GAMBLING, IT SEEMS, is akin to alcohol, marijuana and sex. Making it illegal has not made it unfashionable, unpopular or unprofitable. We are talking serious money.
Consider, for example, that Internet gaming is illegal in Canada. Yet earlier this year 1,000 people attended the Global Interactive Gaming Summit and Expo held in Montreal. And the $12 billion industry's largest server farm, processing about 65 per cent of all online poker transactions and large portions of other transactions, is located on a Mohawk reserve bordering the south shore of the St. Lawrence River in Quebec. Canadian companies are also among the world's largest developers of online gaming software.
In addition to the Internet, land-based gambling in Canada—a business forbidden to all but provincial govern-ments and charities—is a $13 billion industry, boasting 87,000 gambling machines, 60 casinos and 33,000 lottery ticket sellers. Ontario alone has more than 7.2 million gamblers.
In 2003 the gambling industry generated $6.3 billion in revenue for provincial governments, not far off the take from fuel and alcohol taxes. Put in more understandable terms, gambling revenue to Canadian governments came to $262 a year for each Canadian over the age of 19.
Ontario, with profits of $2.1 billion, and Alberta, with $1.1 billion, are two of the big winners. Yet Ontario's Liberal government recently announced a freeze on the industry and Alberta—where gambling generates 5.1 per cent of provincial revenues, the second highest proportion in the country—has capped the number of video lottery terminals the province will allow. None of this has dampened the enthusiasm of capital markets for gambling stocks.
According to a report prepared in early 2005 by Robert Winslow, an analyst with Wellington West Capital Markets, a $10,000 investment in TSX-listed gaming stocks in January 2004 would have returned nearly $23,000, or 127 per cent. Had the investor put his or her money into e-gaming stocks they would have earned $35,529, or 255 per cent. Among the top-performing stocks were Great Canadian Gaming Corporation, Chartwell Technology Inc. and CryptoLogic Inc.
Winslow argued that this spectacular capital appreciation was likely to continue. Within a few months of the release of his report the markets proved him right. On August 5, income trust units of Pollard Banknote Ltd. came to market in Toronto. The IPO of the Winnipeg-based lottery ticket manufacturer was oversubscribed tenfold and rose 20 per cent on the first day of trading as one third of the six million units issued changed hands.
However, notwithstanding the obviously lucrative nature of the business of gambling, only a handful of Canadian lawyers have profited professionally. Among them are Des Balakrishnan of Lang Michener LLP, Yvan Bolduc of Heenan Blaikie LLP, Gerold Goldlist and Ed Hannah of Davies Ward Phillips & Vineberg LLP, Alex Igelman of Goodman and Carr LLP, Ian Kyer of Fasken Martineau DuMoulin LLP, Morden Lazarus of Lazarus Charbonneau, Michael Lipton of Elkind Lipton & Jacobs LLP, Don Macintosh of Fraser Milner Casgrain LLP, David McCarthy of Stikeman Elliott LLP, Joel Rose of Aird & Berlis LLP and John Tuzyk of Blake, Cassels & Graydon LLP.
The numbers are small. None of these lawyers leads a team large enough to constitute a significant “gaming group.” There are good reasons for this, not the least of which is the fact that most gaming markets are government monopolies. “The group of private lawyers involved is very small because there isn't a free market in commercial gaming in Canada,” explains Ingrid Peters, vice-president and general counsel, corporate secretary, legal & compliance at the Ontario Lottery and Gaming Corp. (OLGC). OLGC is responsible for the Ontario government's gaming businesses.
The industry is also relatively new to Canada. As Alex Igelman at Goodman and Carr points out, “Gaming has only a 15-year history in Canada with much of the action transpiring in the last five years. So gaming law as a subset of the legal profession is just starting to develop, but gaming is big business and there's a need for lawyers.”
The best evidence of this may be the fact that in 2002 a Quebec court certified the class in Brochu v. Loto-Québec, a $700 million lawsuit that Yvan Bolduc, a senior litigator at Heenan Blaikie, is defending. The plaintiffs allege that use of Loto-Québec's video lottery terminals has led to their addiction to gambling.
In other words, it would be a mistake for major firms across Canada not to pay attention to the industry. What's going on in Canada, after all, is but a shadow of what's taking place on the world stage. As globalization is proving over and over, any major production on the world stage will—sooner or later—have a long, healthy run in this country. A run that will likely result in a great deal of work for lawyers.
That certainly appears to be the view of major clients. Last April CIBC World Markets, for example, hosted a Toronto conference on online gaming companies. Two months later Desjardins Securities held a conference at Montreal's casino to promote the prospects of Canadian companies involved in Internet gambling. Last May, Frank Stronach, who indirectly controls Magna Entertainment Corp. (MEC), told shareholders that the company had the potential to earn $700 billion in betting revenue alone by attracting millions of people around the world to wager electronically on races at MEC's tracks. That would make MEC the world's largest corporation, with revenues more than twice the $330 billion earned by Wal-Mart, the current leader.
If this all seems fantastic, consider the following international numbers.
$248 BILLION in legitimate bets are placed each year by gamblers. Less than 5 per cent of this amount, or $10 billion, passes through transactions on the Internet, an untapped frontier that embraces not only computers but cellphones, BlackBerrys, PDAs and interactive television. In the past five years alone on-line gambling has tripled. Industry leaders say it will double again by the end of the decade.
To date the biggest stumbling block to online gaming has been regulatory. Until 2005 no G7 country had legitimized it. But the United Kingdom became the first to do so with the passage of The Gambling Act 2005.
