The Law of Internet Gambling (Page 3)

A. Statutes explicitly designed to cover Internet gaming.

1. Nevada -- SB 318 (codified at in NRS 465.091 to 465.094), signed into law on July 17, 1997 by Gov. Bob Miller, makes Nevada the first state to explicitly prohibit -- and allow -- gambling via the Internet.

a. An Internet operator, anywhere in the world, who accepts a wager from a person who is physically present in Nevada commits a misdemeanor and "may be prosecuted within this state." There is no exception for licensed out-of-state operators.

b. Anyone who makes a bet from Nevada via the Internet is committing a misdemeanor, regardless of where the person accepting the wager may be. Even before Prohibition, there have been few attempts to go after common bettors. This is the first, and so far only, law in this country which makes it a crime to make a bet on the Internet. Sen. Kyl's bill would make it a federal crime, as well.

c. Servers, like America Online, are also now covered, if they are aware gambling is taking place. It is a crime to "knowingly... send, transmit or relay" a wager from within Nevada to anywhere via the Internet, or from outside the state into Nevada via the Internet.

d. Exceptions: Because this is Nevada, it should come as no surprise that the new criminal penalties do not apply to wagers accepted in the state by:

(1) Nevada-licensed race and sports books;

(2) Nevada-licensed off-track pari-mutuel betting operators; and

(3) "Any other person or establishment that is licensed to engage in wagering" in Nevada; meaning casinos. Notice it is a crime for a Nevada resident to make an out of state bet, but perfectly legal for Nevada operators to accept wagers from anywhere in the world.

2. Louisiana -- LSA-R.S. 14:90.3, enacted July 15, 1997.

a. Makes gambling by computer a misdemeanor. Defined as "conducting as a business of any game, contest, lottery, or contrivance whereby a person risks the loss of anything of value in order to realize a profit" over the Internet; bettors not covered.

b. Makes it a felony, up to five years hard labor and $20,000 fine, to design, develop, provide etc. any computer services or any server providing a web site "or any other product accessing the Internet... offering to any client for the primary purpose of the conducting as a business" any gambling.

c. Statute exempts providers of online access, web sites, etc. if done "in the normal course of their business," unless "its primary purpose in providing such service is to conduct gambling as a business."

d. Statute does not explicitly give state jurisdiction over out-of-state offenders.

3. Illinois - Pub.L. 91-257 (S.B.4) signed into law by governor July 23, 1999, amending the Illinois Criminal Code of 1961, ?? 28-1, 28-1.1 and 28-2.

a. Makes it a Class A misdemeanor to make or accept a bet over the Internet. Operating a gambling business is a Class 4 felony for the second conviction.

b. Declares "A person commits syndicated gambling when he or she accesses the Internet to operate a 'policy game' or to engage in the business of bookmaking."

c. Jurisdictional reach is unclear. Bettors and web sites set up in Illinois are clearly covered. But there is nothing to indicate this new law is designed to reach activities taking place outside the state. In a case involving cash transactions by Illinois credit cardholders at licensed race courses and casinos, a State Court of Appeals held that "gambling offenses are defined by conduct, not results" and therefore "Section 1-5 of the Criminal Code of 1961 (Ill.Rev.Stat.1991, ch. 38, par. 1-5 (now 720 ILCS 5/1-5 (West 1994)) limits Illinois' jurisdiction to cases in which an element of the crime occurs within its borders." Cie v. Comdata Network, Inc., 211 Ill.Dec. 931, 937, 275 Ill.App.3d 759, 767-768, 656 N.E.2d 123, 1 29 (1995), appeal denied > 214 Ill.Dec. 857, 165 Ill.2d 548, 662 N.E.2d 423. But see Aaron Chambers, Ryan Signs Bill Outlawing Internet Gambling Sites, 145 Chi. Daily L. Bull. 3 (7/27/99 ).

4. Bills under consideration:

a. Arizona -- HB 2367 (Introduced 1997).

b. California -- SB 777 (1997) would have outlawed all Internet betting; while SB 141 (1997) would have permitted racing associations to accept out-of-state wagers by phone or any other approved communications technology.

c. Hawaii -- House Concurrent Resolution No. 150 (1997).

d. Illinois -- HB 793 (2/10/99), HB 1484 (1/19/99).

e. Indiana -- HB 1484 (1/19/99); HB 1134 (1/6/99).

f. Michigan -- HB 4689 (5/18/99) would make it a felony to conduct a gambling business over the Internet. Gaming legal in Michigan, including multi-state lotteries, bingo and horse racing, are exempt.

g. Minnesota -- SB 2273 (5/15/99) - would require the house research office, the Minnesota lottery research division and the office of senate counsel and research to conduct a study of gambling on the Internet and issue a report. 81st Legislative Session (1999-2000).

h. New York -- AB5650 (3/01/99) - would require anyone providing gambling over the Iinternet to post a bond, unless they offering exclusively wagering on horse races. 1999-2000 Regular Sessions. SB 917 (1/1/2/99), SB 2044 (2/2/99); SB 4174 (1997) and AB 8044 (1997) would have required foreign companies to register with the Secretary of State; AB 7818 (1997) would have required posting bonds.

i. Pennsylvania -- HB 2271 (2/24/98).

