Indiana’s Proposed Ban On Sweepstakes Casinos Aligns With Status Under Existing Gambling Laws

Indiana’s proposed ban on sweepstakes casinos has exposed divisions over whether the online games are currently illegal under Indiana law. The Indiana Gaming Commission has urged state lawmakers to pass House Bill 1052, reasoning that online sweepstakes casinos “are essentially offering a form of gambling with no regulation, licensing, or taxation.” By contrast, sweepstakes casino proponents have urged state lawmakers to regulate, rather than ban, the online casino-style games because “they’ve been doing business [in Indiana] for well over a decade” and “are operating within the law.”

Despite any suggestions that online sweepstakes casinos are not currently violating any laws in Indiana, it is readily apparent under existing Indiana law that such websites contravene the state’s prohibition against offering casino-style games over the Internet and the state’s ban against “gambling devices”, as reflected in Indiana case law and prior statements by the Indiana Attorney General and the Indiana Gaming Control Division.

1) Professional Gambling over the Internet (I.C. § 35-45-5-3(b))

Indiana has a specific statutory prohibition which makes it a crime for any person or entity to offer casino-style games (such as slot machines, roulette, and banking and percentage card or dice games) through an Internet website that is accessible to Indiana residents. Indiana Code § 35-45-5-3(b) – “Professional gambling over the Internet” – prohibits an “operator who knowingly or intentionally uses the Internet to: . . . (3) maintain, on an Internet site accessible to residents of Indiana, the equivalent of: (A) slot machines; . . . (D) roulette wheels; (E) dice tables; . . . [or] . . . (5) conduct any banking and percentage games played with the computer equivalent of cards [or] dice, or counters, or accept any fixed share of the stakes in those games . . . in Indiana or in a transaction directly involving a person in Indiana.” (I.C. § 35-45-5-3(b)(3) & (5)). The violation of this statute is a Level 6 felony punishable by a prison term ranging from 6 to 30 months, with an advisory sentence of 1 year.

Sweepstakes casino websites are readily accessible to Indiana residents and most offer a full range of casino-style games, including slots, roulette, blackjack, craps, and other banking or percentage card or dice games. The availability of such online games in Indiana would be appear to be relatively straightforward violation of § 35-45-5-3(b).

Indiana is just one of a small handful of states that have passed legislation banning the use of Internet gambling sites. (The others are Oregon, Washington, Montana, South Dakota, Illinois, and Louisiana). In Official Opinion 98-8, the Indiana Attorney General concluded that Internet gambling is illegal based on Indiana’s definition of gambling, which prohibits any gambling not specifically authorized by law. The Attorney General’s opinion also concluded that for “virtual card games, slot machines and other games of chance,” the use of the Internet would constitute a “gambling device” under Indiana law.

The Indiana Gaming Control Division reached the exact same conclusion in 2013 when it posted a list of “Frequently Asked Questions” on its website. In response to Question 11 – which addressed simulations of slot machines – the Division wrote that “a slot machine displayed on an internet website” meets the definition of an “electronic gambling device.” (The FAQs are still publicly accessible on the site).

2) Prohibited “Gambling Device” (Indiana Code § 35-45-5-1(e))

A “gambling device” is broadly defined under the Indiana Code to include either “(1) a mechanism by the operation of which a right to money or other property may be credited, in return for consideration, as the result of the operation of an element of chance; or (2) a mechanism that, when operated for a consideration, does not return the same value or property for the same consideration upon each operation . . . .” (Indiana Code § 35-45-5-1(e)(1) & (2)).

Indiana courts have recognized that so-called ‘promotional’ games which award consumers ‘free points’ to play games of chance for cash or other prizes are “gambling devices” under Indiana law – even where free entries are available without a purchase.

In Jack Eiser Sales Co. v. Wilson, the Indiana Court of Appeals held that a ‘Free Spin’ machine which, for the price of a dollar, dispensed a sports collector card and allowed the consumer to use 20 promotional credits to play a slot machine-like game and earn prize credits redeemable for cash was an illegal gambling device. The machine owner had argued that consideration was absent because players could play without purchasing a card. However, the Court countered that players were still incentivized to continue playing after their initial free game. This continued play involved risking points that could potentially be redeemed for cash prizes, which constituted a form of consideration.

The Court found consideration existed because if the free spin yielded more points, the person could continue to play the game, thereby risking his prize points:

The appellate court rejected the game developer’s assertion that the machine owner did not receive any consideration for the continued play by pointing to the fact that “when the player uses the prize points, no cash need be paid out to the player for them.” The appellate court likewise found unavailing the game developer’s argument that “consideration cannot appear in the middle of the process” by noting that “it is the design of the device that entices the player to continue playing, thereby risking any prize points that came into being on the initial ‘free’ spin.” (emphasis in original). Thus, the appellate court highlighted that consideration did not have to be limited to the initial purchase; rather, the design of the machine encouraged players to stake their earned points on further chances to win, thereby reinforcing the presence of consideration.

