Feature: Walking the regulatory tightrope of online skill gaming - November 2007  

Online skill gaming is an increasingly popular activity worldwide, that has proven to be a substantial growth area in the last five years, writes Tom Lippiett, a solicitor in the betting and gaming group at Berwin Leighton Paisner LLP. Strictly speaking, and certainly in the UK, there is no obvious reason why this largely unregulated area of activity should be advised upon by betting and gaming lawyers. However, one of the key issues with skill gaming is the fine line between it and gambling.

The distinction is not always easy. By way of example, certain jurisdictions permit wagering on an event (i.e. staking money with the promise of a greater return if the participant is successful; essentially a bet) in which the skill of the wagering participant determines the outcome. Conversely, other jurisdictions prohibit wagering on such an event, but permit an entrance fee to be charged, and a prize to be awarded to the winner. The distinction between this and wagering is almost impossible to determine.
Of course, a fundamental issue is the flexibility afforded to a company that is able to operate free from the shackles of regulation, and it is this that has led to a number of skill game operators seeking guidance on the classification of products and even reworking products to bring them outside of regulation.
I consider below the position of skill gaming, by which I mean the playing of a game of skill with an entry fee and a return of money if the participant is successful. However, it should be noted that there are very few regulatory controls on the playing of games of skill (or indeed games of chance) where there is no entry fee and/or no possible return.

The issue of classification

Classification of a game as unregulated skill gaming is not always as straightforward as it seems at first glance. As an example, the UK considers a game of skill (as opposed to legally regulated “gaming”) to be a game that includes no (inherent) chance element (section 6 Gambling Act 2005). In light of this, there are very obvious examples of a ‘skill game’. Chess is a classic example. However, there is always a degree of ‘chance’ in a number of games - the smash into the pack in a game of pool, for example. However, ultimately while the bounce of a ball off a cushion can never be entirely predicted by a player, it is ultimately down to their actions that the balls go exactly where they do, and there can be no chance element. If, however, an online pool ‘game of skill’ suddenly had random pockets that offered a bonus cash award if a ball if potted into them, then this introduces an inherent chance element which is not in the control of the player, and the game has an element of uncontrollable chance that does not keep it within the ‘skill game’ definition.
However, a game can even be skill gaming or gambling depending on how it is played. For example, if a skill game involves a player following three cups, one of which has a ball under it, it is, prima facie, a skill game. If, however, these cups travel at such a speed that it is simply not possible to follow their paths, the ultimate choice will be nothing more than a guess, and therefore the activity is gambling.

The UK position

The UK adopts a liberal approach to skill gaming which in fact typifies the general approach to skill gaming throughout Europe. As stated above, skill gaming is permitted in the UK provided that the game itself contains no inherent chance element. While, albeit subject to the predicted variables discussed above, it is generally fairly straightforward to distinguish between a game of skill and a game of chance (e.g. chess is a game of skill, roulette is a game of chance) and indeed the Gambling Commission has essentially pre-classified all the significant current gaming offerings (backgammon, for example, is a game of chance), problems arise with the plethora of new purported skill games that are being brought on to the market.
By way of example, pool is a classic skill game, but if I introduce a product called ‘bonus pool’, where a player wins extra money for potting a certain ball into a certain pocket, it instantly becomes a game of chance. Likewise, ‘first person shooter’ games are classified as games of skill in the UK, but if any random chance element, or cash winning element is introduced into such a game, it runs the risk of being classified as a game of chance.
Incidentally, it is not altogether clear how games of skill in the UK in fact are not caught by the definition of pool betting under the Gambling Act 2005. ‘Betting’ is defined in section 9 as “making or accepting a bet on the outcome of a race, competition or other event or process,” while pool betting is betting where “all or part of winnings shall be determined by reference to the aggregate of stakes paid or agreed to be paid by the persons betting” and “shall be divided among the winners.” However, it seems that the Gambling Commission has adopted the policy decision that games of skill will not be subject to any form of regulation.

Why is poker not a skill game in the UK?

While arguments continue about the precise skill factor contained within poker, and there is little doubt that, over time, a ‘skilled’ poker player will be more successful than an ‘unskilled’ one, the Gambling Commission maintains that poker is a game of chance.
The Gambling Commission’s argument is based on the fact that poker involves the random drawing of cards, which is subject wholly to chance. Accordingly, there is an obvious inherent chance element within the game. As a result, taking any one poker game in isolation, there is a significant amount of variation in the result that can occur, irrespective of the level of skill of the players, based on the random card drawing.
The Gambling Commission also appears to have a concern about the “escalated” way in which money is staked in poker, such that players can potentially be drawn into risking larger and larger amounts of money. While, undoubtedly, it is the random card drawing in poker that is the principal reason for its “chance” determination in the UK, the substantial stakes placed on online poker games are clearly an augmenting factor.

The European Position

The general position in Europe in relation to skill gaming is that it is a permitted activity, for money, without a licence. Accordingly, in the majority of jurisdictions in Europe it is permissible to wager on a game of skill (i.e. where participants place money into a pool prior to the event, with the promise of an increased return for the more/most successful participant).
Given the decidedly fine line between a wager on a skill game and a regulated bet, there are, unsurprisingly, certain exceptions to the general permission. States such as Italy and Spain specifically state that skill gaming for money is to be treated as a licensable activity. In the case of Spain, there is no obvious opportunity to obtain a licence for online supply. Therefore, the offering of this service in the Spain is effectively prohibited.
Italy intends to licence skill gaming, and is in the process of finalising the regulatory regime. The Netherlands is also a notable jurisdiction on the subject of skill gaming. While it bans physical skill gaming for money, online skill gaming appears to benefit from a loophole in the legislation, which only prevents skill gaming on “physical devices”. Electronic skill gaming, as a result, appears to be permitted, although this is far from an absolute legal certainty.

The US position

There is no general US federal approach to the treatment of skill gaming.
One of the problems of skill gaming classification in the US is that a large amount of state gambling legislation prohibits wagering on “contests of skill”. The problem here, is that this provision is fairly obviously intended to prohibit betting on sporting events (such as American Football) that the participant is not involved in (i.e. standard betting activity).
However, as the legislation does not always specify the point, this prohibition appears to also apply to skill gaming activity in which the customer is a participant. Of course, this effectively prohibits any contest in which the participant pays an entry fee, with the promise of a return if they are successful, and therefore activities such as beauty pageants potentially fall foul. With this in mind, certain states have made the distinction and exempted activity in which the “wagerer” is participating (and thereby determining the result), but in others, skill gaming does appear to be wholly prohibited.

Operating a multi-jurisdictional online skill gaming business

As a result of the divergence of domestic laws on skill gaming, it is impossible for operators to assume an inflexible approach to the supply of a global skill gaming product. Current and potential operators can be comforted by the fact that the general position is one of tolerance of skill games. However, local legal advice is an essential in any jurisdiction in which a skill game is to be offered: presumption of legality could lead to significant and unplanned legal obstacles to a skill gaming operation.

Berwin Leighton Paisner LLP is ranked number one for betting and gaming by both the Chambers and Legal 500 directories. For advice on any aspect of skill gaming or gambling law, please contact tom.lippiett@blplaw.com.

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