Currently, online gambling is legal in approximately

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1 Internet Gambling in New Jersey It s in the Cards for New Jersey s Gaming Industry by Eric G. Fikry, Stephen D. Schrier and Dennis M.P. Ehling Currently, online gambling is legal in approximately 85 countries, and generates nearly $30 billion annually worldwide. 1 Despite the fact that legal, online gambling in the United States is limited to pari-mutuel betting on horseracing and state lotteries, Americans are estimated to have spent nearly $4 billion wagering online in Conversely, gaming revenues generated by Atlantic City s brick and mortar casinos continued to decline in the face of increasing out-of-state competition in Proponents of Internet gaming contend that the introduction of intrastate, online gambling is essential to ensuring the continued vitality of New Jersey s gaming industry, 4 and that the state s substantial experience in gaming regulation will position it to become the Silicon Valley of Internet gaming should interstate online gaming become a reality. 5 New Jersey recently took a major step toward becoming the first state to authorize online, intrastate casino gaming. 6 On Feb. 7, 2012, Governor Chris Christie conditionally vetoed Assembly Bill 2578, which amends the Casino Control Act 7 to authorize Internet gambling on an intrastate basis, but indicated his willingness to approve a revised bill that included his recommendations. 8 The amended bill was passed by both Houses of the Legislature and was returned to the governor, who signed it into law on Feb. 26, This article will provide an overview of federal regulation of Internet gambling, New Jersey s efforts to expand intrastate online gambling, and the challenges faced by proponents of online gaming. It will also assess the expected impact of Internet wagering on Atlantic City casinos. Overview of Federal Regulation of Internet Gambling Several federal statutes function to restrict the operation of gambling enterprises over the Internet. The Interstate Wire Act of prohibits the transmission of information assisting in the placing of bets or wagers on any sporting event or contest over a wire communication facility[.] 11 Although the act predates the Internet, it is generally understood to be applicable to Internet communications. 12 Until recently, there was a question regarding whether the scope of the act extended beyond sports betting, to prohibit other forms of gambling. This issue was substantially resolved on Dec. 23, 2011, when the Office of Legal Counsel within the U.S. Department of Justice (DOJ) issued a memorandum opinion 13 concluding that the act s prohibition on the use of interstate transmissions of wire communications involved in betting or wagering applied only to betting or wagering related to a sporting event or contest. The DOJ s memorandum opinion constituted a reversal of its former position on the scope of the act, and its applicability to Internet gaming. As a consequence of the DOJ s opinion, however, it appears that the act is no longer a significant impediment to the establishment of online gambling. Another federal statute that impacts online gambling is the Unlawful Internet Gambling Enforcement Act of (UIGEA), which prohibits the acceptance of payments from individuals who make bets over the Internet. 15 It is significant to note that the UIGEA, despite its title, does not itself outlaw any gambling activity. Rather, the UIGEA is more commonly understood as applying to banks and other financial institutions that process payments of customers attempting to utilize otherwise illegal gambling websites. 16 Additionally, whether a transaction constitutes unlawful Internet gambling under the UIGEA turns on how the bet would be treated under the laws of the states in which the bet is initiated and accepted if it is illegal under either state s laws it constitutes unlawful Internet gambling under the statute. 17 The UIGEA effectively constitutes a significant barrier to interstate Internet gambling. Although the UIGEA effectively serves as a bar to interstate online gambling, the statute creates an exception for intrastate bets or wagers, and bets or wagers authorized by 40 NEW JERSEY LAWYER April

