Kentucky’s Domain-Name Grab

The governor of Kentucky, Steve Beshear, is cracking down on Internet gambling sites, which he refers to as “leeches on our communities.”  (See story.)  The governor filed a lawsuit in Kentucky state court in an attempt to force gambling sites to prevent access to Kentucky residents.   To get the sites’ attention he asked the court to transfer ownership of their respective domain names to the state.  It’s an audacious strategy that raises a number of issues about the state’s power to achieve it.  Assignment of the names to the state is not the same thing as garnishment but still this case reminds me of NSI v Umbro International–perhaps because I reread it a few days ago.   This is the Virginia case in which Umbro attempted to attach a domain name as collateral for the domain name owner’s debt to Umbro.  NSI, the domain name registrar, objected to the attachment.  The court refused to treat the domain name as property.  The court held that a domain name contract gives the name’s owner a license to use the name for a set period of time.  More specifically, it gives the name owner the right to have domain name root servers point to the owner’s website when someone enters the domain in a web browser address bar.  This contract for services does not give the owner a property right that a creditor can attach.

Blocking these sites from Kentucky residents’ access is also novel, and difficult.  Kentucky is not China or Saudi Arabia, where the government exercises significant control over what Internet traffic crosses the border.  The remedy seems futile.

The trial court judge refused to grant the governor’s motion to transfer the names, asking all parties to brief the issues so he can consider what to do.

Antigua vs the U.S.

I read about this WTO ruling the other day (In Trade Ruling, Antigua Wins a Right to Piracy) and today a reader sent me a link to another article (Antigua wins modest sanctions in U.S. gambling cases). Briefly, the background is this. Gambling, including Internet gambling, is legal in Antigua. The U.S. prosecuted the owners of Antiguan sites in U.S. courts under the Wire Act sending one, Jay Cohen to prison, for 21 months after he voluntarily returned to the United States. Cohen thought that the U.S. laws didn’t apply to online gambling hosted in Antigua and said to himself “”No judge is going to let this stand.” (See Paul Blustein, “Against All Odds,” The Washington Post, 4-Aug-06 p. D1). Instigated by Cohen upon his release from prison Antigua filed a trade complaint against the U.S. with the World Trade Organization. The U.S. argued that its prosecution of online gambling sites was necessary to protect public morals. Antigua countered that certain types of online gambling–on horse racing and some state lotteries–is legal in the U.S. and that its selective prosecution of Antiguan gambling sites violated the International trade principle of “national treatment,” i.e., the U.S. can’t limit trade in Antigua that is legal in the U.S. If the U.S. wants to prosecute Internet gambling in Antigua then it must ban all Internet gambling in the U.S. The WTO agreed with Antigua’s argument in 2004 and again, although less broadly, on appeal in 2006. The 2006 ruling was marked by simultaneous press releases from the U.S. and Antigua, each claiming “we won!” The question was what the WTO would do to enforce its ruling.

The WTO’s solution, described in these articles, is to allow Antigua to violate U.S. copyright and trademark laws up to a value of $21 million–which of course makes no sense at all. Antigua’s recourse for the U.S. government’s violation of International trade treaties is to pirate $21 million from the pockets of private companies. It’s as if, in an eminent domain case, a court agreed that the city didn’t pay you enough for taking your property and allowed you to loot your neighbor’s property in compensation. The ruling will be impossible to enforce. How should one value acts of piracy? Using the RIAA’s math ($150,000 per incident of copyright infringement) Antigua would even the score by downloading 140 Celine Dion songs that would cost $138.60 on iTunes. As my correspondent said “I just don’t understand why copyright holders would be the ones who are more or less punished because of a Government decision. It seems the WTO thinks two wrongs make a right.”

NETeller Exits U.S. Market

Writing here yesterday of the arrest of the founders of Internet-gambling-payment processing company NETeller, I asked what would happen to the company. NETeller announced that it is dropping its U.S. Internet gambling services, “wiping out over 65 percent of its business” according to this Reuters story. NETeller’s explosive growth slowed after the U.S. passed the Unlawful Internet Gambling Enforcement Act (UIGEA) last October 13. NETeller issued a statement saying its “withdrawal from the U.S. market . . . is the culmination of months of careful planning” spurred by concerns about the regulatory environment in the U.S. See here and here for posts about the UIGEA and its effect on the market.
My understanding is that NETeller maintains accounts for Internet gamblers. Has NETeller started returning that money to its owners? Does anyone know?

