ONLINE GAMING MEETS ONLINE GAMBLING

ONLINE GAMING MEETS ONLINE GAMBLING

Roxanne ChristJanuary 27, 2013

Video Game Law

University of British

Columbia Law School

Law

450A.001

DOJ switched its view of the Wire Act– now says the Wire Act applies only to sports-related gambling activities (Dec. 2011)Nevada legalized interactive gambling -- online poker to start (Dec. 2011)New York Federal Judge Weinstein ruled that poker is predominantly a game of skill, not chance under the Illegal Gambling Business Act (US v. Dicristinia, Aug. 2012)

Recent Legal Developments in Online Gambling

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What “Online Gaming” Means to Casino Companies

SPORTS WAGERINGPOKER CASINO GAMESBINGO LOTTERIES

Globally, $21.4 billion in 2010$30.5 billion by 2015In US, potentially $10 billion (including $1.4 billion in poker)

What “Online Gaming” Means to Casino Companies

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Social games Social casino games Real money social games

Social Video Gaming Social Casino Gaming

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Played on web-based social networks (e.g., Facebook) and mobile social networks (e.g., Gree)

$8.2 billion in 2012 (ThinkEquity)$14.6 billion by 2015

Social games played with real money that cannot be redeemed$1.6 billion in 2012 (SuperData)$2.5 billion by 2015

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Gaming and Gamers: The Coming Convergence

Community-based, on-going engagement with massive numbers of concurrent usersGame content is immersive; content and game play mergeEconomics focused on “owning” the player, micro-transaction revenue, data generation and advertisingWrite their own constitutionsCompeting without government-granted licenses

Location-based, periodic engagement with limited numbers of playersGame content is about the game, not the storyEconomics focused on maximizing machine and real property assetsLive with government regulationCasino companies have large player databases through loyalty programs

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Social Game Plays

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February 2011

Tencent

takes control of Riot Games

July 2011

EA buys PopCap for about $750

million

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Social Game Plays

March 2012

Zynga

buys OMGPOP for about $180 million

May 2012

GREE buys Funzio

for $210 million

Online Gambling Meets Online Video Games

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December 2011

Caesars buys Playtika

October 2011

MGM, Boyd and Bwin join Bwin to offer internet poker

Online Gambling Meets Online Video Games

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January 2012

IGT buys Double

Down for up to $500 million

May 2012

WMS buys Jadestone

Principal Federal Laws Affecting Online Gaming

Unlawful Internet Gambling Enforcement ActIllegal Gambling Businesses ActTravel Act The Wire Act

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Unlawful Internet Gambling enforcement Act (UIGEA)

Prohibits accepting credits, fund transfers, or other payments from anyone “engaged in the business of betting or wagering, in connection with the participation of another person in unlawful Internet gambling” Defines “unlawful Internet gambling” as “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”

6a

Makes it a crime to conduct, finance, manage, supervise, direct or own all or part of an “illegal gambling business.” An “illegal gambling business” is a business that meets the following conditions: (i) violates the law of the state where it takes place; (ii) involves at least five people who conduct, finance, manage, supervise, direct, or own all or part of the illegal gambling business; and(iii) operates continuously for at least 30 days or has a gross revenue of $2,000 on any single day “Gambling “includes” slot machines, conducting lotteries, numbers games, or selling chances therein.

Illegal Gambling Business Act (IGBA)

6b

US v. Dicristina, Judge Weinstein, E.D.N.Y. Aug. 2012)

Texas Hold’em is a predominantly a game of skill, not chanceThe IGBA does not criminalize all activities that constitute gambling under state law. There is no reason to think Congress intended for gambling to include pokerUnlike live poker, video poker is predominantly a game of chanceHouse-banked games are more likely, but not necessarily, to be predominated by chance The IGBA was passed to close the gap in state enforcement of intra-state mob-backed gambling activities

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Prohibits, in relevant part, a person or entity from using “any facility in interstate or foreign commerce” with the intent to “(1) distribute the proceeds of any unlawful activity; or... (3) otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on of any unlawful activity,” and thereafter performing or attempting to perform such conduct“Unlawful activity” is defined to include “any business enterprise involving gambling in violation of state or federal laws”

Travel Act

6c

The Wire Act

“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.”

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DOJ Wire Act Opinion (Dec. 23, 2011)

DOJ reversed its long-held interpretation of the Wire Act that all online gambling is prohibited by Wire ActDOJ now says the Wire Act only applies to sports-related gambling activitiesThe DOJ says the “ordinary meaning of the phrase ‘sports event or contest’ does not encompass lotteries”Per Judge Weinstein, “the [Wire] Act applies only to wagering on sporting events.”Open issue: what are “sports-related gambling activities” and “sporting events”?

