Founders of Three Internet Poker Sites Charged with Bank Fraud,
Money Laundering and Illegal Gambling

U.S. v. Scheinberg (10 Cr. 336)
U.S. Attorney's Office, S.D.N.Y.
Press Release - April 15, 2011

Indictment:

• Preet Bharara, the United States Attorney for the Southern District of New York, charged 11 defendants, including the founders of the three largest Internet poker companies doing business in the U.S., with bank fraud, money laundering and illegal gambling.
• The three named companies are PokerStars, Full Tilt Poker and Absolute Poker (hereinafter, the "Companies").
• Among other things, the U.S. Attorney was able to obtain restraining orders against more than 75 bank accounts (in 14 countries) used by the Companies and five of their Internet domain names were seized.
• The indictment and complaint seek at least $3 billion in civil money laundering penalties and forfeiture.

Complaint:

• In 2006, the U.S. enacted the Unlawful Internet Gambling Enforcement Act (the "UIGEA"), making it a federal crime for gambling businesses to "knowingly accept" most forms of payment "in connection with the participation of another person in unlawful Internet gambling."
• The Companies (located offshore) allegedly arranged for the money received from U.S. gamblers to be disguised as payments to hundreds of non-existent online merchants, claiming to sell items such as jewelry and golf balls.
• The complaint alleges that the defendants worked with many highly-compensated "payment processors" who secured accounts at U.S. banks.
• These payment processors allegedly lied to banks about the nature of the financial transactions that they were processing.
• In late 2009, after U.S. banks and financial institutions shut down many of the fraudulent accounts, the defendants persuaded principals of a few small, local banks to handle such processing in exchange for investment interests in the gambling operations.

U.S. Attorney's Office Statement:

• "As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits . . . . In their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud."
• The statement continued: "foreign firms that choose to operate in the United States are not free to flout the laws they don't like simply because they can't bear to be parted with their profits."

Looking Ahead:

• As the prospect for legalizing online poker in the near future continues to improve, it is interesting to see such sudden and significant legal action in this space. We will continue to closely monitor any and all developments in the online gambling arena.

U.S. Supreme Court Holds that Clause in Contract
Requiring Arbitration Precludes Class Action Lawsuit

AT&T Mobility LLC v. Concepcion et ux., 563 U.S. ___,
April 27, 2011

Facts:

• AT&T Mobility LLC ("AT&T") and the Concepcions entered into an agreement for the sale and servicing of cellular telephones.
• The contract included an arbitration clause that barred plaintiffs from bringing an action as part of a "class" proceeding.
• Under the contract, the Concepcions registered for AT&T's mobile service, which was advertised as including "free" cellular telephones.
• While there was no charge for the phones, the Concepcions were charged $30.22 in sales tax based on the retail value of the phones.
• The Concepcions filed a complaint against AT&T – which was later consolidated in a putative class action – alleging that AT&T engaged in false advertising and fraud by charging sales tax on phones that it had advertised as free.

Motion to Compel Arbitration:

• AT&T moved to compel arbitration under the terms of the parties' agreement.
• The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawful under California law because it disallowed classwide proceedings.

District Court:

• The district court denied AT&T's motion, relying on the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. Rptr. 3d 148 (Cal. Ct. App. 2005), which prohibits most class action waivers in arbitration clauses involving consumers.

Ninth Circuit:

• The Ninth Circuit affirmed, finding the arbitration clause unconscionable under California law as handed down in the Discover Bank case.
• That court also held that the Discover Bank rule was not pre-empted by the Federal Arbitration Act (the "FAA").

U.S. Supreme Court:

• The Supreme Court first discussed the purposes of the FAA and, specifically, the grounds upon which arbitration agreements may be unenforceable: "upon such grounds as exist at law or in equity for the revocation of any contract."
• The issue in this case was whether Section 2 of the FAA "preempts California's rule classifying most collective-arbitration waivers in consumer contracts as unconscionable."
• The Concepcions argued that the Discover Bank rule "exists at law or in equity for the revocation of any contract under the FAA . . . . "
• In its analysis, the Court pointed out that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."
• The Court further noted that the Discover Bank rule interferes with arbitration. While that rule "does not require classwide arbitration it allows any party to a consumer contract to demand it ex post."
• The Court stressed that class arbitration also greatly increases risks to defendants. It went so far as to indicate that "[a]rbitration is poorly suited to the higher stakes of class action."
• Finally, the Court held that "[b]ecause it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, California's Discover Bank rule is preempted by the FAA."

