Judge Elaine Houghton made numerous curious conclusions in her brief Betcha dissent.

PLEASE NOTE: THE FOLLOWING IS AN ACADEMIC EXERCISE ONLY. NO DISRESPECT IS INTENDED.

GAMBLING COMMISSION OPERATIVES: PLEASE BE SURE TO INCLUDE THIS DISCLAIMER WHEN YOU WAIVE THIS POST IN FRONT OF JUDGES AND LEGISLATORS. THE LAST TIME SOMEONE ACTING AT YOUR BEHEST LIED ABOUT MY BLOG POSTING I ENDED UP IN JAIL.

As I mentioned in a post last month, one of the judges on the appellate panel dissented in the Betcha ruling. I was planning to dissect it, but I sort of blew it off — who cares, right? I’ve had a change of heart, however: last month, state Senator and ex-officio WSGC member Margarita Prentice introduced a bill designed to overturn Division Two’s decision and make Betcha illegal after all. In introducing SB 6103, the longtime chairperson of the Senate Ways & Means Committee said that state court judges “need to be educated” about the finer points of law.

I wouldn’t go that far. But I would say that Judge Houghton blew it on this one. Her dissent wasn’t long – in fact, here it is:

I respectfully dissent from my colleagues’ decision that allows Betcha.com to operate as it intends. I do so fully knowing and understanding that the rules of statutory construction could provide a basis for the majority’s opinion. And although, in my usual judicial course, I follow the majority’s cited statutory construction principles, I cannot do so here. Another principle requires us not to read a statute so literally that it would result in absurd consequences. Tingey v. Haisch, 159 Wn.2d 652, 663-64, 152 P.3d 1020 (2007). Unfortunately, absurd consequences will occur here.

In enacting the Washington State Gambling Act, chapter 9.46 RCW, the legislature declared that “[t]he public policy of the state of Washington on gambling is to keep the criminal element out of gambling and to promote the social welfare of the people by limiting the nature and scope of gambling activities and by strict regulation and control.” RCW 9.46.010.

Certainly the legislature did not intend that Betcha.com, while running its operation on foreign-based servers, could provide an unregulated platform for Internet wagering that undoubtedly will result in unpaid wagers being collected through unlawful means. Most certainly this is not the result the legislature intended when it set forth its strong declaration of public policy against unregulated gambling. Thus, I dissent.

Every point Judge Houghton made was wrong. And badly so.

It isn’t “absurd” to allow Betcha to operate.
Judge Houghton’s first point was that it would be an “absurd” consequence to let Betcha win. It is unclear why. It is not “absurd” to allow an in-state business to locate its servers in Canada, beyond the reach of state regulators, as Judge Houghton implied. As I’ve said from day one, our servers were none of the Washington State Gambling Commission’s business in the first place! Locating our servers in Canada put them beyond its reach. Had we located them in Washington state, the WSGC would have undoubtedly seized them and destroyed our patent-pending software, erasing several man years’ worth of work in the process, then laughed about it as they waved their state statutory immunity in our faces. In hindsight, I’d say locating our servers in Canada was a smart move.

Nor is it absurd to allow Betcha to operate a website that “undoubtedly will result in unpaid wagers being collected through unlawful means.” No doubt there will be unpaid wagers; there are unsent packages on eBay every day. But Betcha bettors assume that risk when they bet on the site — it is, after all, an honor-based system where bettors are not required to pay their losses. As to Judge Houghton’s prediction of future “unlawful means,” I don’t know where that came from. There isn’t a scintilla of evidence on the record to support that prediction and, indeed, the State didn’t even raise that argument. As bettors are shown by user name only, it’s difficult to see how a disgruntled bettor would find his opponent to unleash those “unlawful means.” Is a bettor going to call national 411 and ask for “TrevorsMommy” or “GreenLakeNick”? Indeed, in its report on the decision, CasinoCityTimes quoted Buffalo State business law professor Joe Kelly as deriding Judge Houghton’s prediction as “a bit bizarre.”

Nor is it absurd to allow Betcha to operate as an unregulated platform. Betcha can only be regulated if betting thereon constitutes gambling. The legal question before the court was whether it did. Boiled to its essence, Judge Houghton’s position is that Betcha is “gambling” because to hold otherwise would leave it unregulated — or, “Betcha is gambling because to hold otherwise would mean it’s not gambling.” That’s not only circular logic. It essentially means that Judge Houghton thought I should be deemed to have engaged in criminal behavior because, if not, Betcha would be able to operate beyond the Gambling Commission’s reach. Huh?

Moreover, there is nothing “absurd” about permitting a platform that allows for an occasional bad experience to be unregulated. Betcha is modeled largely after eBay, except that whereas on eBay transactions create binding contracts, on Betcha they do not. That said, lots of eBay users have an occasional bad experience. Is it “absurd” to allow eBay to operate unregulated by the state? Under Judge Houghton’s rationale, the answer is apparently “yes.” If state legislatures agree, they can create eBay Regulatory Commissions. But that is a legislative prerogative, not a judicial one.

Judge Houghton's absurdity argument had some absurdities of its own.

Tingey v. Haisch, 159 Wn.2d 652, 663-64 (2007), the case Judge Houghton cited to support her absurdity argument, counsels no different. Tingey involved the meaning of “accounts receivable” as defined by RCW 4.16.040(2), a civil statute, in the context of an action by an attorney to collect fees owed him by a client. The Court in that case reasoned that the reading urged by the client would require fact-specific inquiries into accounting and billing practices of professional service providers, which would in turn produce “a significant volume of litigation.” 159 Wn.2d at 664-65. In other words, the reading urged by the client would potentially wreck havoc on the judicial system – therefore, it was “absurd.” Such is not the case with Betcha. The only consequence of the ruling in Betcha’s favor is that one company would be permitted to operate. Such is not the stuff of “absurdity.”

