Gambling and the Law®:
Court Approves Racino’s Non-Slot Machines

An Alabama court has ruled that Birmingham Race Course can legally operate more than 1,300 machines that look, sound, and play just like slot machines – but aren’t.

Jefferson County Sheriff, Mike Hale, had raided the Race Course on December 15, 2005. In an amazingly quick decision, J. Scott Vowell, Presiding Judge of the Jefferson County Circuit Court, issued a final judgment on January 31, 2006, declaring the machines to be part of a legal sweepstakes. Judge Vowell permanently enjoined the Sheriff from taking any further action against the sweepstakes operation and ordered him to return all money, papers and equipment seized in the raid.

The Race Course testified the sweepstakes had been set up to promote the track and a CyberCenter with 116 state-of-the-art computers where patrons could connect with the Internet. Customers received a plastic access card with an encoded magnetic strip, called a “Qcard”. They took the Qcard to a Point of Sale Terminal to purchase the cybertime, 4 minutes for $1. Some of these patrons actually did use the Internet time at the CyberCenter. But most were much more interested in the 100 MegaSweeps entries that came with each $1 purchase.

Whether a particular sweepstakes entry was a winner or loser was predetermined at the time it was encoded onto the card. Patrons could not tell by looking at the card. They had to access a website, or call an 800 number or – here it comes – go to an electronic Reader.

As the court determined, the 1,300 electronic Readers “are designed and arranged so that they look and sound like slot machines at a gambling casino.”

How successful was the promotion? “The evidence shows that during the brief period the plaintiffs were operating the promotion, few customers were using the CyberCenter; however they were lined up at all hours to use the Readers.”

Judge Vowell agreed with the Sheriff that the Readers were made to appeal to patrons’ urge to gamble. But does that make them illegal?

All gambling consists of three elements: prize, chance and consideration. This sweepstakes certainly had prize – winners were paid in credits or cash. The outcome was determined 100% by luck. But was there consideration?

Law students waste much of their first year in law school contracts classes learning about consideration. For run-of-the-mill contracts, consideration is any detriment to one side or benefit to the other. The reason this is a waste of time is that there is almost always consideration: all you have to show is that someone expended some money or effort or received anything of value and this element has been fulfilled.

In a very few states, this type of consideration is still enough for a gambling contract. In 1969, the Washington Supreme Court held a Safeway grocery store “bonus bingo” game was illegal where participants had to visit the store to obtain a booklet of game cards, pick up prize slip numbers, and present the winning card. Although no purchase was required, the Court found consideration in the benefit Safeway obtained by having people visit its stores and in the time and effort participants had to spend in filling out forms.

But as far back as 1890, other courts realized that gambling contracts were different. As a coincidence, the breakthrough case, Yellow-Stone Kit v. State, was also from Alabama. The operator in that case gave away sweepstakes tickets to anyone who attended his first few free “magic lantern” shows. His aim was to increase attendance at these primitive slide shows, because he sold patent medicines in between acts. He also charged admission for the final show, where the winning tickets were drawn.

There was clearly sufficient consideration for a non-gambling contract: Patrons had to sit through a show and the operator obtained more potential customers. But, the Supreme Court of Alabama held that there was no direct proof that anyone paid anything for the right to participate in the drawings. Since the evil of lotteries is in encouraging people to risk a small amount for the remote chance of winning a large prize, there could be no evil if patrons risked nothing. The Court thought it was not important that most people did pay to see if they had won.

Creative operators have taken this rule – it is not gambling if no one is required to pay money, even if most do, to participate – and created everything from the no-purchase-necessary sweepstakes to no-purchase-necessary poker games and Birmingham Race Course’s no-purchase-necessary slot machines.

Sometimes these work, and sometimes they don’t.
In this case, the operators did everything right:

• Experts designed the game. Multimedia Games, Inc., a large and experienced supplier of Class II and III gaming devices developed the sweepstakes with outside consultants.
  
  
• Free alternative means of entry were easily available, so that everyone knew they did not have to spend any money to enter this sweepstakes.
  
