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August-07-2008,
California Intrastate Poker, the Topic on Everyone's Lips...By Hartley Henderson

The Next Generation in Gambling Conference, run by Clarion Gaming, concluded last Wednesday and the main topic of interest was California intrastate online poker. In February of this year Assemblyman Lloyd Levine introduced bill AB2026 which was designed to look at the legalization and implementation of online poker in the state of California. The bill is now on its way to the Senate Appropriations Committee, where if it passes it will then move to the full state Senate for a vote. On the surface the issue may seem somewhat inconsequential since intrastate gambling is not illegal in the U.S., but the DOJ has made the claim that all gambling that occurs online is interstate in nature and hence is illegal per the Wire Act and the UIGEA. California, however, seems determined to offer online poker as soon as the bill passes the senate, regardless of the DOJ's interpretation of the law. Therefore the DOJ will likely react as it did when Nevada, North Dakota and the Virgin Islands announced they were going to legalize intrastate online gambling and will shoot off a letter to the California state attorney asserting that the state is in violation of the Wire Act if it proceeds as planned. Unlike Nevada and North Dakota who backed down upon receiving the DOJ letter, California will not go away so easily. Earlier in the year, the 5th circuit court of appeals decided that the wire act is not applicable for non-sportsbetting, and the UIGEA, which seemed a formidable piece of legislation, still doesn't have final regulations written for it, making it just a paper tiger. So if the DOJ is going to use the UIGEA as a prosecution ploy, it is almost certain the courts will demand that the final UIGEA regulations be written, at which point the treasury most likely will simply announce the proposed regulations are final. If the final regulations are passed as they stand, it is clear that the banks (which have already said they can't implement them as they are proposed) will either refuse to comply or will take the government to court demanding a definition of illegal gambling so they know what transactions to block---something which the treasury and the DOJ clearly are not prepared or are unable to do. As well, California will demand declaratory judgment on whether or not the wire act is applicable to intrastate online non-sports wagering and will use the 5th circuit court's decision as a main defense.

According to Jim Tabilio, a spokesperson for Poker Players of America, California (unlike Nevada and North Dakota) has the political will to proceed and is prepared to fight the DOJ as much as they need to. Tabilio stated that California will likely use 3 arguments to affirm their rights. Along with the 5th circuit court's decision, California will likely argue that the fourth amendment gives states the constitutional power to run their own affairs in various areas, and that gambling has always been one of those areas (it will be difficult for the courts to deny states' rights simply because the activity is occurring online). As well, California will also likely argue that if the federal government is truly concerned about the legitimacy of games, underage betting and location of players (as the UIGEA requires for intrastate online wagering), the tools exist that would allow the state to address those issues, but only in a legal, regulated environment.

This is the wording of the relevant UIGEA section in question that requires states to ensure that underage gambling and location of players exist only in a specific state:

Intrastate transactions.--The term `unlawful Internet gambling' does not include placing, receiving, or otherwise transmitting a bet or wager where- ``(i) the bet or wager is initiated and received or otherwise made exclusively within a single State; ``(ii) the bet or wager and the method by which the bet or wager is initiated and received or otherwise made is expressly authorized by and placed in accordance with the laws of such State, and the State law or regulations include- ``(I) age and location verification requirements reasonably designed to block access to minors and persons located out of such State; and

``(II) appropriate data security standards to prevent unauthorized access by any person whose age and current location has not been verified in accordance with such State's law or regulations;

If California wins, as many lawyers and gaming experts expect they will, then almost certainly other states that have land based poker rooms will decide to offer intrastate online poker using the California decision as their green light to do so. Consequently, poker will exist online across the United States. According to trade lawyer Martin Owens, this is where the situation gets sticky. Owens has stated his opinion that the Wire Act 18 U.S.C. Section 1084(b) and the UIGEA 31 U.S.C. section 5362 (10)(B) imply that if gambling is legal in state A and the same gambling is legal in state B then gambling between state A and state B is also legal.

This is the wording of the appropriate sections of the 2 statutes.

Wire Act, 18 U.S.C. Section 1084 (b)

"(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.