It didn't take business long to see the opportunities. In the summer of 2005 PartyGaming plc, an online gaming pioneer, went public on the London Stock Exchange. Dresdner Kleinwort Wasserstein Limited underwrote the offering, providing market legitimacy from the outset.
The IPO, which valued the company at $10 billion—making PartyGaming one of the United Kingdom's 100 largest companies and larger than British Airways—raised $2.2 billion. PartyGaming, which historically operated the online sites Partypoker.com, Partybingo.com and Partycasino.com (largely from servers run by Mohawk Internet Technologies (MIT) on the Kahnawake reserve south of Montreal), reported a 2004 revenue of $700 million and profits of $350 million.
PartyGaming estimates that 90 per cent of its bettors are Americans avoiding domestic prohibitions against online gaming. Indeed the United States, like Canada and other countries, has been ineffective in its efforts to stop its citizens from gambling on the Internet. Even totalitarian states seem helpless. In China, where gambling is illegal, underground casinos and gaming rings reportedly extract almost $60 billion annually from Chinese punters. No surprise, then, that almost 800 foreign gaming sites provide Chinese language web pages.
With the UK's legitimization of e-gaming, stopping illegal gaming will become even more difficult. Other nations, anxious for a share of this rapidly expanding revenue base,
are likely to follow suit, thus providing an increasingly welcoming regulatory climate. Already the European Commission has decided to challenge government gaming monopolies in Sweden and other European Union member states.
Indeed, international opinion and jurisprudence seems to be lining up against the Americans and others seeking to prohibit free markets in the gaming industry. Sixty countries now grant online gaming licenses. And in April, the World Trade Organization ruled that American prohibitions against online gaming discriminate against foreign operators.
If these developments continue, more and more countries will be regulating online gambling. That will make a great deal of illegal betting legitimate, thus creating tremendous potential for taxing gaming. A potential so great that it may be difficult for any nation, including Canada, to resist joining in.
It is against this background that the legal aspects of the business of gaming in Canada must be analyzed. “Gaming in Canada is in its nascent stage,” argues Michael Lipton. Lipton should know. He is vice-president of the International Masters of Gaming Law, an international by-invitation-only association of legal experts in gaming. Lipton goes on to add that “You don't see governments in Canada cutting back on gaming and, as soon as they need more money, they'll start expanding it.”
FIFTEEN YEARS AGO there were no gaming operations in Canada. Then the federal government gave provincial governments a monopoly on commercial gaming. Lotteries, casinos, slot machines, racinos (racetracks with slot machines) and video lottery terminals proliferated. Because provincial regulators must vet anyone associated with a gaming enterprise, knowledge of gaming law became essential not only to the direct participants, but also to anyone with clients who did business with the participants.
Like many practitioners in a new practice area—E-commerce and Internet law are perhaps the best examples—gaming lawyers come to the industry with different backgrounds. Generally, they are lawyers in mainstream practice areas who have developed industry expertise. “The lawyers who deal with gaming transactions are mostly M&A and finance generalists,” explains Lee Jackson, MEC's corporate secretary and legal counsel.
Take, for example, Gerold Goldlist at Davies. Goldlist's diverse client base includes the Ontario Lottery & Gaming Corporation, which operates the province's gambling business. He became involved in the early 1990s in developing the private sector model that governs Ontario's casinos. This model has the government as owner hiring private gaming companies as operators. As outlined by Goldlist, “Much of what you're doing as a gaming lawyer is commercial contracts and agreements.”
Mundane as this may sound, the practice can be broadly-based, profitable and interesting. “The real payoff is the big projects, where you're structuring models for gaming and then doing development work,” Goldlist explains, going on to note that the costs associated with Ontario's four commercial casinos run into the billions and that the current refurbishing of the Windsor casino is a $400 million project.
The development work involves significant real estate transactions, major financing, construction, Crown issues related to public-private partnerships and even aboriginal issues where First Nations are involved. And Goldlist's practice has taken on a national dimension as his experience acting for Ontario makes him attractive to private sector participants negotiating with other provincial governments. His practice is also developing an international aspect. Goldlist is currently working on a casino development outside Canada.
By contrast John Tuzyk at Blake, Cassels & Graydon has represented the private sector from the outset. He was first retained by three American gaming giants—Hilton Hotels Corporation, Caesar's World Inc. and Circus Circus Enterprises Inc.—who banded together to win the operating contract for the Windsor interim casino in 1992. “I've been outside general counsel for the Windsor casino every since,” Tuzyk notes. He also represents the American operators of Niagara's Fallsview Casino Resort and Casino Niagara.
Tuzyk describes his firm's gaming work as an “active practice” engaging two partners and one associate in “hard core” gaming law. But the practice also spins off work for the firm's tax, litigation and intellectual property lawyers. Overall, gaming generates approximately 10,000 hours of work annually. “When you're looking at those hours you have to separate out the development work from the operations work,” Tuzyk says. “The big fees are in the development work with the rest generating under $1 million annually.”
Tuzyk is not shy as to where gaming fits in at Blakes. “Gaming law is an important practice here,” he says. Although growth has been limited by Ontario's recent freeze on casinos, Tuzyk is quick to point out that opinion work has blossomed. “Giving advice to credit card companies, entertainment concerns, advertisers and others who are concerned about the legality of their involvement with online gaming companies in the United States is a growth area.”
