Washington Anti-Online Gambling Law Survives Dormant Commerce Clause Challenge — Rousso v. State

[Post by Venkat, with brief comments from Eric]

Rousso v. Washington, Case No. 8040-1 (Wash. S.Ct. Sept. 23, 2010)

Professor Goldman blogged recently about a case from the Washington state Supreme Court interpreting the state’s online gambling laws: “P2P Gambling Site is Illegal Bookmaker.” The same court just issued an opinion rejecting a dormant commerce clause challenge to Washington state’s online gambling laws.

Lee Rousso, an online poker aficionado and Washington state resident, brought a declaratory judgment lawsuit seeking a declaration that Washington’s online gambling statute violates the dormant commerce clause. The trial court and the court of appeals rejected this challenge, and the Washington Supreme Court affirmed.

No delegation of authority

The court first noted that existing federal laws regulating online gambling did not delegate to the states authority to regulate online gambling. The court rejected the State’s argument that the Unlawful Internet Gambling Enforcement Act of 2006 and the Wire Act contained language from which the court could find that Congress delegated the matter to the states.

Court finds that the statute does not discriminate

The court next applied the traditional discrimination test to determine whether the Washington law discriminated in language or effect against out-of-state commerce. The language of the statute was not discriminatory – “it equally prohibits internet gambling regardless of whether the person or entity hosting the game is located in Washington, another state, or another country.” The court could not find any discriminatory effect on interstate commerce, since the statute prohibits internet gambling “evenhandedly, regardless of whether the company running the web site is located in or outside the state of Washington.” Rousso argued that in reality, since there were no Washington-based internet gambling sites, the effect of the ban was to favor in-state brick and mortar gambling services. Citing CTS Corp v. Dynamics Corp, 481 U.S. 69, 87-88 (1987), the court rejected this argument.

Rousso also argued direct discrimination because banning internet gambling will “have a secondary effect of promoting in-state, Internet gambling substitutes . . . .” The court rejects this argument as well, noting that internet gambling and brick and mortar gambling are “two different activities, presenting risks and concerns of a different nature . . . .” According to the court, purchasing substitute goods and services (whether that is brick and mortar gambling or “buying more snacks for an in-person poker game among friends”) is not a direct discriminatory effect.

The burden is not “clearly” excessive in relation to the local benefit

Finding no overt discrimination, the court engaged in commerce clause balancing and asked whether there is a legitimate state purpose for the ban, and whether the burden imposed as a result of the ban is “clearly excessive” in relation to the local benefit. Interestingly, the court credits the State’s arguments regarding the State’s interest in regulating online gambling on the basis that online gambling (as opposed to in-person gambling) presents unique harms:

Internet gambling introduces new ways to exacerbate [the same threats to health and welfare as off-line gambling] . . . . Gambling addicts and underage gamblers have greater accessibility to on-line gambling–able to gamble from their homes immediately and on demand, at any time, on any day, unhindered by in-person regulatory measures. Concerns over ties to organized crime and money laundering are exacerbated where on-line gambling operations are not physically present in-state to be inspected for regulatory compliance. Washington has a legitimate and substantial state interest in addressing the effects of Internet gambling.

The court found that the burden on interstate commerce is “comparable” to the substantial state interest in protecting health, welfare, safety, and morals.

Regulation vs. an outright ban

Rousso argues that the State had a less restrictive alternative to address these concerns: regulating (rather than banning) internet gambling. The court again recited the “unique dangers and pitfalls” presented by online gambling, and concluded that it wasn’t clear regulation could adequately address these issues, and in any event, it wasn’t up to the court to second guess the legislature’s decision to ban, rather than regulate, online gambling. The court further noted that regulating online gambling would be “an interstate-commerce burdening nightmare.” [It wasn’t clear to me that an outright ban presents less of a burden than regulation.] Regulation would require Washington to inject itself into the universe of non-Washington (and off-shore) online gambling entities, and “foreign operations would need to be reorganized in conformity to Washington regulations. . . . When a foreign operation failed to conform, all Washington commerce on that web site would be precluded.”

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I wasn’t sold on the Court’s conclusion. The Washington Supreme Court previously rejected a dormant commerce clause challenge to Washington state spam laws (See State v. Heckel, 24 P.3d 404, 406 (Wash. 2001)), but as the court of appeals noted, Heckel differs from this case since the law here applies to “passive” websites. Also, Washington’s spam statute (like most others) also contains a geographic limitation. In fact, I may be missing something pretty basic, but I don’t see an express geographic limitation in the statute. RCW 9.46.240 states:

Whoever knowingly transmits or receives gambling information by telephone, telegraph, radio, semaphore, the internet, a telecommunications transmission system, or similar means, or knowingly installs or maintains equipment for the transmission or receipt of gambling information shall be guilty of a class C felony . . . . However, this section shall not apply to such information transmitted or received . . . relating to activities authorized by this chapter . . . .