Unlawful Internet Gambling Enforcement Act, in particular 31 U.S.C. section 5362 (10)(B)

`(B) INTRASTATE TRANSACTIONS- The term `unlawful Internet gambling' does not include placing, receiving, or otherwise transmitting a bet or wager where-- `(i) the bet or wager is initiated and received or otherwise made exclusively within a single State; (ii) the bet or wager and the method by which the bet or wager is initiated and received or otherwise made is expressly authorized by and placed in accordance with the laws of such State, and the State law

Naturally, if gambling is legal within certain states it will only be a matter of time before the other states realize there is more money to be made by offering true interstate games, creating networks similar to what is already being offered at the various online poker sites. After all, when horse racing realized they could make more money by allowing other states to bet into commingled pools they jumped at the opportunity.

If the above occurs then the UIGEA becomes effectively meaningless. Gambling for all intents and purposes will be occurring online between states in a manner concurrent with UIGEA requirements and there is absolutely nothing the DOJ can do. Don't forget, the UIGEA was a law signed in with fanfare by the President of the United States, so, as Martin Owens stated to me, "Even the wildest, most bloodthirsty fundamentalist neocon in the pack would not dare openly declare that the DOJ has veto power over existing law which has been signed by the President."

When interstate poker begins operating legally in the United States that will create an additional problem for the U.S. government. The award offered to Antigua by the WTO was the hypothetical amount that Antigua could have received if the U.S. allowed Americans to bet on horse racing from Antiguan companies. If poker is thrown into the mix the amount clearly becomes at least 10 fold, if not more, and no doubt Antigua will push for a new compensation amount. If indeed the amount becomes hundreds of millions in annual compensation, that represents a lot of CDs, DVDs and software that can be sold by the small island. But it's not just Antigua that will demand the trade agreement be reviewed again. EU trade commissioner Peter Mandelson now seems anxious to find a way out of the agreement they made with the U.S. which allows the USTR to change its commitments regarding remote gambling. Clearly many in Britain think they lost a lot more than they gained from opening markets in shipping and storage and want the U.S. gambling market reopened to the European Union. In fact the EU is now questioning the U.S. as to the real reasoning for their anti-gambling laws and are particularly upset about what they view as selective persecution of EU-based gambling operators. A meeting between the EU and the USTR on the topic was scheduled this week, but the U.S. has postponed it. Based on the wording of the request by the EU for the meeting, it seems clear that there was more to the agreement that the EU made with the United States than is known to the public when they agreed to allow the U.S. to rewrite its commitments, but the U.S. may be in some sort of violation of that agreement. Mandelson seemed to accept that the U.S. "made a mistake" when they allowed remote gambling in the original GATS agreement because the country found online gambling to be immoral. But if online poker all of a sudden was offered online throughout the U.S., Mandelson may be given a reason to change the agreement by claiming that if the U.S. really made a mistake they wouldn't be expanding remote gambling, and therefore the only reason for wanting to rewrite the commitments is protectionist. A spokesperson from the WTO seemed to concur as well, stating that "if the U.S. opens up more online gambling that does indeed become troublesome."

The U.S. federal government is therefore in a huge predicament, and its own laws that they thought would stop online gambling within the U.S. for all intents and purposes could be useless. The DOJ realistically can't challenge the higher courts if they side with California. And even if the DOJ decides to challenge the decision it may be an effort not worth making. In a few months there will be a new president, and whether Barak Obama or John McCain wins there will almost certainly be a new look to the Department of Justice. If Obama wins as expected the new DOJ will have a vastly different focus than the current department, and the new DOJ will likely focus on the enforceability of laws. Furthermore, it is widely accepted that the Republicans will likely take a beating in both the House and Senate elections, which will help push bills, such as the Frank or Wexler bills, which to date have been defeated down party lines.

So several at the conference seem to feel the following is likely to happen from now until December: California will pass the bill in the state senate and will announce their intentions to start online intrastate poker in 2009. The DOJ most likely will send a letter similar to the one previously mentioned, but neither it nor the California government will do anything further until the November vote, at which point both sides will decide how to procede. In the meantime companies like Harrah's, Caesars and possibly even some of the current poker software makers will start preparing for the explosion of online poker in the United States.

It's no wonder this issue was at the top of the agenda.

08-07-2007
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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