State Online Gambling Law: Express Prohibitions

•October 29, 2014 • Leave a Comment

Recapping the last post:

The Justice Department appears to have backed of from enforcing the wire act as it applied to online gambling (other than sports betting), as evidenced by their 2011 letter. While some Congressmen have attempted to pass legislation banning online gambling completely, those bills have been unable to garner enough support to even stand a chance at passing. But where does that leave the state of online gambling law in the U.S.. Well the short answer is no one is really sure. The complex, overlapping regulatory framework has left even gambling law experts baffled. Still, at least one inference may be drawn from the justice department’s recent letter: it appears that the federal government has left the majority of online gambling regulation up to the states. As mentioned in the previous post, some States have used their regulatory authority to enact laws legalizing online gambling. Many states have however taken the opposite approach and enacted express prohibitions on online gambling. This post will examine some of those prohibitions.

 

Washington State:

Although brick and mortar gambling in Washington State is legal to an extant, online gambling is not. In 2006, the Washington legislature amended the Washington Revised Code 9.46.240 (the Gambling Act) to include a ban on all forms of bets or wagers over the Internet from Washington. Not only is it illegal for a person to place bets online from Washington but it is illegal for an internet gambling business to accept bets placed by people in Washington, whether or not the business operates within the state’s borders.

That law was challenged in the case of Rousso v. State.[1] In that case, Rousso, a online gambling enthusiast sought a declaratory judgment that the law impermissibly interferes with congress power’s to regulate interstate commerce, thus violating the Commerce Clause. The Washington Supreme Court affirmed the states authority to regulate internet gambling, finding that the burdens imposed on interstate commerce were not “clearly excessive” in light of the state interests.[2] Washington’s law is uniquely punitive, making the offense of online gambling a Class C felony.[3]

Illinois:

In Illinois’s statute Article 28 Ch. 38, any person who “knowingly establishes, maintains, or operates an Internet site that permits a person to play a game of chance or skill for money or other thing of value by means of the Internet or to make a wager upon the result of any game, contest, political nomination, appointment, or election by means of the Internet.” However, the law does not prohibit online lottery. In fact, Illinois was the first state to create an online lottery ticket program.

Recently, a bill was introduced in the Illinois legislature that would legalize many forms of online gambling including online poker.[4] According to legal sources, this bill will likely pass in some form. Therefore, online gambling prohibition in Illinois may soon be over.

Nevada:

Nevada has had perhaps the most interesting online gambling law development. In 2001, Nevada passed legislation that legalized all interactive online gaming including internet gambling. Unfortunately for Nevada, Department of Justice still believed that the Wire Act prohibited online gambling and thus the Nevada statute was in conflict with this law. Faced with this pressure, Nevada completely reversed course and became one of the only states that have expressly prohibited online gambling. [5]

Yet the story does not end there. In 2013, Nevada partially reversed its course by enacting legislation legalizing online poker (At the time, Nevada was the only state to have any form of online gambling legalization).[6] More recently, Nevada has made a deal with Delaware to permit individuals in each state to play poker against each other.[7] Under the agreement, both states must adhere to certain regulatory minimum standards.

Next Post

The next post will focus on those states that have enacted legislation legalizing online gambling in some form.

[1] Rousso v. State, 170 Wash. 2d 70, 91, 239 P.3d 1084, 1095 (2010)

[2] Rachel J. Schaefer, Must the House Always Win?: A Critique of Rousso v. State, 35 Seattle U. L. Rev. 1549, 1551 (2012)

[3] Charles P. Ciaccio, Jr., Internet Gambling: Recent Developments and State of the Law, 25 Berkeley Tech. L.J. 529, 550 (2010)

[4] http://www.kleinmoynihan.com/blog/online-gambling-may-soon-be-legal-in-illinois/

[5] Charles P. Ciaccio, Jr., Internet Gambling: Recent Developments and State of the Law, 25 Berkeley Tech. L.J. 529, 550 (2010)

[6] http://abcnews.go.com/US/story?id=93177

[7] http://www.foxnews.com/politics/2014/02/25/raising-stakes-nevada-and-delaware-sign-agreement-to-allow-interstate-online/

Bitcoin Regulation Imminent in Response to Money Laundering Crimes

•October 20, 2014 • 2 Comments

On November 19, 2013, Director Jennifer Calvery of the Financial Crimes Enforcement Network of the U.S. Treasury (FinCEN) offered a statement detailing the dangers that virtual currencies pose to the legitimacy of the United States financial system. According to Director Calvery, virtual currencies such as Bitcoin may be classified as either centralized or decentralized virtual currency. [1]. Calvery cited Liberty Reserve, an institution which participated in various fraud and money laundering schemes, as an example of a centralized virtual currency. [id.]. Bitcoin, however, follows the decentralized model, as users interact only with each other, and the currency is not moderated by any centralized administrator. [id.]. The government’s interest in regulating virtual currency stems from its initiative to deter fraud and money laundering, as well as from its desire to prevent discreet funding of terrorist operations. [id.].

Decentralized virtual currency systems, such as Bitcoin, are commonly viewed as opportune mediums through which users can pay each other for goods or services without regulation or scrutiny. Many users remain unaware, however, that every bitcoin transaction is recorded in a ledger called a block chain. [2]. This block chain makes it possible for IRS investigators, tasked with the burden of uncovering tax fraud and tax evasion, to track users who transmit virtual currency. “The IRS knows that to use bitcoins, one needs a virtual wallet along with private keys and public addresses… While the public address itself does not identify the user, the IRS has been very clever in associating the public address with the identity of the Bitcoin user.” [id.]. Apprehension toward virtual currency is fueled by situations in which bitcoins were used illicitly, to effect gun-for-hire solicitation, or help tech-savvy drug dealers launder over one million dollars. [3,4].