  
• They offered a legitimate product at a legitimate price: $1 for four minutes was the going rate for Internet time.
  
  
• Many patrons did buy the service. The North Dakota Supreme Court held a sweepstakes selling one-minute phone card for $1 was a sham when patrons threw all the cards in the trash.
  
  
• They checked first with law enforcement. In May 2005 the operators demonstrated the sweepstakes to the Alabama Attorney General’s office, supplied additional requested documents and were told that the A.G. considered it to be legal.
  
  
• They avoided the technicalities of the anti-gambling laws. For example, under Alabama law, a slot machine must be used in the play of the game. Here, the electronic readers did not contain a random number generator; they merely displayed a predetermined result imprinted on the Qcard.

Judge Vowell admitted that the race course was using a loophole in the law. But it is up to the legislature to declare an activity illegal, and he stated that it was not up to the courts to tell the legislature what they should have done.

Will this work in other states? That depends on many factors. The most important is the law of that jurisdiction.

In California, for example, the Attorney General declared that electronic Readers are slot machines. It does not matter that the device has no internal computer, since the card is the software.

In a recent case in Michigan, the court held a sweepstakes with $1 pull-tabs was a sham because it was difficult to use the alternative free means of entry and no one actually used the product that was supposedly being promoted.

Of course, if the law simply allowed racetracks to have true slot machines, they would not be forced to have to come up with ideas like Qcards and electronic Readers.

© Copyright 2006. Professor I Nelson Rose will be teaching International Gaming Law as part of Whittier Law School’s Summer Abroad Program in France in July 2006. For more information, contact Prof. Rose through his website, www.GAMBLINGANDTHELAW.com.

It's Not Just About Voting

Should 14-year-olds be allowed to play poker for money in California card clubs?

As silly as the idea sounds, that could be the unexpected result of an even sillier proposal by State Sen. John Vasconcellos' (D-Santa Clara), to give 14-year-olds one-quarter of a vote and 16-year-olds one-half in state elections.

Until the mid-1960s, American society conventionally viewed 21 as the most appropriate age for full adult status, as reflected in most state and federal laws. It was not an issue of great controversy. But the Vietnam War brought the age of majority status into the spotlight. Eighteen-year-olds were sent off to kill or be killed, without having a political voice in this unpopular war.

The result was the 26th Amendment to the United States Constitution, which lowered the voting age to 18 for all elected positions, federal and state. After it was ratified in 1971, it seemed logical to change all minimum age limits to 18.

If a person is competent at 18 to make decisions about whom should be elected to every office in the land, that person must also be competent to serve on juries. If a person is competent to make those types of decisions that vitally affect the lives of others, that person must be able to make similar choices for himself or herself, such as deciding to enter into legally enforceable contracts. Because the law set 18 years as the legal floor for every other activity, there seemed little reason to keep the age at 21 for drinking, smoking and gambling.

The law of unexpected consequences stepped in.

Experience with the lowered age of majority has led legislators to conclude that some activities are just too dangerous for too many individuals who are only 18 years old and too dangerous for society.

In the last 33 years, state legislatures have moved to raise the age limits for more dangerous activities back to 21. The dangers created by minors' drinking and driving was pushed to the forefront by well-organized advocacy groups such as Mothers Against Drunk Driving (MADD). Their success can be seen in the states' drinking ages.

Although almost every state lowered the drinking age to 18 during the early 1970s, the 1980s saw a nationwide movement to return it to 21. In 1984, Congress required a drinking age of 21 for states to be eligible for federal highway funds. By 1993 the National Transportation Safety Board reported that "no state allows the sale of alcohol to persons under the age of 21."

Because the proliferation of legal gambling began prior to the War in Vietnam and has continued up to the present, virtually all gambling age limits range from 18 to 21, with the ages differing according to the perceived danger of the particular form of gambling involved. So the minimum age to play bingo and most state lotteries is usually 18, but casino gambling and slot machines is 21.