Questions as to legality? Absolutely. Skadden, Arps, Slate, Meagher & Flom LLP in New York has warned US investment banks to avoid financing online gaming flotations for fear of being charged with aiding and abetting illegal transactions. This could create a problem for Canadian banks, many of whom have a presence in the United States.
MERGERS & ACQUISITIONS in the gaming industry in the US has also turned into a growth area for Tuzyk. “We represent Penn National Gaming Inc., which has done a ton of acquisitions in the United States. They acquired CHC Casinos, which operates Casino Rama. Every time there's a change in the shareholdings of a Canadian operating company, there's a fair bit of legal work involved.” When Harrah's acquired Caesar's, for example, which had a 50 per cent interest in the Windsor casino, the transaction engaged the full regulatory process in Ontario.
Gaming is so regulated that every direct or indirect shareholder and supplier of services—from law firms to uniform providers—must be vetted. This has international implications. “A regulatory development affecting any shareholder in any jurisdiction in the world will be taken seriously by Ontario authorities because it affects registrability in Ontario,” Tuzyk explains. “That broadens the scope of our practice because we need to understand regulatory developments on an international basis.”
For his part Des Balakrishnan, a partner in Lang Michener's Vancouver office, is too busy keeping up with what's going on in Canada to worry much about international business. That said, his primary client, BC-based Great Canadian Casinos (GCC), operates four casinos in Washington State. But the company's main business is in Canada where it has been on an acquisition binge. GCC, directly or indirectly, now owns dozens of gaming properties. Recent high-profile acquisitions include the Georgian Downs racetrack near Barrie, Ontario, Flamboro Downs near Hamilton and two Nova Scotia casinos in a $100 million transaction. According to Balakrishan, “We've done $600 million worth of deals in the last 12 months and our practice has generated over $3 million in fees annually for the last couple of years.”
Joel Rose at Toronto-based Aird & Berlis has also flourished as a gaming lawyer. He originally represented American bidders for the Windsor casino and eventually became counsel to the Ontario Lottery Corporation (OLC), continuing in that role until the government created its successor, the OLGC. After losing OLC, Rose shifted back to the private sector and found no shortage of clients. He does a thriving business buying and selling racinos and aiding clients who want to register with authorities as qualified suppliers to the gaming industry.
The work isn't likely to abate as the gaming industry evolves. Building on the Las Vegas experience, GCC is intent on changing the gaming industry from a pure gambling experience to one that embraces all forms of entertainment. It's a trend that's permeating the entire industry. As explained by Bill Rutsey, President and CEO of the Canadian Gaming Association, “Gaming revenues used to constitute about 80 per cent of revenues at Las Vegas casinos. They now account for less than 50 per cent.”
IF GCC HAS ITS WAY casinos will become des-tinations that offer accommodation, food, spas and shows. A convincing portend of the future may be the Ontario Jockey Club, which owns Woodbine Racetrack, Canada's most prominent track. In June of 2001 the Jockey Club changed its name to Woodbine Entertainment Group. For Michael Lipton there is no question as to what the future holds in store. “A number of gaming destinations are destined to become tourist destinations.”
On this view there's going to be lots of lucrative “gaming” work for lawyers with the right clients, regardless of decisions made by provincial governments on expansion. “There are enormous opportunities in acquisitions and in growing casinos organically,” Balakrishnan argues.
The problem, however, is that there are only a handful of private domestic clients able to take direct advantage of these opportunities. Gaming lawyers, on the other hand, have not limited their horizons—either to Canada or to gaming operators. “There are always opportunities from the private sector perspective,” Rutsey says.
The same can be said about the perspective of gaming lawyers. As pointed out by Dan Macintosh at Fraser Milner Casgrain, “A lot of the legal work these days is around Internet gaming and clients who are suppliers or purveyors to that industry. They want or need to understand the legal complexities surrounding industry issues.”
Many of these clients can be found in Canada's rapidly growing online gaming software industry. Its ranks include public companies such as CryptoLogic, whose software facilitates financial transactions on the Web, and Parlay Entertainment, the world's leading developer of online bingo software. “Gaming software is a huge business whose legality is not in question so long as the software is exported to jurisdictions where the gaming is lawful,” explains Ian Kyer of Fasken Martineau DuMoulin in Toronto. Kyer, an information technology lawyer, goes on to note that gaming “is and will continue to be an important practice area for us.”
A second set of clients is found among Canadians interested in investing in offshore gaming operations. “There's a big rush from people who want to get involved in online gaming,” Lipton says. These clients need business advice as much as they need legal advice. “My clients are significant businesses, like major casinos,” adds Alex Igelman. “I do M&A work for them, help them identify international business opportunities, formulate growth strategy, put different parties together, and assist clients in expanding their product offerings.”
The lawyers who practise in this area, like Igelman, Lipton, Morden Lazarus of Lazarus Charbonneau and Ed Hannah of Davies, generally have strong international contacts. So much so that Lazarus—who has no shortage of important non-gaming clients—has just finished a term as the first Canadian president of the International Association of Gaming Attorneys.
The third group of clients are those dealing with aboriginal rights. The prime example is Mohawk Internet Technologies, a partnership between the Mohawk Council of Kahnawake and a group of local businessmen who got together six years ago and now run the world's largest server farm for online gaming concerns. The potential was clear. Nowhere else in Canada or the US would MIT's business be legal.
For their part the Mohawks insist their reserve is a sovereign state with the right to decide whether to allow onsite gambling within its boundaries. And, with an initial $5 million in capital financing, they were willing to put their money upfront. MIT is now hosting more than 200 gambling sites whose legitimacy comes from licenses issued by the Kahnawake Gaming Commission.
