U.S. GAMING LAW UPDATE

U.S. GAMING LAW UPDATE Canadian Gaming Summit CGA – Canadian Gaming Association Wednesday, June 13th , 2012 Presented By: Lawrence G. Walters, Esq. of Walters Law Group www.GameAttorneys.com

OVERVIEW This presentation will examine recent developments in U.S. gaming law and the potential impact of such developments on the Canadian gaming industry as a whole. • Current Issues / Trends in U.S. Gaming Law: • Expanding Land-Based Gaming • Expansion of Unregulated Gaming Activity • Legalizing Intrastate Online Gaming • Regulatory & Licensing Challenges • Potential for Interstate Gambling Compacts

Setting the Stage for 2012-The DOJ Opinion Dept. of Justice Opinion on Internet Gambling (Dec. 23, 2011): • Issued in response to Illinois and New York inquiries as to the impact of Wire Wager Act (18 U.S.C. § 1084) on intrastate sales of lottery tickets via the Internet • Concluded that “interstate transmissions of wire communications that do not relate to a ‘sporting event of contest’ fall outside the reach of the Wire Act.” • Meaning; the federal Wire Act only prohibits such activities as related to sports betting, not other forms of gambling. • Note: Opinion specifically did not discuss the UIGEA: • “In light of that conclusion, we need not consider how to reconcile the Wire Act with UIGEA, because the Wire Act does not apply in this situation. Accordingly, we express no view about the proper interpretation or scope of UIGEA.” • Arguably condones intrastate online gaming, but still unclear if the Opinion rises to the level of permitting state-to-state compacts.

Setting the Stage for 2012- Black Friday • April 15, 2011 – U.S. Department of Justice unsealed indictments charging the 3 biggest online poker sites (PokerStars, Full Tilt Poker, Absolute Poker) with illegal gambling, bank fraud and money laundering. • Various bank accounts, including those holding players’ funds, were seized, as were the sites’ respective Internet domains. • Although considered one of the most damaging days in online gaming history, Black Friday leveled the playing field, and cleared the way for potential legalization of online poker in the U.S. • A handful of federal online poker legalization bills have come and gone and several states are considering legalizing the activity after Black Friday and the issuance of the DOJ Opinion in December, 2011.

State Legislative Efforts-Summary • Nevada has begun accepting applications for interactive gaming licenses, with Massachusetts, New Jersey, and Delaware actively considering legislation to regulate online gaming within their geographical limits. • The Nevada Gaming Commission adopted regulations relating to intrastate, online poker, and began accepting applications from online poker site operators who wished to launch online poker businesses within the state. • California – a legalization hopeful, is no longer in the running, with its bill withdrawn June 12, 2012. • Iowa, Washington D.C., Florida, Connecticut, Hawaii, and Mississippi all failed at previous attempts to regulate online gambling within their borders, but may try again. • Illinois, New York, Maryland, Virginia, and Ohio have publicly stated their willingness to regulate online poker and are developing legislation.

Expanding Land-Based Gaming-New Jersey Sports Betting Professional and Amateur Sports Protection Act of 1992 [PASPA] – outlaws gambling on sporting events in the United States, with Nevada, Delaware, Oregon and Montana as the only ‘grandfathered’ exceptions. New Jersey missed its opportunity to be included when statute was passed. New Jersey: • Legal Challenge: Interactive Media Entertainment & Gaming Assoc., Inc.(IMEGA) v. Holder, 2011 WL 802106 (D. N.J. March 7, 2011) – New Jersey Senator Raymond Lesniak brought suit against U.S. government, seeking to overturn PASPA as unconstitutional. • The case was ultimately dismissed for lack of standing. • Referendum: NJ Sports Betting Amendment; Public Question 1 (Nov. 8, 2011) • In a non-binding referendum, citizens voted to support amendment of the NJ Constitution to legalize sports betting within the state. • New Law: Jan. 17, 2012 – N.J. Gov. Christie signs sports betting bills (S-3113 & A-4285) into law that permit sports betting at the state’s casinos and four horse tracks and also allow off-track betting on horse races at bars and restaurants in 12 counties • NOTE: Prior to passage the NJ Legislature removed language from the law that would have permitted online wagering. • Status: The sports betting law has not been put into effect yet because of the federal sports betting ban (i.e., the Wire Act), but Gov. Christie openly announced he intends to defy PASPA’s prohibitions and move forward with allowing sports wagering. “Let them try to stop us,” said Christie.