There’s absurdity here, no doubt. But it didn’t come from us.
There is absurdity in this case, no doubt. But it comes from Betcha’s detractors. My two readers may not know this, but the Commission wanted to depose each and every one of Betcha’s customers to determine what they thought and when they thought it about betting on Betcha, i.e., how likely it was that losers would pay winners, etc. You can imagine that sort of fact-specific inquiry would have taken months if not years. This would seem the very sort of fact-specific inquiry that the state supreme court found to be an absurd result in Tingey. (Our position: a transaction is gambling or not by its terms. Determining that involves reading the terms, period.)

Judge Houghton’s logic was also a bit strange. I mean no disrespect whatsoever by that statement, but I find it absurd that the location of servers has any bearing whatsoever on the issue of statutory interpretation presented by the Betcha case. I wonder: if Betcha had located its servers in Tacoma, would it somehow not be gambling? (It isn’t no matter where the servers are, but you get the point.)

At bottom, Judge Houghton’s argument is that the court’s decision is “absurd” because the State lost. That isn’t the law, nor should it be.

The Judge asked the wrong question.
Judge Houghton plainly misunderstood the legal question the court should have asked. She essentially reasoned that, had it thought of Betcha in 1973 when it wrote the law, the legislature would have wanted the patent-pending invention covered by the state gambling laws. Under the principle of strict construction, which even Judge Houghton admits applies here, it is not the court’s role to deign what they think the legislature would have wanted had only they thought about it, Sedlacek v. Hillis, 145 Wn.2d 379 (2001), Rhoad v. McLean Trucking Co., 102 Wn.2d 422, 426 (1984) — especially in a the context of a criminal statute, where all doubts should be resolved in favor of the individual. State v. Enloe, 47 Wn.App. 165, 170 (1987); see also McBoyle v. United States, 283 U.S. 25 (1931)(Justice Holmes opining that it was not the role of the court to fill in the blanks upon the speculation that, if the legislature had thought of a given activity, “very likely broader words would have been used”). The United States Supreme Court reaffirmed this principle just a few months ago — and in a gambling case no less. United States v. Santos and Diaz, 128 S.Ct. 2020, 2025-26 (2008)(ruling that probability has no place in criminal law.) The question wasn’t “Would the legislature have wanted this covered if they’d thought of it?” Had that been the law, I may have acted differently. Instead, as per our procedural due process rights, the question was:

“Is the individual’s reading of the statute so indefensible that we would feel comfortable sending him to prison for many years?”

Given that virtually everyone who’s ever considered the Betcha matter has said it is, at worst, a close call, the answer to that question is clearly “no.” (Even the trial court judge said that Betcha’s reading of the statute was “reasonable.”)

On that subject, it isn’t altogether apparent the state legislature would have banned Betcha had it thought about it. In her recitation of RCW 9.46.010, Judge Houghton neglected to mention that, while the legislature wanted to combat unregulated gambling, it also sought to “avoid restricting participation by individuals in activities and social pastimes, which activities and social pastimes are more for amusement rather than for profit, do not maliciously affect the public, and do not breach the peace.” Betting on Betcha.com would seem to fit that latter description. Betcha is a betting exchange, so it competes against bookmakers, the very degenerate professional gamblers the legislature had in mind in 1973. And there’s every reason to believe that legislatures may have liked the built in safety valve that is Betcha’s opt-out feature.

If there’s a strong public policy against X, then anything near X must be X?
Finally, Judge Houghton’s remark that “this is not the result the legislature intended when it set forth its strong declaration of public policy against unregulated gambling” suggests she believes that so long as the legislature declares a strong public policy against activity X, then anything that resembles activity X must be considered activity X. Criminal law doesn’t work that way: if it did, the procedural due process right to strict construction would be a requirement of liberal construction (read: the accused always loses), and the rule of lenity would be the rule of severity. The real world doesn’t work that way, either. I may have a strong interest in protecting my family in the privacy of our home. But that does not make my neighbor’s law mine.

When you stop to think about it, the idea of invoking the state’s purported interest as a reason it should win is, in itself, dubious. By way of example, suppose I had a boundary dispute with my neighbor. In court, I invoked as a reason I should win the fact that I was remodeling my house and without the 50 or so square feet at issue my remodeling plans would exceed the 30% lot coverage allowance in Seattle (read: I’d have to fork out a lot of dough for new architecture plans). I would be laughed out of court. Yet that is exactly what the Commission is doing in the Betcha case which, as it concerns the definition of “gambling,” boils down to a question of the Commission’s lot line.

It is questionable at best to invoke the state's interest WITHIN a line to determine WHERE the line is.

Washington’s “strong public policy” against unregulated gambling is dubious at best.
No matter the State’s rhetoric, Washington does not have a “strong public policy” against unregulated gambling. And if it ever did, that time has long passed. When it passed the gambling act in 1973, for example, the legislature specifically exempted casual players from the statute’s reach. See RCW 9.46.0269(1)(a)-(c). Even today, the only players who the State deems criminals are those who gamble on the Internet. See RCW 9.46.240. If the State’s public policy were so “strong,” one would think there would be no exceptions at all.

Today’s public officials don’t act as though Washington has a strong policy against unregulated gambling, either. Governor Chris Gregoire bet very publicly against other state governors during the Seahawks’ march to the Super Bowl a few years ago. And she issued press releases (1I2) about it. Seattle Mayor Greg Nickels, too, bet on the Mariners-Yankees series a few years back. If the State is right, and any betting of money constitutes “gambling,” then both Gov. Gregoire and Mayor Nickels issued press releases about their gambling. (At oral argument before Division Two in September, the assistant attorney general assigned to the case would not go so far as to agree that all betting is gambling. Instead he said “it depends.”) These transactions may have fallen within the player exceptions listed above, and were therefore legal, but they were nonetheless unregulated gambling, at least if we accept the argument that any bet is gambling (a position which the WSGC is going to have to take if it hopes to win its appeal). Not exactly the stuff of a “strong public policy against.”

