Betfair v Western Australia : The Death Of Protectionism In The Age Of The New Economy

Facts Of The Case

Betfair Pty Limited (Betfair) is an Australian registered company which is a joint venture between The Sporting Exchange Limited (a UK registered company and owner of Betfair Limited) and Crown Limited. Betfair Limited (UK) is a privately held company.

Betfair run an online betting exchange that is licensed under Tasmanian law since 7 February 2006. The licence runs for a period of 5 years. It was the first betting exchange licence issued in Australia and has its central server located in Hobart.

The second plaintiff in the case was a Western Australian by the name of Mr Erceg who used Betfair from his computer in Western Australia[i].

Under the federal law – the Interactive Gambling Act 2001, Betfair’s operations fall under the category of an excluded wagering service, which is an exception to the general prohibition on internet gambling[ii]. Thus from the federal perspective their operations are completely legal.

In a move to protect revenues leaving the state and the ‘integrity’ of the racing industry in Western Australia the Betting Control Act was amended:

·         To  prohibit Western Australians from betting through a betting exchange (Section 24(1aa)) and;

·          To prohibit a person, in Western Australia or otherwise from publishing a race field without authorisation (27D(1)).

Betfair brought the case against Western Australia disputing the constitutionality of three aspects of the amended Western Australian Betting Control Act. The third aspect was deemed to be unnecessary to answer, thus the two issues that the court was asked to determine were:

1) Section 24(1aa) of the Betting Control Act (WA) provides that “A person who bets through the use of a betting exchange commits an offence.” Betfair asserted that s 24(1aa) was invalid by reason of s 92 of the Australian Constitution.   

Section 92 of the constitution states: ‘On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.’

2) Section 27D(1), read with s 27C(2)(a)(iii), of the Betting Control Act (WA) provides that it is an offence for a person who operates a betting exchange, whether in the State of Western Australia or elsewhere, to publish a WA race field without authorisation. Betfair asserted that s 27D(1) was invalid by reason of s 92 of the Constitution.  

Reasons for Judgment[iii]

The Concept Of Protectionism In The Age Of The New Economy[iv]

In addressing the issue of section 92 for the first time in 20 years, the court introduced the concept of a ‘new economy’ to which competition law must now be applied.  This new economy is described as a place where “internet dependent businesses, like that of Betfair, operate readily and deal with customers without regard to geographic boundaries”[v]

In the leading authority of Cole and Whitfield[vi] the Court concluded that the intention of section 92 was to create a free-trade zone among the Australian states, and the words "absolutely free" referred to freedom in the economic sense. Thus, laws of a protectionist kind interfering with interstate trade and commerce would be invalid.

The court in Cole and Whitfield  mentioned five traditional examples of protection of domestic industry. However, it was stated that these were ‘by no means exclusive or comprehensive’.  It stated that ‘there will always be scope for difficult questions of fact in determining whether particular legislative or executive measures constitute discriminatory interference with interstate trade.’

The court, in introducing legislation against internet commerce as a new category of protectionism (in addition to those mentioned in Cole), highlighted :

“the practical and conceptual perplexity that arises in accommodating internet commerce to the notion of protectionism in intrastate trade and commerce.”  [vii]

The Western Australian position, in arguing that the amended provisions of the Gaming Control Act were not discriminatory in a protectionist sense, relied upon the case of Castlemaine Tooheys [viii] where it was stated that a 'fundamental consideration' was that each state legislature has power to enact legislation for the 'well being' of the people of that state. In this instance, Western Australia argued that the amended law was enacted for the well being of the racing industry in the state, and that this in turn was of benefit to the state as a whole.

Here the court stated that the fundamental consideration identified in Castlemaine Tooheys “of a condition of localised well being will not encompass much modern State regulatory legislation in the new economy” [ix]

Neither Betfair or Tasmania challenged the existence of this fundamental consideration, however they used the Castlemaine Tooheys case in another respect. In this 1990 case, it was stated:

"[T]he validity of the 1986 legislation rests on the proposition that the legislative regime is appropriate and adapted to the protection of the environment in South Australia from the litter problem and to the conservation of the State's finite energy resources and that its impact on interstate trade is incidental and not disproportionate to the achievement of those objects.[x]"

On this point, Betfair’s counsel argued that that there needs to be the existence of proportionality between the differential burden imposed on an out-of-state producer and an in-state producer. And, on the other hand, the new law must be designed to achieve a competitively neutral objective.

In accepting this view, the court stated that this proportionality must give ‘fundamental consideration of well being’ of a state government. However, a criteria of ‘reasonable necessity’[xi] was viewed as the accepted doctrine to be used by the court. Particularly they used a statement by Mason J in an earlier case (North Eastern Dairy Co Ltd v dairy Industry Authority of NSW[xii] who stated:

"As the defendant has failed to show that the discriminatory mode of regulation selected is necessary for the protection of public health, it is in my judgment not a reasonable regulation of the interstate trade in pasteurized milk." [xiii]

The Prohibition On Using A Betting Exchange In Western Australia

Flowing from this issue raised above, the question which was next raised by the court was whether Western Australia had an ‘acceptable explanation or justification’ for implementing the legislation. Was the amended legislation 'reasonable' and 'necessary' with the above considerations in mind?

