By: Lawrence G. Walters & Neil Braslow
The Skill Gaming industry is growing, and many entrepreneurs are looking at new ways to tap the market. Fantasy sports, trivia games, video game tournaments, and a wide variety of other skill-based activities have captured the public’s interest.This Legal Guide is intended to provide an overview of the legal issues associated with Skill Gaming. Our firm’s experience in representing various skill gaming business models allows us to share a broad industry perspective on the potential legal concerns.This Guide is therefore intended as a general overview on gaming, gambling, and contests of skill, and is not offered as a legal opinion on a particular business model or specific state laws.
A game of skill refers to any game, contest, or amusement of any description in which the outcome is determined by the judgement, skill, or physical ability of the participant in the contest, rather than by chance.The crucial distinction between contests of skill and games of chance can have significant legal repercussions for operators.Jurisdictions vary on their interpretations of the distinction, so it is important to learn how these activities are defined in the relevant marketplaces.
2. The Element of Skill
Every state prohibits unlicensed gambling. However, gambling laws only apply to games that involve the elements of prize, chance, and consideration (i.e., payment). In order to avoid being labeled as gambling, the outcome of a game must be governed by skill, not chance. The question is: “How much skill?” Courts across the nation differ in how to weigh the element of skill in comparison to chance. In evaluating whether the degree of skill involved in affecting the outcome of a contest is sufficient to avoid violation of a state’s gambling laws, state courts typically use three approaches: (i) whether skill or chance is the dominant factor in the outcome (“Dominant Factor Test”); (ii) whether chance is a material element in the outcome (“Material Element Test”); or (iii) whether any chance at all is involved (“Any Chance Test”). The test used could determine whether your game is a legal game of skill, or illegal gambling.
3. Dominant Factor Test
The Dominant Factor test generally asks whether the outcome of the game is determined more by the participants’ relative skill rather than by chance (i.e. random events like dice rolls or random number generators should have little impact on determining the outcome of the game. The primary question is whether chance or skill is the dominant orcontrolling factor in determining the winner of the contest or game.
4. Material Element Test
The Material Element test focuses on whether chance plays any significant role in determining the outcome of the game. Under this test, it does not matter whether skill plays a significant, or even dominant, role in determining the outcome. The game will be deemed gambling if chance plays a meaningful role.
5. Any Chance Test
The Any Chance test evaluates whether chance plays any role whatsoever in determining outcome.Under this test, if any element of chance affects the outcome, then the game is considered one of chance. For example, the game of Blackjack involves chance card flips and the skill of the player in deciding whether to “hit” or “stand.” Since this game involves at least some chance (the card flips), it likely would not pass the Any Chance test and would be considered gambling. The Any Chance test is the strictest test for classifying skill games, and can render wagering on most any game illegal gambling.
6. Entry Fees
Things get tricky when entry fees are charged to participate in a contest of skill. Some courts have recognized that paying an entry fee for the opportunity to participate in a game of skill, in the hopes of winning a prize, is a traditional part of American social life. However, other courts have held that if the entry fees are linked to the prize amount, and used to pay the prizes, the game involves a “wager” which can be illegal. Federal law (the “UIGEA”) exempts certain fantasy sports and other contests, but only if the prize is announced in advance, and the amount of entry fees does not impact the prize. Therefore, the handling of entry fees can be a critical element of risk mitigation in skill gaming.
Skill Gaming is essentially unregulated in most of the United States. Federal law does not prohibit skill gaming, but, as noted above, does provide a safe harbor exemption for certain contests of skill that meet the statutory criteria. Congress has left gambling regulation primarily up to the states, with limited exceptions. Most states do not expressly prohibit skill games by statute, but instead, focus restrictions on traditional gambling.States like Florida represent the exception, where wagering on skill games is prohibited by statute, along with games of chance. Even there, the courts struggle to permit participation in some Skill Gaming activity, such as midway fair games or golf tournaments. Instead of imposing a blanket prohibition on Skill Gaming, the courts often distinguish between illegal wagering on games of skill, and legal participation in contests involving skill.This can lead to inconsistent and unpredictable results. Often the “look and feel” of the game can be an important factor if its legality is tested in court.
The actual functioning of a skill game can be tested and “certified” by various game testing laboratories. The lab will independently evaluate the functionality of the game, and render a report confirming its actual operation. Any operator looking to offer a skill game should consider obtaining a certification from a reputable lab, describing how the game works, and how the element of skill plays out during gameplay. Such certifications can be important evidence in the event of a court challenge.
With any potential Skill Gaming business model, the devil is in the details, and those details have a huge impact on the game’s legality. Skill Gaming seeks to remove the element of “chance” by ensuring that the outcome of the subject game is determined by the player’s skill, instead of some random event. The courts in various jurisdictions use different tests to determine how much skill must be involved in the game – relative to chance – to remove the activity from the scope of gambling prohibitions. However, if the outcome of the game is determined primarily by skill, with chance playing little if any role, most courts will deem the activity a skill game, not gambling.
With the popularity of Skill Gaming on the rise, operators are actively looking to offer legal skill games on the Internet, via mobile apps, and in retail locations. Understanding the nuances of applicable law in the Skill Gaming realm will help avoid unintentionally violating gambling laws which can carry serious consequences.