L ck Skill or ?

By John Brennan

The American Gaming Association represents numerous companies that run legal gambling businesses in the U.S., including casinos.

In a comprehensive report issued last fall, the headline on AGA’s website noted that “Americans gamble more than half a trillion dollars illegally each year.” That includes $337.9 million in illegal online casino play and $63.8 billion at illegal sportsbooks—most of them online and based in foreign countries.

But the third category—at $109.2 billion—is described not as “illegal machines” but “unregulated machines.”

Why is that? The answer is complicated.

OK, very complicated.

That’s because a significant part of that $109.2 billion includes so-called “skill games” machines that look superficially like slot machines, but which include player options that can improve their chances of winning. Is that illegal?

Almost certainly so in some states, definitely not in others—and the status is murky in still others, all depending on the state’s specific gaming regulations and laws. A number of states feature lawmakers, regulators and law enforcement officials doing what they can to outlaw these games—in large part to protect the interests of regulated gambling outfits such as casinos, horse racing tracks and state lotteries.

But in Pennsylvania, such efforts have been unsuccessful because the state’s laws are too vague on the issue. Yet in Virginia, a 2021 law passed that explicitly outlaws the machines may prove to be too specific. “It is a bit of a Goldilocks problem,” says Chris Cylke, AGA senior vice president of government relations, in terms of figuring out exactly how to outlaw such machines if a state is so inclined.

But for Michael Barley, the chief public affairs officer for leading skill games supplier Pace-O-Matic, there’s no reason for there to be an issue at all. He says the solution is to enact legislation that permits and regulates the games.

“When has a regulatory ban ever worked?” asks Barley, whose machines are present in 11 states. “We tried Prohibition, and that didn’t work. Why not just regulate and tax us?”

But Cylke counters that “people in the gray machines market just try to obfuscate the fact of what the games really are, and they gum up the works with political contributions. It’s a weak argument.”

The company stance is that it wants to see Pennsylvania in particular join a handful of jurisdictions such as Wyoming, Georgia and Washington, D.C. in formally regulating their machines. In fact, three Keystone legislators have sponsored a bill to do just that.

The legal battle in Pennsylvania dates back even before a 2014 court ruling that found that the state’s gaming laws do not permit oversight of skill-based games by regulators. A 2019 ruling further emphasized that point, making it apparent that it would take passage of a new, more specific law to change the status quo.

“The Gaming Act was intended to license slot machine operations at racetracks, casinos, hotels, and established resort hotels,” the Commonwealth’s Court ruling read. “The Pace-O-Matic games are not located at any of these types of facilities and there is absolutely no suggestion... that the Gaming Act was intended to apply to the facilities where the games are located, e.g., taverns and social clubs, or that the Gaming Act regulates the placement of slot machines at such facilities.”

And in May 2022 and in February 2023, Pace-O-Matic prevailed once again as Pennsylvania judges in two different counties ruled that the company’s machines had been seized illegally in raids.

In Virginia, a back-and-forth on the wisdom of permitting the games led to a law that places an absolute ban on “skill games.”

But what is a skill game, anyway? Even expert poker and blackjack players, if pressed on whether those games were based on skill or luck, likely would simply answer “yes.” Both elements definitely apply.

How Much Skill?

State regulations tend to break down the “skill vs. luck” gambling issue into one of three directions.

One is whether skill is the “predominant” factor in whether a player is successful. Another is the “material element test” regarding whether chance plays a significant role in the result. The least common is the “any chance test,” which basically finds that if there is any luck involved, it constitutes illegal gambling.

The AGA has simplified this seeming conundrum, coming out against any activity where money is risked but which does not feature legal oversight. From the report:

“These unregulated machines look and act just like the slot machines found in a casino, but operate instead in unlicensed environments like bars, taverns, convenience stores and gas stations, where they prey on vulnerable consumers, including minors. Additionally, the lack of regulatory controls increases the risks they may be tied to criminal activity including money laundering, drug trafficking and violent crime.

“State lawmakers and regulators must take action to strengthen and enforce laws protecting consumers from these machines that often lure players in under the guise of being ‘games of skill.’”

But Barley disputes that characterization of his games, a popular version of which resembles a tic-tac-toe board where a player might have 30 seconds to choose which of the nine symbols on the screen to convert to “wild.” The shrewdest move would be to add the wild symbol in a slot that produces the equivalent of three consecutive matching symbols—and thus a winning result.

Pattern recognition and memory recognition skills also come into play with many games, so someone particularly adept and focused will “beat the house”—to use a gambling term—over and over, to the tune of about a 5 percent profit.

“In our games, you can win every single time. It just depends on how you play it and if you’re a skillful, patient player,” Barley has said. “There are players that don’t put in such effort, and that’s their choice.”

Further muddying the waters is the fact that the AGA does not offer a stance on the legitimacy of “historical horse racing machines,” which quite similarly could involve the use of some skill by a player, but often do not.

