" Asserting Legal Jurisdiction Over Online Gambling Sites. "

By Chuck Humphrey

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Introduction

A former law partner of mine[1] once told me that he could figure out answers to legal questions based on knowing where each player in the problem was.  He reasoned that everybody had to be some place.  Then he determined where that place was.  Once he put everybody in place, he had a map showing  him where everyone was in relation to each other.  From the map he could assume, guess or argue their responsibilities and obligations to one another.

This article focuses on the power of U.S. courts to assert personal jurisdiction over website operators.  This article does not deal with the more practical, and probably more important, questions of:

  • How does a law enforcement authority enforce a sentence issued by a state court?
  • How can a private person collect on a money judgment against an operator located out of the United States?
  • Is it wise to try to enforce gambling laws on an extraterritorial basis?

Those questions will be the subjects of future articles.

The Question

Where is the legal here for an Internet gambling website?

The proper answer to that question determines the ability of the “Court of Here” to assert legal jurisdiction over the possibly offending website operator and perhaps also over some of its owners, operators, employees, other affiliates and advisors.

“Jurisdiction” means having the authorized legal power to determine issues raised in a criminal indictment or information or in a civil complaint presented to the court by a law enforcement authority or a private person.  The defendant has to be haled into the state court by a legal method of giving notice and the state court has to also have the power to determine the subject matter involved in the dispute.

The typical legal method of giving notice to an absent defendant (whether out-of-state or out-of-country) involves using the so-called long-arm laws that have been adopted by every state[2].  Such statutes allow a substituted method of giving notice (i.e. service of process), such as mailing the notice.  One court went so far as to authorize notice by sending a mere email to the absent defendant at his website[3].

In analyzing the application of the law we will use hypothetical situations confronting Hypo Online Gambling. com.  The facts about Hypo are in a separate article on this website, Who is Hypo Online Gambling.com?

Where in the world is Hypo?

Operators of websites that offer real-money wagering, like Hypo, take the position that "here" is the place where they are incorporated (Costa Rica), or where the server for their website is located (Canada), or where they may have gotten a license to engage in casino-style gambling (Canada, Costa Rica or both) or only in cyberspace.  (An analysis of some of the foreign licensing procedures is in a separate article on this website, Licensing of Online Casinos .)

Since cyberspace is everywhere all at once, they thus conclude that the website has no particular here—so the website is nowhere.  They thus violate the wry, immutable truth of the universe that no matter where you are, you are always here. 

No less a legal expert than Anthony Cabot of the prominent Las Vegas firm Lionel Sawyer & Collins recently took exactly that position in an interview on the Nov-Dec 2004 PokerUpdates.com show available on streaming video.  He said "The Internet has no location base.  It is in cyberspace."  That will come as an insupportable shock to many who have successfully asserted jurisdiction in state and federal courts located in places where an interactive website is received by a user.

Following the lead of attorney Cabot, the owners and operators of online gambling websites firmly believe and insist that wherever they in fact are, it is nowhere near any place that might want to punish them for violating the gambling and gaming laws of that place.

In asserting personal jurisdiction over out-of-state or out-of-country companies, Professor Michael Geist notes that there are three layers:

  • An “application layer.”
  • A “substantive layer,” and
  • An “enforcement layer.”[4]

The rest of this article covers the application and substantive layers.  The enforcement layer is not dealt with even though it is perhaps the most problematic layer.[5]

The application layer deals with gaining personal jurisdiction over a defendant in the International Shoe sense.  That is, whether Hypo should expect to be haled into the Court of Here and what means will give Hypo fair notice that it is being haled in. 

The substantive layer deals with whose law can or should be applied in deciding the litigation.  That is, whether the law of the state in which the Court of Here is located should be applied to Hypo's gambling offerings, or whether the laws of either Costa Rica or Canada should be exclusively applied.

The enforcement layer deals with how the plaintiff in the litigation can extract from Hypo any penalties that the Court of Here may order.

Zippo and Hypo: Personal Jurisdiction

The U.S. law on asserting personal jurisdiction over an absent Internet website has evolved from the decision in Zippo Mfg. Co. v. Zippo Dot Com, Inc. , 952 F. Supp. 1119, 1124 (W.D. Pa.1997).  The court there announced the following test:

“[T]he likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet. . . .At one end of the spectrum are situations where a defendant clearly does business over the Internet.  If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. At the opposite end . . .is a defendant [who] has simply posted information on an Internet Web site which is accessible to [forum resident] users . . . . The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer.” Zippo, 952 F. Supp. at 1124 (citations omitted).