Assuming arguendo she was gambling, Gov. Gregoire's very public betting on the Super Bowl a few years back rests uneasily with the idea that Washington's hostility to gambling is overwhelming.

Let’s be honest. The state’s public policy isn’t against unregulated gambling. It’s against anyone profiting from gambling. Anyone, that is, except the state.

Personally, I think the state’s interest in the rule of law is far more important.

NOTE: The below piece is one I penned for publication in any of the state newspapers. Although they published one of my pieces a few years ago, it isn’t easy to get the papers to accept publication. Unless and until I get a taker, I’ll post it here.

This week, the state House of Representatives is considering a bill that would broaden the legal definition of gambling to make the company I founded, Seattle-based Betcha.com, illegal. Supported by the Washington State Gambling Commission and Sen. Margarita Prentice, SB 6103 flew through the state Senate in less than two weeks. The House of Representatives can put a stop to this latest chapter in the state government’s persecution of its own. It should.

Betcha’s story to date would bring a smile to the face of any Third World despot. A few years ago I came up with the idea of a social betting network – think Ebay meets Facebook in Las Vegas. All wagering was honor-based; bettors were not obligated to pay their losses, but if they didn’t they risked receiving negative feedback. I researched the law for months, raised capital, opened an office, and hired employees to develop a website. Thirteen days after we launched, the WSGC told me to shut down or else. When I sued for the right to operate, the WSGC enlisted authorities in Louisiana to teach me a lesson in who’s boss. Two months later, Governor Gregoire, who yesterday wagered very publicly on the Gonzaga-North Carolina game, extradited me and two Betcha employees to Louisiana as felony fugitives, even though she knew or should have known we’d never been to the Bayou State and had a lawsuit pending over the legality of the very action for which we were being extradited. Three trips to jail and sixteen months later, a state Court of Appeals ruled I was right all along; that there was “no logical basis” to believe Betcha bettors were gambling; that the WSGC’s position was contradicted by the “plain language” of the Gambling Act and its own literature; and that Betcha lacked “the essence” of gambling. The WSGC is appealing its loss to the state supreme court.

SB 6103 pushes an already gruesome story into Pulp Fiction territory, and for no reason. Betcha’s upside is extreme. According to a 1999 estimate, Americans casually wager roughly $400 billion annually amongst themselves on sports alone. Betcha would tap into that money pot as well as the billions now being bet on pop culture staples like American Idol and the Academy Awards. People will continue to wager; all 6103 would do is keep Washingtonians from capitalizing on it. No doubt some enterprising entrepreneur in a free state will steal the idea, thanking the Washington legislature all the way to NASDAQ. The tax dollars that would flow into Washington’s treasury will flow to some other state.

There’s no need for SB 6103, either. Given Betcha’s story to date, no entrepreneur considering a business that even rhymes with online gambling would stay here. Tribal interests don’t need protecting: Betcha offers none of the games their casinos offer, and since our focus is global, the customer overlap is minimal. SB 6103 is not needed to prevent an increase in bookmaking: as a person-to-person betting exchange, Betcha cuts out the bookmaker. Because Betcha’s customers may opt out of their bets (that’s the “honor-based” part), they won’t lose the rent money. And judging by the public support for the 2006 law that turned online gamblers into Class C felons – that is, none (1I2I3) – the people of Washington wouldn’t support SB 6103 if they knew about it.

If nothing else, the legislature should back off 6103 to keep from making dubious history. To my knowledge, no state legislature has ever changed the law specifically to put one of its own out of business, at least not without the urging of either the competition or the public. Lawmakers can at least wait until the judicial process runs its course. Governor Gregoire couldn’t wait. The legislature need not repeat her mistake.

Yesterday we finally got our chance to be heard. The House Commerce & Labor Committee gave us 15 minutes. I don’t think a few of them cared much for what we had to say but at least we had an opportunity to speak. There were roughly ten of us there, five of whom spoke. Our cameraman Erik Lawyer was on the camcorder. His excellent work is posted on YouTube: 1 — 2 — 3 — 4

Nearly twenty months after the Washington State Gambling Commission ordered me to shut Betcha.com down or else, we finally received the word we’ve been waiting for. The Washington State Court of Appeals ruled that bettors on Betcha are not gambling:

The salient point here is that as a prerequisite to registration and use of Betcha.com’s website, users must acknowledge and agree that all bets made on the website are non-binding. Accordingly, bettors cannot have an understanding that they will receive something of value if they win.

Exactly what I’ve been saying for years.

We don't drink, but if we did we'd be breaking out the bubbly.

The court vindicated us, and while I wouldn’t say the judges were laudatory, they did throw in a few kind words. in particular, the court said we “forcefully argued” that the trial court erred in concluding the rule of lenity did not apply to this case because it was, for now, a civil matter. That wasn’t a difficult argument to make: there are no reported cases in any jurisdiction to support the trial court’s position. The trial court made that rule up without even the State’s suggestion. By contrast, the court was none too impressed with the state’s argument: it said there “is no logical basis for concluding” that bettors on Betcha are gambling under either state or common law.

Perhaps more importantly, the court rejected the State’s claim that the liberal construction provision the state Gambling Act applied here — emphatically so:

But that statute states in relevant part: “[a]ll factors incident to the activities authorized in this chapter shall be closely controlled, and the provisions of this chapter shall be liberally construed to achieve such end.” RCW 9.46.010. The plain language of this provision clearly provides that liberal construction is to be applied to chapter provisions regarding the regulation of enumerated “activities authorized.” To read the “liberally construed” language as broadly as the State advocates would require us to add language to the statute, which we cannot do. See Vita Food Prods., Inc. v. State, 91 Wn.2d 132, 134, 587 P.2d 535 (1978 ) (a court will not add words to a statute even if it believes the legislature intended something else but failed to express it adequately).

