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Is the state lottery the new online casino?

Intellectual Property and Technology News

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Retail lottery games and traditional casino games have long been easy to distinguish from each other. For example, Powerball tickets or scratch-off tickets are easily identified as conventional lottery games; whereas slot machines and roulette tables are easily identified as traditional casino games. 

However, with the advent of Internet and mobile gaming in the US, the traditional lines of demarcation between lottery and casino games are eroding. To the casual player, new “iLottery” games played on a smartphone are largely indistinguishable from online casino-style games.

While the appearance and gameplay of Internet-based lottery products may closely resemble Internet-based casino games, lottery products are typically afforded different treatment under applicable law than are casino games, since lotteries are creatures of state government and casino gaming exists pursuant to narrow prescriptions. This difference in legal treatment begs the question: is a turf war for online players smoldering between state lotteries and the private-sector casino industry?

Lottery v. casino gambling under state laws

State-sanctioned lottery and casino gambling products have coexisted for hundreds of years, dating back to at least the 1560s in England, where the first recorded official lottery was chartered by Queen Elizabeth I, and lottery products have existed arguably since the dawn of recorded time.[i] At their core, both lottery games and casino games constitute gambling: both types of games contain three key elements: payment (otherwise known as “consideration”), chance, and prize.[ii] [iii]

Despite both being treated as “games of chance” under applicable law, state lottery products are now legal in 45 states plus the District of Columbia, Puerto Rico, and the US Virgin Islands. In contrast, only 25 states currently offer commercial or retail casino gaming.  Private-sector interactive/mobile casino gaming has been legally authorized in only six states to date: New Jersey, Pennsylvania, Nevada, Michigan, West Virginia and Delaware. Why, then, do so many more states and territories legally authorize lotteries?

One of the reasons lies with the manner in which state lottery laws are written vis-à-vis private-sector gambling laws.  While federal laws typically proscribe or criminalize certain interstate gambling activities, Tenth Amendment jurisprudence coupled with state law gives the states expansive authority and jurisdiction to legalize and regulate the gambling and lottery activities conducted on an intra-state basis. Under each state’s enabling legislation, lotteries are operated and conducted by an instrumentality or body of state government, and the profits of lotteries inure to public beneficiaries such as universities and schools, transportation systems, senior citizen programs, and the state’s general fund, to name a few. State lottery laws typically consist of a broad mandate and are generally permissive in enabling authority, giving the state lottery wide discretion to determine the means and manner in which lottery games (online and retail) may be conducted. 

Take New Jersey as an example. The Constitution of the State of New Jersey has expressly authorized the state legislature to establish a state lottery so long as the “entire net proceeds of any such lottery shall be for State institutions and State aid for education.”[iv] Consistent with that constitutional authority, the New Jersey legislature enacted a statutory scheme creating a Division of Lottery within the Department of Treasury as well as a State Lottery Commission.[v]  The legislature also adopted statutory provisions setting forth the regulatory duties and powers of both the Director of the Division of Lottery and the State Lottery Commission, enabling them to, among other things: (1) authorize the type(s) of lottery to be conducted; (2) determine the method to be used in selling tickets or shares; (3) license agents to sell tickets or shares; and (4) determine the number and sizes of prizes on the winning tickets or shares.[vi]

In contrast, state gambling laws typically consist of a blanket constitutional prohibition on all types of private gambling enterprises, with narrowly tailored exceptions. As a result, casino and online gaming enterprises are required to be licensed by state gambling regulatory authorities, and they operate subject to strict oversight by those authorities. Criminal consequences befall any enterprise that conducts gambling activities without express state approval and regulation.

In New Jersey, the state constitution expressly prohibits private-sector gambling unless it has been first authorized by a majority of voters via state-wide referendum. The only for-profit gambling exceptions currently authorized in the state constitution are a) wagering on running and harness horse races conducted at racetracks located within or outside of the state and b) gambling at casinos located within the territorial boundaries of Atlantic City.[vii]Indeed, when the New Jersey legislature legally authorized Internet casino gambling on an intrastate basis, a statutory provision was included requiring all “facilities, equipment and personnel […] directly engaged in the conduct of Internet gaming activity, shall be located […] within the territorial limits of Atlantic City, New Jersey” so as to not run afoul of the constitutional exception providing that casino gambling may only take place within the boundaries of Atlantic City.[viii] Both land-based and online casino operators must undergo a protracted licensing process that includes remitting substantial licensing fees (totaling hundreds of thousands of dollars) and filing invasive personal and business-level disclosures with state gambling regulators before being permitted to operate in New Jersey.