2 state law. As such, the intrastate model being contemplated in New Jersey would fall outside the purview of the UIGEA. Nevertheless, in an attempt to ensure compliance with the UIGEA, some payment processors have adopted a policy of refusing to fund gambling transactions altogether. It remains to be seen how quickly these companies will adapt when Internet gambling comes online in New Jersey. Efforts to Legalize Intrastate Online Gambling in New Jersey and the Challenges Faced by Proponents The New Jersey Constitution declares a strong public policy against gambling, and prohibits the Legislature from authorizing any kind of gambling unless the specific kind, restrictions and control thereof are approved by public referendum. 18 The constitution establishes exceptions to this rule only for: 1) bingo or lotto games or raffles operated by certain groups when the entire net proceeds of such games of chance are to be devoted to educational, charitable, patriotic, religious or publicspirited uses[;] 2) the state lottery; 3) Atlantic City casinos; 4) horse races; and, 5) simulcasts of horse races. 19 A and prior bills that have been introduced seeking to legalize Internet wagering in New Jersey are structured to fall within the constitutional exception to the prohibition on gambling carvedout for the Atlantic City casinos. A-2578, co-sponsored by Assemblymen John Burzichelli, Vincent Prieto and Ruben J. Ramos Jr., as well as its predecessor, S-1565, co-sponsored by Senators Raymond J. Lesniak and James Whalen, establish the parameters for online gaming to be conducted in New Jersey. The proposed amendments to the Casino Control Act would allow all games that may be played at a casino, as well as variations or composites of those games, to be offered through Internet wagering. 20 Players would have to open an account and confirm that they are both old enough to gamble and physically present in New Jersey at all times while they are participating in online wagering, which would be verified using sophisticated age verification and geolocation software. Only licensed casinos would be eligible to obtain permits or licenses to operate Internet gaming sites. In addition, all servers and other computer equipment used by a licensee to conduct Internet gaming would be required to be located either in a restricted area within a licensed casino hotel, or in a secure facility located within the territorial limits of Atlantic City. The most recent amendments to the legislation include a provision declaring that, All Internet wagers shall be deemed to be placed when received in Atlantic City by the licensee. Any intermediate routing of electronic data in connection with a wager shall not affect the fact that the wager is placed in Atlantic City. 21 These provisions form the basis for the legal argument that the expanded gambling contemplated by the amendments to the Casino Control Act is constitutionally authorized as gambling in Atlantic City casinos. Ironically, the argument challenging the constitutionality of Internet gaming was most clearly articulated in the governor s veto statement of Internet gaming bill S-1565, introduced last year by Senators Lesniak and Whelan. In his veto of S-1565, Governor Christie expressed skepticism that the bill would survive a constitutional challenge: In my view, the creation of a legal fiction deeming all wagers to have originated in Atlantic City cannot overcome the clear and unambiguous language of the State Constitution. 22 Proponents of Internet gaming counter by arguing that the amendments to the Casino Control Act sufficiently address the concerns regarding the measure s constitutionality, since the constitution gives wide discretion to the Legislature to determine the nature and type of gaming in Atlantic City. 23 In addition, the amended Casino Control Act would enjoy the presumption of constitutionality afforded legislation generally. 24 Since it now appears that both the legislative and executive branches of state government are in accord, and that online gaming is soon to become a reality in New Jersey, the arguments over the constitutionality of the legislation may be academic unless the new law is challenged in court. Impact of Internet Gambling on Atlantic City Casinos The substantial detrimental impact of the proliferation of gaming opportunities in neighboring states on Atlantic City casinos is well documented. Gross casino gaming revenue from Atlantic City casinos reached a high of $5.2 billion in This compares with a total of $3.565 billion in revenues in 2011, 25 and $3.318 billion in While economic conditions during this period certainly contributed to that decline, the convenience and proximity of new gaming facilities opened in Pennsylvania in 2007 and Maryland in 2010, and the addition of table games in Delaware in 2011, are clearly driving the decline of revenue in New Jersey. 