The Labels' New Suit Targets Internet Service Providers

On Aug. 16, 2002, 13 music labels, including giants Universal Music Group, Sony Music Entertainment and RCA Records, filed suit in Federal District Court for the Southern District of New York to compel four giant Internet service providers, AT&T Broadband, Cable and Wireless, Sprint Corporation and UUNet Technologies, to block American access to Listen4ever.com, an English-language, Chinese-based Web site that offers copyrighted songs free of charge (The New York Times, August 17, 2002).

The lawsuit invokes an untested provision of the 1998 Millennium Copyright Act that allows courts to order ISPs to take "limited steps" to block access to offshore Web sites that violate U.S. copyright laws. Although copyright law has not been an issue in online gambling, the labels' suit poses questions being asked by governments from Washington to Hong Kong that want to halt online gambling by their citizens. What can ISPs do to block access to Web sites somebody doesn't like? What can ISPs be compelled to do?

Although copyright law has not been an issue in online gambling, the labels' suit poses questions being asked by governments from Washington to Hong Kong that want to halt online gambling by their citizens.

The labels' lawsuit may provide some answers to these questions. If it does, it will have implications for many kinds of e-commerce, e-gambling among them.

Listen4ever.com is one of the rapidly proliferating Napster successor sites. Napster made music file sharing a global pastime. The recording industry went after Napster in U.S. courts and won, forcing Napster into bankruptcy. The victory did not discourage sharing music files over the Internet. As of the end of Q1 '02, sales of recorded music were down 9.4 percent; file sharing is the biggest reason why. The proliferation of offshore music sites means that the legal strategy the labels employed against Napster--going after the online music service--involves sharply rising costs for diminishing returns; there are too many music sites in too many countries (like China) that don't acknowledge the jurisdiction of U.S. courts to make the Napster strategy workable. After all, the labels put Napster behind bars, figuratively speaking, only to see their sales drop another 9 percent. That's a losing game.

So on Friday the labels shifted their attention to the Internet's backbone. David Farber, a computer scientist at Penn who was one of the Internet's architects, told The New York Times that it would be "relatively easy" for Sprint or AT&T Broadband to block Listen4ever.com's address "without disrupting other traffic." Web sites, of course, can easily change Internet addresses; if ISPs walk down a road that ends in a legal obligation to block sites in large numbers and police address holders on some government's ever-lengthening enemies list they would be incurring new, open-ended, and possibly uncontrollable costs.

This possibility goes back to a question that has been often asked but not yet answered: Is the Internet a common carrier? If it is, ISPs probably shouldn't be asked to do what the labels' new lawsuit seeks to compel them to do--block Internet addresses that provide services somebody somewhere doesn't think should be provided, like music file sharing or gambling. The Wire Act (18 U.S.C. § 1084) targets gambling operators who transact business over telephone wires, not telephone companies, largely because when it was enacted in 1961, telephone and other wire communications companies were protected by their status as common carriers.

The 1998 Millennium Copyright Act may have taken the Internet out of the common carrier category. That's the labels' argument: that ISPs, unlike telephone companies, can, under this recent federal law, be compelled to block traffic to Listen4ever.com. If the Southern District buys this argument, and if ISPs do, in practice, effectively block access to Listen4ever.com, the federal government, and by extension other governments, can ask courts and legislatures to compel ISPs to take similar steps against online gambling sites (or online sites of any other kind the governments in question don't approve of).

On the face of it, a Chinese music file-sharing service may seem to online gambling services a pretty remote concern, but what the Southern District decides to do about Listen4ever.com might have important consequences for them.

Governments are still adjusting to the Internet. The process will go on for years, perhaps for decades. In the global debate over online gambling, high-profile legislative prohibitions have gotten most of the attention. Some Internet gambling prohibitions have passed, like the one enacted in Hong Kong this spring. Others haven't, the innumerable versions of the Kyl and Goodlatte bills, circulating like unclaimed laundry in a perpetual motion washing machine, being a well-watched case in point. Observers keep expecting the washing machine to run down, but it may not matter.

Existing state and federal powers have been invoked to discourage the use of credit cards in online gambling, very effectively. It is unreasonable to expect relatively small and highly regulated companies like Harrah's Entertainment or Churchill Downs to jump into waters so murky in a legal sense that to mix a metaphor global giants like Citicorp and Wells Fargo fear to tread. This is readily understandable. Shareholders expect corporate executives to keep their feet firmly on the ground, not try to walk on water however clear. A subpoena issued by an angry attorney general is not something the CEO of a publicly traded corporation wants to see in his or her inbox, whether the corporation engages in financial services or casino gaming. Corporate subpoenas don't have to be upheld in court to be effective. They just have to make The New York Times.

What all this means is that the letter of laws like the Wire Act is beside the point. The point is government policy. In countries where e-gambling has been accepted as a fact of life and brought under the regulatory tent, as it is in the United Kingdom and much of Western Europe, publicly accountable corporations like Ladbrokes and William Hill will engage in it. In countries that can't make up their collective mind about online gambling, continuing uncertainty about its legality is enough to keep publicly accountable corporations out, no matter what courts decide laws like the Wire Act actually mean.

Regarded from this perspective, the debate over online gambling, and online file sharing, online pornography and even online sales of goods and services no one objects to in principle at prices that undermine national pricing and sales tax structures, takes on a different aspect. E-commerce is something new in the world. Its implications are only gradually becoming clear. As consumer behavior changes, in gambling, purchasing travel, listening to music and even forming personal relationships through the online dating services that are turning out to be very important components of even the biggest Internet companies, governments are having to adjust.

It's a messy process, and the defining events aren't always clearly marked. The recording industry's lawsuit against Listen4ever.com might be forgotten tomorrow, or it might turn out to be a milestone. But the result of many events of this kind will, over time, constitute United States policy toward controversial kinds of e-commerce.

The current cycle of the congressional washing machine will end sometime in the next few months, with the fate of Goodlatte's prohibition probably unresolved. It may never be resolved. But perpetual uncertainty about online gambling' legal status would in itself be a resolution, one that would keep gambling companies licensed by U.S. governments out of the burgeoning American online gambling market, probably for good.

Christiansen Capital Advisors, LLC is a gambling and entertainment industry research and consulting firm. The company's Web site, www.cca-i.com, offers a large selection of research items on an array of gambling industry topics, including Internet gambling, riverboat gambling and fantasy sports, as well as charts and tables from the report "The Gross Annual Wager of The United States," a comprehensive account of all forms of wagering in the United States that has been published annually since 1982. To subscribe to CCA News, their free daily e-mail newsletter, send a blank email to subscribe@grossannualwager.com.