American racing beware: Betfair is coming

April 01, 2008 7:00 PM
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Burnt Offerings by Stan Bergstein | It is a long way from Las Vegas to Sydney and Melbourne, Australia – 7,721 miles to Sydney, 8,156 to Melbourne – and even longer – 9,531 miles – from Vegas to Perth, the majestic city on Australia’s western shore.

Events affecting betting in those cities last week have to be of interest in Sin City, however, and everywhere else where people bet on horse racing.

The High Court of Australia ruled unanimously in favor of Betfair, the big English betting exchange, upholding the company’s contention that a ban on Betfair taking bets from the rest of Australia in Western Australia was unconstitutional.

The reverberations were felt throughout the Southern Hemisphere, and the question posed was how the decision affected Australia’s other states, primarily Victoria, where Melbourne is located, and New South Wales, the home state of Sydney.

First, a bit of background.

Betfair, as most know, is based on individuals betting against one another, including betting on horses to lose. It returns vastly less to bricks and mortar racing than conventional betting, but it got a foothold in Tasmania, the island state across the Tasman Sea from Australia, where it was supported by the premier and found a bottomless banker in the Packer family, the wealthiest Down Under, which bought into the firm.

From there, with the immense Packer wealth behind it, it crossed the Tasman to Western Australia, operating from its southern hemisphere headquarters in Tasmania’s capital city of Hobart. It was immediately challenged by Western Australia authorities, who passed a three-part amendment to its Betting Control Act designed to prevent Betfair from operating.

The changes provided that establishing or operating a betting exchange was illegal; that betting with an exchange also was illegal; and that no one could publish past performance information without approval of state authorities.

One Mr. Erceg, who was using Betfair’s exchange betting service, found he no longer, could bet with them, nor could Betfair publish a race field online.

Betfair and Erceg sued, claiming the ban prevented competition and illegally deprived an out-of-state operator like Betfair access to racing information. They contended the ban was unconstitutional, and the High Court of Australia agreed without dissent.

The Court found that a law making it an offense to establish a betting exchange, or bet with one, was in fact unconstitutional. Given that, it found no need to rule on banning publication of racing information.

The Western Australian constitution requires trade within the commonwealth to be "absolutely free," as an expression of national economic unity. The Court said geographic boundaries of a state had little significance in Internet commerce markets. As a result, and noting that the Internet enables real time transactions to occur between people in different geographic locations, it found that state sanctioned protective laws were overly broad.

The High Court did not, however, seek to prevent states from regulating the conduct of betting exchanges within their borders. But the Western Australia ban on Betfair was not limited to residents of that state. It applied to any bettor who placed a bet through a betting exchange, regardless of where the bettor lived.

Bottom line, the Court said the effect of the Western Australian ban was discriminatory on interstate trade.

The states of Victoria and New South Wales, Australia’s most populous, had taken a different approach toward banning Betfair, using regulatory rules rather than laws. The High Court not only did not ban that approach, but endorsed Victoria’s regulatory approach. Those states perceived that Betfair represented a threat to horse race betting as we know it, and they were right.

The Sydney law firm of Clayton Utz, whose concise summary of the Betfair decision was used for this explanation of what happened last week, concludes that the law will impact the exchanges of racing information; the way betting exchanges are regulated in each of Australalia’s states; federal reviews of the laws; existing commercial arrangements in betting in Australia; and current and future wagering licensing renewals.

The decision obviously is a major victory for Betfair. It is questionable, even doubtful, that it will have serious impact here, but it certainly will encourage Betfair to renew and redouble its efforts to secure an American foothold.

How American courts will react to possible future challenges is unknown, but the High Court ruling in Australia bringing down the Western Australian approach is a shadow on the wall, and casts another element of uncertainty over an already nervous industry.

Racing commissions in the United States and Canada had better have their lawyers study the Australian decision closely. It is likely only a matter of time before they will hear more about it, not from Australia, but here and close up.

Forewarned is forearmed.