ONLINE GAMING A Comparison of U.S. and Canadian Law Governing Online Gaming. April 17, Danielle Bush

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1 ONLINE GAMING A Comparison of U.S. and Canadian Law Governing Online Gaming April 17, 2009 Danielle Bush

2 OVERVIEW OF PRESENTATION A. Review of American gaming law B. Review of Canadian gaming law C. Comparison of American and Canadian law applicable to three types of online gaming: Sports betting Fantasy sports leagues Skillgaming

3 AMERICAN LAW generally speaking, in the US gaming is governed by state rather than federal law each state has passed legislation governing this activity, with significant disparities in approach from state to state given the above, it will be clear that a full review of American gaming law cannot be provided in this format this presentation therefore provides only a very broadbrush overview of the subject with apologies for the oversimplification

4 most obvious example of this disparity is gaming laws in Nevada as opposed to neighbouring Arizona Nevada permits the operation of casinos and wagering on sports events in Arizona, it is illegal to engage in any wagering activities which would certainly exclude sports betting and the operation of casinos

5 US federal government has passed a number of statutes that make certain gaming activities illegal, subject to state law Wire Wager Act Professional and Amateur Sports Protection Act Unlawful Internet Gambling Enforcement Act of 2006

6 A. Wire Wager Act (aka "Wire Act", "Federal Wire Wager Act") this legislation is not a separate statute but rather section 1084 ("Transmission of wagering information; penalties") of Chapter 50 ("Gambling") of Part I ("Crimes") of Title 18 ("Crimes and Criminal Procedure") of the United States Code ("USC") the legislation therefore does not have a legislative title and so is referred to by a variety of names by legal commentators

7 The prohibitive section reads: "1084(a) Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both."

8 Subsection (b) provides an exemption: "1084(b) Nothing in this section shall be construed to prevent the transmission in interstate or foreign commerce of... information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal into a State or foreign country in which such betting is legal." this exemption theoretically appears to permit betting by a resident of Nevada (where sports betting is legal) on an online sportsbook operated from England (where betting is legal), subject to state law and regulations

9 it has been argued that the Wire Act makes it illegal to engage in online gaming of any nature whether or not the betting or wagering involves sports events other commentators argue that the parliamentary history of the legislation clearly shows the legislation was enacted specifically to stop cross-border bookmaking and so should only apply to sports betting in the case of In re: Mastercard International Inc. (132 F.Supp.2d 468 (E.D. La. 2001), the Eastern District of Louisiana and the Fifth Circuit on appeal both rejected the argument that the Wire Act was broad enough to cover transmissions concerning any type of gaming activity

10 while some argue that the Wire Act should not be read broadly to cover the Internet, the definition of "wire communication facility" is broad enough to capture online activity: "The term wire communication facility means any and all instrumentalities, personnel, and services (among other things, the receipt, forwarding, or delivery of communications) used or useful in the transmission of writings, signs, pictures, and sounds of all kinds by aid of wire, cable, or other like connection between the points of origin and reception of such transmission." (Section 1081)

11 Professional and Amateur Sports Protection Act Chapter 178 ("Professional and Amateur Sports Protection") was added to the USC in 1992 s of the Act makes it illegal for any person (including a state government) to operate a betting, gambling or wagering scheme based on a sports event

12 "It shall be unlawful for (1) a governmental entity to sponsor, operate, advertise, promote, license, or authorize by law or compact, or (2) a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographical references or otherwise), on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games."

13 the Act grandfathered states under certain circumstances; as a result Nevada was exempted as well as sports lotteries run by the states of Delaware and Oregon Nevada is currently the only state that allows sports betting

14 Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA") this Act attempts to control online gaming activity by regulating the activity of financial service providers it requires that financial service providers comply with regulations requiring the identification and blocking of financial transactions relating to "unlawful Internet gambling"

15 s. 5362(10)(A) defines "unlawful internet gambling": "The term `unlawful Internet gambling' means to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made."

16 s. 5362(1) defines "bet or wager" to include the following: A. means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome; B. includes the purchase of a chance or opportunity to win a lottery or other prize (which opportunity to win is predominantly subject to chance); C. includes any scheme of a type described in section 3702 of title 28 [the Professional and Amateur Sports Act].

