Gaming Law: Understanding the Radical Revamp of Pennsylvania s Gaming Industry June 20, 2018 2017 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm Offices New York London Singapore Philadelphia Chicago Washington, D.C. San Francisco Silicon Valley San Diego Shanghai Taiwan Boston Houston Los Angeles Hanoi Ho Chi Minh City Atlanta Baltimore Wilmington Miami Boca Raton Pittsburgh Newark Las Vegas Cherry Hill Lake Tahoe Myanmar Oman Duane Morris Affiliate Offices Mexico City Sri Lanka Duane Morris LLP A Delaware limited liability partnership The Speakers Adam Berger, Duane Morris LLP Evan Davis, SugarHouse Casino Frank DiGiacomo, Duane Morris LLP Susan Hensel, Pennsylvania Gaming Control Board R. Douglas Sherman, Pennsylvania Gaming Control Board Christopher Soriano, Duane Morris LLP 1
Overview of Presentation Gaming expansion in Pennsylvania Overview of sports betting in the United States following the landmark Supreme Court decision Current gaming landscape with a focus on the present and future East Coast gaming market Gaming Expansion in Pennsylvania 2
Brief History of Legal Gaming in Pennsylvania 1972 - The Pennsylvania Lottery 2004 the Pennsylvania Race Horse Development and Gaming Act ( Gaming Act ) was passed; Gaming Act (in 2004) Authorized Slot Machine Only Casinos at: Racetracks (Category 1 Slot Machine Licensees) Stand Alone (Category 2 Slot Machine Licensees) Resort Casinos (Category 3 Slot Machine Licensees) Brief History of Legal Gaming in Pennsylvania 2006 - First Slot Machine Only casinos opened 2010 - Table Games Legalized 3
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2018 Gaming Expansion 2.0 Category 4 (Satellite) Casinos Interactive Gaming Video Gaming Terminals (VGTs) at Truckstops ilottery Airport Gaming Fantasy Contests Sports Betting Category 4 Casinos How many of this type of casino could be open? Up to 10 locations are authorized by law. 5
Who can own a Category 4 casino? Through an initial, sealed bid auction process conducted by the Gaming Control Board: Open only to Existing Category 1 and Category 2 casinos can bid for these facilities. Minimum bid ($7.5 MM to offer slots; an additional $2.5 MM for table games certificate) Should all 10 available licenses not be awarded the initial auction process, other entities may become eligible to obtain a Category 4 license through a subsequent auction process. Including Cat 3 Licensees and perhaps non-pa entities Where Can Category 4 casinos be located? Generally, a Category 4 facility may not be located within 25 miles of another licensed PA casino (Category 1, 2, or 3), except if the location is within 25 miles of the winning bidder's own licensed facility Category 4 licensees have a 15 mile radius restriction from other Category 4 licensees 6
Category 4 Casinos Local governments had opportunity to opt out i.e. exercise an option to prohibit the siting of a Category 4 casino in that municipality. Each Category 4 casino may operate between 300 and 750 slot machines and up to 30 table games. The licensee does have the ability after 1 year to petition the Gaming Control Board to add 10 additional table games. To date 5 Category 4 bidders have submitted successful bids Penn National 2 successful Bids $50,100,000 bid in York County $7,500,003 bid in Lancaster County Stadium Casino $40,1000,005 in Westmoreland County Mount Airy Casino $21,888,888.88 Lawrence County Parx Casino $8,111,000 Cumberland County 7
Interactive (Internet) Gaming Casino-style games which are also offered at Pennsylvania casinos (table games, poker, slot machines) using communication technology generally through a computer, tablet or mobile phone Internet gaming in PA includes three categories: non-banking table games (generally, poker); banking games which simulate casino table games; and games which simulate slot machines. Also internet/mobile based sports betting permitted 8
Who can obtain licenses for Internet Gaming? Existing casino license holders (Cat 1, 2 and 3) may request the Board for authorization to offer internet gaming Interactive Gaming Certificate Holder A Qualified Gaming Entity may also conduct interactive gaming directly or through an Interactive Gaming Operator pursuant to an interactive gaming agreement; Who can obtain licenses for Internet Gaming? Interactive gaming operators (platform providers): A company that operates interactive gaming, or an underlying interactive gaming system, on behalf of a casino or qualified gaming entity must be licensed as a so-called interactive gaming operator by obtaining an interactive gaming license. 9
igaming Skins Skins is the term used for websites or brands operated by internet gambling companies New Jersey allows multiple skins under each casino/internet gaming license (Current policy is 5 per casino license). For example: www.playsugarhouse.com www.borgatacasino.com www.pokerstarsnj.com www.wsop.com Skins Per regulation, the Gaming Control Board has not limited the number of skins/brands that can be used by a certificate holder. However all interactive gaming skins must clearly identify the PA casino under which the skin is being offered for play 10