MIT attracted the business because it is located in the path of a major fibre optic corridor.
Sophisticated gaming software, which is graphics intensive, requires speedy online communications to create a satisfactory experience for online gamblers. A server that is thousands of miles from the computers of gamblers can slow things down and interfere with the experience. With 85 per cent of online gamblers located in the US, Kahnawake's popularity with operators grew rapidly, so much so that MIT is reportedly considering a public listing on the London Stock Exchange.
As to the legality of the MIT operation, the Quebec government did launch an “investigation” more than two years ago. But this investigation appears to be going nowhere. “There is no way the government wants another Oka standoff,” Kyer explains, referring to the 78-day violent showdown in 1990 between Native people, Quebec police and the Canadian Army, triggered by a dispute over native rights relating to a proposed golf course. Instead, the federal government is negotiating with the reserve towards a treaty that will legalize MIT's operation. “That's pretty much what happened in Ontario when Casino Rama was established,” Kyer notes.
If this comes to pass, what's OK for Kahnawake may soon be OK for other reserves, and perhaps for the rest of Canada. That's not as far-fetched as it sounds. If Canada became a server haven, subsequent exchange listings and tax revenues could prove to be very attractive.
AS MATTERS STAND, there's a flourish-ing business in advising offshore clients on the ins-and-outs of where to put their servers. “You've got to remember that there are no laws governing Internet gaming in Canada,” Lazarus explains. “All we've got is the Criminal Code, so there's a lot of room for opinion work.”
However that may be, there are signs that the online wave may be cresting. PartyGaming shares dropped more than 33 per cent after the company revealed that new customer growth and spending by players had slowed more than anticipated. The US Department of Justice continues to insist that all online gaming activities are illegal. And provincial governments, particularly Queen's Park in Ontario, show no sign of expanding their gambling operations in the immediate future.
So while those who practise gaming law may go on as they are, it is arguable that gaming will remain a niche practice that will have little bearing on major law firm growth. Arguable, but, as close scrutiny reveals, not likely.
Canadian newspapers have recently been awash with reports citing the steep social costs of unchecked gambling. Given the huge profits in the business, it's hard to think of any other reason why governments, faced with spiralling healthcare and education costs, haven't been more aggressive in expanding their tax base from gaming.
The truth is that with huge surpluses at the federal level and in Alberta, and with the economy strong, there is no pressing need for new revenue sources. But such a time will come, as it always does. Joel Rose at Aird & Berlis points out the obvious. “The provinces love the money and that's not going to change.”
The authors of The Legalization of Gambling in Canada, a report prepared in July for the Law Commission of Canada, appear to agree. “Provincial governments have become increasingly dependent upon the revenue generated by the expansion of legal gambling. Therefore, they have a vested interest in the promotion and expansion of gambling.”
When the next economic downturn arrives it will be hard for governments to resist getting back some of the money that is now going to foreign jurisdictions or illegal operations. As Ed Hannah at Davies, former executive vice-president and corporate counsel at Magna Entertainment, puts it, “Detroit eventually established casinos because it was sick and tired of losing so many dollars to Windsor.”
In other words, it is no more feasible to hold the line on gambling that it would be to cap liquor sales. Even some American states have jumped on the bandwagon with attempts to legalize statewide online gambling. In a similar vein the US Senate recently refused to pass a measure forcing banks and credit card companies to block payments to online gambling sites.
THE BOTTOM LINE is that provincial governments have simply been hedging their bets; mollifying critics with soothing platitudes about the social evils but leaving the door wide open to the expansion of gaming. According to the authors of The Legalization of Gambling in Canada, this approach dovetails with public opinion. “Canadians generally view gambling as an acceptable community activity due perhaps to its perceived inevitability and as a source of revenue for governments and charities…gambling no longer stands as a matter warranting criminal prohibition.” The authors conclude that the criminal law as it pertains to gambling has been used principally “to consolidate and legitimize a provincial government expansionist monopoly.”
So when Ontario announced its freeze on gambling expansion, it didn't rest its case on social concerns. Rather, the Liberal government explained its actions as rooted in its belief “that the market could not support further expansion.” That leaves plenty of room for manoeuvre in the future.
Likewise, Alberta has touted its cap on video lottery terminals in the province without mentioning the fact that the number of slot machines in the province has, in the past few years, grown by 50 per cent. For its part Nova Scotia recently issued its first “gaming strategy” report, nestled soothingly under the signature, among others, of the Minister for Health Promotion. The authors recommendations included a proposal that the government “pursue the development and growth of responsible, entertaining gaming products and venues.”
Indeed, as The Economist recently pointed out, with considerable sarcasm directed towards opponents of the industry's expansion, gambling is not prohibited by the Ten Commandments, nor it is one of the seven deadly sins. That being said, it must surely be fair game for lawyers.
Julius Melnitzer is a Toronto-based freelance legal affairs writer.
Consider, for example, that Internet gaming is illegal in Canada. Yet earlier this year 1,000 people attended the Global Interactive Gaming Summit and Expo held in Montreal. And the $12 billion industry's largest server farm, processing about 65 per cent of all online poker transactions and large portions of other transactions, is located on a Mohawk reserve bordering the south shore of the St. Lawrence River in Quebec. Canadian companies are also among the world's largest developers of online gaming software.
In addition to the Internet, land-based gambling in Canada—a business forbidden to all but provincial govern-ments and charities—is a $13 billion industry, boasting 87,000 gambling machines, 60 casinos and 33,000 lottery ticket sellers. Ontario alone has more than 7.2 million gamblers.
