Online bettor wins second chance to recoup losses

Legal gambling on pro and college sports outside Nevada hit the jackpot on May 14 when the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act passed by Congress in 1992.

That act, preventing states from authorizing sports betting, was ruled unconstitutional in Murphy v. NCAA. The court determined the federal statute “commandeered” the states to enforce federal laws or policies in violation of the 10th Amendment.

The upshot of the Murphy case, originally named for former New Jersey Gov. Chris Christie and renamed for his successor, Gov. Phil Murphy, is that the states can now decide if and how to regulate sports betting, absent intervening congressional action. Delaware became the first state to open its own sports book on Tuesday.

Several states, in addition to New Jersey, have already introduced or are preparing to introduce legislation to begin licensing sports betting.

Expecting a favorable ruling from the Supreme Court, Connecticut, New York, Pennsylvania, Mississippi and West Virginia all proactively laid down their bets on legalized sports gambling.

Other states have bills in the pipeline, which may gain traction now that the Supreme Court has spoken. Illinois falls within this category with multiple bills pending in Springfield, including to amend the Illinois Horse Racing Act of 1975 by creating a Division of Sports Wagering to issue licenses for authorized sports betting.

States with sports gambling bills percolating at various levels include Michigan, Kansas, Hawaii, California and Indiana.

Then there are states that have long outlawed betting on sports with no signs of change in the weeks following the Supreme Court’s ruling. Utah, Wisconsin, Idaho, Colorado, Alabama, Texas and Nebraska are among those unlikely to authorize sports betting in the near future, though they now have the authority to do so.

In the states amenable to sports betting, casinos and other existing gaming establishments are the likely immediate beneficiaries of the Murphy decision, but one less publicized consequence of the ruling looks to be the rapid expansion of both online and mobile options for sports betting.

With each state’s approach differing rather dramatically, the potential for a patchwork of inconsistent laws to develop and clog up this emerging business looms large and invites a uniform federal approach, which Murphy surely contemplated.

If online gaming options are to be legal in New York and California while banned in Texas and Wisconsin, providing successful virtual gaming from a nationwide platform faces long odds. Add to that pot the risk of inconsistent state and federal judicial views interpreting and applying the various state gaming statutes and operating lawful online gaming looks to be as problematic as drawing to an inside straight.

Consider as a case study litigation recently arising in Washington state. Essentially all online or virtual gambling is outlawed in the Evergreen State, where a recent appellate court test of this ban produced a surprising result.

Washington resident Cheryl Kater gambled and lost more than $1,000 worth of virtual chips after she downloaded the Big Fish Casino app to play games like blackjack, poker and slots in 2013.

First-time entrants to this online casino, then owned and operated by Churchill Downs, receive a set of free virtual chips and can either win or buy more chips to keep playing or occasionally receive additional free chips while playing.

The game’s terms of use, which must be accepted before playing, expressly state that virtual chips have no monetary value, and prohibit their exchange “for cash or any other tangible value.”

However, Big Fish Casino does enable chips to be transferred between users, who can then “cash out” their winnings. Churchill Downs charged a transaction fee for all such transfers.

Washington’s version of an anti-gambling law, titled the Recovery of Money Lost at Gambling Act, vests anyone who loses money or “anything of value” at an illegal gambling game with the right to bring a cause of action against “the proprietor for whose benefit such game was played or dealt, or such money or things of value won.” Wash. Rev. Code §4.24.070.

The Washington act further provides that players who (1) stake or risk “something of value (2) upon the outcome of a “contest of chance” (3) based upon receiving “something of value in the event of a certain outcome” engage in illegal gambling. Wash. Rev. Code §9.46.0237.

Under Washington’s definition of “gambling,” “thing of value” includes “any money or property … involving extension of a service, entertainment or a privilege of playing at a game or scheme without charge.” Wash. Rev. Code §9.46.0285.

Asserting that playing in the Big Fish Casino with her virtual chips qualified as illegal gambling, Kater brought a putative class-action suit in Seattle federal court against Churchill Downs.

She contended Churchill Downs unlawfully profits from its customers’ transfers and wrongfully “facilitates” players cashing out in violation of the Washington act. Finding the virtual chips did not meet the statutory definition of “thing of value,” the district court dismissed her suit.

On appeal to the 9th U.S. Circuit Court of Appeals, both parties focused on whether Big Fish Casino’s virtual chips were a “thing of value” within Washington’s definition of gambling. Kater contended the virtual chips comprised a “form of credit,” that extended the playing of casino games inside the virtual casino without charge.

Churchill Downs’ counterargument was instead of extending game play in the Big Fish Casino, a virtual chip only enhances it and therefore does not meet the statutory definition of “thing of value.”

The 9th Circuit adopted a rather expansive view of “thing of value” in ruling that Kater’s suit was dismissed prematurely. Virtual chips had “value” by extending the privilege of utilizing the virtual casino, including “to place another wager or respin a slot machine,” the court found, while rejecting as outside the complaint Churchill Downs’ position that games can also get extended by receiving free chips.

Other federal decisions upholding online gaming were also rejected because they were based on other state statutes. Accordingly, the court determined that the same online games enjoyed by millions nationwide are illegal in Washington. Kater v. Churchill Downs Inc., No. 16-35010 (9th Cir. Mar. 28, 2018).

With the stakes this high, Churchill Downs is doubling down. In a newly filed petition for rehearing en banc, it again urges that continued game play does not meet the Washington legislature’s definition of “thing of value,” especially when virtual chips are sometimes available gratuitously.

The petition also notes how five new class actions were filed in Washington against online video game owners since the panel opinion came down.

The application of a Washington state statute, enacted before gaming — as well as most other commerce — was routinely conducted online, to virtual casino playing evidences the urgent need for a federal framework regulating online and mobile sports betting.

Like the true regulatory big fish it is, Congress must step in with a uniform federal approach to avoid subjecting the sports betting industry to a quagmire of troubles in states clinging to outdated bans, while simultaneously anticipating a new era of prosperity in states poised to authorize such betting.

To view this article as published in the Chicago Daily Law Bulletin, click here.