Effective igaming tax rates 16 % on peer-to-peer games (poker). 16 % on non-peer-to-peer games table games. 54 % on slot machine games. 36 % on sports betting. Initial igaming License Fees Initial License fees for igaming certificates: $10 million for casino within 90 days (includes all 3 categories); $4 million per category of game for casino in days 91-120; $4 million per category of game for Qualified Gaming Entities after 120 days; $1 million for Interactive Gaming Operator; Renewal license fee $250k for igaming certificate holder; $100k for interactive gaming operator; 11
What type of gaming will be available at airports? Airport gaming will be permitted on multi-use computing devices, such as ipads and other similar computer tablets and devices. Gaming options could include slots, blackjack, roulette, poker and other table games. Within which airports could these be located? Publicly owned commercial service airports can offer airport gaming through an agreement with one of Pennsylvania s existing casinos that has been issued an interactive gaming certificate by the PGCB. However, airports are not required to offer the gambling options, and each airport will decide on its own whether it wants to engage in this offering. Publicly owned commercial service airports include: 12
Airports Include Who will be able to gamble in airports and at what age? Individuals 21 years of age or older who have cleared security check points and have a valid airline boarding pass for travel from one destination to another are eligible to participate in airport gaming. 13
Will the gaming resemble slot machines in the Las Vegas Airport? No. McCarran International Airport in Las Vegas has slot machines that are similar to those in Pennsylvania casinos. Pennsylvania s new law permits gaming in publicly owned commercial service airports only through the use of multi-use computing devices like ipads and other similar tablet computers. Devices are affixed to tables and counters in terminal waiting areas, lounges and restaurants and can be used for ordering food and drinks, online shopping, checking the status of a flight and, in this case, playing casino-style games When will Airport Gaming be available? What has to occur? 14
Who will own these Airport Gaming licenses? Who is eligible to petition? Will tax revenue be generated by airport gaming? Yes. Gross interactive gaming revenue, which includes airport gaming, is taxed at 14% for games that simulate table games and 52 % for games that simulate slot machines and is paid to the Commonwealth to support the state s general fund. In addition, a 2% local share assessment tax is split among the county in which the airport is located, the airport authority, grants for public interest purposes and, in the case of gaming at the Philadelphia International Airport, the Philadelphia School District. 15
VGTs at Truck Stops A VGT is short for a Video Gaming Terminal which operates in a similar way to a slot machine in a casino with each play determined at random. VGTs will only accept cash, not credit or debit cards, and winnings must be paid through a redemption machine. By law, the maximum bet on a VGT will be $5 with a maximum payout of $1,000. Also, by law, the minimum theoretical payout percentage for VGTs is 85%, the same as slot machines in Pennsylvania casinos. Where can VGTs be located? VGTs can only be located in Truck Stop Establishments that meet the following criteria: is equipped with diesel islands used for fueling commercial motor vehicles; has sold on average 50,000 gallons of diesel or biodiesel fuel each month for the previous 12 months or is projected to sell an average of 50,000 gallons of diesel or biodiesel fuel each month for the next 12 months; has at least 20 parking spaces dedicated for commercial motor vehicles; has a convenience store; is a PA Lottery Sales Agent; and, is situated on a parcel of land of not less than 3 acres. 16
How many truck stops would be eligible? The exact number is yet to be determined. A truck stop establishment that is eligible and licensed can operate up to 5 VGTs. The process to apply for VGT licenses at qualified truck stops began PGCB already accepting applications 17
Who will receive the tax revenue from VGTs? 42% of the gross revenue generated by VGTs will go into a newly-established Video Gaming Fund which, in turn, will be deposited into Pennsylvania s General Fund 10% of the gross revenue will be used for grants to any county in the Commonwealth and administered through the Commonwealth Finance Agency Sports Betting 18
Sports Betting An Overview The Professional and Amateur Sports Protection Act ( PASPA ) A Most Unusual Law With Most Unusual Effects What Does PASPA Prohibit? a government entity to sponsor, operate, advertise, promote, license, or authorize by law or compact a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly on one or more competitive games in which amateur or professional athletes participate or on one or more performances of such athletes in such game. (28 USC 3702) 19
Important Point PASPA DOESN T ACTUALLY BAN SPORTS BETTING In fact, it has exceptions: PASPA does not apply where: A lottery, sweepstakes, or other betting, gambling, or wagering scheme [was operated], to the extent that the scheme was conducted by that state or other governmental entity at any time during the period beginning January 1, 1976 and ending August 31, 1990 20