In 2003 the gambling industry generated $6.3 billion in revenue for provincial governments, not far off the take from fuel and alcohol taxes. Put in more understandable terms, gambling revenue to Canadian governments came to $262 a year for each Canadian over the age of 19.
Ontario, with profits of $2.1 billion, and Alberta, with $1.1 billion, are two of the big winners. Yet Ontario's Liberal government recently announced a freeze on the industry and Alberta—where gambling generates 5.1 per cent of provincial revenues, the second highest proportion in the country—has capped the number of video lottery terminals the province will allow. None of this has dampened the enthusiasm of capital markets for gambling stocks.
According to a report prepared in early 2005 by Robert Winslow, an analyst with Wellington West Capital Markets, a $10,000 investment in TSX-listed gaming stocks in January 2004 would have returned nearly $23,000, or 127 per cent. Had the investor put his or her money into e-gaming stocks they would have earned $35,529, or 255 per cent. Among the top-performing stocks were Great Canadian Gaming Corporation, Chartwell Technology Inc. and CryptoLogic Inc.
Winslow argued that this spectacular capital appreciation was likely to continue. Within a few months of the release of his report the markets proved him right. On August 5, income trust units of Pollard Banknote Ltd. came to market in Toronto. The IPO of the Winnipeg-based lottery ticket manufacturer was oversubscribed tenfold and rose 20 per cent on the first day of trading as one third of the six million units issued changed hands.
However, notwithstanding the obviously lucrative nature of the business of gambling, only a handful of Canadian lawyers have profited professionally. Among them are Des Balakrishnan of Lang Michener LLP, Yvan Bolduc of Heenan Blaikie LLP, Gerold Goldlist and Ed Hannah of Davies Ward Phillips & Vineberg LLP, Alex Igelman of Goodman and Carr LLP, Ian Kyer of Fasken Martineau DuMoulin LLP, Morden Lazarus of Lazarus Charbonneau, Michael Lipton of Elkind Lipton & Jacobs LLP, Don Macintosh of Fraser Milner Casgrain LLP, David McCarthy of Stikeman Elliott LLP, Joel Rose of Aird & Berlis LLP and John Tuzyk of Blake, Cassels & Graydon LLP.
The numbers are small. None of these lawyers leads a team large enough to constitute a significant “gaming group.” There are good reasons for this, not the least of which is the fact that most gaming markets are government monopolies. “The group of private lawyers involved is very small because there isn't a free market in commercial gaming in Canada,” explains Ingrid Peters, vice-president and general counsel, corporate secretary, legal & compliance at the Ontario Lottery and Gaming Corp. (OLGC). OLGC is responsible for the Ontario government's gaming businesses.
The industry is also relatively new to Canada. As Alex Igelman at Goodman and Carr points out, “Gaming has only a 15-year history in Canada with much of the action transpiring in the last five years. So gaming law as a subset of the legal profession is just starting to develop, but gaming is big business and there's a need for lawyers.”
The best evidence of this may be the fact that in 2002 a Quebec court certified the class in Brochu v. Loto-Québec, a $700 million lawsuit that Yvan Bolduc, a senior litigator at Heenan Blaikie, is defending. The plaintiffs allege that use of Loto-Québec's video lottery terminals has led to their addiction to gambling.
In other words, it would be a mistake for major firms across Canada not to pay attention to the industry. What's going on in Canada, after all, is but a shadow of what's taking place on the world stage. As globalization is proving over and over, any major production on the world stage will—sooner or later—have a long, healthy run in this country. A run that will likely result in a great deal of work for lawyers.
That certainly appears to be the view of major clients. Last April CIBC World Markets, for example, hosted a Toronto conference on online gaming companies. Two months later Desjardins Securities held a conference at Montreal's casino to promote the prospects of Canadian companies involved in Internet gambling. Last May, Frank Stronach, who indirectly controls Magna Entertainment Corp. (MEC), told shareholders that the company had the potential to earn $700 billion in betting revenue alone by attracting millions of people around the world to wager electronically on races at MEC's tracks. That would make MEC the world's largest corporation, with revenues more than twice the $330 billion earned by Wal-Mart, the current leader.
If this all seems fantastic, consider the following international numbers.
$248 BILLION in legitimate bets are placed each year by gamblers. Less than 5 per cent of this amount, or $10 billion, passes through transactions on the Internet, an untapped frontier that embraces not only computers but cellphones, BlackBerrys, PDAs and interactive television. In the past five years alone on-line gambling has tripled. Industry leaders say it will double again by the end of the decade.
To date the biggest stumbling block to online gaming has been regulatory. Until 2005 no G7 country had legitimized it. But the United Kingdom became the first to do so with the passage of The Gambling Act 2005.
It didn't take business long to see the opportunities. In the summer of 2005 PartyGaming plc, an online gaming pioneer, went public on the London Stock Exchange. Dresdner Kleinwort Wasserstein Limited underwrote the offering, providing market legitimacy from the outset.
The IPO, which valued the company at $10 billion—making PartyGaming one of the United Kingdom's 100 largest companies and larger than British Airways—raised $2.2 billion. PartyGaming, which historically operated the online sites Partypoker.com, Partybingo.com and Partycasino.com (largely from servers run by Mohawk Internet Technologies (MIT) on the Kahnawake reserve south of Montreal), reported a 2004 revenue of $700 million and profits of $350 million.
