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HEADLINE: New Liability Trends
In Online Gaming
BODY:
As the popularity of online
gambling (let's call it "gaming") and entertainment
grows, so does the complexity of related liability. Gamers who
lose money don't want to pay. Astonished parents are shocked at
online gambling debts
of teenaged offspring. Even where it is legal - in some countries
outside of the U.S. - many users get angry and do not want to
pay debts, feeling that they might have been cheated.
It all leads to lawsuits against each service
provider in the chain, from content provider, to payment processor,
to ISP. Particularly in the U.S. - despite efforts to ban it -
online gambling has become a billion dollar industry. Some estimate
that the majority of online gamblers, in fact, reside and play
from their computers in the United States. Potential plaintiffs
will look for deep pockets among all of the money being traded.
The economics of the industry are amazing and
are particularly enticing in a down sector of the economy. While
it may cost $ 300 million or more to build a new resort casino,
a virtual casino can be developed for $ 1.5 million and operate
with as few as 17 employees. Profit margins can run as high as
24 percent versus 8 to 16 percent for a land-based casino. An
estimated 20 million people are currently online, with a projected
160 million online by the year 2020.
While most online gaming companies are located
outside of the U.S., in an effort to avoid government prosecution,
it is common for a U.S. company to be in the gaming network chain.
Payment processors set up methods to send cash through companies
offering secure payment systems for the Internet, others set up
the means to open an offshore account, and ISPs provide networking,
transport, caching, you name it.
What happens to the ISP who is not engaged
in gambling but whose services are used as a conduit between the
individual gambler and the online casino? What happens to the
payment processor who facilitates the money transfer? What about
the content providers who aren't necessarily affiliated with the
offshore gambling company?
Each has to keep up with current legal trends.
Knowing what is legal and where liability falls is an edge that
often only one side of a bargain enjoys.
Until now, with somewhat good reason, most online service providers
thought they were immune from gambling-related liability. Under
certain laws, service providers enjoy broad immunity for their
content in most situations. But the law is changing.
Two recent events have occurred that warrant
some concern if you are a service provider in the chain of questionable
content. First, a recent case focusing on User Agreements between
an ISP and its end users illustrates how knowing the law can cost
an ISP money, if not up-to-date with current trends, or make money
by avoiding liability for the company. Second, the industry in
general should note a new policy announced by eBay's subsidiary
payment processor, PayPal, which imposes fines for violations
of its user policy, including using its service for online
gambling debts.
The new, more restrictive view of ISP immunity
arises from Grace v. eBay Inc., California Second Appellate District,
Div. Three, B168765 (7/22/04). It has long been thought that ISPs
are immune from most, if not all, liability associated with the
content on their networks. In this case, a California court took
a new approach - there is no statutory immunity against liability
for a distributor of information who knew, or had reason to know,
that the information was defamatory. In other words, if you know,
or have reason to know what is on your network, you may be liable
for the content. This represents a narrowing of immunity for ISPs.
Despite this holding, however, eBay escaped liability.
Why should an ISP care, legally? eBay avoided
liability because its User Agreement (the agreement used with
online end users) was written in a way to relieve it of liability.
That means that online service providers operating in California
must evaluate their User Agreements. Time for a tune-up. The law
is not completely on the side of ISPs any longer (at least in
California).
Why should an ISP care, as a technologist?
Technologies that block and filter access to objectionable material
help, as do technologies that enable clear click-throughs and
other methods which inform consumers about what they are buying
or using. Make the terms of the relationship clear at the forefront
of the User Agreement and the ISP will more likely be cleared
later, as eBay was.
Why should an ISP's wallet care, or, what's
the bottom line? ISPs which do not take Grace v. eBay into account
will be at a disadvantage when negotiating with content providers,
and could wind up with unnecessary liability. Content providers
blind to this case will take on unnecessary liability. ISPs should
negotiate their agreements with an eye against accepting liability
for the customer's content. Be sure that whoever interfaces with
the end user has an up-to-date User Agreement.
The other new development is that PayPal is
not legal tender for all debts, public and private. PayPal's new
policy, which takes effect September 24th and applies to both
buyers and sellers, will soon fine users up to $ 500 for uses
related to online gambling, adult content or services, and buying
or selling prescription drugs from non-certified sellers. It marks
the first time PayPal has imposed fines for violations of its
use policy.