(Emphasis added.) Again, exactly as I’ve been saying for the last two years. In other words, Betcha has been out of business for almost two years based on a legal position that is rebutted by the plain language of the Revised Code of Washington. Incredible.

I might add: if the Gambling Act had actually read as the State needed it to, it would have been unconstitutional. In State v. Shipp, 93 Wn.2d 510 (1980), the Washington State Supreme Court held that the rule of strict construction of criminal statutes is a matter of procedural due process not subject to abrogation by statute. 93 Wn. 2d at __. That distinction is key: liberal construction is code for “the State always wins.” With strict construction, at least the individual has a chance.

News of the decision got out almost before I heard about it. Ian Ith of The Seattle Times called Betcha’s lawyer for comment literally before I’d read the opinion. (Mr. Ith’s report appeared on SeattleTimes.com late last night.) Venkat Balasubramani, a lawyer from West Seattle, reported on the decision on CircleID.com, albeit with a regrettable title. Randazza is the first blogger I’ve seen to pick it up: he covered it on his blog late this evening.

In the interest of full disclosure, one of the judges dissented. It was a three-paragraph job that made virtually no effort to tie fact to law. I’ll pick that one apart tomorrow for fun — there are literally no fewer than five errors therein. For now, it’s 2 am and I’m getting a bit tired.

It’s been a big day.

UPDATE: The case now has a cite: 201 P.3D 1045 (Wn. App. 2009).

I obviously have a more-than-healthy interest in the outcome of the Kentucky gambling domain name litigation. Yesterday I did a just-for-fun analysis on why domain names do not constitute “gambling devices” under Kentucky law, my second entry on that subject. (In case you aren’t following, Kentucky’s theory is that domain names are no different than slot machines or roulette wheels, so the Commonwealth is entitled to seize them.)

Today’s endeavor — to demonstrate that Kentucky’s attempted domain name seizure also violates the United States Constitution — specifically, the dormant Commerce Clause.

A big caveat: I put this together via Internet-based research. I did not use physical books, so there are several missing jump cites below.

Background. The dormant Commerce Clause restricts the powers of states to regulate interstate commerce. Barclays Bank, PLC v. Francise Tax Bd. of California, 512 U.S. 298 (1994). Beginning with Gibbons v. Ogden, 6 L. Ed 23 (1824), courts have found an implied power in the Commerce Clause and struck down state regulations which interfere with interstate commerce by effecting policies of economic discrimination and/or protectionism. This implied power, known as the dormant Commerce Clause, has been used to enjoin states from impeding the flow of interstate commerce, practicing economic protectionism, and discriminating against outsiders. See generally Dan L. Burk, Federalism in Cyberspace, 28 CONN . L. REV . 1095, 1123-24 (1996).

Kentucky’s seizure of gambling-related domain names concerns “interstate commerce.” “The definition of ‘commerce’ is notably broad.” American Library Ass’n v. Pataki, 969 F. Supp. 160, __ (S.D.N.Y.1960). Beginning with Wickard v. Filburn, 317 U.S. 111 (1942), the famous case in which the United States Supreme Court held that wheat produced for private consumption substantially affected interstate commerce, courts have considered virtually everything and anything to constitute commerce. In Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241, 244, 258 (1964), for example, the Court held that interstate commerce is affected by private race discrimination that limited access to a hotel and thereby impeded interstate commerce in the form of travel.[1] (Although Heart of Atlanta involved Congress’ affirmative powers under the Commerce Clause, “its reasoning is applicable in the dormant Commerce Clause context.” Camps Newfound Owatonna, Inc. v. Town of Harrison, Maine, 520 U.S. 564 (1997)(citing Hughes v. Oklahoma, 441 U.S. 322, 326, n. 2.) In Camps Newfound Owatonna, Inc. v. Town of Harrison, Maine, 520 U.S. 564 (1997), the Court held that property taxes affected interstate commerce, even though the tax in question was inherently intrastate. In the context of the Internet, the Southern District of New York held that a New York law that prohibited the dissemination of obscene materials to children online placed impermissible burdens on commerce between the states in violation of the dormant Commerce Clause. The court said that Internet pornography to children affected interstate “commerce” because the law placed an “undue burden on interstate traffic, whether that traffic be in goods, services, or ideas.” American Libraries Ass’n v. Pataki, 969 F. Supp. at __.

A state cannot discriminate against businesses because they are located outside their borders. But that is exactly what Kentucky is doing.

Kentucky’s attempted seizure of 141 gambling-related domain names speaks to commerce no matter your perspective. With regard to players, the commerce is the interchange of money concomitant with gambling — short of currency trading, about as purely a commercial activity as one can imagine. With regard to gambling companies, the “commerce” isn’t so much the gambling itself as the provision and importation of gambling services. Cf. Carbone v. City of Clarkstown, 511 U.S. 383 (1994) (article of commerce is not so much solid waste itself as the service of processing and disposing of it). The Commonwealth did not object to the idea that the object of its seizure is to ban interstate commerce, and I do not anticipate that they will argue otherwise in the Kentucky Supreme Court.

Kentucky’s attempted seizure treats out-of-state economic interests differently than in-state economic interests precisely because they are out-of-state. Thus, it is per se invalid under any of a myriad of Supreme Court precedents. In analyzing dormant Commerce Clause cases, courts follow a two-step inquiry. First, “(w)hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests,” it is “generally struck down . . . without further inquiry.” Brown-Forman v. N.Y. State Liq. Auth., 476 U.S. 573 (1986); Granholm v. Heald, 544 U.S. 460, __ (2005)(numerous citations omitted). If it does neither of the above, courts apply a balancing test first articulated by the United States Supreme Court in Pike Church v. Bruce, 397 U.S. 137 (1971):

Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will, of course, depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.

