Dog and Pony Show: The History (and Future?) Of Legal Gambling In Arkansas

Monday (May 14, 2018), the United States Supreme Court struck down a 1992 federal law that prohibited most states from legalizing gambling on sporting events. That decision found that, while the federal government could regulate sports betting itself, what it could not do–and what the 1992 statute did–was direct the states to prohibit sports gambling under state law.

Following that decision, there are two possible routes that the issue could take. The less-mentioned option is that Congress could decide to take up the matter itself and regulate sports betting at the federal level. Under the doctrine of preemption, it is probable that, if Congress goes that route, their regulation would be seen to “occupy the field” of sports-betting regulation, and the states would not be free to pass any regulations that were less stringent than the federal law.

On the other hand, as was reported widely yesterday, if Congress does not act, the Supreme Court’s decision leaves the regulation of sports betting to the individual states. This possibility has left some folks, including me, wondering: if Arkansas’s legislature decided to take steps to legalize and regulate sports betting, what would that process look like?

Before we dive into the finished product, however, let’s review some history, both for context and because it is a weirdly fascinating look at Arkansas.

The 1874 Arkansas Constitution only deals with one type of gambling: lotteries. Article 19, section 14, originally prohibited lotteries in all forms in the state.1 Thus, under the Arkansas Constitution, gambling other than lotteries was not originally prohibited and was a matter of various state laws. Unfortunately, at least for people who like clarity in such matters, the Arkansas Constitution did not define “lottery.”

Horsing (and Dogging) Around

It was into this grey area that lack of a definition of “lottery” created that horse racing was born in the state. In the late 1890s, Sportsman Park was built on the southeastern side of modern Hot Springs, sparking something of an interest in bringing the increasingly popular sport of thoroughbred racing to Arkansas. In 1902, William McGuigan, a member of the Arkansas Legislature, bought land on Malvern Avenue in Hot Springs. In 1903–purely by coincidence with McGuigan’s purchase, I’m sure–a number of anti-gambling laws that had been passed in the 1880s and 1890s were repealed. Then, blessed with his good legislative luck, McGuigan turned that land on Malvern Avenue, nestled close to the railroad tracks at a time when rail travel was the preferred method of traversing the state, into Essex Park, which opened in 1904.

Essex Park was immediately successful, which, as might be expected, attracted the attention of would-be competitors. A group of businessmen that included Charles and Louis Cella formed the Oaklawn Jockey Club in 1904 and purchased land north of Hot Springs on which to build another horse-racing track. Oaklawn opened in 1905 and, unlike the open-air wooden grandstands of Essex Park, featured a glass front and steam heat to make watching the races more comfortable.2

McGuigan, angry that Oaklawn was eating into Essex Park’s profits, and apparently more than willing to cut of his nose to spite his face, joined with Reverend W.T. Amis and formed the Citizens Improvement Union, whose only apparent goal was to stamp out horse racing in Arkansas entirely. In 1907, during racing season no less, McGuigan used his connections as a former legislator and succeeded in getting the Citizens Improvement Union’s bill passed, which outlawed horse racing anywhere in the state.

Hot Springs being Hot Springs, Oaklawn initially tried to ignore the new law and to continue having horse races. However, McGuigan continued using his connections, and both police and others who were decidedly not actually police harassed would-be attendees outside Oaklawn, with gate receipts falling off rapidly because of this. Faced with this new reality, Oaklawn was forced to close its doors to horse racing in 1907, though the infield was used for other purposes, including the Arkansas State Fair from 1906 to 1914.

In 1913, a number of fires ravaged downtown Hot Springs, leading to a downturn in tourism dollars coming into the city. In 1914, a group of Hot Springs business leaders convened and decided that a return of horse racing to the city would be just the thing to improve the local economy. A bill to revive horse racing in the state easily passed the legislature in 1915, but Governor George Washington Hayes vetoed it. A lawsuit followed, attempting to get the veto overturned, but the Arkansas Supreme Court sided with the Governor and affirmed the veto. Nevertheless, in 1916, Oaklawn reopened in connection with the the Business Men’s League, under the guise of a having horse races–with no betting, you guys! We swear!–as a civic event. It was an abbreviated race season, but was successful enough that Oaklawn and Essex Park made plans to split a full racing season in 1917. Essex Park, however, burned to the ground immediately after opening day of the 1917 season, leaving Oaklawn as, literally, the last place standing.

