May 2005 – Gambling Law Update™

By: Lawrence G. Walters, Esq.

Weston, Garrou, DeWitt & Walters.

Legislative Update

Although several attempts have been made by different lawmakers, Internet gambling prohibition measures have failed each year, while the industry continues to gain more ground with the American public. Now, with the rise of Internet poker fueling the fire, many Washington insiders believe that it will be impossible to tell Americans that the activity is illegal.¹ With such high-profile issues like the continuing war in Iraq, Social Security overhaul, and heightened tensions between both parties in Congress right now, it is not very likely that an anti-online gambling bill would make it to the Senate floor for a vote. Nevertheless, that did not stop Senator John Kyl (R.-AZ) from preparing to introduce the 2005 version of his Internet gambling legislation; the Unlawful Internet Gambling Enforcement Act of 2005. Like previous versions of the bill, this new version would still make it illegal to fund online gambling transactions, but this version fails to define legal and illegal gambling activity.² However, unlike previous versions, the bill is free of exemptions for Internet horse wagering, and state sponsored and regulated gambling like past versions have contained. Notably, the last exemption-free gambling funding prohibition bill, introduced in 2000 by Rep. Jim Leach (R.-IA), was ultimately killed by special interest groups seeking exemptions. The lack of previously-included exemptions in this bill, bodes ill for its chances of success, however given the increasingly conservative nature of U.S. lawmakers, anything is possible.

U.S. v. Antigua – WTO Ruling Confusion

The long-awaited appellate body ruling from the World Trade Organization (“WTO”) was finally released, however some questions still remain unanswered. While both sides claimed victory, the United States was clearly the big winner here, and not for the reasons that are most apparent. The U.S. Justice Department dodged a bullet with its attempts to restrict worldwide commerce through its enforcement of the Wire Act and other federal laws, and now the feds are apparently safe to prohibit online gambling directed at U.S residents, without violating any international trade agreements. Nevertheless, this most unfavorable ruling is not the worst part of the decision. The real concern for the industry is the purported justification for approving U.S. regulation of international gambling transactions. In its 138-page report, the appeals panel said the United States had demonstrated that the 1961 Wire Communications Act – which was written to cover sports betting by telephone and has been used to prosecute some Web site operators – “was necessary to protect public morals or maintain public order.”³ However, no evidence was submitted to the WTO, indicating that online gambling interferes with public morals or impacts public order. A clarifying statement on the scope of the ruling is expected to be issued by the trade body next month.⁴

Esquire Magazine Subpoenaed by Department of Justice

Right on the heals of the ruling by the WTO Appeals Body, Esquire Magazine has become the latest media outlet to be hit with a subpoena from the Justice Department over advertising for Internet gambling. The recent action, which was first reported by a New York Post article, relates to Esquire magazine’s April issue, which featured an eight-page insert entitled the “Gentlemen’s Guide to Poker,” sponsored by Internet poker site BoDog Poker. The insert also includes BoDog CEO Calvin Ayre’s photo and his tips for playing Texas Hold ‘Em online, along with several references to the BoDog Poker URL, images from the site, and the disclaimer: “Void where prohibited by law. Fully licensed in Costa Rica.” Since the beginning the of Justice Department’s Internet gambling investigation, the DOJ has contended that any company accepting advertisements from online casino operators could be charged with aiding and abetting. The Department has stated in various letters, including correspondence to the American Broadcasting Association, that it believes that such advertisements are in violation of the Interstate Telephone Act of 1964 and that online gambling operators are violating the Federal Wire Act of 1961.⁵ Esquire spokesman Paul Luthringer confirmed that the magazine has received an “informational subpoena,” and stated that “We intend to provide the information as required by the law, since there is no request of any editorial information which would be constitutionally protected.⁶” The author will continue to monitor this situation in future updates.

Federal Outlook

Interestingly enough, the number of federally-approved secret court-authorized wiretaps across the country increased dramatically by26 percent in non-terrorist criminal investigations according to the Administrative Office of the U.S. Courts.⁷ With its provisions set to soon expire, the federal government has touted the U.S.A. Patriot Act as a key tool in bringing terrorists to justice. The new provisions granted under the Act were used in connection with racketeering or gambling to obtain 128 wiretaps around the country, while homicides and assaults produced only 48 wiretap orders. This difference in wiretap request illustrates the level of priority and dedication that the federal government has in combating gambling activities.

A proposal is being studied by the U.S. Treasury which would grant the government unprecedented access to banking records, and force banks to disclose hundreds of millions of wire transfers to help fight terrorist financing. A sweeping intelligence bill passed by the U.S. Congress in December to overhaul the U.S. spy community called on the Treasury to study whether the proposal was useful and feasible. A Treasury spokeswoman said, “Information collected from certain cross- border wire transfers could be incredibly valuable to our efforts to starve terrorists of funding.” While counterterrorism officials are eager to tap into this mother lode of financial information, some officials, bankers and experts question whether authorities can actually glean pertinent information from the flood of data, while protecting the privacy of banking clients.⁸

State Legislative Update

lthough the state of Internet gambling in the United States is still some what uncertain, some states have taken it upon themselves to attempt to establish legislation to allow state licensing of Internet gaming sites. In South Dakota, Senate Bill 95, which is now law, permits state

residents to use the Internet or telephone to place a bet on horse or dog tracks in other states. Residents who wish to wager on races in other states are now required to set up special accounts in South Dakota banks from which their bets will be deducted, and a 25 percent tax on every bet placed will go toward the support and operation of state tracks.⁹

Some states are looking towards Internet lottery sales as an additional source of revenue. Texas has been evaluating legislation which would allow players to establish an online account with the Texas Online Lottery Commission and pay for tickets over the Internet with debit cards. The bill, which would help the state to earn an additional $100 million a year, was introduced on April 11, 2005 and referred to committee, where it passed by a unanimous vote.¹⁰ The bill now moves onto the

full House. Illinois is also taking steps toward becoming the first state to bring its lottery online. The state’s Senate has passed a bill, SB0198, which would create a pilot program allowing state residents to purchase lottery tickets over the Internet. The bill, passed in the Senate 32 to 24 and unanimously voted out of House Committee, would amend the Illinois Lottery Law as well as the Criminal Code of 1961.¹¹ It is estimated that the proposed Internet lottery sales would generate another $60 to $200 million for the state. Similarly, Georgia was also looking to regulate Internet lottery sales, and introduced a bill that passed in the state House, however the Senate adjourned for the year before it went for a vote.¹²

In Wyoming, citizens looking to continue to play games of chance are among a growing number of people that are buying long-distance phone cards that are loaded with sweepstakes points. These points can be used to play casino-type games on the Internet, where the winners receive a cash prize. There are similar games being played in Alabama, California, Florida, Hawaii, Massachusetts, South Carolina and Texas, with Arizona and Utah considering joining as well.¹³

While some states are gratefully looking towards revenue brought in by Internet gambling as way to raise state funds, others are looking to keep the activity out of their state all together. Indiana has become the latest state to pass a law prohibiting Internet gambling with the adoption of Senate Act No. 92. Signed into law and effective July 1, 2005, the law makes it a Class D felony for an operator of an Internet site to knowingly use the Internet to engage in unlawful or professional gambling or to promote such a site or service from within the state.¹⁴ Authored by Sen. David Ford, R-Hartford City, the law states: “A person outside Indiana who transmits information on a computer network . . . and who knows or should know that the information is broadcast in Indiana submits to the jurisdiction of Indiana courts for prosecution under this section.” It is believed to be more likely that the state will begin using other powers provided in the statute to block Indiana citizens from accessing the sites.¹⁵ Internet service providers that do not take the initiative to block gambling sites could eventually be required by the attorney general to do so. Ford said the attorney general will begin compiling a list of sites that all Internet service providers will be required to block. “The major way for the attorney general to update the list is from notices that he may receive from local prosecuting attorneys,” Ford said. “The prosecuting attorneys will report sites that they become aware of from law enforcement agencies or from citizen complaints.”¹⁶

In North Dakota, the measure that would allow the state’s citizens to vote in 2006 on whether the definition of gambling should be amended to exclude Internet poker, reclassifying it as a game of skill, was defeated when the state’s Senate voted 44 to 3 to kill the bill. The Senate vote followed recent Justice Department actions, where the DOJ sent a letter to the North Dakota Attorney General Wayne Stenehjem stating that the proposed bill could be a violation of federal laws, coincidently, the same federal laws that the WTO has been evaluating. North Dakota Attorney General Wayne Stenehjem sent the letter back to the state Senate Judiciary Committee, which voted against the bill.

Advertising Outlook

he Internet gambling industry has been filling the void for many media outlets that have been struggling to keep up with advertising revenue over the past few years. Despite this, the DOJ has maintained that Internet gaming advertisements, like Internet gaming itself, is

illegal and that “anyone carrying them could be charged with aiding and abetting.” With the new rounds of subpoenas recently issued, many in the gaming industry are left wondering what the future may hold for advertising. A DOJ spokesman in Washington, DC said that little has changed in the eyes of the federal government since the launch of investigation. “Our position still stands that the advertisements are illegal and that anyone carrying them could be charged with aiding and abetting,”

the spokesman said.¹⁷ In spite of the Justice Department’s crackdown on Internet gambling advertising, and its contention that it will be able to maintain restrictions on Internet gambling following the WTO ruling, the irony remains that 60 percent of all offshore gambling dollars comes from Americans.¹⁸ Similarly, about 70 to 85 percent of Internet poker players are believed to be United States citizens. Internet poker alone generated global revenues of $1 billion in 2004 and is projected to top $2.4 billion this year.¹⁹ With the revenues constantly increasing, some operators are developing free-play promotional strategies and promoting the sites on major TV networks as well as on numerous cable channels. These free-play sites allow players to get comfortable with a service without risking money, and are fast becoming a vital promotional tool for Internet gaming sites.

With the international popularity of Internet gaming spreading like wild fire, mainstream companies are also looking for new ways to cross promote their products along with popular gambling games. Absolute Vodka, in targeting young adults, has introduced a site featuring real time flash gaming. Once the player clears the age verification system, they have a chance to free-play Hold ‘Em poker.²⁰ Internet gaming operators are turning to creative advertising when looking for new ways to promote their company. Just ask GoldenPalace.com, she was born April 27, 2005. The proud mother sold her naming rights on eBay to Internet casino GoldenPalace.com for $15,100 while she was still

pregnant. This seems to be a growing trend for the casino, as another baby due later this year will be named GoldenPalace.com, and recently 33-year-old Tennessee resident Terri Illagan legally changed her name to GoldenPalace.com as well.²¹ The woman formerly known as Terri has since made headlines worldwide, and has been featured on numerous radio and television shows, and Internet news sites.

The Rise of Mobile Gaming

here has been a recent boom in Internet casinos and for the past several years the Internet gambling market and Internet casinos have been expanding at a rapid rate. More recently, there has been an increase in the popularity of the mobile Internet casino, with people

starting to play Internet casino games on their portable hand held units and mobile phones. This increase in popularity has even led to the cross promotion between wireless giants like Orange and Internet casinos.²² The mobile phone and hand held units are fast becoming popular and feature almost all of the same perks you can receive when you use the Internet for entertainment. Launched in April, PokerRoom.com appears to be one of the first Internet gambling companies to allow its game to be downloaded into mobile phones.²³ The service highlights Internet gambling’s rapid growth and accessibility. It only makes sense then that the Internet casino made its way to the mobile phone. It has already caught on in a big way and mobile Internet casinos are very popular in countries like Japan. However, the legal issues pertaining to mobile gambling remain clouded. While some legislation, like the Wire Act, may be more clearly applied to mobile gambling, other Internet-oriented

laws like the CAN SPAM Act may not apply outside of traditional cyberspace. While telecommunications law attempts to catch up with the technology, the field of mobile gaming continues to explode; ignoring any legal impediments that may arise.