PartyGaming estimates that 90 per cent of its bettors are Americans avoiding domestic prohibitions against online gaming. Indeed the United States, like Canada and other countries, has been ineffective in its efforts to stop its citizens from gambling on the Internet. Even totalitarian states seem helpless. In China, where gambling is illegal, underground casinos and gaming rings reportedly extract almost $60 billion annually from Chinese punters. No surprise, then, that almost 800 foreign gaming sites provide Chinese language web pages.
With the UK's legitimization of e-gaming, stopping illegal gaming will become even more difficult. Other nations, anxious for a share of this rapidly expanding revenue base,
are likely to follow suit, thus providing an increasingly welcoming regulatory climate. Already the European Commission has decided to challenge government gaming monopolies in Sweden and other European Union member states.
Indeed, international opinion and jurisprudence seems to be lining up against the Americans and others seeking to prohibit free markets in the gaming industry. Sixty countries now grant online gaming licenses. And in April, the World Trade Organization ruled that American prohibitions against online gaming discriminate against foreign operators.
If these developments continue, more and more countries will be regulating online gambling. That will make a great deal of illegal betting legitimate, thus creating tremendous potential for taxing gaming. A potential so great that it may be difficult for any nation, including Canada, to resist joining in.
It is against this background that the legal aspects of the business of gaming in Canada must be analyzed. “Gaming in Canada is in its nascent stage,” argues Michael Lipton. Lipton should know. He is vice-president of the International Masters of Gaming Law, an international by-invitation-only association of legal experts in gaming. Lipton goes on to add that “You don't see governments in Canada cutting back on gaming and, as soon as they need more money, they'll start expanding it.”
FIFTEEN YEARS AGO there were no gaming operations in Canada. Then the federal government gave provincial governments a monopoly on commercial gaming. Lotteries, casinos, slot machines, racinos (racetracks with slot machines) and video lottery terminals proliferated. Because provincial regulators must vet anyone associated with a gaming enterprise, knowledge of gaming law became essential not only to the direct participants, but also to anyone with clients who did business with the participants.
Like many practitioners in a new practice area—E-commerce and Internet law are perhaps the best examples—gaming lawyers come to the industry with different backgrounds. Generally, they are lawyers in mainstream practice areas who have developed industry expertise. “The lawyers who deal with gaming transactions are mostly M&A and finance generalists,” explains Lee Jackson, MEC's corporate secretary and legal counsel.
Take, for example, Gerold Goldlist at Davies. Goldlist's diverse client base includes the Ontario Lottery & Gaming Corporation, which operates the province's gambling business. He became involved in the early 1990s in developing the private sector model that governs Ontario's casinos. This model has the government as owner hiring private gaming companies as operators. As outlined by Goldlist, “Much of what you're doing as a gaming lawyer is commercial contracts and agreements.”
Mundane as this may sound, the practice can be broadly-based, profitable and interesting. “The real payoff is the big projects, where you're structuring models for gaming and then doing development work,” Goldlist explains, going on to note that the costs associated with Ontario's four commercial casinos run into the billions and that the current refurbishing of the Windsor casino is a $400 million project.
The development work involves significant real estate transactions, major financing, construction, Crown issues related to public-private partnerships and even aboriginal issues where First Nations are involved. And Goldlist's practice has taken on a national dimension as his experience acting for Ontario makes him attractive to private sector participants negotiating with other provincial governments. His practice is also developing an international aspect. Goldlist is currently working on a casino development outside Canada.
By contrast John Tuzyk at Blake, Cassels & Graydon has represented the private sector from the outset. He was first retained by three American gaming giants—Hilton Hotels Corporation, Caesar's World Inc. and Circus Circus Enterprises Inc.—who banded together to win the operating contract for the Windsor interim casino in 1992. “I've been outside general counsel for the Windsor casino every since,” Tuzyk notes. He also represents the American operators of Niagara's Fallsview Casino Resort and Casino Niagara.
Tuzyk describes his firm's gaming work as an “active practice” engaging two partners and one associate in “hard core” gaming law. But the practice also spins off work for the firm's tax, litigation and intellectual property lawyers. Overall, gaming generates approximately 10,000 hours of work annually. “When you're looking at those hours you have to separate out the development work from the operations work,” Tuzyk says. “The big fees are in the development work with the rest generating under $1 million annually.”
Tuzyk is not shy as to where gaming fits in at Blakes. “Gaming law is an important practice here,” he says. Although growth has been limited by Ontario's recent freeze on casinos, Tuzyk is quick to point out that opinion work has blossomed. “Giving advice to credit card companies, entertainment concerns, advertisers and others who are concerned about the legality of their involvement with online gaming companies in the United States is a growth area.”
Questions as to legality? Absolutely. Skadden, Arps, Slate, Meagher & Flom LLP in New York has warned US investment banks to avoid financing online gaming flotations for fear of being charged with aiding and abetting illegal transactions. This could create a problem for Canadian banks, many of whom have a presence in the United States.
MERGERS & ACQUISITIONS in the gaming industry in the US has also turned into a growth area for Tuzyk. “We represent Penn National Gaming Inc., which has done a ton of acquisitions in the United States. They acquired CHC Casinos, which operates Casino Rama. Every time there's a change in the shareholdings of a Canadian operating company, there's a fair bit of legal work involved.” When Harrah's acquired Caesar's, for example, which had a 50 per cent interest in the Windsor casino, the transaction engaged the full regulatory process in Ontario.