The potential for criminal abuse is enhanced by the utilization of bitcoins as a method of payment on the former “illicit Silk Road website”, which—with the aid of BitInstant—transmitted nominal payments to drug dealers. BitInstant, a bitcoin exchange, is no longer up-and-running after its operator, Charlie Shrem, pled guilty to helping drug dealers launder over one million dollars using bitcoins. [3]. In that case, judge Katherine Forrest “found [that] federal money-laundering statutes ‘encompass use of Bitcoin’ — and that ‘any other reading’ of the law would be ‘nonsensical.’” [4]. Judge Forrest explained, “There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then convert[ed] back to cash, that would constitute a money-laundering transaction. One can money launder using Bitcoin…”. [id.].

Practical dangers of using bitcoins are far less criminally implicating, but nonetheless problematic. Because the Bitcoin exchange is peer to peer, decentralized, and “at a crossroads between a lightly regulated industry–software and technology–and a heavily regulated one, which is banking,” users transmit bitcoins without any guarantee of value in their currency. [5]. “Bitcoin, which isn’t backed by any country and doesn’t have an interest rate, has been one of the most volatile currencies in the world this year, falling more than 45 percent to about $407.23 [in just one day].” [6]. Because of the large amount of transactions processed through Bitcoin, an estimated $8 billion between October 2012 and October 2013 alone, federal agencies like FinCEN and state officials like Benjamin Lawskey (NY) are trying to implement regulatory measures to curtail both criminal involvement and consumer deceit in the Bitcoin exchange. [1, 7].

Lawskey, Superintendent of the New York Department of Financial Services began his plight against Bitcoin perhaps too aggressively, proposing registration requirements that would stifle the efficiency and convenience of the system. [7]. After having been met with much resistance from the public, namely Bitcoin users, Lawskey dialed it back and proposed new regulations that would take place in New York next year in 2015. [id.]. Under Lawskey’s proposal, banks attempting to take part in the trade and transmission of virtual currencies would be required to apply for a special banking license, a BitLicense, designed to regulate virtual currencies. [id.]. Some of Lawskey’s revisions, however, resulted in the exemptions of software developers, bitcoin miners, and individual users who take advantage of the bitcoin service but otherwise do not offer any financial service to the general public. [id.].

New York is one of the first states to recognize the need for bitcoin and virtual currency regulation in order to protect consumers. Additionally, FinCEN has dedicated significant resources to combat the crime in the virtual currency context. Because of the vast array of retailers and large-scale corporations now accepting Bitcoin as a legitimate method of payment (PayPal, Expedia, Dell, to name a few), the collapse of the noninsured virtual currency exchange could further complicate matters. [8]. Complications from non-regulation could result in not only consumer mistrust, but perhaps an entanglement of large, do-right corporations, with illegitimate criminal enterprises.

If anyone would like to reference the federal money laundering statute, please take a look at 18 U.S.C. § 1956. You may also view a link to the Bank Secrecy Act (BSA) here: http://www.fincen.gov/statutes_regs/bsa/

Chris

Footnotes:

[1] http://www.fincen.gov/news_room/testimony/html/20131119.html

[2] http://www.forbes.com/sites/irswatch/2014/10/03/are-virtual-currencies-the-next-offshore-bank-account-for-tax-evaders/

[3] http://nypost.com/2014/09/04/bitcoin-operator-admits-to-aiding-drug-dealers-launder-1m/

[4] http://nypost.com/2014/07/09/judge-rules-bitcoin-as-legal-tender-in-silk-road-case/

[5] http://www.inc.com/jeremy-quittner/lawsky-and-new-virtual-currency-regulations-for-new-york.html

[6] http://nypost.com/2014/10/15/lawsky-relents-on-bitlicense-regulations/

[7] http://blogs.wsj.com/moneybeat/2014/10/14/bitbeat-lawsky-outlines-changes-to-bitlicense/

[8] http://www.fool.com/investing/general/2014/10/15/bitcoin-and-retailers-who-accepts-the-virtual-curr.aspx

The New Federalism: The Wire Act and How Congressional Inaction Regarding Online Gambling is Unsustainable

•October 15, 2014 • 2 Comments

Ostrich-man-head-in-sand

When we last left our discussion regarding Federal Online Gambling Law, the Justice Department was reeling from the 5th’s Circuit’s interpretation of the Wire Act (that it only applies to sport gambling.) More than five years later, the federal governed finally acquiesced to that decision. On December 2011, the Justice department issued a letter in response to inquires from Illinois and New York regarding proposals to use the internet to buy out-of-state lottery tickets. In the opinion, the Justice Department concluded that interstate transmissions of wire communications that do not relate to a ‘sporting event or contest’ fall outside the reach of the Wire Act.[1] This has essentially eliminated most federal restrictions on online gambling other than the relatively weak Unlawful Gambling Enforcement Act. [2]

Many thought that this was the end to the wire act debate. Yet, leave it to lawmakers in Washington to reignite a seemingly settled issue. In March of this year, a group of lawmakers, led by Utah Rep. Jason Chaffettz, proposed a bill that they say will “re-establish” the 1961 Wire act. According to Chaffetz, there was a specific reason why they used the word “re-establish” in the proposed bill.[3] “This bill is not as much about gambling as it is about restoring the law to what it was before the Justice Department decided to unilaterally reinterpret it. This is just one of any number of issues on which this administration has failed to consult Congress and ignored the law,” Chaffetz said. [4]

The Chaffetz bill has not been the only response to the Justice Departments letter this year. In February, the attorney generals for 16 different states sent a letter to Congress requesting that they act to stay the Justice’s department’s interpretation, because it would “give federal and state law enforcement agencies time to fully assess and report on the implications Internet gambling has on our respective charges to protect the citizens of our states.” [5]

In contrast, some lawmakers have taken the momentum gained from the Justice department’s remarks to propose bills for federal legalization of online gambling. A bill proposed by Peter King, Rep. from New York seeks to legalize all forms of online gambling while a similar bill from Rep. Joe Barton would legalize online poker specifically.