Nevada is once again treading uncharted territory in the United States in welcoming mobile gaming within its casinos. The Bill, AB 471, focuses on the use of mobile gaming devices that could be used while visitors are on the casino premises. It would only allow the activity in public areas of establishments holding non-restricted gaming license and operating at least 100 slot machines, along with at least one other game.²⁴ The bill passed in the General Assembly on 41-0 vote, and if it becomes law, casino visitors would be able to “check out” PDAs or similarly connected devices enabling them to gambling while roaming the casino properties. The state’s Senate Judiciary Committee has scheduled a hearing for May 11 to discuss the Bill.²⁵ If the bill is approved by the Senate Judiciary Committee at its meeting, it could be sent to the full Senate within days for a full vote. The law would go into affect immediately, but the Nevada Gaming Commission would then have to draft the exact regulations for mobile gaming and approve specific platforms like that of Diamond I, which has developed a wireless casino platform deployable at land-based casinos.²⁶ The system, “WiFiCasino GS,” creates a secure wireless PDA-based gambling and media network designed for Vegas-style casinos and resorts, and enables patrons to gamble anywhere on casino premises.

International Outlook

he Gambling Bill, which overhauls Britain’s outdated gaming regulations, was passed by Parliament and became law in April. In the struggle to save the legislation, the government agreed that there would be only one regional super-casino as a pilot rather than the eight

previously included in the Bill. Initially the government had proposed as many as 20 super-casinos but was forced to accept the compromise in order to get other elements of the Bill – such as the establishment of the Gambling Commission and regulation in Internet gambling – on to the statute books. Officials hope that within months, a new commission, and a body of some 100 investigators, will be established to regulate the industry. The British government said that it was setting up a new commission to regulate gambling, including bets made on the Internet. A major focus of the legislation is to regulate Internet gambling, which has become increasingly popular in recent years. Internet gaming companies will be allowed to operate from Britain for the first time. Although the new commission will not have the power to regulate the practices of Internet casinos operating outside

Britain, it could ban them from advertising here, the Department of Culture, Media and Sport said.²⁷

The WTO Ruling – A Wolf in Sheep’s Clothing

By: Lawrence G. Walters, Esq.

Weston, Garrou, DeWitt & Walters.

In the latest chapter in the World Trade Organization (“WTO”) dispute between the United States and Antigua over U.S. regulation of cross-border internet gambling, the online gaming industry has lost a round. Virtually all the favorable findings contained in the initial decision, relating to the inability of the U.S. to regulate online gambling on a worldwide basis, were undone in this appeal. This is quite a common occurrence in the legal field – a wonderful victory is snatched away by a reviewing tribunal, with the swipe of a pen.

U.S. v. Antigua – the latest chapter

In the latest chapter in the World Trade Organization (“WTO”) dispute between the United States and Antigua over U.S. regulation of cross-border internet gambling, the online gaming industry has lost a round. Virtually all the favorable findings contained in the initial decision, relating to the inability of the U.S. to regulate online gambling on a worldwide basis, were undone in this appeal. This is quite a common occurrence in the legal field – a wonderful victory is snatched away by a reviewing tribunal, with the swipe of a pen.

While the appellate decision was not favorable to the online gaming industry, there are some positive terms of the decision. Most notably, some provisions of U.S. law must be brought into compliance with the applicable treaties, to avoid apparent inconsistencies in how Internet gambling is treated by this country.

So who won? (and more importantly, why?)

While both sides claimed victory, the U.S. was clearly the big winner here, and not for the reasons that are most apparent. To the advantage of the United States, the U.S. Justice Department dodged a bullet with its attempts to restrict worldwide commerce through its enforcement of the Wire Act and other federal laws. The feds are now apparently safe to prohibit online gambling directed at U.S residents, without violating any international trade agreements. Nevertheless, this most unfavorable ruling is not the worst part of the decision. The real concern for the industry should be the justification for this seemingly over-reaching power now apparently granted to the D.O.J. In other words: Why can it do this? Why is the U.S. government free to impact the world’s economy in a negative way, by restricting this increasingly common form of international commerce?

The answer? Morality. Public Order. Say what? The U.S. actually convinced the WTO appeals panel that the public’s morals and order demanded that it have the ability to prohibit online gaming, even if that prohibition impacted international trade and agreed-upon WTO treaties. The U.S. trotted out the traditional ‘parade of horribles’ commonly associated with land based gambling, like public corruption, organized crime, and money laundering. Nevertheless,no ‘evidence’ of these adverse impacts of gambling was submitted to the WTO. Instead, the U.S. referred to Congressional reports and testimony indicating that the Wire Act, the Travel Act, and the Illegal Gambling Business Act “were adopted to address concerns such as those pertaining to money laundering, organized crime, fraud…and pathological gambling.” On this limited information contained in the U.S. legislative record pertaining to a law that was directed at telephonic sports betting, and having nothing to do with online gaming, the panel concluded that the United States proved that there was a ‘genuine and sufficiently serious threat…posed to one of the fundamental interests of society.”

Such “evidence” would never sustain the burden of proof in any civil or criminal case brought in the U.S. justice system. In fact, no evidence was submitted to the WTO that would tie online gaming with organized crime, corruption, or money laundering. Unfortunately, that troublesome fact did not stop the WTO appellate body from finding that such evidence exists, and that the federal prohibitions on Internet gambling are “necessary.”

The interests relied upon

Equally distressing is the panel’s finding that the federal gambling legislation, which parenthetically has never been found by the courts to apply to typical online casino gaming, was necessary to serve “very important societal interests”; specifically including the United States’ concerns relating to “underage gambling.” Moreover,the initial panel’s finding that the availability of gambling on the Internet contributes to gambling by minors, was approved on this appeal. These findings highlight the significant challenge currently facing the industry: How to keep children from accessing online gambling services?

Self-regulation and Age Restriction

Age-restriction is an issue that the industry itself must pro-actively self-regulate. The other alleged concerns caused by online gambling, such as influence of organized crime, public corruption and money laundering, can be readily disproved through a proper evidentiary procedure. However, age verification must be responsibly addressed by the industry if legalization and regulation are ever to become a reality. Before any real progress can be made on the issue of legalization, U.S. authorities, and indeed international authorities, must be comfortably convinced of the fact that the online gaming industry takes the issue of underage gambling seriously. While several age verification devices currently exist; none have been implemented as industry standards. The primary reason for reluctance to institute these roadblocks to underage use area belief that they cause loss of user sign ups and interruption of traffic flow. Even if true,these justifications can no longer serve as a basis to avoid responsible age verification in the industry, and the WTO decision emphasizes this concern.

A Step Backward – but a learning experience

Every setback must be viewed as a learning experience, and the WTO ruling certainly falls into the category of a setback. While the U.S. will need to pay closer attention to the consistency of its online gaming prohibitions, the WTO cleared the way for continued U.S. prohibition, based on the alleged concerns about organized crime, public corruption, money laundering, and age verification. The industry now has a road map that it must follow, in order to demonstrate that these concerns are not viable.

Conclusion

while any industry has its share of corruption, online gaming is no more vulnerable to organized crime, public corruption or money laundering than sanitation, construction, or a host of other industries. These alleged concerns should not serve as a legitimate basis on which the United States can avoid its obligations under international trade treaties. However, the industry has some hard
choices to make, and some ground to travel, when it comes to age verification. This issue must be taken away from the prohibitionists, and the industry leaders must demonstrate the necessary leadership to confront this concern head on. Otherwise, this issue will continue to rear its ugly head, to the detriment of the industry.

The WTO Ruling – A Wolf in Sheep’s Clothing

By: Lawrence G. Walters, Esq.

Weston, Garrou, DeWitt & Walters www.GameAttorneys.com

 

In the latest chapter in the World Trade Organization (“WTO”) dispute between the United States and Antigua over U.S. regulation of cross-border internet gambling, the online gaming industry has lost a round. Virtually all the favorable findings contained in the initial decision, relating to the inability of the U.S. to regulate online gambling on a worldwide basis, were undone in this appeal. This is quite a common occurrence in the legal field – a wonderful victory is snatched away by a reviewing tribunal, with the swipe of a pen.

While the appellate decision was not favorable to the online gaming industry, there are some positive terms of the decision. Most notably, some provisions of U.S. law must be brought into compliance with the applicable treaties, to avoid apparent inconsistencies in how Internet gambling is treated by this country.

While both sides claimed victory, the U.S. was clearly the big winner here, and not for the reasons that are most apparent. To the advantage of the United States, the U.S. Justice Department dodged a bullet with its attempts to restrict worldwide commerce through its enforcement of the Wire Act and other federal laws. The feds are now apparently safe to prohibit online gambling directed at U.S residents, without violating any international trade agreements. Nevertheless, this most unfavorable ruling is not the worst part of the decision. The real concern for the industry should be the justification for this seemingly over-reaching power now apparently granted to the D.O.J. In other words: Why can it do this? Why is the U.S. government free to impact the world’s economy in a negative way, by restricting this increasingly common form of international commerce?

The answer? Morality. Public Order. Say what? The U.S. actually convinced the WTO appeals panel that the public’s morals and order demanded that it have the ability to prohibit online gaming, even if that prohibition impacted international trade and agreed-upon WTO treaties. The U.S. trotted out the traditional ‘parade of horribles’ commonly associated with land based gambling, like public corruption, organized crime, and money laundering. Nevertheless, no ‘evidence’ of these adverse impacts of gambling was submitted to the WTO. Instead, the U.S. referred to Congressional reports and testimony indicating that the Wire Act, the Travel Act, and the Illegal Gambling Business Act “were adopted to address concerns such as those pertaining to money laundering, organized crime, fraud…and pathological gambling.”¹ On this limited information contained in the U.S. legislative record pertaining to a law that was directed at telephonic sports betting, and having nothing to do with online gaming, the panel concluded that the United States proved that there was a ‘genuine and sufficiently serious threat…posed to one of the fundamental interests of society.”²

Such “evidence” would never sustain the burden of proof in any civil or criminal case brought in the U.S. justice system. In fact, no evidence was submitted to the WTO that would tie online gaming with organized crime, corruption, or money laundering. Unfortunately, that troublesome fact did not stop the WTO appellate body from finding that such evidence exists, and that the federal prohibitions on Internet gambling are “necessary.”

Equally distressing is the panel’s finding that the federal gambling legislation, which parenthetically has never been found by the courts to apply to typical online casino gaming, was necessary to serve “very important societal interests”; specifically including the United States’ concerns relating to “underage gambling.”³ Moreover, the initial panel’s finding that the availability of gambling on the Internet contributes to gambling by minors, was approved on this appeal.⁴ These findings highlight the significant challenge currently facing the industry: How to keep children from accessing online gambling services?