One of Gov. Gray Davis least known, but most bizarre, decisions was to sign compacts opening California's tribal casinos to 18-year-olds. Most tribes voluntarily require bettors to be over 21, because they serve alcoholic beverages.

The law almost always declares that a minor is automatically legally transformed from being an incompetent child into a competent adult on the day the minor reaches a certain age. Yet we all know that 100 percent of all minors do not become instantly wiser the day they turn 18 or 21. So why is the law enforcing a legal fiction?

The legal system has only two ways of dealing with legal competence. It can either take each and every person as he or she is at any moment and conduct hearings to determine that person's actual competence. Or it can impose irrebuttable presumptions.

Both solutions create real-world problems. A case-by-case analysis of each individual would burden the court system beyond its breaking point. Yet whenever the law saves judicial resources by making broad generalizations, some individuals outside the norm will be harmed. A 17-year-old college political science student cannot vote while truly incompetent adults, who have not been institutionalized, can.

In the end, the decision is political rather than scientific. If 14-year-olds have one-quarter of a vote for Governor, they should one-quarter of a vote on a jury. And they should be able to gamble in California's licensed card clubs.

That Vasconcellos' "Training Wheels for Citizenship" is universally ridiculed shows that society is not willing to start down that slippery slope again.

Gambling and the Law7:
Keeping Out Legal Gambling

Licensed online casinos, sports books and poker rooms and state-operated Internet lotteries are now a multi-billion-dollar-a-year industry.  Yet, for most governments, they are not dreams come true, but public policy nightmares.

States and countries that permit their operators to take at-home wagers from foreigners gain tax income and create jobs.  But the governments where the bettors live usually get nothing.  Worse, they suffer the negative side-effects created by underage and compulsive gamblers.  For a jurisdiction like the federal government of the United States, cross-border gaming means exporting money and importing social problems.

So, while the issue of whether to legalize is being debated, law enforcement officials face a more fundamental question:  Can a state or nation keep out foreign legal gaming?

We now may be able to answer that question, or at least make educated guesses, due to recent decisions from the United States Supreme Court, the European Court of Justice and the World Trade Organization.

The first step is to find a statute or regulation that might apply.  Most fights against remote betting stop here, because lawmakers simply have not enacted the necessary laws.

The anti-gambling laws that are on the books were designed for specific problems from other eras.  The Wire Act, for example, the major federal barrier to overseas-based gaming, was passed in 1961 as part of Attorney General Robert Kennedy=s Awar on organized crime.@  It was designed to help states fight illegal bookmakers who took sports bets by telephone.  No one at the time thought about the possibility of playing poker on home computers.

The federal Department of Justice, which is charged with enforcing federal laws, asserts the Wire Act covers all forms of interstate and international gambling.  But the three courts that have looked at the issue have ruled the Wire Act is limited to bets on sports events and horse and dog races.  So, if these courts are correct, the question of whether the U.S. Congress has the power to bar foreign, licensed Internet poker, need not be answered, because Congress has not yet passed such a law.

There are many other ways in which a law which might bar at-home gambling will fall short in a particular situation.  For example, many jurisdictions have laws making it a crime to sell a foreign lottery ticket, even if the lottery is legal where the drawing takes place.  But is an Internet lottery selling Atickets@?  Does the law cover a transaction where the seller is in a different country, especially if the purchaser has previously deposited money in that country?

Assuming there is a law in place that makes it illegal to accept bets on a particular form of gambling, can a government use that law against gaming that is legal where the operator is?

Sovereign governments have power over their land and people.  They have the inherent power to protect their borders.  There is no doubt that a state can keep out illegal gambling (although it is not easy to know whether a foreign operator is breaking its own laws).

The situation can get much more complicated if the operator is acting legally under its local laws.  Many foreign governments permit their operators to take bets from other countries where the gambling might be illegal.

Still, states start with the right to bar the importation of all goods and services, even if these come from places where it is legal to sell and ship these products.  The problem arises when a government has agreed, sometimes unintentionally, to eliminate its trade barriers.

