Assembly Bill 2863, introduced by Assemblyman Adam Gray, D-Merced, would make California the fourth state after New Jersey, Nevada and Delaware to legalize some Internet poker websites. The measure, which passed the Assembly Governmental Organization Committee on a 19-0 vote last week, says the sites can only be operated by Indian tribes that already have casinos in California.

The connection between the financial struggles of California horse-racing tracks and online poker is based on track owners’ arguments that they have been financially devastated by the rise of legal online horse betting and by the proliferation of Indian casinos in the Golden State since 2000. That’s when voters approved a state constitutional amendment making it much easier for tribes to get casinos approved. While the racing industry is declining in California, it still has some pull in the Legislature.

But there is a split in the media over how much of a breakthrough online poker advocates truly achieved last week. Coverage in the niche media that specialize in gambling was less likely to see the committee vote as a huge step toward online poker’s legalization than the mainstream media.

OnlinePoker.Report.com challenged the description of some of California’s wealthiest tribes as being “neutral” on AB2863 simply because they had not taken an unequivocal public stand on the measure. In particular, OPR reported, Agua Caliente and Pechanga representatives privately express broad skepticism about Gray’s bill. 

Some CA tribes want to block online juggernaut

Their biggest objection involves what in the online poker world is known as the “bad actor” debate: whether online poker sites with questionable histories should be firmly banned from partnering with casinos in setting up new state-specific online sites.

PokerStars is the site most consistently depicted as a villain, which led to clauses in a Nevada law meant to keep it out of state-approved online poker sites. Founded in 2001, the world’s largest online poker site was the biggest fish targeted in the U.S. government’s 2011 crackdown on online betting. The next year, it settled its legal fight with the Justice Department by paying $700 million without admitting wrongdoing.

Now PokerStars has quickly established itself as a juggernaut in New Jersey with its pokerstarsnj.com site. In 2014, it lined up partners in California: the Morongo Tribe and the San Manuel Band of Mission Indians.

Unless other tribes get language in AB2863 that provides hard protections against a PokerStars-Morongo-San Manuel partnership, the legislation may end up being opposed by most of California’s richest tribes, whose generous campaign donations have given them considerable clout in Sacramento.

There is again a gap between mainstream and niche media coverage of this issue. Instead of being about keeping “bad actors” out of states, gambling news sites depict “bad actor” clauses as being about market protectionism.

One of the world’s best known law professors, Harvard’s Lawrence Tribe, agrees with that description and could work as a lobbyist for and counsel to PokerStars if a state law attempts to keep PokerStars from partnering with California tribes.

Led by the Pechanga Band of Luiseño Indians, a half-dozen tribes have registered their opposition to Assembly Bill 167, by Assemblyman Reggie Jones-Sawyer, D-Los Angeles. The bill would allow race tracks and a controversial gambling coalition to enter the online poker market.

“The citizens of California deserve protection from bad actors,” the tribes wrote in the opening salvo of this session’s online poker debate. “Assembly Bill 167 and any legislation that would expand the scope of gaming in California to grant Internet poker licenses to horse racing associations or which would ease regulatory standards to accommodate actors whose past behavior and tainted brands and assets would erode the integrity of intrastate Internet poker under consideration.”

In addition to Pechanga, other tribes that have signed the opposition letter to AB167 are the Agua Caliente Band of Cahuilla Indians, the Barona Band of Mission Indians, the Lytton Band of Pomo Indians, the Viejas Band of Kumeyaay Indians and the Yocha Dehe Wintun Nation.

The early opposition comes before legislative committees officially take up dueling proposals to legalize online poker in the state and dashes the hopes for a third compromise measure that would open up the country’s largest online gaming market.

Dueling poker bills

The debate over legalizing online poker is expected to be one of the session’s most heated as lawmakers take sides in a battle between rival gaming interests. This session, two proposals have been introduced to establish the basic iPoker regulatory structure, set licensing requirements for gaming providers and levy taxes on gross online gaming revenue.