Enabled by this disparate legislative treatment, state lotteries generally have more latitude to establish a wider array of intrastate gambling products than do private-sector gambling enterprises.

Recognizing that 96 percent of Americans shop online through a variety of e-commerce solutions and platforms, and that, in 2021, over 72 percent of all e-commerce sales were made via mobile platforms, it is safe to say that most Americans today own a mobile phone and use it to access the Internet on a daily basis to engage in a variety of activities, including e-commerce purchases and gambling.[ix] However, only a handful of state lotteries have begun to offer interactive lottery games that are played via Internet or mobile channels, in addition to traditional paper tickets. Indeed, these iLottery products often resemble private-sector Internet casino gambling products in terms of appearance, gameplay, and other features.

Meanwhile, private and public sector enterprises continue to innovate new forms of lottery game play. For example, Tapcentive is a private company that offers an instant ticket solution in which hundreds of instant ticket plays are stored on what resembles a gift card. Outcomes can be revealed digitally through one’s mobile or tablet device via a simple tap of the card against the device. With such innovative products continuing to drive the marketplace, a battle for market supremacy has begun in those states that have legally authorized both igaming and iLottery, and Pennsylvania is the first state in the nation where this smoldering battle has erupted into litigation.

Greenwood Gaming and Entertainment, Inc., et al. v. Commonwealth of Pennsylvania, Department of Revenue, et al.

In August 2018, seven casinos filed an action in Pennsylvania state court seeking declaratory and injunctive relief to prohibit the Pennsylvania Lottery from “offering iLottery games that contain certain features, such as reveal all, auto play, bonus games, adjustable bets, and unlimited play/non-depleting prize pools” all of which “customers associate with slot machines.”[x]During discovery, in June 2019, the casinos filed an application for a preliminary injunction, seeking to enjoin the Pennsylvania Lottery from offering iLottery games that were “uniquely characteristic of slot machines.” Following a two-day preliminary hearing, the court denied the casinos’ application, concluding the casinos failed to meet their heavy burden of proof.

The court eventually presided over a five-day trial that involved ample documentary evidence, demonstrative evidence, and argument, including the testimony of the following individuals: Drew Svitko, Executive Director of the Pennsylvania Lottery; Stephanie Weyant Fidler, Deputy Executive Director; Dan Cherry, VP of Casino Operations for Penn National Gaming; William Eagan, Senior Lottery Associate at Spectrum Gaming; David Schultz, Senior VP at JVL Gaming; Rhydian Fisher, CEO of IWG; Amy Bergette, VP of Digital Content at Scientific Games; John Dixon, CEO of Parx Casino, and Michael Lightman, an industry expert. The court made over 100 findings of fact and other determinations, including those pertaining to (a) the history of the lottery and gaming in Pennsylvania; (b) the legislative development of iLottery games; (c) iLottery games and their characteristics; (d) the experts’ opinions; and (e) the credibility of all witnesses.

Central to the court’s analysis in Greenwood were two provisions of the Pennsylvania Lottery Law. Section 303(a.1) of the Pennsylvania Lottery Law forbids the Secretary of Revenue and, in turn, the Pennsylvania Lottery, from allowing “any Internet-based or monitor-based interactive lottery game or simulated casino-style lottery game, including … slot machines”[xi].  Section 502 defines iLottery games as “Internet instant games and other lottery products offered through iLottery … [excluding] games that represent physical, Internet-based or monitor-based interactive lottery games which simulate casino-style lottery games, specifically including poker, roulette, slot machines or blackjack”[xii]. The court observed that the crux of the case distilled to two questions: “(1) whether the legislature intended iLottery games to merely be online versions of instant tickets … and (2) what the legislature intended to authorize and prohibit when it described the prohibition as relating to the simulation of ‘casino-style’ games.”[xiii]In May this year, the court issued its ruling. 