Usually when a state joins a federation, like the states of the United States or Australia, or signs a treaty organization, like the WTO or the European Union, it finds it has opened its borders to goods and services from its sister states or trade partners.  The United States discovered that it had consented to allow in legal gambling from other member states of the World Trade Organization (AWTO@) when it signed the WTO treaties.  Its major mistake was failing to do what some other member states did: specifically list Agambling@ as an activity it wanted kept out.

But decision-makers have unanimously agreed that gambling is different from other legal businesses.  A government can bar foreign gaming, if it can come up with good reasons for doing so.

This is easy if the state has a complete prohibition.  Utah does not have to allow in California State Lottery tickets if it does not permit anyone to sell lottery tickets to its residents.

States that want to exclude legal foreign gambling always raise the same arguments: fear of fraud, money laundering, organized crime, underage and problem gambling, and because it offends local morality.  Governments cannot rely solely on the real reason B to keep out competition.

Skillful lawyers can usually prevail and convince judges to uphold prohibitions on foreign, legal gaming.  They have been particularly successful with remote wagering.

However, it is almost impossible to successfully argue that a state has the right to exclude a legal activity from its sister states or trade partners when that state allows only local operators to do the exact same thing.

This is what happened to the U.S. in its fight with Antigua in the WTO.  The WTO ruled that the U.S. had agreed to let in legal gambling from other members of the WTO.  But it then bought the argument that federal laws against remote gambling were necessary to protect Americans.  So, the U.S. would have won .  But Antigua raised the Interstate Horseracing Act, which allows Americans to bet on races from their homes, but only with operators in other U.S. states.  Since there is no reason for this discrimination against Antiguan horsebooks, the U.S. was held to be in violation of the WTO treaties.

The same type of analysis can be done with any two countries and any form of gambling, for anyone willing to spend large amounts of time and money.

Internet Gaming:  U.S. Beats Antigua In WTO

In 2003, Antigua filed a formal complaint against the United States with the World Trade Organization (WTO) over the issue of Internet gaming.  In 2004, after many briefs and hearings, a WTO panel ruled in favor of Antigua, igniting worldwide speculation that the U.S. would soon have to let Americans bet with foreign online operators.

In 2005, the Appellate Body of the WTO reversed.  At the time this is written, just days after this latest decision was released, Antigua is claiming victory.  The Report is 145 pages long, long enough to contain something for everyone.

But the truth is that this is a big win for the U.S.

First, the WTO decided not to look at U.S. state laws, which outlaw all unlicenced commercial gambling.

As for federal law, with just a little tweaking of the Interstate Horseracing Act, the U.S. will be in complete compliance with its WTO treaty obligations.

The entire controversy can be traced back to a mistake the U.S. federal government keeps making:  It does not take gambling seriously.

Nations that sign trade treaties like the ones creating the WTO agree that they will let in some types of goods and services of other signatories.  One category was ARecreational, Cultural & Sporting Services,@ which included everything from circuses to news agencies.  Some other countries expressly stated that they were not agreeing to open their doors to foreign gambling operations.  But the U.S. agreed to let in every recreational service, Aexcept sporting.@

ASporting@ services were undoubtedly excluded to keep out foreign sports teams.  The U.S. argued that Asporting@ includes gambling.  It didn=t work.

The funny thing is that the U.S. did want to keep out gambling.  And all it had to do was say so.

The U.S. signed the WTO treaty in 1994.  Maybe the federal government did not know about Internet gaming then, but it should have.  It certainly did know that foreign operators were trying to gain patrons from the U.S.:  The federal government was seizing a million pieces of foreign lottery mail at the borders each year.

But the U.S. could still keep out Internet gambling if it could show that this was Anecessary to protect public morals or to maintain public order.@

The first panel held the U.S. had failed to show this because the U.S. had refused to talk with Antigua about changing its laws against Internet gaming.  On appeal the WTO ruled that whether or not the U.S. had met with Antigua was irrelevant to the legal of question of whether the anti-gambling laws were necessary.

