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Online Gambling under the United States Law

David Storobin, Esq. - 7/19/2005

The rise of the internet during the 1990's may become known as the greatest event of the 20-th century. It has become easy for people to find and communicate with those to whom they would have no access prior to the invention of information superhighway. While the benefits of this are spectacular, business people, lawyers and judges have had to tackle issues that arose as a result.

One of the issues facing businesspeople, lawyers and judges is the legality of online gaming. In my paper I intend to discuss:

1. Whether states are allowed to prohibit internet gambling in their states or are they Constitutionally prevented from doing so under the Dormant Commerce Clause?

2. Whether the federal government is allowed to prohibit internet gambling or is it Constitutionally prevented from doing so under the First Amendment.

II. THE ONLINE CASINO AND SPORTSBOOK INDUSTRY

A typical online casino is run outside the United States - usually in the Carribean - where online gambling is legalized. A licensing fee is paid to the host country and operate the web site and provide customer support. Those interested in gambling, can register with the casino and deposit money by credit card, Western Union, PayPal, check or another method. After the casino receives the money, members can play games similar to the ones found in land-based casinos, including video poker, craps, roulette, blackjack, and slot machines, as well as to place bets on sporting events and horse races. This is done by signing on to the internet, visiting the web site or opening its software, entering a user name and a password, and then using the graphic computer interface the same way one would use games in a land-based casino. Considering the unlimited nature of the internet, gamblers need not be in the same venue as the server, and the operators of the casino have no way of limiting access only to those who are legally allowed to participate in online wagering.

III. ONLINE CASINO REGULATION


According to the Department of Justice, Internet gambling is illegal according to "at least four federal statutes." Under the Wire Act of 1961, it is illegal for gambling providers to offer or to take bets from gamblers over telephone lines or other wire devices unless allowed by the state.

In 1999 Senate approved the Internet Gambling Prohibition Act (IGPA), which prohibits the use of wire communications for accepting interstate or foreign wagers. On July 17, 2000, the House nearly passed IGPA (H.R. 3125) which required a 2/3 majority vote. The strong vote in favor of the bill (245 to 159) shows support for internet gambling prohibition.


Additionally, several states passed laws prohibiting internet gaming by their residents. Missouri was the first state to take significant action. The company, Interactive Gaming & Communications, was based outside of Missouri, but allowed Missouri residents to bet on roulette and blackjack through the Internet site. In 1997, the state of Missouri argued in State v. Interactive Gaming & Communications Corp. that the gambling transactions, which were illegal in Missouri, occurred on the state resident's computer and not on the out of state server. The court held that the out of state casino violated Missouri consumer protection law and granted the state an injunction to prohibit the casino from taking bets from all Missouri customers. The company then violated the court order by accepting bets that Missouri authorities placed on the site. Under the state's law, the operator of the site faced a fine of fifteen thousand dollars or up to five years in prison. The company entered into a plea agreement in which the operator did not have to do any jail time, but had to pay $ 27,500 in fines and court costs.

Other states, including Minnesota, New York, Florida, Texas and Indiana, passed similar anti gambling laws.


Internationally, at least twenty two countries, including Australia, Belize and multiple Caribbean islands, license Internet gambling in some form. There are principles of international law that protect foreign countries and bar the United States from extraditing foreign citizens for violating U.S. antigambling law. The Constitution also prohibits the United States from arresting or sentencing any foreign Internet gambling operators.

However, under the IGPA, the United States has the potential to exercise extraterritorial jurisdiction over offshore Internet casino operators who violate the IGPA's prohibition on online gambling. Yet, these offshore operators have the ability to move from country to country in the blink of an eye. Regulators generally use software filters to catch people accessing the Internet casino sites. However, it is impossible to filter out certain gambling web sites because it is so easy for the site to simply change its web address so that the static filter does not catch the new address.

