Every week, I receive emails and phone calls from operators, reporters, and particularly entrepreneurs – individuals to large companies – wondering whether a new Internet idea is legal.
Auctions are particularly big at the moment, but these aren’t your grandfathers’ auctions.
Creative, non-traditional markets are blooming, sometimes having very little to do with stocks, bonds and commodities.
Inventors are developing more and better skill contests.
And no-purchase necessary games.
And variations on fantasy sports.
There are other important legal issues that have to be examined. For example, something that operates like a public exchange, with participants buying and selling predictions or whatever, might run afoul of the many restrictions on trading in securities.
But the reason they contact me is that they want to know: “Is it gambling?” And, if it is, what can we do to make it legal, that is, make it not gambling.
Traditionally, any analysis started with examining whether all three elements of gambling are present: prize, chance and consideration.
But recent developments, including, ironically, a statute that was supposed to kill Internet gaming, the Unlawful Internet Gambling Enforcement Act (“UIGEA”), has created new opportunities for risk-seekers.
Take fantasy sports. What started as rotisserie football has developed into a multi-billion dollar industry, primarily due to the UIGEA.
American law allows the individual states and the federal government to create their own standards for what constitutes a contest of skill as opposed to a game of chance.
So, conservative game developer’s gaming lawyers would have to research more than 51 sets of law, if they wanted to include the District of Columbia, Puerto Rico and other American possessions.
Although most American jurisdictions agree that the standard is predominantly skill, some try to regulate or prohibit games with “substantial” or even “any” chance. And while all courts would agree that predicting whether the next play is gambling, some judge-made tests will not even recognize the skill required to analyze an entire season of sports games.
As an additional complication, the federal Wire Act prohibits sending sports bets across state lines, even if the gambling is legal under state law.
To get around these restrictions, developers turned to eliminating other elements of gambling. The legal term “consideration” derives from the law of contracts, which means any detriment to one party to an agreement, or benefit to the other party. But, for gambling, the days of finding consideration in a player filling out a form or visiting a retailer are gone. Just about everyone, today, agrees that if a game does not require money to participate there is no consideration.
A little more complicated, most jurisdictions find no consideration even if the overwhelming majority of players do spend money to enter. No-purchase-necessary sweepstakes have flourished because they work, people really do buy more hamburgers if they get a free entry to a drawing with each purchase. And they work legally if anyone can enter with a free alternative means of entry and is treated with equal dignity, meaning they have exactly the same chances of winning as paying customers.
The third element, prize, is the easiest to eliminate in theory, but used to be the most difficult in practice. After all, who would pay to enter a game of chance where winners win nothing? But the growth of social games, with millions of players paying to win only bragging rights or fancy avatars, have astounded and enticed the gambling industry. Everyone wants to be the next Zynga
The UIGEA introduced a wild card into the mix. Rammed through by the right-wing religious Republican, then-leader of the U.S. Senate, Bill Frist (R.-TN), the law contains express exemptions for such things as intra-state and inter-tribal gambling. And fantasy sports.
Technically the exemptions apply only to this particular federal statute and would not overrule the Wire Act, let alone any state law. But everyone, including law enforcement, sees the UIGEA as expressing the will of Congress. The Obama Department of Justice (“DoJ”) has let state lawmakers know, informally, that it won’t interfere if a state wants to legalize purely intra-state poker, even if the computer lines happen to cross through a neighboring state. And for fantasy sports, prosecutors and regulators seem relieved to act like there is now a short checklist to determine whether a game is legal or not.
As icing on the cake, the UIGEA called for regulations to be issued by the Federal Reserve Board and Treasury, in consultation with the DoJ. These went into effect on June 1, 2010. They allow banks and other payment processors to accept online gaming operators as patrons, if the operators have “reasoned legal opinions” from lawyers, explaining why the Internet gambling transactions are legal.
So, in practice, a safe harbor has developed for sophisticated fantasy sports operators, and their gaming lawyers. And the UIGEA does not limit the exemption for fantasy sports to sports.
The most interesting question I received along these lines was whether it would be possible to created fantasy teams for poker tournaments, and whether a person could be on his own fantasy team.
Technology has opened the door to other ideas, that may, or may not, be gambling. Trading in commodities and other securities was considered gambling until the dawn of the 20th century. Federal laws first passed during the Great Depression expressly preempted state anti-gambling laws, for securities traded on listed U.S. exchanges. The birth of new markets, in such things as elections, currencies and fictional companies, has led to a renewed interest by regulators in these ancient laws.
Insurance, also, was considered gambling. That is one reason why you cannot take out a policy on the life of a person you do not know – plus, lawmakers are afraid you might do something to increase your chances of collecting.
Entrepreneurs have come up with innovative variations on insurance, all designed to allow individuals to pay small amounts to protect much larger investments. These include policies to refund expensive tickets of final playoff games, if the buyer’s teams is knocked out of the running, to compensating students monetarily if they are forced to withdraw from college.
It is only a small twist to convert these into money-making plans. How about allowing fans to pay small amounts way in advance for very expensive playoff tickets, good only if their team makes the playoffs? Or rewarding students with large payoffs in cash if they achieve straight A’s?
Are these forms of gambling?
Online auctions have evolved far beyond eBay. Many sites today allow participants to obtain expensive goods and services for a fraction of their retail costs, if they have the winning, unique bid, high or low. The sites are extremely profitable, because participants have to pay a small fee for each bid they make. The psychological impact of sunk costs can be so great, that many people find they can’t walk away and write off the money they spent on losing bids.
Do these violate anti-gambling laws? Some gaming lawyers analyze these online auctions in the traditional terms of prize, chance and consideration. Certainly, anyone who gets something cheap has won a prize of value, and all bidders are paying for the chance to win. But is the outcome determined by skill?
There is no random number of generator. But participants also have no control over what other participants are going to do, and often little or no information even on how many other people are bidding them.
But that is true in conventional, land-based auctions as well.
So the correct question may be, not “Is it gambling?” but “Is it legally an auction?”
After all, there are many forms of gambling, or what used to be considered gambling, that are now perfectly legal.
And a smart gaming lawyer will know that changes in the law and technology have changes the questions they must ask, and answer.
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© Copyright 2010. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.
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