GAMBLING IN SECOND LIFE: THE POSNER EXCEPTION?

Judge Posner and raccoon-cum-IP lawyer during his Honor's December '06 visit

Is Second Life enjoying special legal allowances due to its cultural cache?  That's the unexpected theory of a well-known law professor, at least.  Following a friendly visit by the FBI, Linden Lab recently set a prohibition on gambling advertisements in the viewer.   Evidently this was just a preemptive precaution, for as Adam Reuters reports, the "federal law enforcement officials have not yet taken an official stance on virtual gambling."  It's strange that they haven't, writes Christine Hurt of the University of Illinois College of Law, for:

According to the Department of Justice, I would be violating the Wire Act by gambling on Second Life.  (I would like the chance to fight that one in court, but I don't have time to be a test case right now.)  Also, after the SAFE Ports Act passed last Fall, Second Life would be liable for processing the exchange of U.S. dollars to Lindens and from Lindens that facilitated the illegal online gambling.  So why is the FBI so confused?

Professor Hurt's hypothesis for that confusion is surprising, especially since it indirectly involved New World Notes:

My colleague Larry Ribstein has coined the phrase "the Apple Rule" to describe the seeming willingness to prosecute corporate officers for options backdating, which may or may not be illegal, but not popular officers such as Steve Jobs, who have done the same exact thing.  Perhaps we could call this "the Posner Rule"; Second Life is so hip and cool and brainy that even lovable jurists like Richard Posner drop by every now and then.  So how could Second Life be criminal like those sleazy online gambling sites based in foreign countries and run by foreigners?

It's a fascinating theory, though of course, legal minds far larger than mine may have another take.  Read it all here.

Comments

[Ananda]

The Posner rule makes for some colorful speculation, doesn't it? Philip's certainly got the face...

But no, I'm sure the real trouble is that while the Lindex is used to cash out illegal gambling winnings, this is a tiny minority of the money being funnelled through there. Someone at the FBI is probably puzzling over whether there is a way to separate out gambling from all the legitimate uses and whether it is even worth bothering with on this small scale. What sort of statement could they make, given the current laws? If they state SL gambling is illegal, they would then have to go after Linden Lab for running the exchange. And they would have to be able to trace the money flow from the casinos through all the legitimate businesses and accounts here... after a while it begins to look more like an international mafia or money-laundering investigation. My guess is the FBI will try hard not to make any statements at all on the issue until there is a lot more money involved.

[Gwyneth Llewelyn]

I wonder if the FBI had more problems if Linden Lab did the following:

1. Outsource the LindeX completely (ideally: never "absorbed" GOM's concept). Their "currency", as it states in the ToS, has absolutely no value and all residents have to accept that when signing in to SL.

However, LL seems to be breaking their own ToS when actually providing the LindeX. This means that any suit against LL would be mostly a "word duel" — LL claiming that gambling in SL is not really gambling, since it's done with "play money" which is clearly stated as having no value, even if they allow people to exchange "tokens" by real money. But, obviously, that's what real casinos do — they have chits and tokens that are redeemable for money. I fail to see how LL would manage to "escape" that charge.

One can argue that LL's lawyers would probably try to compare SL with something like eBay without direct money transactions (and disallowing access to gambling ads is a good first step). If someone sells something illegal through eBay (weapons, drugs...), eBay gets a notification to take down that shop and close the account. So LL would probably be willing to do that, and it might be enough to comply with the law. It's a complex thing.

2. Become truly multinational. Move their HQ to, say, Holland or any other country where the gambling laws are quite different. Get a couple of non-US grids, and either allow gambling and prostitution on those (making all the servers on the US grids PG), or rotate sims across all grids, so it's impossible to pinpoint one sim as being physically on a specific server.

This is also not 100% safe. US citizens using SL would still be subject to their local legislation — and this means they would need to prevent other US citizens to come to their non-US-based casinos. On most European countries, gambling is legalised — but you would need to apply for a license and pay heavy taxes instead. Which complicates things further. There *are* countries that allow "low-end" electronic gambling machines to be set up on bars, pubs, or restaurants for a small fee, and I'm pretty sure it would be possible to get a license to allow that. Some countries would also allow "money to be given out at contests" (like what happens on TV shows, or charity fairs, etc., even if they "resemble" casino games) for a token fee, and this could apply to SL gambling as well.

The major issue is a very complex legal one. So, in the future, if you open a casino in SL, you might need to hire a lawyer and get a permit/license under your own legislation, and place a sign outside the casino saying: "No US citizens allowed". If an US resident stepped in, that would be their own problem — not the casino's owner — since regularly, every day, dozens of thousands of US citizens enter casinos all over the world (or on international waters) just to gamble, and there is nothing the US jurisdiction can do about that.

Take a look at http://www.gambling-law-us.com/. It shows how strict the gambling legislation is in the several US states, even the ones that allow "licensed gambling" like Nevada.

I wonder what will come next — forbidding the sex market in SL? Again, on most European countries, prostitution is not exactly forbidden — what is forbidden is *pimping*, or setting up brothels (legislation varies, from the very open-minded and tolerant Dutch, to the more conservative Mediterraneans). But you are allowed to do what you wish with your own body inside your own home (or property), so long as nobody else gets a profit for what *you* are doing. This is another shady area, since it definitely allows "phone sex" and pornography to be sold on the streets, but has the police after you if you open a brothel... The sex industry in SL might very well be classified as simply a variant of "phone sex", and allowed on all US states that don't explicitly forbid it. So this might explain why (surprisingly!) LL is much less worried about the sex industry than about the casino industry.

[John Branch]

My quick reactions:

1. Christine Hurt is very likely right that gambling in SL is illegal.

2. She's probably wrong about the reason for the FBI's inaction. It's true that Second Life is "hip and cool and brainy," but it's not nearly so well known as Steve Jobs. What's more, when the feds go after a person (i.e., Jobs), it registers much more strongly with the public than would their going after a website (or whatever the news media would call SL). In other words, the SEC is saving itself a lot of controversy by sidestepping Jobs; so far, the FBI isn't saving much but its own effort by sidestepping SL.

3. The FBI has enough people, and probably enough organizational efficiency, that it could be taking a harder line on virtual gambling if it wanted. It probably isn't sure yet how to go about it and--bigger reason--doesn't see the violation as a big one yet. They'll watch, and think, and get ready to pounce if and when they decide the fish is big enough to be worth cooking.