Company Charging Fees for Opportunity to Place Bets Engaged in Bookmaking under Washington Statute

Internet Cmty. & Entm't Corp. v. Washington State Gambling Comm'n, No. 82845-8
(Wash. Sup. Ct. Sept. 2, 2010)

Facts:

• Plaintiff Internet Community & Entertainment Corp., d/b/a Betcha.com ("Betcha"), is an online, person-to-person betting website that charged customers fees for connecting them to other online users who wish to wager on assorted events.
• For a fee, registered Betcha users could post proposed wagers on the outcome of certain events for other users to accept.
• Once a bet was accepted, Betcha placed the wagered funds into escrow and froze the account pending the results of the applicable event. 
• Betcha earned a fee for each transaction, for example: when a bettor listed a bet, accepted a bet or proposed a counteroffer to a bet.
• Customers were expected to make payment on their bets if they lost, but were not required to do so.  Betcha provided bettors with 72 hours to elect not to pay on a losing bet to another customer.
• Betcha's system provided each registered user with an "honor rating," indicating how likely a particular bettor was to make payment on a losing bet. 
• Soon after going into business, the Washington State Gambling Commission determined that Betcha was engaged in professional gambling and ordered it to cease operations. 
• Betcha filed this declaratory judgment action seeking a ruling that its operations did not violate State gambling laws. 

Issue:

• Whether Betcha.com has engaged in "professional gambling" under the Washington Gambling Act.

          Washington Gambling Act, Chapter 9.46 RCW -

• Under the Act, a person may be engaged in professional gambling if he or she engages in various forms of "gambling activity" or engages in "bookmaking."

Trial Court:

• The trial court ruled that under the statute:
  • bettors on Betcha were engaged in "gambling;"
  • Betcha transmitted and received "gambling information;"
  • Betcha engaged in prohibited "bookmaking;"
  • Betcha's activities were illegal "professional gambling;" and
  • Betcha used "gambling records."

Court of Appeals:

• In a split decision, the court of appeals reversed and held that Betcha users had not "gambled" because bettors were not certain that they would receive something of value; there was only a chance that the losing party would honor the bet.
• Further, the court held that Betcha did not engage in "bookmaking" under the statute, which requires "accepting bets."  The court construed this "ambiguous" term to mean one who takes "a position in the bet."
• In addition, because Betcha did not take a position in the bets placed through its website, the court found that Betcha did not accept bets and, therefore, did not engage in bookmaking under the meaning of the statute.

Supreme Court:

• The court granted review and reversed the decision.
• The statute defines "bookmaking" as either accepting bets as a business or charging a fee for the opportunity to place a bet. 
• Ultimately, the court agreed with the State that a bookmaker may, but need not, take a position on the bet for it to be engaged in bookmaking under the statute. 
• In fact, the court pointed out that Betcha charged a fee for the opportunity to place bets with others, thereby establishing "bookmaking" under the statute.
• Betcha argued that in order to have engaged in "bookmaking," it would have to first engage in gambling activity. 
• Betcha claimed that the word "bets" under the statute implies "gambling" bets and that because bettors were not obligated to pay on their losses, no gambling occurred through their website.
• The Supreme Court disagreed, finding that it was immaterial whether or not Betcha users were engaged in gambling activity.
• The court ultimately held that within the plain meaning of the statute, bookmaking is charging a fee for the opportunity to place a bet and the term "bet" does not require that the bet be honored or betting losses be paid.

Summary:

• While this decision, and ultimate holding, is very specific to the language of the State statute, as well as to the specific scenario under which Betcha operated, it reaffirms the general countrywide rule that online "gambling" is illegal.
• Here, despite the fact that no one bettor was guaranteed to collect even if he/she won a bet, Betcha was still found to be in violation of the State gambling statute. 

