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Kentucky Tests State's Reach Against Online Gambling

By Brian Krebs
Washingtonpost.com Staff Writer
Wednesday, October 8, 2008 5:40 PM

An effort by the state of Kentucky to seize more than 140 online gambling Web site names is raising novel legal questions about the physical location of digital property and the reach of local and regional governments on the global Internet.

Last month, a Kentucky circuit court judge granted a request by the governor to have 141 Web site names used by online gaming operations transferred to the state's control. The action was filed by a Chicago law firm on behalf of Gov. Steve Beshear (D), who was elected in part on the strength of a promise to bring casino gambling to the state.

The domains include some of the most popular online gaming sites on the Internet, including UltimateBet.com and FullTiltPoker.com. According to the state, residents spend roughly $170 million each year gambling at online casinos, potentially taxable revenue that might otherwise have been spent at the state's own gaming operations, which include regulated betting on horse racing and bingo.

Attorneys for the state convinced Judge Thomas Wingate that the gambling Web site names were tangible "gambling devices" that could be seized under Kentucky's gaming statutes. Wingate's order compels the entities that manage the registration of those domains, known as domain registrars, to transfer control over the Web sites to the state.

Jennifer Brislin, spokeswoman for the Kentucky justice department, said the state is seeking unspecified damages from the casinos, but that its primary goal is to force the Web sites to block Kentucky residents from visiting them. She said the majority of the registrars affected by the judge's order had "locked" the domains in question to prevent them from being transferred to another registrar pending the outcome of the case.

"We think it creates a tremendous disadvantage for our legitimate, licensed and taxed gaming interests, and there are some damages that are due to the commonwealth as a result," Brislin said.

Opponents of the decision say the Kentucky has no legal authority to seize the casino Web site names, as neither the individuals who registered the Web sites nor the registrars themselves are physically located there. All of the online casinos are operated outside of the United States. Many online gaming companies are lobbying on Capitol Hill to be legalized, regulated and taxed in the United States, which would allow them to market to U.S. consumers.

Bret Fausett, a domain name expert and attorney with the Los Angeles law firm Adorno, Yoss, Alvarado & Smith, notes that Kentucky's gaming regulations were written long before the advent of the commercial Internet, and make no mention of virtual casinos.

"This is a little bit like if the Home Shopping TV network was accused of fraud, and Kentucky decided to seize the show's cameras and set even though HSN's real location is nowhere near the state," Fausett said.

At least two domains, luckypyramidcasino.com and highrollerslounge.com -- both registered through Bellevue, Wash. based registrar eNom -- have been handed over to the state government. Enom did not respond to requests for comment.

Christine Jones, general counsel for GoDaddy.com, the registrar used by 20 of the 141 domains named in the judge's order, said the company tried to walk a line between complying with that demand and defending the rights of their customers, noting that the casino site owners did not have an opportunity to present their side of the case at the hearing in which the judge ordered the transfer of the domains.

"We issued a registrar certificate to the state that says the court has jurisdiction over the issue, but it doesn't have control over the domains, other than the ability to exercise judgment so that when there is a final adjudication on the merits of the case or a settlement by the parties, we will honor that outcome," Jones said.

On Tuesday, dozens of trade groups, domain registrars and gambling advocates had an opportunity to tell Judge Wingate why the case should be dismissed outright.

One of those at the hearing was Michael Collins, executive director of the Internet Commerce Association, a trade group representing domain name investors and online advertisers. Collins said entire prospect of using the Internet -- not only for commerce but for free speech -- is at risk if one government or state decides they can freely seize domain names.

"What's to keep Iran or China from doing the same thing? Yet, even China - which tries very hard to control the Internet its citizens use - hasn't tried to do what Kentucky is trying to do here," Collins said.

Collins said that while the judge appeared to listen attentively to statements from those defending the online casinos, attorneys for the state presented the registrar certificates from GoDaddy as evidence that the court does indeed have jurisdiction to seize the casino domains.

Wingate is expected to decide within seven days whether to dismiss the case or allow it to proceed to a forfeiture hearing.

John Levine, author of "The Internet for Dummies" and co-founder of the Domain Assurance Council, a non-profit industry consortium, said the case is likely either to be thrown out or reversed on appeal.

"The state's legal arguments fail on so many levels that it's truly bizarre that the court didn't reject this case in the first place," Levine said.

A federal law passed in 2006 makes it illegal for U.S. financial institutions to process payments for online gambling sites. But the law did nothing to prohibit U.S. citizens from gambling at online casinos. Only one state - Washington - has passed a law that bars residents from placing bets online.

Critics of the federal law say U.S. citizens who wish to gamble online can easily find ways around the payment restrictions. For example, in a transcript of the oral arguments that Kentucky's lawyers made to the judge, investigators describe how they were able to gamble at various online casinos using a gift card issued by Visa.

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