Age-restriction is an issue that the industry itself must pro-actively self- regulate. The other alleged concerns caused by online gambling, such as influence of organized crime, public corruption and money laundering, can be readily disproved through a proper evidentiary procedure. However, age verification must be responsibly addressed by the industry if legalization and regulation are ever to become a reality. Before any real progress can be made on the issue of legalization, U.S. authorities, and indeed international authorities, must be comfortably convinced of the fact that the online gaming industry takes the issue of underage gambling seriously. While several age verification devices currently exist;⁵ none have been implemented as industry standards. The primary reason for reluctance to institute these roadblocks to underage use are a belief that they cause loss of user sign-ups and interruption of traffic flow. Even if true, these justifications can no longer serve as a basis to avoid responsible age verification in the industry, and the WTO decision emphasizes this concern.

Every setback must be viewed as a learning experience, and the WTO ruling certainly falls into the category of a setback. While the U.S. will need to pay closer attention to the consistency of its online gaming prohibitions, the WTO cleared the way for continued U.S. prohibition, based on the alleged concerns about organized crime, public corruption, money laundering, and age verification. The industry now has a road map that it must follow, in order to demonstrate that these concerns are not viable.

While any industry has its share of corruption, online gaming is no more vulnerable to organized crime, public corruption or money laundering than sanitation, construction, or a host of other industries. These alleged concerns should not serve as a legitimate basis on which the United States can avoid its obligations under international trade treaties. However, the industry has some hard choices to make, and some ground to travel, when it comes to age verification. This issue must be taken away from the prohibitionists, and the industry leaders must demonstrate the necessary leadership to confront this concern head on. Otherwise, this issue will continue to rear its ugly head, to the detriment of the industry.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

Gambling Law Update™

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

MARCH, 2005

LEGISLATIVE UPDATE

Although all Bills concerning Internet gambling died at the end of last session, that does not mean that we won’t see a reincarnation of prohibitory efforts in some form or another in the near future. The Christian Science Monitor reported in its January 12, 2005 edition that “The Financial Services Committee has had a long standing interest in combating the scourge of Internet gambling. . .”¹ Its no surprise that the Committee has had such an interest, with members like Rep. Michael Oxley (R-OH), Rep. Spencer Bachus (R-Al.), and Rep. James Leach (R-Iowa), all of whom have introduced some form of prohibitory legislation of their own, and who all wrote to the Christian Science Monitor to assure its readers that they “will continue our efforts in the newly convened Congress to deny offshore gambling interests access to the U.S. Market.”² However, lawmakers might find that this will be a more difficult task than expected. In the U.K., lawmakers are expected this year to allow 137 land-based casinos to take Internet wagers from United States residents³ – which would further hamper efforts by United States lawmakers to restrict Internet gambling. In addition, as noted below, the State of North Dakota is considering legislation to allow licensed Internet poker operations to set up shop in that state.⁴

It is estimated by the American Gaming Association, that bets placed through offshore sports-betting operations, office pool wagers, and wagers illegally made through bookies represent more than 99 percent of all sports betting nationwide.⁵ It is these types of bets, which the National Gambling Impact Study Commission estimated to equal up to as much as $380 billion annually in “illegal wagers,”⁶ that have the federal government up in arms. The United States Internal Revenue Service (“IRS”) has been frustrated with the explosion in sports wagering, since the Internet and other industry innovations have made tracking and taxing gambling winnings by U.S. citizens virtually impossible.⁷ There are no bells or whistles that go off in cyberspace when a player hits a jackpot, therefore the IRS has no way of knowing who won and how much. In state regulated betting operations, in certain circumstances, Uncle Sam even gets his cut (25 percent on most winnings, up to 33.33 percent for certain non-cash payments) before the winner gets any payout.⁸ It is possible that lawmakers will eventually realize the amount of taxable revenue the United States is losing by not having some sort of regulatory scheme in place – analysts say that the federal government will eventually accept the Internet gambling industry.⁹ With Internet gambling revenue alone pegged to hit $10 billion, up by 40 percent from 2004,¹⁰ and “illegal wagers” estimated at $380 billion, it looks like the gaming industry will once again have to ready itself for battle, as opponents look yet again to immobilize this industry.

STATE LEGISLATIVE UPDATE

Although the state of Internet gambling in the Untied States is still some what uncertain, some states have taken it upon themselves to consider regulation of Internet poker, like North Dakota, with its House of Representatives recent passage of a bill that was designed to do just that. If the bill is passed in both chambers and signed into law, the legislation would not take effect unless North Dakota voters approve a constitutional amendment to allow state licensing of Internet poker sites.¹¹ The bill would allow the state’s citizens to vote in 2006 on whether the definition of gambling should be amended to exclude Internet poker, reclassifying it as a game of skill. If the measure, which also provides for taxes on poker revenue and an annual $10 licensing fee for each player,¹² is approved by voters, the state can then license Internet poker companies to operate within the state – providing millions of dollars in tax revenue for education, property tax relief and other public funding.¹³ Despite the economic advantages the bill could bring to North Dakota, gambling opponents are against the measure, asserting that the since the state-owned Bank of North Dakota could get processing fees from handling player transactions, it would effectively serve as a clearinghouse for gambling money.¹⁴ Adding fuel to the fire, the United States Department of Justice (“DOJ”) recently sent a letter to the North Dakota Attorney General Wayne Stenehjem stating that the proposed bill could be a violation of federal laws, coincidently, the same federal laws that the World Trade Organization (“WTO”) is evaluating right now. North Dakota Attorney General Wayne Stenehjem sent the letter back to the state Senate Judiciary Committee, which is reviewing the bill. A vote on the bill is expected soon, although the impact of the letter is yet to be seen. The DOJ letter mirrors those sent to the Nevada Gaming Commission and the U.S. Virgin Islands after those jurisdictions passed laws regulating the Internet gaming industry.¹⁵ Apparently the Department of Justice is resorting to the same “scare tactics” it utilized during the online gambling advertising fiasco, when it attempted to scare off mainstream advertisers from the industry. While the State of North Dakota will understandably be concerned by this threat, it has a history of independence and individuality. Therefore, the heavy hand of the feds may only serve to solidify its resolve to approve this controversial Bill.

Conversely, right across the border in South Dakota, Governor Mike Rounds recently signed a bill that makes an exception to a state law banning Internet gambling. The measure will allow the use of the Internet or email to place bets on dog and horse races in other states, however all other types of Internet gambling will remain illegal.¹⁶ While the status of Internet gambling in the United States continues to remain in constant limbo, some states are evaluating the possibility of the sale of lottery tickets online to state residents, or allowing bets to be placed over the Internet to dog and horse tracks to bring in much needed revenue. Illinois’ legislature is considering a bill that would allow the sale of lottery tickets over the internet to residents 18 or older.¹⁷ The bill, which is scheduled for a vote next month, is one that is being looked at in several states, such as Georgia, where a similar bill passed the House last week.¹⁸

New Jersey is also once again evaluating the possibility of bringing Internet wagering within its borders. The State’s Senate Committee on Wagering, Tourism and Historic Preservation recently held a hearing focused on whether the state should consider a regulatory approach toward I-gaming. Although no conclusions were reached at the hearing, the Committee is set to meet back in April – possibly after the WTO final ruling has been reached, to discuss the decision and what its implications may be.¹⁹ Other New Jersey lawmakers want cable networks that feature gambling shows like “The World Series of Poker,” or “Celebrity Poker Showdown,” to help gambling addicts by giving money to treatment agencies, and called for a surcharge to be applied to state cable providers if the networks did not cooperate.²⁰

WTO FINAL RULING EXPECTED

Soon enough, the WTO Appellate Body will have given its final ruling concerning the island nation of Antigua & Barbuda’s precedent-setting case against the United State’s Internet gaming policies. The Appellate Body is currently evaluating the WTO’s dispute panel’s report, which found that the United States was violating its commitments under the General Agreement on Trade in Services (“GATS”) by not providing free trade in commercial services, mainly through its prohibition of online gambling transactions, declaring 3 federal laws and 4 state laws “inconsistent” with U.S. obligation under the 1995 GATS. Antigua-Barbuda Minister of Finance and the Economy, Errol Cort, told the Appellate Body while presenting a 21-page document outlining Antigua & Barbuda’s case, “We believe that any resolution to this dispute will see our two countries developing a scheme reasonably acceptable to both of us that allows Antiguan operators fair competitive access to consumers in the United States. Although the United States is not ready to negotiate with Antigua at this time, we are hopeful that upon Antigua prevailing in this appeal, the United States will consider constructive engagement with us to achieve a speedy and comprehensive solution.”²¹ If the Appellate Body upholds the ruling, the WTO can request that the United States change its policies for Internet gambling or face trade sanctions, and may open up the possibility for future proceedings from additional countries that offer online gambling services. Support for Antigua & Barbuda has so far come from Mexico, while some WTO member states, including others also involved in Internet gambling, are monitoring the case closely as well as U.S. jurisdictions with gaming industries. A final appellate ruling in favor of Antigua & Barbuda could come as a shock to U.S. authorities, who apparently believe that U.S. law can be applied internationally, and in blatant disregard to the laws and policies of other countries.

CASINO CITY PROCEEDINGS

Many gambling proponents in the industry were hopeful that the Casino City case would re-establish advertising services for Internet gambling services in the United States market. However, the DOJ was successful in having the Casino City case dismissed by the U.S. District Court for the Middle District of Louisiana since the Court held that Casino City lacks standing to bring such a case to court because it failed to demonstrate that it faces a “realistic danger of sustaining direct injury.”²² The Court based its decision on the fact that since Casino City asserted that is did not, nor did it plan to, engage in any illegal activity, and faced no legitimate threat of prosecution, therefore it lacked standing to bring the case. The Court was un-swayed by Casino City’s argument that it should fear prosecution based on earlier actions of the DOJ, where the Department sent a letter to the National Association of Broadcasters warning that companies that advertised for offshore gambling operations may be guilty of aiding and abetting an illegal activity. The Court determined that since Casino City did not receive a letter or a subpoena, which was issued to advertisers and other Internet gambling-related companies, that the company did not face an imminent threat of prosecution and stated: “The record simply fails to support a finding that Casino City is in any way subject to threat of investigation of an actual investigation.”²³ The Court also rejected Casino City’s First Amendment argument, holding:

“The government has a significant interest in regulating the activity in which plaintiff engages. Internet gambling is of significant interest to the government because of its accessibility by the general public, which includes children and compulsive gamblers. By targeting and punishing advertisers who utilize this type of information, the government reaches its goal of deterring illegal activity.”²⁴ The gratuitous, early ruling on the First Amendment issues may be a blessing in disguise for Casino City, and the industry, since it allows the Plaintiff to raise these issues in its planned appeal to the Fifth Circuit Court of Appeals, without having to endure the time, expense and inconvenience of a full blown trial in the District Court. All eyes are on the appellate court, now.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

The Rise of Internet Poker:

What are the Legal Implications?

By: Lawrence G. Walters, Esq.

Weston, Garrou, DeWitt & Walters www.PokerLawyers.com

 

The online poker industry is red hot. The game has never been more popular with American teens¹ and televised poker tournaments are commanding greater market share than ever. Revenues are rumored to have reached the billions, and online poker companies are going public. Yahoo! is rumored to be opening a poker site through its UK and Ireland division,² and even the State of North Dakota is considering legislation to legalize Internet poker, since it is a “game of skill.”³ So where do the poker chips fall, from a legal perspective?

