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February-16-2010,
Tribal Groups are Biggest Obstacle to California Intrastate Gambling Network...By HARTLEY HENDERSON

For a few years now it has appeared that California was leading the way towards legalized online poker.

With California's budget deficit in excess of $200 billion the state has been desperate for new forms of revenue that didn't involve tax hikes. It seemed inevitable that the state would introduce an online poker network in an attempt to tackle their financial concerns. To date that still hasn't happened. So last week California began holding Senatorial meetings to discuss the viability of an online network and hear arguments for and against the proposal.

Representatives from Ladbrokes, Party Gaming and Paddy Power along with state spokespeople and tribal interests were present. The majority suggested that an online gambling network would thrive and estimates were bandied about that online poker could bring in up to $200 million a year in revenue to the state. Furthermore, it was suggested that any licensing fees that would be issued to run a poker network by the state would be the highest in the world. Attorney and gambling expert Martin Owens suggested that offshore gambling is generating over a billion dollars a year from California so that figure could even be higher.

For the longest time the concerns about online poker rested with the DOJ, which contended that any gambling on the internet (including horse racing) was illegal as far as they were concerned, but it appears that the DOJ's power in that area is limited. Today there are many online horse racing sites that operate throughout the United States and there is absolutely nothing the DOJ can do about it. Furthermore, it seems clear that the DOJ, under the current Democrat regime, isn?t as fixated with stopping online gambling as the DOJ under the former Republican regime was.

One issue that may raise concerns with the DOJ is that several other states are currently looking into online networks as well. These include Florida and New Jersey, and by law, any activity that is legal within 2 or more states is automatically legal between the states. Consequently, if an online poker network was legal in California and one was legal in New Jersey then constitutionally poker networks between California and New Jersey would also be legal, thereby legalizing interstate gambling.

This would not only raise the eyebrows of the DOJ, but also the country of Antigua, who was limited to a small amount of compensation for their suit against the U.S. since the WTO appellate courts only considered revenues from interstate horse racing in their ruling. If Interstate poker was legalized prior to the U.S. rewriting its commitments Antigua could ask for a new ruling.

Regardless, gambling expert Frank Catania from Catania Gaming Consultants wasn't overly concerned. "The DOJ has contended that as far as they are concerned all online gambling is illegal including horse racing, but there are numerous sites offering horse race betting online and the federal government has done nothing to prevent it." Besides that there could probably be ways to prohibit gambling between states online until that issue is resolved once and for all.

So in essence there is really nothing legally preventing an online gambling network since online gambling was given an exemption under the UIGEA and courts ruled long ago that the wire act only applies to sports betting.

The main stumbling block to a gambling network in California therefore isn't the DOJ, but rather the native tribes. In 1999 California issued licenses to tribes to run casinos in the state and as part of the agreement (known as compacts) they gave the tribes exclusive rights to any gambling that involved gaming devices like slot machines, roulette tables etc. In 2004 the tribes agreed to pay taxes to the state, and that compact is valid until 2030. The state did allow poker rooms to operate independently since they do not use devices per se but gambling that involved machines was solely the right of the tribes.

By most accounts the tribes are contributing around $350 million per year to state coffers through the casinos and have threatened to withhold paying the government their due if they go ahead with an online poker network. The state is contending that the compact doesn't include poker and was intended strictly for games of chance but the tribes are arguing that internet gambling involves gaming devices which is part of their domain. Leslie Lohse, the chairwoman of the California Tribal Business Alliance, told the committee that Internet gambling in any form was a clear violation of the compacts and that any violation of the agreement would result in the tribes stopping all payments to the state.

"If a state were to allow a non-Indian business to offer gambling devices, the compacts provide that the tribes will stop making those payments to the General Fund."

Lohse argued that the talk about poker and the internet were all red herrings intended to confuse the issue but that the definition of a gambling device was well laid out.

"A gaming device includes any electronic device that allows the individual to place a bet, play a game of chance or skill, and view notification of any winnings. It doesn't matter if the game is house banked or whether the winnings come from the bets made by the players - as in poker. It doesn't matter if it's Class II or Class III - those definitions do not apply. What matters when we talk about breaching the tribe's exclusive right to offer gaming devices is that the electronic device allows a player to connect to a system, make a bet, play the game and view his entitlement to the winnings. That includes a personal home computer in a private home."

Lohse also went on to argue that as far as they were concerned the current land based poker clubs are also failing to help the economy since they don't contribute anything to state coffers and in all fairness they should pay their due.

It should be noted that while Lohse was asked to speak on behalf of the tribes at the meeting, not all tribes are represented by one voice. The Pechanga tribe, for instance, insists that Internet poker would violate the guarantee of gaming exclusivity, but the Morongo tribe hold that exclusivity does not apply to poker. They are not a united bloc on the issue but many different interests, each considering what's best for them.

Not everyone is impressed with the arguments of Lohse, however, and Frank Catania believes the state should call their bluff. "If I were governor of California I'd tell the tribes that if they aren't going to pay their taxes then maybe we'll just legalize casinos to other interests." Of course taking that route could lead to bigger native rights issues which the state likely would hope to avoid.

California may be in a rush to get something decided soon, however for both financial and practical reasons. As mentioned earlier, Florida and New Jersey are preparing to start an online poker network and the advantage to being the first is immense.

In an article in The Sports Network, Martin Owens wrote the following "The advantages will be many for the first operator to crack a US market, and the system itself would become the keel of a multistage system that would inevitably- and rapidly- go nationwide. That means benefits for the first state to get its system up and running."

Owens noted that all states have opposition to the plan from interests who don't want competition - namely casinos, race tracks and the tribes. But the race tracks likely are more concerned about the right to offer their product online without impediment and the casinos believe there may be some opportunity if the poker network (being proposed by New Jersey) were to operate from servers within the casino. Florida has the least opposition but also has the least experience. In any case Owens would like to see the main licensee for a California poker network come from a process that maximizes revenues while limiting exposure. And more than likely this would exclude the tribes. In an article published in California Capitol Weekly Owens wrote:

"Choosing the in-state online poker Main Licensee should only be done through a competitive bid process, open to all experienced companies who are a) qualified to provide the secure services the state needs for this system and b) thoroughly vetted by the Attorney General's office. Most importantly, legislation should require that the system operator provide operational transparency, 24/7 access to all relevant State oversight agencies, while insuring California is reimbursed for all regulatory costs. The successful candidate would be one that can show a track record of profitability, honesty, flexibility and long-term financial strength, and then be ready to quickly roll out a custom product, tailored to California's needs."

It is almost certainly, for that reason, that EU based companies were present at the Senatorial meeting since they have experience in offering Internet poker and while many believe Pokerstars, Full Tilt Poker and others would likely be excluded from any bids since they accept U.S. customers, Frank Catania isn't convinced. "In an open process all bids would be considered." Furthermore Catania contends that at some point foreign operators would have to be considered for licensing at some point since if they don't accept foreign companies from being licensed the U.S. would still be inundated with companies taking bets but contributing nothing to government revenue.

The Senatorial meeting held in California last week was intended to generate debate and hear the pros and cons of the proposal. More hearings will be held in the future but it seems evident that as soon as California can work out an agreement with the tribes a poker network will follow shortly thereafter.

02-16-2010
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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