Gaming is so regulated that every direct or indirect shareholder and supplier of services—from law firms to uniform providers—must be vetted. This has international implications. “A regulatory development affecting any shareholder in any jurisdiction in the world will be taken seriously by Ontario authorities because it affects registrability in Ontario,” Tuzyk explains. “That broadens the scope of our practice because we need to understand regulatory developments on an international basis.”
For his part Des Balakrishnan, a partner in Lang Michener's Vancouver office, is too busy keeping up with what's going on in Canada to worry much about international business. That said, his primary client, BC-based Great Canadian Casinos (GCC), operates four casinos in Washington State. But the company's main business is in Canada where it has been on an acquisition binge. GCC, directly or indirectly, now owns dozens of gaming properties. Recent high-profile acquisitions include the Georgian Downs racetrack near Barrie, Ontario, Flamboro Downs near Hamilton and two Nova Scotia casinos in a $100 million transaction. According to Balakrishan, “We've done $600 million worth of deals in the last 12 months and our practice has generated over $3 million in fees annually for the last couple of years.”
Joel Rose at Toronto-based Aird & Berlis has also flourished as a gaming lawyer. He originally represented American bidders for the Windsor casino and eventually became counsel to the Ontario Lottery Corporation (OLC), continuing in that role until the government created its successor, the OLGC. After losing OLC, Rose shifted back to the private sector and found no shortage of clients. He does a thriving business buying and selling racinos and aiding clients who want to register with authorities as qualified suppliers to the gaming industry.
The work isn't likely to abate as the gaming industry evolves. Building on the Las Vegas experience, GCC is intent on changing the gaming industry from a pure gambling experience to one that embraces all forms of entertainment. It's a trend that's permeating the entire industry. As explained by Bill Rutsey, President and CEO of the Canadian Gaming Association, “Gaming revenues used to constitute about 80 per cent of revenues at Las Vegas casinos. They now account for less than 50 per cent.”
IF GCC HAS ITS WAY casinos will become des-tinations that offer accommodation, food, spas and shows. A convincing portend of the future may be the Ontario Jockey Club, which owns Woodbine Racetrack, Canada's most prominent track. In June of 2001 the Jockey Club changed its name to Woodbine Entertainment Group. For Michael Lipton there is no question as to what the future holds in store. “A number of gaming destinations are destined to become tourist destinations.”
On this view there's going to be lots of lucrative “gaming” work for lawyers with the right clients, regardless of decisions made by provincial governments on expansion. “There are enormous opportunities in acquisitions and in growing casinos organically,” Balakrishnan argues.
The problem, however, is that there are only a handful of private domestic clients able to take direct advantage of these opportunities. Gaming lawyers, on the other hand, have not limited their horizons—either to Canada or to gaming operators. “There are always opportunities from the private sector perspective,” Rutsey says.
The same can be said about the perspective of gaming lawyers. As pointed out by Dan Macintosh at Fraser Milner Casgrain, “A lot of the legal work these days is around Internet gaming and clients who are suppliers or purveyors to that industry. They want or need to understand the legal complexities surrounding industry issues.”
Many of these clients can be found in Canada's rapidly growing online gaming software industry. Its ranks include public companies such as CryptoLogic, whose software facilitates financial transactions on the Web, and Parlay Entertainment, the world's leading developer of online bingo software. “Gaming software is a huge business whose legality is not in question so long as the software is exported to jurisdictions where the gaming is lawful,” explains Ian Kyer of Fasken Martineau DuMoulin in Toronto. Kyer, an information technology lawyer, goes on to note that gaming “is and will continue to be an important practice area for us.”
A second set of clients is found among Canadians interested in investing in offshore gaming operations. “There's a big rush from people who want to get involved in online gaming,” Lipton says. These clients need business advice as much as they need legal advice. “My clients are significant businesses, like major casinos,” adds Alex Igelman. “I do M&A work for them, help them identify international business opportunities, formulate growth strategy, put different parties together, and assist clients in expanding their product offerings.”
The lawyers who practise in this area, like Igelman, Lipton, Morden Lazarus of Lazarus Charbonneau and Ed Hannah of Davies, generally have strong international contacts. So much so that Lazarus—who has no shortage of important non-gaming clients—has just finished a term as the first Canadian president of the International Association of Gaming Attorneys.
The third group of clients are those dealing with aboriginal rights. The prime example is Mohawk Internet Technologies, a partnership between the Mohawk Council of Kahnawake and a group of local businessmen who got together six years ago and now run the world's largest server farm for online gaming concerns. The potential was clear. Nowhere else in Canada or the US would MIT's business be legal.
For their part the Mohawks insist their reserve is a sovereign state with the right to decide whether to allow onsite gambling within its boundaries. And, with an initial $5 million in capital financing, they were willing to put their money upfront. MIT is now hosting more than 200 gambling sites whose legitimacy comes from licenses issued by the Kahnawake Gaming Commission.
MIT attracted the business because it is located in the path of a major fibre optic corridor.
Sophisticated gaming software, which is graphics intensive, requires speedy online communications to create a satisfactory experience for online gamblers. A server that is thousands of miles from the computers of gamblers can slow things down and interfere with the experience. With 85 per cent of online gamblers located in the US, Kahnawake's popularity with operators grew rapidly, so much so that MIT is reportedly considering a public listing on the London Stock Exchange.
As to the legality of the MIT operation, the Quebec government did launch an “investigation” more than two years ago. But this investigation appears to be going nowhere. “There is no way the government wants another Oka standoff,” Kyer explains, referring to the 78-day violent showdown in 1990 between Native people, Quebec police and the Canadian Army, triggered by a dispute over native rights relating to a proposed golf course. Instead, the federal government is negotiating with the reserve towards a treaty that will legalize MIT's operation. “That's pretty much what happened in Ontario when Casino Rama was established,” Kyer notes.
