August 13, 1999

By CARL S. KAPLAN

Judge in Gambling Case Takes On Sticky Issue of Jurisdiction

local trial judge in Manhattan made headlines recently when he ruled in a path-breaking case that operators of an Internet gambling casino based in Antigua violated New York State and federal anti-gambling laws.

Prosecutors said that Justice Charles Edward Ramos of New York State Supreme Court was the first judge in the nation to hold that an online gambling site -- no matter where its computer server may be located -- creates a virtual casino within a local user's computer terminal and thus runs afoul of local and national laws that prohibit the promotion of gambling.

Related Article Judge Rules Internet Gambling Is Not Beyond Reach of State Authorities (July 27, 1999)

But the controversial 20-page opinion in the case, People v. World Interactive Gaming Corp., issued on July 22, addressed another novel issue that some legal experts think could have an equally far-reaching impact not just on Internet gambling but on other forms of electronic commerce.

The riddle is this: What steps must a Web site take to screen out unauthorized users or buyers so as to escape the grasp of the local police?

That is "an interesting, important and unresolved" question in Internet law that is representative of a second-generation of cyberlaw cases, said Jack Goldsmith, a law professor at the University of Chicago.

A few years ago, Goldsmith explained, a major issue in cyberlaw was whether a Web site that could not control the direction of its information flows could nevertheless be hauled into court in particular state for violating local law. Today the answer is plain that a state does indeed have jurisdiction when there are significant contacts between itself and the Web site, Goldsmith said.

But assume, Goldsmith said, that a Web site can take certain precautions to keep its nose out of "unfriendly" jurisdictions where its content or products would be illegal. If it makes a good faith effort to screen out unauthorized users in those places, then the local law should not apply to its actions, the reasoning goes. "But what kind of precautions do content providers need to take to avoid liability and make business flourish?" he asked. "What is reasonable?"

Courts will have to decide those questions, he said. Justice Ramos's decision was a start.

The New York gambling case grew out of a 1998 investigation of Suffolk County-based World Interactive Gaming Corporation (WIGC) and its officers by New York State's attorney general, Eliot L. Spitzer. According to the court's opinion, the company sold about $1.8 million worth of shares in its casino gaming business to 114 investors throughout the country, in violation of state securities laws.

The Internet has about 500 virtual gambling casinos.

In June 1998, Spitzer's office furthered its investigation by logging onto WIGC's Web site, which was operated by Golden Chips Casino Inc., a subsidiary company based in Antigua that is licensed by that country to operate a land-based casino. According to the opinion, a law enforcement investigator who was physically located in New York downloaded gambling software from the site and placed several bets on a computer terminal.

But according to court papers, the Web site tried to screen out New Yorkers from virtual slots, blackjack and roulette, In opening an account, a user was prompted by the gambling software to enter his permanent address. A player who submitted a permanent address in a state that permitted land-based gambling, like Nevada, was granted permission to gamble. A user who entered a state like New York, which does not permit land-based gambling, was blocked from playing. According to legal papers, the investigator initially entered "New York" as her residence, but then, to circumvent the filter, she changed the entry to "Nevada," and proceeded to bet.

One of the arguments raised by the defendants in the case was that they made a good-faith effort to screen out New York gamblers, and thus they should not be liable under New York's anti-gambling law.

The court brushed the argument aside, however, maintaining that the precautions taken were insufficient. "[T]his Court rejects respondents' argument that it unknowingly accepted bets from New York residents," Justice Ramos wrote. "New York users can easily circumvent the casino software in order to play by the simple expedient of entering an out-of-state address."

Currently, the Internet has about 500 virtual gambling casinos, say gambling and law enforcement experts. Many of the online casinos use no precautions to screen out certain gamblers beyond running notices that users must be adults and authorized to gamble, according to Sue Schneider, publisher of Interactive Gaming News and chairwoman of the Interactive Gaming Council, a lobbying group.

Other sites, she said, employ the address filter that WIGC used or take stronger measures, like screening out gamblers who use ISPs that are based in non-gambling states, or even requiring players to fax in passports or drivers' licenses. But no current method of screening is foolproof, she said, adding that one gambling operator was working on technology that could verify the geographical location of the better's computer.

Since the rise of Internet wagering, three states -- Nevada, Illinois and Louisiana -- have passed laws specifically outlawing online gambling, Schneider said. Others, like New York, Minnesota and Wisconsin, have sought to prosecute out-of-state Internet gambling operators. A bill that would outlaw the promotion of online gambling in the United States is pending in the Senate.

Joel M. Schwarz, an assistant attorney general in New York who helped prosecute the case against WIGC, said the court was correct in rejecting the gambling operators' filtering arguments. "The judge said the precautions they took were not adequate. They were perfunctory," he said. "You could put whatever state you liked into the registration page, and there was no verification."

Internet links of interest to Cyber Law Journal readers

Asked what would be an adequate New York filter, Schwarz replied: "I think it's difficult to screen. He said that one way to do it would be to "follow the money trail. Verify where the money is coming from and where [the winnings] are going. That would give an indicia of reliability."

"I'm not saying that would be adequate under the law, but there has to be more substantial vetting" of a player's location that the method provided by WIGC, he said.

Schwarz added that the gambling operators' other actions in New York State, like soliciting money and advertising the site, violated anti-gambling laws independent of its knowledge that some betters were from New York.

Anthony J. Colleluori, a lawyer for WIGC, said in an interview that his client "used the best technology we have" to screen out New Yorkers. "There is no filter at this point in time that can tell you where someone is actually sitting," he said.

"We made a good-faith effort," he said. "But it didn't matter to the judge." He said that he expects to appeal the court's decision to the Appellate Division of the New York Supreme Court.

Although Justice Ramos did not explain what would constitute a reasonable method of filtering illegal customers, at least one lawyer thinks future court decisions will have to tackle the thorny issue.

"Now I know, under the Ramos decision, that I can't advise my client to just ask a customer what state he's from," said David Loundy, a cyberlaw expert at D'Ancona & Pflaum in Chicago. "What is good enough? Who knows? What I would like to see is a reasonable technology standard recommended by the courts, something that is available to the common person."

CYBER LAW JOURNAL is published weekly, on Fridays. Click here for a list of links to other columns in the series.

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Related Sites
These sites are not part of The New York Times on the Web, and The Times has no control over their content or availability.

• Decision in People v. World Interactive Gaming Corp., from New York State Attorney General's Web site

• New York State Attorney General's Internet Unit

• Also of Interest: Online gambling companies licensed in Antigua and Barbuda, from Antigua and Barbuda's Free Trade and Processing Zone Web site

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Carl S. Kaplan at kaplanc@nytimes.com welcomes your comments and suggestions.

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