liable under the Act. This debate has gone back and forth for some time, but prosecutors have been skeptical about bringing charges. Senator Kyl has long attempted to close this potential loophole (as well as the one Professor Kerr notes) with the Internet Gambling Prohibition Act. There are tax consequences here as well, since individuals are far less likely to report income that may have been procured illegally.
6.29.2005 1:26pm
David M. Nieporent (www):
Don't I recall a relatively recent WTO decision which is relevant here? If I recall correctly, Antigua filed a complaint, and the WTO said that while the U.S. could regulate gambling, it couldn't discriminate against foreign gambling operations.
6.29.2005 2:02pm
JF (mail):
I'm sure others can answer these questions:
(1) What is the "business" of gambling? Does it mean that if I call my mother in Reno and ask her to make a legal (in Reno) bet on a sporting contest and we settle up later, without her taking a fee, that she is not in the "business" of gambling and thus we haven't violated the Wire Act?
(2) Why isn't poker a "contest?" or, if you parse the sentence that way, a "sporting ... contest?"
6.29.2005 4:30pm
Bob Woolley:
Ah, my favorite subject--internet poker. I can't get enough.

Speculate, if you please: Would the corporation (and/or its chief officers) have standing to seek a declaratory judgment on the meaning of the statute? They certainly have the DOJ on record as threatening prosecution, at least in general terms. They might reasonably claim fear to set foot in the US because of the risk of arrest.

And if they could do so, would it be smart? Of course, the decision might go against them (though that seems unlikely), but they're apparently counting on being unreachable anyway, so a clear but adverse decision in advance of possible prosecution doesn't really hurt them.

The up side is that a favorable ruling would free them to broaden advertising, and expand to whatever part of the potential market is currently intimidated by fear of breaking the law.

As for Congress, doesn't it seem just as likely that it would amend the statute to explicitly *prohibit* internet gambling as to explicitly allow it?


Bob Woolley
6.29.2005 4:50pm