Turning Up the Heat

Although there has been no action on Capitol Hill this month regarding pending online gambling legislation, the U.S. attorney general's office has begun to turn up the heat in an effort to slow down the rapid growth of online gambling. Recently, a letter from Assistant Attorney General John G. Malcolm was sent to the National Association of Broadcasters, "encouraging" them not to accept advertising from online gambling sites.

In order to understand this letter, a bit of history about Assistant Attorney General John G. Malcolm is helpful.

John G. Malcolm is a deputy assistant attorney general in the Criminal Division of the Department of Justice, where he oversees the Computer Crime & Intellectual Property Section, the Child Exploitation & Obscenity Section, the Domestic Security Section, and the Office of Special Investigations. He was formerly an assistant U.S. attorney in Atlanta, Georgia, where he was assigned to the fraud and public corruption section, and was an associate independent counsel investigating fraud and abuse at HUD. For a short time, he was a partner at the Atlanta law firm of Malcolm & Schroeder, L.L.P., specializing in general litigation with an emphasis on white-collar criminal defense, internal investigations, commercial litigation, appeals, and medical malpractice.

Malcolm was also formerly the chairman-elect of the Federalist Society's Criminal Law Practice Group. Founded in 1982, the Federalist Society is a group of conservatives and libertarians dedicated to reforming the current legal order. It is founded on the principles that "the state exists to preserve freedom, that the separation of governmental powers is central to our Constitution, and that it is emphatically the province and duty of the judiciary to say what the law is, not what it should be. The Society seeks both to promote an awareness of these principles and to further their application through its activities. This entails reordering priorities within the legal system to place a premium on individual liberty, traditional values, and the rule of law. It also requires restoring the recognition of the importance of these norms among lawyers, judges, and law professors. In working to achieve these goals, the Society has created a conservative and libertarian intellectual network that extends to all levels of the legal community." Many famous names are a part of this ultraconservative organization that takes the position that the legal profession is currently strongly dominated by a form of orthodox liberal ideology to which the Federalist Society is opposed.

This year, Malcolm testified before both the House and Senate, offering the views of the Department of Justice about Internet gambling. He stressed the following problems: the potential for gambling by minors, compulsive gambling, the potential for fraud and money laundering, and the role of organized crime in online gambling. He testified that the Department of Justice supports the efforts of the drafters of anti-gambling legislation to enable law enforcement to cut off the transfer of funds to and from illegal Internet gambling businesses. He told the legislature that it is estimated that by the end of 2003, there will be approximately 1,800 online gambling sites generating approximately $4.2 billion. His estimate is probably low.

Malcolm sent a letter to the National Association of Broadcasters, advising them not to accept advertising from online gambling sites since such advertisement could be in violation of federal law. The letter is worded carefully. It says: "As you are no doubt aware, advertisements for Internet Gambling and offshore sportsbook operations are ubiquitous on the Internet, in print ads and over the radio and television. The sheer volume of advertisements … is troubling because it misleads the public in the United States into believing that such gambling activity is legal, when, in fact, it is not. Because of the possibility that some of your organization's members may be accepting money to place such advertisements, the Department of Justice, as a public service, would like you to be aware that the entities and individuals placing these advertisements MAY be violating various state and federal laws and that the entities and individuals that accept and run such advertisements MAY be aiding and abetting these illegal activities." The letter goes on to state: "Notwithstanding their frequent claims of legitimacy, Internet gambling … operations that accept bets from customers in the United States violate Sections 1084, 1952, and 1055 of Title 18 of the United States Code."

It is interesting to note that on one hand, Malcolm testifies before Congress in order to encourage the passage of anti-gambling legislation; on the other hand, he publicly states that online gambling is already illegal.

Let's begin by analyzing the sections mentioned by the deputy attorney general one at a time.

