Difficulties Facing State Online Poker Compacts

John Mehaffey June 24, 2013

It seems all but certain that online poker will not be legislated at a federal level before states begin negotiating gaming pacts.  There are a number of potential issues that need to be addressed before states can agree to share player pools. 

Rake Allocation Formulas

The most important issue facing potential online poker gaming pacts is how to allocate rake.  There are five formulas that have been used in online poker to determine how rake is distributed to players.  This distribution is important in terms of taxes and player promotions.

Dealt – The dealt rake method was once used by most online poker rooms.  The formula is rake divided by the number of players dealt into a hand.  Each player dealt cards receives the same amount of rake regardless of whether they contributed to the pot. 

This formula has been abandoned by all offshore online poker rooms with the exception of Revolution Gaming.  It was thought this formula attracted too many players that abused the system by receiving rakeback or clearing bonuses without giving any action. 

Ultimate Poker, the only regulated U.S. facing online poker room, uses this formula to determine bonus clear rates.  Gamesgrid once used this software and also used the dealt method to determine rakeback and bonus requirements.  The software may be capable of other rake formulas, but this could require testing for approval, which does not appear to be a part of the original launch.

Weighted Contributed – This formula attributes rake by determining what percentage of the pot a player contributed and dividing the rake taken by that amount.  This is the most common formula used today by online poker rooms. 

Average Contributed –This formula distributes rake equally among all players that put any money in the pot.  This means that a small blind that folds preflop will receive the same amount of rake consideration that a player that reached the showdown receives. 

Winner Takes All – The player that wins the pot is credited with all rake taken when this method is used.  High Pulse Poker, which has since failed, is the only online poker room that ever used this method.

Recreational Player Model – The recreational player model rates players based on their previous win totals.  Stronger players receive less rake credit than weaker players seated at the same table.  This is an advanced model currently used on the networks of Bodog and Ongame.  It seems very unlikely this method could be used in an already confusing regulated U.S. market.

Clearinghouse

Money that is lost and won with each hand must be held in a clearinghouse until sessions have ended.  Online poker networks typically settle up at the end of the month, but sometimes these are settled daily or weekly.  There are multiple issues that must be considered when players across state lines win or lose.  These include the frequency of payments, as well as how the interest on these accounts will be distributed to participating states.  It must be determined whether the online poker room or the state will receive the interest on this money that is held in what is certain to be a segregated account.

Bad Actors

Absent a uniform federal law, each state must determine how to handle offshore companies that accepted U.S. online poker players in the past.  A blanket bad actor clause could prevent most legitimate online poker companies from participating in the U.S. online poker market.  Some state legislators feel the need to exclude companies that operated in the U.S. after the UIGEA went into law.  Nevada will license a company as long as it left the U.S. market on or before December 31, 2006, while New Jersey did not include any such language in their interactive gaming law.  These discrepancies must be resolved before a compact is signed.  

States with a strict bad actor clause will need to address how a company that fails to qualify under its licensing guidelines may participate in its state through gaming pacts. This may require adjustments to bad actor clauses or force states to only create gaming pacts with others that have similar restrictions on these companies.  A change to a bad actor clause may require legislative action.  This could be especially troublesome to Nevada where the State Assembly only meets every two years, though a special session could be called by the governor. 

Software Testing

The lack of flexibility in Nevada’s online poker testing requirements has been shown in the inability of Ultimate Poker to launch its version 2.0 in a timely manner.  New Jersey seems confident that it can approve online poker and casino software in just five months, less than half the time it took to approve Ultimate Poker.  Nevada has a stringent process that seems to require months to approve even the slightest software improvement, even if the software has a proven track record.  While it is still up in the air whether Nevada and New Jersey will ever enter into an online gambling pact, this is an example of how testing procedures will need to be mirrored before any such agreement may be reached or else there will be major delays in enacting interstate online poker.

Banned and Excluded Players

States that have approved or even considered online gambling have all addressed banned and self excluded players.  In most cases, players that are not allowed in live casinos are also banned from virtual ones regulated by the state.  Gaming pacts between states must address how to handle a situation where a player is excluded in one jurisdiction but not another.  Nevada will not be quick to accept a player finding a back door to its online poker rooms by simply moving to another state.  There is also a responsibility to exclude players that felt the need to ban themselves from casinos due to gambling problems. 

Banned Software

The legality of certain types of software has become a common discussion among poker players.  A mutually agreed upon list of banned software will be required before states can agree to share player pools.

Security Procedures

Gaming pacts must address the how to handle cheating and other types of fraud.  State gaming commissions must find a way to compromise on how to handle crimes committed on shared networks and how privacy laws might interfere with investigations, which brings us to the next problem.

Interstate Fraud

Fraud that crosses state lines is often left up to the federal government to enforce.  Online poker creates a difficult situation without federal legislation that specifically addresses it.  It may be difficult for a state to investigate and pursue players that collude, chip dump, charge back losses on their credit card or hack into a player’s account across state lines.  This may require involvement by the U.S. Department of Justice and the FBI, which may not be quick to get involved in disputes over small amounts of money.

Lotteries and Monopolies

Some states without a commercial casino industry may decide to offer online poker directly through its lottery.  This could create a situation where there is only one operator in that state.  This could make it difficult to network with other states as a company that wins a lottery monopoly bid may not be willing to allow outside companies to access their players.

State online gaming pacts are just one example of the complexity facing the future U.S. online gambling industry.  Casino games should be able to escape this issue, but online poker requires interstate liquidity to survive in most scenarios.  Absent any federal law addressing this, it may be a long road before players can bad beat their friends across state lines. 

 

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