By: Chuck Humphrey
Introduction
Just prior to going live for "real money" another new entry into the world of online poker cardrooms issued a press release saying:
“[We] will offer real money games and tournaments through...[a] licensee… in areas where online games of skill are permitted. [Our licensee] will be licensed and regulated by the Kahnawake Gaming Commission in Canada.”
This article analyzes the legality of offering poker as a skill game in the U.S. In making this analysis I have assumed that the cardroom will charge a rake in the same manner as the majority of the other dozen or so online poker rooms. That is, the players will be charged a “Nevada-style rake” where the operator of the game is paid a percentage of the amount in the pot, up to a stated maximum dollar amount per hand.
The brains behind the new room include over a half dozen well-known U.S.-resident tournament poker players who apparently personally put up some of the money and provided some of the effort to write and debug software to allow the room to operate on the Internet. They refer to themselves collectively as "the Team." The URL under which this online cardroom can be reached is shown in the domain registration records as being owned and administered by the Los Angeles-based software developer. [N.B. After the first publication of this article, the registration of the URL was changed on June 8, 2004, to the name of an offshore business, which provided the registrar's data base with an apparently fictitious telephone number. The URL, however, continues to use a domain server with a U.S. address and which is listed as belonging to a person who includes a portion of the name of the software development company in his name identification.]
No information is yet available on the place of formation of the licensee. I assume it will be in a foreign jurisdiction where it will obtain one of the easy-to-come-by cheap licenses such jurisdictions issue. See Online Gaming Licensing Reality. [N.B. After first publication of this article the licensee was disclosed. It is a business formed in Nevis and St. Kitts, one of the West Indies nations.]
When the room goes “real-money live” I assume players will provide an address for themselves and will be able to deposit money into an account maintained by the licensee. [N.B. The gaming licensing statute in Nevis requires that players be registered with the licensee using a form approved by the local gaming board and that: "A person shall not be eligible for registration as a player unless he produces evidence that satisfies the licensee of the person's identity and place of residence and that he is at least 18 years of age." Assuming the Nevis-based company secured a license from Nevis, it will be interesting to see what documentation the gaming board and the operator deem adequate to satisfy the statutory requirements. I also note that the required documents will give the operator of the site and its affiliates actual knowledge of the place of residence of the player.]
The site now has separate tables named for each of the members of the Team. Those promoters play on the site from time to time and will continue to do so in the future. Here are some of the rather mild legal disclaimers in the software developer’s recent press release:
“[This] software will give users of all skill levels the opportunity to play against these poker champions for fun or for real money where online games of skill are permitted….
“[The online cardroom] will allow users of all skill levels to become involved in the game and learn from real champions….
“Laws and regulations permitting and when users feel ready, they can also play against [our Team] members in low-stake, real money games, courtesy of [our licensee]. Any money won by [our Team] members in those games will be donated to an international charity by [our licensee].”
Where are Games of Skill Permitted?
The software developer’s press release says “[This] software will give users of all skill levels the opportunity to play against these poker champions for fun or for real money where online games of skill are permitted.” The implication is that the poker games available will only be offered in states where games of skill played for money are legal. The best known games of skill played for money, which are also available online in the United States, are fantasy sports leagues. There are many such leagues. Some well-known, large companies offer such leagues. It is questionable whether fantasy sports leagues violate the anti-gambling laws of most states. For example, Anthony Cabot, a well-known gaming lawyer has said: "Whether Fantasy Sports contests are considered gambling is a matter of debate, which revolves around whether skill or chance predominates the contest. See, e.g., State v. Hahn, 586 N.W.2d 5 (Wis. 1998). Fantasy Sports contests require skill to assess players and strategy to properly draft players and make trades. Nevertheless, a significant element of chance is present. A participant can draft or trade to obtain the most talented players, but the chance that a player may become injured could eliminate his opportunity to win. Also, because fantasy league operators have yet to be prosecuted under anti-gambling laws, the legality of fantasy contests remains unresolved." Cabot and Faiss, GAMING LAW SYMPOSIUM: Sports Gambling in the Cyberspace Era, 5 Chap. L. Rev. 1. footnote 46 at 9. For an extensive note on the legality of fantasy sports leagues see Davidson, COMMENT: Internet Gambling: Should Fantasy Sports Leagues Be Prohibited?, 39 San Diego L. Rev. 201.
