Gambling law expert Professor I.Nelson Rose addresses pressing issues about India’s online gaming scenario; taxation, and regulation
24th November 2021
While the rise online gaming market in India has created ripples across the world, the overwhelming barrage of PILs, litigation, bans, complaints, and harsh regulations continue to haunt its upward trajectory. The new age sector has set some of the most distinguished experts and arbiters in the country scratching their heads while addressing the skill versus chance debate.
What are real money games? What determines whether they are skill-based or chance-based? What should be the tax structure? Is an overarching regulatory framework the way forward? Are the blanket bans imposed by some Indian states justified?
A developing country like India continues to progress across multiple sectors owing to a host of factors. Rapid digitization, smart phone penetration, high speed internet and cheaper data prices have enabled the proliferation of games that involve monetary stakes (Games that India has culturally played for eons) on digital platforms.
With no common law to regulate this newly emerging segment in sight, the stakeholders are curious about what global pundits have to say. In the recent episode of G2G news’ flagship video series “Game on with Jay Sayta”, we saw Professor I. Nelson Rose who is regarded as the world’s leading expert on gambling and gaming laws discuss the skill versus chance issue, American model of regulation, ideal tax system, best practices and the ideal gambling laws that states should adopt.
Professor Rose is currently a Professor Emeritus at Whittier College and a Visiting Professor at the University of Macau. He is best known for his internationally syndicated column and 1986 book, Gambling and the Law. Being an expert witness, he has appeared in several legal cases and legislatures and continues to advice governments across the world on issues of gambling law.
So far, India has been dealing with the skill versus chance issue with a predominant or substantial skill test which was originally laid down by the Supreme Court in context of horse racing. Jestfully recounting his Harvard Law School days, Professor Rose reveals that he himself played Poker five nights a week during his final semester with the Chief Justice of USA’s roommate in 1979. Having become familiar the innards of this ecosystem, he reveals he has been writing about the gaming and gambling-related issues for years now.
He informs that gambling in the United States is primarily a state-issue rather than a federal one. He shares, “In fact, there are very few federal laws, and they’re usually written to say; if it is the illegal, then you can’t use Interstate Communications with no definition of what illegal is. So it is up to the state.“
Using Tests To Prove Skill In Gaming
Sharing what he always tells his students to do when they’re fighting a gaming-related case, he shares, “The important thing to do in almost any case is convince the court that your test is the proper test. And the way you define your test is that this is the proper test. And of course, the test you want is the one that helps your clients. So we do have, in general, the test that is the predominant test; whether chance predominates over skill and it can be at any point in the whole process.”
He informs that there is a famous test in case in California where they were throwing darts at a board and if one wins, they get the prize. “Darts, they decided is a game of skill but the prize is a bingo card. And then, to win the money prize, you have to play Bingo. And the way the operator made his money is that he would sell Bingo cards as well, and bingo is not a game of skill. So in general, it is the predominant test,” he adds.
Professor Rose shares that the courts tend to fudge that test a lot. Citing an example viz-a-viz daily fantasy sports which is currently a hot button issue in the states, he shared, “In New York, there’s a very recent case; there is a fight going on right now over daily fantasy sports using a different test, the material element test. And I think the easiest way to understand the difference is poker. If you’re honest about poker, particularly tournament, poker is predominantly-skilled. We have professional poker players. We don’t have professional watery players. In New York, they decided to use the material test. And with the material test, they then say, “Oh, an amateur can sit down against a professional and get dealt a royal flush and beat the profession.””
Poker: A Game Of Skill Or Chance?
Countering the notion that Poker is chance-based, he states, “First of all poker is never played one hand. So the material element test says a single hand of Poker because the cards are random, that’s a material element. The predominant test should say that poker is predominantly skill because in the long run, skilful players win more and lose less.”
He further shares that there are courts that have held that poker was a game of chance because they use the time-frame of a single-hand. He adds, “And if you use the time-frame of the single hand, then you can say oh in a single hand of poker, chance is predominant. So even with the test, you have to be careful not to cheat.”