Additional Expansions-Florida Land-Based Gaming Florida • Florida Gaming Centers, Inc. v. Florida Dep't of Bus. And Prof'l Reg., 2012 Fla. LEXIS 862, 2012 WL 1520863 (Fla. April 27, 2012) (denying petition for review) • The state Supreme Court possibly opened the door to gaming expansion within the state by allowing lower appellate court decision to stand. (71 So.3d 226). • In October, the appeals court wrote that the "Legislature has broad discretion in regulating and controlling pari-mutuel wager and gambling under its police powers." • The effect of the decision is to broaden the definition of facilities that are permitted to offer slot machines, to include all pari-mutuel facilities in Florida. The decision confirmed the broad authority of the Legislature to authorize more gambling in Florida, and has been celebrated by pro-gambling interests. • However, this legal decision may cause a battle between gaming interests and the Seminole Indian tribe. • The Seminoles have a compact with the state that gives them exclusivity for games such as blackjack and baccarat, and also exclusivity of slot machines outside of South Florida. • This means that if lawmakers continue to move forward and permit casino resorts, the state risks violating the terms of the compact.

Unregulated Gaming Expansion-Internet Sweepstakes Cafes The Internet Sweepstakes Phenomena: • Considered the largest unregulated expansion of gambling since the initial Indian casino movement. • Internet cafes use electronic sweepstakes to promote the sale of long distance phone minutes or Internet time. • Both counties and states have attempted to prohibit the activity, but have faced constitutional challenges. • Statistics (Florida example): • Expanded to roughly 1,500 locations statewide. • Generating an estimated $1 billion in annual revenue. • Industry is forging relationships with lawmakers • Starting to rival traditional gambling venues • Rumors of potential similar “boom” in Canada?

Sweepstakes Regulation -Free Expression Issues • Internet sweepstakes cafes use software to reveal the results of the game, in an entertaining format. • The software plays no role in determining whether a player has won – all winning entries are predetermined. • Regulation of Internet sweepstakes devices has proved challenging due to potential infringement on free expression rights. • Legislation has been struck down or enjoined since it essentially prohibits a form of video game. • Canada’s Charter of Rights & Freedoms may provide similar protection to sweepstakes software.

Unregulated Gaming ExpansionsAlternative Gaming Options • Fantasy Sports (UIGEA Exception) • Penny Auctions • Skill Gaming • Poker Tournament Websites • Virtual Currency / Free Play

Factors Influencing U.S. Online Gaming Expansion *DOJ Opinion along with UIGEA exemption for intrastate gaming opens the floodgates for statewide legalization. *Precedent for intra-state agreements or “compacts” in other areas (e.g., energy, environmental management, transportation) – may support gaming compacts. * Impact of Web 2.0 influences like the confluence of gaming and social networking (e.g., Zynga Poker), leading to increased social education and acceptance of gambling-related activity. *Struggling U.S. economy driving the debate toward revenue enhancement as justification for legalization of otherwise controversial gambling activity. *Increased use of mobile devices along with increasingly effective geo-location tools (e.g., GPS in smartphones) suggests that geographic player limitations are not only possible but realistic.

Advertising Issues-Overview • iGaming companies grappling with new marketing concepts such as social gaming in Web 2.0 environment, in preparation for legal gaming. • Conversion of free players to paid players remains challenging. • U.S. entities preparing for entry into the iGaming market are looking for experienced promoters in nations where online gambling is legal. • FTC rules and policies apply to gaming affiliate marketing activities. • Paid Endorsements – all material connections must be revealed • “Refer A Friend” – communications sent by customers may be deemed to originate from the promoted site.

Advertising Issues-Constitutional Considerations • Under U.S. Constitutional Law, online gambling advertising is considered “commercial speech” protected from government censorship. • Under relevant Supreme Court precedent, advertisements are legal in jurisdictions that prohibit the gambling activity, so long as the gambling is legal in its place of origin. • Legalizing gambling in any U.S. jurisdiction will have the consequential impact of legalizing advertising in every state. • Depending on effectiveness of geo-blocking tools, non-residents will be drawn to wager in states where gambling is legal.

Unsuccessful Online Gaming Legalization Attempts District of Columbia • Feb. 2012 – D.C. Council voted to repeal the Internet gambling law passed in 2010 that would have made the District the first to offer Internet gambling. Allegations of corruption and insufficient public input ended the District’s brief experiment with online gaming, and suggests future difficulties in other jurisdictions. Mississippi Mississippi Lawful Internet Gaming Act of 2012 (HB 1373). Recently tabled. Iowa State bill (SF 2275) would have authorized online poker and permit multi-state online gambling compacts passed state Senate California • Intrastate Internet Gambling bill (SB 1463) withdrawn June 12, 2012, for lack of a co-sponsor. • Would have created a framework for to regulate intrastate, online gambling. • Bwin.Party and the United Auburn Indian Community (owner of Sacramento’s Thunder Valley Casino Resort) entered into a formal agreement to offer online poker services in California if bill would have passed this term

Illinois – Online Gaming Update Illinois (HB 4148) • 2011 – state legislature passed a bill that would greatly expand the state’s fledgling gambling industry • BUT… the bill was halted when the Illinois Gov. publicly stated his intent to veto the bill • The original bill would have brought slot machines to Chicago airports, and also would have permitted several new land-based casinos in the state. • Feb. 2012 – lawmakers amended the legislation per the Governor’s request. Bill appears to have ‘quietly tabled.’ • Creates Division of Internet Gaming and authorizes it to enter into multi-state compacts regarding online gambling. Online Lottery: March 26, 2012 – became first state in U.S to offer online lottery ticket sales. 21 other states considering similar expansion into online lottery ticket sales.