A prominent example is the offering of the ESPN fantasy leagues. ESPN is a part of the Walt Disney-ABC-CapCities media conglomerate. The legal restrictions that ESPN has adopted (presumably on advice of its lawyers) for its football league include:
“This promotion is intended for play only within the 50 United States (and the District of Columbia) and Canada (except Quebec). U.S. law governs this promotion.
"Only open to U.S. residents, 13 years of age or older only. Void in all U.S. Territories (e.g. Guam and Puerto Rico) and where prohibited by law.
"If you are a resident of Arizona, Connecticut, Florida, Louisiana, Montana or Vermont, you are permitted to purchase and be a participant in the game, but not eligible to win any of the promotional prizes.”
Thus, it is clear there are some states that do not allow wagering on even games of skill. By the way, a visit to the websites of three other prominent big-name players in the online fantasy sports skill-game arena shows similar lists of excluded states. However, there is no universal agreement on which states should be included and excluded. My research has the following jurisdictions excluded on one or more of those lists: Arizona, Arkansas, Connecticut, Florida, Iowa, Louisiana, Maryland, Montana, North Dakota, Tennessee, Vermont, Puerto Rico and Quebec, Canada.
Will the software developer tell potential players from those jurisdictions what ESPN tells players on its site—you can’t win any money here?
Is “Skill” a Relevant Factor?
The next logical inquiry is whether the game being promoted by the software developer would be a game of skill that could be played for money in those jurisdictions where games of skill played for money are legal.
The answer is NO.
I have not been able to find any case law that has ever squarely held poker to be a game of skill free from illegality under applicable state anti-gambling laws. There have been some passing references to poker as a game of skill in a few cases.[1] But these are only references that go to whether any skill is involved in the game, not to the level of that skill as compared with the element of chance in the game. The actual decisions did not involve poker, let alone the more relevant question of the legality of offering poker games in a setting where the house directly or indirectly makes money by raking the game, charging an entry fee or selling food, beverage or merchandise to players.
The decided cases hold that in order to be a “game of skill” the elements of skill must predominate over those of chance in determining the outcome.
That general rule is set forth in the California decision In re Allen as follows:
“The term ‘game of chance’ has an accepted meaning established by numerous adjudications. Although different language is used in some of the cases in defining the term, the definitions are substantially the same. It is the character of the game rather than a particular player's skill or lack of it that determines whether the game is one of chance or skill. The test is not whether the game contains an element of chance or an element of skill but which of them is the dominating factor in determining the result of the game.”[2]
There are many “crane game” and “digger game” cases. Those games involve exercising varying degrees of skill to win a prize by grabbing it or pushing it with a remotely controlled crane-like or shovel-like object. One of those cases shows the struggle that courts can and do go to in finding a game to be one of chance and not predominately skill.
In State v. Gambling Device, 859 S.W.2d 519 (Tex.App.-Hous) (1 Dist.), 1993) the court ruled against a digger game (called a “Bulldozer” in the text) being a game of skill in the following language:
“Even a contrivance that is predominantly a game of skill may be determined by chance. For example, assume that a novice player of Bulldozer, through a minimal exercise of skill, has a 25 percent chance of winning an award. Assume also that an experienced Bulldozer player, through the exercise of his superior skill, has a 75 percent chance of winning an award. Chance would appear to predominate over skill in the former case, while in the latter case; skill would appear to predominate over chance. Yet in either case, the outcome in each particular game played is ‘determined by chance.’ A player's level of skill may influence the degree of chance involved, but it does not eliminate the element of chance altogether. The outcome is always determined by chance because no player, through the exercise of skill alone, can control the outcome of any given trial. It is chance that finally determines the outcome of each and every trial. Thus, it is the incorporation of chance that is the essential element of a gambling device, not the incorporation of a particular proportion of chance and skill." Id at 523.
The body of law in the area of skill versus chance is a fractured one. What is needed is better understanding in statutes and case law of what constitute elements of skill, and how, in the overall balance, to compare the weigh of the particular elements of skill against the weight of the elements of chance that are present. The Wisconsin anti-gambling statute (sec. 945.01 (3)(b)(3) has a unique definition of skill in the context of machines like these. It says:
“In this subdivision, ‘skill’ means, within an opportunity provided for all players fairly to obtain prizes or rewards of merchandise, a player's precision, dexterity or ability to use his or her knowledge which enables him or her to obtain more frequent rewards or prizes than does another less precise, dexterous or knowledgeable player."
