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.
Posted by greenlakenick 
Posted by greenlakenick 
Posted by greenlakenick 
