[1993/oagheade.htm]

OAG 93-58

August 5, 1993

Senator Jeff Green

Representative Jim Yates

Co-chairs, Interim Joint Committee On Business Organizations and Professions

State Capitol

Frankfort, Kentucky 40601

 

Dear Messrs. Green and Yates:

You have posed the following questions:

Will the Kentucky Constitution need to be amended to permit casino gambling in Kentucky?

Is the state lottery amendment broad enough to permit casino gambling as a licensed and regulated function of the lottery?

For the reasons explained below, it is the opinion of the Attorney General that the state constitution, including the lottery amendment, prohibits the General Assembly from permitting casino gambling. The answers to your questions are yes, the constitution must be amended in order to permit casino gambling; and no, the lottery amendment is not broad enough to permit casino gambling.

Historical perspective on the prohibition against lotteries

Section 226 of the state constitution says that with the exception of the state lottery (discussed below), “lotteries and gift enterprises are forbidden, and none shall be exercised, and no schemes for similar purposes shall be allowed.” This provision is similar to that of some other state constitutions in specifying only the particular form of gambling called a lottery. As a result, many courts have considered cases in which a particular game or activity was analyzed to determine whether it was a lottery. In making this determination courts have found it instructive to consider the nature of lotteries in order to determine the intent underlying the constitutional provisions.

Lotteries have been used as a source of governmental revenue since biblical times. They flourished during the Renaissance in Italy (hence the popularity of the Italian term “lotto”). In England, Queen Elizabeth chartered a lottery in 1567 to raise revenue for the repair of harbors. [1] Lottery revenue financed the Jamestown settlement, the Continental Congress, the building of the British Museum, the rebuilding of Faneuil Hall in Boston, several well-known colleges including Harvard, Yale, and Dartmouth, and in modern times the construction of the Sydney Opera House.

In the 17th Century public support for lotteries began to decline following widespread corruption, including the suspicion that something was amiss when Louis XIV won the French lottery. Public lotteries also suffered as private entrepreneurs ran their own lotteries based on the same number drawing used in the public lottery but with more favorable returns to the players.

In the United States, private lotteries flourished before pubic opinion turned forcefully against them in the latter half of the 19th Century. Although lotteries had been employed in every state of the Union, public sentiment against lotteries was so strong that at one point every state had adopted a constitutional amendment to suppress them, [2] the last two states to do so being Kentucky and Louisiana. [3] Congress in 1868 forbade use of the mail to send lottery paraphernalia and in 1890 prohibited the interstate transportation of lottery tickets. The latter measure may have been responsible for the demise of the famous Louisiana Lottery, which ran from 1869 to 1894 and in its heyday had a sales agent in every city of the United States, collected sales of $2 million per month, and distributed prizes of as much as $600,000. [4]

The legal history of gambling in general and lotteries in particular has been one of judicial obloquy. In 1850 the U.S. Supreme Court wrote, “Experience has shown that the common forms of gambling are comparatively innocuous when placed in contrast with the widespread pestilence of lotteries. The former are confined to a few persons and places, but the lottery infests the whole community; it enters every dwelling; it reaches every class; it preys upon the hard earnings of the poor; it plunders the ignorant and simple.” Phalen v. Virginia, 8 Howard 163, 12 L Ed 1030, 1033 (1850). Thirty years later, the court reflected on that statement and said,

Happily, under the influence of restrictive legislation, the evils are not so apparent now; but we very much fear that, with the same opportunities of indulgence, the same result would be manifested.

If lotteries are to be tolerable at all, it is, no doubt, better that they should be regulated by law, so that the people may be protected as far as possible against the inherent vices of the system; but that they are demoralizing in their effect, no matter how carefully regulated, cannot admit of doubt.

Stone v Mississippi, 101 US 814, 818, 25 L Ed 1079 (1880). That attitude has persisted into this century. The Supreme Court of Nebraska said that gambling “attracts young and old to places of idleness, where valuable time and fruits of honest endeavor are lost. It deprives legitimate industry of profitable service and lessens individual regards therefor.” Sorensen v Ak-Sar-Ben Exposition Company, 226 NW 705 (Neb 1929). In Kentucky, the Court of Appeals in 1931 said “all forms of gambling are evil and characterized by vicious tendencies.” Commonwealth v Kentucky Jockey Club, Inc., 238 Ky 739, 38 SW2d 987, 994 (1931).

