Online Poker a Game of Skill or Chance? US Attorney Says The Latter

Written by:
C Costigan
Published on:
Jan/07/2011
Online Poker a Game of Skill or Chance

Following charges leveled against James Davitt in Maryland last month as part of an ongoing investigation into Internet poker financial activities, the U.S. Attorney’s Office filed a memorandum attempting to show that poker is indeed a “game of chance”.  Davitt incidentally plead guilty.

The Poker Players Alliance (PPA) has long argued that poker is a “game of skill”.

Below, Gambling911.com has published the filed memorandum.

 

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Northern Division UNITED STATES OF AMERICA v. JAMES DAVITT, Defendant. : : : : CRIMINAL NO. CCB-10-0751 : : : ...oo0oo...

 

GOVERNMENT'S RULE 11 MEMORANDUM The United States of America, by and through undersigned counsel, hereby submits this memorandum to outline the legal basis for the plea in this case. The Information charges the defendant with conducting an illegal gambling business in violation of 18 U.S.C. section 1955. This memorandum discusses the operation of section 1955 in conjunction with Maryland gambling law. FACTS In the plea agreement, the defendant has agreed that he and others made arrangements with representatives of Full Tilt Poker to make payments to internet gamblers through a company called HMD Inc. Full Tilt Poker is a company that offers online gambling on the internet; it is located in Dublin, Ireland, and has several hundred employees that conduct, manage, and direct the online gambling activity. During at least 2008 and 2009, Full Tilt Poker accepted funds from people located in Maryland and elsewhere (“gamblers”) to open accounts. The plea agreement also states as follows: These gamblers then played games, including Texas Hold‘Em poker, online with other gamblers and, as each game was played, gamblers won money that was credited to the winner’s account. Gamblers with a positive account balance that included winnings routinely requested a payout of funds by check or by electronic funds transfer. Because most gamblers play online poker with the hope of winning

 


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money, the movement of winnings to online gamblers is essential to the success of the gambling business. Texas Hold ‘Em poker is the most commonly hosted and played form of Internet poker. In Texas Hold 'Em Poker: “each player is dealt two private cards face down. The cards are referred to as the hole cards. [After this first deal], the initial betting round takes place. After that, three public cards (the flop) [are] placed face up in the middle of the table. The second betting round follows. When the betting round has finished, another public card (the turn), is placed alongside the flop. Next is the third betting round. After that, the final, fifth, public card (the river) is turned up, followed by the final betting round. Each player still remaining in the pot now combines the public cards with her hole cards to obtain a five card poker hand. When doing so, it is possible to use one, both or none of the hole cards to obtain a five card poker hand. Naturally, the player now (at the showdown) having the best poker hand wins the pot.”1 This sequence of deals and placing bets is true of poker played on the Internet as well as with live play, with the main difference being that in Internet poker, the players can not see or hear each other to observe facial expression, body language, or tone of voice. In order to facilitate the movement of funds to and from their customers, Internet gambling operators use money-processing businesses generally called “Payment Processors.” Typically, an Internet gaming operator sends a large check or wire transfer directly to the payment processor who then distributes the money, at the direction of the gaming site operators, to gamblers for their winnings. This is accomplished either by check or electronic transfer. The government submits that

 

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Pennsylvania v. Dent, 2010 Pa. Super 47, *P3 (2010) (internal citations omitted)

 

(emphasis in original). 2

 


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Full Tilt Poker is an illegal gambling organization within the meaning of 18 U.S.C. section 1955, and that it operates in violation of Maryland law. Because the defendant performed a function that was essential to the gambling business by moving money to winning gamblers, the facts and the law support the plea in this case. DISCUSSION An “illegal gambling business” is defined in section 1955 of title 18 of the United States Code as a gambling business which: (1) violates the law of the State or political subdivision in which it is conducted; (2) involves five or more people who conduct, finance, manage, supervise, direct, or own all or part of the business; and (3) has operated or operates on a substantially continuous basis in excess of thirty days, or has a gross revenue of $2,000 in any single day. 18 U.S.C. § 1955. As is mentioned above, Full Tilt Poker has several hundred employees that conduct, manage, and direct the online gambling activity. Also, as is set forth in the plea agreement, the defendant’s business, HMD Inc., moved approximately $3.9 million on behalf of Full Tilt Poker in June 2009; these facts satisfy elements (2) and (3) above. Therefore, in this case, the question of whether the defendant was engaged in an illegal gambling business in violation of section 1955 depends on element (1): whether the business activity violated the law of the jurisdiction within which the business was conducted. Under Maryland law, gambling is prohibited by section 12-102 of the Maryland Criminal Code. This section prohibits a person from: (1) betting, wagering, or gambling; (2) making or selling a book or pool on the result of a race, contest, or contingency; or (3) receiving, becoming the depository of, recording, registering, forwarding, proposing, agreeing, or pretending to forward money or other consideration of value to be bet, wagered, or gambled on the result of a race, contest, or contingency. Further, section 12-101(d) of the Criminal Law Article states in relevant part that