IV. CONSTITUTIONAL IMPLICATIONS
OF ONLINE CASINO PROHIBITION


One particularly problematic provision of the IGPA prohibits a business engaged in gambling from "transmitting information about bets or wagers placed on the Internet." The House bill explicitly exempts from liability advertising or other communication done by licensed gambling businesses in states where they are allowed to operate and which require the recipient of the information to be physically present at the business's location to place a bet or wager. However, the Senate bill does not contain such an exception, thereby posing the potential problem of violating the Constitution's First Amendment right to free speech.


Generally, advertisements for legal casinos, and how to information for persons participating in legal gambling, are not illegal in most cases. It is, after all, perfectly legal to advertise Las Vegas casinos by inviting people to travel to Nevada where they can legally gamble. Nonetheless, the effect of the Senate bill would prohibit the MGM Grand in Las Vegas, for example, from operating a web site which advertises its room and casino services. Such advertising would be a direct violation of the Act since the MGM Grand uses a wire communication facility (i.e., the Internet) to transmit information that would assist a person (by advertising a phone number to make reservations) in placing a bet or wager at one of its casinos.

In the recent decision, the Ninth Circuit held in Valley Broadcasting Company v. United States that the federal government's prohibition on radio broadcast advertising by legalized Nevada casinos was an unconstitutional restraint on free speech. The statute at issue in the case prohibited the radio or television broadcasting of any gambling advertisements, presumably within a state where such activity was legal. However, the Supreme Court has recognized that commercial speech is protected by the First Amendment. The Court articulated a test in Central Hudson Gas & Electric Corp. v. Public Service Commission, to determine whether commercial speech should be afforded First Amendment protection:


"At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest."

Using this test, the Valley Broadcasting court concluded that the government could not prohibit radio and television stations from broadcasting gambling advertisements. First, parties agreed that the activity being advertised, gambling, was neither unlawful nor misleading since it originated in Nevada where gambling was legal. Thus, as long as the state where an Internet gambling business is established allows such activity, then the first prong of the Central Hudson test would be satisfied.

Next, the court in Valley Broadcasting analyzed the government's proffered interests in prohibiting gambling advertisements and whether those interests were substantial. The government asserted two interests: (1) its interest in reducing the amount of public participation in gambling, and (2) its interest in providing protection for those states which have not legalized gambling within the state. The court found that the first interest was substantial to protect the health, welfare, and safety of citizens. The second interest proffered by the government was also found to be substantial to provide states with an effective means of ensuring their anti gambling polices are fulfilled. These same conclusions likely would be reached in relation to Internet gambling.


Under the third prong of the Central Hudson test, however, the government likely could not prohibit the Internet transmission of information which relates to gambling. This part of the test requires a court to determine whether the imposed regulation directly advances the government's proffered interests. In Valley Broadcasting, the Ninth Circuit found that the regulation prohibiting gambling advertisements over the airwaves did not advance the government's interest in discouraging people from gambling. The court found significant that the statute excepted from the general ban advertisements for state run lotteries, non profit lotteries, and any gambling conducted by Indian Tribes [Indian Gaming Regulatory Act of 1988 (IGRA), 25 U.S.C.A. §§ 2701 2714 (Supp. 1997)]. Thus, the court found that the widespread advertising permitted by the statute made it impossible for the government to discourage participation in commercial lotteries and that the exception which allows Indian Tribes to advertise in any state undermined the government's proffered interest in protecting those states which have not legalized gambling. Thus, the court struck down the prohibition on television and radio gambling advertisements as unconstitutional.

V. ENFORCEABILITY AND WISDOM
OF ONLINE CASINO PROHIBITION

A. ENFORCABILITY

Online ambling is inevitable. No matter what is said or done by opponents of online gambling, it will continue.


The World Wide Web is a borderless, perimeter-less computer network that is growing exponentially. The Internet was purposefully designed by the Defense Department to circumvent impediments to transmission. The Internet's basic architecture renders the gambling prohibition futile. The Internet removes traditional barriers to gambling. Users no longer need to go to the physical locations where gambling is legal; they can simply sit at home on their own couch and access an Internet gaming site.