B. Statutes that have been construed as covering Internet gaming.

1. Minnesota -- see discussion under Personal Jurisdiction. First attorney general to post notice on Internet -- legal theory appears to be that an Internet gaming operator aids and abets the crime of making a bet in Minnesota. This will not work, because the state legislature has differentiated between individuals making a bet and those accepting a bet. If a gaming operation is guilty of aiding and abetting making a bet, then a drug buyer is guilty of aiding and abetting selling drugs.

2. Missouri -- Attorney General Jay Nixon has been one of the most active governmental officials in pursuing civil and criminal actions against Internet gambling operators.

a. In State v. Interactive Gaming & Communications Corp., CV97-7808 (Cir.Ct. Jackson County, Mo. May 22, 1997), Nixon obtained a permanent injunction against defendant and its subsidiary, Global Casino, Ltd.

(1) Defendant was served in its headquarters in Blue Bell, PA, but refused to answer or appear.

(2) Undercover agents send a money order for $100 to defendant's address in Pennsylvania.

(3) Defendant agreed not to accept any applications from Missouri residents for casino gambling services, but did.

(4) The court in Missouri held there was personal jurisdiction.

(5) Defendant was enjoined from marketing in Missouri, from representing that its services were legal in that state; from accepting applications from residents of Missouri and was ordered to post notices. Defendant was also fined and ordered to pay costs.

b. Interactive Gaming Corp. and its President, Michael Simone, continued to take wagers from Missouri -- pleaded guilty.

(1) Nixon obtained a criminal indictment that Simone had "traveled to" M issouri and "set up" a "gambling device" (the undercover agent's PC), which contacted defendant's Pennsylvania web site.

(2) Nixon obtained an extradition order from a trial court in P ennsylvania, upheld on appeal.

c. Nixon was almost as successful against the Coeur d'Alene Indian Tribe's US Lottery; see discussion infra.

3. Florida -- Attorney General Butterworth ordered Western Union to cease wiring players' money to off-shore sports books. Butterworth had previously issued an Opinion that state law prohibits individuals within the state from placing a bet by wire. Fla.AGO 95-70 (Oct. 18, 1995).

4. Indiana -- In the Attorney General's opinion, "A Hoosier gambling on the Internet by sitting at her computer, feet firmly planted on Indiana soil, with credit-card number close at hand, is 'gambling' unlawfully in Indiana; for that Hoosier to gamble over the Internet from her home, office, or favorite tavern is not different in practical or legal terms from g ambling by telephone, even if the person or computer taking the bet is at some exotic location; consequently, the individual making a bet and the person taking the bet are both lawbreakers." 1998 Op.Atty.Gen. 98-8. Indiana Attorney General Jeff Modisett sent emails to several dozen gambling-related websites asking administrators to inform visitors accessing the Net from Indiana that they are breaking the law. wwwrgtonline.com/index.cfm?BodyLoc= /newspage/artlisting.cfm/2494.

5. California -- Attorney General Dan Lungren, held Penal Code ??330 & 337a prohibits making a bet by phone from within the state to a licensed foreign sports book. 80 Ops.Cal.Atty.Gen. 98 (April 25, 1997). These statutes do make it criminal to place as well as take wagers; however, ?330 covers only casino banking and percentage games and ?337a only sports contest and races. Internet lotteries and bingo would not be covered; nor would Internet casinos, if computerized craps is legally a lottery rather than a banking or percentage game.

6. Texas AG Op. -- Dan Morales opined that the federal Wire Act would a pply not only to sports betting, but also to card games on the Internet. Tex.A.G.Op. No. DM-344 (1995).

7. Kansas -- Kan.Atty.Gen.Op. No. 96-31 (March 25, 1996) -- Anyone placing a bet on an Internet virtual casino using a computer in the state may be p rosecuted in Kansas.