Around this same time,3 Louis and Charles Cella became the sole owners of Oaklawn. (Louis died in 1918, and Charles took total ownership at that time.) It was not smooth sailing from that point forward, however. In 1919, a circuit judge ruled that holding the races at all was illegal, and Oaklawn again had to cease having races.

In 1929, a new bill to legalize horse racing passed the Arkansas legislature, only to be vetoed again, this time by Governor Harvey Parnell. Legislatures in 1931 and 1933 could not get the votes to get a similar bill to the Governor’s desk, what with being more concerned with things like the Great Depression.

Yet, it was the Great Depression that triggered the next move in the history of Oaklawn. In 1934, with the city (like so many cities) deep in financial struggles, Hot Springs Mayor Leo McLaughlin and several prominent Hot Springs businessmen formed the Business Men’s Racing Association and announced that racing would re-start at Oaklawn in March of 1934, which it did, without any approval by the legislature or the state in general. Betting was still technically prohibited, of course.

Rather than attempt to stop the racing, the Arkansas legislature passed, and Governor Junius Futrell signed, Act 46 of 1935, which legalized pari-mutuel betting on horse races.4 Ironically enough, it was the Depression that seems to have provided the final impetus for the passage and signing of Act 46, as Arkansas was struggling financially, and Act 46 gave the state a set fee for every day that racing was held, plus a percentage of every dollar bet and every admission.5

Predictably, a citizen sued the Secretary of the Arkansas Racing Commission, arguing that such betting was an illegal lottery prohibited by the Constitution. In holding that the betting under Act 46 was not an unconstitutional lottery, the Arkansas Supreme Court explained6

A lottery is a species of gaming, which may be defined as a scheme for the distribution of prizes by chance among persons who have paid, or agreed to pay, a valuable consideration for the chance to obtain a prize. […] It appears therefore that to constitute a lottery it is essential not only that the element of chance is present, but also that it controls and determines the award of the prize whatever it may be.

[…] A game of chance is said to be such a game as is determined entirely or in part by lot or mere luck, and in which judgment, practice, skill and adroitness have honestly no office at all, or are thwarted by chance. It was there further said: “The test of the character of the game is not whether it contained an element of chance or an element of skill, but which of these is the dominating element that determines the result of the game.”

Unsettlingly, if you were interested in keeping horse racing around long-term, a number of the Justices dissented in that decision. In another case in 1953, Chief Justice Griffin Smith noted in a concurring opinion that he thought the prior decision was incorrect and should be revisited and overruled.

Faced with this uncertainty about the future of pari-mutuel betting in Arkansas, John G. Cella, who had taken over from Charles Cella in 1940), succeeded in getting a proposed amendment on the November 1956 ballot. The amendment, which passed easily and became Amendment 46, stated in no uncertain terms:

Horse racing and pari-mutuel wagering thereon shall be lawful in Hot Springs, Garland County, Arkansas, and shall be regulated by the General Assembly.

In the 1957 legislative session, the Arkansas General Assembly quickly went to work codifying and cleaning up the rules regarding horse and greyhound racing. Act 46 of 19577 created in broad strokes the current system of licensing and taxing horse-racing facilities, and it gave each county a local option to approve, by popular vote, new horse racing venues in the state once a temporary license was issued. They did not stop there, though; they also passed Act 1918, which officially legalized greyhound racing and pari-mutuel betting, placed it under the aegis of the Racing Commission that was created under Act 46, and gave a local option for approval of new greyhound racing venues.

Why did they bother with passing laws for greyhound racing if Amendment 46 only dealt with horse racing? Because Southland Racing Corp. had more or less forced the legislature’s hand the previous year.

In 1956, Southland Racing Corp. applied for a license to hold greyhound races, with pari-mutuel betting, in Crittenden County. Southland had built a forum for the races and had complied in every required way with the statutory framework at the time. (The legislature had passed legislation regarding greyhound racing in the same 1935 session where they approved horse racing/betting.) The Arkansas Racing Commission denied Southland’s application, despite Southland’s compliance with the statutes, and Southland sued the Commission for an injunction directing the Commission to issue the license.

The suit was filed in Chancery Court in Crittenden County, and the Commission filed a demurrer. (A demurrer was, basically, the legal equivalent of saying “I’ve seen what you filed…so what?”) The Chancellor directed the Commission to file an actual answer to the complaint, and the Commission refused, so the Chancellor found in favor of Southland. The Commission appealed and argued that the statutes allowing for betting on greyhound races were unconstitutional. The Supreme Court held that, on that case as presented, they could not say that the statutes were unconstitutional, as there was nothing in the record to suggest that greyhound betting was an illegal lottery under the rationale set forth in the earlier horse-racing case.