 

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a “gaming device” is a “a game or device at which money or any other thing or consideration of value is bet, wagered, or gambled.” Under Section 12-104 of the Criminal Law Article, it is a crime punishable by imprisonment or a fine to inter alia manage a gaming device or have an interest in a gaming device or the profits of a gaming device. The Maryland Criminal Code does not explicitly define gambling or unlawful gambling. However, in analyzing Maryland’s gambling prohibition, the Maryland Court of Appeals explained illegal gambling as “consideration . . . paid for the chance to win a prize or reward.” F.A.C.E. Trading, Inc. v. Todd, 393 Md. 364, 375, 903 A.2d 348, 354 (2006) (analyzing whether a coupon card game constitutes illegal gaming prohibited by §§ 12-101(d) and 12-104 of the Criminal Law Article). Accordingly, the three elements of gambling under Maryland law are consideration, chance, and reward. Further, in the same decision, the court noted the long-established extensive scope of the gaming prohibitions in Maryland, as codified in section 12-113 of the same article, which requires courts to construe liberally all gaming and betting provisions to prevent the prohibited activities. Id. at 376-77.2 In F.A.C.E. Trading, Inc., the court explained that the requirement for courts to liberally construe Maryland’s gambling statute had been well established since the nineteenth century.

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The liberal construction requirement was first enacted in 1842, and has been regularly applied by this Court in a multitude of gambling cases. As Judge W. Mitchell Digges emphasized for the Court in Gaither v. Cate, 156 Md. 254, 258-59, 144 A. 239, 240 (1929), we take it that section 257 [now § 12-113] is an expression by the Legislature of the policy of the State in respect to the construction of gambling statutes generally, and requires the courts to construe statutes prohibiting and penalizing the use of gambling devises liberally, so as to prevent the mischiefs which the Legislature sought to repress. By that section it was, in effect, stated by the Legislature to the courts that, whenever the Legislature enacted statutes having for their object the repression of gambling, in respect 4

 


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As explained above, to participate in a game of poker, players must wager money, and if they have the most successful hand, they are rewarded with money. Therefore, by definition, the game of poker satisfies the consideration and reward elements of gambling under Maryland law, leaving open only the issue of whether poker is a game of chance. To date, there have not been any judicial decisions in Maryland on the specific issue of whether poker (or Texas Hold ‘Em poker) meets the “game of chance” requirement for illegal gambling under Maryland law. While no Maryland court has decided this precise issue, in State v. Cresent Cities Jaycees, the Court noted that “card games” may constitute gambling devices. 330 Md. 460, 471, 624 A.2d 955 (1993). See also Emerson v. Townsend, 73 Md. 224, 20 A. 984 (1890) (debt for money loaned at poker game held void as money was loaned for gambling). Additionally, the Office of the Attorney General of the State of Maryland has taken the position that poker

 

to such statutes the rule of strict construction should be reversed, and the courts should so construe them as to give validity not only to the word, but to the spirit of the law. According to our view, it is incumbent upon the courts to give force and effect to the legislative mandate contained in this section of the Code, and to construe liberally statutes aimed and intended to prevent gambling, or order to effectuate the legislative intent and purpose; and therefore this statutory rule of construction should be applied to all gambling statutes without regard to whether they were enacted before or subsequent to section 257 [now § 12-113]. See, e.g., Chesapeake Amusements, Inc. V. Riddle, 363 Md. 16, 32-33, 766 A.2d 1036, 1044 (2001) (reiterating the above-quoted passage from Gaither v. Cate, supra); State v. Crescent Cities Jaycees, 330 Md. 460, 471-72, 624 A.ed 955 (1933) (where we pointed out that courts give “full sway to the legislative intention so clearly expressed in §[12-113] that the gaming law prohibitions be literally construed to prevent the evils inherent in gambling”); Ballock v. State, 73 Md. 1, 7. 20 A. 184, 185-186 (1890) (Instead of the rule “applied to the construction of other criminal statutes, which is a rule of strict construction, . . . the law says this statute is to be construed liberally , in order to prevent” gambling). F.A.C.E. Trading, Inc., 393 Md. at 377-79. As such, Maryland gaming laws are to be to be construed broadly and liberally. 5

 


