An Unknown Gamble

Online lottery games face an uncertain future in light of a recent Justice Department opinion.

An Unknown Gamble

August 2019   minute read

By: Darryl Nirenberg

On Monday, June 3, Paul Barbadoro, federal district court judge for the district of New Hampshire, rejected the Justice Department’s reversal of a 2011 legal opinion that had paved the way for the growth of online gambling—including gambling offered by a handful of state lotteries. The ruling is the latest development (but not the last) in the wrangling over the legality of internet lotteries and other gambling—an issue of concern because playing the lottery is an age-restricted activity best secured through face-to-face transactions.

Background

In 1961, Congress enacted the Federal Wire Act, criminalizing the use of interstate telecommunications for gambling. The bill was drafted to cover all forms of wagering because its authors were aware the wires were used by organized crime to conduct betting on sports, horse races and lotteries (commonly referred to as the “numbers racket”).

When the internet came into being, the Justice Department, viewing the internet as a form of interstate telecommunications, interpreted the Wire Act to cover internet gambling. Despite this interpretation, internet gambling proliferated in the late 1990s and early 2000s, leading Congress to enact the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which banned the use of U.S. financial instruments for all forms of internet gambling.

Around the same time, Illinois began considering privatizing its lottery and taking it online. The Department of Justice caught wind of these plans, and on May 5, 2005, sent a letter informing the Illinois lottery that “federal law prohibits internet gambling, including the purchase of lottery tickets over the internet.” In the letter, the DOJ made clear that online wagers would violate federal law even if they originated and were received in the same state and the transmission crosses state lines (as the internet inherently does).

Following the inauguration of President Barack Obama in 2009, Illinois (along with New York) approached the Department of Justice seeking a re-evaluation of the Department’s policy regarding application of the Wire Act to online gambling offered by lotteries. Two days before Christmas 2011, the department’s Office of Legal Counsel (OLC) issued an opinion contending the Wire Act covers sports wagering alone, reversing 50 years of interpretation of the law and opening the door for casino games and lotteries to be offered online.

Opinions issued by the OLC do not carry the force of law. They are simply interpretations to guide federal enforcement. The 2011 opinion was, in effect, the DOJ stating it would no longer enforce the Wire Act against online lotteries and casinos as long as they do not accept sports bets. The opinion did not shield lotteries or casino companies offering internet gambling from civil RICO (the Racketeer Influenced and Corrupt Organizations Act) or other lawsuits based on their violation of the Wire Act and other federal laws. Despite the legal uncertainties, the lotteries of seven states launched online activities in reliance on the 2011 opinion.

Online Lotteries Issues

Online lotteries typically offer more than the sale of lottery tickets. Many have products similar to online slot machines or scratch offs, which provide instant results. Online lotteries have been caught offering cartoon games with names such as “Snowman Raceway,” “Grumpy Cat,”  “Cats ‘N’ Dogs” and “A Dragon’s Story.”

The position of NACS on the sale of age-restricted products and services is that the only certain age verification is through a face-to-face transaction—a measure unavailable with online lotteries. For example, Pennsylvania’s lottery offers casino games online to youths between 18-21, even though state law bans gambling by anyone under 21. Pennsylvania’s age verification was reported to consist of simply checking a box stating one’s birthday.

The internet knows no state boundaries, opening the door for state lotteries to poach players from other states. (NACS staff was able to sign up and play an out-of-state lottery online.) It remains a question as to how vigorously a state can be expected to prevent its own lottery from selling tickets to residents of other states. State lotteries could lose online and retail outlet sales to residents attracted to larger online “payouts” offered by other states.

NACS believes the only certain age verification is through a face-to-face transaction—a measure unavailable with online lotteries.

Permitting lotteries to sell tickets or offer gaming online makes these lotteries direct sellers of gambling to individual consumers and puts them in direct competition with private entities such as convenience stores, grocery stores and brick-and-mortar casinos. Some states offer higher payout percentages for online play than they do for products sold in retail outlets.

A New Opinion

In January 2017, at Jeff Sessions’ confirmation hearing to become Attorney General, Senator Lindsay Graham (R-S.C.) asked about the department’s position on the Wire Act and secured from Sessions a commitment to have the 2011 opinion reviewed. That review was completed in November 2018, with the OLC issuing an opinion reversing the 2011 opinion and reaffirming the prior, longstanding DOJ position that the Wire Act covers all forms of gambling—sports and non-sports alike.

To give Justice Department lawyers and states time to adjust, the department announced it would forbear enforcement under the new policy first until April 15, 2019, and then to June 14, 2019. On June 13, the department announced it would extend the forbearance through the end of 2019. On April 8, the department issued a memo clarifying that the new opinion “did not address whether the Wire Act applies to state lotteries and their vendors,” instructing the department to refrain from applying the Wire Act to lotteries until the department concludes its review.

Powerball, Mega Millions

Following the issuance of the new Justice Department opinion, some news reports suggested the Wire Act could impact multijurisdiction games such as Powerball and Mega Millions. Such reports are unfounded because the Wire Act does not prohibit interstate lotteries that use traditional lottery tickets purchased at physical locations.

For background, Powerball and Mega Millions were initiated and adopted before the 2011 opinion was issued—during the years in which the department held the broad interpretation that the Wire Act covers all forms of gambling. When asked by Congress in 2003 whether the law “prohibits all types of internet gambling, including…lotteries,” the DOJ stated nothing that would indicate that Powerball, Mega Millions or use of the internet for processing in-store lottery sales would violate any federal law, despite 20 states and Washington, D.C., initiating Powerball and seven states offering Mega Millions before 2000.

In no case (before or after 2011) has the DOJ applied the Wire Act or other federal laws banning internet gambling to licensed casinos or lotteries using the internet for administrative functions of lotteries or casinos.

The New Hampshire Case

In the hopes of invalidating the new Wire Act opinion, the New Hampshire Lottery and its provider, NeoPollard, filed a lawsuit seeking to overturn the new opinion and asked that the Justice Department be enjoined from enforcing the opinion anywhere in the United States.

The Department of Justice filed a motion seeking to have the lawsuit dismissed, since it had not taken any action yet under the new opinion. NACS, along with the Coalition to Stop Internet Gambling, filed an amicus brief in support of the new opinion, citing the impact online lotteries may have on in-store sales of lottery tickets and products.

In finding for the lottery and NeoPollard, the judge limited the ruling’s scope by refusing to issue a nationwide injunction against application of the 2018 opinion. At this point, his ruling applies only to New Hampshire and to the activities of the New Hampshire Lottery and NeoPollard. The judge has yet to rule on a petition filed by NACS and the Coalition to Stop Internet Gambling to intervene in the case, although that ruling is anticipated shortly.

What’s Next?

The Department of Justice is expected to appeal the judge’s decision. Recognizing the limited reach of the judge’s opinion, the likelihood of an appeal and the pending ruling on NACS motion to intervene, it is expected this case (and the issue of internet gambling) could take months to work its way through the judicial system.

Darryl Nirenberg

Darryl Nirenberg

Darryl Nirenberg is a partner in the Government Affairs and Public Policy practice at Steptoe & Johnson LLP, NACS legal counsel.

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