Regulation of the internet - events in Kentucky

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The ruling by a Circuit Court judge in Franklin County that the state of Kentucky can seize ownership of 141 domain names owned by gambling operators has once again raised questions about regulation of the internet. If upheld, this decision will have an impact far beyond the online gambling industry and could pose a fundamental threat to the existence of a worldwide web operating without geographical boundaries.

On 16 October, in a 40 page ruling, Judge Thomas Wingate upheld his earlier interim order (from 18 September) that the state of Kentucky was authorised to seize the domain names of 141 internet gambling websites.

The action was launched by Kentucky's Justice and Public Safety Cabinet ("JPSC") in September, with the strong public support of Governor Steve Beshear. The JPSC claimed that online gambling operators, including Poker Stars, Bodog, Microgaming and Full Tilt Poker, had been illegally accepting bets from residents of Kentucky. These companies still accept bets from residents of the US despite the passing of the Unlawful Internet Gambling Enforcement Act "UIGEA") in October 2006, which led other major operators, including PartyGaming and 888, to pull out of the lucrative US market.

This ruling of a lower Kentucky court attracted such widespread interest – and apprehension – because Judge Wingate authorised the forfeiture of the .com domain names operated by these companies (for example, www.pokerstars.com, www.absolutepoker.com and www.ultimatebet.com). Whereas the UIGEA targeted financial institutions which facilitate bets, this ruling focused on domain names, which some commentators have seen as the "weak spot" of internet gambling operators determined to continue to accept bets from US residents.

The JPSC claimed that the state of Kentucky has the right to regulate all gambling activities that take place within its borders, including those that are online. As the state has not granted licences to any online gambling operators, the JPSC argued that any online gambling which takes place within state borders is illegal. The Seizure Order was issued primarily on the basis of Chapter 528 of the Kentucky Revised Statutes, which allows the state to assume ownership over gambling "devices" or "records" used for unlawful gambling purposes. As can be seen here the definition of "gambling device" under that chapter is "any other machine or any mechanical or other device … designed and manufactured primarily for use in connection with gambling". Judge Wingate did not find the gambling operators' presentation on the proper construction of the literal text of the statute to be persuasive, stating that "a person who adheres to the literal text of the law, but violates its spirit, cannot succeed" and therefore ruled that a domain name falls within the meaning of a "gambling device" as "internet domain names, when used as virtual keys to access, create and maintain a virtual casino, contain the vice at which the statute is directed".

This judgment clearly raises substantial issues. A state court in the US has transferred ownership of domain names registered outside that state and belonging to companies involved in inter-state and international commercial activities. On 26 September, The Register reported that "who is records list goldencasino.com as the rightful property of J. Michael Brown, the Justice and Public Safety secretary who filed the lawsuit". Judge Wingate stated that he had legal standing to seize ownership of the domain names even where the owners of such domain names are not located in the state of Kentucky, writing that "the internet… is still not above the law, whether on an international or municipal level".

The ruling in this case stated that if domain name operators so choose "they can filter, block and deny access to a website on the basis of geographic locations". Consequently, Judge Wingate concluded that the 141 websites had been "designed" to be accessed by residents in Kentucky and could therefore be seized by the state. The judge did, however, amend his interim order to allow gambling operators who agree to no longer accept bets from residents of Kentucky to maintain ownership of their .com domain names if they could prove that they have installed technology to that effect within a 30 day period.

Opponents of the ruling have taken issue with the judge's reasoning on a number of levels. These include that: the court lacked the necessary jurisdiction, as the domain names were not physically located in Kentucky; domain names cannot be seized as they are rights granted under a service contract rather than an owned asset; under the US constitution, inter-state commerce is the responsibility of the federal government; and, that under the First Amendment (protecting free speech), seizure would be akin to censorship.

Politics is also reported by some to be a factor at play in this decision. The state of Kentucky is thought to be looking to license an additional 18,000 slot machines over the next few years and also needs to protect the taxes generated from horse racing in the state, particularly the prestigious Kentucky Derby. State officials are reported to have admitted that online gambling takes revenue away from these licensed activities and at a press conference Governor Beshear was reported to have described online gambling websites as “leeches on our communities” that are taking money away from Kentucky's horseracing industry.

A forfeiture hearing scheduled for 3 December was effectively cancelled by a ruling on 14 November from the Kentucky Court of Appeals. Following a petition from the Interactive Media Entertainment and Gaming Association ("IMEGA"), the Court of Appeals granted a stay applying to all online gambling companies named in the complaint filed by the state of Kentucky. IMEGA's case includes that the Franklin Circuit Court had no jurisdiction over the domain names as Kentucky residents do not own or manage any of them and that the state is attempting to protect state interests and drive away competition. The blocking of websites will now be delayed until further oral arguments have been heard - scheduled for December 12.

The danger for the online gambling industry is the uncertainty that this situation creates and in light of this it is perhaps not surprising that Microgaming, which supplies casino and poker software to some of the affected operators (including 32redpoker and Nordicbet), implemented a new policy in November of refusing new registered users from the US on any of its licensees' websites following requests from some licensees. Previously Microgaming had only blocked residents from the 13 US states where online gambling is expressly in violation of state law. Microgaming has also stated that some of its licensees are considering withdrawing from the US market altogether.

The case has also highlighted the wider issue of the vulnerability of domain names. Although Kentucky's action is limited to gambling operators, there is little to stop other states or countries from attempting to seize domain names owned by companies operating websites of which it does not approve. If Kentucky can seize the domain name of a gambling operator that is based outside of not just its state borders but the US itself then there may be little to stop authoritarian governments from clamping down on content of which they don't approve. Judge Wingate's actions could be the first shot in a battle for control over the internet, where content or services become subject to the laws of the most restrictive jurisdiction in which they are available.