A GLOBAL EXPLOSION, A DOMESTIC OPPOR TUNITY · Featured speakers w ere E rw in va n L am ba art, C...

VOLUME 10 NUMBER 1SUMMER 2017

Brexit — The Impact on the Online Gambling Industry

The Phantom of Single Game Betting in Canada

Duty of Care: Liability Potentially Extended to Gamblers?

A GLOBAL EXPLOSION, ADOMESTIC OPPORTUNITY

MESSAGE FROM THE PRESIDENT

IMGL started the New Year where it left off in 2016 by offering itsMasterclass at the National Council of Legislators from Gaming States(“NCLGS”) at the NCLGS winter meeting in Scottsdale, Arizona, onJanuary 6-8th, 2017. The IMGL Masterclass included panels on therole of Regulators, Tribal Gaming Legal Issues with States, and eSportsand were well received.

On February 3, 2017, IMGL and the law firm of Kalff Katz& Franssen hosted a pre-ICE gathering of gaming off icialsand industry representatives at the Industrieele Groote Club inAmsterdam, Holland. Over 150 guests attended this invitation

only gathering. Justin Franssen, IMGL Assistant Secretary and General Memberfrom Holland, was the host and did a fantastic job. Featured speakers were Erwinvan Lambaart, CEO of Holland Casino, Peter-Paul de Goeg, Managing Director ofLottomate and Marja Appelman, head of the Holland Casino Commission. It was avery informative meeting and great networking event.

Then it was on to London for the Annual ICE conference (February 7-9) in London,England, at the ExCel center. IMGL once again held a Masterclass at ICE whichwas very well attended with 221 attendees (extra chairs needed to be brought intothe conference room!) and included panels on worldwide developments, anti-money laundering and the effect that Brexit and the election of Donald Trump would haveon the gaming industry. IMGL also had its annual ICE reception at Merchant Taylors’Hall in London and experienced the largest crowd ever to attend the reception.Our thanks to member Tony Coles and his firm Gordon Dadds for co-hosting thereception. It was not only a great location but a fascinating historical venue.

However, perhaps the biggest news of the new year is IMGL’s entering into aMemorandum of Understanding with Clarion Event Limited which gives IMGL theoption to conduct Masterclasses at all Clarion events. We are very excited about thispartnership and the opportunity to extend the reach of the IMGL brand. If any of ourmembers are interested in participating or organizing any of these Masterclasses, pleasecontact Joerg Hoffman, our past President, who is coordinating our Masterclasses andour Executive Director Sue McNabb. We have posted on the IMGL website a list of the confirmed future IMGL Masterclasses for 2017 as well as the Clarion events whereIMGL will have the option of conducting a Masterclass.

Finally, our fall conference will be held in Copenhagen, Denmark, September10-12th, 2017. Please mark your calendars accordingly. As you can tell, 2017 will be avery busy and exciting year for IMGL.

Michael E. ZatezaloPresident

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COVER STORY

A Global Explosion, a Domestic OpportunityeSports Gambling

BY PETER CZEGLEDY, PARTNER, AIRD & BERLIS LLP


COVER STORY

eSports, or competitive video gaming, isunquestionably on the rise. Although its genesislies in ad hoc communities that developedaround a few video gaming titles, furthered by themarketing efforts of their respective publishers,it has out-grown such antecedents - eSportstournaments now sell out arenas and attract onlineviewership numbers that capably compete withtraditional sports leagues.1 60% of eSports viewersare aged between 25-39, and 43% have householdincomes of US$75,000 or higher.2 14% of NorthAmericans aged 21-35 watch eSports, approachinghockey viewership in the same demographic(18%).3 In other words, competitive video gamingis now a very “adult” business.

It should surprise no one that an activity builtaround competitive play and culminating indefinitive and measurable outcomes has alsoattracted the scrutiny and interest of persons interested in gambling on those outcomes in the same fashion as they have historically donewith traditional sports and gaming activities.4

However, as has unfortunately been the case inother technologically advanced areas of gamblingendeavour, in Canada such gambling activity hasproceeded tentatively.

Only three of ten Canadian provincialgovernmentally licensed and regulated operatorsmake available gambling on eSports. Suchofferings are sparse in many respects. Thegaming titles are few in number, the bettingoptions rudimentary, the social interactivityelements underwhelming, and the communityconnections fragmented or non-existent.Independent, non-governmental operators, eitherregulated in foreign jurisdictions or operatingon an unregulated basis, and carrying moredeveloped and diverse product and experienceofferings, have instead captured the bulk ofthe Canadian eSports gambling market share.Canadian residents have willingly migrated tosuch operators’ businesses in their search forquality, diversity and authenticity of experience.Meanwhile, government regulators and otherindustry representatives have grown frustratedover the insufficiency of Canada’s legislative andregulatory structure, generally designed beforethe advent of the personal computer and theInternet, to deal with this new area of activity.

This article summarizes the state of play inCanadian eSports gambling by surveying theavailable Canadian offerings, reviewing theposition and concerns of Canadian regulators,

Both traditional gambling-basedbusinesses and video gaming-basedbusinesses continue to navigate thechallenges that increasing consumerdemands for creative and immersiveexperiences, changing demographics andmaturing business models have createdfor them. In both industries, the impetusfor innovation and the pressure to be apart of disruptive technologies is pressing- and the associated search for revenuestream diversification is continual. At theintersection of these industries lies eSports– an activity that many feel holds promiseas a bellwether for evolutionary shifts ofhistoric business paradigms in both cases.

SUMMER 2017 | 5

COVER STORY

and considering the possible future of theindustry, all with a view to encouragingthe public and private sectors to collaborateon developing a regulated, best-in-classCanadian approach to this significantbusiness opportunity. To understandthe context in which this may occur,it is first useful to recognize eSportsgambling’s diversity, breadth and uniquecharacteristics.

eSports Gambling FormatseSports gambling formats vary, butare largely dominated by four generalgroupings: (i) skins and in-game itemeSports betting, (ii) eSportsbook betting,(iii) fantasy eSports betting, and (iv)challenge betting.