If this comes to pass, what's OK for Kahnawake may soon be OK for other reserves, and perhaps for the rest of Canada. That's not as far-fetched as it sounds. If Canada became a server haven, subsequent exchange listings and tax revenues could prove to be very attractive.
AS MATTERS STAND, there's a flourish-ing business in advising offshore clients on the ins-and-outs of where to put their servers. “You've got to remember that there are no laws governing Internet gaming in Canada,” Lazarus explains. “All we've got is the Criminal Code, so there's a lot of room for opinion work.”
However that may be, there are signs that the online wave may be cresting. PartyGaming shares dropped more than 33 per cent after the company revealed that new customer growth and spending by players had slowed more than anticipated. The US Department of Justice continues to insist that all online gaming activities are illegal. And provincial governments, particularly Queen's Park in Ontario, show no sign of expanding their gambling operations in the immediate future.
So while those who practise gaming law may go on as they are, it is arguable that gaming will remain a niche practice that will have little bearing on major law firm growth. Arguable, but, as close scrutiny reveals, not likely.
Canadian newspapers have recently been awash with reports citing the steep social costs of unchecked gambling. Given the huge profits in the business, it's hard to think of any other reason why governments, faced with spiralling healthcare and education costs, haven't been more aggressive in expanding their tax base from gaming.
The truth is that with huge surpluses at the federal level and in Alberta, and with the economy strong, there is no pressing need for new revenue sources. But such a time will come, as it always does. Joel Rose at Aird & Berlis points out the obvious. “The provinces love the money and that's not going to change.”
The authors of The Legalization of Gambling in Canada, a report prepared in July for the Law Commission of Canada, appear to agree. “Provincial governments have become increasingly dependent upon the revenue generated by the expansion of legal gambling. Therefore, they have a vested interest in the promotion and expansion of gambling.”
When the next economic downturn arrives it will be hard for governments to resist getting back some of the money that is now going to foreign jurisdictions or illegal operations. As Ed Hannah at Davies, former executive vice-president and corporate counsel at Magna Entertainment, puts it, “Detroit eventually established casinos because it was sick and tired of losing so many dollars to Windsor.”
In other words, it is no more feasible to hold the line on gambling that it would be to cap liquor sales. Even some American states have jumped on the bandwagon with attempts to legalize statewide online gambling. In a similar vein the US Senate recently refused to pass a measure forcing banks and credit card companies to block payments to online gambling sites.
THE BOTTOM LINE is that provincial governments have simply been hedging their bets; mollifying critics with soothing platitudes about the social evils but leaving the door wide open to the expansion of gaming. According to the authors of The Legalization of Gambling in Canada, this approach dovetails with public opinion. “Canadians generally view gambling as an acceptable community activity due perhaps to its perceived inevitability and as a source of revenue for governments and charities…gambling no longer stands as a matter warranting criminal prohibition.” The authors conclude that the criminal law as it pertains to gambling has been used principally “to consolidate and legitimize a provincial government expansionist monopoly.”
So when Ontario announced its freeze on gambling expansion, it didn't rest its case on social concerns. Rather, the Liberal government explained its actions as rooted in its belief “that the market could not support further expansion.” That leaves plenty of room for manoeuvre in the future.
Likewise, Alberta has touted its cap on video lottery terminals in the province without mentioning the fact that the number of slot machines in the province has, in the past few years, grown by 50 per cent. For its part Nova Scotia recently issued its first “gaming strategy” report, nestled soothingly under the signature, among others, of the Minister for Health Promotion. The authors recommendations included a proposal that the government “pursue the development and growth of responsible, entertaining gaming products and venues.”
Indeed, as The Economist recently pointed out, with considerable sarcasm directed towards opponents of the industry's expansion, gambling is not prohibited by the Ten Commandments, nor it is one of the seven deadly sins. That being said, it must surely be fair game for lawyers.
Julius Melnitzer is a Toronto-based freelance legal affairs writer.
Lawyer(s)
Desmond Balakrishnan
Yvan Bolduc
C. Ian Kyer
Morden Lazarus
Michael D. Lipton
Don Macintosh
John M. Tuzyk
Joel M. Rose
Ingrid E. Peters
Frank Stronach
Bill Rutsey
Firm(s)
National Bank Financial
Chartwell Technology Inc
Great Canadian Gaming Corporation
Cryptologic Inc.
Pollard Banknote Limited
McMillan LLP
Davies Ward Phillips & Vineberg LLP
Fasken Martineau DuMoulin LLP
Lazarus, Charbonneau
Elkind & Lipton LLP
Dentons Canada LLP
Stikeman Elliott LLP
Aird & Berlis LLP
Blake, Cassels & Graydon LLP
Ontario Lottery and Gaming Corporation
CIBC World Markets Inc.
Desjardins Securities Inc.
Little Caesars Pizza
Wal-Mart Stores, Inc.
London Stock Exchange
Dresdner Kleinwort Wasserstein Limited
British Airways Plc
Mohawk Internet Technologies
Hilton Hotels
Skadden, Arps, Slate, Meagher & Flom LLP
Penn National Gaming Inc.
Great Canadian Casinos Inc
Canadian Gaming Association
Ontario Jockey Club
Parlay Entertainment Limited
Kahnawake Gaming Commission