In the early 1890s, when the Constitution of Kentucky was written and adopted, it is fairly clear that the common understanding of a lottery was the sort of program characterized by the Louisiana Lottery and the state lotteries of today: a system in which players wager that a particular number will be selected in a random drawing, with the lottery operator retaining a fixed percentage of the pool. It is also clear that the popularity of lotteries was in decline even as our constitution was adopted, while the prohibition against lotteries has of course remained (subject to the 1988 amendment), provoking a series of legal questions as to what the phrase “lotteries and gift enterprises are forbidden” really means. [5]

The comments of Delegate Robert Rodes of Warren County to the 1890 Constitutional Convention are enlightening as to the intention of the delegates when they debated Section 26 of the Kentucky Constitution which prohibits lotteries. On October 7, 1890, Rodes rose from his chair and stated:

[B]ut I would make this remark: The newspapers have called lotteries "vampires," one of those big Brazilian bats that fans you gently to sleep while it sucks the last drop of blood from you. Some other newspapers call it a political "octopus," the appellation of the great, large-eyed, huge monster of the deep, with its hundred tentacles reaching out and drawing you in its close embrace with the hug of death. Lotteries are doing those very things, and anything that does it belongs properly and ought to be inserted in the Bill of Rights, the right intention of which is to protect the people and save them from such an unspeakable lot.

Vol 1, p. 443, Debates, Constitutional Convention 1890.

Judicial history of Kentucky Constitution Section 226

Other states have constitutions that ban lotteries, and courts in those states have had occasion to consider whether lottery includes wagering on horse races under the parimutuel system. The issue reached Kentucky's Court of Appeals in 1931 in Commonwealth v Kentucky Jockey Club, Inc., 238 Ky 739, 38 SW2d 987, 994 (1931). The court approached the issue by adopting a textbook definition of lottery:

A lottery, it is said, is a species of gambling, described as a scheme for the distribution of prizes or things of value, by lot or by chance, among persons who have paid, or agree to pay, a valuable consideration, for the chance to share in the distribution, or as a game or hazard in which small sums of money are ventured for the chance of obtaining a larger value in money or other articles.

Id. at 992. Obviously this is a legal definition; that is, it provides the sort of analysis that would later apply the term lottery to such items as a pinball machine. The court summarized this definition as comprising four elements: “consideration, chance, prize, and means of disbursement.” Id.

The court then briefly referred to cases from other states — which provided authority on both sides of the question — and found that “the clear weight of authority does not sustain the position . . . that the result of a horse race depends on mere chance within the meaning of that term in the definition of a lottery.” The court did not elaborate on two questions raised by that statement: whether the outcome of a bet, and not the race itself, is determined by chance, and whether by “mere chance” the court meant “chance and chance alone.”

The court next considered the intention of the framers of the constitution and of the voters when they adopted section 226. “It did not occur to anyone during that period,” the court found, “that betting on races, elections, or similar forms of wagering constituted a lottery.” Id. at 993. Rather, “the General Assembly and the Court of Appeals have proceeded upon the general understanding that the whole subject of betting and gaming was within the power of the Legislature to prohibit, regulate, or classify,” and that “[u]pon the faith of such legislation and decisions, large investments have been made.” Id.

Finally, in what appears to be the essence of the opinion, the court said, “Gaming, betting, and lotteries are separate and distinct things in law and in fact, and have been recognized consistently as calling for different treatment and varying penalties. The distinctions are well developed, clearly marked, and in most instances rigidly maintained.” Id. Unfortunately the court did not explain what it considered those distinctions to be. We have studied the cases cited by the court and find in them no attempt to draw a distinction between betting and a lottery; the issue in the cases is whether particular conduct, such as wagering on the outcome of an election, constituted betting under statutes making betting illegal. The cases do not provide any elucidation on the term lottery as it is used in the constitution.

