February 02, 2011
In the debate over whether online poker is legal, and the extent to which state governments can regulate online poker, there are several important, interrelated legal concepts—personal jurisdiction, subject matter jurisdiction, venue/forum, and standing—which are thrown around with little or no explanation. Often, poker players merely offer a flippant, "Well, the court can't have jurisdiction over that company/person/group" without really specifying the legal basis for that claim, or offering analysis supporting their conclusory claim. This post is the first of four posts looking at some of the common legal concepts related to jurisdiction in the context of online poker. Of course, the legal issues being discussed are complex, have developed over a long period of time, and remain in flux even today as courts attempt to apply old legal concepts to new situations (in this case, internet commerce). But poker players interested in understanding online poker litigation should at least have a basic understanding of the legal issues in play in order to evaluate for themselves the merits of various pronouncements being made about the interplay of the law and online poker.
When online poker players make claims that the federal or state governments "don't have jurisdiction" over online poker, online poker players, or online poker companies based overseas, it's important to know exactly what is being asserted. Jurisdiction is an important legal concept directly tied to a court's power or authority to enter rulings and judgments that are binding and enforceable. Any court in the world theoretically could enter an order directing that John Smith of Des Moines, Iowa be thrown in prison or pay one million dollars to another person. Whether that court order is enforceable, however, depends on whether the court has the authority to bind John Smith to its order. In other words, court's power to enforce an order depends on whether it has jurisdiction to enter that order.
Although there are several types of legal jurisdiction, the two most basic jurisdictional concepts are personal jurisdiction and subject matter jurisdiction. A court must have both kinds of jurisdiction to enter binding, enforceable judgments.
Looking at personal jurisdiction, a court has jurisdiction over a person or company based either on their residence or their activities. Personal jurisdiction is governed by due process considerations of whether a person or company has sufficient connection to a state to fairly subject them to the court's authority. If a person resides in California, or a company is incorporated and based in California, it seems axiomatic that the person or company is subject to the authority of California state courts. But what about people who merely travel through California, or companies located outside California but which do business, directly or indirectly, with people or companies located in California?
Courts can still gain personal jurisdiction over people or companies located outside their territory via long arm statutes. This jurisdiction can either be specific (limited to a particular claim) or general (applicable to all claims). Courts examining whether personal jurisdiction exists generally use the "minimum contacts" test set out by the U.S. Supreme Court in International Shoe v. Washington. The concept of "minimum contacts" is necessarily vague and fact-dependent, but the general concept is that, where a non-resident person or company has sufficient contact with a state, it is fair to expect that person or company to appear in and be subject to the authority of that state's courts.
The minimum contacts analysis is straightforward in many cases. An Indiana resident driving a car in Ohio should expect to be subject to Ohio court jurisdiction for a traffic accident occurring in Ohio. A Kentucky company selling its products in a dozen states and contracting with vendors in another dozen states might reasonably be hailed into court in any of those states where it does business. In each of these situations, the party is said to have "purposefully availed" itself of the legal benefits and protections of the forum state; i.e., the person or company has intentionally acted in some manner within the state, or engaged in a transaction which will occur in part within the state.
Difficult personal jurisdiction issues arise when companies are located outside a state (or even overseas), and do not intentionally engage in commercial activities in a particular state. For example, what if a company manufactured a machine component part and sold it to a manufacturer in Texas? The machine manufacturer then distributes the assembled product throughout the western states. Should the component manufacturer be subject to personal jurisdiction in Arizona, despite having no direct contact with Arizona or Arizona residents and companies? Has the component manufacturer had any contacts with Arizona, let alone "minimum contacts"?
Earlier this month, the U.S. Supreme Court heard oral arguments about personal jurisdiction in two lawsuits arising from foreign-based manufacturers who produced products or product components that eventually wound up causing injuries to residents of states where the companies have no physical presence and have never done business. See Goodyear Luxembourg Tires v. Brown and J. McIntyre Machinery Ltd. v. Nicastro (check out SCOTUSBlog for an excellent recap and analysis of the arguments and the underlying issues). Although these cases arise from physical products, the fact the companies involved are foreign-based means the Court's holdings in these cases will have some impact on the analysis of personal jurisdiction by other courts when they confront jurisdictional issues related to foreign-based internet poker companies. Keep an eye out for the Court's decisions in these cases in the next few months.
Turning to the specific issue of personal jurisdiction over internet companies, courts have struggled to find a workable analytical framework for determining which out-of-state or foreign-based internet companies can be subject to a state's jurisdiction. Although a number of tests have been developed, many courts have analyzed the concept of "purposeful availment" by examining the nature of the company's internet website and its use in promoting the company's business within a state. Essentially, a passive website that merely advertises a company's good or services is insufficient to establish personal jurisdiction, while an interactive website that actively takes orders or facilitates sales of goods or services within the state will be sufficient to establish personal jurisdiction. Websites that fall somewhere in the middle—exchanging data with users, but not actually selling products or services—require additional analysis of the degree of the commercial nature of the data exchange.