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tournaments do not constitute illegal gambling as long as “the participants do not pay any money or other valuable consideration, directly or indirectly, in order to participate in the tournaments at any level.” Op. Atty Gen. Md. 64 (2010). As the Attorney General’s opinion implies, if the game involved consideration, it would be illegal gambling, compelling the conclusion that the other elements of gambling are present in poker. As such, this opinion of the Attorney General requires the conclusion that under Maryland law, poker is a game of chance. Moreover, the Fourth Circuit and several other United States Courts of Appeals have regularly categorized poker as a game of chance. For example, in explaining the states’ ability to regulate gambling under their police powers, the Fourth Circuit noted that “[t]he regulation of lotteries, betting, poker, and other games of chance touch all of the above aspects of the quality of life of state citizens.” Johnson v. Collins Entertainment Co., 199 F.3d 710, 720 (4th Cir. 1999) (emphasis added). See also, e.g., Keweenaw Bay Indian Community v. United States, 136 F.3d 469, 472 n. 5 (6th Cir. 1998) (“At its gaming facility, . . . the Community operates six blackjack tables, one craps table, and electronic and/or video games of chance including approximately 100 video poker games and slot machines.”) (emphasis added); Mashantucket Pequot Tribe v. Connecticut, 913 F.2d 1024, 1027 n. 5 (2nd Cir. 1990) (“The games of chance that Connecticut permits at the ‘Las Vegas nights’ include blackjack, poker, dice, money-wheels, roulette, baccarat, chuck-a-luck, pan game, over and under, horse race games, acey-ducey, beat the dealer, and bouncing ball.”) (emphasis added); Chance Mgmt. v. South Dakota, 97 F.3d 1107, 1009 (8th Cir. 1996) (“Video lottery consists of games of chance played on a computer-controlled video machine, simulating the games of poker, blackjack, keno, and bingo.”) (emphasis added); Percifield v. United States, 241 F.2d 225, 226 (9th Cir. 1957) (“During the years in question appellant operated a gambling casino at Rangely, Colorado, 6

 


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known as the Ace-High Club. This contained a bar, a lounge, a café, a casino room where games of chance were played, including blackjack or '21', poker, craps or dice, as well as slot machines.”) (emphasis added). 3 In addition to many courts’ treatment of poker as a game of chance, the very nature of the game of poker coupled with the mandate for courts to liberally construe Maryland gaming laws warrants the conclusion that poker is a game of chance under Maryland law. Recently, however, some in the gaming industry have suggested that poker is not a game of chance because a level of skill can influence the outcome. Since this specific issue has never been decided by the Maryland courts, there is not a precisely articulated legal standard under Maryland law for assessing the role of chance relative to skill when determining whether poker is a game of chance under the gambling statute.

 

There are two U.S. District Court opinions that include a statement of fact that poker is a game of chance or a casino game. Progressive Games v. Shuffle Master, 69 F.Supp.2d 1276, 1279 (D.Nev. 1999)(“a jackpot component as a complement to live card games of chance (e.g., poker).”) , and Coeur d’Alene Tribe v. State, 842 F.Supp. 1268, 1270 (D.Idaho 1994)(“casino gambling including ... poker ....”). There also are a number of state court decisions that find that poker and other card games are games of chance. State v. Terry, 141 Kan. 922, 44 P.2d 258, 260 (1935)(“Five-card stud poker is not a confidence game or swindle, but is a game of skill and chance.”); State v. Cannon, 2323 Mo. 205, 134 S.W. 513 (1911)(poker is gambling); Indoor Recreation Enterprises v. Douglas, 194 Neb. 715, 235 N.W.2d 398 (1975)(poker is a game of chance)(cited in Santee Sioux Nation v. Norton, 2006 WL 2792734 (D.Neb. 2006)(“Nebraska ... in fact prohibits games of chance such as ... poker and blackjack.”)); People v. Turner, 165 Misc. 2d 222, 223-24, 629 N.Y.S.2d 661 (N.Y. Crim. Ct. 1995) (poker is a game of chance); State v. Hansen, 108 Or.App. 609, 612, 816 P.2d 706 (1991)(“‘Gambling’ is broadly defined to include the kind of poker played here, except to the extent that the game is a ‘social game.’”); State v. Randall, 121 Or. 545, 550 256 P. 393 (1927)(“It is true there is an element of chance in poker, and a very large element at that....”); State v. Barnett, 79 Wash.2d 578, 580-85, 488 P.2d 255 (1971)(“The element of chance in the instant card games [low ball poker] satisfies the requisite element of chance for a gambling game within the statutory prohibition....”).