Essentially, by riding on the heels of horse racing, and by lucking into a Racing Commission who failed to properly defend the lawsuit against them, Southland was able to more quickly and smoothly get up and running. Further, both because of Amendment 46 making horse racing and pari-mutuel betting unquestionably legal for horse racing in Hot Springs and because the State was getting a percentage of bets and attendance along with daily racing fees, there was no motivation for the legislature to attempt to differentiate between what Oaklawn was doing and what Southland was doing.

Games of “Skill”

That is where legal gambling stood in Arkansas for several years, without much change to the horse or greyhound statutes. Then, in 2005, the legislature passed Act 1151, which allowed for the people in “cities or counties where horse racing or greyhound racing parks are located” to vote on whether to allow the horse- or greyhound-racing venues to also feature “electronic games of skill.”

A few things jump out about that 2005 legislation. Most notably, while the pre-existing statutes allowed any county or city to vote on whether to have a horse- or greyhound-racing venue, only those places that had horse or greyhound racing could vote to have electronic gaming. Given the cost of getting a racing facility up and running, to say nothing of the uphill climb of trying to compete with long-existing racing venues, it is no stretch to say that the 2005 law was more or less specifically designed to guarantee that only Oaklawn and Southland would have electronic gaming for the foreseeable future. (If you are wondering why the legislature would do this, you can probably find most of your answer by looking at the amount of campaign contributions made each cycle by Charles J. Cella and others associated with Oaklawn.)

The other big thing that stands out from the 2005 legislation is this:

“Electronic games of skill” means games played through any electronic device or machine that afford an opportunity for the exercise of skill or judgment when the outcome is not completely controlled by chance alone.

This was done to comport with the generally accepted definition of what is and is not a lottery, as set out in the 1949 Supreme Court decision (and later cases that cited it). According to that Longstreth decision, remember, a “lottery,” within the meaning of the Arkansas Constitution, is a game that

is determined entirely or in part by lot or mere luck, and in which judgment, practice, skill and adroitness have honestly no office at all, or are thwarted by chance.

This seems straightforward enough. An electronic game that was completely dependent on chance and required no skill would be barely different from a lottery, so you would basically have to prevent those games to stay within the lines of the Arkansas Constitution.

Except, if you’ve actually been in the casino at Oaklawn or Southland, you have certainly seen how slot machines appear to be crammed into every available inch. And what casino game takes less skill and is more reliant on pure chance than a traditional slot machine?9

As one gaming website ranking casino games by skill explains,

It’s time to dispel some myth; slot machines are a game based entirely on chance. The push of a button leads to a number of symbols on reels. If the symbols match up money is paid out. [N]o matter how flashy a slot machine may seem, you are always looking at a digital representation of a pseudo random number generator (SRNG). Behind the games and reels is a set of numbers, and when you push the button the RNG decides whether or not you have won.

The casinos (or “racinos,” if you want to be pretentious about it) got around this vis-a-vis slot machines by initially having (or claiming to have) slot machines that used two spins per play, where the player could see the first spin, keep some combination of the symbols that showed up on the first spin, and then have the second spin to try to make a winning match. Except, as you know if you’ve played slots at Oaklawn recently, that is not how nearly any of the slots on site actually work. As one slot player put it when I asked whether her favorite Willy Wonka-themed slot machine was one spin or two spins per play:

One spin. I just press the button and hope for the Oompa Loompas to line up.

This makes sense. The Dept. of Finance & Administration regulations regarding electric games of skill specifically allows for games based on a random number generator. Those regulations even have lengthy descriptions of how random and non-countable a random-number generator must be to be part of an approved game.

So…how does a single-spin, purely chance-driven slot machine pass muster under the 2005 law? With occasional gimmicks that require some modicum of “skill,” even where that “skill” appears to be nothing more than knowing how to read or realizing you have to hit a button a second time.

Under the 2005 law, DF&A sets the big-picture regulations for the gaming scheme, and they set the requirements for licensing of casinos as well as the games that can be used in the casino. DF&A does not, however, actually inspect the technical aspects of a given game, nor do they provide a specific list of what does and does not constitute a skill.

Rather, there is some outsourcing involved. Under DF&A regulations, a company that builds a new electronic game and wants that game able to be used in an Arkansas casino must get a company called Gaming Laboratories International to review the game’s rules of play. Specifically,

GLI shall examine and test all games of skill and shall issue a recommendation to the Arkansas Racing Commission that the machine be certified as meeting the criteria under Arkansas Code Section 23-113-101 et seq (Act 1151 of 2005), or that the machine fails to meet that criteria.