Officer of PayDay Loan Marketer Pays $850,000 to Settle FTC Charges

FTC v. Swish Mktg., Inc., No. C09-03814 (N.D. Cal. Sept. 29, 2010)
Federal Trade Commission
Press Release – October 4, 2010

FTC Complaint:

• The Federal Trade Commission ("FTC") alleged that Swish Marketing, Inc. ("Swish") and its three (3) officers operated short-term or "payday" loan websites. 
• According to the complaint, the websites featured an online loan application form. 
• Once an applicant applied for a loan online, users were given various "prompts" leading to product offers unrelated to the subject loan, each with "yes" and "no" buttons. 
• The FTC alleged that "no" was  pre-checked for three (3) of the offers, while "yes" was pre-checked for a debit card offer, including fine print disclosing that the consumer consents to having his/her bank account debited. 
• At the completion of the form, consumers who clicked "finish matching me with a payday loan provider" and had not checked "no" for the debit card, were ultimately charged for the debit card. 
• Further allegations claimed that some of the websites described the card as a "bonus" while disclosing the fee in fine print below the "submit" button, charging consumers up to $54.95 for each card.

August, 2009 Charges:

• Last year, the FTC charged Swish and VirtualWorks, LLC, the debit card company that helped to design the online offers, with deceptive business practices. 
• VirtualWorks has already settled the charges against them.

April, 2010 Charges:

• The FTC amended the complaint against Swish and its officers alleging that defendants sold consumers' bank account information to the debit card company without the consumers' consent. 
• These allegations included the fact that the officers of the company were aware of consumer complaints regarding unauthorized debits.

Settlement Order:

• Under the settlement order, Jason Strober, an officer of Swish, is required to pay $850,000.
• Mr. Strober is prohibited in the future from misrepresenting material facts about a product or service, including the cost or method for charging consumers.
• Further, he may not misrepresent that a product or service is free or a "bonus" without first disclosing all associated materials terms and conditions.
• Mr. Strober is also prohibited from charging consumers without first disclosing what billing information will be used, the amount to be paid, how and on whose account the payment will be assessed and all material terms and conditions associated with the subject product or service. 
• Under the order, all transactions must be affirmatively authorized by consumers.
• Mr. Strober is also required to monitor his affiliates who market the financial products or services to ensure compliance. 

Summary:

• The FTC's action is indicative of its intolerance with deceptive marketing practices.  The settlement appears to cover all of the issues raised in the complaint.
• The Order specifically states that defendants are prohibited from "representing, in any manner, expressly or by implication, that such product or service is a bonus, free, a gift, or without cost, without disclosing clearly and conspicuously, and in close proximity to the representation, all material terms, conditions, and obligations relating to the receipt and retention of such product or service."
• The Order defines "clearly and conspicuously" as "a type size and location sufficiently noticeable for an ordinary consumer to read and comprehend the disclosure, in print that contrasts with the background on which it appears . . .".
• The Order further defines "in close proximity" as "on the same webpage, online service page, or other electronic page, and proximate to the triggering representation, and shall not be accessed or displayed through hyperlinks, pop-ups, interstitials, or other means . . .".

California Unsolicited Commercial Email Statute's Damages Cap
Applies to Total Liability not Per Individual Recovery

Bank v. Hydra Group LLC, No. 10-1770 (E.D.N.Y. Sept. 24, 2010)

Facts:

• Plaintiff Todd Bank brought this putative class action against defendant Hydra Group, LLC ("Hydra"), claiming that it sent to him and others, unsolicited commercial email advertisements in violation of California's Business and Professional Code.
• Specifically, Mr. Bank alleged that Hydra sent him three (3) unsolicited commercial email messages.  Each message was substantially similar in that the subject lines all contained the phrase: "ATTN: Your Auto Insurance Renewal Reminder," but the body of the email consisted entirely of advertisements for an auto insurance broker.
• Mr. Bank further alleged that Hydra sent each message to at least one million other email addresses.
• The statute at issue makes it unlawful for any person or entity to send a commercial email advertisement from California or to a California email address if the advertisement "has a subject line that a person knows would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message."

Court Review and Decision:

• Before the court would even consider the merits of the claim, it reviewed whether subject matter jurisdiction existed, which involved looking at the statute's damages clause.
• The provision limits liquidated damages to $1 million per "incident." 
• Incident is defined as "a single transmission or delivery to a single recipient or to multiple recipients of an unsolicited commercial email advertisement containing substantially similar content."
• Mr. Bank argued that the plain language of the statute limits to $1 million a particular plaintiff's per incident recovery, not a defendant's per incident liability.
• The court disagreed, noting that such an interpretation "is not a reasonable construction of the liability-limiting provision."
• In fact, the court pointed out that, "even if Hydra executed the three (3) alleged transmissions in violation of the statute, the recipients of the messages sent in those transmissions -- whether one person or a million -- are entitled to no more than $3 million in liquidated damages."
• According to the court, the intent of the statute is "to limit a defendant's liability . . . ".
• Ultimately, the court dismissed the case for lack of subject matter jurisdiction and held that the statute's liquidated damages cap, at $1 million per incident, applies to a defendant's total liability for each transmission of a commercial email message, not per plaintiff. 