27 Perhaps the most persuasive evidence of this can be found just across the Delaware River in Pennsylvania, which went from earning $2.486 billion in gross casino gaming revenue in 2011, to over $3 billion in The contemporaneous decline of revenue in Atlantic City and dramatic increase in revenue in Pennsylvania is striking, and leaves little doubt that the expansion of convenience gaming is the major challenge facing Atlantic City s gaming industry. Proponents of Internet gaming contend that without the additional revenue Internet gaming would provide, some Atlantic City casino operators would be in jeopardy of closing. 29 A NEW JERSEY LAWYER April

3 2010 study evaluating the potential economic impact of intrastate gaming in New Jersey found that in the short run, the introduction of intrastate Internet gaming in the state would result in $210-$250 million in revenues, the creation of between 1,586 and 1,903 jobs, and additional tax revenues for the state between $46 million and $55 million. 30 More recent estimates by gaming industry analysts project as much as $1 billion in revenue to potential Internet gaming operators, as well as suppliers of Internet gaming platforms. 31 Empirical evidence to support the theories regarding the level of interest in Internet gaming, and of its potential to impact Atlantic City, is already materializing, even before the amendments to the Casino Control Act have been enacted. The Rational Group parent company of PokerStars recently entered into an agreement to acquire the Atlantic Club Casino Hotel. PokerStars now faces the scrutiny of an investigation by the New Jersey Division of Gaming Enforcement, and a hearing on its suitability before the Casino Control Commission. The outcome of that investigation is by no means assured; however, the transaction can be a win for both parties, as it provides PokerStars with an opportunity to enter the New Jersey online gaming market, and the Atlantic Club with a means to improve gaming revenues that have been on the decline since That new revenue could allow the Atlantic Club to reinvest in marketing, subsidize upgrades to its facilities, and undertake other measures to make the property more attractive to customers than its out-of-state brick-and-mortar competitors. Similar deals with companies interested in online gaming could help other Atlantic City operators attempt to recapture some of the market share lost to out-of-state competitors. The addition of online gaming would also enable New Jersey to leverage the reputation of its experienced gaming regulatory staff and agencies to establish the state as the business hub for the online gaming industry nationally, should Internet gaming continue to expand. 33 The proposed amendments to the Casino Control Act lay the groundwork for this by providing that wagers could be accepted from people who are not physically present in the state of New Jersey at the time the bet is made, provided state regulators determined that doing so would not be inconsistent with federal or state law. 34 New Jersey is by no means the only jurisdiction seeking to assume a leadership role in Internet gaming in the U.S., however. The Nevada State Gaming Control Board has adopted regulations that authorize Internet poker in Nevada, and has already approved license applications for a number of companies seeking to manufacture and operate online poker sites within the state. Pending Federal Legislation Could Frustrate New Jersey s Efforts to Legalize Intrastate Online Gaming The DOJ s decision to construe the Interstate Wire Act as applying only to sports wagering and the implications of the memorandum opinion on the potential for online gaming does not necessarily mean New Jersey s path to online gaming will be free from federal obstacles. To the contrary, last October it was reported that U.S. Senate Majority Leader Harry Reid (D-Nev.) and Senator Jon Kyl (R-Ariz.) had begun preparation of legislation titled The Internet Gambling Protection, Online Poker Consumer Protection and Strengthening UIGEA Act of The Reid-Kyl Internet gambling draft legislation was in some respects a response to the DOJ s memorandum opinion, and would serve to legalize online poker while prohibiting house-banked internet games or sports betting[.] 