(Originally released October 28, 1998)
According to a National Gambling Impact Study Commission (NGISC) report1, there are currently (as of October 1998) more than 180 web sites that offer some form of gambling, including on-line casinos, lotteries, bingo games, sports books and sites specializing in horse and dog racing. Experts estimate that by the year 2000, Internet gambling will be a $10 billion industry. The rapid growth the industry is experiencing is due to many factors, including relatively low capital requirements, the potential availability of very large profit margins, and increasing consumer demand.
While gambling is and has been completely legal in many countries, in the United States, the industry has historically been highly regulated. The combination of this highly regulated activity with the largely unregulated Internet has created a unique challenge for legislators, law enforcement officials and businesses. Gambling has historically been regulated by the states; however, this new medium which traverses state as well as national boundaries presents unusual difficulties for law enforcement and regulation officials.
What are the odds that the state and federal governments can effectively control this rapidly growing industry? Some officials are trying to curb the Internet gambling activities by applying current anti-gambling legislation. Others, including some members of Congress, are working to pass legislation that would ban Internet gambling in the United States. I will address the major issues surrounding the application of current law to these on-line gaming activities, as well as proposed state and federal legislation. I will then discuss the recent indictments of web site operators and the potential effect these indictments will have on the industry. Finally, the prospects for future regulation of the Internet will be addressed.
I. Does The Operator Of An Internet Gambling Site Based In Nevada Or Offshore Violate State And/Or Federal Criminal Code If U.S. Residents Attempt To Place Bets Through The Site?
To answer this question, the issue of whether the court in the forum state may assert personal jurisdiction over the operator must first be addressed. If jurisdiction is confirmed to be proper, the question of whether the web site operator's actions violate the relevant criminal code can then be analyzed.
A. Jurisdiction and the Internet
The power of any court to hear and adjudicate disputes is dependent upon its ability to exercise jurisdiction over the parties to the dispute. In order for a court to assert jurisdiction over a web site operator in Nevada or offshore, the court must find that the operator established minimum contacts with the forum state and purposely availed itself of the laws of that state. Although the legal framework courts have applied to resolve jurisdiction questions has been in place for years, proving that an out-of-state defendant has established the requisite minimum contacts in the forum state has often been complicated. The addition of the Internet to this equation makes the question even more complex.
Courts began addressing the issue of jurisdiction and the Internet only a few years ago. As is by now expected, the jurisprudence, still in its development stage, has been varied. The following is a brief review of the relevant case law prior to this year as well as a summary of cases decided thus far in 1998.
1. Case Law Developments: Pre-1998
a. On-line contractual relationships: purposeful availment.
In January 1997, while many courts were struggling to decide whether electronic contact with a forum state alone might be sufficient contact for a court to assert jurisdiction, the U.S. District Court for the Western District of Pennsylvania established that electronic contracts almost certainly would be. In Zippo Manufacturing Co. v. Zippo Dot Com,2 subscribers to the defendant Internet news service who resided in Pennsylvania completed an online application and paid for that service by credit card over the Internet or telephone. The court, in holding that this conduct constituted purposeful availment commented, "traditionally, when an entity intentionally reached beyond its boundaries to conduct business with foreign residents, the exercise of specific jurisdiction is proper. Different results should not be reached simply because business is conducted over the Internet."3
b. On-line advertising contacts alone not necessarily sufficient.
In September 1997, the Second U.S. Circuit Court of Appeals confronted the personal jurisdiction issue head-on in Bensusan Restaurant Corp. v. King4 when it held that the posting of a Web site by a party based in one state does not automatically give a court in another state jurisdiction over that party.
This case represented the first time a court of this stature answered the important question of whether the mere posting of a web site, in and of itself, subjects the operator of the site to the risk of being called into court in virtually all of the 50 states, regardless of whether the operator made any sales or transacted any significant business there. Before Bensusan, a surprising number of voices could be heard claiming that a Web site operator should reasonably expect to be sued wherever the Web site could be accessed by cyber-surfers - that is, anywhere in the country. The Bensusan court, however, found that asserting jurisdiction over the defendant, a Missouri resident who operated a small club under the same name as that operated by the plaintiff in New York, would violate due process.
In December of last year, the 9th Circuit, whose territory includes Silicon Valley, reached a similar result for similar reasons in the Cybersell case.5
2. Case Law Developments: 1998
This year, when determining whether jurisdiction is proper, courts have been analyzing the interactivity of the particular web site and what, if any, non-Internet based contact the defendant had with the forum state. Following the analysis of the Zippo court, many courts now categorize web sites as
(i) actively doing business over the Internet,
(ii) passively advertising or providing information, or
(iii) allowing users to exchange information with the host.