Despite poker’s newfound popularity as the game of choice in cyberspace, the legal issues, from a United States perspective, remain as blurred and muddied as ever. Given a confusing set of legal decisions on applicability of the federal Wire Act to Internet gambling websites,⁴ players and webmasters are uncertain as to the status of their legal rights and obligations when it comes to enjoying this increasingly popular pastime.

Poker has traditionally been seen as a kinder, gentler, form of gambling. It is, however, questionable if poker is, in fact, “gambling” at all, under the traditional definition. Given the element of skill inherent in any game of poker, arguments can be made that traditional laws prohibiting “games of chance” do not apply. Although the Department of Justice may differ with this conclusion,⁵ poker should not be considered a “sporting event or other contest” within the proscription of the Wire Act.⁶

Each state regulates gambling activities in a slightly different way. However, the ability for any of the states to restrict or regulate transactions occurring in cyberspace is dubious, at best. The constitutional provision known as “the dormant commerce clause,” requires that such global transactions be regulated at the national, as opposed to state, level.⁷ Paradoxically, various federal gambling laws relate back to, and depend on, the definitions of “gambling activities” passed by the individual states.⁸ The United States Supreme Court has not weighed in on the issue of Internet gambling, let alone online poker rooms. Thus, the lower courts have been given little direction on the scope and applicability of existing legislation to this new form of entertainment. Poker players can take some comfort in the fact that the Wire Act was not intended to apply to casual betting activities, and has not been applied in that manner.⁹ Although numerous attempts have been made at the federal level to regulate the funding of online gambling transactions, the bills have been defeated each and every time.¹⁰

While Congress may choose to prohibit various forms of online gambling, or related services, poker should be the last form of online gaming that it seeks to regulate. The game enjoys a traditional position of popularity and endearment in American culture, dating back to the World War II generation. This is not a group of constituents that Congress generally likes to alienate. Moreover, online poker can be separated out from other forms of gambling regulation by seizing upon the element of skill necessary to participate in this form of gaming. Traditional games of chance can be potentially regulated while carving out exceptions for online poker, should Congress decide to venture into these murky legislative waters.

Regardless how the executive or judicial branches decide to approach online gaming regulation, the game appears to be unstoppable in the court of public opinion. Legislators can choose to ignore the will of the public at their own peril. Historically, lawmakers have paid a substantial price at the ballot box when they try to restrict activities that enjoy wide popular support. Like in North Dakota, regulators throughout the United States may see the wisdom of experimenting in the legalization and regulation of some forms of Internet gambling; and poker seems to be the best place to start.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.PokerLawyers.com, or via AOL Screen Name: “Webattorney.”

18 or 21?

What is the Legal Age for Gambling Online?

By: Lawrence G. Walters, Esq.

Weston, Garrou, DeWitt & Walters www.GameAttorneys.com
As the issue of underage gambling takes on increasing significance within the online gaming industry, a threshold question remains unresolved: At what age does an individual attain “legal age” to wager online? The age at which a person becomes an “adult” in the United States is primarily governed by state law.¹ For most purposes, in the vast majority of states, an individual is considered to be an adult when he or she reaches the age of 18. At this “age of majority,” a person can legally enter into binding contracts, vote and state and federal elections, own property, and purchase tobacco products. However, to engage in other activities, such as the purchase of alcohol or owning a handgun, an individual must be at least 21 years old. In those United States jurisdictions that have legalized brick and mortar casino gambling, bettors must be at least 21 years old to bet at a casino. However, where other forms of gambling are involved, such as parimutuel dog racing, the minimum age to gamble is 18.²

So what about online gambling? Should any age restriction be imposed; and if so, what is the magic age at which individuals should be considered sufficiently mature to make intelligent decisions on the issue of wagering?

By their very nature, all age restrictions are arbitrary. Every person matures at a different pace, and therefore uniform age restrictions do not work perfectly for all unique individuals. Lawmakers have struggled with the issue of age in regards to sexual activity by minors, and have developed wildly conflicting “age of consent” restrictions in the United States. The age at which an individual can engage in intimate relations with a member of the opposite sex ranges from 13 in some states up to 18, in others.³ The rationale advanced for restricting intimate relations for teenagers is similar to that offered for restricting other “vice related” activities. It is claimed that adolescents are legally incapable of making informed decisions whether to engage in potentially damaging activity – either emotionally or physically – and thus the law must interpose a prohibition from a paternalistic, protectionist point of view.

Many negative impacts allegedly caused by gambling activities have been offered as a basis for gambling regulation in general, including the disruption of moral and cultural patterns, the increase in local crime, the fostering of prostitution, the development of corruption and the infiltration of organized crime.⁴ These concerns are highlighted by opposition groups to argue that “children” have no business wagering. However, online gambling differs significantly from

the traditional brick and mortar variety, and does not produce the same negative impacts. Thus, the arguments for imposing age restrictions on Internet gaming are not as strong.

Assuming for the sake of argument that adolescents of some age should be shielded from commercial online gambling activities, the issue of a precise age cutoff remains in doubt. The age problem is highlighted by the fact that online gambling is instantaneously available to a world wide audience, which collectively possesses a multitude of differing cultural norms and customs. In some cultures, children grow up gambling from the time they are first able to communicate. On the other extreme are repressive regimes, which prohibit all traditional vice activities, including any form of gambling, under penalty of imprisonment, or worse.

The gambling age issue has recently risen to the forefront: Various state attorneys general have recently sent communications to some of the author’s clients, expressing concern about the ability of individuals aged 18-21, to gamble on the clients’ websites, since the states’ laws impose a 21 year old cutoff. To be sure, the norm in the online gambling industry is to require that bettors be 18 or older to open accounts and wager, not 21. This policy clearly conflicts with many states’ laws requiring land-based casino gamblers to be 21 or older, but is consistent with age restrictions for other forms of gambling, such as horse racing or the purchase of a lottery ticket. Such conflict leaves room for confusion, doubt, and potential legal exposure.

An important distinction between brick and mortar gambling and online gambling is the fact that most casinos in the United States rely heavily on the service of alcohol for their profitability and ambiance. Drinking and gambling go together, well, like . . . drinking and gambling. The presence of alcohol is likely a significant factor in the regulators’ decision to set the legal gambling age at 21, as opposed to 18. The casino culture has developed such that cocktail waitresses hand out free alcoholic beverages to gamblers while at the tables or slot machines as a means to keep them in place and presumably increase the casinos’ profitability. The waitresses should be permitted to presume that any individual engaged in gambling activities is also old enough to drink. While this may not be the decisive factor for requiring a 21 year cutoff, it certainly plays a significant role.

Obviously, Internet gambling does not involve the consumption of alcohol. Thus, a reasonable argument exists to tie the age at which individuals are permitted to gamble online, not to the legal age for alcohol consumption, but to the legal age for the ability to enter into contracts. Certainly, no online gambling website desires to do business with an individual who can later disclaim any gambling losses due to their legal inability to enter into binding agreements. Individuals under the age of 18 cannot be held to their contracts, which are considered “voidable” at the option of the minor.⁵ Thus, 18 appears to be a rational legal cutoff for online gambling, as it addresses the contract validity issue, and conforms to the traditional western notions of the “age of majority.” However, regulators and law enforcement officers in the United States have yet to be convinced of the soundness of this position. Therefore, the more conservative approach is to set the bar at 21, to assuage the concerns of the brick and mortar world.

Regardless of the minimum age selected for participation, some form of online age verification is essential. The study released in July, 2005, on the issue of underage access to online gambling services, conducted in the United Kingdom, added fuel to the fire on these discussions. The study tested 37 online gaming sites to see if a minor could set up an account and gamble.⁶ The site “passed” the test for age verification if, after the registration process, the account was blocked or request was made for further proof of age and identification at that point.⁷

With the dramatic increase in popularity of poker among American teens, this issue will not soon go away.⁸ Given the increasing adolescent interest in poker, largely fueled by televised poker tournaments, any website offering poker play ought to be particularly sensitive to the age verification issue.

Since technology has not yet developed to the point of verifying an individual’s online identity through retina scans or fingerprint analysis, other, less perfect, forms of age verification have developed. One such device, created by the author, requires the user to submit the equivalent of an online affidavit, setting forth his or her date of birth in accordance with the recently-passed E-SIGN legislation, as detailed on www.BirthDateVerifier.com. Other systems rely on ID databases, or personal information, such as social security numbers or driver’s license numbers. Given the world-wide audience for online gambling, any system that is reliant on database information for age verification, is necessarily deficient. Thus far, there is no world- wide identification database capable of providing confirmation of every individual’s age, everywhere on the planet. Until such (scary) databases are developed, the industry will necessarily be required to rely on a combination of imperfect age verification devices, such as credit cards and sworn statements, in order to verify age of online users. However, some attempt to weed out children from online gambling services should be taken, particularly in the current legal climate.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

Gambling Law Update™

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

JANUARY 2005

Introduction

Gambling Law Update returns this month after a several month hiatus. Much has been happening in the world of Internet Gambling, and the Author has been in the trenches fighting various battles at different levels. Advertisers remain nervous about taking online gambling advertising, although significant progress is being made to educate them on the difference between reality and rumor. The Casino City case continues to wind it way through the court system, with the first round of briefs completed, and very little surprises. The Department of Justice claims that the case should be dismissed because they have not prosecuted anybody in the almost 2 years since the initial threats. Now there’s an argument. Does that mean that the threats were empty, and they didn’t really mean it? Does that mean they finally realized online gambling advertising is protected by the First Amendment? Time will tell, but speaking of time, there’s no time to waste, so on with the Update:

LEGISLATIVE UPDATE

With revenues from Internet gambling bets placed from the United States toping more than $1 billion annually, according to Christiansen Capital Advisors, LLC, and with the market is expected to grow to $18.4 billion internationally by 2010,¹ all eyes were on Congress to determine whether or not they would finally pass some form of Internet gambling legislation.

But as was evident in previous terms, Bill language and state’s rights to regulate gambling held several different Internet gambling Bills in committee. On July 31, 2004, the Senate Banking Committee voted 19-0 to approve restrictions that Sen. Jon Kyl (R-AZ), the leading anti- gambling voice in Washington proposed. However, the Senate Banking Committee also added

additional provisions to prevent states from regulating gambling within their borders, effectively killing the Bill.² In the House of Representatives, Rep. Michael Oxley, Chairman of the Financial Services Committee, added HR 2143, an Internet gambling prohibition bill, to the September 11 Bill before sending it out of Committee. However, this move was against the wishes of House Republican leadership, and the HR 2143 provision was stripped from the September 11 Bill before its final passage.³ Now that the 108^th session of Congress has come to a close, any pending legislation will have to be reintroduced. It is likely that Senator Kyl, who has introduced several versions of this Bill before, will attempt to pass another version during the 109^th session; “I wouldn’t bet the mortgage that (Internet gambling restrictions) will pass this year, but his interest in this issue will not go away,” Kyl spokesman Scot Montrey said.⁴ With the loss of Senate Minority Leader Tom Daschle, the major voice of opposition to this Bill, it remains to be seen whether the Senate will be influenced by Kyl. Although Kyl’s vendetta for the gaming industry is unlikely to go away, it is more likely that Congress will eventually pass some form of legislation to regulate Internet gambling, similar to HR 1233 proposed by Rep. John Conyers (D-MI), to create a federal commission to study the licensing and regulation of companies taking bets online. Nevertheless, this lack of clarity as to what is legal with respect to Internet gambling in the United States is going to continue to cause headaches for online wagering companies.