I suggest that those interested in improving the law on skill v. chance work on expanding that definition to better specify the principal elements that constitute skill and chance. A weighing mechanism that could be considered by a judge or jury should also be set forth. A few states have passed so-called Chuck E. Cheese laws to allow businesses to legally offer low-cost arcade games with prizes of a low value. That law in Georgia includes a definition of "some skill" that is of interest even though it does not cover the real question, which is what does it take for skill to be predominate. Here is the definition from the Georgia statute:
"[S]ome skill" means any presence of the following factors, alone or in combination with one another:
(1) A learned power of doing a thing competently;
(2) A particular craft, art, ability, strategy, or tactic;
(3) A developed or acquired aptitude or ability;
(4) A coordinated set of actions, including, but not limited to, eye-hand coordination;
(5) Dexterity, fluency, or coordination in the execution of learned physical or mental tasks or both;
(6) Technical proficiency or expertise;
(7) Development or implementation of strategy or tactics in order to achieve a goal; or
(8) Knowledge of the means or methods of accomplishing a task.
The term some skill refers to a particular craft, coordinated effort, art, ability, strategy, or tactic employed by the player to affect in some way the outcome of the game played... If a player can take no action to affect the outcome of the game, the bona fide coin operated amusement machine does not meet the 'some skill' requirement of this Code section.
For the time being, however, the law is such that poker is not a game in which the elements of skill predominate over chance. The time frame over which the elements that constitute skill in poker work to allow the more skilled player to “obtain more frequent rewards” is both uncertain and too lengthy.
Consider that on any one hand of poker it cannot seriously be contended that skill outweighs chance. Also, the results of any given session of poker (one night, one tournament, etc.) are not likely to be determined based on the preponderant skill of any given player. Perhaps the result of playing many sessions for a whole year is indicative of skill predominating over chance. But, perhaps not. Poker "player of the year" awards have become popular over the past few years. No one has ever repeated as the winner from one year to the next. Indeed few repeat in the top ten of those lists from one year to the next.
This lack of certainty may be considered by a court in reaching the determination that while there are significant elements of skill in poker, they just do not outweigh the elements of chance caused by the fall of the cards and the erratic, unpredictable play of a large number of opponents. In an article in Card Player magazine, Lou Krieger, anticipating a field of 3,000 or more in the 2005 World Series of Poker championship event, sets up this scenario:
"Let’s take a good player. No, let’s take a great player. Make him the greatest hold’em player who ever lived. Suppose his chances are 10 times greater than those of Joe Average, even though the chasm between great and average is probably not anywhere near that deep. With that kind of edge, our hero figures to win a 3,000-player event once every 300 times. If he has a 60-year poker-playing career, he ought to win the World Series of Poker once every five lifetimes. An average player, by comparison, figures to win all the marbles only once in 50 lifetimes." Card Player Magazine Volume 17, No. 26 - Friday, December 17th, 2004
The long time frame may push a court to reach the conclusion that skill is not the predominate factor since, at a minimum, it takes years, or perhaps a lifetime, to determine if a person is a “winning player.” The anecdotal stories about most professional poker players, even those who were the best of their time, like Johnny Moss, Doyle Brunson and Daniel Negreanu, going broke is more “proof” of the chancy nature of the game.
In SYMPOSIUM: CROSS-BORDER ISSUES IN GAMING: The Games People Play: Is It Time for a New Legal Approach to Prize Games? Anthony N. Cabot*, Louis V. Csoka 4 Nev. L.J. 197 (Winter, 2003) the authors say: “To assess the legality of such games, most states have adopted the "predominance test." Under that test, if the winner is determined predominantly by chance, then the activity is gambling. If, however, the winner is determined predominantly by skill, then the activity is a contest. Two more traditional activities within the "grey area" are poker and backgammon, both of which have elements of skill and chance. To date, these two games have been held to be predominantly skill-based by some courts and predominately chance-based by others.” Id at 202-3 (Footnote references omitted.)