If the web site involves interaction between the host and the user, the courts then analyze the level of this interactivity and the commercial nature of the communication in determining whether jurisdiction is proper.
a. Passive web sites.
In cases involving purely passive advertising sites, courts have generally followed the decision of the Bensusan court. For example, in Hornell Brewing Co. v. The Rosebud Sioux Tribal Circuit6, a suit had been brought in the tribal court against the brewery claiming that it defamed the memory of Crazy Horse by associating his name with alcoholic beverages. The tribal court argued that the brewery's advertising outside the Reservation and on the Internet directly affected their members. The Eighth Circuit held that the mere operation of a web site that could be accessed in the Reservation did not provide sufficient contact on which to base jurisdiction. The court observed that "the Internet is analogous to the use of the airwaves for national broadcasts over which the Tribe cannot be said to constitute non-Indian use of Indian land."7
Similarly, the U.S. District Court for the District of New Jersey, in Green v. William Mason & Co.8, held that the defendant's passive advertising web site was not sufficient contact to support the exercise of personal jurisdiction. In so finding, the court reasoned that the defendant's web site, which included an 800-number, was not equivalent to the defendant maintaining a physical office in New Jersey.9
b. Active web sites.
At the other extreme, the U.S. District Court for the Western District of Texas, in Thompson v. Handa-Lopez, Inc.10, held that jurisdiction was proper when the parties actually contracted through the web site. The plaintiff in Thompson brought suit to recover winnings from a California web site that offered casino games. The defendant not only advertised its on-line casino on the Internet, but actually entered into a contract with the plaintiff knowing that it would receive commercial gain from such a contract. The plaintiff played the games while he was physically located in Texas and any winnings were to be sent to him in Texas. The court reasoned that this contract provided sufficient contact with the forum state to make the assertion of jurisdiction proper.
c. Where should the line be drawn?
When such an explicit contractual relationship does not exist between the user and the web site operator, the courts' opinions have not been as consistent. Some examples follow.
i. Jurisdiction is proper when the web site offers direct communication with host personnel through the web site.
The plaintiff in Mieczkowski v. Masco Corp.11 brought a wrongful death suit against the manufacturer of a bed. The defendant manufacturer's web site allowed customers to shop on-line and to communicate directly with sales people via the site. The U.S. District Court for the Eastern District of Texas concluded that the manufacturer's web site did more than just advertise and held that the web site, combined with the defendant's traditional business contacts with Texas were sufficient contact to support the court's jurisdiction.
ii. Jurisdiction is proper when the web site offers on-line reservations.
In Parks Inn International, Inc. v. Pacific Plaza Hotels12, defendants advertised their hotel on two web sites, which provided the hotel's address, telephone number and fax number information. The web sites also included a reservation form that could be filled out by the user and processed over the Internet. The U.S. District Court for the District of Arizona held that jurisdiction over the defendants was proper because (i) the sites were interactive, (ii) at least seven Arizona residents had actually made reservations via the web sites, and (iii) the defendants had solicited Arizona business through other channels.
iii. Jurisdiction may be proper when the site offers communication via e-mail.
In Vitullo v. Velocity Powerboats, Inc.13 the U.S. District Court for the Northern District of Illinois asserted jurisdiction based on defendants' (i) sale of powerboats to a dealer in Michigan who in turn showed them in Chicago and (ii) maintenance of a web site in which users were able to communicate with the defendant through electronic mail.
The following month, the same court, in Scherr v. Abrahams14 , found that the inclusion of an in-state resident on an out-of-state defendant's e-mail distribution list did not provide a sufficient basis on which the court could assert jurisdiction. The court reasoned that although the defendant distributed his satire publication to some Illinois residents via electronic mail, the level of interactivity was low - "the only exchange is the listing of a person's e-mail address for an electronic copy of the newsletter"- and no money was exchanged, therefore, jurisdiction was not proper.
iv. Jurisdiction is not proper where the site merely includes a posting of toll-free number or e-mail address.
The U.S. District Court for the District of New Jersey, in Osteotech, Inc. v. GenSci Regeneration Sciences and GenSci Labs, Inc.15 , found that a web site that could be accessed in New Jersey was not interactive enough for the court to assert jurisdiction over defendants. The court stated, "that a phone number or e-mail address may be listed on the web site encouraging interested persons to contact the company for more information has no more of an impact on any particular forum than a website without such information…"16
v. Example on point: advertising an upcoming Internet gambling site.