The court sighted the preamble to the Western Australian amending legislation which aimed to ‘prohibit betting through and the establishment and operation of, betting exchanges’. It stated that

·         they make no contribution to the racing industry in Australia and,

·         betting exchanges allow punters to bet on any of the racing codes and lose.  That means that the integrity of the racing industry is put under threat by betting exchanges.

The court systematically rejected this justification for the enactment of this legislation.

With regards to Betfair not making any contribution to the industry in Australia, the court raised the agreement that was forged with the Victorian regulators, undertaking to return an amount equivalent to one percent of the bets taken by it on races in Victoria. This is the same amount required from bookmakers in Victoria. The court said that there is no reason why Betfair wouldn’t forge a similar agreement with Western Australia.

With regards to issues of integrity, Western Australia argued that to lose a multi-party sporting event was easier than to win it, and thus to allow punters to bet on a negative event was to bring in a threat to the integrity of the process above that which might be thought to be present already in the racing industry.

Interestingly, the court states that to measure the threat to sports integrity posed by betting exchanges at an evidentiary level is ‘something of an imponderable'[xiv]. The remedy to counter this threat, they say, which is an alternative to prohibition, is effective non-discriminatory regulation. They state that the Western Australian law is neither proportionate and not appropriate to the ‘propounded legislative object.’

In addition they state that there was no evidence of any increase in Australia of dishonest practices attributable to the operation of the betting exchange by Betfair.

On these points Justice Heydon, in his separate reasons, was more scathing of the approach taken by Western Australia. He said: ‘So wide is the technique adopted – so ill-suited is it to achieve the end supposedly advanced – that it must be inferred that the only purpose is protectionist.’[xv]

The Prohibition On Publication Of Race Fields Without Authorisation

With regard to S27D(1), the judges provided relatively scant reasons for finding that the race fields provision was unconstitutional.  Especially given the widespread implications of this decision to the industry. With many other states[xvi] in Australia seeking to introduce similar legislation with the aim of protecting the revenues of their respective local industries, and with corporate bookmakers in the Northern territory basing their livelihoods on the publication of interstate racefields, the significance of this aspect of the judgment cannot be understated.

The judges state that the Western Australian legislation burdens interstate trade and commerce both directly and indirectly.

‘It does so directly because it denies to Betfair use of an element in Betfair's trading operations.  It does so indirectly by denying to Betfair's registered players receipt and consideration of the information respecting the latest WA race fields by access to Betfair's website or by communication with its telephone operators.’[xvii]

Justice Heydon was much more elaborate on this point when he said:

‘The plaintiffs are correct in submitting that s 27D(1) burdens inter-State trade to a significantly greater extent than it burdens intra-State trade. But does s 27D(1) advance any other end?  The answer must be in the negative.  Western Australia submitted that the other end advanced was the same as that which it submitted was advanced by s 24(1aa).  But like s 24(1aa), s 27D(1) goes so far beyond the end of preserving the integrity of racing in Western Australia as to exclude the possibility of that being its purpose..... The mismatch between the technique employed in s 27D and the end supposedly achieved is so great as to prevent that end being treated as its purpose.'[xviii]

Analysis And Implications Of The Case

It is now clear that the states will need to reformulate their prohibitive approach towards betting exchanges and the publication of race fields. If aggrieved state governments are still concerned with issues of integrity posed by betting exchanges, then it appears that effective ‘non-discriminative regulation’ is the remedy suggested by the court.

Provided that the states amend their legislation, both Betfair and interstate corporate bookmakers will be able to continue to offer interstate wagering across the country and will be able to continue to publish racefields from other Australian jurisdictions. The challenge for these state governments is in encouraging contribution from both Betfair and the interstate bookmakers to the local industry in the absence of a legislative obligation to do so.

Betfair and the Interstate bookmakers have no obligation to obtain any further license other than renewing those that they currently hold. Nor is there any obligation to forge agreements with any particular racing body. Despite this, Betfair has undertaken to forge revenue sharing agreements with various sporting bodies [xix] and also integrity and product fee agreements with other bodies including Racing Victoria. It was this policy that impressed the court over questions regarding lack of contribution. Indeed, This has been integral to Betfair's approach to enter the Australian market.

On this point Betfair's director of corporate and business affairs Andrew Twaits says it will gladly offer the same deal as Racing Victoria's to anyone else: access to its records to alleviate integrity concern and a "product fee" for race fields [xx]. But in terms of their Tasmanian licence they are already paying  a tax of 15 percent of the gross revenue on racing and sporting events held in Australia. Betfair also pays a product fee of 20 percent of the gross revenue from Australian racing events.

