Pennsylvania Holds Its First Ever Legislative Hearing on Internet Gaming

by K&L Gates LLP
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Pennsylvania legislators are beginning to explore a topic that, for them, was previously uncharted territory: the possibility of legalizing Internet gaming. In April 2013, Representative Tina Davis introduced a bill (HR 1235) that would empower the Pennsylvania Gaming Control Board to authorize licensed Pennsylvania casino operators to offer certain games on the Internet. Additionally, in December 2013, the Pennsylvania Senate adopted a resolution (SR 273) that directed the Legislative Budget and Finance Committee to issue a report that addresses, among other things, “the potential impact of online gaming on the gaming industry, including the impact online gaming may have on the [state’s] tax revenues and employment at the [state’s] casinos.” On May 1, 2014, with these points as a backdrop, the Pennsylvania House Democratic Policy Committee—-which includes Representative Davis—held Pennsylvania’s first ever legislative hearing on Internet gaming.

The hearing featured 14 witnesses who were divided into four panels: (1) policy and regulatory issues, (2) social impact issues, (3) technology and consumer protection issues, and (4) gaming industry issues.

Policy and Regulatory Issues
The hearing began with the panel on policy and regulatory issues. The first witness was Kevin O’Toole, the Executive Director of the Pennsylvania Gaming Control Board. Mr. O’Toole explained that Board members have reviewed the Internet gaming laws of other jurisdictions, met with Internet gaming regulators of other jurisdictions, and attended several Internet gaming conferences. The Board, he said, believes that if Pennsylvania legalizes Internet gaming, only licensed casino operators should be permitted to offer Internet gaming opportunities in the state. The Board also believes that it should be the entity that regulates this activity.

After Mr. O’Toole finished his remarks, James Kilsby, a Managing Director for GamblingCompliance, outlined some of the key policy issues that arise when a state decides to legalize Internet gaming. He noted that the state must decide, among other things, who should be licensed to operate gaming websites, who should regulate the licensed operators, which types of games should be authorized, how licensure “suitability” determinations should be made, and what the tax rate should be for Internet gaming revenue.

Mr. Kilsby was followed by Geoffrey Dixon, the Head of Insights for Commercial Intelligence. Mr. Dixon described the results of a survey that his company conducted of people who had recently participated in legalized Internet gaming activities in New Jersey. Mr. Dixon noted that 65 percent of the survey respondents had participated in “unregulated” Internet gaming activities before participating in the legalized ones, 21 percent made their first visit to a land-based casino after participating in the legalized activities, and 70 percent believed that, after participating in the legalized activities, they visited land-based casinos just as often as beforehand.

Social Impact Issues
The second panel addressed social impact issues. The first witness was Patty Aftab, the Founder and Executive Director of Wired Safely. Ms. Aftab said that Internet gaming implicates important social concerns, including underage gambling, identity theft, “scamming” of senior citizens, fraud, and money laundering.  She emphasized that, since people will participate in Internet gaming regardless of whether it is regulated, “the only way to get [consumer] protection” is to “have the government step in.”

The next witness was Jim Pappas, Executive Director of the Council on Compulsive Gambling of Pennsylvania.  He said that Pennsylvania lawmakers should review other states’ statutes that authorize Internet gaming to see how those statutes address “problem gamblers.” He also noted that his organization supports “New Jersey’s approach,” which involves allocating some Internet gaming-related tax revenue directly to the Council on Compulsive Gambling of New Jersey. 

Mr. Pappas was followed by Keith Whyte, the Executive Director of the National Council on Compulsive Gambling. Mr. Whyte suggested that Internet gaming can foster gambling addiction because of the “fast pace of play,” the use of credit cards to pay for wagers, and “24-hour access” to gaming websites. He said that, if Pennsylvania passes legislation that legalizes Internet gaming, the legislation should bolster the state’s approach to treating gambling addiction and contain robust standards for preventing “problem gambling” issues from arising in the first place.