With AB167, Jones-Sawyer has aligned himself with the state’s horse tracks and a controversial gaming coalition of card rooms, two Indian tribes and the online PokerStars. Rivals accuse of PokerStars of being a bad actor in the gaming market.

A second measure, Assembly Bill 9, is authored by Assemblyman Mike Gatto, D-Glendale. It explicitly would block both groups from marketing poker to the state’s 2 million online gamblers. Gatto’s measure, which sides with the state’s big tribes, also proposes a lower tax rate than Jones-Sawyer’s measure.

The tribes’ opposition to horse tracks isn’t surprising as the two groups have repeatedly battled over ballot measures to change the state’s gambling regulations.

In their opposition letter, the tribal coalition said voters repeatedly have upheld tribal gaming and, “By comparison, the voters have rejected expanded gaming at horse-racing facilities by an astounding 84 percent to 16 percent vote.” That’s a reference to Proposition 68 from 2004, when horse tracks and card rooms unsuccessfully sought approval for up to 30,000 slot machines in urban areas.

Tribes focus on “bad actors”

The fight over horse tracks was expected, but gambling industry experts were taken aback by the focus on AB167’s “bad actors” provision.

“I was somewhat struck by the tone of the letter, which spends only one paragraph on the issue of the tracks, but quite a few paragraphs focused on ‘bad actors’ and PokerStars,” wrote Chris Grove of the OnlinePokerReport.com.

PokerStars, a popular online poker site, defied the 2006 federal Unlawful Internet Gambling Enforcement Act, which effectively banned online gaming. In 2011, the U.S. Department of Justice used UIGEA to seize the Internet domains and freeze the accounts for several online poker sites, including PokerStars. The following year, the company reached a settlement with the Justice Department that dismissed the charges without admitting any wrongdoing.

Now owned and operated by the Amaya Gaming Group, PokerStars has partnered with two tribes, Morongo and San Manual, and three card rooms, Bicycle, Commerce and Hawaiian Gardens, to develop an online poker venture. Jones-Sawyer has embraced this coalition, arguing the group represents “broad consensus.”

“The dialogue over the past year has allowed us to reach even broader consensus and mutual agreement as to who will be able to participate in providing Internet poker to the citizens of this great state,” Jones-Sawyer said in a press release defending his proposal to include PokerStars. “My goal remains unchanged: to set a standard in California that is the shining example for the entire nation.”

But the state’s leading tribes, who’ve worked for decades to earn the trust of voters, believe PokerStars’ past actions should prevent it from gaining access to the online poker market.

“The language proposed in AB167 is not sufficient to protect the integrity of the California market,” the tribal coalition led by Pechanga wrote. “As proposed, AB167 provides no such protection, and instead would reward those gaming corporations that acted inconsistent with federal law and the letter of California law by authorizing them to use the fruits of their illegal conduct to obtain a license in California.”

Will Gray and Hall fold compromise hand?

While the fight over online poker is far from over, the tribes’ first action deals an immediate blow to Assemblyman Adam Gray, D-Merced, and State Sen. Isadore Hall, D-South Bay. The pair had introduced identical spot bills, Senate Bill 278 and Assembly Bill 431, to serve as a compromise measure.

“The issue of iPoker in California has historically been divisive; dealing legislators, the governor and the public a folding hand,” Hall and Gray, the chairmen of the Governmental Organization Committees in both houses, said in a joint statement earlier this year. “It is time to work together, stop bluffing and take control of this issue. Our bills do not create winners and losers.”

Yet it’s the tribes who could force Gray and Hall to fold their compromise measure, and with it the potential for legalizing online poker in 2016.

“More and more, Assemblyman Gatto’s view that online poker legislation had only a 35 percent shot at being passed in 2016 seems unduly optimistic,” wrote Steven Stradbrooke, a gambling industry reporter at CalvinAyre.com.

