State legislatures need no longer fear an overbroad interpretation of the Wire Act.
By Bradley P. Vallerius, JD
As far back as the 1990s, the US Justice Department has insisted that federal law prohibits wagering of any kind on the internet, a view that has deterred lawmakers in the 50 states who might otherwise seek to raise tax revenue through internet gambling. Recently, however, the Justice Department has circulated a Memorandum Opinion indicating it would like to get out of the way.
What is the Memorandum Opinion?
The Memorandum Opinion is signed by Virginia A. Seitz, Assistant Attorney General for the Justice Department’s Office of Legal Counsel. Her Opinion is directed to the Justice Department’s Criminal Division, which had requested clarification of two critical questions of law related to proposals by the States of Illinois and New York to sell lottery products over the internet.
In framing its questions, the Criminal Division had referred to the Justice Department’s traditional view that the federal Wire Act of 1961 prohibits all gambling on the internet. The Criminal Division noted that this view conflicts with provisions of the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) which explicitly exempt intrastate wagering from its scope.
The problem, as perceived by the Criminal Division, was that the Illinois and New York plans entail sending data across state lines, even though their lottery products would be available only to in-state customers. This was a problem because if data crosses state lines, then the federal government’s power over interstate commerce is invoked, which means that the prohibitory provisions of the Wire Act would apply and consequently make Illinois and New York’s plans illegal.
The Criminal Division, therefore, sought the opinion of the Attorney General’s Legal Counsel to clarify this apparent tension between the Wire Act and UIGEA. Specifically, the Criminal Division asked whether New York and Illinois:
1. Could legally use a processor located outside the state to process their transactions; and
2. Could legally route data across state lines?
Legal Counsel’s Opinion answers affirmatively that Illinois and New York may legally use out-of-state processors and may route data across state lines. Legal Counsel reaches this conclusion by disagreeing with the traditional Justice Department interpretation of the Wire Act.
According to Legal Counsel, the proper interpretation of the Wire Act is that:
Interstate transmissions of wire communications that do not relate to a “sporting event or contest” fall outside the reach of the Wire Act.
Legal Counsel’s conclusion is based on a thorough statutory analysis of the Wire Act which takes into account the explicit language of the statute as well as its legislative history in order to determine the true intent of Congress in 1961.
“In sum, the text of the Wire Act and the relevant legislative materials support our conclusion that the Act’s prohibitions relate solely to sports-related gambling activities in interstate and foreign commerce,” according to the Opinion.
Legal Counsel further notes that it is not necessary to reconcile the Wire Act with UIGEA because the Wire Act does not apply to Illinois and New York’s plans since their plans do not entail wagering on sports. Hence Illinois and New York may legally sell lottery products on the internet.
Although Legal Counsel’s opinion has no real force of law, there are substantial implications and there will be resounding effects throughout the states.
Above all, the Opinion indicates how Justice Department officials will act in the future. Originating from the Attorney General’s Legal Counsel, the Opinion should be regarded as a high-level authority commanding other divisions of the Justice Department how to conduct their affairs from this point forward. In this regard, it should be noted that the Attorney General’s Office of Legislative Affairs has already forwarded the Opinion to Senators Harry Reid and Jon Kyl in a letter dated 23 December 2011.
Senators Reid and Kyl had written a letter to Attorney General Eric Holder in July 2011, criticizing the Justice Department for an apparent lack of consistent and aggressive enforcement of federal internet gambling policy. More importantly, the Senators requested that the Attorney General either “reiterate the Department’s longstanding position that federal law prohibits gambling on the internet,”… or… “consult with Congress before finalizing a new position that would open the floodgates to internet gambling.”
As for potential effects in the states, if the Wire Act applies only to sports wagering, then each state has the power to license and regulate poker, gaming, lotteries, bingo, and virtually any other sort of gambling that is not related to sports, and the Justice Department should be expected not to interfere.
A surge of momentum is already being experienced this week (4 January 2012) in New Jersey, where media reports indicate Governor Chris Christie could be prepared to sign a bill that would be offered by the legislature, even though he refused to sign a similar bill that arrived on his desk less than one year ago.
One significant implication of Legal Counsel’s new interpretation is that the Wire Act does not apply to non-sports interstate wagering.