Finally, the appellate court rebuffed the game developer’s comparisons to the “law of promotional schemes” – referring specifically to sweepstakes “promotions by McDonald’s and Pepsi” – by noting that the promotional nature of the game did not exempt the machine from being classified as a “gambling device” under Indiana Code section 35-45-5-1(e), as the machine still involved risking money for potential gain:

Similarly, in F.A.C.E. Trading, Inc. v. Carter, the Indiana Court of Appeals held that “Ad-Tab” cards which were sold for one dollar and featured a discount coupon on one side and a cash prize game of chance on the other side were gambling devices, rejecting arguments that they were legal sweepstakes promotions. Although card seller claimed that it was merely selling discount coupons, the Court concluded that “the real enticement” was the game in which purchasers could win up to several hundred dollars. The Court also found that the element of consideration was not eliminated merely because of the “no purchase necessary” disclosure on the coupon side of the Ad-Tab card and on posters affixed to the dispensing machine which allowed a participant to call or write for a free game piece, reasoning that it was apparent that the opportunity to win money or other property “arises specifically as the result of the operation of an element of chance,” thereby satisfying the definition of a “gambling device” under Indiana law.

Notably, the Court rejected the card seller’s argument that the Ad-Tabs were just “promotional devices” and the games were similar to sweepstakes promotions “run by companies such as McDonald’s and Coca-Cola.” The Court drew a distinction between a true sweepstakes promotion – which is primarily intended to attract sales of a primary business product – and a so-called “promotion” in name only where the primary subject of the transaction is the game of chance rather than the allegedly promoted product:

Finding the card seller’s activities to fall within the latter category, the Court concluded that the Ad-Tabs were “merely a subterfuge” for the promotion of a gambling device.

Relying on these cases – representing both a local and national consensus on the issue – the Indiana Gaming Control Division (which is part of the law enforcement arm of the Indiana Gaming Commission) acknowledged in 2013 that “Internet Sweepstakes Café” businesses “have been ruled by Indiana and federal courts to be illegal gambling.” The Division similarly acknowledged that online or digital versions of the same games are prohibited “gambling devices” under Indiana law, specifically referring to “a slot machine displayed on an internet website” as an example of an illegal “gambling device.”

The Indiana Attorney General’s Office has likewise concluded that “virtual” slot machines, card games and other online games of chance are “gambling devices” under Indiana law because they satisfy several of the definitional requisites of section 35-45-5-1(e). In addition, Opinion No. 98-8 recognizes that a person who “offers games of chance via the internet” is committing the crime of “unlawful gambling” (I.C. § 35-45-5-2).

Addressing the argument that internet-based casino games are somehow beyond the purview of Indiana’s gambling statutes, the Attorney General observed as follows:

Reinforcing this principle, Indiana law specifies that “[a] person outside Indiana who transmits information on a computer network” (defined by I.C. 35-43-2-3 to include the internet) “and who knows or should know that the information is broadcast in Indiana submits to the jurisdiction of Indiana courts for prosecution under [I.C. 35-45-5-4.5].”

This should put to rest any suggestion that sweepstakes casino platforms comply with current Indiana law. As demonstrated above, Indiana’s statutory prohibitions against Internet gaming and “gambling devices” (as interpreted by the Indiana Court of Appeals, the Indiana Attorney General, and the Indiana Gaming Control Division) make it clear that the dual-currency sweepstakes casino business model runs afoul of Indiana law.

Nonetheless, clarifying legislation is necessary because sweepstakes casino websites are skirting existing statutory prohibitions based on flawed legal arguments, including that the availability of free play makes their real money casino-style games legal – a premise rejected by the Indiana Court of Appeals in Jack Eiser and F.A.C.E. Trading. As shown in other states that have enacted statutory bans against online sweepstakes casinos (i.e., California, Connecticut, New Jersey, and New York) – even though existing laws had already made those games illegal – operators swiftly exited those markets following the enactment of the new law. In addition, House Bill 1052 would grant the Indiana Gaming Commission expanded enforcement powers, including the ability to levy civil penalties of $100,000 against any operator or individual who knowingly uses the internet to conduct an illegal sweepstakes game. Without clarifying legislation, sweepstakes casino platforms will continue to skirt existing Indiana law based on a flimsy – and judicially rejected – legal premise, and new entrants will continue to flood the market.