Conclusion:

The Justice department was correct to issue the letter. The Fith Circuit’s interpretation of the act is so much more logical. The Wire Act, as enacted in 1961 was simply not broad enough, to cover online gambling nor was it ever intended to cover anything other than sport’s betting. The gray area in the law was not good for the economy. Of course, it is always difficult to admit that you were wrong. Likely, this is why it had taken over seven years for the letter to be issued in the first place. Moreover, the bills brought by Peter King and Joe Barton are a step in the right direction. The federal government cannot ignore the fact that online gambling is growing in popularity. Without proper federal regulation, inconsistency in the law will continue to plague the U.S. (hurting the economy) and the black market for online gambling will flourish. Next week, I will cover the state’s responses to online gambling.

[1] http://www.forbes.com/sites/nathanvardi/2011/12/23/department-of-justice-flip-flops-on-internet-gambling/

[2] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[3] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[4] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[5] https://www.scribd.com/doc/214631788/State-Attorneys-General-Letter-on-the-Wire-Act

Betting on the Future of Internet Gambling Law: Always a Risky Wager

•October 7, 2014 • 3 Comments

Ever since its inception, running an internet gambling website in the United States has been as high a risk as the gambling games its provides. In 2010, for example over 1.5 million players played online poker, generating over a billion dollars in revenue.[1] Those who had bet on the gambling industry’s success were lauded as visionary entrepreneurs on the forefront of a cutting-edge industry poised for long-term success.

Yet in April of 2011 those same visionaries found themselves at the mercy of the United States Justice Department. Eleven individuals, along with the three largest online gambling cites, were charged with bank fraud, money laundering, conspiracy, operation of an illegal gambling business, and violations of the Unlawful Internet Gambling Enforcement act.[2]

According to the indictment, Isai Scheinber and Paula Tate of PokerStars, Scott Tom and Brent Beckley of Absolute Poker, Raymond Bitat and Nelson Burtnick of Fill Tilt Poker engaged in a criminal enterprise that sought to “to deceive United States banks and financial institutions into processing billions of dollars in payments for the poker companies, by, among other things, arranging for the money received from United States gamblers to be disguised as payments to hundreds of non-existent online merchants and other non-gambling businesses.”[3]“The defendants bet the house that they could continue their scheme, and they lost” Janice Fedarcyk, the assistant director in charge of the FBI’s New York Field Office, told reporters in a prepared statement.[4] Yet for all these lofty words, the actual allegations contained in the indictment were vague, inconsistent and piecemeal. As with most new technologies lawmakers have thus far, failed to implement a comprehensive framework of regulation for online gambling industry.

This blog post, the first in a series of eight, will provide an overview of the current hodgepodge of state and federal law regulating the internet gambling industry. The next posts will examine those states that have decided to legalize and/or regulate internet gambling. Then, the following posts will discuss the international response to Internet Gambling. Finally, the series will conclude with a post discussing a possible framework for gambling regulation in the future.

The Federal Level

  1. The Wire Act…. Really?

As early as the 1990’s, the federal government has sought to prohibit online gambling.[5]  Somewhere along the line, the federal government got the bright idea that the best way to do through the 1961 Wire Act, an act originally intended to prevent sports betting. For instance, In 1997, a bill that sought to amend the Wire Act to prohibit all forms of online gambling was proposed to the Senate. The bill passed the Senate but died in the House of Representatives.

However, the federal government could not let the issue drop. When this effort failed to pass, the D.O.J, decided to take a hard line interpretation of the Wire Act, arguing that it already encompassed all types of online gambling, with or without the proposed amendment.

Utilizing this interpretation, the DOJ issued letters to the National Association of Broadcasters in 2003, advising them to stop providing advertisements to these websites as the D.O.J. considered it aiding and abetting illegal gambling operations.[6] Without commencing any litigation, the DOJ was able end mulit-million dollar advertising deals, crippling a major revenue source for internet gambling websites. But in August of 2004, the Internet gambling industry struck back.[7] Casino City, the largest online gambling website at the time, filed suit against the DOJ, asserting that the DOJ had violated their First Amendment rights; they argued that they had a right to accept advertising for Internet Gambling because the act itself was not illegal under federal law . Unfortunately for Casino City, the District Court dismissed the case, finding that Casino City lacked standing to sue.[8]

The DOJ’s Wire Act theory was put to the test in In Re Mastercard in a somewhat unexpected scenario.[9]  In that case, a class of plaintiffs attempted to invalidate debt they had accrued through online gambling by suing their creditors.[10] They made an interesting and persuasive argument, that the debts were the result of internet gambling activity made illegal under the Wire Act.[11] The court however, did not buy into it. According to the court, the Wire Act was clearly intended for sporting events only. [12] On appeal, the Fifth Circuit affirmed. This decision significantly weakened the D.O.J.’s position, that Internet gambling in any form was illegal under the act.[13]

  1. The Unlawful Internet Gambling Enforcement Act

Congress shocked the gambling industry world when, in 2006, they enacted the Unlawful Internet Gambling Enforcement Act.[14] The UIEGEA does not itself outlaw online gambling. Rather, it seeks to prevent the flow of money from online gamblers to the online casinos. The UIEGEA makes it a felony for a person who is engaged in the business of betting or wagering to knowingly accept money in connection with unlawful gambling. The crime is punishable by up to five years in prison.[15]

Many commentators have criticized the act because it requires gambling to be unlawful under existing federal or state law to trigger criminal liability.[16] In other words, a person may be prosecuted under the act only when that person is already in violation of a pre-existing law gambling law. Many of these existing laws also require another separate predicate offense to find liability, further complicating the matter. For example, a UIGEA allegation could require two separate predicate offenses.

However, this was not an issue for the D.O.J. in the 2011 indictments discussed above because the D.O.J. agreed to drop the charges after their respective companies agreed to a civil settlement.

Since those indictments the D.O.J. has softened its stance on Internet gambling. This is partly the result of the increase in state legislation seeking to regulate, not prohibit, internet gambling (see below.)