Thus far policy proposals in the states have dared to envision only wagering on an intrastate basis, but eventually they will desire to link their markets for poker and other games that require heavy liquidity.
If the Wire Act does not prohibit interstate wagers, then there may be no other federal statute which prevents states from linking their markets. Presumably state legislatures would have liked federal rules indicating how they should proceed with linking their markets, but if they perceive that there are presently no federal prohibitions against interstate wagering then they could potentially seek to negotiate agreements among themselves—especially if they lack confidence in Congress’s ability to legislate on these issues.
But it is still important to remember that just because wagering activity is not prohibited by the Wire Act does not mean the activity is legal in the states. The typical format of gambling laws in the states is to prohibit all gambling except that which is licensed by the state government. Hence state governments will remain hostile to operators from other states and countries in the absence of some sort of licensing agreements.
Also, the importance of UIGEA should not be underestimated. Although UIGEA explicitly exempts intrastate gambling from the scope of its financial transaction prohibitions, it does not explicitly exempt interstate gambling, and such an exemption should not be implied even where states have negotiated an agreement to connect their markets.
An exemption for wagering between regulating states probably cannot be implied because UIGEA explicitly gives such an exemption to Indian tribes that choose to combine their markets (see 31 U.S.C. § 5362(10)(C)(i)) but does not explicitly give such an exemption to states (see 31 U.S.C. § 5362(10)(B)(i)). Hence the most plausible interpretation is that Congress intended that tribes should enjoy this exemption but the states should not. UIGEA’s banking regulations, therefore, could prevent transactions for wagering even between two states which have properly legalized internet gambling.
Another significant implication is that if the Wire Act applies only to sports wagering, then many foreign companies who served American customers prior to UIGEA’s enactment may never have violated federal law.
The likes of PartyGaming and 888.com, as well as several other companies licensed outside the US actively seek to return to the US market by way of software and services partnerships with American operators, but the potential for findings of past transgressions poses uncertain risks when it comes to suitability determinations for licensing purposes.
If the Wire Act is not applicable, then these risks are significantly reduced. However, it remains to be seen whether regulating states will choose to hold such companies accountable for past violations of state laws.
Given that unlicensed operating remains a violation of state law even if it does not violate the Wire Act, Legal Counsel’s new interpretation does not weaken UIGEA’s ability to combat foreign operators.
As Ronald Weich, Assistant Attorney General for the Office of Legislative Affairs wrote in his letter to Senators Reid and Kyl:
[Legal Counsel]’s conclusion will not undermine the Department’s efforts to prosecute organized criminal networks. The significant majority of our current and past prosecutions concerning internet gambling involve cases where the activity is part of a larger criminal scheme. [Legal Counsel]’s conclusion will not undermine our ability to use other powerful tools, such as federal statutes prohibiting organized crime, racketeering and money laundering, to prosecute that type of criminal conduct. Furthermore, in states that ban various forms of gambling – including internet poker – the Department will be able to investigate and prosecute those gambling businesses under [UIGEA] and other sections of the criminal code.
Overall, we think the Justice Department’s new interpretation of the Wire Act is a very reasonable and welcome turn of events that is long overdue. It finally restores to the states their sovereign right to make and enforce their own gambling laws without having to fear a long and expensive legal battle with the Justice Department.
And ultimately we agree with Assistant Attorney General Weich, who concludes his letter to Senators Reid and Kyl by stating:
“Of course, if Congress wishes to give the federal government greater enforcement authority over non-sports-related Internet gambling, it could do so by amending the Wire Act.”
Lotteries, however, are wary of upsetting their established retail sales network, through which retailers earn commission from sales of lottery tickets. Internet sales are often perceived as a threat to the retail sales. In the immediate aftermath of the interpretation being published some lotteries were cautious about what it would mean for their games.
Bradley P. Vallerius, JD has been researching and writing professionally about the business and law of internet gambling since 2003. He is a graduate of Saint Louis University School of Law (May 2011) who will sit for examination to become a licensed attorney in the State of Illinois in February of 2012. Bradley seeks fulltime employment helping gambling corporations prepare for legalized internet gambling in the United States. firstname.lastname@example.org