SCCG Research: Can you define skill-based gaming?

I imagine it was a tense day at the movies， when Nico Jacobellis， a movie theater manager in Cleveland Heights， Ohio， was arrested on two counts of possessing and exhibiting an obscene film. That film was the French film， "Les Amants" – in English， “The Lovers”. Skipping past the initial conviction by a three-judge panel and subsequent appeals to an Ohio appellate court and the Ohio Supreme Court， we find ourselves at the decision of the US Supreme Court on June 22， 1964， Jacobellis v. Ohio 378 U.S. 184 (1964). In that decision， Justices Brennan， Goldberg and four other Justices reversed the lower courts' decisions， concluding that "Les Amants" was not obscene under the applicable standard.

Included in this obscenity decision was a concurrence from Justice Potter Stewart， who wrote:

"I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description， and perhaps I could never succeed in intelligibly doing so. But I know it when I see it， and the motion picture involved in this case is not that."

Federal obscenity law would remain somewhat ambiguous until Miller v. California 413 U.S. 15 (1973) introduced the Miller test， a three-pronged obscenity test for obscenity.

Unfortunately， the legal test for skill-based gaming won't be as simple as a couple of federal-level Supreme Court decision because responsibility for laws and gambling regulations has traditionally been the role of the individual US states. Furthermore， the states' opinions on the legality and even definition of skill-based gambling are quite different and highly resistant to the common sense， "I know it when I see it" test.

THE LIMITS OF COMMON SENSE

Some companies have worked with mathematicians to arrive at the definition of skill-based gaming through statistical analysis – the same way we often test for randomness – by measuring the outcomes of many games and seeing if differing skill levels changed the results. This seems immensely reasonable and intuitive. At one end of the spectrum， you have skill-based games like chess， for which there is no randomness in the game rules apart from the benefit of going first. Alternatively， you have outcomes for traditional casino games， like slots， solely determined by random number generation and are clearly gambling.

Other frequently referenced tests include:

Predominance

If skill is the dominant factor in outcomes， it's skill-based， and if the outcome is predominantly random， it's a chance-based game and gambling – the most liberal test.

Material Element

If chance is a material element in determining an outcome， even if skill is also significant，Table games it's chance-based， and gambling – a stricter test.

Any Chance

If chance plays *any* role in the outcome， the game is chance-based， and gambling – a very strict test.

It is widely accepted that among typical gambling activities， poker is considered a game of skill. However， some states have specifically listed poker and other specific games in their definitions of gambling. So， unless and until things change， logical tests don't matter for those states. Suppose it's a skill-based game that was explicitly defined as gambling. In that case， there's no variant of that game you can develop and deploy for the skill-based gaming market that isn't at risk of being targeted by regulators or law enforcement. So， in some states， a game determined to be skill-based by the Material Element test could be legal in some states， while a game determined to be skill-based by the stricter Any Chance test could be prohibited.

In far fewer words， we could have said， "Regulators gonna regulate，" – especially when policymakers see measurable， material losses of taxable income for the State. This is how it's supposed to be. Industry leaders can be proactive and reasonable and work towards self-governance， but any self-governance policy exists within what is permitted by law and regulation. The most effective developers of industry self-governance policies work hand in glove with regulators and policymakers before they put new products into the market. We're not saying that gamblers can't be winners. We're saying it's a gamble.

Some operators are doing neither of these things. They're punting and generating revenue while they can. Some of these skill-based gaming platform operators put the responsibility for compliance with local gambling laws and regulations on their users. They use "clickwrap" terms and conditions and indemnification language in terms of service that consumers never read.

Users are expected to proactively understand and adhere to their local laws – fairly unreasonable given the complexity of the scenario. These platforms， while providing the means for gaming， clearly distance themselves from legal accountability and act as if they were mere "carriers for gambling，" assuming no responsibility for the gambling itself.

Skill-based gambling has a huge grey market in the US. The American Gaming Association (AGA) made the following critical observations in a press release on August 23， 2023:

"While most Americans see 'skill' games as similar to traditional casino slots， AGA findings show for every dollar bet by consumers， regulated machines in Pennsylvania keep 7.7 cents on average， while unregulated machines across the country keep 25 cents.

"Americans wager $109bn each year with unregulated "skill" machines according to AGA estimates， at an annual cost of $8.7bn in state taxes and $27bn in legal gaming revenue."

Platform operators， regulators， and legislators are all looking at this murky area of the industry. Many investors are already placing bets in the hopes that they will be the next FanDuel or DraftKings in this next phase of expansion of the US gaming market， and we're going to watch it intently and with great interest.