The Internet transmits data in packets with each Internet message broken down into numerous separate packets. Each of the separate packets travels across the Internet using various and unpredictable routes and then is reassembled back into the data at their final destination. The Internet makes it easy to encrypt messages, to change addresses, to send and receive anonymous messages, and to disappear without a trace.

There are two primary methods available to the federal and state governments for determining whether an individual illegally placed a bet or wager on line: the government could (1) establish their own on line gambling site, or (2) wiretap a person's Internet communications.


The first alternative is for the law enforcement agency, itself, to establish an Internet gambling site, require individuals to register with the site, and allow them to place bets or wagers which would provide evidence of a direct violation of the IGPA. However, such a sting operation by the government would almost definitely be deemed entrapment. Entrapment occurs when "the government induces a defendant to commit a crime that he was not otherwise predisposed to commit." The primary focus is on whether the defendant was "predisposed" to committing the crime. Since the Supreme Court's decisions regarding what constitutes predisposition have been unpredictable, determining with foresight whether the government's creation of a gambling web site would be entrapment is difficult. Nonetheless, the idea that the government would purposely make a web site available where people can commit an illegal act would likely cause significant public indignation, especially since gambling has become a generally accepted form of entertainment.

The second primary tool which law enforcement could use is to wire tap an Internet user's telephone line and monitor his or her Internet activity. However, the effectiveness of such action is quite limited. Although wire taps are allowed under federal law and most states, tapping an Internet communication would require the government to follow the same procedures which have been established to tap telephone communications. To conduct such wiretapping, the police first must obtain a court order. However, to obtain a court order authorizing the wire tap, the police must first show probable cause that a crime is being committed. This creates a circular problem since such proof concerning illegal Internet gambling activity would be difficult to obtain without a wire tap.


Moreover, the probability that an individual who places a bet or wager will be charged is unlikely for several reasons. First, the privacy and anonymity problems discussed above may make it impractical, if not impossible, to determine who is placing a bet or wager on the Internet. Second, the Department of Justice has "expressed concern about the proposed expansion of federal law to make small or first time Internet bettors guilty of a federal crime." Thus, whether there can or will be vigorous enforcement of the law is uncertain, especially against individual bettors.

An injunction against ISP allowing access to online casinos would also run into problems. Under IGPA, an injunction would be ordered when there was reason to believe that people were illegally gambling. The ISP would not be responsible until having been notified by a law enforcement agency that a court ordered injunction had been obtained against the on line gambling business. As a result, two problems arise. First, to prevent its own residents from receiving gambling information, a state would have to obtain injunctions against all ISPs within the state since each of them may receive an out of state transmission of gambling information. In practical terms, it may not be realistic to obtain the many injunctions needed for each ISP within the state. Second, even if the injunctions can be obtained, it still will not prevent all of the state's citizens from receiving gambling information because many people subscribe to national ISPs such as America Online or Earthlink which may be beyond the state's jurisdiction.


Because of the national and international scope of the Internet, state regulation may not be constitutional under the Dormant Commerce Clause. The clause delegates to the federal government all powers that regulate commerce between the states. Thus, Congress has exclusive domain over those aspects of interstate commerce that are so national in character to demand uniform treatment. Since any display of web pages and flow of finances, including those related to on line gambling, cannot feasibly be limited to citizens of one state, the Internet is national and indeed, even international, in scope. Although the Supreme Court has acknowledged that states have the right to regulate gambling, the state laws are still subject to constitutional scrutiny.

Three aggregate reasons support the conclusion that Internet gambling would be considered interstate commerce. First, the state statutes which prohibit businesses from offering gambling services to in state citizens are broad enough that they would permit prosecution of out of state defendants. Second, the nature of the Internet does not allow a business which creates a web site to close itself off to users from another state. Finally, the Internet has consistently been referred to as the "information superhighway" which transports digitized goods, thereby making it analogous to highways and railroads which have historically been considered a conduit for the interstate transportation of services. Thus, regulating the Internet does have an affect on interstate commerce.