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Looking to courts in our sister jurisdictions, two tests for assessing the role of chance relative to skill have emerged. Some courts that have decided the issue of whether poker is a game of chance use the “predominate factor” test, which looks at whether the element of chance predominates over skill,4 while others use a “material factor” analysis whereby chance simply needs to be a material factor to the outcome of the game for the chance element to be satisfied.5 Indeed, the Court of Appeals of Maryland’s decision in Brown v. State supports the conclusion that a standard requiring a minimal showing of a role of chance in the outcome should be used in Maryland. Specifically in Brown, the Court of Appeals held that a pinball machine was an illegal gambling device, explaining that when “[c]onstruing the statutes liberally, we see no reason to confine the application of the

 

See, e.g., Pennsylvania v. Dent, 2010 Pa. Super 47, *P11 (Pa. Super. Ct. 2010) (using the predominate factor test to hold that live Texas Hold ‘Em is a game where chance predominates over skill in violation of Pennsylvania law); Joker Club, L.L.C. v. Hardin, 183 N.C. App. 92, 97, 643 S.E.2d 626 (2007) ( “[T]he test . . . as to whether it is a game of chance or a game of skill is not whether it contains an element of chance or an element of skill, but which of these is the dominating element that determines the result of the game, to be found from the facts of each particular kind of game. Or to speak alternatively, whether or not the element of chance is present in such a manner as to thwart the exercise of skill or judgment.”) (holding that poker is a game of chance because it “presents players with different hands, making the players unequal in the same game and subject to defeat at the turn of a card.”); OHIO REV . CODE ANN . §2915.01(D ) (2010) (“‘Game of chance’ means poker, craps, roulette, or other game in which a player gives anything of value in the hope of gain, the outcome of which is determined largely by chance, but does not include bingo.”).

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See, e.g., VFW Post 6477 v. Mo. Gaming Comm'n, 260 S.W.3d 388, 391(Mo. Ct. App. 2008) (using the material factor test to hold that certain bingo games violated the state’s prohibition on gambling); People v. Turner, 165 Misc. 2d 222, 629 N.Y.S.2d 661 (N.Y. Crim. Ct. 1995) (“Gambling differs from other kinds of contests in that in gambling the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”) (internal citations omitted).

 

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statute to those devices that depend upon chance, as distinguished from skill. In broader aspects, ‘playing any game for money is gaming.’ . . . The insertion of the money and the operation of a device by the player in a hope of winning a monetary reward in varying amounts, in our view of the Maryland statute, constitutes a bet or wager, regardless of the element of skill.” Brown v. State, 210 Md. 301, 307 (Md. 1956). This language was also quoted favorably in the Court of Appeals’ F.A.C.E. Trading, Inc. opinion. 393 Md. at 378-79. This language, as used in Brown and repeated in F.A.C.E. Trading, Inc., indicates the likelihood that the Court of Appeals would analyze the issue of whether poker is a game of chance under a less strict standard than the predominate factor standard.6 While it is likely that Maryland law requires something less than chance predominating for poker to be illegal gambling, using either of the two standards employed by Maryland’s sister states allows the conclusion that poker is a game of chance. An assessment of the role of chance in poker under either of these standards compels the conclusion that poker is a game of chance because the cards dealt to the players ultimately dictate whether any one player wins or loses. Indeed, as the Supreme Court of Alaska has suggested, the test is that “without skill it would be absolutely impossible to win the game.” Morrow v. State, 511 F.2d 127, 129 (1973). While knowledge of human psychology, the ability to bluff, and an understanding of the odds of receiving certain cards may help a skilled player to win over time, she or he is always at the mercy of the cards received with

 

As it examined the problem of defining what is a lottery, the Supreme Court suggested that the exercise of some skill in a game does not eliminate the effect of chance. Horner v. United States, 147 U.S. 449, 459 (1893)(“The element of certainty goes hand in hand with the element of lot or chance, and the former does not destroy the existence or effect of the latter.”)

