More than three centuries ago, Sir Isaac Newton pointed out that to every action there is always opposed an equal reaction. At the time, he was talking about physics, but he might well have been talking about gaming law too.
In gaming, the action (pardon the pun) consists of legislatures, regulators and casino operators. Working together, they ensure that games of chance available to the public are legitimate, regulated, fair, taxed and free of criminal influences.
Casino gaming in the U.S. is a very profitable, $40 billion-plus industry, and as President Trump can attest, building and operating a casino is a risky investment. It also isn’t cheap. State casino license fees can run as high as $50 million, and statutes or competition for a limited number of licenses in some states require investments of more than $1 billion just to get in the game. Once in, casino operators in some states can see more than half their gaming revenue go to state taxes and fees to offset costs incurred by host communities, while other businesses that invest less and employ fewer receive tax breaks as incentive to locate in those same communities. Likewise, casinos must continually invest in training their employees and developing the infrastructure and controls necessary to ensure that a casino and its patrons play by the rules.
The reaction is the innovation, creativity and, in some cases, opportunism of would-be operators—some well-meaning and others not so much—who want a piece of this industry, without, so to speak, anteing up. As gaming lawyers, we frequently receive calls from people who believe they have found a way to operate and profit from pay-to-play card games, lotteries, auctions, or even slot machines; either in their homes, private clubs, bars and restaurants, or over the Internet, outside of the jurisdiction of gaming regulators.
These “needle threaders” range from sophisticated, well-capitalized investors and entrepreneurs who seek and follow our advice (by changing or abandoning their plan when we explain that their proposals would violate the law) to scammers who know their games are illegal, intend to operate them anyway, and hope to obtain our legal opinion to use as a get-out-of-jail-free card when, inevitably, they are caught. Their “aha moments” usually stem from either straddling, blurring or eschewing the line between contests and gambling or cherry-picking clauses, phrases, or even a word or two from gaming statutes and ignoring contradictory provisions. In almost every instance, this search for the “Holy Gray” ends with a gaming lawyer explaining that the scheme won’t work, a court issuing an injunction, a law enforcement officer making an arrest, or a legislature passing a crystal clear law prohibiting the activity.
One of the most brazen examples of needle threading came in the form of the Internet Sweepstakes Café. In the mid-2000s, these pop-up casinos were ubiquitous in strip centers in Florida, North Carolina, Ohio and elsewhere. At the remaining Internet cafés, customers purchase for cash the use of an Internet-connected computer that happens to have casino games on it. Winnings are credited to a pre-paid phone card, which the customer exchange for cash. The proprietors claim to have threaded the needle by offering the pre-paid phone cards instead of cash. Not surprisingly, investigation revealed that many of these games were dishonest or provided payouts far below what regulated casinos pay.
Many state regulators and law enforcement agencies perceive these operations as illegal gambling, tax-evading and with no regulation to protect the public. In some states, they’ve been shut down and their proprietors, employees and even patrons have been arrested. Where state law was ambiguous, or where the needle threaders were particularly clever, states passed new laws—sometimes on an emergency basis—expressly outlawing the cafés.
In Florida, North Carolina, Ohio and others, an ongoing game of move/countermove pits Internet café owners, who are very good at adapting to the enforcement and regulatory environment, against the state authorities. Some Internet cafés have reinvented themselves as office service venues, adult arcade game venues or skill-based games in further attempts to circumvent the latest version of state gaming laws. One new entry has been vape shops in the Tidewater Virginia region, where players purchase vape oil for their e-cigarettes, then proceed to a back room where they play casino games on desktop computers. If they win, the store will buy back their oil at a premium. Sound familiar?
More sophisticated gray-area gambling schemes involve lotteries or other games of chance masquerading as online auctions, shopping sprees, or contests (including stock picking and predicting which movies will earn the most at the box office).
If one apple has defied gravity, it is perhaps daily fantasy sports (DFS). What began as a fun game played among friends has obviously become big business. Proponents have argued that DFS is a game of skill, or at least predominated by skill, and therefore not illegal gambling. Others, including most notably the Nevada Gaming Control Board and Broadway Joe Namath (in an interview included in a Last Week Tonight with John Oliver skit mocking DFS and those who enjoy it), have pronounced it gambling.
Many of the entrepreneurs who contact us cling to the success of DFS; their mantra is “if they can do it, so can we.” But can you? Have you conceived a game that is or will be so wildly popular that it will not require much to educate the public regarding its existence and how to play? Do you have the hundreds of millions of dollars of capital that DFS operators have spent initially challenging unfavorable state laws and then lobbying for favorable ones? Are you ready to withstand competition from regulated casinos that have multi-billion dollar investments to protect? Are you willing to operate in the red for years before possibly turning a profit? And, are you capable of operating in what will likely be a state-by-state patchwork of licensing laws that will impose varying requirements on your operations, require you and your key employees to submit to intrusive background investigations, tax your revenue and cost you significant sums for lawyers and other compliance professionals?
If your answer to any of these questions is no, then you probably should think twice about threading that needle.