In the only case relating directly to the issue of potential violation of state statutes by a web site gaming operator, State of Minnesota v. Granite Gate Resorts17, the Supreme Court of Minnesota affirmed without opinion the Court of Appeal's assertion of jurisdiction. The defendant in this case advertised that its future on-line betting service was legal. The web site provided information about the gambling service and offered the opportunity to be included on a mailing list. The State alleged that this advertisement constituted unfair trade practice and consumer fraud.
The court reasoned that although the defendant claimed that its web site was merely passive advertising, the defendant's intent was clearly to advertise to users worldwide. "Appellant's clear effort to reach and seek potential profit from Minnesota consumers provides minimum contacts of a nature and quality to support a threshold finding of personal jurisdiction."18
This web site is distinguishable from that in Bensusan because this site had in fact, been visited by at least 248 Minnesota residents within a two-week period and at least one such resident was included on the defendant's mailing list. 19
B. Violation of current state law
Although licensed gambling in some form is legal in 48 states, casino gambling is legal in less than twenty states. The state gambling statutes generally make it unlawful to operate a gambling business or device. Some statutes make exceptions for lotteries, riverboat gambling or horseracing.
States could potentially charge out-of-state web site operators for violation of these anti-gambling laws. Some states are also applying their current consumer protection laws to stop the operation of gambling sites that are accessible to their citizens. Still other states have attempted to control the industry more indirectly.
1. Example of the application of current state gambling laws.
The Illinois gambling statute20 includes provisions making it illegal to make wagers, operate a gambling device, knowingly possess money received in the course of a bet or wager, setting up or promoting a lottery, or knowingly transmitting information as to wagers. To prosecute a web site operator under the statute, the state must show that a web site operator performed one of those acts in Illinois.
Commentators argue that a wager is made where the server is located and where the wager is accepted by the on-line casino. The web site operator is not transmitting the information to the user; the user is traveling into the operator's jurisdiction. Support for this argument comes from court opinions that have confirmed that like a contract, a wager is formed where it is accepted21. In those jurisdictions, a wager placed over the Internet might be considered to have been made at the Nevada or offshore host computer and not in the forum state. Theoretically, then, no activity in violation of the state statute would have taken place.
Others argue that the situs of a wager is the place where the end-user is located. This argument is supported by courts' interpretations of the state statutes as prohibiting the wagering by "a person in this state" and not the entering "into an agreement in this state."22 In those jurisdictions, the bettor and the web site operator could be considered to have violated the statute.
Finally, some would like to consider that a wager on the Internet takes place in cyberspace which is a completely separate venue that should be subject to its own form of regulation. Although it is possible that someday, the Internet will be regulated by a different body of law than that of the physical world, that someday is not in the immediately foreseeable future. Therefore, we must consider the possible consequences of applying existing laws to business conducted via the Internet.
2. Attempted state enforcement against on-line gaming operators.
Minnesota and Missouri have been the first states to challenge on-line gambling operators in court. The first criminal charges challenging this industry came from a grand jury in Missouri. Early in 1997, a Missouri court barred Interactive Gaming & Communications from accepting any bets that originated in Missouri. An undercover agent later placed a bet via the company's site. The Attorney General of Missouri sought an indictment against the company and its president. In June of 1997, a grand jury indicted Interactive Gaming charging them with setting up a gambling device.
In Missouri v. UniStar Entertainment23 , the state has charged the defendants with violations of the Missouri Merchandising Practices Act and gaming laws. Specifically, the claim asserts that the defendants have misrepresented to Missouri citizens that Internet gambling is legal in Missouri. In January of this year, the state obtained a temporary restraining order prohibiting the defendants from (i) offering any illegal gambling in Missouri, (ii) representing that the games are legal in Missouri, or (iii) concealing the illegality of the games.
In the Granite Gate Resorts case24, the state of Minnesota claimed that the on-line advertising in Minnesota indicating that on-line gambling was lawful constituted false advertising, deceptive trade practice and consumer fraud. Now that the assertion of jurisdiction has been affirmed by the Minnesota Supreme Court, the state will now have to prove that Granite Gate Resorts, in the course of business, "…(5) represent[ed] that goods or services have sponsorship, approval, characteristics, …that they do not have" or that Granite Gate Resorts has sponsorship, approval, status, affiliation, or connection that it does not have."25 To the disadvantage of the defendant, Minnesota courts construe consumer protection statutes liberally in favor of protecting consumers.26
3. Alternative state action aimed at controlling Internet gaming.
Florida has actively worked to curb wagering over the Internet in a more non-traditional manner. Florida negotiated an agreement with Western Union whereby Western Union agreed not to transfer funds from Florida to offshore Internet companies. This agreement likely will eliminate a widely used method by which individuals otherwise might place bets on-line.
