Online gambling operations have sprouted in cyberspace, and the application of new or preexisting jurisdictional principles to their proliferation has caused much political as well as legal debate. “Virtual” or “cyber” casinos have boomed over the last several years into a very lucrative enterprise. According to a Final Report published in June 1999 by the United States’ National Gambling Impact Study Commission (the “NGISC Final Report”), annual revenues from Internet gambling surpassed $650 million in 1998.1 Online gambling revenues are expected to exceed $10 billion by the year 2000.2 This dramatic increase may be attributed to several factors, including increased Internet access, improvements in technology which facilitate online betting, increased public confidence with online financial transactions, and national licensing of Internet gambling operations by several countries.3 Online gambling ranges from real-time casino-style gambling, to pari-mutuel betting, to sports wagering, to lotteries. Placing a bet in cyberspace eliminates travel costs to casinos or other wagering establishments, protects a bettor’s privacy and anonymity, and currently provides those who wish to skirt state restrictions on gambling a means by which to do so. The NGISC Final Report noted that “[o]n-line wagering promises to revolutionize the way Americans gamble because it opens up the possibility of immediate, individual, 24-hour access to the full range of gambling in every home.”4
Most Internet gambling operations are outside of the United States based in jurisdictions where gambling is legal.5 In the United States, legalized gambling is controversial. Proponents argue that legalization creates economic benefits, including job creation, economic development, investment and tax revenues. Opponents cite the possible social costs associated with wagering, including compulsive gambling and increased crime.6 In recent years, proponents have prevailed with all but two states in the United States having some form of legalized gambling, and casinos existing on Native American tribal reservations throughout the U.S. This gambling industry is regulated by a network of state and federal legislation.7
Online wagering raises new concerns in addition to the same problems associated with off-line gambling. First, the anonymous nature of cyberspace makes it more difficult to prevent wagering by minors, credit card fraud, money laundering, and tampering with computerized games. Second, the global nature of the Internet and thus of Internet gambling also poses a major obstacle to the regulation of cyber-casinos. Since most cyber-casinos are located off-shore, there is increased concern in the United States that, to the extent these offshore online casinos are unlawful, law enforcement and regulatory authorities cannot reach across national boundaries to prosecute the perpetrators in an effort to protect United States consumers.
This issue came to the forefront with the debate surrounding the “Internet Gambling Prohibition Act of 1997” (S. 474), introduced by Senator Jon Kyl of Arizona, and passed by the Senate in the 105 Congress. The legislation has been reintroduced in the 106th Congress as the “Internet Gambling Prohibition Act of 1999” (the “Kyl Bill”). The Kyl Bill would extend the Wire Actth (which criminalizes transmission of wagering information in interstate or foreign commerce via wire transmissions) to apply to the Internet.
From a practical perspective, it is technically difficult to prevent U.S. Internet users from accessing gambling sites operated off-shore. From a legal perspective, it is arguable whether U.S. courts may exercise personal and prescriptive jurisdiction over off-shore cyber-casino operators.
This draft focuses on the developing jurisprudence regarding the exercise of jurisdiction under United States law, as applied to the Internet and to Internet gambling.8
I. PERSONAL JURISDICTION UNDER U.S. LAW
The reach of U.S. courts is limited by the concept of personal jurisdiction. In order to render a valid judgment over the defendants involved in a particular suit, courts of the United States must have jurisdiction over the subject matter of the suit, as well as personal jurisdiction over the parties involved.9 The exercise of personal jurisdiction is limited by the due process requirements under the Fifth and Fourteenth Amendments to the U.S. Constitution.
