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Madras High Court's Verdict Unveils Opportunities for Online Gaming Entrepreneurs



In a significant legal development, the Madras High Court recently rendered a verdict on the Tamil Nadu Online Gaming 2022 (“Act”), providing clarity on its scope and applicability. The court's decision, while upholding the constitutionality of the Act, introduced a crucial exception, stating that the Act cannot be extended to cover ‘games of skill’ such as rummy and poker even if it is played online. This ruling has far-reaching implications for the online gaming industry, players, and the regulatory framework governing such activities. In this article, we have analysed the issues raised by the Court, the contentions raised by the parties and the conclusions reached by the Court.


Issues


  1. Whether the Act) is (a) constitutional as the same is lacking legislative competence; and/or (b) in violation of the Constitution of India (“CoI”) including the fundamental rights enshrined under Articles 14, 19 and 21 of the CoI.

  2. Whether games of skill like poker and rummy qualify as games of chance when played online.


Facts


The Act was enacted by the State of Tamil Nadu (“State”) in the backdrop of the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 ( “Erstwhile Act”) which had also sought to ban online games such as rummy and poker played with stakes or money as it amounted to wagering and betting in cyberspace. However, the Erstwhile Act was struck down in its entirety by the Madras High Court for being ultra vires to the CoI. After which, the State Government appointed a five member committee (“Committee”) for enacting a fresh legislation on online games. Based on the recommendations of the Committee the State passed the Act. 


Section 2(i) and Section 2(l) of the Act banned online gambling and online gaming with respect to ‘game of chance’. Section 23(1) of the Act read with the schedule to the Act expressly clarified that games such as rummy and poker will be considered ‘game of chance’. 

The petitioners filed a writ petition, under Article 226 of the CoI, before Madras High Court stating that the said Act is ultra vires and should be struck down.


Arguments by the Petitioners


The petitioners have argued that games such as ‘rummy and ‘poker are ‘games of skill’ and the same has been regarded by many courts including the Supreme Court of India in the case of K.R. Lakshmanan v. State of Tamil Nadu. It was contented that the State has only banned online form of rummy and poker and not its physical form merely deriving its deductions from the report of the Committee. The petitioners argued that the report by the Committee stating suicides, mental disorders, financial liability as a consequence of playing such online games are unsubstantiated and baseless with no evidence backing the same. The petitioners have argued that merely because these games exist in online form does not necessarily mean that it comes within the ambit of ‘game of chance’ as the petitioners follow a strict code of conduct and software verified by the E-Gaming Federation, a self-regulatory body for the online gaming industry, to ensure that no foul play, or use of bots are employed by the players. They also argued that the report by the Committee stating suicides, mental disorders, financial liability as a consequence of playing such online games are unsubstantiated and baseless with no evidence backing the same.


Arguments by the State


The State argued that the said Act is bona-fide and in interest of public order and morality. The State also argued that the State is well within its powers to enact laws upon ‘gambling’ and ‘betting’ as it is a matter of state list under schedule VII of the CoI. Further, it submitted reports and studies about the impact of online gaming on the public such as suicides, mental disorders, financial liability. The State argued that the courts of India have ruled out rummy and poker as ‘game of skill’ but, when played in an online mode, with the use of artificial intelligence and bots, the same becomes manipulative and hence making it a ‘game of chance’. 


Judgement


The division bench of the Madras High Court, comprising of Chief Justice SV Gangapurwala and Justice PD Audikesavalu, after taking into account all the contentions of the petitioners as well as the State, allowed the writ petition.


The court held that the State has the power to make laws and regulate all online games taking into consideration the intention behind the Act being bona fide and is in interest of public order. However the Madras High Court also stated that “mere intention and bona fides would not be sufficient to uphold the legislation. The legislation has to withstand the test of legislative competence and should be free from manifest arbitrariness. The same will also have to be viewed on the premise of the rights of the parties being trampled or otherwise.”

The court has given the State the power to regulate, put restrictions by providing reasonable regulations on time limit, age restrictions or such other restrictions in regard to playing of online games. Nevertheless, since the State failed to prove that playing rummy and poker online is different and distinct from playing rummy and poker offline/physically, the same cannot be considered ‘games of chance’. The contention of the State that bots may be used or the dealer (software) would know the cards were without any substantive evidence. The court clarified that in an isolated case, if it is noticed by the State that the petitioners or any other online games servers, online games providers are using bots or have indulged in any illegal activity, it can take action against them specifically. But to dub online games of rummy and poker as ‘games of chance’ would be against the dictum of the Supreme Court of India and the various High Courts. Therefore, the court struck down the schedule to the Act that expressly included rummy and poker within the ambit of ‘games of chance’ and stated that sections 2(i) and 2(l)(iv) of the impugned Act shall be read as restricted to ‘games of chance’ and not be extended to include ‘games of skill’, viz., rummy and poker.


Conclusion


The Madras High Court's decision to exempt games of skill from the purview of the Act is a significant development for the online gaming industry. Skill-based games, which have a substantial player base and contribute significantly to the gaming ecosystem, can now operate within the State without being subject to the Act's regulatory framework. This exemption is likely to provide a boost to online poker and rummy platforms, offering them a more favourable legal environment to operate and innovate in. 


Under Indian law, ‘games of skill’ are generally considered legal, while ‘games of chance’ are generally considered illegal. The legal distinction between games of skill and games of chance is based on the relative importance of skill and chance in determining the outcome of the game. If the outcome of a game is predominantly determined by skill, then the game is considered a ‘game of skill’ and is generally considered legal. On the other hand, if the outcome is predominantly determined by chance, then the game is considered a ‘game of chance’ and is generally considered illegal. 


This judgment not only provides clarity to stakeholders within the online gaming industry but also sets a precedent for future legal debates on the classification and regulation of skill-based games. As the industry continues to evolve, it becomes imperative for lawmakers and regulators to adopt a flexible and adaptive approach that fosters innovation while ensuring the protection of consumers.



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