Finding that a plain reading of the statutory provisions at issue provided that the state legislature did not intend to limit iLottery games to that of online instant tickets, the court analyzed whether the following game features are unique to slot machines: reveal all; auto play; bonus games; adjustable bet; unlimited plays and nondepleting prize pools; and other features (eg, random number generator and return to player). The court ultimately held that:

“the features of the iLottery games challenged by [the casinos] are not signature, iconic, or key features particular to casino slot machines. Rather, they are features that; related to technological advances in online gaming; are based on online entertainment and gaming, as well as existing entertainment sources like television and board games, which have indisputably inspired both iLottery game and slot machines game designers; or existed in the same or similar fashion in traditional lottery products that were translated into a new online medium.”[xiv]

The court in Greenwood further held, “It cannot have been the intent of the legislation for [Sections 303(a.1) and 502] to be read to preclude either one of these newly authorized online games, iLottery or interactive gaming, from taking advantage of technological advances, changes in gaming and entertainment, or features that are found in existing popular entertainment.”[xv]

Consequently, the Pennsylvania Lottery may continue to offer its iLottery products and compete in the online and mobile space, pending a likely appeal by the casino plaintiffs.

Conclusion

The Greenwood case in Pennsylvania is likely a harbinger of similar cases to come in other states that legally authorize both iLottery products and private-sector interactive casino gaming. iLottery products will continue to evolve as more state lotteries enter the online market. In many cases, the courts will ultimately decide how closely new and emerging iLottery products may resemble private-sector online casino gambling products.


[i] See John Ashton, A History of English Lotteries (1893).

[ii] Soto v. Sky Union, LLC, 159 F. Supp. 3d 871, 878 (N.D. Ill. 2016) (citing People ex rel. Green v. Grewal, 61 Cal.4th 544, 564, 189 Cal.Rptr.3d 686, 699, 352 P.3d 275, 286 (2015) (quoting Trinkle v. Stroh, 60 Cal.App.4th 771, 782, 70 Cal.Rptr.2d 661, 667 (1997) (Trinkle 1). First, the machine or device must be activated by "the insertion of money or [some] other object." Trinkle v. Cal. State Lottery, 105 Cal.App.4th 1401, 1410, 129 Cal.Rptr.2d 904, 910 (2003) (Trinkle 2). Second, "the operation of the machine [must be] unpredictable and governed by chance." Id. Third, "by reason of the chance operation of the machine, the user may become entitled to receive a thing of value." Id.

[iii] FCC v. American Broadcasting Co., Inc., 347 U.S. 284, 290 (1954) (“All the parties agree that there are three essential elements of a "lottery, gift enterprise, or similar scheme": (1) the distribution of prizes; (2) according to chance; (3) for a consideration.”)  (citing Stone v. Mississippi, 101 U.S. 814 (1879) (a typical “lottery” is a scheme in which tickets are sold and prizes are awarded among the ticketholders by lot)).

[iv] N.J. Const., Art. IV, §7, Par. 2., Subpar. C.

[v] N.J. Stat. Ann. § 5:9-1 to -7.

[vi] N.J. Stat. Ann. § 5:9-7 and 5:9-8.

[vii] N.J. Const., Art. IV, §7, Par. 2., Subpar. D through F.

[viii] N.J. Stat. Ann. § 5:12-95.22.

[ix] Broadband Search, Key Internet Statistics to Know in 2021.

[x] Greenwood Gaming and Entertainment, Inc. v. Commonwealth of Pennsylvania, Department of Revenue, Pa. Cmwlth No. 571 M.D. 2018 (Filed May 25, 2021), slip op. at 3.

[xi] 72 Pa. Const. Stat. § 3761.303(a.1).

[xii] 4 Pa. Cons. Stat. § 502.

[xiii] Greenwood Gaming and Entertainment, Inc. v. Commonwealth of Pennsylvania, Department of Revenue, Pa. Cmwlth No. 571 M.D. 2018 (May 25, 2021), slip op. at 29.

[xiv] Id. at 44-45.

[xv] Id. at 45.