The due process analysis takes into account several major factors established by the United States Supreme Court in International Shoe Co. v. Washington10 and its progeny.11 In International Shoe, the Court held that in order for a court to be permitted to exercise personal jurisdiction over a defendant, due process requires that the defendant have “certain minimum contacts with [a forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”12
The most frequent question presented to courts with regard to the Internet is whether the operation of a web site from outside of a jurisdiction, but accessible in that particular jurisdiction, satisfies the minimum contacts and reasonableness requirements of International Shoe and its progeny. Because no legislation specifically addressing the issue exists, the courts have adapted traditional personal jurisdictional principles to cover Internet use. Courts have most commonly addressed the issue in matters relating to advertising, business transactions, and allegedly tortious contacts, such as trademark disputes.13 The court’s ability to exercise personal jurisdiction over a defendant increases with the level of interactivity of the defendant’s website and the extent of commercial contracts between the defendant’s website and users in the jurisdiction. However, a growing number of courts have applied these principles to cases involving Web sites specializing in Internet gambling. Courts having the opportunity to decide cases involving Internet gambling sites have generally followed the personal jurisdiction doctrines adapted by courts and applied to non-gambling Web sites.
In State of Minnesota v. Granite Gate Resorts, Inc.,14 the Attorney General of Minnesota brought an action alleging deceptive trade practices, false advertising, and consumer fraud over the Internet against the defendant, who operated an online casino based in Belize.15 The complaint was filed based upon the fact that the defendant, on his Web site, advertised in Minnesota that gambling on the Internet was a lawful activity, which in fact in Minnesota it was not.16 The Court of Appeals of Minnesota adopted a five-factor test for determining whether the defendant had established minimum contacts with the state.17 The court found that the defendant, in advertising his gambling service on the Internet, demonstrated a clear intent to solicit business from numerous markets, including Minnesota.18 This intent was evidenced by the multiple contacts the defendant forged with Minnesota as a result of its Web site, including phone calls from Minnesota residents to the defendant’s toll-free phone number, the addition of Minnesota residents to a mailing list,19 and “hits” on the defendant’s Web site.20 The court noted that “[d]efendants keep track of who is accessing their website, and therefore know that Minnesota computers are accessing them.”21 Additionally, the cause of action at issue arose out of the advertisements on the Web site and “implicates Minnesota’s strong interest in maintaining the enforceability of its consumer protection laws…and regulating gambling.”22
Weighing the interest of the State of Minnesota in enforcing its consumer protection laws against the inconvenience it would cause the defendant to defend against such a suit in Minnesota, the court found that “the state’s interest in enforcing its consumer protection laws weighs in favor of exerting jurisdiction over appellants.”23 Therefore, the court held that the defendant’s Internet activities constituted purposeful availment of the protections and benefits of doing business in Minnesota, “to the extent that the maintenance of an action based on consumer protection statutes does not offend traditional notions of fair play and substantial justice.”24
In Thompson v. Handa-Lopez,25 a United States District Court found that the extensive interaction between the defendant, who ran an online casino, and the plaintiff, a resident of the Texas who had allegedly won $193, 728.40 gambling on the site, justified the assertion of personal jurisdiction. The defendant in Thompson not only provided a toll-free phone number, but also “entered into contracts with the residents of various states knowing that it would receive commercial gain at the present time.”26 The court found that each time a resident of another state, in this case Texas, played a casino game online, a new contract was created; furthermore, the plaintiff, while playing the games online, was effectively playing the games as if the casino was physically located in Texas,27 and the defendant would send any winnings to the plaintiff in Texas.28 Thus, the repeated formation of contracts with the plaintiff in Texas demonstrated the defendant’s purposeful availment of the benefits of doing business in Texas.
Having found minimum contacts, the court proceeded to analyze the exercise of jurisdiction in the context of “fair play and substantial justice.”29
Interestingly, the Thompson court refused to enforce the following “inconspicuous” provision directing that any dispute:
“shall be governed by the laws of the State of California . . . and shall be resolved exclusively by final and binding arbitration in . . . California . . . .”
First, the court stated that the clause “is not a forum selection clause,” reasoning that it didn’t preclude litigation anywhere but California.30 How that conclusion can be reconciled with the clause’s reference to the exclusivity of arbitration the court does not explain. However, it does continue by noting the interests of Texas in “protecting its citizens by adjudicating disputes involving the alleged breach of contract, fraud, and violations of the Texas Deceptive Trade Practices Act by an Internet casino on Texas residents” and the plaintiff’s choice of the Texas court. While it merely concludes that those interests outweigh the burden imposed on the defendant by the Texas proceeding, thus making an assertion of personal jurisdiction reasonable, those same interests justify an unarticulated conclusion that Texas could constitutionally decide and in fact had decided to apply its own law rather than that chosen by the parties’ contract to the dispute. While such contract provisions have been upheld by the U.S. Supreme Court,31 when the dispute, as here, arises under state law, the provision’s validity is also a matter of state law.
