ifrah on igaming
image description

A Blog About Online Gaming and Entertainment Regulations

◂ back
How the Gray Bill Tries to Keep Out Bad Actors
May 24, 2016

How the Gray Bill Tries to Keep Out Bad Actors

By: Steven Eichorn

The iGaming world is excited about Assembly Bill 2863—better known as the Gray bill because of lead sponsor Adam Gray—which would legalize and regulate intrastate online poker in California. A few weeks ago, the bill unanimously cleared the Assembly’s Governmental Organization Committee; now it looks set to clear the Appropriations Committee as well.

Those are promising signs—but we’ve seen this before. Last year, a similar bill—also by Adam Gray—cleared the same two committees and caused much enthusiasm, only to “die on inactive file.” California has tried, and failed, to pass an online poker bill for almost a decade: is there any reason to get excited over this bill?

Actually, there is. For one, the Gray bill is the first to resolve the dispute between racetracks and tribal casinos. Previous bills allowed only tribal casinos and card rooms to apply for an online poker license, and the racetracks didn’t think that was fair. They wanted in—but the tribal casinos didn’t think that would be fair, because they worried that letting racetracks run poker games would infringe upon the gaming exclusivity granted to the tribes by the state’s constitution.

The Gray bill compromises; it asks racetracks to rescind their online poker eligibility in exchange for a subsidy of $60 million a year, taken directly from the online poker revenue made by other operators. Despite uncertainty over how soon, if ever, online poker will make that much in a year, the racetracks have shown support for the Gray bill.

But a second controversy remains unresolved. This has usually been called the debate over the “bad-actor clause,” although we’re seeing an increase of references to the issue of “suitability.” Either way, it’s clear enough what it is: some tribes want the bill to contain language that prohibits licensing any online poker operator who offered real-money play in California after the passage of the UIGEA in 2006. Others protest the inclusion of such language and would rather the matter be decided by the California Gambling Control Commission without the need to take cues from a bill.

The Gray bill shows cognizance, but ambivalence, about this issue. Some have gone so far as to say that the bill doesn’t contain suitability language at all; that is not true. Go to Subsection 19990.405 and you’ll find plenty of dead giveaways that make you unsuitable. For example, you cannot have been convicted of a felony. Nor can you be under 21 years of age. And don’t even think about turning in your paperwork late.

But none of them specifically address whether you were taking bets online in California between 2006 and the present day—the most salient segment of time by which “bad actors” are judged. There is, instead, a very vague but critical subparagraph, typed in an electric blue that sets it eerily apart from the rest of the black-and-white bill:

The act that added this subparagraph shall not become operative until criteria are established by statute to address involvement in Internet betting prior to the state’s authorization of Internet poker pursuant to this chapter.

That’s a fancy way of saying “this bill goes nowhere until we’ve decided what to do about PokerStars.”

That subparagraph is likely to cause trouble—but it need not nullify everything else the bill says about licensing, most of which you’ll find under Article Four of the 11-article document. (Because almost every section of the bill begins with 19990, I will refer only to the last three digits for brevity.) Section 404 provides directives to the Commission about how to screen prospective applicants. It’s a section that is worth studying more closely because, even if the Gray bill never becomes law, the investigative protocol it recommends could set a precedent with staying power.

The Gray bill directs the Commission to carry out two investigations per applicant—a preliminary “partial” investigation followed by a more penetrating “full” one.

The partial investigation is like a bad-actor receptionist, stationed upfront to turn away the very obvious bad guys. 404 (c) describes it:

A partial investigation shall include fingerprint-based state and federal criminal history checks and clearances, and inquiries into various public databases regarding credit history and any civil litigation. … A full investigation shall be conducted of only those service providers that pass the partial investigation …

The full investigation is instead so scrupulous, one could almost hope not to get to it. As described in 404 (d):

Before the commission issues a service provider license to an applicant, the department shall conduct the full investigation required by this section of all of the following persons:

(1) All officers of the license applicant.

(2) The owner or owners of either of the following:

          (A) The license applicant.

          (B) Any corporate affiliate of the license applicant.

(3) Any persons otherwise providing goods to, or performing services for, the license applicant related to core functions.

(4) Any person deemed by the department to have significant influence over the license applicant or its service providers or their respective operations.

And mind the next subsection about what a “report” entails. We will return it later:

… A full investigation shall include … the required submission of a report prepared on each service provider by an outside firm contracted and supervised by the department … The report shall include information necessary for the department to make a determination of suitability, consisting of, but not limited to, personal history, prior activities and associations, credit history, civil litigation, past and present financial affairs and standing, and business activities, including whether the applicant or an affiliate of the applicant has a financial interest in any business or organization that is or was engaged in any form of gaming or transactions related to gaming prohibited by the law of the federal or state jurisdiction in which those activities took place.

Curiously, nothing so far indicates whether anything uncovered from the investigative process would bar an applicant from a license; there are only mandates that this or that information be solicited. So, an applicant who’s had some troubling things come up during the investigation or inside the report could still be recommended for a license. For a list of clearly disqualifying offenses, you need to go to the aforementioned Section 405—which is exactly where the proponents of a bad-actor clause hope to stick one.

But is that really the only way you could keep out people you don’t like, if those people are online poker operators who took bets in California after UIGEA?

Go back to the part about the report that says it has to include information about “whether the applicant has an interest in any business that was engaged in any form of gaming prohibited by the law of the jurisdiction in which those activities took place.” (Abridged.)

Could that do the work of a bad-actor clause? It’s not quite the definitive red card that some tribes have in mind, but could it stick some operators into a litigious licensing process like the one that PokerStars had to endure in New Jersey for years before being licensed?

We would hate to see that happen. The Gray bill and all of its investigative measures seem fit to do quick work of clearly bad people. What would be the use of dragging an applicant through a licensing battle of the wills? The Commission would look inefficient. The industry would look obtuse. Californians would be annoyed; they have waited almost ten years to play the kind of online poker promised to them bill after bill, and if this controversy continues to rage, they might have to wait another ten.

Steven Eichorn

Steven Eichorn works with clients at the forefront of the technology, eCommerce, igaming and sports gambling industries. For both established companies and startups, Steven helps with licensing applications, legal opinions, buyouts and acquisitions, commercial agreements and ICOs, in addition to general legal matters like corporate formation documents, operation agreements and employee contracts.