Four pieces of legislation have been put into play: AB9, AB167, and two identical bills, AB431 and SB278. Of these, AB9 and AB167 have attracted the most attention.

Lawmakers have hesitated to act boldly, unsure which constituencies should be treated most favorably. But after so much wrangling, some kind of consensus has seemed inevitable: as analysts have agreed, the money in online gambling is too big to ignore.

Tough choices

The market for Internet poker has grown large enough that its would-be masters haven’t hesitated to push and pull for influence in Sacramento. As U-T San Diego reported, legislators still disagree strongly, however, about how to choose among “card clubs, Indian tribes, race tracks and out-of-state gaming companies,” all of which want to play a leading role:

“Lawmakers and these groups have failed for nearly a decade to craft rules for who should control state-regulated poker sites and how much they should pay to do so. During this time, thousands of California poker players have migrated to playing online through unauthorized, often untrustworthy sites based overseas, letting industry and tax money slip away.”

Much of the uncertainty in the Legislature revolved around the way the law should treat California’s Indian tribes, some of which have proven especially eager to get in on the action. That question, in turn, has long been tangled up with controversies over federal policy.

Attention has focused around America’s biggest online poker website, an out-of-state business called Pokerstars. Because it has been working with California’s Morongo Band of Mission Indians and San Manuel Band of Mission Indians, Pokerstars has a vested interest in taking a robust share of the online poker business under a new regulatory regime.

But as the Sacramento Business Journal noted, a rival group of Indian interests, including the Pechanga Band of Luiseno Indians and the Agua Caliente Band of Cahuilla Indians, has accused Pokerstars of raking in illegal profits between 2006 and 2011, when Congress briefly had outlawed online poker as a matter of federal law.

Rival tribes, rival bills

As a result, divisions on legislation have gathered around the battle lines set by the tribes. Pechanga and Agua Caliente have sided with AB9 — authored by Assemblyman Mike Gatto, D-Glendale — because it contains a so-called “bad actor” clause, barring Pokerstars from entering California’s online gambling market.

Morongo and San Manuel, meanwhile, have rallied around AB167, introduced by Assemblyman Reggie Jones-Sawyer, D-Los Angeles. In lieu of a bad actor clause, that bill would punt to the state Department of Justice on which companies could and couldn’t participate.

In an effort to break the impasse, yet another alternative was recently introduced by State Sen. Isadore Hall, D-South Bay, and Assemblyman Adam Gray, D-Merced. Their identical bills are AB 431 and SB 278.

In a statement, the two allies played up their potential to reach a consensus through their legislative authority:

“Hall and Gray serve as Chairmen of each legislative house’s policy committee that oversees gaming within the state and are best positioned to lead a productive dialogue on an iPoker regulatory framework. By working together, their legislation seeks to build consensus on a public policy matter that has eluded California for years.”

Persistent challenges

Despite the substantial market, the lack of movement on online gambling has been attributed to several stubborn factors. As Gatto explained at the recent iGaming Legislative Symposium, legislators have proven risk-averse, and Californians haven’t exactly pushed them to action:

“If we pass a great bill, this isn’t going to make my career in terms of the voting public, and if we don’t pass a bill it’s not going to break anyone’s career. If you went to the average person on the street, I don’t think they’d even have an opinion on this and they would just want to know am I going to see some tax dollars go to my school and my neighborhood.”

Last year, Gatto noted, no more than five constituent emails out of 57,263 sent to him concerned online poker.

Assemblymen Mike Gatto, D-Glendale, and Reggies Jones-Sawyer, D-Los Angeles, have introduced separate proposals to allow online poker in the largest potential gaming market in the country. As many as 2 million Californians already play online poker, according to e-gaming company Vista Global Media, Inc., using websites located in other states or countries.