17 there are a number of interesting exclusions (both explicit and implicit) from the definition of "bet or wager" and so from the application of the Act the reference to a game "subject to chance" has been read to mean that paying to play games of pure skill in order to win a prize ("skillgaming") does not constitute unlawful internet gambling at least under federal law s. 5362(1)(E)(9) specifically excludes the playing of fantasy sports leagues from the definition of "bet or wager"

18 Online Gaming very few states have specifically addressed online gaming Louisiana appears to be one of the few exceptions with its prohibition against "gambling by computer" (La. Rev. Stat. s. 14:90.3) the general approach seems to be that if the activity is taking place between a gaming website operator located in the state and a customer also in the state, state gaming laws apply

19 issues arise once the activity is cross-border - if a bet is placed in Louisiana (where betting is illegal) on an online sportsbook operated out of Nevada (where sports betting is legal), is the activity legal or illegal? the UIGEA does not make it illegal to engage in online gaming - it simply defines unlawful internet gambling further, the definition makes it clear that the legality of the activity depends entirely on the legality or not of betting and wagering in the state where the recipient or the operator is located

20 Conclusion gambling in the US is regulated state by state although there is federal legislation that provides umbrella regulation in certain areas generally speaking, intrastate gambling is either prohibited or very tightly controlled by state government interstate gambling is prohibited with the exception of wagering on horseracing (which is legal under the Interstate Horseracing Act of 1978 (15 USC 3001))

21 online gaming per se has not been addressed in most states but it is very likely that state gambling laws will apply to online instrastate gambling the status of interstate or even international online gaming is less clear it is likely that the law governing online gaming will follow the developing case law on internet commercial transactions and the jurisdictional issues that must be settled in such cases

22 CANADIAN LAW Overview Canadian gaming law is far simpler than American gaming law in most respects Canada has a federal Criminal Code (the "Code") which is the only penal legislation in the country

23 gambling is prohibited by the Code with some exceptions, including an exception for the operation of gambling operations by provincial governments and by licensees of the provinces almost all of the provinces have passed legislation that regulates gaming in their jurisdiction and, like most monopoly gaming authorities, a large part of their annual revenue now derives from provincial gaming activities

24 Criminal Code Provisions Section 197(1) of the Code defines "bet" ( the noun) as "a bet that is placed on any contingency or event that is to take place in or out of Canada..., includes a bet that is placed on any contingency relating to a horse-race, fight, match or sporting event that is to take place in or out of Canada"

25 the same section defines "common betting house" as " a place that is opened, kept or used for the purpose of (a) enabling, encouraging or assisting persons who resort thereto to bet between themselves or with the keeper, or (b) enabling any person to receive, record, register, transmit or pay bets or to announce the results of betting" thus if a company runs a sportsbook in Canada, they are likely keeping a common betting house

26 Section 202(1) provides that every person who does any one of the following is guilty of a criminal offence: a) uses or knowingly allows a place under his control to be used for the purpose of recording or registering bets;... b) has under his control any money or other property relating to a transaction that is an offence under this section; c) records or registers bets;

27 d) engages in book-making, or in the business or occupation of betting, or makes any agreement for the purchase or sale of betting or gaming privileges, or for the purchase or sale of information that is intended to assist in book-making, poolselling or betting;... e) transmits or receives any message that conveys any information relating to bookmaking, betting or wagering, or that is intended to assist in book-making, poolselling, betting or wagering; or

28 f) aids or assists in any manner in anything that is an offence under this section. given the breadth of this section, a sportsbook operator as well as persons providing services to the sportsbook are exposed to charges under s. 202(1)

29 Section 203 is specifically targeted at bookies, providing that: Every one is guilty of an indictable offence who (a) places a bet on behalf of another person for a consideration paid or to be paid by or on behalf of that other person, (b) engages in the business placing bets on behalf of other persons, whether for a consideration or otherwise, or (c) holds himself out as engaging in the business of placing bets on behalf of other persons, whether for a consideration or otherwise.