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each deal, and, short of cheating, no amount of skill can change that.7 Furthermore, in a game of poker played on the Internet, where players cannot watch their opponents to assess their bluffs, skill plays even less of a role in dictating the outcome of the game than when players all sit around a table and can observe each other’s plays. These conclusions are supported by both judicial decisions in other states as well as statistical studies. Although Maryland courts have yet to rule on the legality of poker under Maryland’s gaming laws, persuasive judicial decisions from our sister jurisdictions dating back over a century support a finding that poker is a game of chance, and thus illegal gambling under Maryland law. For example, the Court of Appeals of New York, in 1904 acknowledged the difficulty of distinguishing between chance and skill, but yet explained that “games of cards do not cease to be games of chance because they call for the exercise of skill by players.” People ex rel. Ellison v. Lavin, 71 N.E. 753, 755 (N.Y. 1904). The Supreme Court of Nevada opined that card games were games of chance because “[a]ny game played with cards in which the hand at cards depends on dealing with the face down is a game of chance.” Ex Parte Pierotti, 184 P. 209, 211 (Nev. 1919). The Supreme Court of Utah similarly held that card games involving cards dealt face down are games of chance because, As to how one would determine whether chance or skill predominates in a game, the Fifth Circuit stated as follows about a game of pinball that was used to award cash to the player: “No doubt, habitual players who have studied a particular machine may attain a degree of proficiency in deciding the force to apply to the ball or in nudging the machine so that the ball is more likely to strike a particular bumper or fall into a particular hole; but even the most skillful player combats predetermined conditions and odds which are completely beyond his judgment and control.” Johnson v. Phinney, 218 F.2d 303, 307 (5th Cir. 1955). This same view easily applies to poker because “even the most skillful player” can lose with the turn of the last card. Indeed, this same view was expressed by the Supreme Court of Massachusetts in 1936: “if the element of chance is present in such a manner as to thwart the exercise of skill or judgment in a game, then there may be a lottery.” Commonwealth v. Plissner, 295 Mass. 457, 466, 4 N.E.2d 241 (1936). Again, because the skillful poker player cannot control the turn of the next card, if she has not bluffed the other players into folding early, she can still lose, despite her skill.

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“[i]f the card[s] are fairly dealt, the most skillful player cannot tell in advance what kind of hand he will draw.” D’Orio v. Startup Candy Co., 266 P. 1037, 1039 (Utah 1928). See also, e.g., State v. Barnett, 488 P.2d 255, 258-29 (Wash. 1971) (holding that “low poker” involved a substantial element of chance). More recently, the Criminal Court of the City of New York maintained that, despite the skill required in poker, it was “as much [a game] of chance as [the lottery] since the outcome depends to a material degree upon the random distribution of the cards. The skill of the player may increase the odds in the player’s favor, but cannot determine the outcome regardless of the degree of skill employed. People v. Turner, 629 N.Y.S.2d. 661, 662 (N.Y. Crim. Ct. 1995). Additionally, in 2007, the Court of Appeals of North Carolina held that poker was a game of chance using the predominate factor test, explaining: [W]hile all games have elements of chance, games which can be determined by superior skill are not games of chance. For example, bowling, chess, and billiards are games of skill because skill determines the outcome. The game itself is static and the only factor separating the players is their relative skill levels. In short, the instrumentality for victory is in each player's hands and his fortunes will be determined by how skillfully he use[s] that instrumentality. Poker, however, presents players with different hands, making the players unequal in the same game and subject to defeat at the turn of a card. Although skills such as knowledge of human psychology, bluffing, and the ability to analyze odds make it more likely for skilled players to defeat novices, novices may yet prevail with a simple run of luck. No amount of skill can change a deuce into an ace. Thus, the instrumentality for victory is not entirely in the player's hand. In State v. Taylor, our Supreme Court noted this distinction. 111 N.C. 680, 16 S.E. 168 (1892). It is a matter of universal knowledge that no game played with ordinary playing cards is unattended with risk, whatever may be the skill, experience or intelligence of the gamesters engaged in it. From the very nature of such games, where cards must be drawn by and dealt out to players, who cannot anticipate what ones may be received by each, the order in which they will be

 

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placed or the effect of a given play or mode of playing, there must be unavoidable uncertainty as to the results. Id. at 681-82, 16 S.E. at 169. This is not so with bowling, where the player's skill determines whether he picks up the spare; or with billiards, where the shot will find the pocket or not according to its author's skill. During oral argument, counsel for plaintiff analogized poker to golf, arguing that while a weekend golfer might, by luck, beat a professional golfer such as Tiger Woods on one hole, over the span of 18 holes, Woods' superior skill would prevail. The same would be true for a poker game, plaintiff contended, making poker, like golf, a game of skill. This analogy, while creative, is false. In golf, as in bowling or billiards, the players are presented with an equal challenge, with each determining his fortune by his own skill. Although chance inevitably intervenes, it is not inherent in the game and does not overcome skill, and the player maintains the opportunity to defeat chance with superior skill. Whereas in poker, a skilled player may give himself a statistical advantage but is always subject to defeat at the turn of a card, an instrumentality beyond his control. We think that is a critical difference. Joker Club, L.L.C. v. Hardin, 643 S.E.2d at 630-31 (emphasis added).8 Thus, it is a common theme in these opinions that, regardless of skill, a single “turn of a card, an instrumentality beyond his control,” can determine the winner and losers. Further, just in March 2010, the Superior Court of Pennsylvania wrote an extensive opinion explaining why chance predominates in live, or non-Internet Texas Hold ‘Em poker. At it’s essence, the court’s conclusion was that while “skill can determine the outcome in a poker game, players are still subject to defeat at the turn of the cards.” Pennsylvania v. Dent, 2010 Pa. Super 47, *P23 (2010)

 

In Las Vegas Hacienda, Inc. v. Gibson, the court considered testimony by a golf professional: “He testified that luck is a factor in all holes in one where skill is not always a factor. He further testified that ‘a skilled player will get it (the ball) in the area where luck will take over more often than an unskilled player.’” 77 Nev. 25, 29-30, 359 P.2d 85, 87 (1961). That court went on to hold that “The test of the character of a game is not whether it contains an element of chance or an element of skill, but which is the dominating element.” Id.