Licensing in other jurisdictions raises the possibilities that Betfair’s revenues may be taxed on multiple occasions if the fees and taxes in Tasmania remain the same.

Whether state governments will legislate to allow the licensing of betting exchanges is a question which remains unanswered. In Queensland, Unitab have stated that they may set up a rival betting exchange[xxi]. If this were to occur, any operation would need to compete with Betfair who have first mover advantage in the market.

In addition, restrictions imposed by racing authorities - such as a prohibiting bookmakers from betting with Betfair or interstate bookmakers - will need to be amended to conform to the judgment. For example, under the Australian Racing Rules at AR 175B, no licensed person, registered person, or owner is allowed to place a transaction with a betting exchange on any horse race run in Australia; and no person present at a racecourse can have access to any betting exchange website. It may now be the case that these rules are inconsistent with the court's ruling.

The judgment is good news to Tasmania, who will see greater revenues in the state coffers as a result of access to the Western Australian markets and possibly the other states who are forced to finally recognise the legitimacy of Betfair. The decision comes after Tasmania was recently given white list status which enables its licensees (including Betfair) to advertise gambling in the United Kingdom, drastically increasing revenue potential.

A further implication of the case is that advertising restrictions imposed by the states may have to be lifted. It flows that as a consequence of the trade being ‘absolutely free’ that any restriction on the advertising that relates to the trade must not be prejudicial to operators outside of the state.

The final remark that needs to be made is that the recognition of the court in freeing interstate provision of wagering services, bares immediate comparisons with cases such as Gambelli (C-243/01) and Placanica (C338/04) from the European Court of Justice, and the case brought before the WTO by Antigua against the United States (DS285). Whilst the case is set to revolutionize wagering in Australia, the issue of protectionism against online gaming operators offering their products across borders is being challenged in many courts internationally and is a symptom of embracing the ‘new economy’.

Endnotes 

[i] When this case note refers to Betfair in the context of the case, it refers to both plaintiff’s being the first plaintiff Betfair Pty Limited and the second plaintiff Erceg.

[ii] Under section 15 of The Interactive Gambling Act 2001

[iii] There were two sets of reasons given. The substantive reasons were given collectively by Gleeson CJ, Gummow J, Kirby J, Hayne J, Crennan J and Kiefel J. Separate reasons were given by Heydon J. Unless otherwise stated in this article when the words such as  ‘ the court decided’  are used, the writer is referring to the judgment other than that of Heydon J.

[iv] The term ‘new economy’ was first used by Posner in “Antitrust in the New Economy” (2001) 68 Antitrust Law Journal 925.

[v] See paragraph 14.

[vi] (1988) 165 CLR 360;

[vii] At paragraph 18

[viii] Castlemaine Tooheys Ltd v South Australia (1990) 169 CLR 436. In this case the Beverage Container Act 1975 (SA) required a mandatory deposit of 5 cents per bottle, which would be refunded when they were returned; refillable bottles were exempt from this deposit. A later amendment, the Beverage Container Act Amendment Act 1986 (SA) subjected non-refillable bottles to a refund of 15 cents and refillable bottles to a refund of 4 cents. In addition, the refund for non-refillable bottles was to be implemented by retailers, instead of a collection depot.

The Bond brewing companies brewed beer outside of South Australia, and they used non-refillable bottles as opposed to their South Australian counterparts. Although a 5 cent deposit would not have disadvantaged the Bond companies, the later Act's higher deposit and refund mechanism acted together to make their beer uncompetitive. Around the time of the amending Act, the Bond companies' advertising campaign had increased their market share at the expense of the principle South Australian brewer. The plaintiffs sought a declaration that the laws were invalid as being contrary to section 92.


[ix] At paragraph 90

[x] At paragraph 99

[xi] As stated by Gleeson CJ in Thomas v Mowbray (2007) 81 ALJR 1414 at 1428-1429.

[xii] (1975) 134 CLR 559 at 608.

[xiii] At paragraph 102

[xiv] At pargraph 110.

[xv] Paragraph 134

[xvi] Including New South Wales through the Racing Legislation Amendment Act 2006, Queensland through the Racing (Race Fields) Amendment Bill 2006, and Victoria through the Gambling Legislation Amendment (Problem Gambling And Other Measures) Bill.

[xvii] Paragraph 118

[xviii] At page 52 – paragraphs 144 and 145

[xix] Others include AFL, Cricket Australia, the NRL, Football Federation Australia, Tennis Australia and the PGA Tour of Australasia.

[xx] See article in the Australian dated 29 March 2008 http://www.theaustralian.news.com.au/story/0,,23448180-23850,00.html?fro...

 [xxi]  According to Barrie Fletton UnitabCeo this is a possibility – In the West Australian he was quoted:“(But) if it looks like something the public embraces we’ll set up our own service, similar to Betfair. That would stop any revenue leakage going from Queensland into Tasmania.”