In a footnote concerning the assertion that poker is in a grey area and has been held to be predominately skill-based by “some courts” the authors state: “See, e.g., Charnes v. Cent. City Opera House Ass'n., 773 P.2d 546, 551 (Colo. 1989) (holding that, in Colorado, poker is an illegal gambling game of chance); see also United States v. Marder, 48 F.3d 564, 569 (1st Cir. 1995) (holding that, in Massachusetts, video poker is a lottery in which chance predominates); but see Commonwealth v. Club Caravan, Inc., 571 N.E.2d 405 (Mass. App. Ct. 1991) (holding that, in Massachusetts, video poker games are games of skill); cf. 1993 Colo. Op. Att'y Gen. No. 93-5 (April 21, 1993) (opining that, in Colorado, poker is a game of skill, but nevertheless illegal under specific statutory language). Id at footnote 41.
The Club Caravan case involved criminal charges brought against the owner of a club for violating several provisions of the Massachusetts anti-gambling statutes. The club owner defended as to a small number of the machines on the ground that they were eligible for licensing as automatic amusement devices under a separate state statute that legalizes games with an element of skill so long as the player can only win free plays. The court in Club Caravan said:
“One of the Commonwealth's expert witnesses, an agent of the Federal Bureau of Investigation, had told the grand jury that a video poker machine, while it failed to utilize most of the skills that make for a good poker player (e.g., the use of bluffing, raising, throwing in a hand), nevertheless employed some element of skill (albeit "less than twenty-five percent") because it rewarded prudent calculations of the probabilities of filling in various "dealt" hands through discards and draws weighed against the known rewards if the draws should be favorable****
“Since the video poker machines involved an element of skill and ostensibly paid off winners only with free games, the judge correctly dismissed the indictments based solely on having such machines on hand for the use of patrons. The judge correctly ruled, we think, that licensed machines so used were exempt not only from G.L. c. 271, § 7, this exemption being explicit in G.L. c. 140, § 177A(7), but also from G.L. c. 271, §§ 5 and 17, seemingly overlapping statutes which in relevant part prohibit keeping a place for gaming or keeping gaming apparatus. Commonwealth v. Wetherell, 340 Mass. 422, 164 N.E.2d 889 (1960). The purpose of § 177A, to legalize and license machines that utilize some element of skill and pay off winners only with free games, would otherwise be thwarted. Marshfield Family Skateland, Inc. v. Marshfield, 389 Mass. at 441, 450 N.E.2d 605.” 571 N.E.2d 405 (Mass. App. Ct. 1991) at 406-7.
This passage clearly shows that the predominance test was not only not at issue, but that the only relevant testimony considered showed that if the issue had been raised, the court would have found that the video poker game in question would flunk the test.
The authors also cite 1993 Colo. Op. Att'y Gen. No. 93-5 (April 21, 1993) for the proposition that in Colorado poker is a game of skill, at least insofar as the office of the Colorado Attorney General is concerned. That Opinion dealt with whether the Colorado legislature had the power to authorize certain games in view of the prohibition in the Colorado Constitution against lotteries. In dicta, the then Attorney General, after analyzing the predominance test said “poker is probably not a lottery because skill plays a larger, perhaps dominant role.” That observation was not crucial to the outcome of the opinion, and is certainly not supported by any case law. The opinion cites Morrow v. State, 511 P.2d 127 (Alaska, 1973) for an analysis of the elements to be considered in determining when skill predominates over chance.
In Morrow the defendant was charged with selling a lottery ticket in the form of a football line card. The purchaser/bettor picked from three to ten games, choosing the winner against the spread for the game printed on the card. The defense contended that the game did not constitute a lottery because picking the winners involved skill, not chance. The Alaska Supreme Court held against the defendant on the ground that the predominance of chance versus skill is a question to be determined by the tried of the facts. The court said:
"The following aspects are requisite to a scheme where skill predominates over chance.
(1) Participants must have a distinct possibility of exercising skill and must have sufficient data upon which to calculate an informed judgment. The test is that without skill it would be absolutely impossible to win the game.