The evolution of this test is considered and applied in Gator.com Corp. v. L.L. Bean, Inc . (9th Cir. No. 02-15035).  Gator.com Corp. distributes a “digital wallet” software product that allows users to store passwords to various websites.  When a user of that software logged into the online website of sports clothing and equipment retailer L.L. Bean, Inc., an embedded ad for an L. L. Bean competitor would pop up on the computer screen.  Bean mailed a nastygram to Gator telling it to stop interfering with its website.  Gator filed a lawsuit in a California Federal District Court seeking a declaratory judgment approving its actions.  The Ninth Circuit Court of Appeals upheld the assertion of personal jurisdiction, finding “that there is general [personal] jurisdiction in light of L.L. Bean's extensive marketing and sales in California, its extensive contacts with California vendors, and the fact that, as alleged by Gator, its website is clearly and deliberately structured to operate as a sophisticated virtual store in California.” Id at 12671.  (Page reference is to the online source linked in the case title above)  6% of L.L. Bean's business was from sales into California.  The Ninth Circuit said:

“In addition,…Gator alleges that L.L. Bean ‘targets' its electronic advertising at California and maintains a highly interactive, as opposed to ‘passive,' website from which very large numbers of California consumers regularly make purchases and interact with L.L. Bean sales representatives…L.L. Bean has not merely made a single ‘package' purchase from a [California] vendor or cashed a check on a [California] bank; instead, it ships very large numbers of products to California and maintains ongoing contacts with numerous California vendors. Nor are any of L.L. Bean's contacts occasional or infrequent….L.L. Bean's contacts are part of a consistent, ongoing, and sophisticated sales effort that has included California for a number of years.”  Id.

The Court also said: “even if the only contacts L.L. Bean had with California were through its virtual store, a finding of general jurisdiction in the instant case would be consistent with the "sliding scale" test that both our own and other circuits have applied to internet-based companies. Id at12673.  [[ NOTE:  On April 29, 2004, in No. 02-15035 , the 9th Circuit ordered the decision of the three-judge panel stayed pending an en banc hearing.  However, the parties subsequently reached a settlement and the 9th Circuit, on February 15, 2005, dismissed the pending en banc hearing on the grounds of mootness.]]

In a recent decision a Utah appellate court in Fenn v. MLeads Enterprises, Inc. 2004 UT App 412, held: "Sending one email to a resident of Utah is sufficient "contact" to satisfy the long-arm statute and the minimum contacts requirement of due process for a statutory claim arising from the sending of that email.

Moreover, email contacts alone can establish jurisdiction when the contacts are extremely numerous. See Verizon Online Servs., Inc. v. Ralsky , 203 F. Supp. 2d 601 (E.D. Va. 2002); Internet Doorway, Inc. v. Parks, 138 F. Supp. 2d 773 (S.D. Miss. 2001) (involving millions of email); Washington v. Heckel , 93 P.3d 189, 193 (Wash. Ct. App. 2004) (involving millions of email but not directly addressing personal jurisdiction). [6}

Personal jurisdiction was found lacking in Pound v. Airosol, Inc.   No. 02-2632-CM, recently decided in a Federal District Court in Kansas.  The court there found that the sellers of the products involved had only minimally interactive websites (e.g. they did not offer an online shopping cart through which any of the products could be ordered and paid for), limited contacts with residents of Kansas, and that there was no evidence any of the defendants targeted Kansas resident or that any of defendants products had ever in fact been sold to a Kansas resident.

How do Hypo's activities measure up to these extended Zippo standards? 

It targets residents of various U.S. states by:

  •  sending emails advertising its activities,
  •  offering bonuses and incentives to players, and
  •  advertising on the cable TV show. 

Its website is very interactive.  That is the nature of online gambling. 

It has an important ongoing relationship with the U.S.-based vendor of its operating system.

It deposits money it receives from residents of various states, albeit the deposits are made in its foreign bank account. 

More than half its business comes from residents of the U.S.

Yahoo and Hypo: Substantive Jurisdiction

Once the Court of Here has decided to exercise personal jurisdiction over a defendant, it usually follows that the court will also apply the substantive law of its state.  A series of decisions involving the civil and criminal laws of France, the United States, California and Missouri is instructive of the application of local laws and the thought and analysis the court with personal jurisdiction gives to whether it is proper to apply those local laws to an absent defendant.