Nevada Online Gaming Update Nevada • State is the first to consider applications for online gambling through the Nevada Gaming Control Board (NGCB). Regulations allow companies currently licensed by the state to apply for approval of their interactive gaming software. • Six companies filed applications: Cantor Gaming, Shuffle Master, International Game Technology, Bally Technologies, South Point, and Caesars Entertainment. • Approval process is expected to be less than 90 days for companies that already own land-based Nevada gaming licenses. • Approved licensees expected to begin serving Nevada players by the end of 2012. • State law requires that its online gaming services not conflict with federal law. DOJ Opinion may provide the necessary legal basis to move forward with formal licensure. Nevada is positioning itself to be the first state to offer legal intrastate online gaming.

Nevada, cont. Nevada (cont’d.) • Licensing Details/Requirements: • $500,000 license fee for 2 years + 6% tax on gross winnings. • Operators must prove their ability to maintain controls on player registration • Prevent underage play and establish the location of players before being licensed • Player fund transfers are not allowed. • Affiliates are allowed. • Operators must ensure that players have only one account. • Operators may pay a fixed sum to celebrity players for marketing purposes as long as the operator does not profit beyond the rake. • Promotional credits or bonus credits offered by the operator are allowed. • An operator must maintain a reserve of cash, cash equivalents, an irrevocable letter of credit, bond, or combination thereof, equal to the sum of all players' funds. • Any compensation received by an operator for conducting any game in which the operator is not party to a wager shall be no more than 10 percent of all funds wagered in each hand.

Nevada, cont. Nevada (cont’d.) • June 7, 2012 – Nevada issues first interactive gaming license recommendations in U.S. • The Gaming Control Board unanimously recommended approval of 2 applications, becoming the first conditionally approved systems in the US. • Bally Technologies and International Game Technologies were given unanimous recommendation by the Nevada Gaming Control Board, clearing a major hurdle for intrastate online poker. • If finally approved by the Gaming Commission, the interactive gaming service provider and manufacturer license will allow them to partner with Nevada casino operators to provide online poker to their players. • The final decision will be made by the Nevada Gaming Commission at their upcoming meeting on June 21.

Licensing Criteria-Who will get approved? • Looming questions as to whether past acceptance of U.S. play (pre or post UIGEA) will automatically preclude consideration for licensure. • 888 / Caesars deal, to promote World Series of Poker, approved by the Nevada Gaming Control Board in March, 2011, suggests that automatic preclusion, based on prior acceptance of U.S. play, may not occur. • However, public attention given to the approval, and the limited nature of the promotion agreement, may provide little guidance. Note; 888 was not granted a gaming license – only an approval of the business relationship. • Regulators’ public statements suggest that investigation of applicants will be much “more rigorous’ when seeking an interactive gaming license. (Mark Lipparelli, Chair, NGCB) • Questions remain as to “who” will need to be licensed; operator, software developer, billing processor, customer service, affiliates, etc.

New Jersey Online Gaming Update New Jersey • Internet Gambling Bill • Proposed legislation authorizes the state Casino Control Commission to issue licenses to casinos to operate computer servers based in Atlantic City. • Computer software would then have to determine if the player was a New Jersey resident, whether the game was being played in New Jersey and if the player was at least 21. • May 31, 2012 – Senate bill was scheduled to be voted on, but lacked the number of required votes – the vote will likely be delayed until after the 2012 presidential election. • Supporters blame NJ Governor – "Because of Gov. Christie's ambivalence […] we're having trouble getting enough Democratic votes to pass it because of opposition from the racing industry.”

Delaware Online Gaming Update Delaware • May 9, 2012 – Delaware Gaming Competitiveness Act of 2012 (HB 333) was introduced and permits: • the state to expand lottery services to the Internet • other forms of online gambling – e.g. – poker • Multi-state compacts regulating such online gambling activities • May 25, 2012 – the bill made it out of Committee and is on its way to the DE House for voting • The state Legislature and Governor are optimistic of the bill’s chances at passage • Delaware would team up with West Virginia and Rhode Island in an attempt for all three states to remain competitive on the east coast due to their smaller populations, respectively.