Looking Ahead:

• This decision should prove to be a big victory for companies looking to resolve customer disputes by way of mandatory bilateral arbitration.
• Based on this ruling, companies looking to eliminate a consumer's right to classwide litigation proceedings could, presumably, draft similar language as exists in the AT&T consumer arbitration provision that was upheld by the U.S. Supreme Court. In order to achieve that, however, the specific protections and benefits offered to consumers in the AT&T arbitration clause should be included.

CAN-SPAM Act Applies to Facebook Communications:
User Messages, Wall Posts, News Feeds

Facebook Inc. v. MaxBounty, Inc. (N.D. Cal., No. 10-4712, Mar. 28, 2011)

Facts:

• Plaintiff Facebook, Inc. ("Facebook") is a popular social networking website.
• Defendant MaxBounty, Inc. ("MaxBounty") is an advertising and marketing company that uses a network of publishers to drive traffic to its advertiser customers' websites.
• MaxBounty's marketing program is based on a cost-per-action model.
• Facebook alleges that MaxBounty is engaging in impermissible advertising and commercial activity on Facebook.com.
• Specifically, Facebook alleges that MaxBounty, through its network of affiliates, creates fake Facebook pages that are intended to re-direct unsuspecting Facebook users away from the site to third-party commercial websites, promising free products.
• To sign up, users have to agree to notify each of their Facebook friends that they have become members. The messages were delivered in a variety of ways: as a posting on the user's "wall," in a user's "news feed" or to the friends' message inboxes.
• MaxBounty moved to dismiss the claims under the CAN-SPAM Act, arguing that the "customer advertisements Facebook complains about . . . are not email and therefore cannot give rise to a claim under the Act."
• Facebook disagreed, claiming that communications on its website fall within the meaning of "electronic mail messages" under the Act.

CAN-SPAM Act:

• The Act makes it "unlawful for any person to initiate a transmission, to a protected computer, of a commercial electronic mail message, or a transaction or relationship message, that contains, or is accompanied by, header information that is materially false or materially misleading."
• Further, the Act defines an "electronic mail message" as "a message that is sent to a unique electronic mail address . . . ."

Issue of First Impression in the Circuit:

• No court in this circuit has addressed directly whether the CAN-SPAM Act applies to social networking communications under the circumstances in which an electronic message is not delivered to an "inbox."

Court Decision:

• The court found that each type of message described above could fall under CAN-SPAM.
• The court looked to earlier decisions in MySpace, Inc. v. Wallace, 498 F.Supp. 2d 1293 (C.D. Cal. 2007) and MySpace, Inc. v. The Globe.com, Inc., 2007 WL 1686966 (C.D. Cal. 2007), where the court held that CAN-SPAM reaches email-like messages sent through the MySpace social network.
• The court found that the transmissions at issue require at least some routing activity by Facebook, and that any routing necessarily includes issues concerning volume and traffic utilization which CAN-SPAM seeks to address.

Summary:

• According to the court, a determination that the communications at issue here are "electronic messages" is consistent with the intent of Congress to mitigate the number of misleading commercial communications that overburden the Internet.
• Interestingly, the court concluded that "in order for the Facebook pages at issue to be considered 'electronic mail messages,' they must be 'sent to a unique electronic mail address,' that is, to 'a destination . . . to which an electronic mail message can be sent.'" Because all Facebook accounts are tied to user email addresses, the court found that Facebook had satisfied this requirement.

FTC Asks Federal Courts to Shut Down Allegedly
Fake News Websites

Federal Trade Commission
Press Release - April 19, 2011

FTC Complaint:

• The FTC filed complaints in federal courts around the nation seeking to halt the allegedly deceptive practices of 10 companies that had used fake news websites to market acai berry products.
• According to the complaints, the respective defendants allegedly operate websites that appear to be affiliated with legitimate news-gathering entities, when in fact the sites are advertisements for acai berry weight-loss products.
• The FTC complaints list the titles of these allegedly fake websites, such as "News 6 News Alerts" and "Health News Health Alerts."
• In addition to these titles, the FTC alleges that the sites often include the names and logos of major media organizations, such as ABC, Fox News, CNN and others, without their authorization.
• The complaints indicate that the websites feature misleading headlines as well, such as "Acai Berry Diet Exposed: Miracle Diet or Scam?"