30 section 204 is the Canadian equivalent, more or less, of the American Interstate Horseracing Act of 1978 it provides that ss. 201 and 202 do not apply to bets made on horse races provided by organizations running pari-mutuel systems or, stated positively, it legalizes certain types of betting (pari-mutuel but not fixed-odds) on horse races

31 section 206 is possibly the single most convoluted and poorly drafted section of the entire Code, as illustrated by the following: 206(1)(b) [Everyone commits an indictable offence who] sells, barters, exchanges or otherwise disposes of, or causes or procures, or aids or assists in, the sale, barter, exchange or other disposal of, or offers for sale, barter or exchange, any lot, card, ticket or other means or device for advancing, lending, giving, selling or otherwise disposing of any property by lots, tickets or any mode of chance whatever;

32 generally speaking, s. 206 makes all games of chance and all lotteries illegal, as well as criminalizing any service provided to assist in the operation of games of chance and lotteries thus, under s. 206, the operator of an unlicensed land-based or online sportsbook that accepts bets from Canadians is likely committing a number of criminal offences, as are their service providers

33 Provincial Exemption section 207(1)(a) provides that it is lawful for the government of a province, either alone or in conjunction with the government of another province, to conduct and manage a lottery scheme.

34 section 207(4)(b) defines "lottery scheme" as any activity described in subsections 206(1)(a) to (g), whether or not it involves betting, other than... (b) bookmaking or the making or recording of bets on any race or fight, or on a single sport event or athletic contest; as a result, with the exception of pari-mutuel betting, it is illegal for any person or organization in Canada (including the provincial governments) to offer betting on races, fights or single sports events or athletic contests

35 Online Gaming Operations 1. Online Sportsbooks

36 United States as noted previously, sports betting is illegal everywhere in the U.S. except Nevada it is a given that unlicensed online sportsbooks will be illegal if they are operating from anywhere in the US the situation is less clear in the case of an offshore sportsbooks that accepts bets from the US

37 they could certainly be charged with offences under the Wire Act, the Professional and Amateur Sports Protection Act, RICO ("Racketeer Influenced and Corrupt Organizations Act"), and various money laundering statutes the issue of internet jurisdiction would loom large in this situation

38 based on the developing jurisprudence in this area starting with the Zippo case (Zippo Manufacturing v. Zippo Dot Com Inc., 952 F.Supp (W.D. Pa. 1997)), it is likely that a US court would find that the provision of illegal gaming services to persons in the US by an offshore online sportsbook constituted sufficient contact with the US to give the court jurisdiction while this hypothesis has yet to be tested, it appears that the Departments of Justice responsible for the arrest of various executives of offshore sportsbooks (such as BetOnSports) over the past three years do not have any doubt about the likely outcome of such a case

39 Canada sports betting (other than pari-mutuel betting on horse races) is illegal in Canada unless licensed by a provincial government single-event sports betting is illegal throughout Canada - not even the provincial governments can offer this type of betting at present, most if not all legal online sports betting in Canada is provided by provincial lottery corporations the legality of offshore online sportsbooks has not been tested in Canada but the probable outcome of such a case is becoming clearer as Canada's internet jurisdiction jurisprudence develops

40 the Supreme Court of Canada in R. v. Libman, [1985] 2 S.C.R. 178, and then later in Society of Composers, Authors and Music Publishers of Canada v. Canadian Assn. of Internet Providers, [2004] S.C.J. No. 44 (the "SOCAN" case) found that online activity can be found to have taken place in several jurisdictions concurrently a Canadian court is therefore now likely to find it has subject matter jurisdiction over the provision of illegal gaming services to Canadians by the operator of an offshore online sportsbook in conclusion, it is likely that unlicensed online sportsbook activity in Canada is illegal whether or not the operator is located in Canada

41 3. Fantasy Sports Leagues United States s. 5362(1)(E)(ix) of the UIGEA provides that fantasy sports leagues do not constitute unlawful internet gambling because to "bet or wager" does not include:

42 "(ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28) and that meets the following conditions:

43 I. All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants. II. All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.

44 III. No winning outcome is baseda. on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or b. solely on any single performance of an individual athlete in any single real-world sporting or other event.