The most that can be gleaned from the court's citations is the following excerpt from McDevitt v Thomas, 130 Ky 805, 114 SW 273, 274 (1908):

[T]he words “betting” and “wagering” have a much broader and more comprehensive meaning than the word “gaming.” They are unrestricted in their scope, and it is immaterial whether the subject of the wager is one denounced or prohibited by statute or not. The subject of a wager may be, and frequently is, a perfectly innocent pastime, or a legally authorized act; such as the test of speed of animals or men, or the result of an election, or it may be based upon a mere matter of opinion or the exercise of judgment, such as the height of a mountain, the width of a river, the distance of an object, or the weight of a given article.

Possibly, the court in Kentucky Jockey Club meant to distinguish the kind of casual wagering just described — which statutes labeled as betting — from the kind of activity prohibited by the constitution under the label of lottery. Applying that dichotomy to parimutuel wagering on horses, the court found such wagering to be properly categorized as betting, which is not unconstitutional, rather than a lottery, which is. At any rate, the court did not say, as some materials presented to us suggest, that parimutuel wagering is a game of skill rather than a game of chance or that an activity is not a lottery if it involves some degree of skill.

We do not mean to appear critical of the decision in Kentucky Jockey Club; we simply conclude that the decision may not be regarded as a source of legal reasoning that can be exported to other factual situations. Kentucky Jockey Club simply establishes that, for whatever reason, our legislative and judicial history holds that parimutuel wagering on horses is not a lottery in this state; and if that conclusion requires an exception to the legal definition of a lottery, so be it.

Subsequent cases have failed to extend the reasoning of Kentucky Jockey Club and have adopted a more concise definition of lottery. In Otto v Kosofsky, Ky, 476 SW2d 626, 629 (1971), the court refused to legalize charitable bingo as part of our political heritage, saying that “there is nothing in our judicial or legislative history to support a construction that bingo is not a form of lottery.” In Commonwealth v Malco-Memphis Theatres, Inc., 293 Ky 531, 169 SW2d 596 (1943), the court shortened the definition of lottery from four elements to three: chance, prize, and consideration. That is the definition generally used today. [6] Of these elements, only chance is applicable to the present discussion, since there can be no question that casino gambling involves a prize (one's winnings) and consideration (one's wager).

Defining “chance”

The chance element is a particularly difficult one to construe, for in most wagering situations there exists the opportunity for the player to exercise some skill. For example, in guessing the number of beans in a jar a person exercising normal human judgment would attempt at least an educated guess, even if he or she lacks sufficient information to make a reasonably close calculation. One might argue that such a guessing game is one of skill, since judgment plays a part in one's guess; or a game of chance, since human judgment or skill can supply only a rough estimation of the correct answer. Thus in determining whether a particular game is a lottery, one must decide whether as a legal matter the element of chance is present when both skill and chance contribute to the outcome.

There are two schools of thought on this question. The minority rule, known as the English or pure chance rule, holds that “a lottery consists in the distribution of money or other property by chance, and nothing but chance — that is, by doing that which is equivalent to drawing lots. If merit or skill play any part in determining the distribution, there is no lottery.” 38 AmJur2d, Gambling �9. This approach has the obvious merit of being straightforward in its application. One need only find some particle of skill involved in play and the determination is done.

The other approach, the dominant factor rule, holds that “[w]here both elements of skill and chance enter into a contest, the determination of its character as a lottery or not is generally held to depend on which is the dominating element.” 54 CJS, Lotteries �4.

We have said that the dominant factor rule is in effect in Kentucky. OAG 80-409; OAG 92-127. [7] We will next examine casino gambling under this rule to determine whether the element of chance is sufficiently present to render casino gambling a lottery.

Casino gambling under the dominant factor rule

The dominant factor rule, despite its widespread use, has fostered many variations of expression as courts have tried to define whether chance or skill predominates over the other. Some of these elaborations are not particularly helpful. In State v Stroupe, 76 SE2d 313, 317 (NC 1934), the court said that chance is the predominant factor if “the element of chance is present in such a manner as to thwart the exercise of skill or judgment.” In Sherwood & Roberts-Yakima, Inc., v Leach, 409 P2d 160, 163 (Wash 1966), the court said, “The measure is a qualitative one; that is, the chance must be an integral part which influences the result. The measure is not the quantitative proportion of skill and chance in viewing the scheme as a whole.” In McKittrick v Globe-Democrat Publishing Company, 110 SW2d 705, 717 (Neb 1937), the court said that chance predominates when “chance enters into the solution of another lesser part of the problems and thereby proximately influences the final result.”