Neteller Founders Arrested

The United States this week arrested John Lefebvre and Stephen Lawrence, the founders of Neteller PLC, for conspiring to transfer funds to promote illegal gambling in violation of 18 U.S.C. s 1956(a)(2)(A). (See SiliconValley.com article and the criminal complaint.) Founded in 1999 and based in the Isle of Man, Neteller is a payment intermediary, a “virtual wallet,” establishing accounts for online gamblers and transferring money for wagering to Internet gambling sites. Referring to data in the prospectus for Neteller’s $70 million initial public offering in 2004 and Neteller’s 2005 annual report, the complaint alleges that Neteller derives more than 95% of its revenues from money transfers connected to gambling, that in 2004 Neteller processed $3.4 billion in transactions in 2004 and provided access to more than 80% of online gaming merchants worldwide, that in 2005 Neteller processed over $7.3 billion in financial transactions, had $172.1 million in revenues, and earned $91.5 million in net profit, and that in the first six months of 2006 Neteller processed $5.1 billion in financial transactions. Lefebvre and Lawrence, both Canadian citizens, were arrested in Malibu and the U.S. Virgin Islands, respectively. They could face up to 20 years in prison.

Their arrests may take Lefebvre and Lawrence out of the picture, but what will happen to Neteller?

Online Gaming Smorgasbord

The Unlawful Internet Gambling Enforcement Act has created interesting ripples. Before the recent election there was speculation that the Republican-sponsored Act, which imposes civil and criminal penalties on financial institutions that process transactions with online gaming sites, could affect the fortunes of some house races. “‘I’ve been a loyal Republican for over 30 years, and I’m quitting the party I once loved,’ said Jim Henry, 55, who lives outside San Francisco. ‘Not because of the Mark Foley scandal or Middle East policy. But because the Republican Party wants to stop me from what I love to do: play poker over the Internet.'” The Republicans, of course, lost the control of both houses of Congress, although I’ve read nothing that suggests opposition to the Act materially affected the outcome. Reactions to the Act underscore a split in Republican voters, between religious conservatives who oppose gambling on moral grounds and libertarians who object to government regulation of a private recreational activity.(1)

Since President Bush signed it into law on October 13 the Act has had serious financial consequences for online gaming companies. Traffic to Internet gaming sites by U.S. residents dropped 56% in the month following the Act’s passage and companies such as Sportingbet PLC (60% U.S.-based business) and Party-Gaming PLC (80% U.S.-based business). Investors sold off shares of publicly traded gambling companies; PartyGaming PLC saw more than half of its market capitalization disappear (£2 billion), Sportingbet PLC lost £500 million, and other publicly-trade companies experienced major losses.(2) Companies like PokerStars continue to operate, offering online poker games that they argue are games of skill, not chance, and therefor outside the Act’s reach.(2)

Meanwhile, BetOnSports PLC settled a civil lawsuit filed by the U.S. Attorney in St. Louis by agreeing (a) not to take any bets from U.S. residents, (b) to take out advertisements in U.S. newspapers telling readers that online gambling is illegal in the United States, and (c) to establish a toll-free number to advise customers how to obtain refunds of wagers placed before the suit was filed. BetOnSports, which did not admit any wrongdoing in settling the case, said it plans to concentrate its business on the Asian market. BetOnSport’s CEO David Carruthers, who was arrested in July along with other BetOnSports employees for conspiracy, fraud, and racketeering charges, still faces criminal charges and is in custody in St. Louis.(3)

The U.S. has also stepped-up enforcement of existing criminal statutes. One week ago law enforcement officials announced the prosecution of a “billion-dollar-a-year gambling ring,” charging 27 people with “enterprise corruption, money laundering, and promoting gambling.” The gambling ring allegedly centered on a web site through which bettors, supplied with a secret code, could track bets placed with bookies on football, baseball, basketball, and other sports. Police say that defendant James Giordino, the putative mastermind, ran the gambling operation from a laptop that he never let out of his sight–until he left it behind in his hotel room while attending a wedding on Long Island in 2005. Police hacked into the computer (presumably subject to a warrant) and discovered information that led to the recent arrests. Prosecutor seek forfeiture of $500 million in assets.(4)

  1. Adam Goldman, Did Republicans overplay their hand with the anti-Internet gambling bill? FindLaw, 2-Nov-06
  2. Sean F. Kane, New Legislation Forces Gaming Sites to Decide When to Hold ‘Em and When to Fold ‘Em, Internet Law & Strategy, 3-Nov-06; Associated Press, Traffic to online gambling sites drops in wake of new U.S. law, SiliconValley.com, 14-Nov-06
  3. Associated Press, U.S., BetOnSports Settle Civil Case, 10-Nov-06, The Wall Street Journal; CBS/AP, 11 Charged in Web Gambling Crackdown, CBSNews.com, 18-Jul-06
  4. Associated Press, Criminal charges brought over online gambling, MSNBC.com, 15-Nov-06

Prohibition? What was Prohibition?