C. Violations of Current Federal Law
Another concern of a web site operator in Nevada or offshore is whether by operating the site he is violating U.S. federal law. The federal government is currently interpreting existing laws to prohibit gambling over the Internet. The Wire Act, the Travel Act and the Crime Control Act may all be interpreted as to expose such a web site operator to risk of prosecution if a bet is accepted from a user in the U.S.
1. The Wire Act
18 U.S.C. §1084(a) prohibits someone in the business of wagering or betting from knowingly using a wire communication to transmit bets or wagers or information to assist in the placing of bets or wagers in interstate or foreign commerce. A violator of this statute would face fines and possible imprisonment.
The following are possible interpretations of the major provisions of the Act as it may apply to Internet gambling.
a. "Engaged in the business of betting or wagering."
The Act subjects those "engaged in the business of betting or wagering" to liability; therefore, the Act would apply to an operator of an on-line gaming site. A bettor or service provider however, would not be subject to such liability.
b. "Using a wire communications facility for the transmission of…"
Because Internet communications are transmitted via telephone lines, the operation of a web site could likely be considered use of wire communication. Arguably, however, the operation of a web site does not constitute "transmission" of information under the Act because the site merely receives bets, it does not "transmit" them. In cases involving betting over telephone lines (for which the Act was passed), courts have been split in their interpretation of whether receipt of bets is considered "use for the transmission" of bets or wagers or information.
i. Receiving information does not constitute "transmission."
The Seventh Circuit Court of Appeals, in U.S. v. Stonehouse27 held that "transmission" as used in the Act is limited to sending and does not encompass receiving. Similarly, the U.S. Supreme Court affirmed a holding of the Northern District of Illinois, that "transmission" of bets or wagers means sending, but does not include receiving of information.
ii. Receiving information can be construed to be "use in the transmission."
The Eighth Circuit, in U.S. v. Reeder28, held that the defendant's obtaining game scores for various sports could be considered as involving "transmission" despite the assertion that "transmission" as used in the statute was not intended to include the receipt of information. Similarly, The Tenth Circuit, in U.S. v. Tomeo29, held that the acts of a defendant who only received bets constituted a crime within this section proscribing the use of telephone for the transmission in interstate commerce of bets or wagers or information assisting in the placing of bets or wagers.
Finally, the First Circuit, in Sagansky v. U.S.30 held that §1084(a) does not "punish the mere transmission of bets or wagers, but rather the 'use' of interstate wire communication facilities for their transmission." 31 The court went on to explain that when a defendant offers that he is willing to make bets over these communication lines and then does accept offers of bets over the telephone as part of his business, he has 'used' the facility for the transmission of bets or wagers.
c. Exception to the general prohibition.
The Wire Act does provide an exception for communication from a state or foreign country where gambling is legal to another state or foreign country where gambling is legal. Therefore, a host offshore whose site was accessed by someone using the Internet in Nevada could not likely be found to have violated this statute.
d. Discontinuance of wire communications services.
Section 1084(d) of the Wire Act allows the government to instruct common carriers to discontinue service to any entity that is in violation of the Act. The carrier will not be held liable for any damages for any such act done in compliance with the notice received from the government agency. This section only applies to carriers licensed by the Federal Communications Commission, however. Therefore, because Internet Service Providers (ISPs) are not currently required to be licensed by the FCC they are not subject to this provision.
Although no court has yet adjudicated the issue of violation of this statute by an Internet gaming site operator, charges have been filed. In March of this year, fourteen people were charged with conspiracy to violate the Act.
2. The Travel Act
"Whoever travels in interstate or foreign commerce or uses the mail or any facility in interstate or foreign commerce, with intent to-
(1) distribute the proceeds of any unlawful activity; or
(2) commit any crime of violence to further any unlawful activity; or
(3) otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity,
and thereafter performs or attempts to perform--
(A) an act described in paragraph (1) or (3) shall be fined under this title, imprisoned not more than 5 years, or both…"32
The statute includes in its definition of "unlawful activity" any business enterprise involving gambling in violation of state or federal law. The language of the Travel Act, which was intended to punish organized criminals, is much broader than that of the Wire Act and the government could attempt to use it to prosecute U.S. citizens who operate Internet gaming sites offshore.