Summary:

• The California Business and Professional Code's damages cap is calculated on a per transmission basis and not on a per plaintiff basis. Stated another way, the damages provision is interpreted as a limit on total liability rather than individual recovery

British Internet Gambling Company Agrees to Forfeit $33 Million

U.S. Attorney's Office
Press Release – September 20, 2010

Parties Enter Into Non-Prosecution Agreement:

• The U.S. Attorney's Office for the Southern District of New York entered into a non-prosecution agreement with Sportingbet PLC ("Sportingbet"), an Internet gambling company incorporated in England and Wales and publicly traded on the London Stock Exchange.
• Under the agreement, Sportingbet provided a statement outlining the circumstances and ramifications of entering into the non-prosecution deal.

Sportingbet's Statement:

• From 1988 until October, 2006, Sportingbet provided a venue for Internet gambling to players located in the United States, including the Southern District of New York.
• Such gambling included real-money sports betting, in addition to wagering on poker and casino games.
• In 2001, Sportingbet began using certain payment processing methods that were formulated to misrepresent the nature of its customers' gambling transactions to U.S. credit card issuers that prohibit the use of their cards for Internet gambling.

Terms of Agreement:

• Sportingbet has agreed to continue to cooperate with the U.S. Attorney's Office in its ongoing investigation.
• The company has also agreed to forfeit $33 million, which represents the proceeds from the Internet gambling services that it had provided to U.S. customers. 
• Sportingbet has agreed to comply with a permanent restriction on providing Internet gambling services to U.S. customers, unless and until there is a change in U.S. law.

Summary:

• Internet gambling in the U.S. is illegal.
• The U.S. Attorney's Office agreed to enter into this non-prosecution agreement for several reasons, including Sportingbet's cooperation with the government's ongoing investigation, as well as its willingness to forfeit proceeds from the operation. 
• The authorities seem eager to shut down such operations.

Court Shuts Down Fraudulent LEC Billing Operation
Orders Defendants to Pay $38 Million

FTC v. Inc21.com Corp., No. C10-00022 (N.D. Cal. June 21, 2010)
Federal Trade Commission
Press Release – September 30, 2010

Original FTC Suit:

• In January, 2010, the Federal Trade Commission ("FTC") brought an action against Inc21.com ("Inc21") for violations of the FTC Act and the Telemarketing Sales Rule ("TSR").
• The suit alleged that Inc21 hired offshore telemarketers to contact potential clients to sell its web-based services. 
• According to the allegations, the defendants used "local exchange carriers" or "LECs" to place the charges on the phone bills of consumers and businesses that either:
  1. were told by the telemarketers that the calls were only to verify personal or business information;
  2. declined Inc21's offer of Internet services; or
  3. were told that they would receive a free trial offer, but were not informed that they would be charged if they did not cancel.
• The FTC moved for summary judgment asking the court to permanently enjoin defendants' billing of consumers and businesses for Internet-related services that they allegedly never agreed to purchase. 

District Court:

• The court found that defendants' billing actions were "deceptive and unfair."
• Specifically, in granting the FTC's motion, the court stated that "[t]he FTC has produced overwhelming evidence that defendants' practice of billing tens of thousands of businesses and consumers via their telephone bills - a fraud-friendly practice called 'LEC billing' - was both deceptive and unfair."
• The court pointed to what it described as "compelling proof;" namely, "a comprehensive expert survey of 1,087 of defendants' stated 'customers.'"
• The survey indicated that virtually 97 percent of defendants' customers had in fact not agreed to purchase defendants' products, and only five (5) percent were even aware that they had been billed.
• The court pointed out that over a five (5) year period, defendants received over $37 million in unauthorized payments through LEC billing of consumers and businesses. 
• The court also looked into defendants' telemarketing strategies and found those activities to be in violation of the TSR. 

