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Chris Ellingwood

Why Yesterday’s Decision about Online Gaming is Not Entirely Destructive to Lotteries

2019-01-15

Yesterday, the Federal Justice Department ruled that placing wagers (gambling) on the Internet, including sports betting and all other forms of gaming, violates the 1961 Wire Act and is illegal.

The ruling immediately made headlines and grabbed the attention of anyone working in the lottery industry―why? In the last year, no fewer than seven states (New Hampshire, Massachusetts, New York, Michigan, Illinois, West Virginia, and Louisiana) passed legislation to allow the purchase and placing of wagers through state lotteries or casinos on the Internet, joining four others that had already passed similar legislation. (Pennsylvania, Delaware, New Jersey, and Nevada).

Online wagering in the lottery industry is seen as a critical way to expand the appeal of lottery products and games to a younger generation of players and ultimately increase revenues for states. Upon first read, yesterday’s ruling immediately questions the legality of these online lottery systems. In reality, I suspect there is actually little to panic over. Here’s why:

First, this ruling will most certainly face a challenge in Federal Courts. In fact, in anticipation of these actions, the Justice Department ordered prosecutors to wait 90 days before enforcing the ruling to allow plaintiffs to file challenges in court. (I will abstain from commenting on the politics of this ruling, but it’s pretty clearly laid out in the Washington Post article – look who funded the effort).

The 1961 Wire Act forbids interstate gambling. There will be some impact, as the article indicates, for some states that have partnered together to offer an online poker game―that may not be allowed. But since the Wire Act states, “so long as a player is in the state where the wager is made and is a resident of that state”, there is no violation to the Wire Act because money did not cross state lines. (full disclosure: I am not an attorney).

State lottery online systems generally have rules that require players to be of age, be residents of the state, and be physically located within that state to place a wager. Geo-location technology verifies that a player, either from their computer (through IP addressing) or on their mobile device, are within state limits. If the player is not within state boundaries, a wager may not be placed.

Here are some things that will be considered and will most likely be hashed out in court.

  1. If the servers and systems are hosted out of state―does a wager technically cross state lines and violate the Wire Act?
  2. Will games like Powerball® and Mega Millions® be permitted to sell wagers online because they are multi-state games?
  3. How does this impact sports betting if the wager is all done in state, but the sporting event is not?

For the next 90 days we will monitor this closely. Anyone with direct interests in gaming may contact me to learn more. We will provide more thoughts as more information is released.