The WTO held that the federal laws prohibiting interstate and international betting were necessary.  Specifically, it said that the U.S. had established Aa specific connection between the remote supply of gambling services@ and dangers to the American public.  It found the U.S. had presented evidence showing Aa link in relation to money laundering, fraud, compulsive gambling and underage gambling.@ 

This does not mean that any of this is true.  Only that the federal government was able to show that it had reason to be concerned about foreign operators taking bets from at-home Americans.  It focused on Internet gambling=s Avolume, speed and international reach,@ Avirtual anonymity,@ Alow barriers to entry,@ and Aisolated and anonymous environment.@

The WTO did reject the federal government=s concern for organized crime, finding the U.S. had not submitted concrete evidence to show that remote gambling, as opposed to other forms of gambling, was particularly vulnerable to mob involvement.

This WTO ruling was the first ever to discuss Apublic morals,@ but it follows established international law.  The High Court of Europe has consistently ruled that the nations of the European Community cannot keep out trade from other members B except gambling.  Even in the U.S., we have long had the concept of a state=s Police Power, the state=s right to do just about anything to protect the health, safety, welfare and morality of that state=s citizens.

But the U.S. laws had to pass one more test.  A nation can enact laws to protect its residents from the perceived evils of gambling, but it cannot discriminate against foreigners just to protect its local businesses.  One federal law failed this test.

In December 2000, Congress amended the Interstate Horseracing Act (AIHA@) to allow parimutuel betting on horse races by phone or computer.  But the law on its face is limited to states in the U.S. where it is legal to place and accept bets.

Since foreign operators were expressly excluded, the WTO found the U.S. had failed to show there was no discrimination.  The government lawyers did not help by making the silly argument that the IHA was only civil and that it did not repeal the criminal anti-gambling laws.  Of course it did.  That was why it was amended, so that off-tracking betting parlors would not be arrested for taking out-of-state bets.

Once again, the government did not bother to talk to anyone in the business.  If it had, it would have learned that international betting on horseracing has been around for decades.  Betting on the Kentucky Derby is very big in Canada and France, and I personally saw Hollywood Park taking bets on races in Hong Kong.

The WTO held the U.S. had not shown that it applied its prohibition on remote wagering on horseraces in a nondiscriminatory manner. 

But the solution is easy.  Congress should immediately amend the IHA to allow what is already being done: expressly allow Americans to bet on foreign races and allow foreign bettors to wager on American races.  The U.S. could then safely prohibit all other forms of Internet gambling, foreign and domestic.

Of course, if Nevada casinos ever start taking bets online, or state lotteries begin selling their tickets on the Internet, everything changes.  At that point, Antigua might go back to the WTO, and this time, win.

The Threat Of Reservation Shopping

Anti-gambling activists use it to scare small children.  Multi-billion dollar casinos say this is why they need lower taxes.  Even some Indian tribes, especially those with competing businesses, claim it=s an attack on tribal sovereignty.

But are there really going to be Indian casinos popping up in the middle of cities across the nation?

The short answer is, ANo.@  The slightly longer answer is, AMaybe a few, but probably not.@

Every situation is unique, because every piece of land has its own legal history.  And so it is with every tribe.

Still, it is possible to predict whether any particular proposed urban casino will ever be built.

It=s best to start by thinking in categories.  There are tribes with reservations who want land in better locations and there are landless tribes.  There are tribes with compacts and tribes without.  And there are federally recognized tribes and tribes with only state recognition, or none at all.

The federal Indian Gaming Regulatory Act (AIGRA@) is clear: A tribe must be on the list of federally recognized tribes before it can operate any gaming.  This instantly pushes many proposals into the category of wishful thinking.

Most tribes fail to gain or regain federal recognition, even after decades of trying.

Even winning back federal recognition is not enough.  Some tribes, like the Tiguas in El Paso, regained their tribal status through an Act of Congress.  But when they opened a casino, they found that they had unintentionally waived their right to have gambling, because they had agreed to be bound by Texas state laws.