More Exceptions such scheme was authorized by a statute as in effect on October 2, 1991; and actually was conducted in that State at any time during the period beginning September 1, 1989, and ending October 2, 1991, pursuant to the law of that State or other governmental entity; and actually was conducted in that State at any time during the period beginning September 1, 1989 and ending October 2, 1991, pursuant to the law of that State or other governmental entity The New Jersey Window Through complicated statutory wording, New Jersey had one year to implement sports betting in its casinos. It didn t. 21
Skip Ahead to Delaware in 2009 Delaware, which had a NFL parlay card system in the 1980s, tried to implement full scale sports betting The Third Circuit said no. Commissioner v. Markell, 579 F.3d 293 (3d Cir. 2009) To the extent must be narrowly construed. New Jersey s Recent Battle In 2011, New Jersey adopted a constitutional amendment allowing the Legislature to amend the Casino Control Act to authorize sports betting. The Legislature did so and the Division of Gaming Enforcement was set to authorize the casinos to authorize sports betting. 22
New Jersey s battle The professional sports leagues sued, saying this violates PASPA. New Jersey then challenged the constitutionality of PASPA. The Third Circuit concluded PASPA was constitutional. New Jersey s battle NCAA v. Christie, 730 F.2d 208 (3d Cir. 2013) Anti-commandeering is the principle that Congress cannot force a state legislature to do something e.g., New York v. United States, 505 U.S. 144 (1992) either arrange for disposal of radioactive waste or take ownership of it Congress may not simply commandeer the legislative process by directly compelling them to enact and enforce a federal scheme 23
New Jersey s battle PASPA does not require a state to actually do anything it is hard to see how Congress can commandeer a state if it does not require it to do anything at all. But we do not read PASPA to prohibit New Jersey from repealing its ban on sports wagering. Both choices leave much room for the states to make their own policy. Cert denied. Round 2 So New Jersey repeals its ban on sports wagering in part. N.J.S.A. 5:12A-7: The [criminal statutes] are repealed to the extent they apply or may be construed to apply at a casino or racetrack in this State by persons 21 years of age or older situated at such location 24
Nope. After going through the District Court and the Third Circuit en banc, the Court held that this partial repeal does not comport with PASPA. NCAA v. Christie, 832 F.3d 389 (3d Cir. 2016) To the extent that in Christie I we took the position that a repeal cannot constitute an authorization, we now reject that reasoning. En Banc Decision To be clear, a state s decision to selectively remove a prohibition on sports wagering in a manner that permissively channels wagering activity to particular locations or operators is, in essence, authorization under PASPA. However, our determination that such a selective repeal of certain prohibitions amounts to authorization under PASPA does not mean that states are not afforded sufficient room under PASPA to craft their own policies. 25
En Banc decision Court s only example was that a state could repeal prohibitions on friendly wagers Dissent: This shifting line approach to a State s exercise of its sovereign authority is untenable. The bedrock principle of federalism that Congress may not compel the States to require or prohibit certain activities cannot be evaded by the false assertion that PASPA affords the States some undefined options when it comes to sports wagering. The Supreme Court gets involved New Jersey petitioned for cert. The Court called for the views of the Acting Solicitor General, who recommended a denial. On June 27, 2017, the Court granted cert. Argument held in December 2017. Decision issued May 14, 2018 26
Supreme Court Decision Justice Alito writes for the Court. Court notes that gambling is a sensitive policy issue long fraught with disputes. Court made clear that it is not weighing in on these policy issues but only on constitutional questions. Supreme Court Decision PASPA unequivocally dictates what a state legislature may and may not do. It is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals. A more direct affront to state sovereignty is not easy to imagine. 27
Supreme Court Decision The provision in PASPA applicable to state conduct is not severable from the provision applicable to individual conduct. Justice Thomas concurred; Justice Ginsburg dissented, joined by Justice Sotomayor and in part by Justice Breyer, primarily on grounds of severability. Pennsylvania s Sports Betting Law The Pennsylvania Legislature took preemptive action prior to the Supreme Court s decision. 4 Pa. C.S. 13C11(b) The PGCB shall publish a notice in the PA Bulletin certifying that federal law has been enacted or repealed or that a federal court decision has been issued that would allow a state to regulate sports betting The PGCB may not authorize sports wagering until the notice is published 28