The majority of eSports-based bettinghistorically has not involved traditionalcash exchanges – instead, it has relied on theexchange of non-cash items called “skins”or “in-game” items5 - items that have valuewithin the context of a particular game(for example, a specific weapon or customcolour scheme), which are transferable andmay often be bought and sold for cashvia secondary markets (or purchased viaan internal currency acquired within thegame itself). Skins are created by gamepublishers and (initially) earned duringgame play. The value of a skin is initiallydependent on the challenge involved inearning it and its rarity (which attributesare often causally connected). However,skins have different market dynamics thancash. In a gambling context, they may beparticularly attractive to individuals whocannot readily access the electronic cashsystem (e.g., minors or others with limitedaccess to credit cards and traditionalelectronic banking systems). Skins also may simultaneously have different valuesfor different people, because their value toa current owner may erode over time dueto personal familiarity (as skins are oftenpartially valued for novelty), regardless oftheir value on the external market. Becauseskins are tied to particular publishersand gaming titles, changes in gameplaymechanics or the lifecycle of a particulartitle can also immediately impact theirvalue. Such attributes create very differentacquisition, retention and divestment

motivations for holders than exist intraditional currency-based systems, andtypically create incentives for a holder totransfer or monetize skins more quickly.6

Accordingly, skin betting has movedbeyond the confines of game play to a pointwhere skins are used as a near-currencysubstitute on a variety of betting sitesinvolving gambling activities unrelatedto the original games under which theywere created, including coin flip games,lotteries/sweepstakes and casino games.As a consequence, although skins areessentially a medium of exchange, and nota gambling format per se, their ubiquitousand critical role in the development ofeSports gambling merit their treatmentas a type of gambling unto itself. The2016 total worldwide skin betting handlewas estimated to exceed $6B, but thismay have been its highpoint.7 A numberof significant events in 2016, including increased scrutiny8 and signif icantcorporate action by and litigation involvingthe pre-eminent eSports portal,9 has ledto the shutdown of a number of skinbetting sites, leaving in their wake debateover the long term suitability and viabilityof the format. These circumstances,combined with the advent of more robustcash and crypto-currency-based eSportsgambling offerings, will likely hasten theend of the dominance of skin betting.Notwithstanding this possibility, mostindustry experts think that skin bettingwill likely remain an element of thefunctional eSports gambling environment.

Although skin betting still forms thegreatest percentage share of eSports-based gambling, eSportsbook betting,relying on cash-based considerations,is more widely seen and understoodby the general populace. eSportsbookbetting is offered through two generaltypes of businesses: The first consistingof traditional established sportsbooksthat have experience with real-worldsports gambling and have largely soughtto apply their usual practices to eSportsas an expansion of their historic productmix, and the second being new serviceproviders that have begun operationsfocussing exclusively on eSports. SucheSportsbooks offer a variety of bet types,

including outright bets (betting on atournament winner), match bets (bettingon the outcome of a single match betweentwo competitors or teams), parlay bets(betting based on multiple outcomes) andin-play bets (betting on specific events or attributes, e.g. “first kill”, “first tower”,“first-to-flag”, etc.). Almost all betting viaeSportsbooks is carried out in cash-basedtransactions, with a steadily growing useof crypto-currencies, such as bit-coin. The2016 total worldwide eSportbooks bettinghandle has been estimated to be $649MM,a figure projected to quadruple by 2020.10

While eSportsbooks have a limited history,they have expanded at a prodigious pacewithin the last five years, and are seenby many as ultimately being the leadingeSports gambling format in the future.

A third eSports gambling format isFantasy eSports – which is broadly similarto traditional fantasy sports. As in itsprecursor, the dominant product class isdaily fantasy eSports. Participants create ateam of eSports professionals that competein a given event or group of eventsand receive point scores based on their performances, with the highest aggregatescore winning. The industry is relativelynew and limited in nature, focussing onthe most prominent gaming titles. The2016 total worldwide fantasy eSportsbetting handle has been estimated to beunder $10MM.11

Challenge betting in an eSports contextis typically considered to be similar to otherpredominantly skills-based gamblingendeavours – participants pay entry fees toenter tournaments that allow winnings tobe paid out based on the degree of successthat the participant has in the tournament,with an entrance fee paid to the organizer.Challenge betting may also occur in aface-to-face setting in an eSports loungeor similar venue or online. The 2016total worldwide eSports challenge bettinghandle has been estimated to be under $25MM.

eSports Gambling Operations inCanadaCanada is the 9th-largest national marketfor general participation in eSports.13

Without specific data available to support it,


COVER STORY

it is unclear what the size of the associatedCanadian eSports gambling market is.However, given its general ranking withinthe eSports industry, there is a compellingcase to be made that a similarly significantportion of the eSports gambling marketis based on Canadian bets.14 Accordingly,it would be logical to assume that severalmillions of dollars are already at stake inthe Canadian eSports gambling market.

So far however, only two governmentallyauthorized eSportsbook offerings, servingthree Canadian provinces, are on offer.The first is through the Province ofBritish Columbia’s PlayNow platform (which is also available to Manitobans) and the second through the Province ofQuebec’s Mise-o-Jeu offering. The BritishColumbia PlayNow version includeseSports gambling within its general sportscategory, and is limited to CS:GO, Leagueof Legends, DOTA 2 and Starcraft 2-based bets. Such betting is positionedas a “novelty” bet, a designation which limits maximum payouts to $25,000.Only match-outcome bets are accepted.

Participants are required to be 19 yearsof age or older and must be within the province when betting. The QuebecMise-o-Jeu version also includes eSportswithin its general Sports offering, and islimited to the same gaming titles-basedbets. Its eSports bets are also limited tomatch-outcomes, and Quebec similarlyaccepts single event betting. Participantsare required to be 18 years of age or olderand residents of the province.