Taking a different approach to regulating Internet gambling, the Bush administration is urging United States money transfer businesses to take steps to make sure that their overseas agents are not vulnerable to money launderers and terrorist financers. The Treasury Department’s Financial Crimes Enforcement Network (“FinCen”) issued guidance aimed at

addressing this issue, making it clear that money transfer businesses must put procedures in place to detect abuses by foreign agents, guarding against money launderers and terrorist financers.⁵ “To the extent a money services business uses relationships with foreign agents and counterparts to facilitate the movement of funds into or out of the United States, the money services business’ anti-money laundering program must reasonably address the risks of money laundering and the financing of terrorism,” the agency said in a statement.⁶ The Treasury said that companies will have six months to come into compliance, marking the latest step by the administration to bolster oversight of money transfer companies.

WTO RULES AGAINST UNITED STATES’ GAMBLING PROHIBITIONS – U.S. APPEALS

Finding that United States’ cross-border gambling prohibitions on its citizens were in violation of international trade agreements, the World Trade Organization (“WTO”) issued its final ruling in favor of the Caribbean island nation of Antigua and Barbuda. The United States’ efforts to ban online gambling within its borders greatly affected Antigua and Barbuda, resulting in a loss of employment and revenue for the island nation. The WTO ruling, recently made public, found that the United States was violating its commitments under the General Agreement on Trade in Services (“GATS”) by not providing free trade in commercial services, mainly through its prohibition of online gambling transactions, declaring 3 federal laws and 4 state laws “inconsistent” with U.S. obligation under the 1995 GATS. The dispute boiled down to two basic issues, which were: “Whether gambling and betting services are covered by the U.S. commitment to end trade barriers under a sub-sector treaty titled “Other Recreational Services

(except sporting);” and, whether the U.S. is entitled to use the “public morals” clause to avoid such a commitment.”⁷ After lengthy discussions over the definition of “sporting,” the panel concluded that “sporting” does not include gambling, and noted that the U.S. had the opportunity to provide its own definitions under this sub-sector, and failed to do so.⁸ Because the U.S. did not specifically exclude gambling and betting services, the panel ruled, these services are included in its GATS commitments. The panel also concluded that the U.S. invocation of Article 14 of the GATS, which permits countries to have laws that protect public morals, could fall within the scope of Article 14 because the laws were aimed at protecting problem gamblers, preventing gambling by minors, and fighting organized crime.⁹ However, since the U.S. spurned Antigua’s offer to discuss these issues, the panel ruled, the U.S. “failed to pursue in good faith a course of action” that could have lad to a “WTO-consistent alternative.”¹⁰

The ruling was a first for the WTO since the ruling involves the Internet, and may have a direct impact on a participating country’s ability to regulate what it considers “moral vices.”¹¹ However, the case is far from over, as Antigua must also be successful in obtaining the same ruling from the WTO’s Appellate Body upholding the dispute panel’s report. On Jan. 7, 2005, a trade representative for the United States filed a Notice of Appeal to Valerie Hughes, the Appellate Body Secretariat of the World Trade Organization, acknowledging the United States’ intent to defend its case against Antigua before the WTO’s Appellate Body.¹² If the Appellate Body upholds the ruling, the WTO can request that the United States change its policies for Internet gambling or face trade sanctions. While federal officials will not be losing much sleep over possible WTO sanctions, ignoring the ruling would further increase perceptions that the United States picks and chooses what international agreements it will honor, and may open up the possibility for future proceedings from additional countries that offer online gambling services.

LEGAL PROCEEDINGS

In August 2004, Casino City, Inc. filed a Complaint against the U.S. Department of Justice (“DOJ”) in the U.S. District Court for the Middle District of Louisiana, seeking a declaratory judgment that advertising online casinos and sports books is constitutionally protected commercial free speech under the First Amendment of the United States. Casino City, an Internet portal that provides a database of information for traditional and online gambling, is filing the suit in response to the Department of Justice’s approach to silencing the Internet gaming advertising industry. Casino City is also seeking a declaration as to whether the DOJ’s threat of charging advertisers with aiding and abetting is consistent with the First Amendment. The DOJ recently filed a Reply Brief in support of its Motion to Dismiss Internet portal site Casino City’s attempt to obtain a declaratory judgment on its constitutional right to carry advertisements for online gambling companies. Responding to Casino City’s latest memorandum filed in November, the Reply Brief attempts to defend the DOJ’s actions while arguing why the

Department believes the case should be dropped due to lack of ripeness and standing.¹³ The DOJ also stated that the case should avoid a ruling on the merits because Casino City has not proved that it faces a credible threat of prosecution, a laughable position to anyone that has been following these developments. The DOJ argues that Casino City “is only one of countless

advertisers of Internet gambling,” and that over a year has passed since the DOJ issued its public service letters, but still no prosecutions have been filed.¹⁴ The DOJ contends that there is no constitutional right to advertise any illegal activity (which the DOJ argues that online gambling to be). Interestingly, even though Casino City demonstrates that online gambling providers are licensed and regulated by governments around the world, the DOJ holds that these companies are illegal everywhere in the United States¹⁵ – contradicting its position that Casino City has not proved that it faces a credible threat of prosecution.

THE ADVERTISING ONSLAUGHT

The gray area surrounding advertising practices in the interactive gaming industry has convinced many network executives to reevaluate their advertising policies and discontinue online gambling advertisements, at least for now. Among the broadcasting giants that have already pulled Internet gambling advertisements are Clear Channel Communications, Infinity Broadcasting, Discovery Networks, and search engines Google and Yahoo! This summer video game giant Electronic Arts announced that is had decided to stop running advertisements for online casinos on its website. Electronic Arts informed Forward Slash, a South Africa-based company, that it would not longer run advertisements for its online casinos on an Electronic Arts website Pogo.com, which lets visitors play interactive games without charge.¹⁶ Now, the latest company to halt gaming advertising to U.S. citizens is FindWhat.com, who also recently announced that they would stop showing online gambling ads to people whose IP addresses indicated that they were in the United States or whose location cannot be determined.

According to the New York Times, the nation’s largest phone operators, Cingular, Verizon and Sprint, are cutting service to adult companies and content for American cell phone users, despite the overwhelming success of such formats throughout Europe and Asia.¹⁷ It is believed that these operators are ignoring revenue forecasts for fear of direct economic repercussions and religious organization boycotts if this materials is offered.¹⁸ The refusal of phone operators to carry specific types of content is chilling and may put the operators in the role of censors by keeping people from accessing material that they want, setting the stage for a free speech battle. If operators can prohibit content from the adult industry, the mobile gaming industry could very well be next. However, as no company is compelled to sell material they do not wish to sell, the operators seem confident they can avoid legal repercussions.¹⁹

PayPal, the third party Internet payment processor whose exit from the online gaming

industry prompted many companies to follow suit, announced this fall that it would begin penalizing users who violate its acceptable use policy by using PayPal to collect payment for any of the “illegal” services, with fines up to $500. The policy, which specifically refers to online gambling, adult content and prescription drug sales, is to be enforced by the company’s compliance team.

A civil settlement was recently reached by 3 related companies which operated 3 St. Louis sports-oriented radio stations, KFFNS-AM, KFNS-FM and KFRT-AM. The stations entered into an over $158,000 settlement agreement to settle forfeiture allegations that these stations promoted, aided and abetted illegal offshore and online gambling activities, through airing advertisements for online gambling sites. The settlement agreement, filed in the Eastern District of Missouri, states that these radio stations knowingly received thousands of dollars in funds derived from criminal offenses, mainly the promotions of illegal gambling transactions. The government’s use of federal forfeiture laws to suppress commercial speech is dangerous, and sets a bad precedent for the industry, given the uncertainty surrounding the online gaming industry.

NATIONAL GAMBLING OUTLOOK

Options for legalized gambling are exploding around the United States – from the Internet and multi-state lottery games to casinos at racetracks dubbed “racinos.” While the legality of Internet gambling remains in constant limbo, more and more states are attempting to take matters into their own hands and form some kind of regulatory scheme. Although states are attempting to regulate gambling as an additional form of revenue, bills are having a hard time getting through committees or are becoming the victim of slander campaigns by opponents. Even though California voters rejected two gaming initiates this past election, the political battles there are far from over, as both sides are still pushing for changes in the law with regards to tribal gaming rights.

Nevertheless, states are cracking down on citizens who venture into the murky areas of this industry. State officials in Missouri shut down a “Pimp My Ride” Internet-based lottery site, which offered users an opportunity to purchase a $2 ticket for a chance to win a $20,000 grand

prize of having their car “pimped out.”²⁰ Officials shut down the site as a result of a tip, but Missouri state law prohibits individuals from running lotteries, allowing only for raffles and lotteries to be run by charities and non-profit organizations.

Since its airing in April 2003, the Travel Channel’s World Poker Tour has become a hit with viewers and now averages 5 million viewers each week, according to the casino- management company Lakes Entertainment, making it the Travel Channel’s most-watched series ever. The popularity of card games like Texas Hold ‘Em has helped fuel a card-playing craze around the nation and on many college campuses. Card games such as Texas Hold ‘em and other poker games have become “the thing” to do on campus with buy-in games organized by some colleges and student groups drawing hundreds, offering prizes ranging from money to televisions. In Florida, Texas Hold ‘Em has become so mainstream with college students that Florida State University has sanctioned campus tournaments as part of the school’s recreational

offerings, with the prize being an intramural T-shirt.²¹ “We’re the last ones doing this,” said

FSU’s recreation director, Alicia Crew. “The have offered everywhere. We’re not doing anything that anyone else isn’t doing.”²² However, the newfound popularity of poker among teens worries some adults, prompting Orange County to become the first school district in Florida to include anti-gambling lessons in its curriculum. The Florida Council on Compulsive Gambling thinks all school systems in the state should warn students of the perils of wagering. The director of Orange’s Safe and Drug-Free Schools program stated that “Instead of doing drugs or alcohol or other destructive behavior, they’re now gambling for the excitement, for something to do.”

INTERNATIONAL GAMBLING OUTLOOK

Gaming markets continue to proliferate as the popularity of Internet gambling is becoming widespread, moving into new sectors, and providing much needed revenue to its hosting country. On the Isle of Man, a policy change that allows online gaming operators to accept bets from U.S. customers has been approved. The policy change, approved by the Council of Ministers and jointly issued by the Treasury and Department of Trade and Industry for the Isle of Man, overturns a policy dating back over 18 months when casino operators on the Isle sought to avoid conflict with U.S. authorities.²³

In Canada, where U.S. interference with online gaming ventures has caused constant headaches, the government of British Columbia has passed a bill that attempts to protect its citizens from the U.S.A. PATRIOT Act. The U.S.A. PATRIOT Act, passed as a result of the September 11, 2001 terrorist attacks, allows the FBI to view private data on citizens that is held by subsidiaries of American firms. The bill passed by British Columbia amends the province’s

Protection of Privacy Act by restricting the access of information from organizations outside of Canada.²⁴

The Atlantic Lottery Corporation (“ALC”) launched a website offering existing lottery products to Atlantic Canadians through a secure and controlled environment on the corporation’s website, called PlaySphere at www.alc.ca. The website will allow Atlantic Canadians of legal age to purchase tickets for already existing lottery games via the Internet. In addition to funding their account using a voucher purchased at lottery outlets, consumers will be able to pay for their lottery product through an electronic funds transfer from their bank account.²⁵ There will be no option to use a credit card. Currently, more than 30 regulated lotteries worldwide offer products for sale over the web.²⁶

GAMBLING IN THE U.K.

