An investigation by the U.S. Departments of Justice commencing in 2003 quelled a large amount of online gambling advertisements across American media through the rest of the year and well into 2004. The DOJ struck first on June 11, 2003 with a "public service" letter to the National Association of Broadcasters and other major media outlets, warning them that online gambling is illegal in the United States. The letter also threatened that any company that runs advertisements for such services could be held accountable to charges of aiding and abetting an illegal activity.
In September 2003 the DOJ issued subpoenas to a number of media agencies and other companies that do business with online gambling companies, ordering individuals from media companies to testify before a grand jury and to turn over all commercial and financial information related to advertisements for online casinos and sports books.
Although the legality of the DOJ's actions is suspect to many involved in the industry, they were no doubt effective in at least one regard: Most major television networks, radio stations and Internet portals and search engines ceased running online gambling advertisements shortly thereafter.
The DOJ in April 2004 confiscated $3.2 million from Travel Channel, which months beforehand canceled an advertising contract with ParadisePoker.com for fear of facing aiding and abetting charges. Instead of returning the sum owed to ParadisePoker in unaired commercial time, the network sought guidance from the DOJ as to whether returning the money was legal. Claiming that it was not, the DOJ took the $3.2 million for itself. In September 2004, the DOJ reached a $158,000 settlement with St. Louis sports radio station KFNS for airing advertisements for Internet gambling providers. Since the incidents in '04, there had been little indication as to whether the grand jury investigation was still ongoing. The only sign that the DOJ was still concerned about the issue came in the form of reports in the summer of 2005 that Esquire magazine had been subpoenaed for displaying blatant eight-page ad inserts for Bodog.com.
It began to appear to many that the sole purpose of the DOJ's actions might have been to frighten advertisers into no longer accepting I-gaming ads, and so having achieved that for a period of time, the DOJ moved on to other matters. But the I-gaming advertisements eventually returned (although as a safety precaution, most ads promote dot-net "educational" sites rather than dot-com gambling sites).
It therefore came as quite a shock to many in the industry to learn last week that Sporting News had settled a $7.2 million case with the DOJ. Also shocking is that according to Catherine Hanaway, U.S. attorney for eastern Missouri, the Sporting News case is only one of many media companies that have settled with the DOJ, perhaps indicating that the DOJ hasn't been asleep for the last two years after all.
The task now is to determine how serious a threat the DOJ now poses to the vitality of online gambling companies who deal in the U.S. market.
For guidance, we asked some of the country's foremost interactive gaming law experts to put it all into context for us.
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"The action of the Department of Justice appears to correspond with the notion of 'low hanging' fruit."
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Anthony Cabot: The action of the Department of Justice appears to correspond with the notion of "low hanging" fruit. The target in this case was the Sporting News, which is operated by Vulcan Sports Media, a company owned by the Microsoft co-founder Paul G. Allen. This is the same Paul Allen with ownership interest in both an NFL and NBA franchise. Whether the Department of Justice's position is right or wrong on its legal interpretation of gambling advertising becomes almost irrelevant in Sporting News' decision process involving whether to settle the dispute. Logically, money is less important than a finding of no criminal liability. The downside to the Allen Empire of criminal prosecution is a possible loss of the sports franchises, substantial public controversy and jeopardizing other privileged licenses. At the same time, even a sizable settlement would hardly even cause a ripple on the Allen pond. Thus, the nature and size of the settlement were not surprising.
At the same time, the Department of Justice was settling this case with the Sporting News, it vehemently (and successfully) argued for dismissal of the declaratory relief action brought by Casino City on the same basic issue. There, the DOJ sought to avoid a decision on the merits by arguing that Casino City failed to show that it had standing to challenge the advertising ban because it was not "subject to a credible threat of prosecution."
What makes Sporting News a credible target and Casino City an unwanted adversary is probably more about vulnerability than substance. Casino City showed that it was not only prepared, but anxious to get into a legal battle over the constitutional issues. In contrast, Sporting News had the money and motivation to get this sordid affair over quickly and without a finding of criminal liability.
If this reminds you of the schoolyard bully that takes the lunch money from the fat rich kid who can't fight back, it is no coincidence. The thing to watch is whether the government's appetite for more lunch money spurs additional settlements. Like any bully, however, it needs to be careful because sometimes looks are deceptive.