The Granite Gate and Thompson courts found that the nature of the defendants’ Web sites possessed a level of interactivity with their respective states’ residents warranting the exercise of personal jurisdiction.32 However, in Shapiro v. Santa Fe Gaming Corporation,33 the court found that the Nevada defendant’s Web site was purely informational.34 The court discounted the plaintiff’s claim that operation of the Web site along with the maintenance of a toll-free number constituted “transact[ing] business in Illinois”35 in satisfaction of the venue requirement of 15 U.S.C. § 7899. More importantly, the court noted that a contrary holding “would impermissibly subject millions of people to personal jurisdiction merely because they had a website, e-mail address or toll-free telephone number.”36
When personal jurisdiction is sought over a foreign national for Internet activities originating from an off-shore location,37 the jurisdictional analysis may take on a slightly different twist. In an attempt to escape the jurisdiction of courts within the United States, operators of many Internet gambling sites have moved their operations elsewhere, hoping to insulate themselves from United States personal jurisdiction.
Several cases have addressed the issue of whether personal jurisdiction may be exercised over defendants located overseas. In Asahi Metal Industries Co. v. Superior Court,38 the Supreme Court held that California could not exercise personal jurisdiction over a foreign manufacturer whose product had caused injury in California.39 The defendant had never been to California; Asahi sold the product in question to a merchant, who in turn sold the product in California.40 Four members of the Court found that “merely placing a product into the ‘stream of commerce’ without purposefully directing that product towards the forum state is not sufficient to constitute minimum contacts.”41 However, the claim remaining before the trial court was not related to the sale of the product in California; it was a contract dispute between two foreign defendants. But even if the injured California plaintiff’s claim had been involved, the Court did agree that the fact that the defendant was a foreign national needed to be taken into account in determining the reasonableness of a jurisdictional assertion. Distance and differences between legal systems may substantially increase the burden the defendant is asked to bear. Policies of foreign nations, and thus the foreign policy of the United States, are implicated.42 The jurisdictional analysis does not change, but the weight of the various factors to be considered may differ.
II. Prescriptive Jurisdiction Under U.S. Law
When a claim is brought against a foreign defendant, however, it is likely that the U.S. forum will be asked to apply U.S. (either federal or state) law to the dispute. The ability of the forum to do so depends upon whether use of local law conflicts with the established principles of international comity, international law, and foreign relations.
International law is, to a certain extent, based upon the "Golden Rule," or certainly upon its converse: "Do not do unto others what you would not have them do unto you." This principle of “comity”43 is particularly imperative for the United States, because multinational corporations of all nations "are caught in the clash of sovereignties" when a nation other than the corporation’s home nation ‘puts the squeeze’ on a corporation based in another nation but supposedly within the reach of the foreign court and law.44
Under the principle of universality, “a state may exercise jurisdiction to define and punish certain offenses recognized by the community of nations as a universal concern.”45 Such crimes may include piracy, the hi-jacking of aircraft, genocide, and war crimes.46 Universality assumes that nations will ideally work together to prosecute such crimes, based on the theory that “some crimes are so universally condemned that the perpetrators are the enemies of all the people.”47 However, Internet gambling is not likely to be looked upon as a “heinous” crime, particularly since over twenty countries have either licensed or legalized Internet gambling in some form.48 This fact also diminishes the possibility that the United States could apprehend or prosecute the operator of an Internet gambling site located overseas.49
Absent the classification of Internet gambling as a “universal” crime as described above, courts apply federal law to conduct occurring outside the United States only if it is clear from the language of the arguably applicable legislation that such an extension was intended by Congress.50 If such congressional intent is in fact present, then “[f]ederal courts will give effect to [it] even if such effect would conflict with another nation’s law or violate international laws.”51 “Congress may override international law by clearly expressing its intent to do so.”52 However, legislation is interpreted where possible to comply with international law, upon the assumption that, unless clearly stated to the contrary, Congress did not intend to violate it.