Internet gambling in the United Kingdom (“U.K.”) has been moving steadily towards regulation for almost as long as United States’ effort to prohibit it. The full form of the UK Gambling Bill was introduced this fall and debated in committee. However, the Bill, which aims to modernize 40-year-old legislation, and allows for Las Vegas-style super-casinos, has angered campaigners, health experts and casino operators alike. Waning support from the industry turned to hostility in December when the government announced stringent new caps on their expansion plans – wiping over 300 million pounds off their combined market value in the span of a few hours.²⁷ With a general election expected in early May and only a few weeks to get the Bill

approved in the House of Lords, Culture Secretary, Malcolm Moss, said it would be a “miracle” if the Bill is passed in time.²⁸ Some industry representatives believe ministers are considering dropping the contentious parts of the Bill relating to new casinos as a last resort to get the rest of the laws approved.²⁹

In an effort to better represent the needs of the betting industry in the U.K., and as the result of one of the biggest race fixing scandals in the betting exchange industry, the three leading P2P sites joined together this past fall to form the Betting Exchange Trade Association (“BETA”), a self-regulating trade association.³⁰ Betfair, an industry leader, was joined by Betdaq and Sporting Options in the group’s formation, whose main focus will be to act as a representative of the betting exchanges in their discussions with government and regulatory authorities and to curb criticism that exchanges are safe havens for race fixers. However, BETA has already revoked the membership of Sporting Options Ltd, after they were found to be in “material breech” of the new code of practices for betting exchanges. The BETA executive

committee ruled that Sporting Options did not meet its requirements in light of the current Gambling Bill.³¹ This author has been a consistent proponent of trade associations, and industry organizing in general. Those forces opposing gambling are well-organized to be sure, and any effort this industry can put forth to achieve even a proportional level of organization compared to those opposition groups, would be time well spent.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

The Benefits of Age Verification for Online Gambling

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

Recently, significant attention has been drawn to the issue of age verification for online gambling services, as a result of the U.K. study preformed by GamCare, Citizencard and the Children’s Charities Coalition on Internet Safety.¹ That article demonstrated that 30 of 37 online casinos and betting sites that were tested allowed minors to set up accounts. The accounts were setup using a debit card, with the minor giving their accurate address and personal information, but indicating that they were of legal age to gamble.² For the purpose of the study, a site “passed “if the account was blocked or a request was made for further proof of age and I.D., after the registration process was complete. Failing sites simply allowed the user to log on and gamble.³

This state of affairs demonstrates a critical need for some form of workable age verification for gaming Websites. Since minors are gaining increasing access to credit cards issued by various different merchant banks, credit cards can no longer be used as a form of age verification for online transactions. Moreover, VISA has notified webmasters that it specifically objects to the use of its credit cards for purposes of age verification. Therefore, it is time for an innovative solution to the vexing problem of online age verification for gaming Websites.

The adult Internet industry was faced with a similar crisis, several times in the past, when the United States government passed legislation mandating the implementation of age verification procedures for access to sexually explicit material on the Internet.⁴ Although the law has been enjoined as unconstitutional on several occasions by the federal courts, many adult Websites sought a solution to the online age verification problem, and this author responded.

Development of the BirthDateVerifier™

Several criteria were used in the development of a workable age verification solution: 1) the verification must be immediate, and the device easy to use; 2) the device must perform some manner of “verification” of the user’s age data provided; 3) some incentive must be created for the user providing accurate and truthful age data; and 4) the device must function effectively world wide, without reference to the user’s location.

Using the above-referenced criteria, this author developed the Birth Date Verifier, which uses a unique combination of the Electronic Signatures Act⁵ (“E-Sign Act”) and the Unsworn Declarations Act⁶ to create a procedure whereby the user submits the equivalent of an electronic affidavit, attesting to his or her date of birth under the penalties of perjury, and stipulating to the use of U.S. law to accomplish this task. The birth date data provided by the user is then checked against the current date as recorded on the server, to calculate the actual age of the individual on that particular day. Once it is verified that the user’s sworn data make him or her an adult, i.e., over the age of 18, the user is allowed entry to the age restricted portions of the site.

A number of adult Websites have adopted the Birth Date Verifier device as the preferred method of age verification, and a partial list of those sites can be found here. Version 4.0 of the software includes a gaming-specific age verification page, which can be seen in operation here. Under well recognized “choice of law” principles, a party to a given transaction – even an electronic transaction – can agree to use the laws of a specific jurisdiction to govern that particular transaction. When using the Birth Date Verifier, the user stipulates to the application of U.S. law for purposes of online age verification only, in order to incorporate the E-Sign Act and the Unsworn Declarations Act. Of course the choice of law provision will not be necessary for U.S.-based users, who are already subject to U.S. law, but it allows gaming sites to use these unique legal provisions for players around the world.

The online affidavit requires that the birth date information submitted on the site be accurate, under the penalties of perjury. In other words, providing false information would constitute a federal felony. Courts are not sympathetic to the claims of minors, who commit felonious acts through perjurous online transactions. Any minor gaining access to the gambling services would, by definition, be committing the crime of perjury and thus would not make a particularly sympathetic victim as compared to the responsible gaming webmaster who is attempting to implement the best age verification device available under current technology.

Of course, like any other new device dependant on legal principles, these theories are all untested. The best scenario would be for the device to remain untested, and for no client to be prosecuted for violation of any age restriction applicable to online services. However, given the recent attention to access by minors to gaming services, it is likely only a matter of time before one or more governmental entities take notice and initiate investigation or prosecution based on access to gaming sites by minors. Notably, given the criteria used by the U.K. study referenced above, the Birth Date Verifier would constitute the subsequent proof of age check required to obtain a passing grade.

While there have been few historical prosecutions based on direct age restrictions, any violation of the law by an online gambling site can be exacerbated, and defenses weakened, if minors are provided unfettered access to online gaming services. Judges, juries and prosecutors

are often less sympathetic to the claims and defenses of those who do nothing to keep age restricted materials away from children, even if such issues are never brought to the forefront in a particular prosecution. Therefore, it is in the best interests of all gaming site operators to consider a viable form of online age verification to strengthen their legal position from top to bottom. It is only a matter of time before alternative forms of online age verification are developed – whether based on finger print transmission, retina scanning or other advanced technology. However, until the technology progresses to such a point where these methods are readily available, the Birth Date Verifier provides a viable option for online gambling sites to impose a barrier to minors’ access to gambling services.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. The Birth Date Verifier is copyrighted with the U.S. Copyright Office, and is the subject of a pending patent application with the U.S. Patent and Trademark Office. All rights reserved. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

A Breakdown of the California Gambling Advertising Suit

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

Introduction

Despite the recent scramble by search engines Google and Yahoo! to pull gambling advertising content from their sites, both have been named along with various other companies, as Plaintiffs in a class action lawsuit recently filed in San Francisco Superior Court.¹ The suit, brought by California residents Mario Cisneros, who allegedly never engaged in any Internet gambling, and Michael Voight, who claims to have used search engines in California to find gambling sites and lost $100,000, specifically names 13 Defendants, and 100 “John Doe” Defendants. The Plaintiffs are seeking monetary relief and to enjoin the Defendants from “participating in, and continuing to market, sell, and display advertising for illegal Internet gambling establishments.”² The class sought to be certified in the suit is defined as “All California residents who visited an illegal Internet gambling website and incurred losses therein each found these websites as a result of advertisements contained on Defendants and their affiliates web pages or search results.”³

CDA Immunity

The Complaint alleges that Defendants are not entitled to immunity under Section 230 of the Communications Decency Act (“CDA”) because they do not qualify as “interactive computer services.”⁴ Section 230 immunity completely protects certain Internet access providers from any claims, asserted under state law, and premised on the publication or editing of materials made available online.⁵ Notably, the types of websites deemed by the courts to be covered by Section 230 immunity have continually expanded of late,⁶ and therefore the absence of immunity is not a foregone conclusion for the search engines and certain other defendants.

The Claims

As a basis of liability, the Complaint alleges that the Defendants “obtain revenue from these Websites when they convince users to ‘click through’ to the advertisers’ websites. In the case of illegal gambling, this ‘click-through’ directs California users to Internet gambling websites where persons in California are enticed to gamble away their hard-earned savings using their home and work computers.”⁷ The Complaint further states that, “Defendants knowingly and willfully conspired with Internet gambling Websites and others to carry out these illegal gambling activities through the use of Defendants’ advertising capabilities and, in fact, carried out these advertising activities in furtherance of the conspiracy, thereby lending aid and encouragement to illegal gambling Websites. Defendants distribute these advertisements to millions of consumers and to affiliate Websites.”⁸

Factual Support

The factual background of the Complaint alleges that 1) Internet gambling is a pervasive and growing problem, and a) noted various article citing the rise of Internet gambling and its availability to U.S. residents,⁹ b) gambling by minors,¹⁰ c) compulsive gambling,¹¹ d) the potential for fraud,¹² e) the potential for organized crime,¹³ f) the potential for money laundering, and g) examined the effects of advertising for Internet gambling, and noted that “The sheer volume of advertisements for Internet sports books and online casinos is troubling because it misleads the public to believe that such gambling is legal, when in fact, it is not.”¹⁴ 2) Internet gambling is addictive to our youth, and noted articles regarding the addictive threat of Internet gambling, especially to teenagers and college students, studies concerning compulsive gambling and athletic participation. The Complaint makes reference to an article by USA Today, which noted that “Internet gambling is growing in popularity, raising the odds that people – especially the young and women – might become addicted.”¹⁵ 3) Internet gambling preys on seniors, noting that is harder for a senior citizen to recover after a gambling loss. “Older adults are, perhaps, more vulnerable than other age groups given their greater dependence on fixed incomes and more limited ability to recover to secure debt or recover from gambling losses.”¹⁶ The Complaint also alleges that “Internet casinos are preying on our older citizens,”¹⁷ and points the wide range of games now offered online and to an article found on Google entitled: “For Senior Citizens: – Why Gambling On The Internet is Good For You.” 4) Internet gambling deprives local governments of license and tax revenues, and alleges that “Internet gambling also drains tax revenues from properly licensed and regulated California Indian casinos and the California State Lottery tax revenues that would otherwise accrue to state educational facilities, or could be used to cover the costs of dealing with the social ills caused by gambling.”¹⁸ 5) Internet gambling deprives California Indian Tribes of exclusivity and State of California revenues. The Complaint notes the deal that Gov. Arnold Schwarzenegger signed with 5 California Indian tribes that gave them the right to operate an unlimited number of slot machines, and pay 15% of their revenue through various licensing fees and additional fees per machine. The Complaint stated that “Internet gambling websites, their co-conspirators and abettors, illegally take money from California citizens, without paying 15% of their revenues to California.”¹⁹ 6) Internet gambling is illegal under California law. a) California law bans conducting, playing or betting on i) most lotteries; ii) a few specific games such as faro, monte, roulette, lansquenet, rouge et

noire, rondo, tan, fan-tan, seven-and-a-half, twenty-one and hokey-pokey; iii) any banking or percentage game played with cards, dice or any device; and iv) most sports bookmaking bets and wagers.²⁰ b) Aiders and abettors to illegal gambling are guilty of violating California’s gambling prohibitions. c) Co-Conspiring to gambling violates California law. The Complaint states that “where one agrees to and does advertise, promote or otherwise facilitate illegal online

gambling, with the online gambling business, and that advertisement or promotion or encouragement takes place within California, then the agreement amounts to a conspiracy.”²¹