The State Level

  1. Express Prohibitions

Surprisingly, only a small minority of states have expressly prohibited online gambling. A chart created Chuck Humphrey for gambling-law-us.com provides an overview of the current state gambling law in the United States whether or not the state has an express prohibition against Internet gambling. (The chart can be accessed here: http://www.gambling-law-us.com/State-Law-Summary/ ).

According to his chart, of all fifty states, only Indiana, Illinois, Loiusina, Montana Nevada, Oregon, South Dakota, and Washington have such provisions. [17]

  1. Regulation/Legalization: The New Trend

While the number of states prohibiting online gambling is decreasing, the number of states that are legalizing and regulating online gambling is rapidly increasing. One commentator has even predicted that online gambling will be legally in every state by the end of this decade.[18]

Leading this charge into legalization is New Jersey, the first state to full “legalize” gambling. Governor of New Jersey, Chris Christie, an major advocate for the new law, had this to say: “This was a critical decision, and one that I did not make lightly, but with the proper regulatory framework and safeguards that I insisted on including in the bill, I am confident that we are offering a responsible yet exciting option that will make Atlantic City more competitive while also bringing financial benefits to New Jersey as a whole.” A year later, New Jersey is seeking now to legalize online sports betting.

Currently, eight states have pending legislation that if passed, would allow internet gambling in some form.

Conclusion

We have seen the lackluster prohibition efforts from the federal government and the federal government. We have seen that the trend amongst the states is regulation and legalization of online gambling. There is little doubt that internet gambling is, once again poised to explode across the United States. However, many questions remain. What might full legalization look like? Will gambling amongst minors increase? Will the U.S. learn from experience of other countries with respect to online gambling? These questions and more will be explored in future posts. Stay tuned!

[1] Ingo Fiedler & Ann-Christin Wilcke, The Market for Online Poker, 16 UNLV Gaming Res. & Rev. J., no. 1, 2012, at 7, http:// digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=1008&context=grrj.

[2] Jeffrey S. Moad, The Pot’s Right: It’s Time for Congress to Go “All in” for Online Poker, 102 Ky. L.J. 757 (2014)

[3] Jason Ryan, FBI Cracks Down on Internet Gambling Companies, April16, 2011, http://abcnews.go.com/Technology/internet-gambling-companies-indicted-fraud-money-laundering/story?id=13389751

[4] id.

[5] See Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[6] id.

[7] id.

[8] Casino City lacked a judicially cognizable injury. According to the Court, Casino city would have standing if they had received a cease and desist letter or a subpoena from the DOJ.

[9] See Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[10] See In Re MasterCard Int’l. Inc., 132 F.Supp.2d 468, 479–481 (E.D. La. 2001).

[11] id. at 475

[12] id.

[13] Gerd Alexander, The U.S. On Tilt: Why the Unlawful Internet Gambling Enforcment Act is a Bad Bet, Duke Law & Technology Review, No 5. http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1181&context=dltr

[14] id.

[15] 31 U.S.C. §§ 5363, 5366 (2006).

[16] See Allyn Shulman, Legal Landscape of Online Gaming Has Not Changed, October 5, 2006 http://www.cardplayer.com/poker-news/1446-legal-landscape-of-online-gaming-has-not-changed

[17] Going into detail about each state’s law is beyond the scope of this introductory blog post. See future posts for a more in depth discussion about how States are regulating the online gambling industry.

[18] Jon Nathanson, Gambling is the Next Wave in Mobile Gaming, http://www.slate.com/articles/business/the_bet/2014/03/when_will_gambling_be_legal_in_the_u_s_by_the_end_of_this_decade.html

Crowdfunding

•October 5, 2014 • 4 Comments

Small businesses, entrepreneurs, and independent developers often face
difficulties in finding the requisite funds to put towards their projects.
Traditionally, these upstart business would seek help from investors, such as
venture capital firms, or put their own money towards these projects.

Specifically, in the video game industry, developers often rely on the capital
investment of their publishing partners. In turn, the publishers exercise a
certain degree of control over the content and overall direction of the upcoming
video game.

Developers who work independently of any current or prior publishing deals may
have the freedom to follow their own path with regard to video game development,
but they often do not have the capital to do so. The concept of crowdfunding
these upstart projects has made the prospect of independent video game
development more viable, but has also brought with it new risks and challenges.

Crowdfunding is the practice of financing a project through large numbers of
investors giving small investment amounts. [1] For example, if a project requires
$10,000, the crowdfunding technique would seek 1,000 consumers to give $10 each.
The traditional investment model would be to find one or two investors to provide
the $10,000 figure. So, rather than having large investment amounts from a small
number of investors, crowdfunding inverts that by acquiring investment capital
directly from the target market.

Often, this funding method uses the Internet as the means of directly reaching
the target market for the project. Crowdfunding is most often facilitated through
the use of a “Crowdfunding Intermediary”, which are regulated by the Jumpstart
Our Business Startups (JOBS) Act. [2] These intermediaries must register with the
Securities and Exchange Commission and follow certain regulations. There are two
forms in which a crowdfunding intermediary can be established: either as a broker
or as a funding portal. Both forms have different obligations under the law. For
example, a funding portal cannot provide investment advice or directly handle
investment funds. They merely function as a facilitator of investment. A broker
is not restricted in this regard.

But crowdfunding platforms that utilize the broker model are restricted by the
fact that only accredited investors may participate. This restriction lowers the
effectiveness of campaigns on these platforms. Some states, such as Texas, have
tried to exempt crowdfunding intermediaries from being subject to the traditional
securities regulations in order to attract small business investment and
entrepreneurship to their states. [3]

One of the major crowdfunding platforms today is “Kickstarter”, which operates on
what is known as a “donation-based model”. [3] Backers, or those who contribute
funding to projects on Kickstarter, receive no interest in return for their
donations and assume the risk that the project my fail to materialize.
Kickstarter does not guarantee the completion of products, thus the consumers are
on the hook when a project fails and can only seek legal action against the
developer, not the crowdfunding platform.