Anthony N. Cabot, a partner with the Las Vegas firm Lewis and Rocca, has practiced gaming law for over 23 years with an emphasis in traditional gaming law and Internet gaming, sweepstakes, and contests. Prior to joining Lewis and Rocca, Mr Cabot was a partner with Las Vegas-based Lionel Sawyers & Collins, where he chaired their gaming practice. He is the president and a founding member of the International Masters of Gaming Law Association as well as co-editor-in-chief of the Gaming Law Review and is on the editorial board for Gaming Research & Review Journal and Cyberlawyer. He is also the author of several reference books on gaming law and Internet gambling and serves as an adjunct professor at Boyd School of Law at the University of Nevada, Las Vegas.
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"The DOJ cannot be pursuing policy in the normal sense, for in relation to I-gaming, the United States still hasn't got one."
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Martin Owens: It's come to this: Attack the government, put your head down and charge like Casino City Press, and you'll be safe. Cooperate with the government, like the Sporting News, and you'll be fined millions. That's how bizarre and unpredictable the enforcement of American gambling law has become. An advertiser for this industry today is probably tempted to get his lawsuit filed against Uncle Sam first thing, and then get on with business. Where there is no safety, make your own.
We already know that the DOJ's campaign against I-gaming advertisers has little or no basis in statute or case law precedent, and may very well fly in the face of the 1999 Supreme Court decision in Greater New Orleans Broadcasting v U.S.. The DOJ itself has demonstrated that they recognize this lack. Why else did they duck away from Casino City's court challenge? But if they recognize it, why continue the beating up of I-gaming's advertisers, essentially exercises in administrative bullying?
The DOJ cannot be pursuing policy in the normal sense, for in relation to I-gaming, the United States still hasn't got one. Even after 10 years, the basic question of where the gambling take place is still not settled; there is still no American statute or case that squarely addresses the issue. But as the British have shown with their new Gaming Act, it could easily be done. Likewise, the other fundamental issues affecting this industry--where I-gaming fits under the Commerce Clause, the role of the various state regulations in a global market, free speech and privacy--all of them remain unaddressed in anything like a serious manner.
Such policy, as there is, is being made at the state level. Driven by the need for revenues in a very competitive market (48 states, after all, now depend on gambling proceeds as part of their permanent revenue), state governments are experimenting with I-gaming facilities for lotteries and race track OTB. At least one state has even considered licensing online poker. Thiss means that the ongoing campaign against the industry's advertising is a case of the right hand fighting the left. Federal prosecutors are attempting to intimidate and drive out the very people that the state governments are going to need, and soon, to help promote licensed operations!
What is the root of the continuing federal opposition to I-gambling, then, if even the states are coming into camp? With the departure of Attorney General Ashcroft, it ceased to be even a self-respecting crusade. It is now no more than a conditioned reflex: gambling is bad (well, gambling that government doesn't control, anyway), so beating up on it must be good. And it’s a handy scapegoat when the politicos are more than ordinarily in dereliction of duty. It is no accident that Senator Kyl and friends see the latest Washington scandals as a fresh opportunity to smite wicked I-gambling, not least because the uproar might serve to drown out other questions, more dangerous to the GOP's congressional edge.
It would be tempting to draw a comparison here between Jack Abramoff and the Department of Justice ( both shake down gambling related businesses for large sums of money, which then go to politicians)- but this is to digress. The question is, what can potential advertisers do when the situation is so muddled that cooperation is the surest way to punishment?
Where the government is in the wrong and knows it, honest people--and the Internet gambling industry is as honest as any--have only two choices if they want to stay in business. The first is to fight for what is rightfully theirs, and to raise very public hell about two-faced policies and abuse of power. The second is to migrate to friendlier locations, and find partners and backers abroad.
There is no possibility of I-gaming being stopped or kept out of the USA anymore. It only remains to be seen whether short-sighted, hypocritical prejudice and petty tyranny will keep I-gaming profits out of American hands.
Martin Owens is an attorney who specializes in the problems of operating gambling businesses online. Services emphasize strategic planning and preventive action in such areas as legal compliance and proper corporate structuring, as well as contracts, intellectual property protection, technology transfer, domain names, and the assorted other ramifications of operating online. Feel free to address questions and comments to mowens@trade-attorney.com.