So, turning to internet poker companies, how do personal jurisdiction concepts apply to claims against the companies? Although the companies are based outside the United States, they operate websites which actively engage in commercial activities within all (or almost all) fifty states. Although many internet poker companies would assert they are not subject to personal jurisdiction in the United States, their commercial activities likely do, in fact, subject them to jurisdiction in the courts of most, if not all, of the states.
A recent example of these kinds of personal jurisdiction issues arose in a trademark infringement lawsuit brought by WMS Gaming, an Illinois company that designs slot machines, against PartyGaming, which operates the PartyPoker site (the site withdrew from the U.S. market after enactment of the UIGEA). PartyPoker refused to appear in Illinois federal court to defend the case, instead asserting, "This issue is about jurisdiction. PartyGaming has never had any physical assets located in the US but is perfectly prepared to defend the merits of this claim in the appropriate jurisdiction." After a default judgment was entered, WMS Gaming appealed, seeking an increase in the amount of damages awarded. The Seventh Circuit Court of Appeals entered a decision granting WMS Gaming's request for enhanced damages. The court also noted in its analysis that it had personal jurisdiction over PartyGaming:
We also note that while the defendants had the opportunity to contest the district court's personal jurisdiction over them, they have now waived their opportunity to do so. See Fed.R.Civ.P. 12(h)(1). While we thus cannot rule on the point, it does appear to us that their business contacts with the United States probably would have sufficed to secure personal jurisdiction under Fed.R.Civ.P. 4(k)(2).
—WMS Gaming, Inc., v. WPC Productions, Ltd., 542 F.3d 601, 605 (7th Cir. 2008) (emphasis added).
Issues of personal jurisdiction can also arise in the context of state attorneys general attempting to enforce a civil remedy, such as an injunction pursuant to consumer protection statute. For example, the Minnesota courts have affirmed a finding of personal jurisdiction against a Nevada online sports betting company (based out of Belize) when the state attorney general sought an injunction barring the company from soliciting business from Minnesota residents through ads which deceptively claimed that such wagering was legal in Minnesota:
Appellants [Granite Gate Resorts, et. al], through their Internet advertising, have demonstrated a clear intent to solicit business from markets that include Minnesota and, as a result, have had multiple contacts with Minnesota residents, including at least one successful solicitation. The cause of action here arises from the same advertisements that constitute appellants' contacts with the state and implicates Minnesota's strong interest in maintaining the enforceability of its consumer protection laws. Appellants have not demonstrated that submission to personal jurisdiction in Minnesota would subject them to any undue inconvenience. For these reasons, we hold that appellants are subject to personal jurisdiction in Minnesota because, through their Internet activities, they purposefully availed themselves of the privilege of doing business in Minnesota to the extent that the maintenance of an action based on consumer protection statutes does not offend traditional notions of fair play and substantial justice.
—State of Minnesota v. Granite Gate Resorts, Inc., 568 N.W.2d 715 (Minn. Ct. App. 1997).
A finding of personal jurisdiction, however, is only the beginning of the legal analysis. There may be treaties which govern foreign-based internet companies that would trump state or federal law and bar jurisdiction. Further, even if a state has personal jurisdiction over an internet poker company, the state may lack subject matter jurisdiction; e.g. the state may lack jurisdiction because federal preemption or the Dormant Commerce Clause places jurisdiction over internet gambling outside the purview of the individual states. Similarly, a state might have personal and subject matter jurisdiction, yet refuse to consider a lawsuit because of issues related to proper venue; venue issues arise when more than one court has jurisdiction, and the courts must decide which of them is best equipped to resolve the matter.
One final issue that arises in personal jurisdiction cases is that lack of personal jurisdiction can be waived by a party intentionally or inadvertently (as noted by the court in the WMS Gaming decision). As will be seen in the upcoming discussion of standing, internet poker companies challenging state court actions may refuse to appear in court at all, fearing that doing so will result in a waiver of any personal jurisdiction defense. Instead, these companies will often default (fail to appear), particularly when they have no assets in the state (the approach taken by PartyGaming in the WMS Gaming case). When the owner of the default judgment attempts to enforce or collect on the judgment in the internet poker company's country of residence, validity of the judgment can be challenged on the company's home turf (not to mention it can be incredibly difficult and expensive to attempt to enforce judgments overseas). Similarly, individuals may refuse to travel to the United States or to a particular state to deny personal jurisdiction to the courts.
In sum, then, when online poker advocates assert that internet poker companies are beyond the jurisdiction of the state and federal courts of the United States, to the extent they are referring to personal jurisdiction, they are likely incorrect.
Next up: Subject matter jurisdiction
ADDENDUM (3 Feb. 2011): The paragraph discussing the WMS Gaming decision was inadvertently omitted from the original version of this article.
ADDENDUM (7 Feb. 2011): The paragraph discussing the Granite Gate case was added. I had originally planned to discuss this case in a later post for this series, but have decided it properly belongs in the personal jurisdiction discussion.