Summary of FTC Claims:

• Defendants made false and unsupported claims that acai berry supplements will result in rapid and significant weight loss.
• Defendants deceptively represent that:
  1. their websites are objective news reports;
  2. independent tests demonstrate the effectiveness of the products; and
  3. comments following the "articles" on their websites reflect the views of independent consumers.
• Defendants failed to disclose their financial relationships to the businesses selling the products.

Relief Sought:

• The FTC is seeking to permanently bar the allegedly deceptive claims and to require the companies to provide refunds to consumers who purchased the supplements and other products.

Prior Related FTC Action:

• In 2010, the FTC brought action against Central Coast Neutraceuticals, Inc. ("CCN") and related companies for certain marketing violations, including deceptive advertising of AcaiPure and Colopure (a colon cleansing supplement).
• The CCN complaint alleged that on their respective websites, defendants made dramatic claims about the products' effectiveness.
• In that case, the District Court of the Northern District of Illinois issued a temporary restraining order requiring CCN to stop its allegedly illegal conduct.
• The order also imposed an asset freeze and appointed a temporary receiver.

Looking Ahead:

• The FTC is carefully scrutinizing the manner in which companies describe and advertise their products' benefits.
• Deceptive marketing continues to be a hotly-investigated and penalized area on both a state and federal level.
• It is imperative to have all programs and associated marketing creative carefully reviewed by counsel prior to promotional launch.

Microsoft and Yahoo! Entitled to CDA Immunity for Email Filtering Lawsuits

Holomaxx Techs. v. Microsoft Corp. (N.D. Cal., No. 10-4924, Mar. 11, 2011)
Holomaxx Techs. v. Yahoo! Inc. (N.D. Cal., No. 10-4926, Mar. 11, 2011)

Holomaxx Files Twin Lawsuits:

• Holomaxx Technologies ("Holomaxx") is an online marketing company, providing (among other things) commercial clients with an email marketing service.
• On its clients' behalf, Holomaxx sends millions of marketing email messages on a daily basis, to its clients' email subscriber lists.
• Holomaxx is paid per email sent and successfully delivered.
• Microsoft Corp. ("Microsoft") and Yahoo! Inc. ("Yahoo!") are both Internet service providers ("ISPs") providing free email service to many users around the world.
• Both companies utilize and employ various email filtering technologies and procedures that identify and reject potentially harmful communications.
• Holomaxx brought action against Microsoft and Yahoo!, claiming that both companies were violating the Wiretap Act, the Stored Communications Act, the Computer Fraud and Abuse Act, among other offenses, when they filtered and blocked its bulk "CAN-SPAM" compliant emails.
• Microsoft and Yahoo! moved to dismiss the complaints, claiming entitlement to immunity under the Communications Decency Act ("CDA").

CDA Section 230 (in pertinent part):

• No provider or user of an interactive computer service shall be held liable on account of —
  
  (A) any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, or otherwise objectionable . . . .

Court Decision:

• The court granted Microsoft and Yahoo! immunity under the CDA and dismissed the claims that they had unlawfully blocked legitimate CAN-SPAM compliant email.
• The court pointed out that one of the main purposes of the CDA is to encourage ISPs to engage in effective self-regulation.
• In this vein, section 230(c) provides protection for "good samaritan" blocking and screening of offensive material.
• The court concluded that Microsoft and Yahoo! were entitled to CDA section 230 immunity for filtering plaintiff's emails.

Looking Ahead:

• The court spent some time discussing what may be deemed "objectionable" within the meaning of the CDA, and therefore, rightfully blocked by an ISP.
• According to the decision, no court has articulated specific criteria to determine what is "objectionable" under the CDA.
• On the facts at issue, the court noted that it was clear from the allegations that both Microsoft and Yahoo! could find Holomaxx's emails to be harassing and "otherwise objectionable" under the statute. As such, the court found that the defendants were entitled to section 230 immunity.

StubHub, Inc. Not Entitled to CDA Immunity

Hill v. StubHub Inc. (N.C. Sup. Ct., No. 07-11310, Feb. 28, 2011)

Facts::

• StubHub Inc. ("StubHub") operates a "ticket marketplace" website, enabling third parties to buy and sell tickets to various entertainment events.
• Plaintiffs Jeffrey and Lisa Hill (residents of North Carolina), purchased four tickets to a Miley Cyrus concert from seller Jason Holohan, through StubHub.
• The tickets were listed at $149.00 each, in addition to a service charge of $59.60 and an $11.00 shipping and handling fee.
• The Hills discovered the face value of the tickets ($56.00 each) upon receiving them in the mail.
• Plaintiffs claim that this transaction, if conducted in front of the arena in North Carolina where the show was to take place, would have violated the state's anti-scalping laws.
• StubHub claims immunity under section 230 of the Communications Decency Act ("CDA").