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(internal citations omitted) (emphasis added).9 As this extensive history of judicial opinions demonstrates, courts have regularly viewed poker as a game of chance because the “luck” of the cards ultimately determines whether a player wins or loses. Notably, most of these judicial decisions involved live games of poker, where players had the opportunity to use their bluffing skills and ability to read people to affect the outcome of the game. By contrast, the role of skill must be even smaller in Internet poker, where players do not have such opportunities to utilize these skills. This reality of Internet poker was appreciated by the Pennsylvania Supreme Court in Pennsylvania Liquor Control Board v. Kehler, when it held that electronic poker machines were gambling devices since chance was a predominate factor in the outcome. 465 A.2d 973, 978 (1983). The Pennsylvania Supreme Court explained that “[t]he skill involved in [electronic poker] is not the same skill which can indeed determine the outcome in a game of poker between human players . . . when it is realized that holding, folding, bluffing and raising have no role to play in [electronic poker]. Skill can improve the outcome in [electronic poker]; it cannot determine it.” Id. at 978. It is evident that internet poker is much more like poker machines then it is like live poker because of this key inability to read the opponent and to bluff. Finally, in addition to the various courts’ opinions that poker is a game of chance, there is a wide array of statistical studies that support the conclusion that poker is a game of chance.

 

Interestingly, prior to the Superior Court’s opinion, a Pennsylvania trial court also determined that poker was a game of chance. The Court of Common Pleas for Westmoreland County found Lawrence R. Burns guilty of violating Pennsylvania’s same gambling laws for organizing Texas Hold’ Em Poker tournaments where individuals paid an entrance fee to the tournament and first through fifth place winners were awarded monetary prizes. Pennsylvania State Police Incident Report - Part II. Incident No. X43-28394. Through this finding, the Pennsylvania court rejected Defendant Burns’ argument that poker is not illegal gambling because it requires a high degree of skill.

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Although studies varying in reliability conclude both that poker is a game predominated by chance and by skill, even those studies which conclude that poker is a game of skill rely on the finding that skill only predominates over time. For instance, in his paper “Poker, Chance and Skill,” Noga Alon uses an overly simplified “basic game” to show that “[i]n fact, when the sequence [of games] becomes long, as is usually the case in poker games, a skilled player wins against an unskilled one with overwhelming probability.” Noga Alon, Poker, Chance and Skill, at 15 (School of Mathematics and Computer Science, Tel Aviv University ). Alon’s conclusions rely not only on a long sequence of games, a circumstance not inherent in internet poker where players come and go as they wish, they also depend on a game played only between a skilled opponent and an unskilled opponent, or opponents where the skilled player knows the strategy of the other players. Alon, supra, at 8-9. Thus, as Professor Kedem points out in his recent paper, if the very skillful tend to win, then for the great majority of other players, the game is one of luck. Benjamin Kedem, On Luck versus Skill in Poker, at 2-3 (Prepared for USAO/MD July 2010; a copy is annexed hereto as Exhibit A for the convenience of the Court).10 Similarly, if all of the players in the game are skilled, then that factor

 

Indeed, the Supreme Court of Hawaii has made this precise point: “It is the professional opinion of Dr. Dillworth that ‘Fascination’ is a game in which skill greatly predominates over chance. Be that as it may, the test of whether a game is one of skill or of chance, or one in which skill greatly predominates over chance, is not to be measured by the standard of experts or any limited class of players, but by that of the average skill of a majority of players likely to play the game, for the purpose is to determine the primary object of the game and this is one of the ways of doing so.” State v. Prevo, 44 Haw. 665, 675, 361 P.2d 1044, 1050 (1961)(emphasis added). A similar point was made by the United States District Court for the District of New Jersey in a case examining the use of slot machines. “Although an individual who plays the game consistently may develop a certain degree of skill, in order to determine if the element of chance exists in operating the machine, the focus must shift to the ‘average player.’ [internal cite omitted] As explained by the court in that case, the average player ‘plays a few times and moves on. He has neither the time nor the inclination to spend a couple of years studying the idiosyncrasies of the machine.’” Wolf v. United States, 1982 WL 1734 (D.N.J. 1982).