For example, sci-fi author Neal Stephenson ran a funding campaign on Kickstarter
to create a sword fighting game named “Clang” with ultra-realistic physics and
combat. [7] The Clang campaign successfully raised over $500,000. However, the
development of Clang was not as successful as the campaign. After two years in
development, the team spent all the money and Clang failed to materialize. The
vast majority of backers did not receive a refund or any material compensation
for the failure of the project. In fact, of the $500,000 that were spent in
development, a total of only $700 were refunded. Among those that contributed to
the project, at least 8 individuals donated $10,000 or more.

Other Kickstarter campaigns have failed in similar fashion. Yogscast, a popular
YouTube channel with over 7 million subscribers, partnered with indie developers
Winterkewl Games to develop an original game using the Yogscast brand. [5]
“Yogventures” would feature open-world gameplay and highly customizable gameplay.
In 2012, they launched a campaign to fund Yogventures on Kickstarter and garnered
over $500,000 from almost 14,000 backers. Two years later, Winterkewl had spent
all the money and had no game to release for that investment.

The Yogscast people proceeded to send an email to the Kickstarter backers,
notifying them of the failure of the project and offering to provide them access
to other similar games. They also distanced themselves from the project saying
that it was Winterkewl’s project and that were ultimately under no obligation
whatsoever to compensate backers of the failed project. That, of course, is
debatable but the simple fact is that backing a project on Kickstarter does not
guarantee success or compensation for failure. Over 200 people backed Yogventures
at $300 or more and 5 people backed the project at $10,000 or more. [6] There is
no indication that they will receive refunds or be compensated for those large
investments.

According to the Kickstarter “Terms of Use”, “the creator [of the project] is
solely responsible for fulfilling the promises made in their project. [4] If
they’re unable to satisfy the terms of this agreement, they may be subject to
legal action by backers.” Kickstarter does not oversee the performance of
projects or mediate disputes. There are no internal measures to guarantee final
completion or quality of the project, so any backers interested in taking legal
action would need to do so on their on time and on their own dime.

But while these Kickstarter campaigns are notable in how they fell short of their
lofty goals, other campaigns have seen success that probably would not have been
possible without this crowdfunding model. Games such as Shovel Knight, Volgarr
the Viking, and Mighty No. 9 exceeded their expectations, sometimes receiving
double, triple, or quadruple support in the campaign. Many of these games have
been funded and successfully released to critical acclaim, while others are soon
to be released.

Since the model is one based on donations and not traditional investement,
backers do not receive any additional compensation if a project exceeds
expectations. As pointed out by Kabir Chibber at Quartz, backers do not receive
additional or ongoing compensation for contributing to the success of an upstart
project. [7]

For example, Oculus Rift, an upcoming virtual reality device, launched a campaign
on Kickstarter to raise $250,000. However, the prospect of this product brought
in about $2.5 million from eager Kickstarter backers. A few months ago, social
media giant Facebook purchased Oculus VR for $2 billion. Backers will not receive
any additional compensation or stock in the company for their initial investment.
They will receive what they were promised in their reward tier and nothing more.

In a traditional investment scenario, investors would receive more return on
their investment if the project performed above expectations. Under the
crowdfunding model of websites like Kickstarter, backers are not investors in the
technical sense of a having a stake in the company or project. That means many
small businesses may find it more beneficial to have backers instead of
traditional investors in that they maintain more control and profit from their
work. However, this also means that serious investors may not see crowdfunding as
the optimal use for their capital.

Kickstarter also does not take responsibility for copyright violations. [4]
Specifically, Section 9 of the Terms of Use prohibits creating campaigns for
projects that contain copyrighted material for which the creator does not have
permission to use. The policing of this issue is up to the holder of the
copyright. For example, recently there was a dispute over two different modding games, one named Garry’s Mod and the other named Gmod. [8] This dispute was not dealt with internally at Kickstarter and any action regarding the use of the “Gmod” trademark needed to be handled externally. As such, Kickstarter may not be the ideal platform for modders to seek funding for their work due to the complex legal issues concerning fair use and derivative works. Modders could expose themselves to liability both from the copyright holder and from Kickstarter themselves for violating the Terms of Use.

Crowdfunding is an exciting, new business prospect that brings with it unique benefits and challenges. Backers as well as developers ought to be aware of the risks as well as the benefits of this platform when deciding whether to participate.

Sources:

[1]

http://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/

[2]

https://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm

[3]

http://www.strasburger.com/wp-content/uploads/2013/10/Texas_Crowdfunding.pdf

[4]

https://www.kickstarter.com/terms-of-use?ref=blog

[5]

http://www.polygon.com/2014/7/17/5912245/yogscast-kickstarter-failure-crowdfunding-risks

[6]

http://www.eurogamer.net/articles/2014-07-17-kickstarter-funded-yogventures-canned-backers-given-steam-key-for-another-game-instead

[7]

http://qz.com/268852/neal-stephensons-failed-500000-video-game-and-the-perils-of-using-kickstarter/

[8]

http://www.reddit.com/r/Games/comments/1dupnt/garrys_mod_creator_responds_to_gmod_kickstarter/

Modding for Fun and for Profit

•September 29, 2014 • 4 Comments

No video game is perfect in the eyes of every one of its players.  While some players vent their frustrations by complaining on a video game forum, more enterprising players seek to improve upon the game.  These players engaging in “modding,” or modifying the source code of the video game, to improve it in some way.  These mods range from graphics updates, such as the Skyrim mod seen here, to creating entirely new game types, such as turning the single player game Half-Life into the wildly popular, multiplayer game Counterstrike

.skymod-arora-sm

(Skyrim graphical mod; click to enhance)

However, most of these mods take place without the game developer’s permission.  Can the modder publish his mod without fearing retribution from a stingy developer?  What remedies do poor developers have against these enterprising players allegedly infringing the developer’s copyright?  This week’s blog post will discuss the legal approaches that developers have taken to deal with modders.  The first part will discuss the available legal remedies in the abstract (generally), while the second will discuss specific fights between video game developers and modders.