In United States v. Moncini,53 the Ninth Circuit held that jurisdiction could be exercised over an Italian citizen who had mailed child pornography, which was legal in Italy at the time, into the United States.54 The court held that “a crime committed through the mail constituted a ‘continuing offense’ which occurred in the United States, and jurisdiction was therefore proper.”55
The fact that mailing child pornography was not illegal in Italy at the time the court exercised jurisdiction in Moncini presents an interesting parallel to the current Internet gambling dilemma. Even though many nations have legalized Internet gambling, the logic of Moncini suggests that United States courts could reasonably exercise jurisdiction over foreign nationals under laws such as the Wire Act,56 or the Kyl Bill”57 if their conduct was deemed to be “continuous.”
As evidenced by Moncini, courts have occasionally found authorization of extraterritorial jurisdiction if the conduct occurring abroad has an intended and substantial effect within the United States. A badly divided Supreme Court so ruled in Hartford Fire Insurance Co. v. California,58 stating that “it is well established by now that the Sherman Act applies to foreign conduct that was meant to produce and did in fact produce some substantial effect in the United States.”59 Similarly, In United States v. Wright-Barker,60 a court held that a federal statute prohibiting the possession of narcotics was intended to apply extraterritorially because the condemned act had an effect within the United States.61
The existence of the effects justifies the application of U.S. law to the conduct under principles of international law;62 it also satisfies the constitutional requirement of due process. However, any congressional attempt to criminalize conduct that was legal where performed, absent a showing of “effects” within the United States,63 would violate both international and constitutional law.64 At first blush, this could be problematic for the United States government’s attempts to regulate an activity such as Internet gambling, which is legal in many foreign countries. However, if the gambler was in the United States, the effects of the site’s operation would be felt here as well.65
Arguably, however, traditional rules of comity ought to confine the assertion of prescriptive jurisdiction even when effects of conduct abroad are felt in the U.S. The principle of “comity,” as defined by the Supreme Court in Hilton v. Guyot,66 is “the recognition which one nation allows within its own territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.”67 In Societe Nationale Ind. Aerospatiale v. U.S. District Court,68 the Court again noted that comity “requires…a more particularized analysis of the respective interests of the foreign nation and the requesting nation…”69 These two cases suggest a pre-1993 Supreme Court belief that the exercise of territorial jurisdiction is bound by “the courtesy of nations, [in that] whatever laws are carried into execution, within the limits of any government, are considered as having the same effect everywhere, so far as they do not occasion a prejudice to the rights of other governments, or their citizens…”70
In recognition of this pre-Hartford Fire Insurance Co. reasoning, the Third Circuit in Mannington Mills, Inc. v. Congoleum Corp.71 adopted a balancing test first established in Timberlane Lumber Co. v. Bank of America72 to determine whether an exercise of territorial jurisdiction would conflict with traditional rules of comity.73 The factors considered by the court were: (1) the degree of conflict with foreign law or policy; (2) the nationality of the parties; (3) the relative importance of the alleged violation of conduct here compared to that abroad; (4) availability of a remedy abroad and the pendency of litigation there; (5) the existence of intent to harm or affect American commerce and its foreseeability; (6) the possible effect upon foreign relations if the court exercises jurisdiction and grants relief; (7) if relief is granted, whether a party will be placed in the position of being forced to perform an act illegal in their own country or be under conflicting requirements by both countries; (8) whether the court can make its order effective; (9) whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and (10) whether a treaty with the affected nations has addressed the issue.74 Such a test is absolutely necessary when addressing extraterritorial jurisdiction because, in the words of the court, “[when] foreign nations are involved…, it is unwise to ignore the fact that foreign policy, reciprocity, comity, and the limitations of judicial power are considerations that should have a bearing on the decision to exercise or decline jurisdiction.”75 After the decision in Hartford Fire Insurance Co., it appears that a consideration of foreign interests is not required. It may, however, be wise. Internet gambling is legal in numerous foreign jurisdictions. An attempt to regulate Internet gambling sites whose operations are located overseas would pit U.S. concerns with the perceived adverse effects of such gambling on U.S. residents against the foreign nation’s desire to foster what it perceives as legitimate commerce. In addition, the U.S. would logically also need to accept the possibility that a United States operator of an Internet site could be haled into an overseas court for Internet activities in the United States legal here but causing effects abroad and illegal there. Absent the classification of Internet gambling as a “universal” crime, prohibiting it across all national boundaries, legislative attention ought be directed at the necessary as well as the legally possible scope of regulatory law.