Not only does the statute not contain an express geographic limitation, it also exempts the identical conduct when engaged in by brick and mortar retailers. As I read the statute I wonder whether it allows gambling establishments that are authorized in the State of Washington to conduct operations on the internet? I think the State’s argument breaks down here, because entities that are authorized (i.e., regulated) can engage in the conduct, but 100% of them will be in the state.

It was also interesting that the court so quickly and easily concluded that a ban did not affect out-of-state and foreign businesses because of their ability to screen customers geographically:

those businesses can easily exclude Washingtonians. If an individual during registration marks his or her location as the state of Washington, the gambling web site can end the registration there.

The court of appeals also mentions this ease with which an online business can exclude a resident from a particular state, but neither the court of appeals nor the Washington State Supreme Court cite much evidence for this proposition. (Here’s a pdf link to the opinion: Rousso v. State, which discusses American Libraries Ass’n. v. Pataki, 969 F.Supp. 160 (S.D.N.Y.1997), and other decisions that came after it.)

The fact that this is a criminal statute dealing with the transmission of information makes this problematic. Would an out of state business violate the statute because a patron happen to use the service without disclosing that the patron was a Washington resident? The statute does not provide a simple answer to this.

I think this case is much tougher than the court gives it credit for being. It’s worth noting that Justice Sanders, who authored the opinion, is well known for his libertarian leanings.

I also think the statute raises First Amendment concerns, but a quick online search did not turn up any challenges to the statute on this basis.

Related:

“State Efforts to Regulate the Internet” (Cyberlaw Cases) (discussing court of appeals opinion)

“Washington State Supreme Court Upholds Internet Gambling Law” (PokerNewsDaily) (discussing Rousso)

“No On-line Gambling for You, Minnesotans” (Info/Law) (discussing 2009 effort by Minnesota to impose filtering on ISPs)

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Eric’s comments: I continue to believe that any state regulation of the Internet presumptively violates the dormant commerce clause, especially when the statute does not contain any geographic limitations in its express terms.

It’s true that a gambling website can block a state’s residents if the site asks the user to report the geography and if the user accurately self-reports. However, a state law requiring websites to ask users to self-report geography governs conduct wholly outside the state because websites located outside the state who serve non-state residents would still have to comply. This extraterritorial reach, in turn, makes the law presumptively violative of the DCC, negating the applicability of the Pike balancing test. So from my perspective the court badly whiffed this ruling.

For my other ruminations on the problems with states regulating the Internet, see Geolocation and A Bordered Cyberspace (Nov. 2007).

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UPDATE: John Ottaviani sent the following:

After rereading a number of dormant Commerce Clause Internet cases, I just come down on the side that the Internet is an inherently interstate entity, incapable of regulation by the states, as did the courts in Pataki and Dean (Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160 (S.D.N.Y 1997); Am. Booksellers Found. v. Dean, 342 F.3d 96 (2d. Cir. 2003)). So I never get to the Pike balancing test. Even on the Pike balancing test, the Washington court gives short shrift to its treatment of the burden on interstate commerce, and is overly glib in its assertion that the websites can simply block the Washington users by refusing to register users with a Washington zip code. One of the reasons state lotteries and other “legal” forms of gambling have not proliferated on the Internet in the United States is the fear of criminal prosecution due to the inability to restrict users by geographic location to the degree felt necessary to avoid criminal prosecution. Users can lie about their address, or can be using service providers located in a different state than the user. The problem is exacerbated now with the proliferation of mobile devices, as users are no longer even tied to a particular fixed location. If a Washington resident is gambling on his Blackberry while on vacation in San Francisco, is that considered a violation of the Washington statute? What if the user lies and provides a California address and zip code?

The Rousso decision is consistent with the Washington court’s decision in State v. Heckel, 24 P.3d 404 (Wash. 2001), where the Washington court rejected a dormant commerce cause challenge to its anti-spam law (prior to the enactment of the federal CAN-SPAM law). In Heckel, the court also gave a cursory treatment to the burden on interstate commerce, finding the only burden was the burden for spammers to refrain from deception, which the court found did not burden interstate commerce at all.

I’m not sure how the case would come out if the Supreme Court accepts a cert petition. Scalia is on record as not liking the Pike balancing test.