  1. Legal Remedies

Suppose Chris decides to create a website, HaxRUs.net, where he allows users to post any mod that they create.  These mods are freely available to the public.  Suppose Alan posts a mod for Super Smash Bros. on Hax-R-Us.net, which inserts into the game as a playable character his favorite Nintendo character, Dragoon from Super Metroid.  Super Smash Bros. is owned by Nintendo.   If Nintendo believes that its copyright on Super Smash Bros. is infringed, and wishes to remove Alan’s mod, it has two options.  First, it can issue a cease-and-desist letter to Alan.[1]  This letter orders Alan to remove his content, to stop infringing Nintendo’s copyright, and to cut a check for whatever amount Nintendo thinks that it can receive without going to litigation.[2]  Now Alan, a poor modder who just wanted to add his favorite Nintendo character to his favorite game, is faced with a choice: does he try to fight this in court just to have a more fun in a game, but at the risk of paying $30,000?  Not a chance.  He sadly removes his mod from Hax-R-Us.net.

Nintendo notices, however, that Hax-R-Us.net has many infringements of its copyrights.  Chris, as the mere owner of the website, who does not actively post any content, probably cannot be held liable.  Indeed, the criminal provisions of the copyright infringement statute require “intent;” thus, mere willful blindness to the posted infringements would not trigger any criminal penalties.[3]  In theory, Nintendo could attempt to prove this, but the law provides an easier method to remove infringing content: the DMCA takedown notice.  Nintendo may send Chris a notice of the infringing content, with a demand for its immediate removal.  Under the safe harbor provisions of the DMCA, 17 U.S.C. § 512(c)(1), if Chris:

  • Does not know and should not know that material on his website is infringing,
  • Does not receive a financial benefit directly attributable to the infringing activity, and
  • Upon notification of infringement, promptly removes or disables access to the infringing content,

then Chris will not be subject to liability for the infringing content.[4]

The safe harbor provision makes sense as a matter of public policy.  If it did not exist, then websites like YouTube, a site where millions of users upload videos daily, would not last more than a day.  Surely one user, oblivious to copyright law, would post infringing material, and the infringed party could sue to take down YouTube.  Indeed, a content provider, Viacom, did try to sue YouTube in 2013.[5]  The court held that YouTube qualified for the safe harbor provision of the DMCA because although YouTube knew that users were posting infringing material, it had no way of knowing what was and was not infringing.[6]

  1. Specific Fights Between Developers and Modders

In this Part, we will examine some of the conflicts that IP holders have had with modders.  In particular, we will look at a case where a developer sued a modder for providing access to the developer’s pirated games (Nintendo), a case where a developer sued a modder for basing a mod for a different game on the developer’s IP (Warner Bros), and a case where a developer sued a modder for modding the developer’s game to provide new content within the game (Blizzard).  On the other hand, some IP holders are more willing to work with modders, as we will see in the Bukkit, Spigot, and Battlestar Galactica cases.

Our abstract case from Part I., supra, may be different from the YouTube case.  Arguably, Chris knew that nearly all of the content posted on Hax-R-Us.net would be infringing (see: its name).  If Nintendo believed this, then the safe harbor provisions of the DMCA would not be triggered, and Nintendo could sue.  Indeed, it did just this in 2013, when Nintendo sued a website called HackYourConsole.com (“HYC”).[7]  HYC sold “flash carts.”  A flash cart permits a user to download pirated games from the internet and play them on the user’s 3DS gaming system.[8]  Nintendo alleged that these flash carts cost them a lot of money, because gamers no longer had an incentive to buy legitimate copies of the games.  HYC, on the other hand, had a notice on its webpage that the carts were “not illegal, however, the software you put on the [cart] may be.”[9]  Nintendo forced HYC into a settlement,[10] the website is shut down, and the URL HackYourConsole.com now redirects to Nintendo’s anti-piracy webpage.  Thus, IP holders are not afraid to sue for direct copyright infringement like piracy.

2014-09-29 00_40_33-Nintendo Anti-Piracy

(glorious leader Mario dislikes piracy)

Another possible form of copyright infringement is a novel work based on a pre-existing IP.  In 2012, Warner Bros. (“WB”) sued a group who was making a Lord of the Rings mod for the PC game Skyrim.  This mod, the Middle-Earth Roleplaying Project (“MERP”) changed Skyrim into a game designed around Lord of the Rings – everything from the aesthetic, to some of the characters, to a recreation of the Lord of the Rings story (“Ringbearer quest”).  WB responded with a cease-and-desist letter to the development team of MERP.[11]  WB argued that this mod amounted to a Lord of the Rings video game.  WB was involved in the production of several Lord of the Rings games, so MERP represented a competitive threat to WB’s games.  Initially, the MERP team tried to bargain with WB, and WB seemed open.  The MERP team offered to remove the Ringbearer quest, as well as player access to some of the main characters from the books, such as Frodo and Gandalf.  Ultimately, WB stonewalled these negotiations and forced the MERP team to cease development on the mod.  The MERP team responded with a Facebook petition, imploring WB to revoke its cease-and-desist letter.[12]  That petition has garnered 32,493 signatures in its two years of life; however, the MERP team appears to have given into the cease-and-desist order.[13]

A more direct type of mod than a device that enables piracy, or one that transforms another game into the IP holder’s IP, is an actual mod of a developer’s game against that developer’s consent.  In May, 2014, Blizzard pounced when a group of StarCraft II modders created a hack called the ValiantChaos MapHack.[14]  These modders committed two sins in Blizzard’s eyes.  The first was that the hack cost money – $62.50.  The second, however, was that the hack provided a competitive edge to purchasers.  This made the game less fun for legitimate players, which resulted in Blizzard losing players from StarCraft II.  Because Blizzard released its own, paid mods and expansions for StarCraft II, this represented a loss of profit to Blizzard.  Moreover, because StarCraft II is one of the most popular e-Sports,[15] Blizzard stood to lose a lot of market power if its game even appeared to be less than legitimate.  Thus, Blizzard sued, alleging copyright infringement, trafficking in circumvention devices[16], and breach of contract.[17]  This case is still pending.