The finest analysis of the predominant factor rule appears in Morrow v State, 511 P2d 127, 129 (Alaska 1973). From an examination of cases throughout the United States the court gleaned four requisites to a scheme in which skill predominates over chance:

1. Participants must have the opportunity and the necessary data on which to make an informed judgment.

2. The general class of participants must possess the skill.

3. Skill must destroy the element of chance.

4. The winners must be chosen according to objective standards known to the participants.

Although the court did not explicitly say so, it is obvious that these elements are phrased to create a presumption that a game is a lottery unless these four elements are present. We will consider four popular casino games under this presumption: slot machines, roulette, craps, and blackjack.

It is immediately apparent that slot machines, roulette, and craps fail the test under items 1 and 3. No one can know what the next pull on the handle, spin of the wheel, or throw of the dice will produce. It is impossible under these games as we know them for any player, no matter how skillful, to destroy the element of chance. They are lotteries, and in the case of slot machines, have routinely been held so. State v Brotherhood of Friends, 247 P2d 787 (Wash 1952). [8]

The game of blackjack offers a player the opportunity to count or memorize cards and deduce, from a knowledge of the cards remaining to be played, the probability of a particular card being dealt. Even so, such knowledge does not destroy the element of chance. Even a computer could lose at blackjack, for no one can foretell to whom a particular card will be dealt. Furthermore, even if such a skill does exist, it is not present among the general class of participants, so blackjack fails the test under item 2.

There are, to be sure, other casino games that we have not considered, and they must pass or fail the test on their own characteristics. We find it highly unlikely, however, that a casino would adopt any game in which the general class of players possess a skill that can eliminate the element of chance.

Therefore we find casino gambling to constitute a lottery under the constitution of this state.

There is an additional ground for reaching this conclusion that we find highly persuasive and which could be adopted by a Kentucky court in ruling on this issue, and we will now describe it.

The Indiana rule

Indiana's 1850 constitution carried a lottery provision similar to ours: “No lottery shall be authorized; nor shall the sale of lottery tickets be allowed.” [9] In 1979 the Supreme Court of Indiana, in State v Nixon, 384 NE2d 152 (1979), faced the same question presented by our Kentucky Jockey Club case: is parimutuel betting a lottery forbidden by the state constitution?

The court examined cases from other states upholding parimutuel betting and found a “lack of logic employed in some of the opinions” on the issue. Id. at 159. One case likened the betting to a salesperson paid on commission; another said that the outcome is not uncertain because the winners are “those who bet on the winning horse”; and another said, “It is not an element of chance as to the amount he may lose but only as to the amount he may win.” The court found the Kentucky Jockey Club case “candid, if not altogether legalistic.” Id. at 160.

What the court saw in those and other cases was a mechanical application of a legal definition in a manner that required continual parsing as new games were devised. The court found that a more holistic approach of examining the purpose of the constitutional amendment, rather than the pigeonholing of its component terms, better effectuated the constitutional intent. A historical examination revealed that lotteries in 1850 were the very symbol of commercial gambling enterprises. Whether the entity in question be a 19th Century lottery or a modern gambling establishment, the description is the same:

These businesses operate by taking a percentage of all the moneys gambled on the event and by paying to the winners only the remaining portion, or by formulating the game so that the mathematical odds are in their favor, or by a combination of the two.

Id. at 161. Anyone can play, “while the operators cannot but profit.” Id. Under this analysis, the court held that regardless of the label employed, the objective of the constitutional provision under consideration required a common-sense open-eyed application:

Given the foregoing, we conclude that the concern of those who drafted and adopted our Constitution, including Article XV, section 8, was to minimize the harmful effects of gambling by sheltering the people from gaming enterprises promoted and operated for monetary gain by those who, because of the methods employed are, in essence, purveyors rather than players. . . . [W]hether or not it is a lottery, in the classical sense, is immaterial. Its effects are precisely those sought to be prevented by Article XV, section 8; and it is, therefore, a “lottery” within the meaning of that term as therein employed.

. . .