Under French law it is a crime to offer or promote the sale of Nazi objects.  A French court applied that substantive French law and ordered Yahoo to ban online auctions by its users of Nazi memorabilia.[7]  Yahoo turned around and sued the French plaintiffs in a U.S. Federal District Court in Northern California.  The District Court there held it was fair to compel the plaintiffs in the French litigation to litigate in the U.S. and that it could apply substantive U.S. freedom of speech law to allow Yahoo to allow it to continue hosting the auctions offering of the Nazi items on its website.  During August 2004, a three-judge panel of the 9th Circuit Court of Appeals reversed, holding that there was no personal jurisdiction over the French entities.  (Yahoo wound up adopting a policy banning the auction of such objectionable items, anyway, a ban which remains in its auction guidelines today.)  The 9th Circuit Court of Appeals has ordered an en banc rehearing of the decision of the three-judge panel

Subsequently, “A court in Paris dismissed criminal charges that were [also] brought against Yahoo!, Inc. and its former CEO, Tim Koogle, in a criminal prosecution involving the auction of [the] Nazi memorabilia on Yahoo's auction site.  The case was closely watched around the world because it appeared to open up Internet providers to prosecution anywhere in the world even if their activities were legal in their home countries.  …[A] French criminal court dismissed all charges, holding that Yahoo never tried to ‘justify war crimes [or] crimes against humanity.'  Although this decision does not address the important jurisdictional issues raised by France's actions, it does support free expression online by reflecting a better understanding of the appropriate role of providers and hosters of material.”[8]  Note: This appears to be a decision that applies the substantive French criminal law and determines it was not violated by Yahoo or its CEO.

In Twentieth Century Fox Film Corp. v. iCraveTV ,  No. 00-121, 2000 U.S. Dist. LEXIS 1013, at *2 (W.D. Pa. Jan. 28, 2000) a U.S. District Court applied U.S. substantive law and ordered a Canadian company webcasting in Canada, to prevent distribution of its webcasts to those in United States jurisdictions.  iCraveTV, whose webcasting of some U.S. TV shows was legal under Canadian law, had taken substantial measures to prevent U.S. residents from using its webcasts.  It required three separate verifications from a user before allowing a subscription. These "clickwrap" agreements were an attempt to limit access to Canadian residents. A potential user trying to sign up for the service had to first enter his or her local area code. If it was an out-of-Canada area code, access was prohibited.  The second step required the user to confirm that he was located in Canada.  The user had to click on one of two choices: “In Canada” or “Not in Canada.”   Again, access was denied if the "Not in Canada” choice was checked.  Finally, the potential user was required to agree to accept or reject by scrolling to the bottom of a clickwrap agreement with the complete terms of use, which contained a confirmation that the user was located in Canada.

Missouri v. Coeur D'Alene Tribe, 164 F.3d 1102 (8th Cir.1999), involved the state of Missouri's challenge to the legality of the offering of a nationwide lottery by an American-Indian lottery over the Internet.  The Eighth Circuit remanded this case back to the original federal District Court to determine where the gambling involved took place, i.e. if the gambling was "on Indian lands."  The Eighth Circuit implied that its view was that the gambling occurred in the place where the person making the wager on the lottery was located at the time of the bet.  The suit was ultimately transferred from the Federal District court to a Missouri state court, thus implicitly confirming the view that the gambling took place where the person making the bet was at the time of the bet, Missouri, and not on the Indian lands occupied by the Coeur D'Alene Tribe in Idaho.

How do Hypo's activities compare to the standards considered in these Yahoo cases?

  • Even if its actions are perfectly legal under applicable Canadian or Costa Rican law, its promotes gambling by U.S. residents.

  • For real-money bets on its website Hypo earns revenue, thus violating state gambling laws, all of which criminalize this sort of activity taking place in the state, whether it constitutes professional gambling or a violation of the gaming licensing laws of the particular state.

  • Hypo's targeting of people in the United States subjects it to the assertion of personal jurisdiction by particular state courts.

  • Its activities are open and obvious given the public nature of its business, so its defenses to criminal and civil charges of promoting gambling are limited.

  • It does not take any action to attempt to block U.S. residents from accessing its website.


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