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is neutralized, and chance would have to play a predominant role.11 Furthermore, Noga Alon also asserts that “in many ways poker requires more human skill than chess, as an optimal strategy depends so crucially on the behavior of the opponents.” Alon, supra, at 16. There are two problems with this conclusion. First, as is mentioned above, while engaged in internet poker, players cannot read the behavior of their opponents. Thus, even if skilled players are able to use bluffs and their ability to read their opponents unintentional quirks and tics in order to reduce risk in face-to-face poker, as argued by Hope and McCulloch, infra, the faceless setting of internet poker renders these skills useless, which means that the outcome is even more dependant on the chance of the card values. It seems self-evident, based on the rules of the game of Texas Hold ‘Em as explained above, that the skill in the game must be based entirely on the hole cards. A player can only gain an advantage if she has an ability to bluff about the value of her own hole cards or to guess at the value of the hole cards of the other players. Other games, such as roulette and golf, can illustrate the point. In roulette, a marble is dropped onto a spinning wheel and bets can be placed based on guesses as to where the marble will come to rest. This obviously involves no skill at all. In contrast, golf involves very little luck, and the more skillful golfer will likely win the game unless something like an illness diminishes his skill. But what if roulette involved separate, hidden spins of the wheel for each player that were

 

Indeed, the opposite of this proposition is helpful in proving the point. In the game of “Duplicate Bridge,” tournaments are played by providing contestant tables of players with identical hands. In other words, the hands provided to the four players at table A are the exact same four hands provided to the players at Table B. In this way, the element of chance is removed and the scores are based on a comparison of the results that the players obtain as they play the same cards. There is no similar game of Duplicate Poker.

11

 

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Filed 12/16/10 Page 16 of 20

 

followed by a round of betting on who had the better spin results? Or, similarly, what if golfers kept separate, hidden scores and the players then bet on who had the best score that day? In these examples, the skill of bluffing would come into play, just as it does in Texas Hold ‘Em poker. An even easier way of demonstrating the skill of bluffing would be to do away with the hole cards. If all cards are dealt face up, then it is unimaginable that one could win with an inferior hand. Second, Noga Alon’s specific reference to chess and some other references to tennis, ignore the fact that, at bottom, the game of poker is not a static game. Alon says that “lots of random elements, like the wind, the sun, [and] balls hitting hidden bumps in the court” affect the game of tennis; based on this premise, he concludes that tennis and poker involve equivalent levels of chance. Alon, supra, at 15. Yet tennis and chess both assume a level playing field, leaving skill to decide the outcome. In games like tennis, soccer, football, and baseball, the components of the game, such as the ball, field dimensions and surface, net height, and goal dimensions are standardized. In fact, in tennis and chess, players even switch sides periodically to ensure that all participants face the same challenges of either side of the field or court. Likewise, all players are subject to the same weather elements during the game. With every hand of poker, however, the players face one another on unequal ground based on the cards that are dealt. This means that the central component of poker, over which players have no control at all, is not static; it is determined purely by chance, and it absolutely will determine the outcome of the game if the players fail to bluff their opponents out of the hand. This point is further demonstrated by the analysis in Hope and McCulloch’s Statistical Analysis of Texas Hold ‘Em, (Prepared for Rational Entertainment Enterprises Limited, 2009). The authors examined 714,439 poker hands taken from a PokerStars database and from the personal files

 

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of ‘serious’ online poker players.12 Based on this data, they find that only 24.3% of hands result in a showdown, and only half of these showdowns, or 12% of the total, are won by the person at the table who could have formed the best hand; the authors go on to conclude that “the majority of games are determined by something other than the value of the cards.” Hope and McCulloch, supra, at 5, 14. There are two serious flaws in this conclusion. First, as Professor Kedem observes in his article, the 12% chance that the player with the best five-card hand will make it to, and win, a showdown is not fairly classified as “rare.” Kedem, supra, at 6. It means that in at least one out of ten hands, the player with the best cards will win, which should not be surprising.13 Second, Hope and McCulloch completely gloss over the critical fact that in the one in four hands that do reach a showdown, the outcome at that point is absolutely determined by the face value of the cards. That is, even if a player uses his skill to convince some players to fold, once he enters the showdown with the remaining players, every player in the showdown is at the mercy of the cards. Skill at that point is obviously and entirely meaningless. Essentially, both Alon’s paper and the paper by Hope and McCulloch attempt to paint poker as a game of skill by showing that players can reduce the importance of the cards dealt by bluffing

 

This should call into question the reliability of the data. The authors try to minimize doubts about the data by telling the reader that “[t]he kinds of players who submitted hand histories are diligent and scrupulous about recording and analyzing their play. So, while it is unlikely that they remember all 60,000 hands in mid-January, it is highly likely that they vetted those hands as the hands were added to their database.” Hope and McCulloch, supra, at 11-12. It should be just as obvious, however, that without controls over the recording process, these “serious” online players could easily select which hands to record based on entirely subjective criteria.