As noted, both provinces currentlyaccept eSports bets on a single event basis.The policy position underlying suchapproach is not completely clear. Giventhe prohibition on bookmaking for singlesport events imposed under paragraph207(4)(b) of the Criminal Code, it wouldnormally follow that (at least for the timebeing) such jurisdictions had determinedthat eSports constituted “games”, ratherthan “sports” – as a characterization as a“sport” would trigger the need for parlaybets. Commentators have, however,noted that the French language version ofparagraph 207(4)(b), which is the Quebec

government’s preferred point of reference,reflects different wording from that ofthe English language version, and can beinterpreted in a less restrictive fashion –with the effect that a parlay bet requirementmay not be required in relation to sportsbetting. Accordingly, particularly inrelation to Quebec, in the absence of a clear public articulation of the underlyingpolicy position, making assumptions as tothe basis for a province’s eSports gamblingapproach may be foolhardy.

Canadian government-regulatedeSports gambling under other formatsis even more limited. In late 2016, GreatCanadian Gaming Corporation openedthe first (and currently only) dedicated eSports lounge at a Canadian casino15 toprovide challenge betting in a regulatedbrick-and-mortar gambling environment.Notwithstanding the operator’s avowedcommitment to the community, theventure remains in its early stages ofdevelopment. Conversely, skins bettingand fantasy eSports are simply not offeredunder any Canadian regulatory umbrella.

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SUMMER 2017 | 7

The majority of eSports gambling byCanadians, under any format, is carriedout through private online businessesthat are operated and regulated in foreignjurisdictions. Leading private operatorsinclude dedicated eSportsbooks Unikrnand Pinnacle and general sportsbooksSkyBet, Bet365, Betway, Ladbrokes andPaddy Power under the eSportsbook bettingformat. FanDuel, DraftKings and eSportsPools are some of the leading operators underthe fantasy eSports betting format. WhileCanadian governmental operators currentlylist their eSports betting offerings as part oftheir general sports betting category, suchleading private operators tailor their offeringsto appeal specifically to the eSports industryand consumer, beginning with dedicatedwebsites or portals, and providing poolbetting, industry news, customer forums/blogs, user-generated content, and virtualgoods management. The offering andinterface is carefully customized to the playerdemographic and gamer/eSports culturalethos. Such operators also offer largerplayer pools/greater liquidity, varied depositmethods, signup bonuses, a larger number ofgaming titles to bet on, more varied bettingoptions, and larger potential payouts, thantheir regulated Canadian counterparts. Aslong as a majority of Canadian residentsdo not have access to Canadian regulatedeSports offerings and while the diversityand innovativeness of such offerings thatare available lag behind that of foreign-based private industry operators, Canadianresidents are unlikely to alter their preferredeSports gambling venues of choice.

The Canadian Regulatory Position oneSports GamblingThe leading regulatory jurisdictions ineSports gambling worldwide are generallyrecognized to be those of the UnitedKingdom, Australia and the State ofNevada. However, the rapid growth of eSports has been monitored by gamblingregulators worldwide, including those inCanada.

Given that they are the only provinceswith meaningful Canadian–regulatedeSports gaming offerings, the authoritiesin British Columbia and Quebec are likelythe Canadian regulators most advanced

in their deliberations on the eSportsgambling industry, while the majority ofothers are maintaining a “watching brief”or are in the midst of a policy review.There is, however, a clear desire to fosternational discussion and create a broaderregulatory strategy – as a consequence ofwhich the Federal/Provincial/TerritorialCoordinating Committee of SeniorOfficials (CCSO) Working Group onGambling has struck a subcommittee ononline gambling that is turning its mindto, among other things, eSports issues. The subcommittee is expected to reportback to the CCSO in 2018, suggestingthat no consensus model can emerge untilsome subsequent date.

In the opinion of this author, Canadianregulators nevertheless face a quandary.eSports gambling remains a largely new orunknown activity for most Canadians whoare not already part of the core gaming andeSports culture. As a consequence, politicalengagement is marginal or non-existent,limiting policy development. Budgets fornew initiatives are constrained. Relevantstatistics on a national basis are hard tofind, of limited scope, or little more thananecdotal. Registered or licensed domesticoperations are generally of a naturethat does not lend itself to presentingu n ique element s beyond t hoseassociated with traditional sportsbooks,providing nominal case study value.The application of Canadian law toeSports gambling is untested, andthe enthusiasm for enforcementquestionable. Furthermore, the marketdominance of foreign-based privateindustry operators presents Canadianregulators with the same issues that theyhistorically have faced in connectionwith online gambling genera l ly.Consequently, despite best attempts tothe contrary, Canadian regulators likelyface challenges ahead in addressingeSports gambling as adroitly as theymight desire.

Nevertheless, Canadian regulatorsunanimously flag similar concerns that theyforesee as pertinent to eSports gambling,whether such activities are currentlyregulated by them or not. Key perceivedissues cited include:

• Participation by Minors – The threatthat eSports gambling is easily accessibleand attractive to minors, promoting underage gambling.

• Blurred Lines between Gamingand Gambling – The considerationthat eSports gambling is insufficientlydelineated from the playing of eSportsgames.

• Game Stability – The concern overthe underlying activity being new,unregulated, and subject to continualchange.

• Game Integrity - Uncertainty overmatch-fixing, doping, collusion betweencompetitors, and outcome distortionscaused by competitors “quitting” mid-game

• Setting Lines and Handling Payouts– A lack of confidence in setting bettinglines and managing payouts in a new anddynamic context.

Such concerns generally echo those raisedby regulators in other jurisdictions. To a certain extent, many of these issuesare already increasingly being addressedinternally within the greater eSportsindustry, through the adoption ofstandardized gameplay equipment, systemsand protocols, competitor protections, responsible gambling initiatives, bettor verification requirements, and other morestringent practices typical of regulatedbusinesses. The entrance of significant f inancial investors, media concerns,traditional professional sports and gamblingbusinesses and others into the area, many ofwhich are themselves heavily regulated inother areas, will no doubt create a furtherimpetus for evolution.

