DOJ High-Wire Act

By: James Trusty

Heavyweight parties are slugging it out in a lawsuit in the Granite State, and Ifrah Law is taking a lead role in protecting the interests of America’s rapidly growing online gaming industry.  The New Hampshire civil case comes on the heels of the Department of Justice (DOJ) releasing an interpretation of the federal Wire Act that threatens to bring within its scope all gambling activity, when the law had previously been interpreted to be limited to sports gambling.  Following the DOJ’s release of its new interpretation, the New Hampshire Lottery Commission (NHLC) and its service provider, NeoPollard, filed suit in federal court in New Hampshire.  Since the initial filing, numerous litigants, including several states, businesses, and the Coalition to Stop Internet Gambling have joined the fray. Ifrah Law represents the iDevelopment & Economic Association (iDEA) as amicus curiae in the New Hampshire case.

The DOJ Reversal and Ensuing Wire Act Litigation

In 2011, DOJ issued an opinion on the Wire Act that expressly limited its application to sports betting.  Relying on that opinion, as well as a Court of Appeals opinions in two circuits that reached the same conclusion, state lotteries and online gaming groups invested in infrastructure and pursued operations in regulated states, enjoying the support of that DOJ opinion. This pathway has allowed online gaming to expand rapidly, bringing with it economic growth, jobs, and greater tax revenues for states.

The DOJ’s pronouncement, released in January of 2019, reverses its 2011 opinion, declaring that the Wire Act prohibits all interstate wagering activity, not just sports betting.  This interpretation runs contrary to federal appellate court decisions limiting the Wire Act’s scope to sports betting, along with the Wire Act’s legislative history.  Even the Supreme Court’s 2018 decision paving the way for state-legalized sports gambling in Murphy v. NCAA referred to the Wire Act as “outlaw[ing] the interstate transmission of information that assists in the placing of a bet on a sporting event” (emphasis added).  Not surprisingly, the surprising reversal has created instability within the gaming industry, and the DOJ opinion literally invited the litigation that has started in the New Hampshire case.

Although the NHLC and NeoPollard are pursuing a declaratory judgment that would state that the Wire Act is limited to sports gambling—which would benefit iDEA members and other private businesses—iDEA is the only party to the litigation representing private businesses not serving as state lottery-contracted vendors.  Thus, iDEA’s participation—led by Ifrah Law—gives the non-lottery gaming industry a critical voice seeking to ensure the broader online gambling industry’s interests are protected.

The Emerging State Exemption Argument

During the April 11 hearing before Judge Paul Barbadoro, the parties began discussing the possibility that the Wire Act does not apply to states and their vendors, such as NeoPollard.  In light of this discussion, Jeff Ifrah repeatedly reminded the Court that state-licensed businesses–such as iDEA’s members and others in the online gaming industry—are not legally equivalent to state vendors and that consequently they remained threatened by the DOJ’s new interpretation, even with newfound exemptions for states and their vendors.  DOJ’s suggestion of state exemption did not go unnoticed by former Solicitor General Theodore Olson, representing NeoPollard’s parent company, who remarked, “[A]llowing iDEA to intervene would ensure that future gambits by the Department cannot manipulate the Article III jurisdiction over this crucial pre-enforcement challenge.”  In short, DOJ appeared to be searching for a way to avoid the court addressing the Wire Act opinion head on, but the hesitant approach may fall short of silencing industry voices on grounds of standing.

Judge Barbadoro asked the parties to submit supplemental briefs addressing whether the Wire Act exempted states and their vendors.  The NHLC and DOJ submitted their briefs last week, and briefing is expected to conclude in early May.  In its brief, the NHLC argued that the Wire Act does not apply to states because the word “whoever” in the statute should not be read to include states.  It also argued that this limitation should extend to state-contracted vendors like NeoPollard, as well.  In its response to the NHLC’s brief, the DOJ stated that it is still studying the issue of whether states and their vendors are in the crosshairs of the Wire Act, and although DOJ reaffirmed that it  would not be prosecuting those entities during its study period, it presented arguments as to why those entities could potentially be subject to the Wire Act.