8. Wisconsin -- See personal jurisdiction, supra.

C. States allowing telephone, and sometimes computer, off-track betting. New York and Nevada are the only states with statutes which expressly allow out-of-state phone wagers. In other states, legislative silence is taken as permission. Pennsylvania is the only state, at present, accepting computer wagers from bettors located in other states.

1. Pennsylvania -- The Commonwealth's Legislature authorized telephone betting. 4 Pa. Stat. ?325.218(b). Racing regulators decided this means OTBs may accept wagers by computer, under the theory that computers use telephone lines. Regulators also feel the federal Wire Act simply does not apply, so bets are accepted from anywhere in the world.

2. New York -- NY Rac.Pari-M. ?1012. The New York Racing Association announced in 1997 that it would be accepting wagers by computer; New York Senate's Committee on Gaming and Wagering held public hearings on March 12 and March 20, 1997, on the issue of whether New York's off-track betting corporations should be prohibited from offering online wagering services.

3. Nevada -- Gaming Control Act ?464.020 ?3(b) restricted pari-mutuel wagering to places where the race or sporting event is taking place and to licensed race and sports books; while regulations have allowed intrastate telephone wagers for at least ten years. Regs. 22.140. In 1995 the Nevada Legislature passed SB 401, amending the Act to allow "wagers made by wire communication from patrons within the State of Nevada or from states in which such wagering is legal." However, no regulations have as yet been promulgated.

4. Oregon -- In 1997 the Legislature authorized "account wagering," in which players deposit money in advance and then bet "in person, by direct telephone call or by communication through other electronic media." O.R.S. ? 462.142. Regulations have not yet been promulgated, but will probably allow out-of-state bettors.

5. Connecticut -- In 1993 the state sold its off-track betting system to Autotote, a publicly traded corporation. Regulations prohibiting out-of-state telephone wagers were deleted. In December 1995 Autotote suspended accepting bets from 28 states, fearing that it might be violating state (not federal) laws.

6. Kentucky -- Ky. Rev. Stat. ?230.379. Ellis Park is accepting telephone wagers from throughout the nation. The Kentucky Racing Commission conducted tests of "in-home access:" televisions with a box for the fan to swipe his credit card before making bets.

7. Maryland -- Md Code, Bus. Reg., tit. 11 ?11-805. Statute allows telephone wagers, but governor refuses to allow regulations to be promulgated.

8. Ohio -- Beulah Park had been taking interstate phone bets. The racing board abolished its enabling regulation after the Attorney General ruled telephone wagering illegal, 1995 Ohio Op. Atty. Gen. No. 95-034 (Oct. 10, 1 995). Legislation is pending.

D. States have considered other forms of at-home wagering -- intrastate only, so far.

1. At least three state lotteries tried telephone games: California, I ndiana and Massachusetts. Second-chance games let players with losing paper lottery tickets enter by calling 800- or 900-numbers. The games had consideration, because players could bet more, by dialing the 900-number, for the chance of winning more.

2. The most interesting U.S. experiment never got off the ground. In 1991, the Minnesota State Lottery announced that it would conduct a market test of at-home lottery games played on Nintendo video sets. The governor warned the Lottery that if it did, he would cut its marketing budget to zero.

IV. Problems for law enforcement and civil plaintiffs when the operator is physically within the U.S.

A. Although the Internet is not without precedent, the law is having trouble deciding upon the appropriate analogy: is it more like direct mail or television?

1. Although the Internet is interactive, like mail or telephone, websites are passive and the user has to choose to receive the message, like television or radio, and similarly there is no way of stopping it at the border.

2. The law is able to adapt to major technological developments. For e xample, a more revolutionary idea was the telegraph. For the first time Americans could be in easy and instantaneous communication with individuals in other states and countries. Pensacola Telegraph Co. v. Western Union Telegraph Co., 96 U.S. 1 (Mem), 6 Otto 1, 24 L.Ed. 708 (1877).

B. Where does the act take place?

1. Criminal law:

a. Substantive -- Sports book licensed in Jamaica and the Dominican Republic which took telephone wagers from the U.S. held did not accept bets in Texas under state anti-bookmaking law. Title 10, Texas Penal Code, Chapter 47 defines bookmaking as "to receive and record or to forward a bet." United States v. Truesdale, 152 F.3d 443 (5th Cir. 1998), convictions for illegal gambling in violation of the OCCA (18 U.S.C. ?1955) and companion counts, conspiracy (18 U.S.C. ?371) and money laundering (18 U.S.C. ?1956), overturned.

b. Jurisdiction -- In Lamar v. United States, 240 U.S. 60 (1916), defendant was charged with impersonating a member of Congress with intent to defraud; held: the federal court in New York had jurisdiction because defendant's impersonation was by phone to a person in New York, so the crime took effect there.

c. Venue -- Criminal venue statutes for interstate crimes.