Future Canadian eSports GamblingDevelopmentsThe development of eSports gamblingin Canada clearly will be impacted bythe legal question of whether eSports are“sports” or “games”. The nomenclatureof eSports certainly predisposes one to assume that they are sports. Concurrently,many of the facets of traditional sportingactivities are reflected in eSports (playoccurring in each case between teams ofprofessional competitors, organized into

COVER STORY


professional leagues, often playing to largepublic audiences, broadcast and viewedwidely, with successful outcomes based onteam high-score performances or victories,involving complex strategy, endurance,reflexes and extensive training). However,others have questioned this assumption,primarily on account of a view that thephysical activity associated with the pursuitfails to rise to the level typified by traditionalsports. The Canadian governmentregulators and operators, even those thatare already involved in eSports gambling,have not committed fully to one stance oranother in a public fashion - the questionis clearly still under study by them to someextent. The eSports community itselfnaturally has been less inclined to ruminateover the issue, considering the distinction anartificial one – driven largely by mainstreampublic views and acceptance. But, as longas the Canadian Criminal Code remainsin its present state, the matter is unlikely torecede, given that its determination has suchclear consequences on the nature of theregulated betting offering that can be made.

As noted earlier, a lack of Canadianregulated eSports gambling offeringshas not held back private industry. Whilerecent events in the skin betting area havecaused setbacks for that format, real moneygambling and the use of crypto-currenciesvia eSportsbooks are largely expected totake up the slack. Tournaments, leagues,lounges and other venues, all specificallyfocussed on eSports, continue toproliferate. Public viewership and societalacceptance continue to expand. Financingfor private industry expansion is becomingmore readily available, with a numberof Canadian private equity and otherinvestors actively interested in participatingin what is perceived as a future-oriented,early-stage industry.

At the same time, the nature of eSportsgambling offerings are expected toevolve. Static odds are increasingly being

replaced by more fluid processes, with in-game betting using shifting oddssoon upon us. This evolution will likelybe driven by direct linkages betweenplaying platform data and analyticprograms, largely removing the subjectivehuman element from the assessmentprocess. Such changes are facilitatedby an important feature of eSports –gameplay in eSports originates in anelectronic environment and requiresno translation from an alternate sphereof existence. Theoretically, it shouldallow signif icantly greater outcomepredictive precision, a continual goal ofall gambling businesses.

eSports gambling is more than simplya new game, sport or other variation onan existing activity that is already a part ofthe traditional culture of historic gamblingbusinesses. eSports arguably represents aparadigm shift in the nature of recreationalactivities that people like to participate in, view, and ultimately bet on. This hasnot been lost on traditional gamblingbusinesses, but they grapple with how theycan incorporate it into their current offeringsand monetize it in a legally permissiblemanner, within the scope of theirregulated operations. Adapting to culturalchange, which eSports surely represents,is inevitably challenging. Although somecasinos have hosted successful eSportstournaments on a one-off basis, anecdotalevidence suggests that eSports participantsare less prone to migrate to other gameson the floor or spend meaningfully on food and beverages when compared to theaverage casino visitor. In an online setting,similar evidence appears to indicate thateSports gambling patrons are less likelyto simultaneously bet on other gamblingcategories as other players. If accurate, theseattributes imply that the future success of eSports-related gambling businesses is heavily dependent on their ability topresent an experience that is accepting,

understanding and dedicated to the gamerand eSports culture, independent of pre-existing business paradigms and facilities.

ConclusioneSports, and by extension eSportsgambling, are likely to continue to growin scope and complexity. Canadianlegislatures, regulators, policymakers andoperators currently have an opportunityto participate in and shape that growth, orto fall behind. All of these parties howeverface challenges imposed by a legislativeand regulatory system that historically has been ill-equipped to rapidly adjustto technological innovation and culturalchange in the gambling industry. Theconsequences of slow action however arelikely to be a loss of business opportunity,increased consumer risks, reduced taxrevenues and limited or non-existentoversight. Given that eSports gamblingis still a relatively young industry, thereremains ample opportunity to avoidsuch consequences through concerted,coordinated action. It is hoped that thiswill indeed bear out. CGL

Peter Czegledy is a partner at Aird & BerlisLLP and a member of the firm’s Corporate/Commercial Group. Peter's practice includesassisting a spectrum of clients ranging from start-up private businesses to large multinationals. Hiswork is focused in four key areas: mergers andacquisitions, high technology businesses, financingand gaming. Peter’s expertise in the area of gaminglaw includes experience both in the acquisition/establishment phase and as ongoing corporatecounsel managing compliance with the applicableregulatory regimes and advising on technologicalapplications in the area. He has acted in bothprivate transactions and public procurements, andhas represented a multitude of leading participantsin the casino, track, i-gaming, mobile gamingand social gaming spheres of industry. Peter isrecognized in The Best Lawyers in Canada inthe field of Gaming Law.

1. The leading streaming platform for eSports, www.twitch.tv , reportsover 100 million viewers a month, trailing only Netflix, Google, andApple in online video traffic.

2. Mindshare North America, 2016.3. NewZoo, 2017.4. In fact, a recent survey found that 18% of eSports viewers have bet

on tournament outcomes – See Eilers & Krejcik Gaming / NarusAdvisors, 2016.

5. For purposes of the remainder of this article, the term “skins” is used tocollectively refer to both skins and other game items, notwithstandingthat the former is a subset of the latter.

6. It is worthwhile noting that there is also a nascent market forcryptocurrency-based eSports gambling, using platforms like Bitcoin.

7. eSports Betting: Overview of the Market and Frequently AskedQuestions – eSports Betting Report, Chris Grove, April 25, 2016.

8. Particularly as a result of “Virtual Weapons are Turning Teen Gamersinto Serious Gamblers”, Brustein, Joshua and Novy-Williams, Eben,Bloomberg BusinessWeek, April 20, 2016.

