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Can Canada regulate the internet?

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Cutting Across Borders

The world is composed of 202 sovereign nations and each of these nations relies upon physical borders to objectively define the limits of their national authority. Problems arise, however, when technology challenges the viability of these borders. A perfect example is the Internet. The Internet is a loose network of computers communicating with each other that transcends national and international borders.

The worldwide reach of the Internet makes the world much smaller and interconnected. The problem is that this interconnectedness challenges the ability of nations to regulate cross-border interaction. Many nations, including Canada, encourage the globalizing effect of e-commerce. But e-commerce also allows unregulated content to flow across national borders. Since the flow is unregulated, criminal conduct can be part of this flow of information and commerce. The situation becomes even more complex because criminal conduct is defined by specific national laws, thus allowing what is illegal content in one nation to lawfully be created and supported in another nation.

Online gambling is a business that cuts across borders. Players anywhere in the world can participate in an online game located thousands of kilometres away. This has become an issue because while most western democracies strictly regulate gambling within their borders to prevent real or perceived social ills, territorial sovereignty strictly limits state attempts to regulate Internet gambling. Thus, many nations are aware of foreign online gambling, but are unable to unilaterally prevent their own nationals from participating. Gambling houses are acutely aware of the territorial limits of national sovereignty and have utilized the Internet to carryout illegal transactions in many jurisdictions while remaining safe from prosecution. Yet despite these impediments, a number of government law enforcement agencies have developed creative ways to curtail online gambling.

Most prominently, agencies have discovered that online gambling requires the participation of third-party participants such as banks and online payment services to securely facilitate the transfer of wagers and winnings. It is thus the third-party payment services that have become the target of recent antigambling legislation and prosecution. The recent arrest of two founders/corporate officers and three separate settlement agreements between Neteller, Canada, the United States, and Turkey highlights this new trend in online gambling prosecution.

Gambling with the Law

Beginning with the explosion of online industries in the mid 1990s, online gambling websites became a lawful way to circumvent national gambling regulations. Gambling websites and players both needed a secure payment system and at first these sites relied upon direct credit or debit card payments. But this direct payment method was foreclosed after law enforcement agencies advised banks to cease facilitating this type of transaction. Gambling sites next moved to indirect payment methods, such as PayPal.

This arrangement changed in 2002, however, when the United States Department of Justice (US DOJ) warned all US-based online payment services that the facilitation of online payments for gambling ran afoul of federal and state anti-gambling laws. Some states followed this federal warning by bringing lawsuits against online payment services. Seattle-based eBay unilaterally announced after its acquisition of PayPal in 2002 that it would no longer process payments to and from gambling sites for customers in the United States and quietly entered into a $200,000 US settlement with New York State on similar US DOJ anti-gambling claims. Although PayPal continued to provide financial services to European customers because it was permitted under less-stringent European Union gambling laws, other US-based online payment services soon followed suit after PayPal's withdrawal from online gambling in the US.

The withdrawal of American payment services proved a boon for foreign-based gambling websites, such as Isle of Man-based Neteller. These off-shore corporations skirted the jurisdictional reach of the United States by incorporating outside of US territory. Operating beyond the reach of American law allowed Neteller to experience rapid growth as online gamblers switched from PayPal. When Neteller went public on the London Stock Exchange in 2004, it realized a 300% increase in its stock value in less than a year: By 2005 Neteller had facilitated $7.3 billion US in transactions, approximately 90% of which was for online gambling. Neteller thus became the world's pre-eminent gambling online payment service.

Neteller's pre-eminence would suddenly change in October 2006 when the 109th U.S. Congress passed the Unlawful Internet Gambling Enforcement Act. This legislation specifically targeted third-party participants in online gambling. Within three months, the US DOJ and Federal Bureau of Investigation arrested and charged the two founders of Neteller (both Canadian citizens) in connection with their alleged violations of several American anti-gambling laws dating from 1999 to 2007. Immediately following the arrests, Neteller entered into an agreement with the US DOJ to cease facilitating transactions from the United States.

Within two months of the arrests, Neteller entered into a similar agreement to no longer accept transfers from Canada, with the Department of Justice of Canada (DOJC). Following the arrests, Neteller's stock dropped three-fourths in value and initiated a series of voluntary withdrawals of online payment services from online gambling transactions in Canada and the United States.