Section 1084 is the now famous 1961 Interstate Wire Act (18 U.S.C. section 1084). You may remember that I wrote extensively regarding the Wire Act. I first predicted that the Wire Act would be found NOT to speak to online poker playing because the words of the statute don't forbid it, the legislative history doesn't include it, case law has found the Wire Act doesn't apply to online gambling, AND the legislature is working feverishly to pass anti-gambling law, which would be unnecessary if the law already prohibited it. Sure enough, there have been two judicial determinations that the Wire Act does not apply to online gambling. In the case of "In Re Mastercard International", decided Feb. 23, 2001, the Honorable Judge Stanwood R. Duval, Jr. made a specific finding that the Wire Act did not prohibit online poker playing. The ruling affected many cases, as there were 33 identical cases and the Mastercard and Visa case were consolidated and selected as the test cases. Obviously displeased by the ruling, the plaintiffs appealed to the 5th U.S. Circuit Court of Appeals in Louisiana, who affirmed Duvall's dismissal, calling his ruling "thorough and careful." Please remember that the role of the attorney general's office is to prosecute violations of law, whereas the judiciary interprets the law. The judiciary has spoken and courts are bound by that determination unless and until the Supreme Court or other District Courts of Appeal hold otherwise. This is what is meant by the legal concept of "stare decisis," which means "a thing decided." It is disingenuous for the attorney general's office to continue to take the position that the Wire Act prohibits online poker playing when the judiciary has already spoken on the issue.

A violation of the Travel Act (18 U.S.C.S. § 1952) requires proof that one who is accused (1) traveled in interstate or foreign commerce or used an interstate or foreign facility, such as the mail, (2) intending thereby to promote "unlawful activity," and (3) subsequently promoted that unlawful activity.

Unlawful activity is defined in 18 U.S.C.S. § 1952(b) as any business enterprise involving gambling offenses in violation of the laws of the state in which they are committed. Case law holds that Congress has the power under the Commerce Clause (U.S.C.S. Constitution, Article 1, § 8, cl. 3) to make it unlawful to travel from one state to another to promote a gambling enterprise that is illegal in the state where the gambling is being carried on.

An interesting example of a successful prosecution utilizing The Travel Act is the case of United States v. Morris 532 F.2d 436 (1976), where Morris was convicted of interstate travel in aid of racketeering, in violation of 18 U.S.C. § 1952(a)(3). Morris and two buddies came up with a plan in Texas. The plan was to go to Vegas and cheat unsuspecting poker players in a private game. A favorite cheating method the trio employed was the use of a "cold deck," in which the cards were prearranged to deal certain poker hands to designated players. Frequently, the victims were dealt hands that in ordinary circumstances seemed certain to win, only to find that one of the trio had been dealt a better hand. Morris argued that his interstate trips from his home in Texas to Nevada for the purpose of conducting private card games could not form the basis for a prosecution under the statute, because gambling is not an offense "in violation of the laws of the State" of Nevada. The court held that Morris didn't understand the distinction between legitimate legalized gambling, permitted in Nevada, and illegitimate or dishonest gambling, illegal in Nevada and every other state.

It is inconceivable that the government would utilize this section to prosecute online gambling. One of the many reasons is that the offshore sites are legal in the jurisdictions from which they operate. Every offshore gambling site offers a play-money area with a caveat that players are not to play where it is illegal to do so. The law is further complicated by the fact that the Commerce Clause (Article I, Section 8, Clause 3) grants Congress the power to regulate interstate commerce. But such regulation cannot interfere with the legitimate right to conduct business. Where an online site offers a service such as free poker playing, Congress may not be able to interfere with that legitimate business operation. Further, it is not clear where and how it is illegal to play poker online. Notwithstanding the fact that a few states have statutes making it a misdemeanor to play online for money, it is doubtful the government would prosecute online gambling pursuant to Section 1052.

Federal Code section 18 U.S.C.S. § 1955 (2003) prohibits illegal gambling where such gambling is a violation of law in the state where it is operating. The code section essentially says that anyone involved in the gambling business shall be imprisoned in state prison for no more than five years and have their assets confiscated if the state proves:

1. The gambling violates a state law.

2. There are five or more people involved in running the whole operation.

3. The company is in continuous operation for a period in excess of 30 days or has a gross revenue of $2,000 in any single day.

