"Win-Time" for the Online Gaming Industry in Wire Act Ruling
"Luck Yeah!" The New Hampshire Lottery Commission ("NHLC"), along with its service providers, NeoPollard Interactive LLC and Pollard Banknote Limited (collectively, "NeoPollard"), recently prevailed against the U.S. Department of Justice ("DOJ"), when the U.S. Court of Appeals for the First Circuit affirmed a narrow reading of the Wire Act, 18 U.S.C.§ 1084, to apply only to interstate transmissions related to bets or wagers on sporting events and not to the state lottery and online gaming operations of NHLC. (New Hampshire Lottery Comm. v. Rosen, No. 19-1835 (1st Cir. Jan. 20, 2021)). This victory represents a huge win, not just for NHLC and NeoPollard or even the 47 other state-run lotteries, but for the online wagering and online gaming industry (and their technology providers), all of which might now look for new opportunities and partnerships given that Wire Act enforcement of their gaming and lottery products is off the table. [Note: Beyond the Wire Act, federal lottery control statutes, see e.g., 18 U.S.C.§1301-1308, 1953, contain provisions concerning state-conducted lotteries and the interstate transfer of lottery tickets and lottery information, but permit states to form interstate lotteries pursuant to an official agreement (e.g., Mega Millions).]
Lotteries were one of the major sources of revenue in colonial America, and a few hundred years later, the New Hampshire Lottery claims to be the oldest legal state lottery in the United States. Since 1964, NHLC has been administering a variety of lottery-style and scratch-off games. NHLC also started an iLottery online gaming system, which allows players located within the state to create online accounts and wager on various types of online games. In all, NHLC operates 1,400 retail locations and an interactive website, which together, account for the lottery providing up to $100 million a year in support of education.
While none of NHLC's business involves sports bets or wagers, NHLC's contests generally involve the transmission of data over the wires and the use of out-of-state vendors, which means online data transmissions may cross state lines even if the actual lottery transaction occurs within the state. For example, as noted by the court, NHLC's retail stores rely on computer gaming and back-office systems that might depend on out-of-state backup servers; on a related front, the NHLC's website transmits lottery results and advertisements online. Thus, although a person must be physically located within the state of New Hampshire to participate in any online lottery transaction, the intermediate routing of information may cross state lines.
Co-plaintiff NeoPollard is a technology and service provider that developed NHLC's online lottery (iLottery) system. Having invested millions in its technology platform, NeoPollard also provides its iLottery system to both Michigan and Virginia. NeoPollard handles the player management, game management, payments, compliance, responsible gaming and all essential iLottery functions for the states it serves. Since running its iLottery system necessarily involves the intermediate routing of data across state lines, NeoPollard claimed that the DOJ's wide interpretation of the Wire Act to encompass non-sports betting would compel the suspension of the iLottery system, prompting its own suit against the DOJ.
The story of the Wire Act begins in 1961. Seeking to dismantle organized crime's grip on sports wagering, in the early 1960s then-U.S. Attorney General Robert F. Kennedy worked with Congress to enact various pieces of legislation aimed at giving the federal government a collection of laws with teeth. Among the bills passed for this purpose, perhaps the most well-known is the Wire Act. Generally speaking, the Wire Act prohibits the "use of a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest" unless the transmission of such information occurs between one state or foreign country and another state or foreign country in which such betting is legal. [Note: If a New York resident wonders why he or she currently has to drive or take mass transit across the river into New Jersey to place an online bet on a sportsbook app, look no further than the Wire Act]. Since its passage in 1961, the Wire Act has been used mostly to go after illegal sports betting conducted across state lines. However, with the rise of e-commerce and overseas gambling websites, the statute received renewed attention in the last few decades. In particular, since the 2000s the use of the internet in lottery transactions by states has been met with continued and inconsistent attempts at regulation.
The genesis of the current dispute began in 2009, when New York and Illinois asked the DOJ whether in-state sales of lottery tickets via the internet would violate the Wire Act if those sales caused information to be transmitted across state lines. The DOJ referred the matter to its Office of Legal Counsel (OLC) for a formal opinion. In 2011, the OLC answered the question and concluded that "interstate transmissions of wire communications that do not relate to 'a sporting event or contest,' 18 U.S.C. § 1084(a), fall outside of the reach of the Wire Act." Following this opinion, states began to expand their lotteries and gaming offerings to online platforms, often partnering with providers like NeoPollard to provide the technological backbone of new online operations. However, in 2018, the DOJ changed its betting stance and sent shock waves through the gaming industry, releasing a new OLC opinion concluding that "the prohibitions of 18 U.S.C. § 1084(a) are not uniformly limited to gambling on sporting events or contests."