9. Valve Corporation, the game developer behind CS:GO, after beingserved under a class-action proceeding, notified 23 betting sites inJuly 2016 to cease and desist use of its “Steam” platform to conductcommercial gambling activities. A number of leading skin betting sites

have since either shut down or suspended operations.10. Eilers & Krejcik Gaming / Narus Advisors, 2016.11. Supra, note 7.12. Supra, Note 7.13. NewZoo, 2016.14. While national cultural and societal norms and practices may have a

distinct impact on the propensity to gamble, such attributes are unlikelyto significantly impact participation rates based on traditional gamblingstatistics.

15. The eSports Lounge at Elements Casino in Surrey, British Columbia.

COVER STORY

SUMMER 2017 | 9

On 23rd June 2016 the UK electorate voted by a proportion of 52% to 48% to leave the EuropeanUnion (“EU”). The Cameron government made a manifesto commitment to hold an in/out referendumto settle the question of the UK’s membership, hoping that the “re-negotiation” of several conditions ofmembership would stem the rise of the UK Independence Party and secure a vote to remain. DavidCameron and his advisers clearly misread the mood of large areas of England and Wales, which votedheavily to leave. Scotland voted to remain along with Northern Ireland and the implications of the splitvote are as yet unclear given that it has resulted in the Scottish First Minister’s demand for a secondindependence referendum. In the following paragraphs I will review the background to the triggering ofthe Brexit process, which occurred on 29th March 2017, and then highlight some of the issues for theonline gambling industry. However, it is likely to be some time before the full implications can be assessed.

FEATURE

Commencing the Brexit ProcessNot only was the referendum resultunexpected but it soon became clear thatthe Cameron government had made nocontingency for a leave vote and the firststep by the government was to establisha Department for the Exiting of theEuropean Union. The Department wascharged with reviewing all legislation thatwould be impacted by the UK leavingthe EU and also drawing up details of therevised arrangements that would need to

be negotiated with the other member statesduring the two year period permitted underthe Lisbon Treaty. The Treaty, which wassigned by all EU members in December2007, established a formal process for amember state to leave the EU and was implemented in December 2009. It is Article 50 of the Lisbon Treaty that governsthe process.

Following Theresa May’s election as the new Conservative Party leader she was invited to form a government by Her

Majesty the Queen. The new PrimeMinister made clear from the outsetthat “Brexit meant Brexit” and that she would implement the will of the peopleto leave the EU. However, for a periodof several months in the autumn of 2016the Prime Minister and governmentprovided no detail of how the Article50 process would be conducted. Whenpressed the government repeatedlystated that as no member state hadever left the EU it was not possible,

BY ANDREW COTTON

BREXIT: The Process So Far And What Will Be

The Impact On The OnlineGambling Industry?


March 2017 and received Royal Assent andbecame law on 16th March 2017.

The Article 50 ProcessOne of the issues that the UK government,and indeed the other 27 member stateshave faced is that Article 50 is short andcontains very little detail of the processthat shall be followed where a memberstate notifies its intention to leave the EU.It comprises only 5 paragraphs.

The first states:1) Any Member State may decide to

withdraw from the Union in accordancewith its own constitutional requirements;

Paragraph 2 reads:2)A Member State which decides to

withdraw shall notify the EuropeanCouncil of its intention. In the light ofthe guidelines provided by the EuropeanCouncil, the Union shall negotiateand conclude an agreement with theState, setting out the arrangements forits withdrawal, taking account of theframework for its future relationshipwith the Union……It shall be concludedon behalf of the Union by the Council,acting by a qualified majority, afterobtaining the consent of the EuropeanParliament.The article also provides that the

European Treaties will cease to apply to theState in question from the date of the entryinto force of the withdrawal agreement, ortwo years after the notification in paragraph2, unless the European Council and theMember State unanimously decide toextend the period.

Theresa May triggered Article 50on 29th March 2017 in a six page letterto Donald Tusk, President of the EUCouncil2, which was hand-delivered byUK’s Envoy to the EU, Sir Tim Barrow.On 31st March President Tusk issued theguidelines referenced in Article 50(2) to theother 27 member states4. Two paragraphare worthy of specific note:

“The United Kingdom's decision to leavethe Union creates significant uncertaintiesthat have the potential to cause disruption,

in particular in the UK but also in otherMember States. Citizens who have builttheir lives on the basis of rights flowingfrom the British membership of the EUface the prospect of losing those rights.Businesses and other stakeholders will losethe predictability and certainty that comewith EU law. With this in mind, we mustproceed according to a phased approachgiving priority to an orderly withdrawal.

In these negotiations the Union will actas one. It will be constructive throughoutand will strive to find an agreement.This is in the best interest of both sides.The Union will work hard to achievethat outcome, but it will prepare itself tobe able to handle the situation also if thenegotiations were to fail.”

What is the UK’s position during thenegotiation period?The UK remains a full member of the EUuntil the Article 50 process concludes andduring that period is required to implementall EU legislation, in accordance with itstreaty obligations. The government hasalready announced that the next Queen’sSpeech, announcing legislation for thenext parliamentary session will include a“Great Repeal Bill”, which will primarilyrepeal the 1972 Act but will also preserveEU legislation that has been implementedas UK law under the 1972 Act untilparliament can scrutinise whether thelegislation is to be retained.

What will be the impact on cross-border gambling?At this stage it is too early to predict withany certainty the impact on the gamblingindustry. Under current arrangementsgambling is excluded from the Directive onElectronic Commerce and the EuropeanCourt of Justice has repeatedly ruled thatmember states are able to implementtheir own licensing regimes for gamblingservices, having regard to the differingpolitical, moral and religious views on gambling throughout the EU. There isno requirement for mutual recognition ofremote gambling licences between memberstates and this was one of the issues raised in

FEATURE

at that stage, to provide detail of thegovernment’s negotiating position or whenthe process would be commenced. Whenthe government finally announced that it would use powers under the “Crown’sPrerogative” to give notice under Article50 by the end of March 2017, proceedingsto judicially review the Secretary of State’sintention to proceed in that manner wereinitiated by interested parties.