Obviously, the gambling business must be within the jurisdiction of the United States. Since every online gambling site appears to be offshore, the United States government has no jurisdiction to prohibit business outside the United States. The government would have jurisdiction if a gambling site conducted substantial business within the borders of the United States. Case law holds that if a company had offices with pencils and pads or a phone line, or other substantial activity occurred within the borders of the United States, the company could be seen as doing business in the United States. This is true notwithstanding the fact that the Internet servers are outside the United States. Additionally, for purposes of satisfying the requirement of there being five people, anyone who performs any act, function, or duty that is necessary to or helpful in ordinary operation of the gambling business is counted. To "conduct" business within the meaning of 18 U.S.C.S. § 1955 means to perform any act, function, or duty necessary to or helpful in ordinary operation of business. In sum, if the online operations are offshore, U.S. law cannot prohibit their operation and 1955 is therefore inapplicable.

Since the federal government has not been able to put a dent in the thriving and wildly profitable world of online gambling, it has begun the utilization of bullying tactics. It has been reported that one portal site has been subpoenaed to appear in a U.S. federal court in relation to advertising online gambling! Interactive Gaming News obtained a copy of a subpoena ordering the portal to testify before a grand jury in the Eastern District of Missouri. The operator of the portal site provided a copy of the subpoena on the condition of anonymity. Attached to the subpoena was a copy of Malcolm's letter. The court has asked the operator to turn over all commercial and financial information from Jan. 1, 1997, to the present related to the advertisement of online casinos and sportsbooks. Other information requested in the subpoena was all the "names and all identifying and contact information you have for every point of contact for each such gambling advertiser."

The subpoena also called for information about advertisements placed on TV, radio, or cablecasts, including any accounting records, records of sales calls, telephone records, contracts, invoices, records of negotiations pertaining to payment, e-mail correspondence, financial transactions, annual gross revenue for the site, information on how advertising revenue was received, and the names of financial institutions and account numbers pertaining to the business.

My guess is that the government will try to prove that some Internet sites are in reality doing business within the borders of the United States, which is the only way I can see the requested documentation being relevant. The subpoena is in the guise of gathering information about illegal advertising. In reality, it is a fishing expedition, because advertisers are the least liable.

The reason I say advertisers are the least liable is because in the United States, there is a huge difference in the law between conduct and commercial speech relating to that conduct. Most advertising constitutes commercial speech protected by the First Amendment. The government's ability to regulate advertising for Internet gambling is not equal to its power to regulate online gambling itself. The established test used to assess the legality of gambling advertising is known as the "Central Hudson Test."

In the landmark decision of Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, the U.S. Supreme Court held that a state must justify restrictions on truthful, commercial speech (advertising) by demonstrating that its actions "directly advance" a substantial state interest and are no more extensive than necessary to serve that interest.

The Central Hudson Test requires the Court to first determine whether the First Amendment applies. They do that by asking whether the advertisement concerns a lawful activity and is not misleading or fraudulent. If the advertising concerns a lawful activity, the First Amendment applies. Thereafter, the speech may be restricted only if: (1) the government's interest in so doing is substantial; (2) the restrictions directly advance the government's asserted interests; (3) the restrictions are no more extensive than necessary to serve that interest.

The Central Hudson Test gives rise to a fantastic knotty legal conundrum. If offshore Internet sites are properly licensed, they are certainly legal in some places. If they have play-money sections, they offer something legal to everyone. If playing online is legal in some places and not legal in other places, can the government prohibit free speech regarding that which is legal in certain areas but not others? Furthermore, if the advertisement specifically states that playing poker online is not legal in every jurisdiction and one must check local laws, the government would be hard-pressed to assert that the advertiser was advertising an illegal activity.

In sum, the government's frustration is showing when it writes letters warning the media that advertising Internet gambling violates U.S. codes already found not to apply. Doubtless, one day there will be a test case about which I will be writing. Any predictions?