In the middle of the modder-developer antagonism spectrum are IP holders that initially send cease-and-desist orders, but who eventually revoke them.  The facts of this incident are similar to the Warner Bros./MERP conflict above.  Modders in the game Second Life created a roleplaying simulation modeled on Battlestar Galactica.[18]  Universal, the holder for the Battlestar IP, sent the modders a cease-and-desist order.  The modders complied, but then they lobbied for Universal to permit the content.  Unlike Warner Bros., Universal gave in.  They permitted the users of the Second Life sim to continue, provided that they earned no profit.  In particular, Universal wrote “Users may continue to create and interact with each other as BSG fans . . . you may re-create BSG items under the fair use act.  Owners of any re-created items sold and/or purchased will be approached by the company’s lawyers hand handled accordingly.[19]  Users were also not permitted to create or sell “unlicensed [] real-life or virtual items featuring our intellectual property.”[20]  This sensible solution is a win-win – Battlestar Galactica fans get to keep their simulation, and Universal gets free publicity and fosters a fan community.

At the far end of the developer-modder antagonism spectrum are developers that, from the beginning, try to peaceably coexist with the modding community, such as the developers of Minecraft (Mojang) with the Bukkit Project.  Players play Minecraft on servers that are set up through the program.  This permits the owners of the servers to configure settings of the game – to a certain degree.  Bukkit sought to give these owners greater freedom in configuring their servers. [21]  The Bukkit community accomplished this by modding the Minecraft Server software, and creating a mod called CraftBukkit.  This took a tremendous amount of work and relied on contributions from many members of the community, as most good mods do.  This can lead to creative differences among the Internet strangers.  During the development of CraftBukkit, one modder, Wesley, decided that he no longer wanted his contribution to the project included in CraftBukkit.  When Bukkit refused to cooperate, Wesley issued a DMCA takedown notice, citing support from Mojang.

That backfired when Mojang rushed to Bukkit’s aid.  Posting on Bukkit’s forums, the COO of Mojang asserted Mojang’s rights to Minecraft in order to block Wesley’s DMCA takedown attempt.[22]  He posted that Wesley submitted his contributions to the project under an open source license, so Wesley could not claim infringement.  Wesley had no rights, and Mojang bristled at the idea that modders could “assert[] rights which they do not have, against us or others.”[23]

Moreover, the COO expressed support for the Bukkit Project.  He wrote that he wanted to support it, while maintaining independence between Bukkit and Mojang, as well as refusing to compromise Mojang’s ownership of the Minecraft IP.  Ultimately, he established that the Minecraft Server software would not be open source, nor would Mojang authorize its inclusion in any mods – but only to ensure that no one else tried to claim a right to Minecraft.  Despite taking this apparent legal step back, the COO made it clear that Mojang fully supported Bukkit and that Wesley had no rights against Mojang or against Bukkit.

Unfortunately, the tactic Wesley chose for his fight with Bukkit – the DMCA takedown notice – is very difficult to fight.  The DMCA requires only a good faith standard to issue takedown notices.[24]  This good faith standard is not subject to a penalty for perjury, so it has little bite.  On the other hand, a counter-notification imposes a good faith standard under penalty of perjury.[25]  As a result, when Wesley tried to claim infringement against another modding project, Spigot, all he needed to do was issue a DMCA takedown notice and wait for Spigot to choose its course of action.  In spite of Mojang’s pronounced support for the modding community in the Bukkit incident, Spigot decided to acquiesce to the takedown notice.[26]  Spigot’s reasoning was that, although they thought they could prevail in an infringement suit, litigating one in a U.S. District Court would require time and money.  The Spigot community decided that removing the infringing content would give Spigot “the best chance of continuing to operate in the future.”[27]  Thus, Spigot gave into this legal bullying, and removed the infringing content.

III. Conclusion

In this post, we’ve seen developers taking a no-tolerance approach to any infringements of their IPs, to developers who appreciate that having these sub-communities actually helps to grow the IP.  Here are a few questions for thought, but I’d like to hear any of your other thoughts too.

  1. Did any of the actions taken by the developers seem unreasonable to you?
  2. How would you handle infringement like this? Is there a distinction between the Blizzard case, where the mod incontrovertibly harmed the IP, and the Battlestar Galactica case?
  3. Is the DMCA fundamentally fair with regards to its takedown provisions? In particular, do you think that there is enough statutory protection against abuse of DMCA takedown notices?  How might you change the DMCA?
  4. How could other provisions of Fair Use be applied to some of these examples?

[1] The helpfully named “patent-trademark-law.com” website provides a template: http://www.patent-trademark-law.com/copyrights/plagiarism-take-down-stolen-content/cease-desist-dmca-takedown/

[2] The template suggests $10,000.  If the copyright is registered, and the holder can prove infringement in court, then the holder can collect up to $30,000 per copyrighted work.  17 U.S.C. § 504(c)(1).

[3] United States v. Liu, 731 F.3d 982, 989–92 (9th Cir. 2013).

[4] The content provider is also required to have a designated agent to receive such takedown notices.  17 U.S.C. § 512(c)(2).

[5] Viacom Int’l, Inc. v. YouTube, Inc., 2010 WL 2532404 (S.D.N.Y. 2010).

[6] Id.

[7] http://venturebeat.com/2013/08/07/nintendo-sues-modding-and-pirating-website-hackyourconsole-com/

[8] Ordinarily, when a user downloads a pirated game off the Internet, that user is limited to playing the game on his computer.  Flash carts permit the transfer of that game from the computer to the system for which the flash cart was designed – in this case, the 3DS.

