• by Wendy Davis  @wendyndavis, October 10, 2008

A judge in Kentucky is expected to decide this week whether state officials can shut down more than 140 out-of-state online gambling companies by permanently confiscating their domain names.

Kentucky officials argue that online gambling threatens the state's "signature industry" of horse racing.

But lawyers representing industry groups including the Interactive Gaming Council and Interactive Media Entertainment and Gaming Association argue that it's unconstitutional for Kentucky to curb interstate online gambling operations in order to protect an enterprise in its own state.

Kentucky officials attempted to seize the domain names in August, when a private law firm acting for the state's Justice and Public Safety Cabinet filed a sealed motion asking to confiscate domain names of 141 sites, including AbsolutePoker.com, PokerStars.com and UltimateBet.com.

Last month, state judge Thomas Wingate of Franklin Circuit temporarily granted that request and issued an order directing the domain name registries--none of whom had yet been notified of the proceeding--to transfer ownership of the names to the state.

Kentucky Governor Steve Beshear issued a statement praising that decision. "Unlicensed Internet gambling significantly undermines and threatens horseracing, Kentucky's signature industry and a key tourism industry, by creating unregulated and untaxed competition," Beshear's office said in a September statement about the case.

But that order was only preliminary. When Wingate issued it, he also adjourned the matter for proceedings about whether the domain names should be permanently forfeited.

Industry representatives then learned of the proceedings and appeared in late September in Wingate's courtroom, where they argued that Kentucky has no jurisdiction over the sites, all operated by companies outside the state or abroad.

They also argued that Kentucky undertook this action in an unconstitutional attempt to foster its in-state activities at the expense of interstate commerce. "The Commonwealth's own pronouncements in press conferences and to the media have made it clear beyond meaningful dispute that the governor's motivation for this seizure action is to protect Kentucky's own gaming operations," the Interactive Gaming Council said in its motion to dismiss the case. The organization argues that protecting state interests by targeting interstate operations is unconstitutional.

Lawyers for the gaming industry also argued that Kentucky's forfeiture law does not apply to domain names. Kentucky has a law dating back to 1974 that provides for seizure of gambling "devices," but says that the types of things covered are "machine or mechanical" devices, such as roulette wheels or slot machines.

Making bets at online sites is not illegal under federal law or Kentucky state law. But a two-year-old federal law prohibits banks from making payments to online gambling sites.

Wingate said at a hearing Oct. 7 that he expected to issue a decision in one week. Meanwhile, at least two of the 141 sites--highrollerslounge.com and luckypyramidcasino.com--appear to have been transferred to the governor's office.

Some experts in Internet law believe that Kentucky's attempts to seize the domain names are problematic. Among other reasons, if Kentucky is successful, the forfeiture will affect the companies' operations far beyond the state borders.

"The problem with grabbing domain names is it puts the company out of business," said Eric Goldman, director of the High Tech Law Institute at Santa Clara University. "It's very troublesome that any one state could use its anti-gambling laws to control behavior that may be out of its state."