Barley also notes that the reason many legislators are loathe to completely crack down on the machines is that in many cases they provide much-needed revenue for local charitable organizations. Three Pennsylvania lawmakers—state Senator Gene Yaw and state Reps. Jeff Wheeland and Danilo Burgos—in late 2021 announced plans for legislation, dubbed the “Skill Gaming Act,” that will regulate and tax such games at 16 percent of gross profits.

That bill has faced its own host of detractors, however, including operators of casinos, the Pennsylvania State Police, and former Governor Tom Wolf.

Barley also points to the company’s self-regulation efforts, such as hiring of a team of former Pennsylvania state police officers to enforce codes of conduct. That includes ensuring that the machines are not located in such an abundance in any one place that they effectively create “mini-casinos.”

He adds that the casino visitor is not similar to a visitor to a local store or tavern, who enters the door for other reasons but might spend a little extra time there to try to make a little money on one of the machines.

“They’re just two different customer bases,” Barley says.

In Virginia, House Majority Leader Terry Kilgore tried and failed in February to pass a bill legalizing skill-based games.

The state’s General Assembly had voted in 2020 to ban the machines, around the same time that the state legalized construction of casinos for the first time. But then-Governor Ralph Northam in 2021 backed a one-year delay in the ban due to economic pressures created by Covid-based shutdowns of many businesses.

An effort to declare the ban unconstitutional led to a Virginia judge issuing an injunction to block enforcement of the ban in December 2021, and the legality of the machines has been unclear ever since.

“The reach of the new law is enormous,” wrote gaming law expert I. Nelson Rose, a professor emeritus at California’s Whittier College, in support of a scrapping of the ban. “Virtually every game, both in the real world and online, would be outlawed.”

Lawmakers in numerous states have been lobbied on this debate to the tune of millions of dollars both by companies such as Pace-O-Matic and by regulated operators such as casinos and racetracks. That seems to be a major reason for the lack of consistency in support of either regulating or banning the machines—with the usual partisan political divide not being evident on the issue.

The Virginia Public Access Project concluded that Pace-O-Matic has donated nearly $1 million to political candidates in Virginia, with nearly an even split among Republicans and Democrats.

The extent of the division among lawmakers was underscored by a vote in the Kentucky House in early March in which 42 members opposed a bill to formally ban skill game machines, 35 supported it, and 23 members abstained.

That vote came just a day after a House committee had advanced the bill by a 13-7 vote. A separate bill would legalize the games under the oversight of a newly created Kentucky Gaming Commission, with truck stops permitted to have as many as 10 skill games and other businesses limited to a maximum of five.

Still, the two houses came together in mid-March and soundly defeated the skill-based machines by a margin of 64-32 in the House and 29-6 in the Senate. Pace-O-Matic spent over $135,000 on the campaign, compared with more than $800,000 by horse racing interests, according to the Kentucky Legislative Ethics Commission in 2022.

Some other states were also running campaigns that would eliminate the issue of skill games.

On one side, a joint federal and state investigation in South Carolina—where only the lottery, raffles and bingo are considered legal gambling—in December 2022 seized more than $1 million related to distribution of machines where a player can insert cash and attempt to in

“shoot digital fish.” Such devices clearly are illegal in that state.

That raid was followed a month later by a letter sent by the AGA to the U.S. Attorneys in each state urging further action on such machines. The letter points to the “Johnson Act,” a federal law that prohibits the manufacture and sale of any “gambling device” unless a state or locality has enacted legislation specifically exempting a product from that law. That could have impact in states with no formal conclusions on skill machines, such as Pennsylvania or Virginia.

In New Jersey, the second state in the U.S. to legalize casino gambling in 1976 — and the source of the six-year legal battle to allow all state lawmakers to make their own decisions on sports betting that ended in success with a 2018 U.S. Supreme Court ruling—a spokesman for the Attorney General’s Office said that “determinations on what constitutes contests of skill are both narrow and fact-specific, such as baking or photography contests where the winner or winners are selected by a panel of judges who are using uniform criteria to assess the quality of entries.”

But Wyoming legislators in 2021 formally endorsed the Pace-O-Matic products as legal games of skill that depend primarily on a player’s skill, not on mere chance.

The Wyoming law that ended the controversy there led Pace-O-Matic executives in the summer of 2022 to invite five key Pennsylvania lawmakers to what in at least one case was an all-expenses-paid visit to the Cowboy State to meet with their legislative counterparts and hear why the legalization was approved.

While there, the guests attended what is described as “the world’s largest outdoor rodeo.” Pennsylvania’s legislative ethics laws do not prohibit such trips, even if a lobbyist pays for them.

According to Spotlightpa.org, a political action committee associated with the skill machine games industry contributed more than $1 million to elected officials from 2019 to 2022.

Opponents of skill games legalization are no less shy about lobbying lawmakers. The same news organization found that a 2019 bill proposing a ban on the games was in large part ghostwritten by executives for Parx casino, the state’s leader in that industry.

Coincidentally or not, the stalemate in Pennsylvania and elsewhere continues. And while Pace-O-Matic officials endorse legislation to regulate and tax the machines, the status quo arguably benefits them even more.