The Gina Miller case - theconstitutional position in the UK 1

On 3rd November 2016 the DivisionalCourt ruled that as a matter of theconstitutional law of the United Kingdom,the Crown, acting through the executivegovernment of the day, has no power touse its prerogative powers to give noticepursuant to Article 50(2) for the UK tocease to be a member of the EU. An Actof Parliament was required to authorise thegovernment to give the requisite notice.The decision was unsuccessfully appealedby the government, under agreed fast trackarrangements, to the Supreme Court. TheSupreme Court’s judgment was deliveredon 24th January 2017.

The UK joined the then EuropeanCommunities in 1973. The courthad specific regard to the EuropeanCommunities Act 1972 (“1972 Act”),which gave effect to Community law inthe UK and conferred rights on Britishnationals and also non-British EUnationals exercising EU Treaty rights. TheEuropean Union Referendum Act 2015,which implemented the Conservativeparty manifesto commitments in the 2015general election to hold an in/out vote madeno provision for the consequences of eitheroutcome of the referendum. As a result theSupreme Court ruled that the requisitechange in the law could be made in the onlyway in which the constitution permitted,namely parliamentary legislation. As a result of the decision the governmentlaid the European Union (Notificationof Withdrawal) Bill before Parliament,which had its first reading in the House ofCommons on 26th January 2017. The Billcompleted its parliamentary passage on 7th

SUMMER 2017 | 11

FEATURE

the challenge to the implementation of thenew remote licensing regime introducedby the UK government by the Gambling(Licensing and Advertising) Act 2014(“2014 Act”).

The Gibraltar Betting and GamingAssociation was granted permission tojudicially review the legislation introducedby Secretary of State for Culture, Media andSport and the regulatory regime imposedby the Gambling Commission.5 The Administrative Court held that the regimeset out in the 2014 Act for the regulationof remote gambling in Great Britain wasneither unlawful under domestic law nor adisproportionate restriction on the freedomto provide services guaranteed by Article56 of the Treaty on the Functioning of theEuropean Union (“TFEU”). Ironically,given Brexit, the legislation was passed toremove the recognition of the laws aboutgambling in other European EconomicArea (“EEA”) member states, Gibraltarand the white-listed jurisdictions that wereapproved when the Gambling Act 2005 wasimplemented.

Indeed the status of Gibraltar and the factthat it will leave the EU at the same time asthe UK is one of the key current issues forthe online gambling industry. Most of thelargest remote gambling operators into theUK market are based in Gibraltar. In excessof 12,000 staff employed in the industry onthe Rock live in Spain and have to commuteover the border every day. The UKgovernment have recently confirmed thatthey will protect the rights that Gibraltariansenjoy but the potential impact on the onlineindustry is enormous should Spain closethe border, as has happened before. TheSpanish authorities have recently installednew controls at the border and are currentlyundertaking enhanced and time consumingpassport checks, which often result in 4hour delays in staff reaching their Gibraltaroffices. Additionally, the guidelines issuedby the European Council under Article 50 have effectively given Spain a veto over

the arrangements that need to be agreedby all member states. Spain also hasissues over the differential tax rates thatapply either side of the border. In the pastfew weeks one of the largest operatorsbased in Gibraltar has signalled that it isreviewing whether to re-locate to anotherEU jurisdiction.

Another critical issue that has to beaddressed is the requirement in several EU jurisdictions for the operator to bebased in the EEA and/or requirementsfor servers to be based within the EEA.It is extremely unlikely that the interestsof the online gambling industry will behigh on the UK government’s agendafor the negotiated arrangements to beaddressed under Article 50. The industryis therefore going to have to take the leadin persuading EU gambling regulatorsto negotiate on-going reciprocalarrangements.

Lastly, there is the question of what EUlegislation will be maintained by the UKonce it leaves, given that over the past 40 yearsso much EU legislation has been appliedas UK law, as required by the Treaties.Inevitably some EU law will need to bemaintained if the UK agrees to remain part of EU-wide organisations and UKproducers and service providers willneed to continue to comply with EUrequirements for goods and productsif they are to continue to sell into theEU. It is acknowledged that most EUconsumer protection legislation is likelyto be maintained in the UK. Indeed,those now licensed by the GamblingCommission are required to complywith the UK’s consumer protectionlaws in transacting with UK customersand not the laws of the jurisdiction inwhich they are established.

There are two specific areas whichare the subject of recently revised EUlegislation and that directly impact ongambling operators throughout theEU, namely Anti-Money Laundering

controls and Data Protection laws. TheUK is required to implement both the4th AML Directive (“4AMLD”) andthe General Data Protection Regulation(“GDPR”) during the two year negotiationperiod. Draft legislation to transpose the4AMLD into UK law is about to be laidbefore parliament and is required to beimplemented by 26th June 2017. TheGDPR, being a regulation, takes directeffect in all EU states on 25th May 2018.The regulation introduces requirementsfor gambling service providers to registerunder data protection laws in thosejurisdictions within the EU where theytransact with customers, replacing thecurrent requirement to register in the EUjurisdiction in which they are establishedand hold customer data. In turn, thiswill then require the UK to negotiate, aspart of the Brexit arrangements, specificrecognition of the UK’s data protectionrequirements as being “adequate” underthe provisions of the regulation andtreating the UK as a safe harbour whendata is moved in and out of the UK.

ConclusionThe Brexit process has now been triggeredbut it is far too early to predict, with anycertainty, the impact on the Europeanremote gambling market. Hopefully, in 12to 18 months’ time, once the negotiationprocess has advanced, it will be possible toprovide greater detail of the matters that willimpact on gambling operators who transactwith customers in Great Britain, once theUK leaves the EU. CGL

Andrew Cotton is the Director of Betting andGaming in the Regulatory Solutions Team atGordon Dadds LLP, London. Andrew workedas in-house counsel in the gaming industry for over15 years before moving into private practice 4 yearsago. He has over 35 years’ experience as a gamingand liquor licensing lawyer and deals with allaspects of land based and remote gaming licensingand specialises in regulatory compliance.