In evaluating the Defendants wrongful conduct, the Complaint claims that the Defendants posted sponsored advertisements in California for unlicensed gambling Websites, in that “Defendants Advertise and deceptively list numerous advertisements for Internet gambling when an Internet searcher types in the phrase ‘legal gambling,’” however, none of the Defendants provided any disclosure that gambling is in fact illegal under California law;²² 2) Defendants

advertising is expressly directed at California locations where gambling is illegal, and noted that “Many Defendants provide localized geo-tracking technologies so that advertisements can be focused on a particular region within a state. For example, Google permits to select regional areas such as the “State of California” or sub-regions in the state.”²³ 3) The Complaint cites specific examples of Defendants wide-scale “illegal” advertising services in California for Internet gambling Websites.²⁴ It also pointed to search results that generated responses on the Defendants’ websites for “illegal gambling,” “Internet gambling,” “California gambling,” and others.²⁵

The Complaint also alleges that the “advertising Defendants, and each of them, conspired in the operation of illegal gambling enterprise by knowingly and purposefully providing advertising in California to the website Defendants to advertise and promote and carry out illegal gambling in California with persons in California. The advertising Defendants knew about the content of the gambling website Defendants’ activities and knowingly conspired to provide advertising to the gambling website Defendants – an illegal act in the State of California.”²⁶

The Complaint makes note of the fact that “Advertising Defendants have for several years advertised illegal Internet gambling in California and have not taken any steps to alleviate the harm caused by this activity. Although two of the advertising Defendants, Yahoo and Google, have suggested intention to withdraw some or all of their illegal Internet advertising, as of the time of the filing of this Complaint this advertising continues.”²⁷ For this reason, Plaintiffs “seek a declaration of this court that the Internet gambling transactions and the Internet

advertisement of gambling websites in California carried on by Defendants, and each of them, are illegal (Penal Code §§230, 321, 322, 330, 337(a) and 337), and constitute illegal unfair business practices under Cal. Bus. & Prof. Code §17200.”²⁸

Novel Theories

All of the above legal theories are untested and novel when applied to online gambling advertising. As has been noted in many of this author’s articles, online gambling advertising is entitled to First Amendment protection as a form of commercial speech, and such protection may affect the viability of one or more of the Plaintiffs’ theories of liability. While the First Amendment will not provide a direct defense to the claims, since the Plaintiffs are not government actors and therefore cannot violate the First Amendment themselves, it may impact the underlying premise that gambling advertising constitutes illegal conduct; a premise which the courts have been hesitant to accept in the past.²⁹

The Plaintiffs also face significant hurdles in their attempt to bring this case as a class action. Class certification is difficult to obtain in any case, and is substantially more challenging where the damages allegedly suffered by each of the individuals making up the purported class vastly differ. Assuming for the moment that the Plaintiffs’ theories of liability are correct, and the court must calculate a damages award for the class, it may be impossible to quantify a ‘standard’ measure of damages for each class member, since each individual California resident may be affected differently by the advertising activities: Some may gamble online in response to the ads; some may become addicted to the services; some may see the ads and ignore them, and some may never see the ads and decide to either gamble or not, independent of their exposure to the ads. While the difference in damages calculations is not an insurmountable hurdle to overcome in class certification, it certainly presents difficulties for the Plaintiffs in this regard.

The Commerce Clause

Although the First Amendment may complicate the legal analysis applicable to this case, the constitutional provision that may be the death knell for this suit is the dormant commerce clause. A number of state laws that attempted to regulate content or transactions on the Internet have been struck down on commerce clause grounds.³⁰ While no case has yet determined the applicability of the commerce clause to online gambling advertising restrictions under state law, a sound argument exists that all such state laws are invalid when applied to Internet transactions and advertisements, which inherently involve interstate commerce. The commerce clause prevents the states from trying to regulate commercial activities occurring outside their own boarders, which is exactly the type of conduct that the Plaintiffs challenge in the subject Complaint. Given the undeveloped state of advertising law as it relates to the dormant commerce clause, it is impossible to predict how this issue might play out in the courts. However, it is a safe bet that one or more of the Defendants will raise it in defense of the claims.

Conclusion

Regardless how this case ends up in the court system, its filing raises broader issues. The Plaintiffs point to the industry’s focus on minors, young adults and the elderly in its marketing activities. Regardless of the truth of these assertions, the points may be well taken. The online gambling industry cannot afford to ignore the public perception that it preys on the defenseless and weak-willed. The claims pertaining to minors are particularly troublesome, and could form the basis for significant private or governmental litigation in the future, if not promptly addressed by the industry as a whole. Gambling is an adult activity. Irrespective of the arguments that might be made pro or con regarding the appropriate age at which one should be allowed to engage in social betting, minors should not be encouraged to gamble given the legal repercussions of doing so; particularly in the United States. Various options exist to verify the age of online users of gambling websites, including one developed by this author. Additional suits like the instant Complaint are inevitable. Often, perception is reality, and if enough complainants claim that gambling advertising is illegal, the average citizen will begin to accept that reality. Therefore, the more the industry can do to focus its advertising on its desired target market, and avoid spillover effect onto minors, problem gamblers, or the weak-willed, the better it will fare in the courts, and in the court of public opinion.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”

Gambling Law Update™

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

APRIL 2004

WTO RULES AGAINST UNITED STATES ’ GAMBLING PROHIBITIONS

Finding that United States’ cross-border gambling prohibitions on its citizens were in violation of international trade agreements, the World Trade Organization (“WTO”) issued a preliminary ruling in favor of the Caribbean island nation of Antigua and Barbuda. The United States’ efforts to ban online gambling within its borders greatly affected Antigua and Barbuda, resulting in a loss of employment and revenue for the island nation. The WTO ruling, which will not be made public until some time in May, found that the United States was violating its commitments under the General Agreement on Trade in Services by not providing free trade in commercial services, mainly through its prohibition of online gambling transactions. The United States now has two months to appeal the ruling, and has made several anno uncements that it intends to do so. Richard Mills, a spokesperson for the U.S. Trade Representative’s Office in Washington, stated, “We intend to appeal and will argue vigorously that this deeply flawed panel report must be corrected by the appellate body.”¹ The preliminary ruling means that the United States will either have to change its policies for Internet gambling or face trade sanctions pending the outcome of the appeal.

While federal officials will not be losing much sleep over possible WTO sanctions, ignoring the ruling would further increase perceptions that the United States picks and chooses what international agreements it will honor, and may open up the possibility for future proceedings from additional countries that offer online gambling services. The case is a first for

¹ Richard Waddington, Internet Roulette, MSNBC.com at http://msnbc.msn.com/id/4594859 (3/25/04).

the WTO because the ruling involves the Internet, and because the ruling will have a direct impact on a participating count ry’s ability to regulate what it considers “moral vices.”² According to The New York Times, “Several members of Congress said they would rather have an international trade war or withdraw from future rounds of the WTO than have American social policy dictated from abroad.”³ Representative Bob Goodlatte (R-VA) said, “I t’s appalling, it cannot be allowed to stand that another nation can impose its values on the U.S. and make it a trade issue.”⁴ Conversely, the same can also be said for lawmakers who impose their moral values on legislation that affects United States citizens; so where do we draw the line?

In response to the United States’ proposed Internet gambling prohibition, the British Treasury stated, “We have taken the view that online gambling can be properly regulated through the new regulatory body: the Gambling Commission. The U.S. concerns over money laundering, problem gambling, child access and fair gambling can be controlled; but we acknowledge that regulators in the United States have reached different conclusions.”⁵ Britain believes that United States law prohibiting Internet gambling has no jur isdictio n outside the country and argued that the prohibitions apply only where the “operator” accepting bets is located and not where the punter resides.⁶ The possibility of the United States passing legislation that prohibits Internet gambling sparked an excha nge of letters between the British Treasury and United States legislators, which revealed the fundamental disagreement. “The purpose of this legislation is to prohibit U.S. citizens from making Internet wagers, specifically

² Scott Miller, WTO Ruling Said to Open U.S. to Internet Gaming, The Wall Street Journal Europe; 32-2-741-1328 at http://www.quicken.com/investments/news_center/article (3/24/04).

³ Matt Richtel, U.S. Online Gambling Policy Violates Law, WTO Rules, New York Times at

http://www.nytimes.com/2004/03/26/technology/26gamble.html (3/26/04).

⁴ Id.

⁵ John Gilmore, UK and US in Gambling Review Row, Evening Standard at http://www.thisislondon.co.uk/news/businesss/article/timid75830?version=1 (3/17/04).

⁶ Id.

with companies outside the U.S. and close the U.S. market to Internet gambling operators in the United Kingdom,” Congressman John Conyers (D-MI) wrote in a letter to the Treasury. ⁷

LEGAL PROCEEDINGS

Opponents of Internet gambling have been battling it out in court over whether a person is liable for debt acquired with a credit card while gambling at online casinos, as in the case of In re MasterCard International, Inc., Internet Gambling Litigation.⁸ In the original lawsuit, numerous class actions were filed in district courts around the country and were consolidated into two “test” cases. In the Plaintiffs’ suit against MasterCard International, Visa International and several other banks that issue MasterCard and Visa credit cards, (“Defendants”), Plaintiffs attempted to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”) to avoid debts incurred when they used their credit cards to purchase credits or “chips” that were used to gamble at online casinos, and sought to recover injuries sustained from the alleged RICO violations. However, the Court ruled in favor of the Defendants and dismissed Plaintiffs’ additional RICO claims and remaining state law claims. The Court concluded that the Plaintiffs did not allege facts showing a pattern of racketeering activity or the collection of unlawful debt, a RICO enterprise, or participation in the management of the enterprise.⁹ Importantly, the Court held that the Wire Act did not prohibit the Internet gambling at issue in these cases. As for the Plaintiffs’ remaining state law claims, which concerned statutes prohibiting gambling proceed transactions, the Court noted in its dismissal that is had previously determined that the transactions at issue consist of two events: 1) Plaintiffs’ transaction with the credit card

⁷ Id.

⁸ In re MasterCard Intern., Inc., 2004 WL 369729 (Feb. 19, 2004) See also: In re Mastercard International Inc., Internet Gambling Litigation, 132 F.Supp. 468 (E.D.La.2001) In re MasterCard International, Inc. Internet Gambling Litigation, 313 F.3d 257 (5th Cir.2002) affirmed.

⁹ In re MasterCard Intern., Inc., 313 F.3d at 261.

company, whic h ends upon the receipt of credit, and 2) Plaintiffs’ subsequent online gambling.¹⁰ Plaintiffs’ claim failed because the transactions with the financial institutions at issue took place before the gambling occurred.