Refusing to cash out, in February 2019 NHLC filed a complaint and motion for summary judgment in response to the 2018 OLC opinion. NHLC requested a declaratory judgment asserting that the Wire Act does not extend to lotteries run by the states, an order setting aside the previous 2018 DOJ opinion, and injunctive relief permanently barring enforcement of the 2019 DOJ Opinion. NeoPollard also filed a complaint and concurrent motion for summary judgment, seeking a judgment stating that the Wire Act only applied to gambling on sports. The district court consolidated the cases. In June 2019 the district court granted summary judgment in favor of NHLC and NeoPollard, ruling that the Wire Act only applied to transmissions related to bets or wagers on sporting events, setting aside the 2018 OLC opinion. The government appealed.
The question presented to the First Circuit was one of statutory construction, that is, whether in Section 1084(a) the phrase "on any sporting even or contest" qualifies the term "bets or wagers" used throughout section 1084(a), or just the "bets or wagers" in the clause it appeared in.
"Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both." [emphasis added]
The appeals court was asked to answer whether each reference to "bets or wagers" be interpreted to mean "bets or wagers on any sporting event or contest," or if the phrase "bets or wagers" in the other prohibitions, untethered to the sports-gambling modifier, apply to all forms of gambling. The parties disagreed on how broadly to apply the phrase "on any sporting event or contest" and proffered differing canons of statutory construction to support their arguments. The Government argued the phrase "on any sporting event or contest is" limited and only qualifies the "bets or wagers" in the first clause, in which it is located. In opposition, NHLC claimed it qualifies both uses of "bets or wagers" in the first clause, and that the term "bets or wagers" in the second clause is shorthand for the qualified meaning in the first. The appeals court's decision was no quick pick, requiring 49 pages of analysis.
Ultimately the First Circuit sided with NHLC, concluding that the Government's "impractical interpretation" must give way to NHLC's "more natural reading" that the prohibitions under Section 1084(a) of the Wire Act apply only to the interstate transmission of wire communications related to any "sporting event or contest." After parsing the parties' main syntax-related, statutory interpretation arguments, the court determined that many of those arguments yielded no firm resolution. The circuit court stated that the fact that the provision at issue "accommodates several possible readings" does not mean that the statute as a whole lacks clarity on the issue at hand. The court stressed the principle of statutory construction that prefers "the most natural reading" of a statute that harmonizes the various provisions and avoid odd or unpredictable results. The First Circuit reasoned that read the Government's way, there would be no congruity between the two prohibitions nor parallelism between the two clauses. Following the Government's reasoning, the Act would allow anyone to transmit over the wires information assisting someone in placing a bet over the wires on a non-sporting event without running afoul of the Wire Act, but the person receiving the assistance would commit a crime if he then places the bet or wager. However, by reading "on any sporting event or contest" as qualifying both, the court appeared to find congruity: one cannot use the wires to place a bet on a sporting contest, nor can one use the wires to send information assisting in placing that bet or wager. In scratching out the DOJ's broad interpretation of the Wire Act, the court also questioned why the Wire Act's safe harbor, 18 U.S.C. § 1084(b), which exempts from liability transmissions "for use in news reporting of sports events or contests," only mentions sporting events if the statute was truly meant to apply to all forms of betting.
With a new administration in power and the DOJ's refocused enforcement priorities, it seems unlikely that the Government will seek Supreme Court review of the decision. It is also seems unlikely the Supreme Court would accept the case as there is no apparent split of authority, with the only other appeals court to consider this issue, albeit in dicta, having stated that the Wire Act's prohibitions are restricted to sporting events and contests. Thus, if the First Circuit's decision stands, the decision is a "Win-Time," or a "Cash for Life" opportunity for the online lottery and gaming industry and the technology providers that work with states to offer the related online and mobile platforms, as such entities will not have to operate under regulatory uncertainty as to whether they may be subject to prosecution under the Wire Act.