Id. at __.

The so-called “per se” cases are numerous. In Dean Milk v. City of Madison, 340 U.S. 349 (1951), for example, the Supreme Court struck down a city ordinance that required milk sold in the city of Madison to be pasteurized within five miles of the city. The Court found it “immaterial” that in-state pasteurizers outside the five-mile city limit were treated the same as out-of-state providers, 340 U.S. at 354, fn.4, because its “practical effect” was to exclude out-of-state providers from the in-state market. Id. at __.

In City of Philadelphia v. New Jersey, 437 U.S. 617 (1978), the Court struck down a New Jersey stature that prohibited the importation of most “solid or liquid waste which originated or was collected outside the territorial limits of the State.” 437 U.S. at __.

In Carbone v. City of Clarkstown, 511 U.S. 383 (1994), the Court struck down a flow ordinance statute that required all solid waste leaving a municipality to be processed through a particular transfer facility within that municipality. The Court treated the ordinance in Carbone as a per se case, even though it excluded both in-state and out-of-state processors (save one) equally. The reason: the government body in question “hoarded” the article of commerce for the benefit of an in-state provider to the exclusion of out-of-state providers, so the presence of some in-state providers in the excluded class was, to borrow from Dean Milk, “immaterial.” 511 U.S. at 391. Justice Kennedy discussed several past cases in which the Court struck down statutes on the grounds that out-of-state economic interests could not, by definition, get within the protected category of economic interests. 511 U.S. at 391 (citing Minnesota v. Barber, 136 U.S. 313 (1890) (striking down a Minnesota statute that required any meat sold within the State, whether originating within or without the State, to be examined by an inspector within the State); Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1 (1928)(striking down Louisiana statute that forbade shrimp to be exported unless the heads and hulls had first been removed within state); Johnson v. Haydel, 278 U.S. 16 (1928)(striking down analogous Louisiana statute for oysters); Toomer v. Wits ell, 334 U.S. 385 (1948)(striking down South Carolina statute that required shrimp fishermen to unload, pack, and stamp their catch before shipping it to another State).

More recently, in Granholm v. Heald, 544 U.S. 460 (2005), the Supreme Court struck down a Michigan scheme that allowed in-state, but not out-of-state, wineries to make direct sales to consumers.

In this case, Kentucky’s attempted seizure of 141 gambling-related domain names effectively treats in-state gambling providers differently than out-of-state ones — and precisely because they are out-of-state providers. In announcing the seizure action, Governor Beshear called the out-of-state gambling companies “leeches” who siphoned off revenue from Kentucky and provided no jobs to the Kentucky Derby’s home state. And he said blocking internet gambling sites “would protect (Kentucky’s) signature industry” – namely betting on horse racing. (Emphasis added.) At the same time, the Commonwealth left alone TwinSpires.com, an online gambling website owned by Kentucky-based Churchill Downs. Governor Beshear attempt to “protect” the Commonwealth’s in-state, land-based gambling operations by banning the importation of competitive gambling services made available online to Kentucky residents is a textbook example of the type of economic protectionism that the Supreme Court has said is impermissible. Indeed, of the many state schemes the Supreme Court has struck down as per se violations of the dormant Commerce Clause (see above), none were as blatantly protectionist as Kentucky’s.

But even if Governor Beshear hadn’t foolishly showed his hand, Kentucky’s action would be invalid under Granholm alone. In essence, Kentucky is attempting to ban the direct shipment of a product — here, gambling services — to Kentucky residents. At the same time, the Commonwealth allows in-state companies — namely, TwinSpires.com — to do just that. And it allows — if not encourages — Kentucky residents to purchase their gambling services from in-state casinos — provided, of course, they are licensed by the Commonwealth.

Kentucky will undoubtedly argue that the dormant Commerce Clause does not apply to this case because it involves allegedly illegal commerce. It argued as much at the appellate level:

(The gambling companies’) argument that internet gambling is beyond state regulation by application of the Commerce Clause is as indefensible as (sic) would be if the Columbian cocaine cartels tried to defend their drug smuggling as an unconstitutional attack on the trucking industry.

(Commonwealth’s Appellate Brief at 59.) The Commonwealth’s argument is incorrect.

First, Kentucky only has the power to ban intrastate gambling. It cannot ban interstate gambling, which is what is at issue here. See Bonaparte v. Tax Court, 104 U.S. 592, 594 (1881) (“No State can legislate except with reference to its own jurisdiction. . . . Each State is independent of all the others in this particular”); see also BMW v. Gore, 517 U.S. 559, __ fn.16 (1996)(discussing several Supreme Court cases that have held similarly). Much of the gambling that takes place on the targeted websites takes place outside the United States, where gambling is legal. By seizing websites, Kentucky would essentially make it impossible for the people in the rest of the world to partake in activity that its legislatures have deemed legal, effectively making it the world government of online gambling.

The Commonwealth’s Columbia cocaine analogy is obviously distinguishable — importing cocaine is quite different from importing gambling services. The Commonwealth is not in the business of licensing and profiting from cocaine dealers; it is in the business of licensing and profiting from in-state gambling operations. When it cracks down on cocaine distribution it is protecting its citizens, and doesn’t make a dime. When it cracks down on online gambling it protects its economic interests and profits aplenty.

The Commonwealth's attempt to equate gambling with cocaine is less than persuasive.