Lawsuits against casinos by gamblers are now becoming more prevalent throughout the Untied States. In Michigan, two “compulsive gamblers,” who signed up for a voluntary program where they were banned from casinos, have filed lawsuits against three casinos in state court alleging breach of contract since the casinos allowed them to continue gambling and failed to keep them out.¹¹ Michigan, like six other states, provides a program where compulsive gamblers can place their names on a list that enables them to voluntarily ban themselves from casinos and face arrest if they attempt to enter.¹² However, compulsive gamblers are not the only ones to bring lawsuits against casinos for gamblers’ gambling activities. In Snowney v. Harrah’s Entertainment, Inc.,¹³ the Court attempted to evaluate the advertising practices of casinos. In that case, the Plaintiff sought to exercise personal jurisdiction in California over several divisions of Harrah’s, a Nevada-based casino corporation, and their marketing company (“Defendants”). The Court concluded that some of the Defendants did not qualify for the exercise of personal jurisdiction because they did not own or operate the hotels. However, based on advertising in California,¹⁴ an interactive Internet Website,¹⁵ a toll- free number for hotel reservations,¹⁶ and other advertising activities purposefully directed at California residents,¹⁷ the Court held that the remaining Defendants who owned and operated the Nevada hotels had sufficient contacts with California to justify the exercise of personal jurisdiction.

¹⁰ In re MasterCard Intern., Inc., 2004 WL 369729 at 3 (E.D.La.)

¹¹ Wendy Davis, Gambling On Casino Cases, ABA Journal, at 18, April 2004.

¹² Id at 18.

¹³ Snowney v Harrah’s Entertainment, Inc., 2004 WL 440183 (Mar. 11, 2004).

¹⁴ Id. at 4.

¹⁵ Id. at 4.

¹⁶ Id.. at 5.

¹⁷ Id. at 4.

With all this talk of legal proceedings in the gaming industry, it is about time to mention the release of Jay Cohen from the Nellis Federal Prison Camp. Cohen was the only one of twenty-one offshore sports book operators who was indicted for violating the Wire Act to actually face charges in a United States court.¹⁸ Cohen, who plans to seek employment outside

of the Internet gambling industry, is not finished with his battle in the United States court system since his legal team has just been granted the right to appeal the dismissal of his habeas corpus petition. ¹⁹ The recent WTO ruling may also aid Cohen in his quest for vindication since it deals with the issue of cross-border gambling. “I still maintain I ran a legal business in another country,” Cohen said. “I regret that I did not get a fair trial or a fair appeals process. What if I were Chinese and ran a Website in the U.S. that was critical of China, then returned to China and was jailed? Would the U.S. support China on that?”²⁰

THE ADVERTISING ONSLAUGHT

The grey area surrounding advertising practices in the interactive gaming industry has convinced many network executives to reevaluate their advertising policies and discontinue online gambling advertisements, at least for now. Among the broadcasting giants that have already pulled Internet gambling advertisements are Clear Channel Communications, Infinity Broadcasting and the Discovery Networks. And now, amid rumors of federal government pressure, the search engines Google and Yahoo! are following suit. Google and Yahoo! have announced plans to stop taking advertising from gambling- related Websites. Although Google is pulling online gambling ads in all markets, officials with Yahoo! said they will continue to carry advertising on the company’s global sites, which are published in numerous languages and

¹⁸ IGN Staff, Cohen Again Challenges 200 Conviction,

www.igamingnews.com/index.cfm?page=artlisting&tid=4972 (3/25/04).

¹⁹ Id.

²⁰ E. Koch, Gaming Operator Freed From Prison, Las Vegas Sun at www.casinocitytimes.com/news/article.cfm?contentID=141757 (3/23/04).

marketed throughout the world.²¹ While specific legislation prohibiting Internet gambling has yet to pass both the House of Representatives and the Senate, “advertising an illegal activity ought to be illegal itself,”²² federal officials say. Family News In Focus boasted that “a quiet federal campaign against the marketing of illegal Internet gambling sites is under way and apparently having an effect.”²³ The campaign by the federal government was kicked into high gear last June, when Deputy Assistant Attorney General for the Criminal Division of the Justice Department, John G. Malcolm, sent a letter to trade groups representing publishers and broadcasters. The letter warned trade groups that their me mbers may be in violation of federal law by aiding and abetting online casinos through the acceptance of ads. However, all has been quiet since the Department of Justice’s September 2003 issuance of subpoenas, which requested all records pertaining to advertisements by Internet gaming establishments dating back to 1997.

LEGISLATIVE UPDATE

With revenues from Internet gambling bets placed from the United States toping more than $1 billion annually, according to Christiansen Capital Advisors, LLC, the National Collegiate Athletic Association, (“NCAA”), is not only maintaining its stance against wagering, it is even speaking out against casual office pools, which can range from $1 to $5 to enter. According to Bill Saum, Director of Agent and Gambling Activities for the NCAA, “Those individua ls in $1 pools might believe we’re going over the edge, but the fact is, across the U.S., the stakes grow to $10, $50, thousands of dollars, and on Wall Street, it enters into the hundreds

²¹ K. Smith, Yahoo, Google Cut I-Gaming Ads, www.igamingnews.com/index.cfm?page=artlisting&tid=5002 (4/06/04).

²² T. Phillips, Broadcasters Halt Web Gambling Ads, Family News In Focus at

www.family.org/cforum/fnif/news/a0031260.cfm (3/19/04).

²³ Id.

of thousands. It’s difficult to say pools are ‘sort of OK.’ We know, for example, that pools are an entry point for youths into gambling.”²⁴

In Washington, Senator Jon Kyl (R-AZ) continues to remain the leading anti- gambling voice. His latest effort at a prohibition bill, S. 627, passed the Banking Committee last summer. However, previous versions of this Bill have not been aggressively acted on by Congress or have died in committee. Although most industry leaders believe that this Bill has no chance of passing during an election year, the issue may once again rear its ugly head once the WTO ruling is finalized. The Bush Administration’s proposal to withhold prize money from gambling winners who owe child support was left out of the budget resolution recently approved by the Senate committee. Representative Shelley Berkley (D-NV) stated that the measure, which would force casinos to take on enforcement duties, “creates a new bureaucracy to process information and leaves the gaming business and the customer at the mercy of any mistakes or misinformation generated by that new bureaucracy. Should banks check the court records of all customers making deposits or withdrawals? Must car dealers invoke the same requirements against their customers? The answer is no, but approval of the Administration’s proposal will open the door to further costly and unreasonable mandates on our business communities.”²⁵

INTERNATIONAL GAMBLING OUTLOOK

Asian gaming markets continue to proliferate as the popularity of Internet gambling is becoming widespread throughout the region. Operators of online casinos have long viewed Asia as the Promised Land, believing that widespread prohibitions there have created a large demand for their product. Angela Ho, President of the www.DrHo888.com Website and daughter of

²⁴ K. Smith, NCAA Holds Its Stance Against Betting,

http://www.igamingnews.com/index.cfm?page=artlisting&tid=4954 (3/19/04)

²⁵ S. Struglinski, Casino Supporters Block Child Support Collection Measure, Las Vegas Sun at http://rgtonline.com/article.cfm?articleId=47852 (3/12/04).

Asian casino king Dr. Stanley Ho, said that due to rapid market growth her Costa Rica-based site has recently seen an increase in monthly wagering of up to 40 percent by the almost exclusively Asian or Asian-speaking clientele.²⁶ In keeping in line with this trend, the Philippine Amusement and Gaming Corp. (“Pagcor”) is set to launch its first Internet casino.²⁷ The company believes the move will enable them to attract new customers at home and abroad. It is anticipated that Asian nations will constitute a large percentage of the online gambling market as the use of new technologies such as mobile phones and PDA’s for wagering increases.²⁸

Internet gambling is proliferating around the globe into new sectors and providing much needed revenue to its hosting country. In Canada, the Atlantic Lottery Corporation (“ALC ”) announced plans to open an online version of its casino, a move that is already being criticized by some influential anti- gambling advocates.²⁹ ALC’s defense is that millions of gambling dollars are leaving the region through the Internet, and gambling online is only for leisure and not for money. The online casino operator estimates that Atlantic Canadians spend up to $20 million a year on Internet gambling, with most of that money going offshore.³⁰ However,

opponents of the plan are concerned over whether the gambling addict problem will only grow worse. Conversely, in response to the growing concern over “problem gamblers,” the New Zealand government has proposed a “problem gambling strategy. ” The plan is aimed at reducing any adverse effects of gambling by working with communities to increase awareness of harms;

²⁶ M. Brunker, Internet Gambling Makes Waves in Asia, MSNBC.com at http://msnbc.msn.com/id/4311924/ (2/26/04).

²⁷ ABS-CBN News, Pagcor Launches Internet Casino, located at http://www.abs- cbnnews.com/flashnewsstory.aspx?flashOID=15841 (3/20/04).

²⁸ M. Brunker, Internet Gambling Makes Waves in Asia, MSNBC.com at http://msnbc.msn.com/id/4311924/

(2/26/04).

²⁹ Maddy, Atlantic Lottery Proposes Internet Gambling, Online Casino News at http://www.onlinecasinonews.com/ocnv2_1/article/article.asp?id=4897 (3/23/04).

³⁰ Id.

the government plans to fund the effort through a proposed problem gambling levy which would be collected from the gambling sector.³¹

NATIONAL GAMBLING OUTLOOK

Options for legalized gambling are exploding around the United States – from the Internet and multi-state lottery games to riverboats and casinos at tracks dubbed “racinos.” As the legality of Internet gambling remains in constant limbo, more and more states are forging ahead with regulatory measures for other types of gambling, particularly video gambling, racetracks, and state-run lotteries. In Maryland and Pennsylvania, state legislators are attempting to legalize gambling in an effort to stop its citizens from spending money in out-of-state casinos in New Jersey, West Virginia, Delaware and New York. Although such proposals have died in the past, it is believed that since the states are facing an array of financial problems, the proposal is likely to pass.³² In Washington, the state’s House of Representatives passed Senate Bill 6481,

a Bill that will allow the state of offer advanced deposit wagering via the Internet and telephone on horse races.³³ The measure will now add Washington to the growing number of states that offer wagering to its residents through Internet and phone accounts.

Since its airing in April 2003, the Travel Channel’s World Poker Tour has become a hit with viewers and now averages 5 million viewers each week, according to the casino- manageme nt company Lakes Entertainment, making it the Travel Channel’s most-watched series ever. Bravo’s “Celebrity Poker Showdown” is also a major money- maker, with popular celebrity contestant s drawing viewers, many of them college students. The popularity of these

³¹ New Zealand Scoop, Government Proposes Problem Gambling Strategy, located at http://casinocitytimes.com/news/article.cfm?contentID=141769 (3/24/04).

³² J. Dao, Two States Trying to Keep Gambling Money at Home, New York Times at http://www.nytimes.com/2004/03/22/national/22GAMB.html (3/22/04).

³³ Tacoma News Tribune, Washington State Legalizing Online Gambling, located at

www.casinocitytimes.com/news/article.cfm?contentID=141270 (3/01/04).

shows has helped to fuel a card-playing craze around the nation and on many college campuses. Card games such as Texas Hold ‘em and other poker games have become “the thing” to do on campus with buy- in games organized by some colleges and student groups drawing hundreds, offering prizes ranging from money to televisions. In New York, the turnout at Binghamton University’s free poker tournament exceeded expectations, with approximately 260 players. Online poker companies are also looking to target students with tournaments such as the first college competition at CollegePokerChampionships.com, which began free qualifying rounds in January. ³⁴ The new craze is a concern to gambling advocacy groups who worry this will only increase the growing number of problem gamblers. However, for Steve Lipcomb, CEO of the World Poker Tour, there are things worse than college students playing poker. Lipcomb said, “Of all the things you’re confronted with in college, this seems to me to be just about the most benign form of entertainment you’ll find.”³⁵

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”