On October 13 President Bush signed into law the Internet Gambling Enforcement Act (“IGEA”), which prohibits the use of checks, credit cards, and electronic fund transfers for online gambling transactions. The IGEA’s sponsor was Virginia Republican Congressman Robert W. Goodlatte. The law puts the onus for enforcing its restrictions on banks and credit card companies. Congress attached the IGEA to port-security bill legislation to ensure its passage. SiliconValley.com reported on October 13 that immediately in the wake of the IGEA’s signing, British-based gaming companies Sportingbet PLC and Leisure & Gaming PLC sold their U.S. operations–for $1.00.

Will the IGEA be effective? A Washington Post article on the bill’s signing reported that 23 million Americans wagered approximately $6 billion online last year. The IGEA won’t make those gambling urges and that river of cash go away. If history is any guide they will go underground. Can we expect new back-channel methods to arise to process online wagering transactions, ones that hide the identities of the parties and shield the nature of their payments? Yes, we can, if history is any guide. But why should our elected representatives study history?

Plaintiff: I gambled and lost

In its chapter on contract legality the textbook we use in the business law class discusses the case of Soheil Sadri. Sadri went to Las Vegas, gambled, lost, and gave the casino a check for $22,000 to cover what he owed. He then returned to California, stopped payment on the check, and was sued for the underlying debt to the casino. (Note the use of the passive voice in the preceding sentence–it contains a clue.) A California Appellate Court ruled for Sadri, holding that a contract for payment of gambling debts violated California public policy and was void.

When I mentioned the case today a student asked why the lawsuit was in California, with its anti-gambling policy, instead of Nevada. Here’s why: The plaintiff was not the casino to whom Sadri wrote the check. The casino assigned its breach of contract claim against Sadri to a collection agency based in Sacramento, California. Creditors sometimes sell claims for money owed at a discount to their face value. The creditor gets ready cash without the risk, expense, and delay of a lawsuit; the collection agency gets to keep whatever it collects from the debtor–which, if it discounted the purchase price correctly, is more than it paid for the claim. The collection agency sued Sadri in California because it was home to both Sadri and the collection agency.

Could the agency have sued Sadri in Nevada? Yes, but to hear the lawsuit the Nevada court would have to determine that it could exercise long-arm jurisdiction over Sadri in Nevada. Since the basis for the suit was a promise Sadri made to a Las Vegas casino to pay $22,000 the Nevada court should have been able to exercise long-arm jurisdiction and hear the case. Would Sadri have lost at trial in a Nevada court? Probably. The reported opinion does not indicate that Sadri had any basis to contest the debt in Nevada.

A judgment for the collection agency in Nevada would not necessarily spell the end of the legal wrangling. If Sadri refused the collection agency’s request to pay the damages awarded by the Nevada court, the collection agency would have to enforce the judgment against Sadri in California. Under the Full Faith and Credit Clause of the U.S. Constitution a California court must enforce a valid judgment obtained in the courts of another state, even if it violates California public policy. How, then, can we explain the result in this case? The answer is that the collection agency sued Sadri in California to enforce a Nevada cause of action, not a judgment of a Nevada court, and the Full Faith and Credit Clause does not require a state to honor a cause of actions of another state that violates its own public policy.

A final note: given the importance of the gaming industry to Nevada’s economy, we might expect Nevada to have protected the right to sue in its courts to enforce gambling debts for many years. It is surprising to learn–I was surprised, anyway–that Nevada has had a statute allowing state court lawsuits to enforce gambling debts only since 1983.

See Metropolitan Creditors Service of Sacramento v Sadri (15 Cal. App. 4th 1821, 1993 Cal. App. LEXIS 559, 19 Cal. Rptr. 2d 646 Court of Appeal of California, First Appellate District, Division Five, 1993)