12

 

Another apparent flaw in this study is that Hope and McCulloch actually only show that one in two (half of the 24.3%) is lost to a better hand, not one in ten. They do not analyze the 75% of hands that don’t reach a showdown. What if all of these actually are won by the best hand? In that case, 87% (75% plus 12%) of the games are won by the best hand, not one in ten.

13

 

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Filed 12/16/10 Page 18 of 20

 

their opponents out of the hand. The conclusions in these papers, however, misapprehend the true nature of poker. Unlike other contests like baseball or tennis where players focus on using their skill to frustrate the skills and strengths of the other player, a poker player’s central focus is on trying to reduce or eliminate the role of the other player’s luck, i.e., the cards he is dealt. For example, a baseball pitcher might use his curve ball and sinker against a talented hitter, or a tennis player might serve to the backhand of an opponent with a dangerous forehand. But, in poker, even the most skilled bluffer or reader of clues knows that he is powerless once forced into a showdown. This, then, is the most serious flaw in these poker studies. Because a player will never know whether he has the strongest hand, the best he can hope for is to avoid a showdown or reduce the number of players in the showdown. It is inescapable that even a novice would never fold while holding a royal flush. Accordingly, if the novice is dealt particularly strong hands and the skilled player is dealt particularly bad hands, skill will play a very small role in the outcome. This situation would become even more pronounced between skilled players because the lucky player will understand the strength of his hand and will be less likely to fold in response to the unlucky player’s bluffs. It is just as obvious that the novice player is much more likely to fold early with a bad hand regardless of the skill of the other players. Thus, simple logic dictates that there would have to be a substantial percentage of hands that would turn not on skill, but simply on the luck of the draw. Finally, the paper Poker Superstars: Skill or Luck?, by Rachel Croson, Peter Fishman, and Devin Pope, CHANCE , Vol. 21 2008, 25-28, does little to further the arguments of Alon or Hope and McCulloch. The authors examined data for every player who finished in the top 18 (the final two tables) of a professional high stakes poker tournament between 2001 and 2005 in an attempt to predict where the player will finish in a given tournament if she again makes it to the final two

 

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Filed 12/16/10 Page 19 of 20

 

tables. Croson, supra, at 25-26. The paper determines that previous finishes in tournaments predict current finishes, and the authors conclude that “there appears to be a significant skill component to poker.” Id. at 28. As Professor Kedem points out, however, in this study the “coefficient of determination,” a tool used to measure the appropriateness of the mathematical model, was exceedingly small. Kedem, supra, at 4. This calls into question the validity of the mathematical model used by the authors as well as the accuracy of the study. Id. Moreover, even as they assert that their study “provide[s] evidence for the impact of skill on poker outcomes,” the authors concede that they cannot identify the source of this skill. Croson, supra, at 28. As is suggested above, the critical traits that qualify as skill must be the ability to read an opponent and then to bluff him out before a showdown. Therefore, if the source of skill is the ability to read the unintentional quirks and tics of other players and to intimidate the rest of the table, the study by Croson, Fishman, and Pope is not applicable to internet poker where these skills never come into play. CONCLUSION As is set forth above, Texas Hold ‘Em poker, when played on the Internet meets the requirements of prohibited gambling under Maryland law, because the game involves paying consideration for a chance to win a reward. Therefore, payment processors who receive, become the depository of, record, register, and forward, money to be gambled must be in violation of section 12102 of the Maryland Criminal Code. Consequently, such a payment processor that works for an internet poker site that has five or more people that conduct its business and operates on a substantially continuous basis or has a gross revenue of $2,000 in a single day, is an illegal gambling business under 18 U.S.C. section 1955. This conclusion is supported by the Maryland Code, a liberal construction of its gaming provisions, Maryland, federal, and other state judicial opinions.

 

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Filed 12/16/10 Page 20 of 20

 

Thus, the facts of this case support the plea.

 

Respectfully submitted, Rod J. Rosenstein United States Attorney //s// Richard C. Kay Assistant United States Attorney Caroline Farrell Law Clerk, Spring 2010 Daniel Stringer Law Clerk, Fall 2010 36 South Charles Street Baltimore, Maryland 21201 410-209-4850

 

CERTIFICATE OF SERVICE I hereby certify that on December 16, 2010, a copy of the foregoing Government’s Rule 11 Memorandum was mailed, postage pre-paid, to Chris Mead, Esquire, London & Mead, 1225 Nineteenth Street, N.W., Suite 320, Washington, D.C. 20036.

 

//s// Richard C. Kay Assistant United States Attorney

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