2. Contract law -- A wager is a contract that is not completed until accepted.

3. Indian law -- The Indian Gaming Regulatory Act ("IGRA") allows tribes to run lotteries, but only if gaming "takes place" on Indian land. 25 U.S.C. ??2702(3) and 2710(d); the Coeur d'Alene tribe's "US Lottery" is testing whether gaming on the Internet is on Indian land.

a. Under provisions of the Wire Act, 18 state attorneys general told AT&T and other telephone companies to cut off service. The Tribe sued the phone companies in its tribal court and won. On December 17, 1998, the federal district court reversed, holding the lottery was a gaming activity not on tribal lands. AT&T v. Coeur d'Alene Tribe, CIV 97-392-N-EJL (D.ID. 1998).

b. Similarly, the Attorney General of Missouri sued the tribe, its operator and tribal officials in state court; the tribe removed. On January 6, 1999, the 8th Circuit reversed a trial court ruling that there was federal subject matter jurisdiction: If the state court decides the gaming w as not on Indian land, the federal IGRA would not preempt state anti-gambling laws. State ex rel. Nixon v. Coeur D'Alene Tribe,--- F .3d ---, 1999 WL 2641 (8th Cir. 1999).

C. Personal Jurisdiction.

1. State v. Granite Gate Resorts, Inc., 1998 WL 240133 (Minn. May 14, 1998), affirming 568 N.W.2d 715 (Ct.App.Minn. Sept. 5, 1997). In a 3-to-3, one sentence order, the Minnesota Supreme Court became the first state high court to confirm personal jurisdiction over an out-of-state Internet gambling operator. But, the case is a weak precedent, in part, because it is so strong procedurally (though not substantively). International Shoe Co. v. Washington, 326 U.S. 310 (1945), requires that the defendant have " minimum contacts" so the suit "does not offend traditional notions of fair play and substantial justice." Hanson v. Denckla, 357 U.S. 235 (1958), requires the defendant "purposely avails itself of the privilege of conducting activities within the forum state..."

a. Plaintiff, the state itself through its Attorney General, Hubert H. ("Skip") Humphrey, III, filed a civil, not criminal, complaint. The causes of action: deceptive trade practices, false advertising and consumer fraud, for advertising on the Internet that defendants' sports betting web-site, WagerNet, licensed in Belize, would be legal. Defendant Kerry Rogers, a resident of Nevada, moved to dismiss for lack of personal jurisdiction.

b. Minnesota's long-arm statute, Minn.Stat. ?543.19, goes to the limits of due process under the federal constitution.

c. Quantity of contacts -- Defendant refused to cooperate with limited discovery and, as a sanction, the trial court ruled that at least one Minnesota resident was on WagerNet's mailing list. Minnesota computers contacted defendants' websites hundreds of times.

d. Quality of contacts -- Defendants advertised on the Internet to develop a mailing list and had a toll-free number. The Court of Appeals used as precedents Internet cases as well as T.V. and radio broadcasters, who knew their program would enter a state, and national direct mail s olicitations.

e. Connection between cause of action and contacts -- Here the claims arise directly from defendant's contacts. Precedent: State v. Reader's Digest Ass'n., Inc., 81 Wash.2d 259, 501 P.2d 290 (1972) (mailing sweepstakes entry information constituted illegal lottery within state)

f. State's interest -- The claims here are consumer protection and, most important, control of gambling.

g. Convenience of parties -- The U.S. Supreme Court has never held it too inconvenient for a resident of one state to have to travel to another. Here, defendant weakened his case by reserving the right to sue customers where they live: if he can travel to Minnesota as a plaintiff, he can as a d efendant.

2. Thompson v. Handa-Lopez, Inc., 998 F.Supp. 738 (W.D.Tex., March 25, 1998). Much stronger case: Held California Internet gaming operator can be sued for non-payment of Texas player in Texas.

3. Three law suits filed by Wisconsin A.G. James Doyle in September 1997:

1) UniStar Entertainment, developer games for the U.S. Lottery (pending in federal court); 2) Net Bet, Inc., and Torrey Pines Nevada, Inc., operators of Casinos of the South Pacific (pending in Dane County Circuit Court);

3)On-Line International, resolved: On-Line International ordered dissolved by United States District Judge John C. Shabaz in a consent decree that was entered upon agreement of the parties, "also barred the owners, officers, and employees of On-Line and its parent corporation, World Wide Web Casinos, Inc., headquartered in Santa Ana, California, from forming any new Wisconsin corporation for the purpose of operating an Internet gambling website." Internet Gaming International Newsletter, vol. 1, no. 5 at p. 1, 3 (May, 1998).