Miscellaneous State Gaming Expansions Connecticut • April 2012 – Foxwoods Resort Casino (owned by the Mashantucket Pequot Indian Tribe) publicly announced its intent to pursue expansion to online gambling due to declining revenue resulting from the influx of NY casinos and the legalization of gambling in Mass. Possible legal conflicts with the federal Indian Gaming Regulatory Act (25 U.S.C. § 2701, et seq.) Maryland • Passed legislation allowing the creation of an evaluation team to explore further gaming expansion allowing table games and Internet gaming.

U.S. Federal Legalization? Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act (HR 2366) • Status: • Introduced June 24, 2011 • Potential consideration during House summer session. • Enacts Office of Internet Poker Oversight in the Commerce Dept. to oversee state agencies issuing licenses. • States automatically included unless they opt out. • States may have their own intrastate online poker only if the state passes a law establishing such practices before the federal law is enacted. • 2 yr. trial period – the only companies able to obtain licenses will be specific US casinos, race tracks and card rooms. • Prohibits all other forms of Internet gambling that is not already legal under current laws. • Credit cards are not allowed for deposit. • The minimum age requirement is set at 21. • Criminal penalties will be established for cheating and the use of bots – fines and up to 3 yrs in prison. • Requires that all sites must locate remote gaming equipment in the U.S. • If a license is revoked, sites must return funds to players within 30 days. • Clarifies the UIGEA by requiring the Treasury Dept. to publish a list of unlawful Internet gambling sites so that banks know what transactions to block • See also, HR 1174 (online gambling legalization) & HR 2230 (taxation bill).

U.S. Federal Legalization? Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act (HR 2366) (cont’d.) • Hurdles: • Election year so the Congressional session is usually cut short – this gives an excuse to let controversial bills fall through the cracks • Opposition from land-based casinos [most notably from Las Vegas Sands chairman Sheldon Adelson] • Economic competition • Claim that technology cannot prevent minors from participating as effectively as land-based casinos * Opposition from Anti-gambling groups

Factors Impacting Legalization of Online Gaming • 2012 Presidential Election • Presidential hopeful Mitt Romney has come out against online gambling regulations, stating that he will not support legalizing online gaming. • “Gaming has a social effect on a lot of people. I don't want to increase access to gaming. I feel that we have plenty of access to gaming right now through the various casinos and establishments that exist.” • President Obama has not went public with his stance on Internet gaming - the Obama Administration has sent mixed signals when dealing with the issue.

Factors Impacting Legalization of Online Gaming • Anti-Gambling Interests • Some experts warn that legalizing online gambling more broadly would increase the number of problem gamblers • National Council on Problem Gambling Public Awareness Report: • 2 million adults in U.S. are estimated to meet criteria for pathological gambling. • About 3% of Americans are considered problem gamblers – this estimate is allegedly even higher for teenagers and college students.

Factors Impacting Legalization of Online Gaming • Public backlash citing to “societal costs” related to legalizing online gambling • June 2012 –Family values groups from 13 states have publicly called on Congress to pass legislation to prevent states from legalizing Internet gambling, claiming that: • Societal costs will far outweigh any benefits • Land-based gambling expansion in any form, including to the Internet, are efforts to separate families from their assets. • The DOJ opinion undermines Congressional intent in implementing the UIGEA • March 2012 – Utah Gov. signed anti-online gambling bill into law • Became first state to preemptively opt out of any potential federal Internet poker regulation • Makes it a misdemeanor offense to play Internet poker within Utah’s borders – the original text of the bill made such a violation a felony and required Internet service providers to block access to the sites

Impacts on Canada • Potential for established Canadian stakeholders to become involved in expanding U.S. market opportunities. • Canadian entities have experience to offer, given online gaming operations licensed by First Nations; i.e., Kahnawà:ke. • Licensing criteria may consider prior acceptance of U.S. play. • Possible preference for U.S. applicants? • Internet Sweepstakes – Possible bleed-over into Canada, given success in U.S.? • U.S. legalization will create competition with site operators providing gaming services to U.S. residents from Canada. (E.g., possible impact on Mohawk Kahnawà:ke licensees). • U.S. can learn from Canadian provincial monopoly model. • Possible international treaty options for online gaming operations between the U.S. and Canada.

Conclusions • U.S. developments relevant to Canadian interests, in the increasingly global marketplace. • U.S. legalization, at the state or federal level, may provide a roadmap for increased Canadian expansion beyond provincial monopolies. • Licensing criteria, software requirements and hardware tools used in legalization process may carry over to Canadian regulators. • Sweepstakes cases may be treated similarly, given analogous constitutional provisions. • Canada may be in a position sit back and watch, as the states experiment with private entity licensure, and learn from any mistakes.

U.S. GAMING LAW UPDATE