As GLI’s criteria explain,

Skill means the human attributes of a player such as knowledge, dexterity, visual recognition, logic, memory, reaction, strength, agility, athleticism, hand-to-eye coordination, numerical and/or lexical ability, or any other ability or expertise relevant to game play.

Those little mini-games that pop up on some slot machines, wherein the player tries to catch a fish or remember where a certain item was on the screen or whatever? That’s the skill component that, according to GLI, makes those slots different from regular slots that lack these things.

So, essentially, as long as the slot machine has SOME additional aspect that requires the player to show that they are a living, breathing human to play that part of the game, the entire slot machine can qualify as a “game of skill,” even if the additional component is still more or less luck, as long as that aspect gives you the opportunity to get an extra spin or somehow increase your potential payout. Of course, neither GLI nor DF&A requires that those “skill” aspects appear after every spin, so the current regulations basically mean that a game that is pure chance nearly all the time becomes a game of skill as long as something nominally different happens every now and then.

Drawing Lots

Unlike the horse-racing-related Amendment 46, which was done solely to give peace of mind to the Cellas about the long-term legality of horse racing and pari-mutuel betting in Arkansas, the Arkansas Constitution’s specific prohibition against lotteries meant that the legislature could never create one simply through legislation. Instead, it would take a constitutional amendment to make that happen.

In 2006, as part of his campaign for Lt. Governor, Bill Halter began to talk about pushing for a statewide lottery, with proceeds going to educational scholarships. Halter won that race and helped spearhead getting the legislature to refer a constitutional amendment to the people to create that lottery system. The proposed amendment appeared on the November 2008 ballot and passed by a roughly two-to-one margin, becoming Amendment 87. Starting in the 2009 regular legislative session, the General Assembly put together the statutory framework for how the lottery would be run, how money would be disbursed, and the like.

The lottery is new enough, and enough words have been written about its plusses and minuses, that a deep dive into the system is probably not necessary here. Suffice it to say that, while the lottery has undergone tweaks and alterations in the 9+ years since it was approved, the actual passage of Amendment 87 and the creation of the lottery system represented the last substantive change to legal gambling in Arkansas until the 2017 regular session.10

Dear Mr. Fantasy

After almost a decade of no newly approved gambling in the state, the 2017 General Assembly passed Act 1075, which allowed for the playing of daily, paid fantasy sports (e.g., DraftKings, FanDuel, etc.). Interestingly, despite the fact that those kinds of games actually do require skill and allow for someone to wager his or her money and receive a payout based on outcomes that are a combination of skill and luck, the legislature specifically mentioned in Act 1075, “a paid fantasy sports game conducted in compliance with this chapter does not constitute gambling for any purpose.” Well, ok!

Regardless of that distinction, Act 1075 effectively allowed players to participate in online daily fantasy sports games and imposed a tax on the operators of those games. People were already playing those games, however, so the real impact of Act 1075 was to try to let Arkansas profit from the activity that was already happening and to clarify that these games were not illegal in Arkansas.

Sports Betting?

As mentioned 3600 words ago, Monday’s Supreme Court ruling leaves two paths forward when it comes to sports betting. Assuming the U.S. Congress decides not to act to regulate sports betting directly, it would fall to the states to decide if and how to allow and regulate that betting.

When I first thought about this issue, my immediate reaction was that the current makeup of the General Assembly was probably not going to allow sports betting any time soon. After researching this article, though, I’ve definitely changed that thought. I think the more likely outcome is the passage of another statutory scheme similar to the 2005 electronic-gaming statutes, wherein the legislature limits sports betting to Oaklawn and Southland by making the option to have sports betting subject to local votes in “cities or counties where horse racing or greyhound racing parks are located.”

They will likely justify this limitation by pointing to how betting at those locations is already regulated and how those locations already have betting infrastructure in place, which are both true statements but still miss the point. Those justifications will, of course, be a smoke screen for the real reason for that kind of limitation: further enriching Charles J. Cella and the corporate owners of Southland, both of whom are dependable donors of big campaign checks.

That is the current reality in Arkansas, after all. Things that could be used to make an economic impact in any variety of locations somehow mysteriously wind up just making an economic impact to the same groups of people who benefit over and over again. I’d wager that sports betting will not be any different.

***

Note: Many thanks to UALR-Bowen Law School Professor Jeff B. Woodmansee for his assistance on the horse/greyhound racing research for this post.