Online poker is a booming business.
Millions of Americans play the card game online, circulating hundreds of millions of dollars each year. There are international tournaments, a growing number of gaming companies and a lot of money to be made.
The only catch? Under federal and most state law, online poker is illegal.
But one Palo Alto man claims his 100-percent skill-based version of the game, which involves no luck or chance, is totally legal.
Arthur Pfeiffer, a local software engineer who's lived in Palo Alto since 1968, created his own version of poker years ago but plans to launch an upgraded version next year called Texas Block 'Em. The new game is very similar to two other poker variations he invented and patented in the early 2000s, in which players privately select a card from the same deck on each round instead of being randomly dealt cards to play.
"You're no longer working by the mathematical principles of randomness," Pfeiffer explained, "so it's a matter of outwitting and out-thinking your opponents in a skill-based situation. Because it turns outs that everything that happens in terms of the cards is a function of what the players do, there's no outside force giving one player an advantage over another."
Any game that contains three particular elements consideration (paying a fee to participate), chance and a prize is illegal under U.S. gambling law. All three elements must be present to deem something illegal; a game that charges a fee to play but doesn't award prizes would not be violating the law.
Pfeiffer's two previous iterations are called "Hold 'em Blitz" and "Hold 'em Battle" and are connected to ThwartPoker Inc., a software company he founded with his son in 2001. Both games are available on the iPhone and iPod touch (not on a desktop computer) and neither award prizes. They come with single and multi-player options (in the single, one plays against a computer).
There's are free versions of both games that accommodate smaller numbers of players and full versions. The full version of Hold 'em Blitz costs 99 cents and Hold 'em Battle costs $1.99 (players can place bets in the latter). The games require Wi-Fi or Bluetooth to operate, meaning that if there are multiple players, everyone has to be in the same room together even though everyone is playing on their own devices.
When the game starts, everyone is shown three face-up "community" cards, similar to popular poker game Texas Hold 'Em. Each player is then prompted to privately choose a card from a limited deck that's randomly generated fresh for each new hand. Players aim for the same hands that are desirable in poker (royal flush, full house, four of a kind, etc.). The second round of selections are made public, introducing the skill element: once a player sees what another player is aiming for (say there's a jack of spades in the community cards and one sees another player selecting a jack of clubs), he or she can strategize to "block" that player. If two players select the same card, they're dealt a "thwart" card that has no value.
"This adds a whole dimension on top of poker because card selection now becomes a very important feature," Pfeiffer said. "And when you play you can play to try to improve your hand, to try to block somebody or when you're trying to improve your hand, you have to consider they might be trying to block you, so you might not make the best selection to avoid (that). So there's a whole different dynamic involved."
Texas Block 'Em will be based on the same concept but will involve either fee- or subscription-based online tournaments that award cash prizes. So the elements consideration and prize will be present, but not chance, meaning the game does not violate gambling laws, Pfeiffer claims.
Pfeiffer's games also have potential educational value, he said. They can be used to teach strategy and negotiation skills, for example.
"When you play this game, it makes you a better thinker, strategist and poker player," he said.
Pfeiffer is not the only one trying to reinvent the world of Internet poker. PurePlay, a San Francisco-based company, broke into the scene in 2005, claiming its legality based on the absence of consideration. PurePlay users don't have to pay to play in its online tournaments, but instead pay a monthly $25 subscription fee to join the website. It's a different business model, but the game that users play remains the same as regular poker.
Pfeiffer's company has been compared to PurePlay, but he said the two aren't in competition.
"It's really a totally different thing because our game basically is a game of skill," he said. "Their game is not a game of skill by the definition of skill where there's no outside force intervening."
David Levine, an affiliate scholar at the Stanford Law School's Center for Internet and Society, said: "The argument that this is more a game of skill and therefore it wouldn't run afoul of laws certainly seems probable."
Levine, himself a poker player, added that learning how to read other players' "tells," bluffs or potential next moves involves a "high degree of skill."
But both ThwartPoker and PurePlay are operating during a difficult time for online poker, during which many companies have come under major legal fire. In 2011, the U.S. Justice Department shut down two of the world's biggest online poker companies, PokerStars and Full Tilt Poker, charging their founders with fraud. The next year, PokerStars paid the government a $527 million gambling fine and an additional $184 million to reimburse customers outside the United States.
Pfeiffer also recalled in the early 2000s when offshore poker sites were formed so that American players could take part in the lucrative game. In response, Congress passed the Unlawful Internet Gambling Enforcement Act in 2006, making it illegal for businesses to knowingly accept payment in connection with illegal online gambling.
At the state and local level, there's variation between enforcement and abatement. Some states explicitly categorize online gambling as illegal; others don't. Some states consider online-poker related violations felonies, and others as misdemeanors (including California).
Under California law, legality depends largely on the rake, or the commission fee taken by the person or company operating the game. If the rake is taken as a percentage of the total sum of money that players gamble during a single hand or game, the game qualifies as a "percentage game" and is illegal. But a flat-rate or non-percentage rake could be considered legal.
Only three states New Jersey, Nevada and Delaware have completely legalized Internet poker.
Proponents of legalization point to the millions of dollars in tax revenue that could be collected from the game. A recent study conducted by Academicon, a Germany-based law and economics research team, and PokerScout, a website that collects online poker data, found that the California market alone could generate between $217 and $263 million in its first year of operations.
Pfeiffer said he thinks it's only a matter of time until online poker becomes legal.
"Several states already allow (it) and just simply as a source of tax revenue, it's going to happen. It's going to happen in the next couple of years."
Levine however, disagrees.
"I don't think I'd go that far. I don't see (legalization) happening immediately," he said, citing gambling's unavoidable association with personal immorality as well as organized crime, money laundering and other illegal activity.
However, he added, there's a lot to be said in terms of the other elements associated with gambling: strategy, thinking, tactics and logic.
"You could convince policy makers that ... this is no different than playing chess where you've got all the pieces on the board and now it's all about who's the better player. That, I could see happening."