1. R. (on the application of Miller) v Secretary of State for Exiting the European Union [2017] UKSU 52. https://www.gov.uk/government/publications/prime-ministers-letter-to-donald-tusk-triggering-article-503. http://g8fip1kplyr33r3krz5b97d1.wpengine.netdna-cdn.com/wp-content/uploads/2017/03/FullText.pdf4 http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex:32000L0031 see Article 1 Paragraph 5 for exemptions5. Gibraltar Betting & Gaming Association Ltd v Secretary of State for Culture, Media and Sport QBD(Administrative Court) 10 October 2014. Neutral Citation Number: [2014] EWHC 3236 (Admin), Case No:

CO/3807/2014


The Phantom of Single Game

Betting in CanadaThis money not only represents potentialrevenue lost to the government, but is alsobelieved to directly contribute to organizedcrime. As a result, one topic that has garneredconsiderable attention over the past few yearshas been the prohibition on single-eventbetting, by what many view as an antiquatedapproach under the current legal system.

Beginning with a near-completeprohibition on all forms of gambling in theearly days of Confederation, the law hasinched slowly forward and now permits,under Section 207 of the Criminal Codeof Canada (the “Code”), the “creation” and“operation” of lotteries run by a provinceor under license by charitable or religiousorganization in the province. However,despite the evolution of societal attitudes withrespect to gaming—a 2012 study conductedby Ipsos Reid found that 64% of Canadianssupport the legalization of single eventsports betting—the law in Canada currentlyprohibits wagering on the outcome of asingle sporting event under section 207(4)(b) of the Code, and instead requires playersto place a combined bet on a minimum ofthree events, all of which the player mustcorrectly predict in order to win—a methodof wagering known as parlay betting.

With the gradual shift in public opiniontowards gambling and sensing theopportunity to effectively regulate a productthat a growing number of Canadians wishto have access to, several attempts have beenmade to remove the outdated prohibition

on single-game betting in recent years—none of which have, as of yet, borne fruit.

In 2011, Bill C-290 was introduced bymeans of a private member’s bill. C-290proposed to amend the Criminal Codeto allow for wagering on the outcomeof a single sporting event, race or fight.The bill unanimously passed the Houseof Commons and entered the Senate inMarch 2012. However, despite seeminglywidespread support, the bill languishedin the Senate for 3 years, before finallydying on the table with the call of thefederal election in 2015. It appears that theprimary opposition to the bill came frommembers of Canada’s Conservative Partywho, backed by the support of severalmajor league sports organizations, arguedthat the bill would jeopardize the integrityof sporting events by making them moresusceptible to match-fixing.

Another attempt was made to amendthe same provisions of the Code in 2016with Bill C-221, the Safe and RegulatedSports Betting Act. This time howeverit was members of the Liberal party whoopposed the bill, even though the Liberalmembers had supported the earlier BillC-290. In similar fashion, and with thesupport of the major sports leagues, theLiberal government (with a majority inParliament) argued that “legalizing single-event sports betting could encouragegamblers to fix games”. Despite claims by itsproponents that the bill would have created

or saved at least 250 jobs and brought in amuch-needed source of revenue for thegovernment, Bill C-221 failed to pass theHouse of Commons.

Implications – Where We’re GoingWith this latest setback, the door seems to haveclosed—at least in the immediately foreseeablefuture—on the legalization of single-eventbetting in Canada. Joe Comartin, the MPwho sponsored Bill C-290 has retired, whileBrian Masse, the MP who sponsored BillC-221 has not indicated whether he wouldre-introduce the bill after the next election,should he remain a sitting MP. Whetheranyone has the appetite to take up the causeremains to be seen.

There are several implications arising fromthe continued gridlock on this issue. Regardlessof the political rhetoric at both the federal andat the provincial level, Canadian politicianscannot continue to shy away from the fact thatonline sports betting is big business and itsacceptance into the mainstream as a valid formof entertainment (along with concomitantrevenue generation) is projected to growconsistently for the foreseeable future. It is clearthat parlay betting has failed to prove popularwith Canadians. Competitive odds, combinedwith the absence of the requirement to parlayand the ease and plethora of available onlinesports betting options, means Canadiansare increasingly sending revenue to offshoreoperators that could be going instead intoprovincial coffers.

BY DANIELLE BUSH (PARTNER) AND KONSTANTIN STAROSTIN (ASSOCIATE)

According to estimates by the Canadian Gaming Association (“CGA”), Canadians bet in excess of $10 billionannually with illegal bookies and another $4 billion through offshore online sports betting companies, with only5% of sports betting in Canada being conducted through provincially-regulated betting and lottery schemes.

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SUMMER 2017 | 13

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The problem is further exacerbatedbecause unless provincial regulators suchas Alcohol and Gaming Commission ofOntario are able to regulate and overseeonline sports-betting and implementresponsible gaming measures to verifythe age of participants, implement checksto prevent fraud or add controls to curbaddiction, there is little that can be done toregulate the conduct of offshore operators,arguably leaving Canadians vulnerableunless they are using sites already regulatedby jurisdictions such as Britain. Ignoringthese issues means that revenues whichcould have been used to promote a safeand responsible experience for players,create jobs and fund programs that providesupport or treatment for addiction are lost toforeign operators with no stake in the well-being of Canadians.

Despite a recent survey that indicates thatan overwhelming three-quarters (76%)of Canadians agree, either strongly orsomewhat, that legalizing single event sportsbetting would bring in more revenue andallow for greater oversight and regulation

of sports betting, there does not seem tobe a clear way forward at this time. Activitysurrounding the repeal or amendment ofSection 207(4)(b) has stalled and no one atany level of government has, to date, shownany real appetite for raising it again. Thereality is that in a world of online sportsbetting that is growing rapidly and showingno signs of stopping, a failure to respondproactively, in a meaningful manner, willonly see more and more Canadians—andtheir dollars—finding their way (virtually)out of the country.