(2) Participants must have the opportunity to exercise the skill, and the general class of participants must possess the skill. Where the contest is aimed at the capacity of the general public, the average person must have the skill, but not every person need have the skill. It is irrelevant that participants may exercise varying degrees of skill. Johnson v. Phinney, 218 F.2d 303, 306 (5th Cir. 1955). The scheme cannot be limited or aimed at a specific skill which only a few possess. '(W)hether chance or skill was the determining factor in the contest must depend upon the capacity of the general public-not experts-to solve the problems presented.' State ex inf. McKittrick v. Globe-Democrat Publishing Co., 341 Mo. 862, 110 S.W.2d 705, 717 (1937).
(3) Skill or the competitors' efforts must sufficiently govern the result. Skill must control the final result, not just one part of the larger scheme. Commonwealth v. Plissner, 295 Mass. 457, 4 N.E.2d 241 (1936). Where 'chance enters into the solution of another lesser part of the problems and thereby proximately influences the final result,' the scheme is a lottery. State ex inf. McKittrick v. Globe-Democrat Publishing Co., supra. Where skill does not destroy the dominant effect of chance, the scheme is a lottery. Horner v. United States, 147 U.S. 449, 459, 13 S.Ct. 409, 37 L.Ed. 237, 241 (1893).
(4) The standard of skill must be known to the participants, and this standard must govern the result. The language used in promoting the scheme must sufficiently inform the participants of the criteria to be used in determining the results of the winners. The winners must be determined objectively. Note, 'Contest and the Lottery Law,' 45 Harv.L.Rev. 1196, 1216 (1932).” Morrow v. State, 511 P.2d 127 at 129-30.
Professor Daniel Kimberg, in his article Luck vs. Skill in Poker and Baseball, published in Card Player magazine, reaches these sensible conclusions:
"For my own purposes, I think of skill as something I work to develop and enjoy exercising, even if it takes effort. Poker certainly qualifies, but it’s also a game played in casinos, for money, and one in which you have relatively little assurance about your short-term fortunes. So, I still think it’s gambling. Some poker players believe that if you’re a gambler, you’re a loser. They may be right, but merely putting a label on the game doesn’t affect how I play, so I’m not too worried.
"So, I’ve decided not to get into any more arguments about this. The next time anyone asks me if poker is more skill or luck, I’ll tell him what I know. It takes a lot of knowledge and ability to play well. You can get better through practice and/or study, and worse through alcohol. Short-term results are highly variable, while long-term results are more reliable (at this point, I’ll pull out a little chart plotting standard deviation of outcomes against hours played). And, you can win at it...."
Wither Thou Goest?
So will this new online cardroom accept any players with domestic U. S. addresses? Businesses that have U.S. licensed casinos and also operate online casinos (and one that closed its online operation), reject real money deposits from anyone with an address in the U.S. They do so because it is the view of regulators that offering online gambling without benefit of a license from an appropriate authority in the state where the bettor resides is illegal. They do not want to jeopardize their U.S. licenses nor face criminal charges.
This new online poker room differs very little from those U.S. licensed businesses. The overall promoter is a California-based company formed under California law. The bulk of its shareholders (I assume) and all of its high-profile Team members are citizens and residents of various jurisdictions in the United States. They are thus amenable to personal arrest, indictment, and trial in one or more of the states where they reside or travel to in attending poker tournaments and promoting the business of this online cardroom.
The fact of licensing what is in all likelihood a “straw” man to serve as the nominal operator of the online cardroom under a license from the Kahnawake Gaming Commission in Canada seems a flimsy defense. It is all but certain that the Los Angeles-based software developer will receive the lion’s share of the revenue generated by the operation of the online cardroom. If not, why would these talented, wealthy, young men and women have invested their time, money and prestige in bringing the site to life and promoting it?
Laws in all 50 states, and various federal anti-gambling laws, will be broken by this new online cardroom if it offers “real money” poker games under its current structure. The structure could be renovated to follow the more common practice of trying to put greater distance between the U.S. software developer and the actual named operator of the site. (3) However, that would not reduce the risk facing Team members that one or more of them may be charged with criminal violations. If the Team members actively promote, appear in advertisements for and encourage U.S. residents to play in the "real money" poker games on the site, they will be aiding and abetting the violations of the nominal operator. Aiders and abettors are equally as liable as the principal for criminal violations. In addition, a prosecutor may well convince a court to ignore the corporate shields used and hold the Team members liable as the de facto owners and operator of the online cardroom. If the Team members continue down the current path they could find themselves in serious legal difficulties.
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