Applying the word “lottery” in its literal sense would serve to proscribe but one form of commercialized gambling, while leaving those whom the proscription sought to protect exposed to the same mischief by methods identical in substance and different in form only. That such was the constitutional intent does not comport with common sense. When we put ourselves, as nearly as possible, in the position of those who framed and adopted our Constitution, we conclude that Article XV, section 8 was intended to proscribe the mischief occasioned by the lotteries, not merely the lotteries, and that the word “lottery” as used therein, embraces all forms of gaming which, by reason of retainage, service charge, or odds, preclude the participants, in sustained play, from winning while providing a reasonable expectancy of profit for the sponsors.

Id. (Emphasis in original.)

To be sure, the ultimate holding of State v. Nixon differs from that of Kentucky Jockey Club; but the political history that sustained the Kentucky Jockey Club decision was not present in Indiana, and in fact the court found itself “fortunate in that we may judge the statute in question without the frustration, doubtlessly encountered by the Kentucky court, as to what would be the impact of illegitimatizing an on-going major industry and eliminating a source of substantial state revenue.” Id. at 160.

We believe that the reasoning of the Supreme Court of Indiana is precisely applicable to the question before us. As in Indiana, common sense governs the interpretation of our constitution. “The constitution is concerned with the substance and not with the form and its framers did not intend to forbid a common sense application of its provisions.” Meredith v Kauffman, 293 Ky 395, 169 SW2d 37 (1943). Common sense dictates that the framers and adopters of our constitution did not intend to forbid merely one type of commercialized gambling; they meant to forbid it all. If, immediately after the adoption of our present constitution, purveyors of commercial lotteries had simply gone into the casino gambling business, we doubt that the general public would have approved. We therefore find that in addition to the traditional analysis that we have described under the dominant factor rule, courts may adopt a more holistic analysis that leads to the same conclusion.

Schemes for similar purposes

When the framers of our constitution forbade lotteries, they chose the term that described the commercial gambling enterprises then in operation. The word casino, if it meant anything at all to them, meant a small house or room (from Spanish casa) used for music, dancing, and card playing; the use of the word “casino” to denote a commercial gambling house is a relatively recent development. [10] The modern gambling rooms at the world's most famous casino in Monte Carlo were not opened until 1879. [11] As late as 1939 “casino” was defined in law as a “building in the nature of a public park improvement, intended for public amusement or convenience.” [12] While the framers may have approved parimutuel betting because of its position in our cultural heritage, they denounced other commercialized gambling by expressing the ban in four different ways:

Lotteries and gift enterprises are forbidden,

and no privileges shall be granted for such purposes,

and none shall be exercised,

and no schemes for similar purposes shall be allowed.

Perhaps out of precaution against future inventions, the framers included the phrase “and no schemes for similar purposes” to insure that the constitutional ban on lotteries would not be given a narrow construction. Although the phrase “schemes for similar purposes” has been more or less disregarded by courts over the years (perhaps because the few cases construing �226 have found the definition of lottery sufficiently broad), the present question plainly calls for its invocation. We cannot fathom how it could be maintained that modern casino gambling lacks a similar purpose with 19th Century private lotteries. The suggestion is absurd. The purpose of both is to undertake a profitable business by offering the temptation of profit far exceeding outlay and to capitalize on the human tendency to engage in such speculation. Whether one adopts the label of lottery or not, the nature of the business is the same.

In Steely v. Commonwealth, 291 Ky 554, 164 SW2d 977 (1942), the court recognized the need to interpret gambling laws with an awareness of the mutability of that line of business. The court quoted from Moberly v Deskin, 169 Mo App 672, 155 SW 842, 844, as follows:

In no field of reprehensible endeavor has the ingenuity of man been more exerted than in the invention of devices to comply with the letter, but to do violence to the spirit and thwart the beneficent objects and purposes, of the laws designed to suppress the vice of gambling. Be it said to the credit of the expounders of the law that such fruits of inventive genius have been allowed by the courts to accomplish no greater result than that of demonstrating the inaccuracy and inefficiency of some of the old definitions of gambling that were made before the advent of the era of greatly expanded, diversified, and cunning mechanical inventions.

Id. at 979. We believe that Kentucky courts would recognize the “fruits of inventive genius” seen in today's gambling casinos as “schemes for similar purposes” that are strictly forbidden by our constitution.