How StubHub Works:

• Buyers and sellers must register with StubHub for a user account and, in the process, agree to its "User Agreement."
• This agreement prohibits violations of ticket pricing laws, such as North Carolina's anti-scalping statute.
• In setting the price amount, sellers are not asked to provide the original face value of the ticket.
• Sellers entering a price outside of StubHub's determined "average price range" will be shown a pop-up window on their computer screen, indicating the average price of tickets sold for the event in that seating area. Then, the seller is given an opportunity to adjust the price that he/she intends to sell the tickets for.
• StubHub takes a percentage of each sale, thereby profiting from any illegally priced tickets.
• The court describes StubHub's involvement with sales on its site as "proactive." Among other tactics, "[i]t actively solicits listings for high demand events. It monitors its competition for listings."

Issue:

• Whether StubHub is an Internet content provider within the meaning of the CDA.

Court Decision and Analysis:

• The court held that StubHub is a content provider and "stripped of any immunity under the CDA" by virtue of the fact that StubHub "directly participated in developing the pricing on its system."
• The court elaborated by pointing out that, "StubHub encouraged, materially contributed to, and made aggressive use of the pricing content on its website. It profited from tickets sold at prices higher than face value. It was consciously indifferent and willfully blind to the illegal prices being posted, knowing that the predictable consequences of its pricing model would be the generation of illegal prices."
• The court also found that StubHub's activities, including its buyers' fees, were in violation of North Carolina's anti-scalping statute.

Looking Ahead:

• The court found that "an Internet Service Provider crosses the line and becomes liable for content on its website when the ISP materially contributes to and/or specifically encourages the offending content."
• The court looked to the decision in Fair Hous. Council v. Roommates.com, 521 F.3d 1157 (9th Cir. 2008), which held that a party responsible for putting information online (the online venue) may be subject to liability under the CDA, even if the information originated with a website user.
• In Roommates.com, the roommate-matching service asked users questions and provided them with a set of pre-set answers that could lead to discriminatory housing advertisements.
• It is important to note that StubHub's Terms of Service, which prohibited violations of tickets pricing laws, did not suffice as an immunity defense under the CDA.

San Francisco Tour Company Sues Groupon for Misleading Google Ads

San Francisco Comprehensive Tours, LLC v. Groupon Inc. (N.D.Cal. No. 11-1300)
Complaint Filed March 17, 2011

Complaint:

• Since 2005, plaintiff has been offering tours of San Francisco, John Muir Woods, Napa Valley Wine Country and Alcatraz.
• Since that time, plaintiff has participated in Google's AdWords program, appearing in one of the top three to four spots in the purchased placement area where users searched for "San Francisco Tours," "Alcatraz Tours," and "Napa Wine Tours," respectively.
• Users who clicked through plaintiff's AdWords links were taken directly to its website.
• Defendant Groupon Inc. ("Groupon") is a "deal-of-the-day" website and focuses on major geographic markets throughout the world.
• According to the complaint, Groupon employed Google's AdWords program and purchased location-specific keywords for sponsored ads on Google.
• Plaintiff alleged that Groupon advertised coupons, such as "San Francisco Tours," "Alcatraz Tours," and "Napa Wine Tours," while not actually offering coupons for those types of tours.
• Plaintiff further contended that when clicking on one of the Groupon links, users would get the message: "Oops! That page doesn't exist."
• Although, as plaintiff has alleged, the ads were not legitimate, they nevertheless generated high "click-throughs," increasing the popularity rating of Groupon's ads.
• Under Google's program, this led to Groupon ultimately paying less per click-through than plaintiff, to the competitive disadvantage of plaintiff.
• Plaintiff alleged that Groupon violated the Lanham Act and California law by engaging in "bait and switch" advertising on Google.com.
• Plaintiff is seeking a temporary restraining order barring Groupon from continuing to engage in false and misleading business and advertising practices.

Looking Ahead:

• We will continue to follow this action and report on any further developments.