When the Iipay Nation of Santa Ysabel announced last week that it was launching an online poker room that would take real-money play from California residents, shockwaves rolled through the online gaming industry.
California is online poker’s “whale.” With a population of more than 38.3 million, the state has almost as many people the Netherlands, Belgium and Greece combined. If California was in Europe, it would be Europe’s 10th most populous state.
In terms of GDP, California is the world’s eighth largest economy with a GDP of $1.959 trillion. That trails only the U.S. as a whole, China, Japan, Germany, France, Brazil and the United Kingdom.
That makes California the big prize. While the online gaming industry would like all of the U.S. to open up its markets to a regulated online gaming product, California is the most important piece of the puzzle.
Since 2007, there have been attempts to bring regulated online poker to the state. But the efforts, so far, have fallen short because the Native American tribes with successful casinos -- which wield significant political influence in California -- initially rejected online poker and have only recently begun to agree to a legislative framework that would regulate the market.
Last week, the Santa Ysabel took matters into its own hands and announced it was launching PrivateTable -- a real-money online poker room for California residents only.
When the announcement was made, the first question many people asked was, “Is this legal?”
Martin Owens, a noted gaming attorney working on behalf of the Santa Ysabel, believes the answer is yes.
“Basically what you have is a bunch of issues that haven’t been adequately addressed or haven’t been addressed at all,” Owens said.
“First of course is the interplay between tribal authority and state authority and federal authority regarding gambling,” Owens said. “It’s well enough for land-based gambling. But when you’re talking about Internet gambling, it’s a whole new set up. And quite honestly, the lawmakers haven’t kept pace with this technology.”
“There are 16 states and D.C. that don’t even define what gambling is!” Owens added. “Only nine states even mention the Internet in connection with gambling at all. And most haven’t updated their gambling laws in decades.”
“So along comes the Internet, and it’s opened up the jurisdiction question,” Owens said. “If there’s ever been an elephant in the room, it’s the jurisdiction question. Where does the bet take place and why?”
“This is an issue that authorities have been playing to their advantage. When England started to take Internet bets, of course it was at the server. But Costa Rica has a law that says it takes place anywhere but Costa Rica, because that’s their legal advantage.”
“In terms of a neutral standard for this, I went to contract law,” Owens said. “According to contract law -- and according to common sense too -- where a contract is silent as to the place, the contract is deemed to take place where it is executory. That is where it can actually be accomplished, where it can be delivered if you will.”
“Now there’s only one place where that happens regarding Internet gambling -- where the odds, the offer to bet, the amount of money to be bet, checking the account to see if the money is there and taking input on the resolution of the event, red 20 on roulette, the horse crossing the line, etc., are brought together” Owens said. “The only place all of those elements are brought together is on the server of the Internet gambling business.”
Because the betting happens on the server -- on Native American land -- Owens says the Santa Ysabel are in full compliance with California law.
“In 1998, the (federal) Indian Gaming Regulatory Act divided gambling into three categories for federally recognized tribes,” Owens explained.
“Class 1 is the traditional tribal competition that is part of the tribe’s history and culture,” Owens said. "Those are strictly under the tribe’s control. Class 2 is bingo and non-banked games like poker (but not keno). Class 3 is pretty much everything else -- slots, table games, baccarat, blackjack roulette etc. Everything but sports betting.”
“If an Indian tribe, which is (federally recognized) and has land of its own wants to offer Class 2 gaming, they don’t have to consult state authority at all,” Owens said. “They can go directly to the feds.”
“There are some administrative requirements,” Owens added. “They have to do a proper job administering it. But once it’s arranged, they can offer Class 2 Gaming.”
“The state has to have a compact with the tribe to offer Class 3 gaming,” Owens said.
Santa Ysabel and the state of California signed a Class 3 gaming compact in 2005.
So if it’s legal to offer online poker now, why are some Native American tribes in extensive negotiations with the state over creating a regulatory framework for online poker?
“It comes down to a five-point legal analysis,” Owens said with a chuckle. “M-O-N-E-Y.”
“California is full of Indian tribes,” Owens said. “Of the approximately 350 federally recognized Indian tribes, 110 are in California. And every recognized tribe has the right -- at least potentially -- to set up some sort of (online) operation.”
“Now you add in half-a-dozen race tracks, county fairs and the 90-odd municipal card rooms and all of sudden you have more than 150 potential claimants for a license out here,” Owens said.
“Well even with a population of 38 million and a very tolerant attitude toward adult pastimes of all sorts, there just are not enough troops to keep 150 operations in business,” Owens said. “So there are going to be winners and there are going to be losers. And that has led to some very intense behind-the-scenes efforts.”
“So everyone is out there, with enough money to block each other in the stage legislature,” Owens explained.
“Now you have people trying to exclude each other,” Owens said. “There are some really deep-seated rivalries. That’s what’s kept Internet gaming from moving forward at the state level. There are too many people whose main interest is making sure someone else doesn’t get a chance.”
“One thing (the legislature) was specializing in was poison pills,” Owens added. “These were calculated measures to keep certain people from entering the market.”
“These measures particularly targeted smaller tribes and smaller card rooms,” Owens said. “The first poison pill was anyone that wanted to set up an online poker room had to be self financing. Most of the smaller tribes and card rooms are not rich. They were counting on people coming in from the outside and helping them with things like software, marketing and the investment.”
“It’s not the law yet,” Owens said. “But that would stop a lot of people.”
This political climate, combined with the Santa Ysabel’s need for money, explains the decision to launch now, Owens said.
“Word got out the larger tribes and card rooms were going to support this poison pill,” Owens said. "This was the crack
of doom for the little guy.”
“If something containing that poison pill goes into effect, they won’t be able to participate in the Internet market,” Owens said. “And that in turn will mean the end of their operations because even now, a lot of these smaller operations are running into trouble.”
The Santa Ysabel had to close its brick-and-mortar casino in February. But the launching of the online poker wasn’t a hasty decision by the tribe.
“They approached me about this 10-to-12 months ago,” Owens said.
Owens isn’t alone in both his legal and political assessment of the California online poker market.
“Of course it's a gray area of the law,” said Joe Kelly, an expert in gaming law and professor of business law at SUNY College at Buffalo. “I think they have a pretty good chance of being success.”
“As long as they stick to intrastate (online poker), the problems are much fewer than if they accept a player from out of state, like Washington, where's it's class C felony to play online poker,” said Kelly, who at present does not have any interests in California.
“California is a circular firing squad (politically),” Kelly added. “The (legislative) deadline is coming up in August. California is losing millions of dollars as players play in sites outside of California. And here you have some degree of regulation.”