The 1988 lottery amendment

In 1988 section 226 was amended to add this paragraph:

The general assembly may establish a Kentucky state lottery and may establish a state lottery to be conducted in cooperation with other states. Any lottery so established shall be operated by or on behalf of the Commonwealth of Kentucky.

The question before us is whether casino gambling may be permitted as a licensed and regulated function of the state lottery. We find absolutely no support for such a proposition. When the voters of this state approved a state lottery, they had in mind a system typified by the lotteries of other states. Among the elements of a state lottery are these:

• All players in the state share an equal opportunity to vie for a sum of money generated by the pooling of all wagers.

• The lottery is operated primarily for the enrichment of the state treasury.

• The lottery is primarily conducted by established retailers who may receive some limited compensation.

• The profit generated by the lottery is fixed by means other than mathematical odds.

• In most games, the payoff is a direct function of the amount wagered by all players of the game.

• Betting is accomplished by the purchase of a ticket in a fixed denomination. As the wager increases, the odds of winning increase but the payoff remains the same.

In contrast, these are the characteristics of casino gambling:

• The games are played in discrete locations or rooms, usually at a table or machine, with the payoffs being determined by the amounts wagered at the table or on the machine.

• The games are operated by casinos whose chief or sole source of income is the profit generated by the games.

• The casino's profit is usually determined by mathematical odds; that is to say, a player competes against the house, which has the advantage of the odds. A player may receive a payoff based on the amount of his bet and his odds of wining, without reference to the amounts bet by other players.

• Betting is accomplished by wagering an amount of money of the player's choosing. Generally, increasing the bet increases the potential payoff but does not increase the odds of winning.

We believe that most citizens of this state would be astonished to hear that when they approved the “state lottery” familiar to us today, they were also approving casino gambling of the type just described. Just as the court in Kentucky Jockey Club stated that nobody ever thought that parimutuel betting was a lottery when lotteries were banned, we believe it must be stated today that nobody ever thought casino gambling was a lottery when a state lottery was approved.

Conclusion

It is the opinion of the Attorney General that casino gambling is a lottery for three reasons: it meets the definition of a lottery under the predominant factor rule, it represents commercialized gambling of the sort sought to be prevented by the constitution, and it is a “scheme for similar purposes” to a lottery.

It is also our opinion that the power conferred on the General Assembly by the state lottery amendment does not extend to the licensing and regulation of casino gambling.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General


Footnotes

[1] The charter reads, “A very rich Lotterie generall, without any Blanckes, containing a great number of good Prices, as well of ready Money as of Plate, the same Lotterie is erected by Her Majesties order, to the intent that such commodities as may chaunce to arise thereof may be converted towards the reparation of the Havens, and strengthe of the Realme.” Compact Oxford English Dictionary, 2nd ed., 1000:43.

[2] Lee v City of Miami, 163 So 486, 489 (Fla 1935).

[3] Horner v US, 147 US 449, 37 LEd 237 (1893).

[4] 11 Encyclopedia Britannica, 15th ed, 113-115.

[5] A gift enterprise is a form of lottery in which the player purchases some goods at market value and by way of inducement is given a chance to win a prize. 54 CJS, Lotteries �7. Kentucky cases do not emphasize that distinction and this opinion assumes the term lottery to subsume gift enterprise. For a brief suggestion that Kentucky law might recognize a distinction between the two terms, see Worden v City of Louisville, 279 Ky 712, 131 SW 2d 923, 926 (1939).

[6] Jurisdictions that depart from this definition generally omit the consideration element. 29 ALR3d 888, Promotion Schemes of Retail Stores As Criminal Offense Under Anti-Gambling Laws, �2(a).

[7] Our finding was based in part on Commonwealth v Allen, Ky, 404 SW2d 464 (1966), which held that in a referral selling arrangement (where customers provide salesmen with names of prospects and are rewarded if a sale is later made to the prospect) “chance permeates the entire scheme,” rendering it a lottery.

[8] See also A. B. Long Music Company v Commonwealth, Ky, 429 SW2d 391 (1968), holding a pinball machine to be a lottery.

[9] Indiana Constitution Art. 15 �8, repealed Nov. 8, 1988.

[10] Compact Oxford English Dictionary, 2nd ed., 218:941.

[11] II Encyclopedia Britannica, 15th ed., 610-611.

[12] 14 CJS, Casino.