Both bills would take advantage of new federal rules that allow states to legalize and regulate online poker. Delaware, Nevada and New Jersey have already granted gamblers the right to ante up online. The two bills proposed in California would establish the basic regulatory structure, set licensing requirements for online poker providers and levy taxes on gross online gaming revenue.

While the bills share much in common, their subtle differences foretell a bruising battle between the state’s biggest and most powerful gambling interests.

Gatto’s AB9: Limited to card rooms, tribal casinos

Back in December, Gatto was first out of the gate, arguing that California lets millions of dollars in potential tax revenue flow to other jurisdictions.

“The status quo is a lost opportunity,” Gatto said last month when he introduced his legislation. “California could receive significant revenue for merely regulating and legitimizing an industry that Californians already participate in but send their dollars overseas.”

His proposal, Assembly Bill 9, includes a one-time license deposit of $5 million, which “would be credited against quarterly fees equivalent to 5 percent of the licensee’s gross gaming revenue proceeds.” It limits licenses to tribal gaming establishments and card rooms, excluding the horse racing industry, from the market.

“The state’s interests are best met, therefore, by licensing only those entities in California that have experience operating card rooms and tribal gaming facilities that are currently permitted to offer live real-money poker games and are in good standing with the appropriate state, federal and tribal regulatory agencies,” Gatto’s bill states.

Understandably, Joe Morris, president of Thoroughbred Owners of California, objected to Gatto’s exclusion, saying his industry wants a piece of the action.

“We want a seat at the table, on a level playing field,” Morris told Dave Palermo of Pechanga.net. “If there are licenses out for sites, we want a site also.”

Jones-Sawyer embraces horse racing industry

Gatto’s exclusion of the horse racing industry is one of several major differences with Jones-Sawyer’s proposal.

Assembly Bill 167 explicitly includes “in-state horse racing associations” in the list of potential online poker providers. Jones-Sawyer, who serves as chair of the California Legislative Black Caucus, also calls for a higher deposit, $10 million, and higher tax rate of 8.5 percent of “the licensee’s gross gaming revenue proceeds.”

“The reintroduction of this legislation comes on the heels of very thoughtful and collaborative discussion, including substantial input from both the state Department of Justice and the Gambling Control Commission,” Jones-Sawyer said in a press release announcing the bill’s introduction. “It is absolutely essential that we have a proper regulatory structure in place that provides safe and compliant internet poker access.”

While Jones-Sawyer has curried favor with horse tracks, he’s drawn the ire of the state’s most powerful gambling interest, the Pechanga Band of Luiseno Indians.

Debate over “bad actors”

Pechanga is concerned that Jones-Sawyer’s legislation would allow “bad actors” to enter the online poker market. The concern is similar to its opposition to Proposition 48, which voters rejected in 2014 and would have allowed off-reservation casinos.

“There is much for tribes to dislike about this bill,” Pechanga Tribal Chairman Mark Macarro said in reference to AB167. “We are disappointed that the bill disregards important principles from a broad coalition of respected tribes and card rooms that help prevent corporations and entities that previously violated federal law from profiting from tainted software, brands and databases derived from illegal activity.”

Macarro’s reference to “entities that previously violated federal law” is directed at PokerStars, a popular online poker site that defied the 2006 federal Unlawful Internet Gambling Enforcement Act. In 2011, the U.S. Department of Justice used UIGEA to seize the Internet domains and freeze the accounts for several online poker sites, including PokerStars. The following year, the company reached a settlement with the Justice Department that dismissed the charges without admitting any wrongdoing.

Gatto’s bill includes language that could qualify PokerStars as a “bad actor” for its role in violating the 2006 law. According to OnlinePokerReport.com, Jones-Sawyer’s bill “appears to lack any UIGEA brightline or similar conditionals designed to explicitly exclude PokerStars.”