36 The Reid-Kyl draft legislation would, if passed, largely undo the impact of the DOJ s memorandum opinion. The draft legislation expressly prohibits the operation of illegal gambling facilities[,] and imposes criminal penalties consisting of fines or up to 10 years imprisonment. 37 This is a significant deviation from prior federal regulation of gambling, which customarily relies upon state law to determine what sort of conduct constitutes illegal gambling. Under the Reid- Kyl draft legislation, licensed operators would be permitted to host poker websites, and the intrastate lottery sales expressly authorized in the DOJ s memorandum opinion would continue to remain legal. 38 The draft legislation also contains findings likening poker to parimutuel wagering, which has been authorized by Congress, and distinguishing poker from other forms of gambling based on the understanding that poker involves a measure of skill, while players of house-banked games will always play against odds favoring the house. 39 Although Senator Kyl retired from the Senate in January, Senator Reid is reported to intend to take up the issue again next session with Republican Senator Dean Heller from Nevada. 40 The future of the Reid-Kyl draft legislation is uncertain, although some speculate the efforts to legalize Internet gaming in states like New Jersey and Nevada may hasten the enactment of federal legislation. 41 The success of Internet gaming abroad, coupled with the competitive environment that exists in the gaming industry, suggests that interest in expanding online gaming in the U.S. will only intensify. New Jersey is currently poised to become a leader in what many believe to be the future of gaming, but time will tell whether online gaming is the key to restoring growth and revitalizing the state s gaming industry. Endnotes 1. American Gaming Association website: ernment-affairs/key-issues/onine- 42 NEW JERSEY LAWYER April

4 gambling. See also, David O. Stewart, Online Gambling Five Years after UIGEA, AGA White Paper. 2. Id. See also, An Insider Look at New Trends in Gaming, Vol. 10 (2012). 3. See DGE Announces December 2012 Casino Win Results (Jan. 10, 2013) (Reporting that [f]or the full year of 2012, casinos won $3.05 billion, which is down 8 percent from 2011 ). 4. See NJ Seen as $1 Billion Online Market, Fantini Report (Feb. 11, 2013). 5. See Martin Bricketto, Internet Gaming On the Horizon for NJ, Lawmaker Says, Law360 (May 16, 2012) ( We re trying to make Atlantic City the Silicon Valley of Internet gaming, [Senator Raymond] Lesniak said. ). 6. In Dec. 2011, the Nevada Gaming Commission promulgated new regulations authorizing interactive gaming, permitting the operation of online poker within Nevada. See generally, NGC Reg. 5A. 7. N.J.S.A. 5:12-1 et seq. 8. The amendments to A-2578 proposed by Governor Christie include the following: 1) extending existing prohibitions on casino-related employment and representation for state employees and legislators to Internet gaming licensees and their promoters and affiliates; 2) establishing a sensible requirement that state elected officials promptly disclose their past and present representations of entities seeking or holding Internet gaming licenses; 3) an enhanced level of funding for compulsive gambling treatment programs and additional financial support for other beneficial purposes for which casino gaming was originally authorized; and, 4) a sunset provision after a period of 10 years, to provide state government with an opportunity to re-evaluate Internet gaming as appropriate. See generally, Conditional Veto Statement at See Hoa Nguyen, New Jersey Legislature Expects to Approve Amended Internet Gambling Bill by Feb. 26, Atlantic City Press (Feb. 11, 2013) U.S.C.A U.S.C.A. 1084(a). 12. See Benham Dayanim, Internet Gambling Under Siege, 11 Gaming L. Rev. 536, 537 (Oct. 2007) (citing, United States v. Ross, No. 98 CR (KMV), 1999 WL (S.D.N.Y. Sept. 16, 1999); People ex rel. Vacco v. World Interactive Gaming Corp., 714 N.Y.S.2d 844 (1999)). 13. U.S. Dep t. of Justice, Mem. Op., Whether Proposals By Illinois And New York To Use The Internet And Out-Of-State Transaction Processors To Sell Lottery Tickets To In-State Adults Violate The Wire Act (Sept. 20, 2011) available at, U.S.C.S Interactive Media Entertainment and Gaming Association, Inc. v. Attorney General of the United States, 580 F.3d 113, 116 (3d Cir. 2009) (citing, 31 U.S.C.S. 5362(10)(A), 5363). 16. IMEGA, 580 F.3d at 116 (citing 31 U.S.C.S. 5362(10)(A)) (footnote omitted). 