Daily Fantasy Sports
While the fuss is mostly rooted in the stakes-involving games on the internet in India, the scenario is much different in the United States. Speaking about the issue related to Daily Fantasy Sports, he shares, “In the United States, the fights are mostly daily fantasy sports which is an issue India too but also machines and in more than half a dozen states in the United States, the operators have put in basically slot machines and have called them games of skill and have said, ‘Well, it’s predominantly skill and the most typical game will be a nudge game.’ where if you get two winning symbols and the third one is above or below the line, you could nudge it and if it’s a winning symbol above the line, you nudge it down. Now you have three winning symbols on the pain line, I personally think that’s hard to argue that it is predominantly skill.“
He shares, according to the operators is, is noticing whether the symbol is above or below the line. “And they give a short period; they only give you 10 or 12 seconds. There is one operator, who says, well, you can also press a button and play a true game of skill that gives you; you have to remember 20 different symbols in a row, exactly right. And remembering 20 gets to be up to skill.“
Informing the situation in the U.S.A regarding the legalities associated with Daily Fantasy Sports, he shares, “By the way, what’s happening with the daily fantasy sports is; in general, I would say the operators are losing. The operators, the courts and other decision makers like the head regulator of Nevada casinos and the United States Treasury in terms of the taxes have said; Daily Fantasy Sports is a game of chance where season-long fantasy sports is a game of skill.“
Proving Predominance Of Skill In Games
So how does one establish the predominance of skill in a game? Is it data or prior case laws that are taken into consideration?
Professor Rose informs that it is a little bit of everything. “There are at least six tests that have been developed. And in fact, the trial courts have tended to rule that even the machines including the crane game which comes down and grabs; even those are predominantly skilled.”
Trial courts in the U.S.A, he informs, like having live witnesses and demonstrations. “So you put on a demonstration, you bring in an expert and the expert wins. That’s a pretty good test that it is predominantly skilled. On appeal, when it’s just a dry paper record. I wonder if things will change if they start having videos more but the courts of appeal have tended to overturn the trial court particularly, when they realise, ‘Wait a minute, if we rule, poker is a game of skill, then everybody can open up poker rooms”
Learning curve test
And among various tests, there is one test called ‘learning curve‘. He describes, “The test says when you first play a new game; you don’t know really how to play so your skill element isn’t very strong. But if you play it a 100 times, your amount of skill will influence the outcome much more and you win, you will learn more. So, the amount of information that you learn about a game between the first and second time you play is great. The information you learn or a new skill you learn between the hundredth game and 101st game is less. And so the amount of knowledge you gain on each subsequent game is less but if there’s no learning curve, I mean you can play lottery a thousand times, you still can’t improve your chances.”
Statistical Test is another one used for poker where, he informs, we have shown that a majority of the hands in poker are won without without the showdown. “Well, therefore, without a showdown, you, you cannot say that the best hand won because; Texas Holdem where each person gets two cards and somebody makes a bet and everybody else faults. Well, how can you say that the winner had the best five-card poker hat. There never was a five card poker hat. So the statistics show that the game of poker is not won by the player with the best hand. The game of poker is won by the player who is the best player.”
Recounting his experience with a case in France where he is serving as an expert witness, he discusses, “The player A won a lot of money; hundreds of thousands of US dollars from player B and player B doesn’t want to pay and so the question is; Is poker gambling?“
France’s Exclusive Bodily Movement Test
Unlike other countries, France’s jurisdiction doesn’t just admit the predominance test, it also requires a test where one can prove the involvement of bodily movement because the original test was developed for archery and other real physical games.
Professor Rose, in his expert witness statement, showed that live in-person poker does involve skilful bodily movement because of bluffs and tells. He shares, “In fact, almost by definition, bluffs and tells involve bodily movements. It gets really interesting because it also includes faking the bodily movement; faking a false tell to get the the other player to bet. When you have a super strong hand. I even went through, everybody knows, the phrase Poker Face. Yeah, that shows how much bodily movements are part of the skill of live-in person poker.“
Recommending the movie that best illustrates that involvement of bodily movements in Poker, he mentioned that one must watch the movie Big Hand For The Little Lady.
Jay, who has appeared in the recent Tamil Nadu case ended up on the winning side said, “The issue in India is that a lot of states are seeing the social concerns and the social impacts of online games particularly; when there is wagering and a fee involved and there could be a win and loss involved. There were a lot of cases of suicides, theft and players taking loans and not being able to pay back. So states have come up with this law and a lot of us; top four or five lawyers from Delhi appear in all these matters for the gaming companies to it. It was interesting where it was argued that once it is established as a game of skill, for example, the card game of Rummy, all daily fantasy sports, then it is elevated to the right of trade and commerce which is guaranteed as a fundamental right under the Constitution.”