1 National Gambling Impact Study Commission, Final Report, at 2-15 (June 18, 1999)(hereinafter “NGISC Final Report”)(available online at Id. at 2-16.
2 See Jack L. Goldsmith, What Internet Gambling Legislation Teaches about Internet Regulation, 32 Int’l. Law 1115, 1116 (1998).
3 NGISC Final Report, supra note 1, at 2-16.
4 Id. at 5-1.
5 Nations including Australia, Antigua, Barbuda, Austria, Belgium, Costa Rica, Germany, South Africa, and several regions of the United Kingdom have licensed Internet gambling operations. NGISC Final Report, supra note 2 at 5-1, note 5.
6 Id. at 1-1.
7Gambling is regulated by several U.S. Federal statutes including the Wire Act (18 U.S.C. §1084), the Travel Act (18 U.S.C. § 1952), the federal Aiding and Abetting Statute (18 U.S.C. § 2), the Professional and Amateur Sports Protection Act (28 USC § 3702), and the Interstate Transportation of Wagering Paraphernalia Act (18 U.S.C. 1953). In addition, several pieces of legislation have been introduced in recent years, most notably, the “Internet Gambling Prohibition Act of 1997” (S. 474), which has been reintroduced in the 106th Congress by Senator Jon Kyl of Arizona, which is discussed in more detail in this draft.
th 18 U.S.C. §1084(a) (1997). The Wire Act creates criminal penalties for anyone “engaged in the business of betting or wagering” who “uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers.”
8 It is anticipated that international perspectives and an expanded discussion of the regulatory framework governing gambling in the United States will be incorporated into a subsequent draft of this report.
9 See J. Christopher Gooch, Note, The Internet, Personal Jurisdiction, and the Federal Long-Arm Statute: Rethinking the Concept of Jurisdiction, 15 Ariz. J. Int’l & Comp. L. 635, 643 (1998). If a suit is filed in a state court of general jurisdiction, subject matter jurisdiction is a given. In a federal court, subject matter jurisdiction is generally a result either of diversity of citizenship between plaintiff and defendant (28 U.S.C. § 1332) or of the existence of a claim arising under federal law (28 U.S.C. § 1332). See Chapter IA2 at ___, infra, for a brief discussion of the relationship between subject matter jurisdiction and prescriptive jurisdiction.
10326 U.S. 310 (1945).
11 See Sean M. Flower, Note, When Does Internet Activity Establish the Minimum Contacts Necessary to Confer Personal Jurisdiction?, 62 Mo. L. Rev. 845, 850 (1997).
15 Id. at 716. The district court found that the defendant’s activities over the Internet constituted minimum contacts with the state, and its exercise of personal jurisdiction was the issue on appeal.
16 Id. at 718. The court’s opinion does not address the issue of applicable law. It (and presumably the parties) assumes that Minnesota law governs the issue of legality with respect to a gambling site accessible (or at least accessed; as a sanction for refusing to comply with discovery orders, the court established as a fact that the defendant’s mailing list contained the name and address of at least one Minnesota resident) in the state. The law applied to determine the legality of conduct without reference to private claims of damage is always that of the forum. If it does not apply to the conduct (for example, because the legislature chose to make it illegal to operate a gaming site only if the site was physically located in Minnesota), the suit is dismissed.
17 Id. at 719. The five factors employed by the court were:
(2) the nature and quality of the defendant’s contacts;
(3) the connection between the cause of action and the defendant’s contacts;
(4) the state’s interest in providing a forum; and
(5) the convenience of the parties.
