Beginning in the nineteenth century every state adopted laws and even constitutions prohibiting most forms of gambling, except for specified exceptions. State laws generally prohibit or regulate lotteries, contests, table or card games, amusement devices, raffles, slot machines, gaming devices, pull-tabs, bingo, racing, sweepstakes, horse racing and sports wagering.
Even where state law appears silent, most states have general laws prohibiting gambling except as expressly authorized under state law. See for example PA Stat. §5512(d): “As used in this section the term ‘unlawful’ means not specifically authorized by law.”
Nonetheless, the trend is for liberalizing state laws. Forty-eight states and the District of Columbia now have some form of legalized gambling, with sports wagering the fastest growing new market. Only Utah and Hawaii prohibit all gambling.
Thus, unless a particular form of gambling clearly comes within an exception or statutory authorization, the gambling is usually not authorized. This leaves many entrepreneurs in the position of arguing that their product does not constitute gambling at all because an essential element of “gambling” is missing.
The most common formulation of gambling is the same as the usual definition of a lottery, namely something which involves consideration, chance and prize.
If any of these three elements is missing, then the activity is usually but not always permitted under both state and federal law. “Free” games focus on eliminating “consideration.” “Skill” games, contests and tournaments focus on eliminating or reducing the effect of “chance.” Games providing in-game awards that cannot be redeemed for value focus on eliminating the “prize.”
Whether a particular contest or game is missing one of these three elements is usually a fact question based on the specific operation of the contest or game. In addition, many states have laws that exempt particular activities within limits, such as insurance contracts or investments, bone fide business risks, charity bingo, business promotions, the state-run lottery, “skill” games or carnival style amusement devices.
The element of consideration can often be removed by allowing people to enter the contest for free or giving them free tokens for game play, often called “no purchase necessary.” But a participant usually must have an easy means to participate and an equal chance to win.
Removing or minimizing the element of chance may seem like the best option, especially since traditionally states have recognized that “skill” games or contests are not gambling. But of the three elements of gambling, state law varies the most with respect to evaluating the element of chance making it the most difficult element to calibrate uniformly under state laws.
In addition, with regard to skill based games some states have bookmaking or sports wagering laws that broadly prohibit staking anything of value on contingent future events or contests regardless of the role of skill or chance, unless the participant is paying an entry fee unrelated to the prize pool. This has posed a particular problem for daily fantasy sports and some types of skill games.
Eliminating prizes and having participants play only for their amusement may be an option, but “freemium” games that sell extended game play have been called into question in a recent ruling in the State of Washington.
The reported court decisions often involve persons who thought that through some artifice or device they could remove one of these three elements while still offering essentially a gambling product. These defendants were usually wrong.