Jay informs that state by law cannot ban it. “And any law has to be struck down as being unreasonable because it’s a total ban. States can bring in certain regulations, for example, on the age, on the stakes and another country,” he explains.
Describing the situation in the U.S.A, Professor Rose informs that the skill versus chance fight continues to this day. He shares, “Gambling requires all three elements; consideration, staking money and prize of value and skill versus chance, So still the fight is there.” In fact, there is a case in Virginia where the state legislature has outlawed all games of skill as well as chance if the money is involved and that case is pending.
Unlike India, The U.S.A doesn’t have a right to commerce. “There are states that say that; Nevada interestingly, is one of them but is so you have to find a part of the Constitution that applies and in Virginia, they decided that it was discrimination because it’s just discriminating against small operators who have machines that are games of skill, supposedly,” he shares.
The Illogic Of Blanket Ban.
“So, although the argument in India is a little stronger. You can have your game of skill, you just can’t play it for money. But the problem is, if you start getting into outlawing games of skill for money, what about a golf tournament?,” he asks. A similar query was posed by the bench in the recent Tamil Nadu case.
Identifying more inconsistencies and pitfalls in the notion of outlawing skill-based games that involve stakes, he shares, “If you really start trying to outlaw or regulate or even prohibit games of skill, what you’re really saying is that an activity that is more skilled than chance, you can’t make money at. Well, that’s farming. That’s everything. I mean, if you’re a farmer, you don’t know if it’s going to rain and wash out your crops and just about every human activity will then become subject to the law, even the game of chess. As long as there are chess tournament, they would have to outlaw chess tournaments with an entry fee.”
Professor Rose finds the freemium idea interesting. Speaking about Candy Crush which is developed by his client; King Digital Entertainment, he shares, “They’re making a billion dollars a year and yet you never have to pay a penny and you can’t win anything. But getting to up to the next level is a prize that people want even though you can’t cash it in and the way they make their money is you don’t have to pay if you’re stuck at a level. You don’t have to pay, you can wait till the next day and you get more free chances to go to the next level in the gate or you can pay a small amount. Yeah, microeconomics and micro currencies where it, well, now they’re getting bigger, but it used to be always less than 1 US dollar; 99 Cents and you get three more entries and they get.”
Ideal Taxation Policy
The ideal scenario of taxing should be; not by regulators but by statue so it can’t be easily changed so the operators know how much it’s going to be in advance. According to Professor Rose, the ideal scenario is that tax should be less than 50 per cent. “It should be set in the law, not by regulators but by statue so it can’t be easily changed so the operators know how much it’s going to be in advance,” he adds.
He informs that there is a lot of interesting research and studies that show that it should never ever be above 50 percent. Furthermore, he suggests, it should be on the operator, not the bet.
Currently, India is grappling with the taxation issue where the government is deliberating on whether the 28 percent charge should be levied on the bet or on the value that the operator is earning ultimately. Criticising the unfair tax law in the US, he shares, “Two and a half percent of the amount bet on a sports event is levied; win or lose. I mean both sides. They have to pay two and a half percent of the amount bet. Well, the margin in sports betting is so small that you can’t do it, but even so they finally change the law and said legal sports betting is one half of one percent; that’s still is five or six percent of the amount that the house wins.“
Recounting the talk he gave at Mississippi, he shared, “The head of the state legislature at Mississippi said, “Well, we never raised the taxes and we when we had open casinos and they were very successful” And I said, “No, you just decided to charge one dollar entry fee for everybody who walked into the casino. Casino isn’t going to ask each person for a dollar. It is just a tax, you know, you get a thousand people, the casino says “Right, we have to give state another thousand dollar.”
Bearing in mind, the nascent stage and initial knee-jerk reactions from some states in India, there is a lot one can learn from the west where the countries have already gone down the same road. Professor Rose in his concluding remarks suggested that this is the time India must have gambling law conferences. “If you ever need any help in India, let them know. I would love to speak,” he concluded.