The rise and fall of Neteller is an interesting story of national laws attempting to catch up with rapid technological changes. But the prosecution of Neteller has particular significance in Canada because Canada, unlike the United States, does not currently possess a clear legislative mandate to regulate third-party facilitators of online gambling. Thus, Neteller's settlement with the Canadian government provides some insight into Canada's attempts to define jurisdiction in a world dominated by the Internet.

Differing Approaches, but the Same Result?

Neither Canada nor the United States has categorically outlawed gambling. For both countries, the legality of a particular gambling practice is defined by provincial or state authorization. This approach works efficiently when gambling houses are limited to a physical location in a single province, but the cross-border reach of the Internet challenges the regulatory ability of territorial laws. The United States is increasingly taking a regulatory approach that attempts to gain jurisdiction over the Internet, but Canada's position is less clear.

Canada does not expressly possess a "long-arm" statute which grants jurisdiction over the Internet. Since Canada's anti-gambling laws do not expressly apply to Internet gambling or to third-party transactors, the DOJC's agreement with Neteller indicates de facto jurisdiction over online gambling and payment intermediaries. This statement is significant because all prior Canadian decisions have not involved direct government action, but have revolved around Canadian courts resolving disputes between third parties.

Canadian decisions concerning jurisdiction over the Internet are sparse. Canada, like the United States, currently has an odd assortment of common law decisions that have resolved fact-specific disputes. Neither Supreme Courts in Canada or the Untied States have discussed Internet jurisdiction, thus leaving the various intermediate appellate courts wide discretion in fashioning their own standards. The United States possesses a larger body of case law than Canada on this issue, but both countries appear to apply very similar tests to establish personal jurisdiction over Internet transactions.

Canada's leading cases, Kostiuk and Bangoura, have dealt with jurisdiction over the Internet as a collateral matter to product liability and defamation suits. These cases apply the "real and substantial connections" test of personal jurisdiction. This standard requires a relationship between parties and the physical location of the issue(s) in dispute. Since both cases automatically found a substantial connection, it is not clear how strong the connection to Canada needs to be to establish personal jurisdiction. In the United States, the Zippo decision established an "active versus passive" standard for minimum contacts. This test is very similar to the "real and substantial connections" test and may provide insight into the degree of contact needed to establish jurisdiction.

Under Zippo, an Internet site's offer for sale was reviewed under a factual examinations of the volume of sales in a particular jurisdiction. Thus, the offer for sale over the Internet does not grant jurisdiction unless some evidence can establish a minimum level of sales in a particular jurisdiction. Zippo's reasoning is tainted by the US Supreme Court's recent emphasis on quantitative evidence of minimum contacts, but Zippo's reasoning may help buttress Canada's "real and substantial connections" test to create a proximate limit of Canadian jurisdiction.

It is against the backdrop of vaguely defined personal jurisdiction over the Internet that the Neteller settlement with the DOJC gains importance The settlement is the first attempt by a Canadian agency to broaden Canada's jurisdictional reach. The Neteller settlement provides further evidence that the "real and substantial connections" test represents the majority view of Canada's authoritative limits. It is also significant because the Canadian settlement, unlike the US agreement, is not clearly grounded in any existing federal or provincial law. The DOJC's decision is a clear extension of existing Canadian gambling laws. It is well within the scope of Canadian government powers to protect its citizens on the Internet in the same way it does on Canadian soil. But it is important to understand that this approach is pushing the limits of the law in the same way that the Internet is pushing our understanding of the world.

Tristan Kenyon-Schultz, JD. is currently Intellectual Property Fellow at the University of Washington School of Law.

References

Unlawful Internet Gambling Enforcement Act, 31 U.S.C. [section]5361 et seq. (2006).

Revised Statutes of Canada--Criminal Code, R.S.C. 1985, C-46, [section]1970 et seq. (2006) (Can.).

Braintech Inc. v. Kostiuk, [1999] W.W.R. 133.

Bangoura v. Washington Post, [2005] 17 C.P.C. (6th) 30.

Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa.,1997).

Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County, 480 U.S. 102, 107 S.Ct. 1026 (U.S.Cal., 1987).
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Title Annotation:Special Report on Internet Law
Author:Kenyon-Schultz, Tristan
Publication:LawNow
Date:Sep 1, 2007
Words:1617
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