Technology and Consumer Protection Issues
The third panel addressed technology and consumer protection issues. Leading off was Peter Murray, Head of Gaming and Consumer Services for GB Group. Mr. Murray said that, in the Internet context, verifying someone’s identity involves gathering and assessing various pieces of information, including the person’s name, address, date of birth, e-mail address, and telephone number, along with information embedded in social media websites, credit-reporting websites, passports, identification cards, and computing devices. These data points, he explained, need to be “combined and cross-referenced” in order to be effective as a means of identity verification.

The next witness was Doug Lewin, Executive Vice President for Strategic Partnerships and Development at Optimal Payments. Mr. Lewin explained that, in order to accept online wagering payments, website operators need to enter into contracts with companies that provide automated clearing house services, pre-paid cards, or credit cards to wagerers. In the United States, he said, many banks do not wish to make the effort (or spend the money) to make distinctions between legal and illegal Internet gaming payments and, therefore, simply block all of those payments.

The last witness on the panel was Lindsay Kininmonth, an Operations Manager at GeoComply. She discussed geolocation technology as it relates to Internet gaming. She explained that the technology is premised on “triangulation” of Wi-Fi signals, cell phone towers, and GPS signals. It also, she said, involves the use of “spoofing detection technology,” which is designed to prevent people from spoofing the physical locations of their computing devices.

Gaming Industry Issues
The final panel addressed gaming industry issues. The first witness was David Satz, Senior Vice President of Government Relations and Development for Caesars Entertainment Corp. Mr. Satz explained that Caesars supports state-level authorization of Internet poker activities. Those activities, he said, do not cannibalize revenues for land-based casinos, but instead encourage people to visit land-based casinos by creating enthusiasm for poker. He said that, similarly, operators of authorized Internet poker websites can “cross-market” land-based casinos by featuring advertisements for those casinos on the websites (and vice versa).

Mr. Satz was followed by Bob Green, Chairman of Parx Casino and Racing. Mr. Green emphasized that Parx Casino agrees with the Gaming Control Board that if Pennsylvania legalizes Internet gaming, only “existing casino operators” should be permitted to offer Internet gaming opportunities in the state. Under this framework, Mr. Green said, the state’s gaming regulators would already “know who they’re dealing with.”

The next witnesses were Schott Bohrer and Manu Gambhir, the Managing Partners of Thrive Gaming. They stressed that the technology exists to “effectively regulate” Internet gaming. Additionally, they estimated that, if Pennsylvania legalizes Internet gaming, it would enable the state to receive $400 to $500 million of new tax revenue per year.

The final witness of the day was John Pappas, Executive Director of the Poker Players Alliance. Mr. Pappas noted that the Poker Players Alliance has 25,000 activists in Pennsylvania, advocates for “sensible regulation” of Internet poker activities, and believes that, if Pennsylvania and other states do not legalize Internet gaming, it will only benefit the “illegal” gaming websites.

Conclusion
While the witnesses discussed a wide variety of topics, some of the most prominent themes that emerged were that (1) there are numerous “unregulated” gaming websites, many of which are currently accepting online wagers from Pennsylvania residents, (2) it is possible for a state government to effectively regulate and tax Internet gaming, (3) Internet gaming is already being regulated in jurisdictions other than Pennsylvania (such as New Jersey, Delaware, Nevada, and Europe), and (4) the technology exists to ensure that underage and “problem” gamblers do not participate in Internet gaming activities. 

During the hearing, members of the House Democratic Policy Committee posed a number of questions to the witnesses. Their questions revealed that, at this point, they have only a basic understanding of the legal, practical, and technical issues associated with Internet gaming. They and other Pennsylvania legislators will need to continue to educate themselves about these issues as they decide whether to support legislation that would legalize Internet gaming. They will have an opportunity to do so at a public hearing on May 7, 2014, where the Legislative Budget and Finance Committee’s report on Internet gaming (mentioned at the outset of this alert) is scheduled to be announced.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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