In addition to PokerStars, several tribes and card rooms are opposed to the tougher standards for blocking “bad actors.” Amaya Gaming Group, which owns and operates PokerStars, has partnered with two tribes, Morongo and San Manual, and three card rooms, Bicycle, Commerce and Hawaiian Gardens, to develop an online poker venture.

“The bill seeks to establish a vibrant, competitive, fully inclusive marketplace with choices for consumers that enacts strong consumer protections; requires strict oversight and regulation of operators and licensees; and ensures a financial return for the state,” the PokerStars coalition said in reference to Jones-Sawyer’s bill.

Potential for compromise?

What are the chances for a compromise?

“If this gets done, and it’s a big if, it’s going to be a year-long process,” Gatto told PokerNews. “It’s not a bill that’s just going to be amended a little bit. It will be amended at every committee stop, and it would probably appear in six committees before it passed.”

He added that he looks forward to working with Jones-Sawyer to forge a compromise bill.

“My goal remains creating a sensible framework for a new California industry,” Gatto said. “That will involve a thoughtful process of consultation with all of the key stakeholders. I pride myself in listening; I expect this process will continue throughout the year.”

Both measures need a two-thirds majority in both houses of the Legislature.

By ELISE VIEBECK

In an eight-hour session on Tuesday, a Senate committee considered the implications of legalizing online poker, which has been prohibited in the United States since 2006. The testimony split legalization proponents — legislators looking to accrue gaming tax revenues and tribes interested in exclusive poker operator rights — and opponents — other tribes who say an authorization scheme would violate current gaming agreements, and analysts who predict expensive legal proceedings and net losses in government revenue.

The legal status of online poker is complex. The 2006 passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) banned U.S.-based online gambling operators from transacting with American financial institutions, forcing those operators to shutter and reopen offshore. Today, an estimated 15 million Americans — and 1 million Californians — continue to play online poker regularly using offshore sites.

In February 2008, then-Assemblyman Lloyd Levine, D-Van Nuys, introduced legislation aiming to restore online poker to California. AB 2026, which failed in the midst of the state budget crisis, would have permitted online poker for California players if provided by California-based sites. Legislators in Florida and New Jersey are currently debating similar intrastate authorization models, which would exempt the plans from UIGEA compliance.

Congressional lawmakers have also identified online gambling as a potential source of tax revenue. In May of last year, Rep. Barney Frank D-Mass., introduced a bill that would authorize the Treasury Department to regulate and license online gambling operations. Sen. Robert Menendez, D-N.J., followed with a bill in August specifically addressing Internet poker, and levying a 10 percent tax on all deposits made in online card rooms by American players. Neither have left committee.

Legalized online poker could increase state tax revenues using a similar per-deposit charge, but may also jeopardize more than $350 million in tribal gaming revenue for 2010-11, according to the Legislative Analyst’s Office.

Under current compacts, tribes are required to make annual payments to the state’s general fund in exchange for non-compete privileges for their casinos. A state-regulated online poker market, said one analyst from the LAO, could violate those privileges and prompt tribes to stop their payments to the state. Mark Macarro, chairman of the Pechanga Band of Luiseño Indians, affirmed this, saying he would consider withholding the more than $42.5 million his tribe contributes to the general fund every year.

The Morongo Band of Mission Indians was the only tribe to strongly disagree.

“We feel the games should be controlled by the tribes and the state — and taxed,” said chairman Robert Martin.

Published reports show that Martin has vied for exclusive tribal rights to online poker in California, and that the Morongo tribe is the biggest gambling lobby in the state.

While no bill is currently active on the issue, committee chairman Roderick Wright, D-Los Angeles, predicted that any solution would present a difficult legal situation.

“Clearly, whatever we do will end up in court,” he said.

Poker player groups, European regulators, Internet service providers and anti-gambling activists also testified. Experts note that civil libertarians, consumer-protection advocates and financial institutions that monitor customer gambling activity are also stakeholders, but were not represented in the speaker roster.