[9] http://www.gamespot.com/articles/nintendo-launches-lawsuit-against-hacking-website/1100-6412649/.  The link that this article provided, to HYC’s FAQ page, now links to a Nintendo anti-piracy page with a scary, authoritarian picture of Mario: https://ap.nintendo.com/.

[10] http://www.examiner.com/article/hackyourconsole-com-shut-down-due-to-nintendo-lawsuit

[11] http://www.pcgamer.com/2012/09/06/middle-earth-roleplaying-project-mod-for-skyrim-petitions-wb-to-revoke-cease-and-desist/

[12] http://www.gopetition.com/petitions/save-merp-from-corporate-greed.html

[13] http://www.moddb.com/mods/merp-middle-earth-roleplaying-project

[14] http://www.forbes.com/sites/erikkain/2014/05/29/blizzard-sues-starcraft-ii-hackers/

[15] According to http://www.redbull.com/en/esports/stories/1331645000683/call-of-duty-tops-western-esports-audience, as of April 2014, StarCraft II was still the fourth most popular e-sport.

[16] 17 U.S.C. § 1201(a)(2)

[17] Complaint, Blizzard Entertainment, Inc. v. Does, 8:14-CV-00781 (C.D. Calif.)

[18] http://nwn.blogs.com/nwn/2011/02/fan-made-battlestar-galactica-content-allowed-in-second-life.html

[19] Id. (emphasis added)

[20] http://nwn.blogs.com/nwn/2011/02/fan-made-battlestar-galactica-content-allowed-in-second-life.html

[21] http://forums.bukkit.org/pages/about-us/

[22] http://forums.bukkit.org/threads/mojang-and-the-bukkit-project.309715/

[23] Id.

[24] 17 U.S.C. § 512(c)(3)(A)(v)

[25] 17 U.S.C § 512(g)(3)(C)

[26] http://www.spigotmc.org/threads/our-dmca-response.28772/

[27] Id.

Gold Farming: Challenges to ToS?

•September 14, 2014 • 5 Comments

This semester our first blog posting will be about the activity known as “gold farming.” The class has discussed the Terms of Service that regulates Second Life, the virtual platform that we use. In a world that is increasingly relying on technology and the software that runs our devices, legal documents known as either Terms of Service (ToS) or End User Licensing Agreements (EULA) are governing more and more of what we do. The user rarely knows or understands what rights he or she has given away by clicking the button that requires them to accept the regulations, mainly because the user rarely reads the agreements and at the point when the document is presented the user is commonly anxious to begin using the new software but cannot do so unless they accept the document. Later, much to the surprise of the user, the software developer will often change, without advance notice, or an opportunity for the user community to offer comments, changes which materially alter the conditions under which they can use the software. There are many examples of when these unilateral changes have created a backlash against the developer. A few examples would be Second Life‘s change in ownership rights of user created content or any of Facebook’s multiple changes to how it can sell user’s content. We started by contrating the current ToS for Second Life with the ToS that was at issue in the case Bragg v. Linden Labs, 487 F. Supp 2d 593 (E. D. Penn 2007) where a lawyer claimed the ToS was unconscionable.

 

The ToS and the EULAs operate to protect the intellectual property of the software developer, but offer few concrete protections for the user of the software. And the user is not in an “at arms length” position and is therefore never able to negotiate the terms of the ToS or EULA. In the game environment, as with other software, the developers protect the intellectual property (the coding and branding of the game) and usually prohibit the user from manipulating the game for the user’s benefit. The benefit may sometimes be to acquire more virtual goods than he or she would be entitled to or to actually use the game to make money for the user. In the minds of the developers and many gamers, gold farmers violate the ToS. Gold farmers are workers who play game accounts solely for the purpose of acquiring virtual goods or currency for sale. Gold farmers are mainly Chinese.

 

Gold farming activity takes place in games where players need to acquire the virtual currencies (gold) in order to acquire gear within the game. Activision/Blizzard‘s game World of Warcraft was plagued by gold farmers. This activity was clearly prohibited in WoW’s ToS. Yet the gold farmers catered to a community of players that needed the gold and either did not have the time to earn it in-game or didn’t want to use their time to grind activities to earn the gold in-game. The class watched two interviews: one with a gold broker, Jared Psigoda and one with the staff of a game, who discusses the phenomenon of gold farming. In addition, we read an investigative report in the New York Times about the realities of life for the gold farmer. The article was written by Julian Dibbell, a journalistic, who himself engaged in gold farming to see what the process was about and to learn what kind of money was passing hands through gold farming. Dibbell’s research was turned into a book called Play Money. Finally, we watched a documentary created by Ge Jin, a social scientist (at the time a PhD candidate) who studied gold farming in China and filmed the actual work, the working conditions (commenting on the “sweat shop” qualities of the work), and reactions to the farmers from gamers and from the farmers about gamers. Mr. Jin’s work looks at the commodification of play and work and draws some interesting conclusions.

 

There are so many questions raised by the attack on gold farming. These are just a few that come to my mind:

  1. If the developers create a system that requires currency, shouldn’t they anticipate players will seek easier ways to get the currency?
  2. Is there anything inherently wrong with gold farming?
  3. Many players see gold farmers as leeches on the system, but in fact the accounts gold farmers play on are paid subscriber accounts, so Activision/Blizzard gets money from the gold farmers as well. Isn’t Blizzard being somewhat hypocritical here?
  4. How is it that the farmers accounts get banned, but the accounts of the players who purchase the gold do not get banned? In the documentary Ge Jin inferred this has to do with racism: the farmers are Chinese but those who buy are predominately white males.
  5. Psigoda suggests the game companies should work with the gold farmers. What might be the pros and cons of that?
  6. If a player wants to buy gold, why should the ToS prevent him from being able to do so?

I am looking forward to hearing what the class thinks about gold farming, the issues that were raised in the film and the other assigned materials.

 
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