45 provided a fantasy league meets the requirements set out above (including in particular compliance with subsection (II) which requires that the game be purely or predominantly one of skill), the US federal government apparently believes it to be a legal activity, whether online or not notwithstanding the view of the federal government on the matter, many states may well find fantasy leagues to be illegal simply because the players must pay to play a game for a prize Florida, Louisiana, and Arizona have all seen their attorneys general rule at one time or another that fantasy leagues were illegal in their respective states

46 Canada according to s. 206 of the Code, it is an offence to run a game in which people provide consideration to play a game of pure chance in order to win a prize further, s. 206 prohibits schemes in which people pay consideration in order to play a game of mixed chance and skill if the prize is goods, wares or merchandise

47 s. 206 does not prohibit or even mention games of pure skill and therefore it is generally agreed that paying to play a game of pure skill for a prize of any nature is legal in Canada it should be noted here that the concept of 'predominance of skill' was specifically rejected by the Supreme Court of Canada in the case of R. v. Ross [1968] S.C.J. No. 60

48 the Supreme Court, in a spirited discussion concerning the nature of the game of bridge, held that if a game contained any element of chance, it would be considered a game of mixed chance and skill, not a game of pure skill although Spence J. objected vigorously, the other four justices held that because bridge players had their hands dealt to them, there was sufficient chance involved to render the game one of mixed chance and skill

49 as a result, the person running the bridge club was found guilty of operating a common gaming house contrary to s. 201 of the Code it is therefore critical that any fantasy sports league be structured so that winners are only chosen at the end of a long period of play that amply demonstrates that the eventual winner has won on the basis of pure skill

50 4. Skillgaming this term refers broadly to the playing of games (usually online) in which the outcome is determined entirely by the skill of the player for the purposes of this presentation, skillgaming is defined to include the payment of some form of consideration by the players for the opportunity to win a prize by playing the game

51 United States as noted previously, the central definition of "bet or wager" in the UIGEA does not appear to include games of pure skill or games that are predominantly skill-based the absence of reference to such games has been taken as strong indicator that the federal government did not intend to have the UIGEA apply to skillgaming

52 no matter the apparent position of the federal government on this issue, it is still necessary to determine on a state by state basis whether skillgaming is legal it appears that the majority of states use some form of predominance test to determine whether an activity constitutes an illegal game of chance rather a legal game of skill even presuming a game is found to be predominantly one of skill, there are still a number of states (such as Arizona, Arkansas and Delaware) where gaming is illegal whether or not skill is the only determining factor in the outcome

53 as is the case with other forms of gaming, the provision of online skillgaming will clearly be governed by the laws of the state in or from which the website is operating it also appears likely that online skillgaming will be governed by the laws of the state where each player is located

54 Canada as noted in the previous discussion of the Code, games of pure skill are not caught by the various anti-gaming provisions of the Code it is therefore almost certainly legal to provide online skillgaming throughout Canada

55 caution is required with respect to the nature of the games provided because of the bright line approach taken by the Supreme Court concerning the presence of chance in games as discussed previously, the Supreme Court takes the position that any element of chance in a game transforms it from a legal game of skill to a potentially illegal game of mixed chance and skill

56 CONCLUSION American gambling law is extremely complex because of the number of jurisdictions governing the activity, the diverse federal statutes that could be brought to bear on the activity, and the issuance of opinions on the subject from time to time by various state and federal attorneys general

57 the primary result of this complexity is an alarming lack of clarity with respect to the legality of gaming activities at any given time or place this is compounded by the complexity of the case law and legislation surrounding the subject of internet jurisdiction in contrast, Canadian gaming law is relatively straightforward, primarily because the legality of gaming can only be addressed in one statute, the Code

58 what Canada lacks is subject-specific legislation and case law that would provide clarity and certainty in this arena online sportsbooks, whether operating from inside or outside the US, are clearly operating illegally (with the exception of Nevada licensed sportsbooks) if they accept bets from the US in Canada, it is also likely that the operation of an unlicensed online sportsbook that accepts bets from Canada would be found to be operating illegally in Canada

59 fantasy sports leagues that conform to the definition set out in the UIGEA may or may not be legal in the US depending on the laws of the state in which they and their players are located in Canada, fantasy leagues are likely legal provided that the game is structured so as to be one of pure skill

60 finally, skillgaming appears to be legal in the US according to the federal government but it may be illegal depending on the state in which the activity is being carried on in Canada, skillgaming is almost certainly legal provided that the games are truly games of pure skill with no element of chance involved in the outcome of the games

61 Danielle Bush Phone: Fax: Bay Street, Suite 1600 Toronto, Ontario M5H 4A6