It does not matter that, to date, most online gambling providers are located internationally, whereas the businesses in the above cases were located in other states. If anything, the international nature of internet gambling makes Kentucky’s attempted seizure more constitutionally troublesome than the cases cited above. See, e.g., South-Central Timber Dev. v. Wunnicke, 467 U.S. 82, 100 (1984)(“It is a well-accepted rule that state restrictions burdening foreign commerce are subjected to a more rigorous and searching scrutiny”); Reeves v. Stake, 447 U.S. 429, 436 fn.9 (1980)(“Commerce Clause scrutiny may well be more rigorous when a restraint on foreign commerce is alleged.”) Moreover there is nothing preventing out-of-state but in-country online gambling providers from going into business – indeed, some already have. E.g., BetToGive.com (Maryland based), BluBet.com (California based). Kentucky’s seizure scheme, if upheld, no less discriminates against these companies than it does against online poker providers located abroad.

Even if the Governor had not stated that economic protectionism motivated the forfeiture action, it would still be invalid under the Supreme Court’s Pike v. Bruce Church balancing test. While Governor Beshear was not guarded about his protectionist motives, Kentucky has volunteered another justification – namely, the protection of children from the evils of online gambling. Although this is lipstick on a pig – children being the lipstick, protectionism the pig – the lipstick here is, at least, an acceptable motive. It is nonetheless insufficient to sustain the seizures under the Pike v. Bruce Church balancing test (supra) because the burdens it imposes on interstate commerce far outweigh the benefits.

Kentucky arguably has an interest in protecting its citizens from online gambling. While that interest is not as compelling as New York’s interest in protecting children from pedophilia in Pataki, it is, nonetheless, an interest. Under Pataki, however, the existence of a legitimate state interest is not enough to sustain its constitutionality. 969 F. Supp at __. The law must actually further the state interest. Kentucky’s seizure does not.

On the benefit side of the ledger, the seizure offers very little to Kentucky residents that they don’t already have if law enforcement would only enforce existing law. As was the case with New York in Pataki, 969 F. Supp. at __, Kentucky has several other laws on the books to deal with gambling activity that occurs within the state. Kentucky law forbids gambling, promoting gambling in various degrees, and possession of gambling records- and devices. Each of those laws seek to proscribe the same behavior that the seizures target – gambling outside of Kentucky’s authorized casinos. Kentucky law also provides for the confiscation of “gambling devices” which, defined as broadly as Kentucky would like it to be, potentially includes PC’s and Internet access equipment located in the Bluegrass State. These laws each prohibit the same activity targeted by the seizures and could easily be used by Kentucky prosecutors to nab Kentucky citizens for gambling online.

On the other side of the Pike balancing test, the impact on interstate (and international) commerce will be extreme. In terms of direct effects, dozens of businesses that operate legally in their respective locales will be out of business overnight because their websites will no longer be accessible. (In effect, an adverse result for the gambling companies will result in thousands of employees in England, Panama, and Costa Rica being sent to the unemployment lines.) Their only option will be to remain out of business, or purchase new domain names and build new brands – not an easy task. Citizens who want to engage in commercial activity by gambling online will find the rivers of Internet commerce drying up, if not, at some point, barren.

More troublesome is the precedent Kentucky’s seizure will set if permitted. If the Commonwealth can bar the importation of gambling services to protect its licensed casinos from out-of-state competition, the slope gets very slippery. Could it not then bar the importation of widgets made in State X because it does not approve of State X’s labor relations laws? Or mallets made in State Y because State Y prohibits gay marriage? If so, then the dormant Commerce Clause is effectively dead.

Of course, none of this will matter if the Kentucky Supreme Court analyzes this matter correctly and decides the case on statutory grounds. That’s an easy case. If the court rules in the Commonwealth’s favor on the statutory question, it may not matter either: any court that can make a domain name a “gambling device” should also be able to sidestep the constitutional roadblock, if by no other means than ignoring it. (That’s exactly what the lone dissenter did at the appellate level did despite extensive briefing on the subject.) Still, one has to hope the law and Constitution still count for something in the Bluegrass state.

If they do, the gambling companies win.

Like most Americans outside Kentucky Governor Steve Beshear’s office, I was pleased to see that the Kentucky Court of Appeals refused to allow the Commonwealth to seize 141 domain names on its tortured theory that domain names are “gambling devices” under Kentucky law. As many in the industry have already noted (see the LawReader’s account for many of them), the court’s ruling was a victory for individual freedom and the rule of law.

I was less pleased about the court’s reasoning. On the important point of whether a domain name constitutes a “gambling device” under Kentucky law, there was none. The 2-1 majority opinion, authored by Judge Michelle Keller, simply stated that it “stretches credulity to conclude that a series of numbers, or Internet address,” constitutes a “gambling device” under Kentucky law. Judge Keller was correct – as I argued a few months ago, such a conclusion does stretch credulity – but that’s more conclusion than reasoning. It reminded me a bit of the United States Supreme Court’s opinion in Roe v. Wade, an infamously weak decision in which Justice Harry Blackmun held that the Constitution contains a right to privacy, and the right to an abortion falls within it. Period.

The Commonwealth has already appealed the decision. The Kentucky Supreme Court won’t give the Court of Appeals’ opinion the deference courts afford Roe. And given that the tally of judges in the Kentucky lower courts is now 2-2 (the trial court judge ruled in favor of the Commonwealth), the court may approach this case as a close one.

It isn’t. If the Kentucky Supreme Court applies the law correctly, this should be a unanimous decision. And the Commonwealth should lose.

The deck is stacked against the State – big time. The Commonwealth’s biggest problem is that the criminal rule of strict construction applies to the reading of “gambling device.” Under the rule of strict construction, a court must be certain that conduct is criminal before it rules in favor of the government. Most states hold that the rule of strict construction applies on a sliding scale – “the more severe the penalty, and the more disastrous the consequences to the person subjected to the provisions of the statute, the more rigid will be the construction of its provisions in favor of such person and against the enforcement of the law.” Norman Singer, Statutory Construction (2000), §59.3, p.140 (numerous citations omitted). Most states, too, hold that individuals have a procedural due process right to have criminal statutes interpreted strictly. Importantly, Kentucky applies the rule of strict construction in forfeiture actions. See Bratcher v. Ashley, 243 S.W.2d 1011 (Ky.1951)

The court should read the law with the same scrutiny it would as if gambling executives were facing jail time. (They still may.)