PayPal processes transactions on the Net and
is potentially giving up a substantial amount of money. It has
been reported that, at one time, PayPal received almost ten percent
of its revenue from online gambling. eBay denies that it was pressured
by the government to make the change. Whatever the reason, if
the reported numbers are correct, eBay is willing to lose a significant
amount of money and must have a good reason for the policy change.
Why should an ISP care, legally? Two reasons:
(1) the User Agreement, and (2) learning how the government works.
First, if a company wants its User Policies to be worth a pixel,
they should adhere to them. It's not impossible, but much more
difficult, to raise a User Agreement as a shield from liability
if the company never abides by it. Second, PayPal might only be
making this move because of its conscience. But considering it
is in the business of making money, there is good reason to guess
that it too is making this move to avoid liability. It has previously
been reported that the government was displeased with certain
links in the online gambling chain. Some argue that they are merely
providing a network service and are immune. But regardless of
whether the prosecutors are right or wrong, it is expensive to
defend in court. An ISP should have its business model reviewed
for potential liability, just as eBay has here with its PayPal
service. It was the smart thing to do.
Why should an ISP care, as a technologist?
PayPal's announcement opens the door for other payment method
opportunities. Online
gambling is still a huge and legal business in many countries.
A technology that could securely avoid the U.S. and U.S. end users
(and in that manner avoid U.S. prosecutors) may find an opportunity.
Why should an ISP's wallet care, or, what's
the bottom line? ISPs know that the mother of innovation is need
and the father of innovation is money. Without money to fund them,
many of these online elements will dissipate. That might be a
good thing - no judgments here. An ISP could consider what the
content replacement will be and fill the void.
The Bottom Line
Congress is also in the mix. Recent legislative
efforts that may affect how ISPs provide service in the online
gaming market, combined with prosecutorial efforts marked by recent
judicial precedent, indicate that federal and state authorities
are more inclined now than in previous years to prosecute a service
provider that supports an online gaming enterprise. Potential
liability increases when elements of the service operate within
the United States. Even when the entire service is located outside
the United States, a foreign company providing support services
to online gaming enterprises may affect a domestic affiliate.
Although there are strong defenses to the types
of prosecution experienced by online gaming operators, there is
no guarantee of immunity. Companies can, however, engage in a
course of action to decrease the potential for claims of illegality.
In addition to fine-tuning User Agreements, first, the service
provider could avoid jurisdictional issues by keeping all elements
of the service in locations where the activities are legal and
outside of the United States, and similarly restricting its advertising
target markets. Second, the proposed service will appear less
like a service promoting or aiding an unlawful gambling enterprise
if it does not directly assist online gambling operators located
in the U.S., or target the U.S. from offshore. Although taking
these two steps will decrease the potential for prosecution, uncertainty
in this area of law makes it very difficult to gauge the likelihood
of prosecution.
In short, there are simply no legal "bright
lines" to follow in assessing legality or illegality in the
provision of support services for online gaming.
It is clear, on the one hand, that online gaming is unlawful
in the U.S., and that, on the other hand, the unknowing provision
of support services (e.g., credit card processing) is not unlawful.
The law between these two examples - knowing provision of specially-tailored
services intended for use by gaming companies and the unknowing
provision of services - is still evolving and remains murky. One
step forward that the service provider should take is to learn
from the two eBay examples and to stay aware of what is happening
in the sector.
Copyright 2004 The Metropolitan Corporate Counsel,
Inc.
The Metropolitan Corporate Counsel
October, 2004 ,Mid-Atlantic Edition
SECTION: KELLEY DRYE; Pg. 11
LENGTH: 1638 words
BYLINE: DANNY E. ADAMS AND W. JOSEPH PRICE , KELLEY DRYE &
WARREN LLP; Danny E.
Adams is a Partner in the Tysons Corner office of Kelley Drye
& Warren LLP, where his practice focuses on technology and
telecommunications policy, related specialized litigation and
transactional matters. W. Joseph Price is an Associate in the
Tysons Corner office who focuses on gaming and entertainment technology,
telecommunications policy, related specialized litigation and
transactional matters. They may be reached at 703-918-2300.
HIGHLIGHT:
Please email the authors at dadams@@kelleydrey.com or jprice@@kelleydrye.com
with questions about this article.
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