18 568 N.W. 2d at 722.
19 See note 18, supra.
20 568 N.W.2d at 719.
23 Id. at 722.
25 998 F. Supp. 738 (W.D. Tex. 1998).
26 Id. at 745.
29 Id. at 744-45.
30 Id. at __.
Id. at 744.
31 Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991). See also Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20 (1991).
32 See also Missouri ex rel. Nixon v. Interactive Gaming & Communications Corp., No. CV97-7808 (Mo. Jackson County Cir. Ct. May 22, 1997). This case also resulted in a similar holding. The defendant, a Delaware corporation, actively sent promotional brochures into the State of Missouri, and other promotional materials via e-mail.. Further, the defendant, when questioned by an investigator from the Missouri Attorney General’s office as to whether it was legal in Missouri to gamble through the site, received an answer in the affirmative. See id. Therefore, the court held that the active solicitation of business in Missouri fell under the state’s long-arm statute, and enjoined the defendant from conducting further business within Missouri or with residents of the state.
33 No. 97 C 6117, 1998 U.S. Dist. LEXIS 2488, at *1 (N.D. Ill. 1998).
34 See id. at *8.
36 Id. Actually, such a conclusion need not follow. The mere transaction of business does not subject a defendant to jurisdiction unless the claim is at least related to the business transacted. Here, for example, the claim was for attorney’s fees allegedly owed to the plaintiff as a result of his investigation into short-swing profits realized by an insider in the defendant corporation. Those activities, however, occurred in either Nevada or New York (on the American Stock Exchange), not in Illinois. Nonetheless, the court is clearly correct that to characterize a passive web site as the transaction of business is disingenuous.
37 Julian S. Millstein, Jeffrey D. Neuburger, & Jeffrey P. Weingart, Doing Business on the Internet: Forms and Analysis, §11.02, 11-16 (1997).
38 480 U.S. 102 (1987) (plurality opinion).
41 SeeMillstein, Neuberger, & Weingart, at 11-7 (citing AsahiMetal Co., 480 U.S. at 112).
42 See Dan L. Burk, Jurisdiction in a World Without Borders, 1 Va. J.L. & Tech 3 (1997) (visited June 26, 1999) .
43 "Comity" is a mandatory principle of law (seeMannington Mills Inc. v. Congoleum Corp, 595 F.2d 1287 (3d Cir. 1979); see also Restatement (Third) of Foreign Relations (1987) (hereinafter the Restatement)), which has been repeatedly enforced and cited by our nation's courts with favor.
44 See Grundman, The New Imperialism: The Extraterritorial Application of United States Law", 14 Intl. Lawyer 257 (1980).
45 Restatement (Third) of Foreign Relations §432 (1987).
47 Damjanuk v. Petrovsky, 776 F.2d 571, 577 (6th Cir. 1985). See also United States v. Martinez-Hidalgo, 993 F. Supp. 1052 (1993) (drug trafficking).
48 NATIONAL GAMBLING IMPACT STUDY COMMISSION FINAL REPORT, (1999).
49 See Damjanuk, 776 F.2d at 582. The 6th Circuit held that the principle of universality can be applied according to the laws of the nation in which the perpetrator is found.” Id. If the operator of the online site was located in a Caribbean nation such as Antigua, for example, where Internet gambling is legal, the Court’s ruling in Damjanuk would effectively eliminate the possibility of prosecution unless the operator was apprehended in the United States, where its laws would be applicable, and even then only if the crime was considered a “universal” one.
50 EEOC v. Arabian American Oil Company, 499 U.S. 244, 248 (1991).
52 United States v. Martinez-Hidalgo, 993 F.2d 1052, 1066 (3rd Cir. 1993).
53 882 F.2d 401 (9th Cir. 1989).
54 See id. at 403.
55 SeeMillstein, Neuberger, & Weingart, at 11-18.
56 18 U.S.C. §1084(a) (1997). The Wire Act states that “Whoever being engaged in the business of betting or wagering uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.” Id.