Federal Flip-Flop-Flip on Online Gambling Seems to Draw Court’s Ire

New Hampshire Lottery executive director Charles McIntyre addresses reporters in 2018. At left is New Hampshire Assistant Attorney General John Conforti. (AP Photo/Charles Krupa)

BOSTON (CN) — After threatening to criminalize virtually the entire online gambling industry two years ago, the U.S. Department of Justice told the First Circuit that it didn’t really mean it and that the judges shouldn’t get involved in the issue.

“There’s not only no credible threat of prosecution, there’s no threat at all,” Justice Department attorney Jeffrey Eric Sandberg assured the Boston-based federal appeals court Thursday at oral arguments.

But the New Hampshire Lottery Commission told the judges that a 2018 opinion by the Department’s Office of Legal Counsel clearly threatened to put state officials in jail for selling online lottery tickets. Although the government has said it won’t enforce the law in that way, it also said that it could change its mind with 90 days’ notice.

“State lotteries bring in hundreds of millions of dollars that are incorporated into budget planning,” observed U.S. Circuit Judge William Kayatta, one of three judges presiding over the appeal. “Any state could wake up tomorrow morning and discover that if it doesn’t substantially change its practices in 90 days, its officials could go to jail.”

Sandberg admitted that was true.

“These are like aircraft carriers; you can’t turn them around quickly,” Kayatta fretted.

Filed last year, New Hampshire’s suit has broad implications not only for state lotteries but for tribal and private casinos and online poker, bingo, and other gambling operations.

At issue is the 1961 Wire Act, a federal law that criminalized using interstate telecommunications for certain types of gambling. The law is confusingly written, and it’s unclear if it applies to all betting or just to sports betting.

In 2011 the Office of Legal Counsel said the law applied only to sports betting, a decision that gave rise to online state lotteries as well as private industry spending billions of dollars to develop online slot-machine and bingo networks and internet-based systems for casinos to monitor gambling and transfer winnings. 

After the office reversed itself in 2018, saying the law applies to all betting, it issued another memorandum in April 2019 where it purported to hold “no opinion” on whether the law applied to state lotteries.

Asserting that it would not prosecute state officials without giving them 90 days’ warning, the government moved to dismiss the New Hampshire Lottery Commission’s suit.

U.S. District Judge Paul Barbadoro nevertheless ruled for the commission at summary judgment.

At the First Circuit, the government insisted again that its intent not to prosecute the case was therefore moot because it wasn’t intending to prosecute anyone.

U.S. Circuit Judge Sandra Lynch seemed to disagree.

“Only after plaintiffs filed suit did your office say, ‘Gee, we didn’t mean what we said,’” the Clinton appointee remarked.

Sandberg next focused on how the 2018 opinion included no mention, specifically, of state lotteries.

“So, you’re saying the case wasn’t ripe because what you said was vague?” Lynch asked.

“I suppose so,” Sandberg replied.

Kayatta was still troubled by the 90-day time limit. “It’s 90 days, and on the 91st day you could find yourself arrested,” the Obama appointee complained.

Assistant New Hampshire Attorney General Anthony Galdieri made a similar point, saying the Justice Department “could change its mind tomorrow,” and “we would have 90 days to change a massive operation, which would not be possible.”

The state lottery raised $87.2 million in fiscal 2018 alone, Galdieri noted, emphasizing that every dime went to support public education.

Lynch wanted to know if the court’s ruling could be limited to state lotteries as opposed to casinos and private businesses. Galdieri said he’d be happy with that outcome, but the Justice Department below didn’t want to carve out the state-lottery issue and therefore the lower court said the entire 2018 opinion was invalid. 

“So they hoisted themselves on their own petard,” Lynch replied.

Representing several private contractors that work with the state lottery, Gibson Dunn attorney Matthew McGill said the 2018 opinion clearly applied to state lotteries because it specifically said that if states didn’t like it they could ask Congress to change the law. “That posed a clear and present danger of prosecution,” he argued.

McGill told the judges that Office of Legal Counsel opinions are binding on the Justice Department, directly contradicting Sandberg who said they are merely advisory.

Lynch pressed Sandberg on the effect of the 2018 ruling on casinos and private gambling companies.

“It seems to me there were considerable reliance interests not only in the states but in the ancillary businesses that caused them to invest hundreds of millions of dollars in reliance on the 2011 memo,” she said. “You may say it’s vague, but they certainly felt they were threatened.”

Sandberg replied that the issue was irrelevant because no casinos were involved in the current case.

Nineteen states and the District of Columbia filed amicus briefs in the case supporting online gambling, as did the Association of Gaming Equipment Manufacturers, a trade group that said the case had “tremendous practical significance for the gaming industry.”

On the other side, a group called the Coalition to Stop Internet Gambling filed a brief supporting the 2018 opinion together with the National Association of Convenience Stores. Convenience stores could see their sales hurt if customers have the option of buying lottery tickets online.

The coalition’s brief warned that allowing online state lotteries that cross state lines “would create a race to the bottom in which the state with the laxest gaming regulations and most generous payouts would generate the most revenue from online gaming activities and effectively set Internet gaming policy for the entire nation.”

U.S. Circuit Judge Juan Torruella, a Reagan appointee, rounded out the panel, which held the argument online due to Covid-19.

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