This Act could also potentially be used to prosecute individual gamblers. Enforcement, however, would likely prove too costly and time consuming. The difficulty in obtaining permission to conduct wire tapping activities, combined with the anonymous nature of the Internet will make identifying and stopping individual gamblers quite difficult.
3. Interstate transportation of wagering paraphernalia.
Section 1953 of Title 18 of the U.S. Code prohibits the transport in interstate or foreign commerce of devices or paraphernalia intended or designed for use in gaming activities.33 Some commentators have suggested that the government could apply this section in efforts to prosecute web site operators if an operator ships software to customers via interstate commerce. In fact, the 9th Circuit has held that a computer disk containing a program to be used to record and analyze bets on sporting events was a "device" within the meaning of the statute.34
The government might also argue that the web site itself is a device being transported in interstate commerce.
4. The Crime Control Act.
This Act provides that whoever conducts, manages, supervises, directs, or owns all or part of an illegal gambling business can be fined or sentenced to up to five years in prison, or both.35 "Illegal gambling business is one that (i) violates a state law where it is conducted, (ii) involves five or more people, and (iii) continues operation for more than 30 days or grosses $2,000 in a single day. Because this statute requires that the business violate state law, law enforcement officials will face the same difficulties in applying the state laws as were discussed earlier in this article.
Federal law enforcement officials may not go out of their way in the near future to prosecute web site operators by applying all of these current laws. It is possible that they will instead wait while Congress and the states consider legislation that applies directly to Internet gambling and the NGISC concludes its study of the industry and its potential impacts on the economy and society.
(Continue to Part 2)
©Michael J. Wagner 1998, all rights reserved.
1Advisory Panel Hears Conflicting Testimony on Feasibility, Need for Banning Net Gaming, 3 BNA Electronic Commerce & Law, Number 22, 1 (June 3, 1998) citing NGISC report An Overview of Internet Gambling.
2 952 F.Supp. 1119 (W.D. Pa. 1997).
3Id. at 1124.
4126 F.3d 25 (2d Cir. 1997).
5Cybersell, Inc. v. Cybersell, Inc. et al, 130 F.3d 414 (9th Cir, 1997).
6133 F.3d 1087 (8th Cir. 1998).
7Id. at 1093.
8966 F. Supp. 394 (D. New Jersey 1998).
9Id. at 399.
10998 F.Supp. 738 (W.D. Texas 1998).
11997 F.Supp. 782 (E.D. Texas 1998).
121998WL 260255, *1 (D. Ariz. 1998).
131998 WL 246152, *1 (N.D. Ill. 1998).
141998 WL 299678, *1 (N.D. Ill. 1998).
151998 WL 278416, *1 (D. New Jersey 1998).
16Id. at *8.
17568 N.W.2d 715 (Minn. Ct. App. 1998).
18Id. at 720.
19Id. at 718.
20720 Ill. Comp. Stat. Ann. §5/28-1 et seq. (West 1991).
21U.S. v. Calamaro, 354 U.S. 351, 355 (1957).
22Martin v. United States, 389 F.2d 895, 897 (5th Cir. 1968).
23Mo CirCt, No. CV-198-7CC, 1/29/98, as cited in Missouri Attorney General Obtains Order Blocking Indian Tribe's Online Gambling, 3 BNA Electronic Commerce & Law, Number 6, 1 (February 11, 1998).
24568 N.W.2d 715, 717 (Minn. 1998).
25Minn. Stat. Ann. §325D.44 (West 1997).
26State of Minnesota v. Alpine Air, 490 N.W.2d 888 (Minn. Ct. App. 1992), aff'd 500 N.W.2d 788 (Minn. 1993)
27452 F.2d.455 (7th Cir. 1971).
28614 F.2d 1179 (8th Cir. 1980).
29459 F.2d 445 (10th Cir. 1972).
30358 F.2d 195 (1st Cir. 1966).
31Id. at 200.
3218 U.S.C.A. §1952 (West 1990)
3318 U.S.C.A. §1953. (West 1979)
34U.S. v. Mendelsohn, 896 F.2d 1183 (9th Cir. 1989)
3518 U.S.C.A. §1955 (West 1994)
*Special thanks to Annette Lesieutre for her helpful assistance in the research for and preparation of this paper.