Pennsylvania Sports Betting At its May 30, 2018 meeting, the PGCB authorized the publication of the required notice. Pennsylvania Sports Betting Pennsylvania casinos must be authorized by the Board to offer sports wagering and issued a sports wagering certificate. Authorization must be sought by petition that sets forth the details of a proposed sports wagering operation. The applicant must establish by clear and convincing evidence that, among other things, the facility has the financial stability, integrity, and responsibility to conduct sports wagering and that internal and external security and protocols are adequate. Petition must be acted upon within 120 days. 29
Pennsylvania Sports Betting One time non refundable authorization fee of $10 million. Annual renewal fee of $250,000. Tax of 34% on daily gross sports wagering revenue. Local share assessment of 2% of gross sports wagering revenue. Portion of the tax is allocated to the Compulsive and Problem Gambling Treatment Fund. Pennsylvania Sports Betting PGCB adopted the first set of regulations on May 30, 2018 as 58 Pa. Code 1401 et seq. These regulations contain definitions and the petition requirements for a sports wagering certificate. Additional regulations will be promulgated before sports betting becomes operational. 30
The Current Gaming Landscape The Rise of Internet Gaming 31
Internet Gaming Full scale Internet gaming currently legal in New Jersey Poker-only Internet gaming currently legal in Delaware and Nevada Pennsylvania will soon become the fourth state to commence Internet gaming activities New Jersey Internet Gaming Overview Governor Christie conditionally vetoed A2578 on February 7, 2013 Passed both houses on February 26, 2013 with additional language added by Governor Christie Internet gaming launched in New Jersey on November 26, 2013 (following a 5-day test period) Only other states to have authorized some form of Internet gaming are Delaware and Nevada (poker-only) 32
Interstate Poker Liquidity New Jersey, Delaware, and Nevada have entered into a compact to share player liquidity. Member-operated consortium known as the Multi-State Internet Gaming Association. Patrons must access sites from the state in which they are located. Game servers must be located in Atlantic City if New Jersey patrons are involved. Tax reconciliation based on revenue. Emerging Forms of Gaming 33
Emerging Gaming Category Skill Based Gaming Casino games in which outcome is determined, in part, by player skill Originally launched in New Jersey in November 2016 Significant to attract millennial gamblers Emerging Gaming Category esports Video game competitions Games of skill in which players compete against one another New Jersey casinos embracing esports competitions Sports betting concerns/illegality Again, important to attract millennials to casinos 34
Emerging Gaming Category esports Emerging Gaming Daily Fantasy Sports Long history of traditional, season-long fantasy sports contests Daily version of fantasy sports reach mainstream in 2009 Achieve record results and massive media attention in 2015 In the fall of 2015 integrity concerns emerge and several states take action to declare DFS an illegal form of gambling Since 2015, through state legislative action, the DFS industry has emerged into a legal and regulated state 35
Emerging Gaming Daily Fantasy Sports Daily Fantasy Sports in Pennsylvania Gaming expansion legislation addresses the regulation of DFS in Pennsylvania Operators of DFS contests are required to hold a Fantasy Contest License issued by the Pennsylvania Gaming Control Board Pennsylvania imposes a 15% tax on DFS revenue Pennsylvania Gaming Control Board has promulgated detailed temporary regulations which detail licensing and operational standards New Competition from Surrounding States 36
New York Casino Developments Prior to December 2016, New York maintained 9 Video Lottery Facilities (racinos) and 6 tribal casinos (Oneida, Seneca and St. Regis tribes) In 2014 and 2015, New York held competitive bidding processes for 4 upstate full-scale casinos licenses. One license in each upstate region (Southern Tier, Capital and Catskills) and one wild card license. New York Casino Developments Gaming Facility Licenses awarded to: Tioga Downs (Nichols) Empire Resorts (Monticello) del Lago (Waterloo, Seneca County) Rivers (Schenectady) New York Constitution authorizes 4 upstate casinos (already awarded) and 3 downstate casinos (New York City region) New legislation would be required. Under current legislation, downstate licenses cannot be awarded within 7 years of award of initial licenses (early 2016). If licenses awarded sooner, current licensees get refund (likely prorated) of license fee. 37
New York Casino Developments Key features of New York s gaming law: Permits slot machines and table games Tax on table games is 10% Tax on slot machines varies by region (37%, 39%, 45%) Each property offers a hotel New York Casino Developments Support by some legislators to legalize Internet poker Internet poker bill failed in prior legislative session, but there appears to be momentum to pass in future sessions. As previously contemplated would only allow poker, not other casino games to be played over the Internet. This would create a potential opportunity for New Jersey (i.e., to pool players and create greater liquidity for Internet poker). 38
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