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"The divide between reality and politics grows larger every day. One must question how much longer the United States government can pretend that the Internet gambling industry is nothing more than a widespread criminal operation and come to terms with the reality that this is a thriving business activity that is here to stay."
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Lawrence G. Walters: As news began to spread of the settlement between the United States Department of Justice and The Sporting News, sweat started to bead on the industry's collective brow. Just when advertisers thought it was safe to venture back into the shark-infested waters of United States’ advertising space, evidence reemerged of the federal "aiding and abetting" prosecution threat that was the topic of much discussion. . . years ago. In April, 2003, the Department of Justice circulated a letter to the National Association of Broadcasting, warning of a possible crackdown on Internet gambling advertising activities, using the federal aiding and abetting laws. It contended that all forms of online gambling are illegal, and any effort to promote or market those activities would be considered aiding and abetting illegal activity. (Correspondence from John G. Malcolm, Deputy Asst. Attorney General, Criminal Division, United States Department of Justice (06.11.03). A copy of the letter can be viewed at https://www.igamingnews.com/articles/files/NAB_letter-030611.pdf.) This not-so-subtle warning was followed by a round of subpoenas issued in connection with a Grand Jury investigation. This caused quite a stir in the industry at the time, but then…nothing happened. Well, almost nothing. Companies responded to the subpoenas, but months, and even years, went by without any indictments, settlements, or convictions. In April 2005, another subpoena was issued to Esquire Magazine as a result of its advertising of BoDog Poker. However, this was nothing more than a blip on the radar that quickly went away.
As time wore on, media outlets as a whole could no longer ignore the significant financial incentives associated with online gambling advertising, and thus became comfortable with the idea of advertising some form of online gambling activity--primarily involving play for free or dot-net informational Web sites. Just as some of those outlets began to flirt with the concept of full-blown dot-com advertising, attention has now quickly turned to the quiet resolution of a major federal case involving Internet gambling advertising activity.
The Sporting News has agreed to pay the government $4.2 million in cold, hard cash, and provide another $3 million in professionally produced public service spots directed at educating end users regarding the dangers of gambling online. In addition, it has agreed to turn over documents and other data relating to other potential violations of the law, and has agreed to assist in future criminal investigations. Of course, the principals of the company dodged a bullet, since nobody faced actual criminal indictment, and nobody is going to a federal penitentiary. However, a settlement of this stature is bound to raise some eyebrows, and result in some concern in the industry. Unquestionably, The Sporting News must have been worried about its potential legal exposure for aiding and abetting, or other criminal law violations, in order to agree to a settlement of this nature. That being said, the company has admitted no wrongdoing, and the government has not established that the company committed any crime, or other violation of the law in the course of its investigation, and settlement. However, the impact of this case is sure to be felt in various ways.
Initially, the existence of the advertising investigation in the Eastern District of Missouri is back in the forefront of the industry. It had been all but forgotten, dismissed, or written off as a bullying ploy until this recent settlement was announced. Now, it appears that at least one significant investigation was occurring, behind the scenes. That raises the question of how many more are pending? Will this be the first in a series of negotiated resolutions, prosecutions, or legal actions? Or is this an isolated incident, potentially marking the end of the entire investigation?
This settlement highlights the societal confrontation between government regulation and the online gambling industry. Large investment firms are considering placing their clients with publicly-traded Internet poker companies at the same time media outlets are being grilled for their association with this industry. The divide between reality and politics grows larger every day. One must question how much longer the United States government can pretend that the Internet gambling industry is nothing more than a widespread criminal operation and come to terms with the reality that this is a thriving business activity that is here to stay. For the present time, anyway, the legal issues pertaining to online gambling advertising remain as murky as ever. In fact, the wrong decision might cost you $7 million.
Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, www.GameAttorneys.com. He has been practicing for over 15 years, and represents clients involved in all aspects involved in the online gambling industry. Nothing contained in this article constitutes legal advice. Please consult with your personal attorney regarding specific legal matters. Mr. Walters can be reached at Larry@LawrenceWalters.com, or via AOL Screen Name: "Webattorney."