Most courts, including "American Libraries Association v. Pataki", use three tests to determine whether the enforcement action by an individual state violates the Commerce Clause, any one of which would be sufficient to make the state regulation unconstitutional. The first test considers whether enforcement of the state regulation would have the "practical effect" of encroaching upon the law of another state. Using this test, the court in ALA v. Pataki found that the New York law violated the Commerce Clause since the legislature


"deliberately imposed its legislation on the Internet and, by doing so, projected its law into other states whose citizens use the Net. . . . This encroachment upon the authority which the Constitution specifically confers upon the federal government and upon the sovereignty of New York's sister states is per se violative of the Commerce Clause."

Similarly, any state which prohibits Internet gambling would be imposing its law on other states. For example, a proposed bill in Nebraska would make it unlawful for any Internet business to offer its citizens the opportunity to gamble. This effectively would deny a Nevada casino which operates an on line gambling business (in a state where such activity may not be prohibited) from conducting any business due to the stifling effect resulting from the company's inability to block Nebraskans from accessing its web site. The business would simultaneously incur the risk that a person in Nebraska accesses the site, thereby subjecting the business to prosecution in the state. Thus, Nebraska's proposed prohibition against Internet gambling results in an imposition of its law on businesses in other states where Internet gambling may be legal.

The second test, commonly referred to as the burden test or Pike test, presumes that the state law does not violate the Commerce Clause. This test accepts some incidental burden on interstate commerce as long as the law does not discriminate against out of state defendants, unless that burden is clearly excessive in relation to the local benefits to be achieved by the law. Using this test, the court in ALA v. Pataki first accepted that protecting minors from indecent material was a legitimate state interest. However, the court then determined that, because of the unique character of the Internet, the law was not likely to prevent minors from accessing obscene materials, whereas the burden on interstate commerce was significant.


Applying this test to state regulation of Internet gambling, a court in a state which prohibits all forms of gambling may find that limiting the availability of on line gambling is a legitimate state interest. Granted, if a state such as Nebraska prohibits all forms of Internet gambling by both in state and out of state businesses, then the law does not discriminate unfairly against out of state businesses, thereby creating the presumption that the law is constitutional. However, because of the worldwide communications on the Internet, the state law would be unenforceable against about one half of the Internet gambling sites which currently exist outside of the United States. In addition, the likelihood that Nebraska would "drag [Internet gambling businesses] from the other 49 states into is not consistent with traditional concepts of comity." The local benefits to be achieved by the law, therefore, are not significant in comparison to the great burden that would be placed on interstate commerce. Consequently, any state law which prohibited Internet gambling likely would violate the second Commerce Clause test.

Finally, the last test judges whether the activity regulated is so national in scope that it requires uniform application among the states which only Congress can regulate. In ALA v. Pataki, the court stated:

"The courts have long recognized that certain types of commerce demand consistent treatment and are therefore susceptible to regulation only on a national level. The Internet represents one of those areas; effective regulation will require national, and more likely global, cooperation. Regulation by any single state can only result in chaos, because at least some states will likely enact laws subjecting Internet users to conflicting obligations. Without the limitations imposed by the Commerce Clause, these inconsistent regulatory schemes could paralyze the development of the Internet altogether"


Thus, the court held that this third test prevented New York from enacting the statute since the Internet requires uniform, national regulation.

This third test is probably the most important test in interstate commerce analysis. Although states have the right to regulate those activities which are so local in nature that varied regulations are necessary, Congress has the exclusive right to regulate those activities which are so national in character that they require uniform treatment. For example, in Wabash, St. Louis & Pacific Railway Co. v. Illinois, the Supreme Court prevented one state from assessing railroad access fees on trains entering or leaving the state. The Court found that if every state was allowed to impose such fees, it would inhibit interstate commerce and prevent railroad development.