D. Indian tribal sovereignty -- A more difficult barrier.

1. The U.S. Supreme Court recently ruled that tribes have greater s overeign immunity than countries, even than the United States itself. Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc., 523 U.S. 751, 118 S.Ct. 1700, 140 L.Ed.2d 981 (U.S. 1998).

2. Federally recognized tribes have sovereign immunity and cannot be sued without their consent; though, Ex parte Young, 209 U.S. 123 (1908), may allow injunctions against tribal officials.

3. Tribe's sovereign immunity does not normally extend to non-tribal, p rivate operators; however, if impact on tribe's sovereignty is too great, third parties may be protected.

V. Problems for law enforcement and civil plaintiffs when the operator is outside the U.S., besides all issues raise in IV above.

A. How foreign countries are handling Internet gambling --

1. Government operating the games themselves.

a. Liechtenstein -- Accepting bets from anywhere in the world, with the significant exception of the two relatively powerful countries that completely surround it: Austria and Switzerland.

b. Finland -- The Lottery, Oy Veikkaus, has restrictions (instructions in Finnish, local bank account required) which effectively limit play to citizens within the country.

c. Bill to allow federal government of Canada to run Internet lottery passed first reading in Parliament, but then killed. Major issue would be provinces' exclusive control over all gambling; the federal government sold gambling to the provinces to fund the Calgary Olympics.

2. Governments selling licenses to some operators and ignoring the rest, no enforcement actions against licensees, nor against non-licensed local or foreign operators. Island and Latin American nations.

3. Governments operating true licensing systems, with background checks, and penalizing non-licensed operators. Australian states and territories are in the forefront; their thinking is that Internet gambling is unstoppable, so government has a duty to regulate it to protect consumers.

a. Governments have issued licenses under existing laws, e.g. the Australian Capitol Territory using its Bookmakers Act of 1985.

b. The Gaming and Racing Ministers of all Australian states and territories met on May 3, 1996, and agreed on a set of principles, leading to a draft National Regulatory Model for new forms of interactive home gambling products. Existing at-home betting, such as telephone betting with TABs and bookmakers, were excluded.

c. The draft Model, first passed by the Queensland Parliament on March 18, 1998 as the "Queensland Interactive Gambling (Player Protection) Act" went into effect on October 1, 1998. The Australian Capitol Territory and Tasmania also adopted laws to license Internet gaming sites, though Tasmania added a prohibition against Tasmanians betting on its sites. The laws:

(1) Expressly legalize Internet gaming operations that have been licensed by another Australian state or territory.

(2) Expressly declare all other Internet gaming products illegal and prohibited from advertising.

(3) Set uniform national standards comparable to the regulation of casinos; though each jurisdiction decides how many operators it will license.

(4) Tax Internet gambling at a high rate, with the money going to the state or territory where the player resides. For American and other n on-Australian players, tax money is retained by the jurisdiction in which the service provider is located.

d. Licensing of new operators and allowing them to take wagers from within that jurisdiction creates conflicts with existing gaming operators in a state or territory, who thought they had the exclusive right to accept bets.

4. Governments specifically prohibiting Internet gambling, e.g. Louisiana.

B. The law of Internet gambling is based on the law of gambling, not communications law.

1. Communications law is concerned with the free commerce of ideas and protection of individuals' rights. See e.g. Reno v. American Civil Liberties Union, 117 S.Ct. 2329, 138 L.Ed.2d 874 (1997) (Portions of Telecommunications Act of 1996, 110 Stat. 56, designed to protect minors from "indecent" material on the Internet declared unconstitutional). The "marketplace of ideas" even gives protection to purely commercial speech: A gambling ad, but not the gambling itself is protected speech. Valley Broadcasting Co. v. United States, 107 F.3d 1328 (9th Cir. 1997).

2. With gambling, commerce is usually completely prohibited. When commercial gambling is allowed, it is always severely restricted by statute and highly regulated by government. With legal gambling individuals have virtually no rights. As extreme examples: In re: Soto, 565 A.2d 1088, 236 N.J.Super. 303 (App. Div. 1988). (upholding state restriction on right of key casino employee to participate in political activity) and State of Nevada v. Rosenthal, 93 Nev. 36, 559 P.2d 830 (1977) ("We view gaming as a matter reserved to the states... Within this context we find no room for federally protected constitutional rights").

Continue to Page 4