The IGRA limits gaming to AIndian Land.@  The wording is significant, and not because it did not use the more politically correct ANative American.@  The legal term had always been AIndian Country.@  By coining a new phrase and giving it a detailed definition, Congress intentionally left out many pieces of land, such as dependent Indian communities, which might have otherwise qualified for tribal casinos.

Getting Indian Land for gaming can be either easy or impossibly difficult.  Existing reservations automatically fit the definition.  If a tribe wants to open a Class II (bingo) hall on its land, it almost always can do so immediately, so long as the reservation is in a state that permits charities to have bingo.  Class III gaming, slot machines, casinos, parimutel betting and lotteries, can be slower, because the tribe first has to negotiate a compact with the state.

But it is so difficult for a tribe with an existing reservation to get new, non-contiguous land for gaming that it has only happened three times in the last 16 years.

The Office of Indian Gaming Management in the Department of Interior (ADOI@) has developed a checklist, 13 pages of tiny print.  There is usually no problem if the land is within the boundaries of the reservation or is merely an expansion.  But the situation is radically different if the land is being acquired simply because it is in a better location.  And the further the land is from where the tribe is now, the less likely it becomes that the acquisition will be approved.

The checklist requires the tribe to include such things as a pre-acquisition environmental site assessment.  The purpose of this and other expensive and burdensome paperwork is to help the Secretary of Interior make a required two-part determination:

1) That the gaming establishment on newly acquired land is in the best interest of the tribe and it members; and

2) That it is not detrimental to the surrounding community.

Officials from the state and local governments and nearby tribes have the right to comment on the proposed acquisition.  In practice, if not in law, heated opposition from these officials and their constituents can kill a tribal gaming project.

But the real obstacle is usually the governor.  The IGRA is clear: Even if the Secretary approves, the governor has to concur.  Courts have held that it is not unconstitutional to give the governor this veto power.

The governor does not have this power if the tribe has no land. 

Landless tribes are created by flukes.  For example, a court decided that the Lytton Band of Pomo Indians had been wrongfully deprived of its status and its land, and ordered tribal recognition be restored.  But houses, stores and even a college had been built on the land, and the court would not order that it be given back.

As the Lytton Band discovered, it is nearly impossible for even a landless tribe to buy new land for a casino.  This Band was able to find a compliant Congressman, George Miller, who was willing to sneak an amendment through Congress turning the San Pablo card club into a reservation, bypassing the normal procedures.

But even with land, the Band still does not have a casino, and probably never will, because the IGRA prohibits Class III gaming without a tribal-state compact.  Note that it is the state, not just the governor, that must approve a compact.  Although, in practice, it is the governor=s office that works out the deal, the state legislature and sometimes state courts get involved.

If a state, like California, agrees to talk with a tribe, it must negotiate in good faith.  If a state, like Florida, does not want to talk, the U.S. Supreme Court has said it does not have to and the tribe cannot sue the state.  No one knows what happens next.  Maybe the Secretary of Interior becomes a super-czar of gambling and issues regulations, despite opposition from the state.  Or maybe the tribes have a right, but no remedy at all.

Negotiating in good faith usually means the state has to give every tribe the same rights, such as the same payment rates and the same number of slot machines.  But governors have discovered that the Secretary will approve compacts giving the state a large share of gaming revenue, if a tribe has an exclusive right to gambling in a locale.

Gov. Schwarzenegger signed a compact with the Lytton Band, letting the tribe have 5,000 slot machines, which would have been the largest urban casino in the world.  The state=s take was to be 25%, so long as the Governor did approve any casino within a 35 miles radius.

But this compact, like most others, had to be approved by the Legislature, which, in this case, is worried about traffic.  Even reducing the initial casino to Aonly@ 2,500 slots -- still as big as a Las Vegas casino -- did not appease opponents.

And the Secretary's approval is no longer a rubber stamp.  The Secretary wants to see the normal safeguards for the environment, tribal members and the community.

So, just because someone announces that they are gong to open an Indian casino near, say, Disneyland (a real proposal), understand that wishes really sometimes do not come true.