Furthermore, each state's imposition of anti gambling regulations, and eventually, other non gambling related regulations which affect commerce on the Internet, would inhibit the development of the Internet as an effective means of interstate commerce. This was the reason that the Framers of the Constitution included the Commerce Clause: to prevent states from regulating the national infrastructure. Since the Supreme Court broadly interprets what activities affect interstate commerce, it is doubtful that state attempts to regulate any activities on the Internet, including gambling, would survive a Commerce Clause challenge.

As the Ninth Circuit has stated in relation to broadcast signals: "We cannot ignore the fact that broadcast signals cannot be contained within state borders and individual states cannot control interstate broadcasts." The same can be said about the Internet.


There are four generally recognized bases for the United States to obtain extraterritorial jurisdiction over defendants who have no physical presence within the country. First, "national jurisdiction" exists when the offender is a citizen of the country which seeks jurisdiction. Second, "passive personal jurisdiction" can exist if the effect of an activity which occurs outside of the country injures a person within the country. Third, "protective jurisdiction" can be exercised when a national interest has been injured. Finally, "universal jurisdiction" exists when a perpetrator has been physically restrained and the illegal actions are considered "particularly heinous and harmful to humanity."

Examining the bases for jurisdiction results in the conclusion that only the first one would justify the United States' exercise of jurisdiction over an Internet gambling business which is not physically located in the United States. The last two bases, protective and universal jurisdiction, probably would not be sufficient justifications to exert jurisdiction over on line gambling since gambling, in general, has become widely accepted in the United States and there has been no proof that Internet gambling poses any more of a threat to the country's national interest than Nevada-style casino gambling. Consequently, arguing that the national interest has been injured or that gambling is harmful to humanity likely would not succeed.


The second basis, passive personal jurisdiction, also should not extend jurisdiction since the victims of on line gambling (i.e., those who place bets or wagers) bring the alleged injuries upon themselves by voluntarily participating in an activity which is not considered a universally condemned crime. Thus, only the first basis, national jurisdiction, would allow the federal government to exert extraterritorial jurisdiction since it has been widely recognized that the United States can exert jurisdiction over its own citizens anywhere in the world.

However, the national jurisdiction basis does not assist in obtaining jurisdiction over non citizen, on line gambling operators. For the United States to obtain jurisdiction over foreign citizens, about the only effective method available for the government to enforce its laws is to demand that the foreign country surrender those who are violating United States law by offering gambling to United States citizens. However, the right to make such a demand generally requires that the United States have an extradition treaty with the foreign country. This presents a problem since, for a foreign criminal to be extradited, the crime being committed, in this case, gambling, must be specifically enumerated in the treaty.

Many countries, including Greece, Turkey, Antigua, and Monte Carlo, have already legalized online gambling. In addition, Australia has taken the lead in the online gambling market by becoming the first industrialized democracy to develop extensive regulations by enacting the Interactive Gambling (Player Protection) Act on March 18, 1998. Therefore, the likelihood that such countries would freely allow the United States to prosecute their foreign citizens is quite minimal, especially if the activity is legal in the national's home country.


Practically, if the United States attempted to prosecute foreign nationals under domestic law, even if allowed because of extraterritorial provisions in the IGPA, doing so could pose serious threats to the freedoms which Americans enjoy. For example, if the United States attempted to prosecute a German casino operator who used an on line service to conduct a gambling business which was transmitted to United States citizens, then presumably Germany would have the same right to prosecute an American citizen who posted material on his or her web site which is deemed racist under German, but not United States, law. 200 Thus, enforcing the IGPA against foreign citizens would be almost impossible.

B. WISDOM OF INTERNET GAMBLING PROHIBITION

It should be noted that online gambling does not have many vices of land-based casinos. Internet casinos do not endanger neighbors, nor do they promote prostitution, drug dealing and other illegal activities around the casino. The three main issues facing Internet gambling are consumer confidence, wagering by minors and gambling addiction.