Strict construction applies to the phrase “gambling device” even though the court will consider the phrase’s meaning in the context of KRS 528.100, the civil forfeiture statute. That’s because the phrase also appears in a criminal statute – namely, KRS 528.020, which makes operating a gambling device a Class D felony punishable by up to five years in prison. In Leocal v. Ashcroft, 543 U.S. 1 (2004), a unanimous United States Supreme Court held that a definition within a statute “must be interpreted consistently,” regardless of whether it arises in a criminal or noncriminal context. 543 U.S. at 11, fn.8. And in United States v. Thompson/Center Arms Co., 504 U.S. 517-18 (1992), the Court applied the criminal rule of lenity to interpret a tax statute in a civil setting because, as here, the statute had criminal applications. See also Clark v. Martinez, 543 U.S. 371 (2005)(“It is not at all unusual to give a statute’s ambiguous language a limiting construction called for by one of the statute’s applications, even though other of the statute’s applications, standing alone, would not support the same limitation. The lowest common denominator, as it were, must govern.”) The Court’s rulings were consistent with state courts that have applied the rule of strict construction in civil declaratory judgment actions, e.g., Graves v. Meland, 264 N.W. 2d 401, 403 (Minn. 1978)(“the rule of strict construction of penal statutes must be applied notwithstanding the civil nature of the proceeding”), and civil forfeiture proceedings. E.g., Hoye v. Commonwealth, 405 S.E. 2d 629 (Va. App. 1991). In other words, despite this being a civil forfeiture, the Kentucky Supreme Court should read “gambling device” with the same scrutiny it would if executives from the gambling companies were appealing their own prison sentences.

That the rule of strict construction applies regardless of the nature of the proceeding makes intuitive sense; a contrary rule would mean that a statute admits to a different meaning depending on whether a litigant appears in court in a gray flannel suit versus orange jail garb. It also makes sense applied here: while executives from the gambling companies are not (yet) facing time in a Kentucky prison, their companies and employees are faced with the loss of their business, all of which are indisputably lawful where they are located.

Taken together, the aforementioned cases mean that “gambling device” is, for the Commonwealth, tainted by its inclusion in KRS 528.020, a criminal statute. (For the gambling companies, of course, this taint is fortuitous.) “Gambling device” cannot mean one thing in KRS 528.100 (civil forfeiture of a gambling device) and something else in KRS 528.020 (criminal operation of a gambling device). And it cannot mean one thing today and another thing a year from now, when one or more gambling company executives may appear before a Kentucky court in shackles. As per Leocal, Thompson Center, and Clark, “gambling device” must be interpreted as though the gambling company execs were appearing before the court in jail garb today for violating KRS 528.020, which is punishable by up to five years in a Kentucky prison. In theory, that should be a high bar indeed for the Commonwealth to hurdle.

It’s not enough for the State to be right. The gambling companies must be wrong. Importantly, courts apply the rule of strict construction even where states offers alternative, reasonable interpretations of the statute(s) in question. Singer (2000) at §59.4 (citing U.S. v. Freisinger, 937 F.2d 383 (8th Cir.1991)). The question before the Kentucky Supreme Court, therefore, is not whether a domain name falls within the “spirit” of KRS 528.010(4)(a) and (b), as the trial court reasoned. It isn’t whether, when combined with PC’s, it creates a “device,” as the lone dissenting judge held. It isn’t whether the court prefers the gambling companies’ reading to the Commonwealth’s, or vice versa. It isn’t even whether the court agrees with the gambling companies’ reading. Rather, given that the phrase “gambling device” appears in a statute that carries with it up to a five-year prison sentence and the principles of strict construction discussed above, the question is:

Is the gambling companies’ reading of “gambling device” so unreasonable that this court would feel comfortable sending their executives to prison for up to five years for violating KRS 5.28.020 because Kentucky residents use their domain names to access their web sites?

The question really isn’t close.

The relevant statutory provisions here are KRS 528.010(4)(a) and (b), which define “gambling device.” Subsection (a) defines “gambling device” as:

Any so-called slot machine or any other machine or mechanical device an essential part of which is a drum or reel with insignia thereon, and which when operated may deliver, as a result of the application of an element of chance, any money or property, or by the operation of which a person may become entitled to receive, as the result of the application of an element of chance, any money or property.

Domain names are neither “slot machines” nor “machines or mechanical devices” whose “essential part(s)” are a “drum or reel,” so that section doesn’t apply. That leaves subsection (b), which defines “gambling device” as:

Any other machine or any mechanical or other device, including but not limited to roulette wheels, gambling tables and similar devices, designed and manufactured primarily for use in connection with gambling and which when operated may deliver, as the result of the application of an element of chance, any money or property, or by the operation of which a person may become entitled to receive, as the result of the application of an element of chance, any money or property.

Domain names fail this definition for three separate reasons. First, domain names are not “devices.” Web sites may be, not domain names are not. Even if they were, they are not “designed . . . primarily for use in connection with gambling.” Domain names (e.g., “PokerStars.com”) may be selected to be used in connection with gambling, but selected is not designed. We would not say “We designed the name ‘Charlie’ for our newborn son to honor his maternal grandfather.” Nor would we say that about a company that picks a gambling-related domain name. Finally, domain names are neither “manufactured” nor “operated.” If anything, web sites are. If Kentucky wants to attempt to seize the gambling companies’ web sites it is free to do so. That it may have a tough go of it – they are all hosted abroad — does not justify ignoring entire swaths of Kentucky law.