17. Id. at N.J. Const., Art. IV, 7, 2. See also, State v. Fiola, 242 N.J. Super. 240, 242, 576 A.2d 338, 339 (App. Div. 1990). 19. N.J. Const., Art. IV, 7, Senate State Government, Wagering, Tourism & Historic Preservation Committee Statement to S-1565 (March 5, 2012). 21. See A-2578 at 14, proposing amendments to N.J.S.A. 5: Governor s Veto Statement to Senate Bill 490, at 3. The governor s position in the veto statement to S- 490 is arguably consistent with earlier case law involving the interstate transmission of wagers. See e.g. United States v. Ross, No. 98 CR (KMV), 1999 WL (S.D.N.Y. Sept. 16, 1999) and People ex rel. Vacco v. World Interactive Gaming Corp., 714 N.Y.S.2d 844 (1999), both of which held that bets took place in New York where the bettor was located, not just in Antigua where the betting operator was located. 23. See Article, IV, Section 7, Paragraph 2(D) of the New Jersey Constitution: It shall be lawful for the Legislature to authorize by law the establishment and operation, under regulation and control by the State, of gambling houses or casinos within the boundaries, as heretofore established, of the City of Atlantic City, county of Atlantic, and to license and tax such operations and equipment used in connection therewith. Any law authorizing the establishment and operation of such gambling establishments shall provide for the State revenues derived therefrom to be applied solely for the purpose of providing funding for reductions in property taxes, rental, telephone, gas, electric, and municipal utilities charges of eligible senior citizens and disabled residents of the State, and for additional or expanded health services or benefits or transportation services or benefits to enable senior citizens and disabled residents, in accordance with such formulae as the Legislature shall by law provide. The type and number of such casinos or gambling houses and of the gambling games which may be conducted in any such establishment shall be determined by or pursuant to the terms of the law authorizing the establishment and operation thereof. 24. See generally, Testimony of Professor John B. Wefing, Seton Hall Law School before New Jersey Wagering NEW JERSEY LAWYER April

5 and Tourism Committee (March 12, 2012). 25. American Gaming Association, 2011 State of the States at 19. See also, Charles V. Bagli, Simple but Local, Queens Slots are Hurting Gambling Meccas, New York Times (Oct. 23, 2012). 26. American Gaming Association, 2012 State of the States at American Gaming Association, 2011 State of the States at 12, 16, and Id. at 21; American Gaming Association, 2012 State of the States at 19, Martin Bricketto, Internet Gaming on the Horizon for NJ, Lawmaker Says, Law360 (May 16, 2012). 30. Potential Economic and Fiscal Impacts of the Proposed New Jersey Intrastate i-gaming Bill, Submitted to Interactive Media Entertainment and Gaming Association by Econsult Corporation. 31. See, Fantini Report, NJ Seen as $1 Billion Online Market (Feb. 11, 2013). 32. See Donald Wittkowski, PokerStars Purchase of Atlantic Club Casino Hotel to Face Tough Licensing Scrutiny, Atlantic City Press (Feb. 18, 2013). 33. See Potential Economic and Fiscal Impacts of the Proposed New Jersey Intrastate i-gaming Bill, at See A-2578 at 32, Sue Zeidler, MGM Expects Online Gaming License, State Compacts, Reuters.com (Oct. 31, 2012). 35. The Internet Gambling Protection, Online Poker Consumer Protection and Strengthening UIGEA Act of 2012, Draft Legislation, available at, A similar bill, H.R. 2366, was introduced in Congress by U.S. Representative Joe Barton (R-Tex.) in June H.R th Cong. ( ) is available at, h r i h / p d f / B I L L S - 112hr2366ih.pdf. 36. Id. at 101(b)(1). 37. The Internet Gambling Protection, Online Poker Consumer Protection and Strengthening UIGEA Act of 2012, Draft Legislation, at Id. at 101(b)(4), Id. at 101(a)(10). 40. David Bain, Don t Bet on a Federal Online-Gambling Bill, Barrons.com (Dec. 18, 2012) ( com/article/sb html). 41. Id. Eric G. Fikry is a partner in the Princeton office of Blank Rome LLP, and is the immediate past chair of the Casino Law Section of the New Jersey State Bar Association. Stephen D. Schrier is a former regulator and partner in the firm s Princeton office, who also teaches gaming law at Rutgers law school. Dennis M.P. Ehling is a partner in the firm s Los Angeles office, whose practice includes online gaming, sweepstakes and promotions, horseracing, sports, and credit card and electronic payments industries. 44 NEW JERSEY LAWYER April