Given the unsettled nature of the state exemption argument, Ifrah Law’s participation in the case on behalf of private, non-state-contracted businesses such as iDEA’s members is even more critical, as a ruling by the court that the Wire Act exempts states would not be beneficial to private businesses.

The Road Ahead

Whether or not the NHLC’s argument that states are exempt from the Wire Act ultimately wins the day, it has led to speculation that states seeking to allow for legalized online gambling within their borders might attempt to avoid potential Wire Act problems by bringing online gambling operators under the umbrella of state lotteries, or some other state agency.  Indeed, although not necessarily for Wire Act reasons, Rhode Island and Washington, D.C. have passed sports gambling legislation allowing gambling to be operated only through their lotteries, and Montana has two bills ready for its governor’s signature, one of which likewise allows for lottery-only sports gambling operation.

Although a lottery “workaround” for legal online gambling could serve the interests of state lotteries (and their contractors) it ultimately should not be necessary.  While the NHLC argued that the Wire Act should not apply to states and their contracted vendors, its argument should apply with equal force to private licensed businesses operating in compliance with state law (albeit not as state contractors).  Namely, in the NHLC’s argument that vendors should be exempt from the Wire Act’s prohibitions, it referenced a decision by the United States Court of Appeals for the First Circuit[1]  where the court stated that the Wire Act’s purpose was not “to criminalize acts that neither the states nor Congress itself deemed criminal in nature.”

The best outcome for iDEA and similarly situated stakeholders within the gaming industry would be to limit Wire Act applicability to situations where the targeted private operator is not in compliance with state law.  Interpreting the Wire Act in that simple manner would be consistent with its original legislative purpose, which was to use federal resources to help states take aim at illegal criminal bookmaking enterprises.  And that federalist concept of limited reach was evident in the Supreme Court’s decision invalidating PASPA in Murphy as the Court mentioned in passing that the Wire Act applies “only if the underlying gambling is illegal under state law.”  It would also allow the regulated, i.e., legal industry to continue to flourish instead of finding itself reacting to new-found chaos at the hands of DOJ opinions.  Finally, in keeping the licensing process from “stove-piping” in the hands of a state lottery or some other singular designee operating as an arm of the state, the competitive model will surely benefit consumers, businesses, and state coffers alike.

Reading the Wire Act to not encompass activity legalized by states would also be consistent the federal government’s historical respect for states’ choices regarding gambling within their borders.  For example, the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprise Act (“Travel Act”), the Illegal Gambling Business Act (“IGBA”), and the more recent Unlawful Internet Gambling Enforcement Act (“UIGEA”) all contain carve-outs allowing for activity made legal by states to take place without federal invalidation.  Interpreting the Wire Act in the same way would harmonize with the traditional approach of using federal criminal enforcement mechanisms solely to help prosecute flagrant violators of state law, rather than to attack activity made legal by states.  Thus, states seeking to legalize online gambling should not need to resort to doing so via their lottery infrastructure, a position that Ifrah Law will continue to promote in and outside of the fast-moving New Hampshire litigation.

Since the Supreme Court eliminated the federal restriction on sports betting in Murphy, states have scrambled to enact legislation that opens the door to regulated on-line gaming that benefits consumers, the industry, and the states.  See https://ideagrowth.org/legislative-tracking/  With the trend clearly moving in the direction of state acceptance and regulation of sports betting, and with the technological convenience of mobile gaming at nearly everyone’s fingertips, there is simply no reason to think that states and businesses finding themselves under the yoke of a surprising federal reversal will meekly accept that change.  Whether New Hampshire marks the first volley or the last battle over the Wire Act’s reach, the gaming industry is well-armed to win this litigation.

[1] Sterling Suffolk Racecourse Ltd. Partnership v. Burrillville Racing Association, 989 F.2d 1266 (1st Cir. 1993).