Court Orders Defendants to Pay:

• The court shut down the defendants' operations, barred the defendants from charging consumer telephone bills, and also barred them from all telemarketing in the future without first obtaining prior approval from the FTC and the court. 
• Defendants were ordered to pay almost $38 million in restitution.

Summary:

• The FTC is busy policing and investigating the LEC billing space. 
• Companies in this space should pay close attention to the rules and regulations governing their actions to avoid any potential enforcement actions.
• We will continue to keep businesses apprised of the latest developments in this busy area. 

Online Marketer Settles with New York Attorney General for $5.2 Million

New York Attorney General's Office
Press Release – September 21, 2010

Investigation Began in January, 2010:

• As we reported in our March Newsletter, Attorney General Andrew M. Cuomo announced in January an investigation into 22 online retailers that had allegedly deceptively linked consumers to fee-based membership programs that charge unauthorized fees.
• According to the Attorney General's Press Release, when consumers shop online, they may be presented with a discount or cash-back incentive offer as they complete their purchase.
• When clicking on one of these discount or incentive links, the Attorney General alleged that consumers are then directed to a membership program web page that is separate from the online retailer's site.
• Next, the consumer is instructed to accept the discount or incentive.
• The Attorney General further claims that information about joining the membership program and its implications is listed in fine print.
• Finally, after accepting one of the offers, consumers then begin receiving small and recurring charges on their credit or debit card bills.
• Among the companies under investigation was online marketer Webloyalty.

Settlement with Webloyalty:

• Webloyalty agreed to pay $5.2 million in penalties and restitution to customers who unknowingly enrolled in, or did not authorize billing for, its discount clubs and programs.
• The company must permanently end its practice of obtaining consumers' billing information from online partner retailers.
• Webloyalty is also required to revise and modify its online marketing practices to ensure that consumers understand that they are enrolling in one of its programs for which they will be billed. 
• Finally, the company must make redemption forms for rebates immediately available to consumers online.

Summary:

• Attorney General Cuomo announced this past August that he had entered into a $10 million settlement with another online marketer, Affinion Group, and its subsidiary, Trilegiant, and its retail partners for similar unauthorized enrollments.
• The investigations into this "post-transaction marketing" are continuing.
• We will keep you apprised of any new developments.

Allowing Comments to Online Article Protected by CDA Immunity

Miles v. Raycom Media, Inc., No. 09-713 (S.D. Miss. Aug. 26, 2010)

Facts:

• Toni Miles was a news anchor at a television station in Mississippi.
• On October 24, 2008, Ms. Miles was arrested during a drug raid at a home that she was visiting.
• After the incident, the news director at the station informed Ms. Miles that her contract - due to expire on October 31, 2008 - would not be renewed. 
• Ms. Miles brought an action for a variety of claims, including sex discrimination, defamation and false light.
• In a separate claim, Ms. Miles alleged that the television station "has allowed cyber libel" against her by running a news article on its webpage and "subsequently allow[ing] unfiltered online comments which contained false information." 
• She did not allege that the defendants wrote or revised the false comments.  Ms. Miles acknowledged that the comments were not filtered by defendants.
• The defendants filed a motion to dismiss.

Court Decision:

          Claims for Defamation and False Light

• The court granted defendants' motion to dismiss this claim, finding that Ms. Miles failed to state a claim for false light or defamation.
• In so holding, the court noted that Ms. Miles did not contend that any statement in the article was false.

          "Cyber-Libel" or Third-Party Comments to Website Article

• Defendants argued that they are immune from liability under the Communications Decency Act ("CDA"), Section 230(c)(1).
• Section 230(c)(1) of the CDA provides: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." 
• This section has been interpreted to mean that, "an interactive computer service is entitled to immunity as long as it did not create or author the particular information at issue." See Prickett v. Infousa, Inc., 561 F.Supp. 2d 646, 651-52 (E.D. Tex. 2006).
• The court found that defendants are immune from liability under the CDA for the allegedly defamatory third-party comments at issue that were published on its website.
• In so finding, the court pointed out that Ms. Miles had complained that, "defendants merely allowed the comments, and there is no indication or allegation that the defendants encouraged defamatory comments on their website."

Summary:

• Here, the CDA protected a television station that featured comments to an article posted on its website.
• Key to this decision was the fact that the plaintiff did not allege that the station wrote or revised the comments or that they filtered or encouraged any defamatory comments.