As Mr. Bill Rutsey said in a CGA Updateposted on the Association’s website onFebruary 7, 2017:

“[Single event sports betting] is needlesslyillegal in that our current and just past federal governments have both ignoredthe wishes and requests of the provincesand the will of the majority of Canadiansacross the country by failing to amend theCriminal Code to allow single event sportsbetting for purely partisan reasons.

Along with the provinces and the majorityof Canadians, single event sports betting has

been supported by the Canadian Chamberof Commerce and the Canadian LabourCongress. The International OlympicCommittee, the National BasketballAssociation, and the Canadian SoccerAssociation have called for the regulation ofsports wagering. Most American professionalleagues have changed or softened theirposition on sports wagering.

Experts in responsible gambling, lawenforcement, and amateur sport all believethat bringing regulatory oversight and controlto sports wagering is the best way to protectpeople, athletes, and the integrity of sport.Look at it this way: if no one is watching howdo you know what’s going on?”CGL

Danielle Bush is a partner at the law firm ofMiller Thomson LLP. Ms. Bush specializesin all aspects of gaming law with a particularemphasis on online gaming. Konstantin (Kosta)Starostin is an associate in the Business Law groupat Miller Thomson LLP. Kosta has experiencewith regulatory and commercial matters in a widerange of regulated sectors, with an emphasis on thegaming and alcoholic beverage industries.

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Contact:Michael D. Lipton Q.C. at [email protected] W. Stocker II at [email protected] J. Whittlesey at [email protected]

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FEATURE

The case arises out of the actions of asolicitor’s clerk, who due to a chronicgambling problem, stole millions of dollarsfrom the Paton Estate (the “Estate”) andother clients of the solicitor’s firm by forgingdocuments, and selling Estate assets. Overa fourteen month period, she lost millionsbelonging to the Estate by playing at anOLGC casino while misrepresenting herselfas a lawyer. The causes of action againstthe OLGC included unjust enrichment,negligence and knowing receipt of trustfunds for failure to scrutinize the sourceof the clerk’s money and permitting acompulsive gambler to continue gamblingat its casinos.

The motion court judge struck thestatement of claim on the grounds that theclerk misrepresenting herself as a lawyer tothe operators of the OLGC’s casinos did notlead to the conclusion that the OLGC hadnotice she was gambling with trust fundsobtained by fraud. In addition, the judgefound that the OLGC had valid reasons forretaining money that it had received, sinceit did not owe a duty of care to the clerk asa problem gambler, and accordingly did notact negligently. Consequently, the claimwas struck on the basis that it did not allegea reasonable cause of action and that it was“plain and obvious” the lawsuit would haveno chance of success.

The Ontario Court of Appeal refused tostrike the statement of claim, holding thatthe duty of care provisions which relatedto commercial hosts may apply to gaming

establishments. The majority found thatthe Estate could be afforded protection ifit could be determined that the OLGCsuspected gambled money was being stolen.Additionally, the claim relating to unjustenrichment would not necessarily fail if theOLGC knew that the clerk was a problemgambler and allowed her to gamble. Asoutlined by the Court of Appeal, case law doesnot definitively establish that casinos owe noduty of care to problem gamblers. However,while casinos cannot be expected to conduct“an individualized assessment of each of theircustomers”, much more is expected of themwhen an individual is a pathological gambler.

The Liquor License Act2 (the “Act”) imposesan explicit duty of care on commercialhosts under sections 29 and 39 of the Act.Under section 29, “No person shall sell orsupply liquor or permit liquor to be sold orsupplied to any person who is or appears tobe intoxicated”. Under section 39, civil liabilityis imposed if the person to or for whom theliquor is sold commits suicide or meets deathby accident; or if injury or damage is caused toanother person or property.

The case puts forward the argument thatthe duty owed by a commercial host, suchas a tavern keeper, who enjoys profits fromcustomers consuming large quantities ofalcohol, may apply with equal force to casinooperators. This argument may be flawedfor three reasons: firstly, civil liability undersection 39 deals with physical damage,whereas in the case of casino operators, theissue would be purely related to economic

negligence. Secondly, while the Act explicitlyimposes liability and a duty of care, the GamingControl Act3 does not. Thirdly, the duty ofcare two stage test outlined in Ann v. MertonLondon Borough Council4 would not necessarilybe satisfied. The loss incurred by the Estatewas not reasonably foreseeable by the OLGCand no relationship of proximity existed asthe two parties were too far removed. If thispart of the test fails, there is no opportunity toput forward policy considerations to negateliability under the second part of the test.

While casinos have a “Know YourClient” (“KYC”) obligation, extendingthat obligation to include differentiatingbetween addicted and problem gamblersversus wealthy customers with anexpensive hobby would be too onerousfor casino operators. This case leaves uswondering whether extending the duty ofcare to casino operators as is the case withcommercial hosts will open the floodgatesto litigation and whether casinos willbe required to be more diligent withrespect to its KYC obligations. Onlytime will tell. CGL

Michael D. Lipton, Q.C. is a Senior Partnerat Dickinson Wright LLP and Head of theCanadian Gaming Law Group and can bereached at 416.866.2929 or [email protected] Cipriano is an Associate in the CanadianGaming Law Group at Dickinson WrightLLP and can be reached at 416-646-6864 [email protected].

Liability Potentially

1. 2016 ONCA 458. 2. R.S.O. 1990, c. L.19. 3. S.O. 1992, c. 24. 4. [1978] A.C. 728.

Will the result of the controversial decision in Paton Estate v. Ontario Lottery and Gaming Corporation1 (“OLGC”) impose a duty of care on the OLGC similar to the “commercial host” duty of care that is owed by establishments serving alcohol?

BY MICHAEL LIPTON AND CHANTAL CIPRIANO Extended to Gamblers

SUMMER 2017 | 15

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IMGL Masterclass at EiGBerlin,Germany

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