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8

Virtual Sports and Game Play Betting for Real Money

The Wire Act does not define a “sporting event” or “sports-related” gamblingThe DOJ did not opine on what kind of games or contests other than state lotteries are not, in its view, sporting eventsBased on Dicristina, the reach of federal gambling laws may depend on:Need for tools to curb mob influenceAbsence of robust state enforcementInability of RICO to reach the objectionable conduct

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The Bottom Line for Federal Regulation

Online sports-related gambling activities are still illegal under federal lawOnline betting that violates state law also remains illegal under federal lawNo new safe harborsFederal legislation to legalize online gambling looks doubtful

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10

A Taste of Tribal Gaming Issues

Does state-by-state approach leave Indian tribes unable to participate? Impact of online gaming on states and tribes with “exclusivity” clauses in their compactWording of exclusivity clauses may be key (“gaming devices”)Is a home computer or mobile phone a “Gaming Device”? Where will the gaming be deemed located – i.e. in the home or on the server?

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State Regulation of Online Gaming

Every state and the District of Columbia have some form of applicable gaming or lottery statutes, whether gaming is conducted in person or over the internetSome states, such as Illinois, Indiana, Louisiana, Oregon, South Dakota, Washington, and Wisconsin, explicitly prohibit online gamingNevada and Delaware have legalized online pokerCalifornia has re-introduced legislation to legalize online pokerNevada has introduced legislation to allow cross-state compacts

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State Regulation of Online Gaming

States that define gambling to include poker:Arizona Arkansas ConnecticutFlorida Idaho Illinois Iowa Kansas MichiganOhio Oklahoma TennesseeWisconsin

13

Nevada’s Online Gambling Regulations– the Model of What is to Come?

Limited to online poker to startOperator, service provider and manufacturer licenses offeredRequires in-state presence or affiliation with entity that has in-state presenceImposes geolocation and “patron identification” technological hurdles on operator

14

Nevada Interactive Gaming License Applicants (green= granted)

3G Studios 888 Holdings (SP,M)ACEP (Stratosphere) (SP, M)Aristocrat (SP, M)Bally Technologies, Inc. (SP, M)Boyd (O, SP)BP Gaming (bwin sub) (SP, M)CAMS (SP-Geolocation, Patron ID)Caesars (O)Canter (SP)Fertitta InteractiveGlobal Cash Access, Inc. (SP-Cash Access and Wagering Instrument)Golden Nugget (O)Hard Rock

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IGT (SP, M)

Lottomatic Group (Italy Based) - includes SPIELO, Boss Media, and St. Minver (SP, M)

MGM Resorts (O)

Monarch Casino (O)

NetEffect Networks (Class 2 SP-IT Service Provider)

Paddy Power (UK)

Pokertrip Enterprises (SP-Marketing Affiliate)

SG Gaming

Shuffle Master (SP, M)

South Point Poker (O, M)

William Hill PLC (Europe)

WMS Industries (M)

Zynga

2012 M&A deal value $4 billion (up 18%)2012 M&A deal volume over 83 transactions (down 27%)2012 average transaction value of $48.6 million

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2012 Games Industry M&A Activity

Source: Digi-Capital Global Games Investment Review

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Trend: Rising M&A Exits

% M&A Activity

% IPO Activity

The convergence of social games and casino games will increase M&A activity and deal sizeCross-state interactive gambling compactsAddiction claims and self-exclusion programs

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What to Expect

Roxanne E. Christ

Roxanne Christ

is a partner in the Los Angeles office of Latham & Watkins and is a member of the Corporate Department. Ms. Christ’s practice focuses on intellectual property, technology and media transactions, including both US-based and China-based cross-border acquisitions and dispositions of intellectual property portfolios; commercial loans secured by copyrights, patents and trademarks; securitizations of receivables arising from copyrighted works; licensing and strategic alliance agreements; and purchases, sales and restructurings of technology and media assets in bankruptcy. For several consecutive years, Ms. Christ has been recognized by Legal 500 US guides as a leading attorney in Technology, video and online gaming corporate advice and the Legal 500 US: Volume II - Intellectual Property, Media, Technology & Telecoms. As noted in the Chambers USA guide, Ms. Christ is considered by clients to be "one of the leaders in the burgeoning video game industry.” In 2010, she was selected by Los Angeles Business Journal as one of the “Top 40 Lawyers” in Los Angeles for work in interactive media. Ms. Christ previously served as Co-chair of the Publications Subcommittee of the American Bar Association’s Special Committee on Computer Gaming and Virtual Worlds.Ms. Christ handles video game industry matters for both publishers and developers as well as investment banks, commercial banks and private equity funds.

Contact+1.213.891.8300roxanne.christ@lw.comEducationJD, Loyola Law SchoolBA, University of California, Los Angeles

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