Even assuming that a tenable argument can be made that a domain name is a “gambling device,” the Supreme Court should still rule against the Commonwealth because of the rule of lenity. Where a criminal statute can be reasonably interpreted more than one way, the court must construe the statute against the Commonwealth under the rule of lenity – in effect, “tie goes against the State.” Lundergan, 847 SW2d at 731; Woods, 793 SW 2d at 814. The rule’s justification – “notice” – is identical to the rational for strict construction. See Crandon v. United States, 494 U.S. 152, 158 (1990) (stating that the rule of lenity “serves to ensure that there is fair warning of the boundaries of criminal conduct and that legislatures, not courts, define criminal liability”); Dixson v. United States, 465 U.S. 482, 511 (1983) (O’Connor, J., dissenting). While Kentucky courts have not yet considered the issue, courts regularly apply the rule of lenity to criminal statutes in civil settings. Leocal, 543 U.S. at fn.8 (citing Thompson/Center Arms v. United States, 504 U.S. 505, 517-18 (1992), Crandon, 494 U.S. at 168; Bingham, Ltd. v. United States, 724 F.2d 921, 924-925 (11th Cir.1984)(numerous citations omitted); see Singer, Statutes and Statutory Construction §59.3 (1986)(rule of lenity “will apply even though the court is construing the statute in a declaratory judgment action (civil)”). In Leocal, the Supreme Court explained its rationale: criminal laws “must” be interpreted “consistently,” regardless of the nature of the proceeding or statutory application. 543 U.S. at 11 n8.

Given the language of the KRS 528.010(4) and the lack of any evidence that the Kentucky state legislature had domain names or anything like them in mind when they last amended the definition of “gambling device” in 1974, several years before the Internet even existed, the phrase “gambling device” cannot reasonably be read to include domain names. The Commonwealth feels otherwise. Even assuming the Commonwealth’s statutory interpretation is reasonable, the Supreme Court must resolve this case against the Commonwealth under the rule of lenity unless it believes that it is unreasonable to conclude that a domain name is not a “gambling device.” Given that two judges have already held that the converse “stretches credulity,” such a conclusion would be quite a surprise.

If the law doesn’t matter, the Constitution should. If the state supreme court gets over the dual strict construction/rule of lenity hurdles, it will run straight into a brick wall. That wall is the Constitution – specifically, the dormant Commerce Clause, a judicially-created doctrine that forbids states from taking actions to protect in-state economic interests at the expense of out-of-state ones.

It is beyond any reasonable dispute that the Commonwealth’s action was motivated by economic protectionism — Governor Beshear made no bones about it. In announcing the forfeiture action, the governor called the out-of-state online gambling companies “leeches” on Kentucky’s communities and complained that they provide no jobs or tourism benefits to the state of Kentucky. And he said blocking internet gambling sites “would protect (Kentucky’s) signature industry” – namely betting on horse racing. (Emphasis added.) Put simply, Governor Beshear seeks to “protect” the Commonwealth’s in-state, land-based gambling operations by banning the importation of competitive gambling services made available to Kentucky residents over the Internet. Under any of the myriad of Supreme Court cases mentioned in the Wikipedia link above, that he cannot do. Indeed, I’ve read most of the cases in this are of law, and I have found no more blatant example of economic protectionism than this one.

State actions that protect in-state interests at the expense of out-of-state ones are per se invalid under the Commerce Clause.

Somewhat surprisingly, the Commonwealth is not backing off its protectionist justification. In reacting to the Commonwealth’s loss, Justice and Public Safety Cabinet Minister J. Michael Brown reportedly had this to say about the decision:

The Commonwealth will continue its action to protect Kentucky citizens from illegal internet gambling operations, and appeal the recent Court of Appeals ruling to the state Supreme Court. The evidence demonstrated that illegal and unregulated activity is occurring in Kentucky, and that millions of dollars are being lost as a result of that activity.

(Emphasis added.) Memo to the folks in Lexington: preventing revenue loss is not a permissible justification for burdening interstate commerce.

That the Court of Appeals did not deal with any of these issues is no surprise. Given that the court believed the Commonwealth’s reading of the law stretched credulity, it ruled in the gambling companies’ favor applying neutral construction; there was no need for it to wax on about strict construction and its application in a civil setting. Because the court did not find the Commonwealth’s reading tenable, there was also no need for it to invoke the rule of lenity. And because courts are supposed to decide cases on statutory- rather than constitutional grounds where possible, it was not necessary for them to reach the dormant Commerce Clause question.

More troubling was Judge Caperton’s dissent. Since he concluded that domain names were “gambling devices,” he should have then reached the constitutional question, which both sides briefed. That he did not raises the troublesome prospect that the state supreme court will make the same error.

No word yet on when the state supreme court will hear oral argument. In the meantime, the entire industry will wait in limbo. That’s too bad because if the law matters at all, this case ain’t close.

On Friday, a three-judge panel of the Kentucky Court of Appeals heard oral arguments in re: Kentucky’s attempt to seize 141 gambling-related domain names. The State’s theory is that domain names constitute “gambling devices” under state law, and thus are subject to seizure. I’ve been trying to glean the news to get some idea of how the arguments went and, thus, how the court may rule. That’s no easy task, but one snippet from a recount on Online Casino Advisory gives me hope.

According to the article, one of the judges asked the State’s attorney whether “the state had a right to seize a bus that was taking customers to Indiana’s legal casinos as a ‘gambling device.’” The attorney answered “yes.”

According to attorneys for the State of Kentucky, a bus may be a gambling device.

So, a bus is a “gambling device” if it is being driven to a casino. Does Kentucky also have the right to seize automobiles driven by Kentuckians on their way to Indiana? Under the state’s rationale, I should think so. And any airplanes leaving Louisville bound for Las Vegas? Under the state’s rationale, why not?

If that’s all Kentucky has to hang its hat on, it loses.