According to the number of times I get asked, there is clearly a misunderstanding about the role of skill in gambling. There is a misconception that if a game during which people can win or lose money has an element of skill in determining the outcome, then it must be legal. This was the argument that the US operators of Daily Fantasy Sports used when they promoted their product all over the US. We know how far that got them. Essentially, this is the Uber approach to the law: push the boundaries as far as you can while you gain market share, and then, if you are called out by the authorities for doing something illegal, you declare “mea culpa” and hope for a slap on the wrist.
In most jurisdictions around the world, if an activity is gambling according to their law, it is regulated and restricted. But what elements does a game need to have in order for it to be gambling? As I have said in the past in this column, gambling sits on a three-legged stool. As long as all three legs are present, then an activity is gambling, but if any leg is missing, then it is not. Those legs: a person must (1) risk something of value, (2) to obtain a prize of value (3) on an occurrence for which the outcome is based on chance.
It is mainly this last point where there is confusion. Games can have elements of skill but still be classified as gambling. It really depends on which country you’re in as to the level of chance that must be reached before something can be classified as gambling and therefore be subject to whatever restrictions that jurisdiction applies to gambling. A game in one country might be considered to be gambling but not in another.
In the US there essentially three different tests that individual states use to determine whether something is gambling. Outside of the US, similar thresholds apply, depending on the jurisdiction. The tests used by the US states are the “Predominant Factor Test”, the “Material Element Test”, and the “Any Chance Test”.
The Predominant Factor Test looks at whether the outcome is predominately based on a random element (chance), irrespective of the fact that the use of skill can improve the likelihood of winning. This test uses the extent to which superior skill overcomes the random element, with “predominantly” being a high hurdle to classify an activity as gambling.
At the extreme, a game in which the outcome is always determined by superior skill is not a game of chance, and hence not gambling.
The Material Element Test looks at whether the outcome depends on chance to a material degree. A player’s proficiency at poker, for example, may influence the outcome of each hand but skill alone cannot influence every hand – the cards that you and your opponents are dealt, randomly, are likely to influence the outcome of that round.
If the Any Chance Test is used, the result of a game must be devoid of any chance element for it to be classified as a game of skill. If there are any elements of chance that can affect the outcome, regardless of the level of skill involved, it is determined to be gambling. This test is the highest hurdle to pass when trying to classify an activity as a game of skill. Most card games, if played for money (legs 1 and 2), and – certainly – fantasy sports would fail this test. There is only one card game that I know that is entirely skill and that would pass the Any Chance Test – Snap!
As you can see, from a legal perspective, determining that something is not gambling is not as simple as stating that something is a game of skill. The issue is whether the activity is likely to pass the specific test that the jurisdiction in question uses.
There is also the point about what constitutes “value”. If you offer a player the chance to win without risking anything of value, it is not gambling. However, care still needs to be taken when deciding what constitutes value.
In the early days of social gaming, players were offered the chance to bet free points, which they could win or lose based on a random outcome during the game. So far, so good: no value being bet or won. Players were shown advertisements during the game, which is how the operator made their money.
But where the operators slipped up was that they allowed customers to cash out their points for prizes, which had a monetary value. They thought, wrongly as it turned out, that as long as the player did not pay anything for the points, then one of the three legs was missing. However, allowing a customer to cash their points out for something of value meant that when those points were risked during a game [the player chose to bet rather than cash out], with that risk based on a chance element, then player was betting something of value and therefore involved in gambling.
So, as with most things to do with the law, it is not as easy as it appears to determine whether a game is gambling or not.