Many Internet users question the reliability of the games on the Internet casinos. The users want to make sure that the game that they are playing is as fair as it would be in a land based casino. Gamblers are at the mercy of Internet casino operators. They have no way of knowing whether odds or game reports are falsely manipulated. There is no way for the user to know if the dice are actually being rolled, if the roulette table is actually spinning, if the cards are dealt randomly, or if they are part of a programmed sequence to cheat customers.


There are new software programs that can actually audit gambling games online, in real time. Given a viable regulatory regime, ensuring the fairness of games of chance online is no different from ensuring the fairness of a Las Vegas casino. Granting online casinos would give them the incentive to submit o a regulatory regime. Regulators could spot check Internet casinos as frequently as they wanted to ensure that the games are not rigged. Regulators could also check the actual software code of the games for faults. Checking the code in games of chance, such as blackjack or slot machines, would identify what programs were rigged.

It must also be said that unfair odds are in the best interests of casino owners. People gamble as a form of entertainment. By taking away people's money without providing entertainment for many hours or days, casinos would drive away customers who would feel cheated. Similarly, credit card fraud is not in the best interest of a casino since it can profit so much more by building a long-term business than by stealing a few thousand dollars from a few hundred people. And if casinos were legalized, people would gravitate towards the registered, established and trusted gambling sites, rather than new, unknown entities.

You can also prevent credit card fraud, gambling by minors and other illegal activity by regulating sites without forcing them underground. Only known to be honest casinos will be licensed, while the underground casinos will lose all their clients because of lack of credibility. The legal casinos would want to remain legal and, therefore, will follow regulations. Thus, the government can prevent gambling by minors by required credit cards or other proper forms of ID before registering.

Today's situation is the complete opposite and actually promotes fraud. Online gamblers typically incur debt, mainly by depositing money into their accounts through the use of credit cards. Yet most, if not all, states have enacted laws that declare invalid or unenforceable, contracts based on gambling. In addition, courts generally refuse to enforce such contracts on the grounds that they either involve illegal subject matter or violate public policy.


A complete prohibition drives out those who would comply with regulatory burdens. Thus, only those who are already predisposed to breaking the law will run Internet gambling operations outside of the United States. The IGC likens this situation to Prohibition in the 1920s. The IGC states that "given the relative ease in which information is transmitted on the net, unscrupulous operators would have greater access to vulnerable consumers than if the government had attempted to regulate the industry at the beginning." The IGPA, in practice, would have little effect other "than to scare away scrupulous operators, leaving behind only those that are willing to break the law to satisfy a very real consumer demand."

Prohibiting Internet gambling in the United States pushes that business overseas. The Justice Department admits that it cannot stop overseas gambling operations. Law enforcement can only arrest local U. S. operators; it has no ability to stop operators abroad. Even Senator Kyl admits that online gambling "would be a very difficult kind of activity to regulate because we don't have jurisdiction over the people abroad who are doing it." Thus, the Internet casino operators located outside the United States know that they would be violating the IGPA, yet they also know that by staying there they can avoid prosecution.

Additionally, legal gambling would go a long way in helping treat gambling addition, whereas underground gambling would not prevent a single addict from quitting. Specifically, legalized casinos would pay taxes and licensing fees - revenue that could be used by the government to deal with gambling's social ills, including addictions.

Finally, gambling is not entirely detrimental and has a positive side. It serves as a social adhesive for the working class; provides a form of adult play; provides a useful diversion of the stresses of the modern world; and provides enjoyment to elderly citizens and others who would otherwise have no entertainment outlets.

[The paper was originally written prior to September 11, 2001 and the Patriot Act, so some of the law and precedents may no longer be accurate. Additionally, despite the legalese used throughout the paper, it was never intended as anything more than entertainment. The author emphatically states that it should not be used as a legal reference. If you would like legal advice about the online gambling industry, please contact an attorney practicing this area of law.]