By: Neil Braslow, Esq. Walters Law Group

It is estimated that nearly $100 billion dollars will be gambled during the upcoming 2016 football season. Of that amount, nearly 95% will be gambled illegally. While considering which outlets would allow individuals to gamble legally, it is hard to forget the media blitz surrounding the daily fantasy sports (“DFS”) industry during the 2015 season that encompassed all aspects of TV and digital media. While the campaign may have been successful in recruiting a large amount of new customers, the over exposure in the media contributed to significant scrutiny and cries for much needed regulation within the industry. Only two years ago, the DFS industry was still somewhat unknown. While awareness of the industry is at an all-time high, the question remains whether DFS should be categorized as gambling or a game of skill. Since October 2015, several states have now labeled DFS as a form of illegal gambling. While the industry appeared to be exploding with popularity just one year ago, the outlook now seems a bit dimmer with questions and concerns about the overall health and sustainability of the industry. The main battleground for the DFS industry has been in the State of New York. It is estimated that nearly 10% of the revenue for the major DFS companies come from New York.  In November 2015, New York state Attorney General Eric Schneiderman sought to stop DraftKings and FanDuel, the two largest operators of DFS, from operating in the state. Schneiderman contended that DFS constituted illegal gambling under state law because they constituted games of chance, not games of skill. The companies argued that their games are legal because they require skill, not just luck. Moreover, federal online gambling law contains an exemption for fantasy sports wagering. However, in June after much debate and an expensive lobbying effort, the New York state legislature approved a bill to legalize and regulate daily fantasy sports. The debate over DFS continues as to whether it is a game of skill or a game of chance. By being categorized as a game of skill, it is highly unlikely that DFS can be categorized as illegal gambling. In order to be classified as gambling, the elements of prizes, consideration, and chance must be present. The activity can still be regulated if any of those elements are absent, but under different laws. Some states, such as Florida for example, prohibit wagering on certain skill games along with games of chance. If it is determined that the outcome of a game is determined entirely by skill of the players, DFS will escape scrutiny under traditional gambling laws. Although New York has grabbed many of the headlines, about 20 states have pending legislation that would largely permit DFS. Most of the proposed laws emphasize consumer protection and are viewed favorably by DFS operators.  While each state’s laws must be examined independently, historically, 5 states have banned DFS: Arizona, Iowa, Louisiana, Montana, and Washington. Additionally, 11 states have allowed DFS: Colorado, Indiana, Kansas, Maryland, Massachusetts, Mississippi, Missouri, New York, Rhode Island, Tennessee, and Virginia. The remaining states either have contested legislation, proposed legislation, or no legislation at all. In addition to the ongoing battle for legalization, rumors continue to swirl that a DraftKings and FanDuel merger is imminent. A merger would result in a single entity controlling more than 95% of the industry. In addition to FanDuel and DrafKings, several smaller entities exist, many of which have innovative products that are trying to grab a larger piece of the market share. DFS is only around six years old, so the industry is still evolving. New forms and versions of DFS are continuing to emerge. The industry continues to push for regulation, and the hope is that over 40 states will become regulated over the next three years. However, DFS faces a long and difficult path to legalization in all 50 states. It will likely be a battle that lasts several years, with a patchwork of inconsistent legislation throughout the country. Another major issue moving forward for the DFS industry is payment processing. In February 2016, payment processor Vantiv decided to cease processing payments by DFS operators. Many other payment processors are increasingly concerned about doing business in the DFS space, due to banking and regulatory concerns. The industry relies heavily on PayPal which is the biggest provider of DFS payments processes. It appears the legalization will solve the problem, but as previously discussed, that will be a lengthy and uncertain battle. Another area of concern for the DFS industry is protecting customer deposits. DFS startup FantasyHub suspended operations in February and owes hundreds of thousands of dollars to players. The reputation of the industry can be significantly damaged by such wrongdoing, and companies can be held civilly or criminally liable for such actions. It is apparent that there is an intense interest and appetite for the DFS industry to the general public. Therefore, it is expected that DFS will continue on a large scale, notwithstanding any regulation that may result. The legal issues have yet to be settled, thus creating both risk and opportunity for operators.

1. Introduction

The author has represented adult website operators since the inception of the industry and has defended numerous obscenity prosecutions against adult website content. Below are some of the legal and constitutional topics facing the adult website operator. This guide is by no means intended as an exhaustive list, but covers the most common legal issues encountered by adult webmasters. Adult entertainment is a “highly regulated industry” in the United States. That means the government can get away with imposing a wide variety of laws and regulations relating to the operation of adult websites, which differ from other “mainstream” goods or services. The adult website operator should become an expert on legal compliance issues governing the production, distribution, and promotion of erotic content.

2. Basic Concepts

Adult websites include things like “pay sites”, which require money from the user to access adult content; “free sites” (such as TGP, MGP, tube sites or affiliate sites) which provide free access to adult content, usually for promotional purposes; “live webcam sites” which allow users to interact with performers using webcam and chat technology, “clip sale sites” which allow content producers to upload and sell their own video clips, and “adult dating sites” which connect individuals interested in erotic social interaction. Publishing adult content is protected by the First Amendment to the U.S. Constitution, under well-settled legal precedent. The creation of adult content has been recognized as legal (and not a violation of prostitution laws) in a couple states, but the issue has not been addressed in most parts of the country. Obscenity and child pornography are illegal, and involvement with these categories of material can result in serious criminal prosecution. Obscenity laws are rarely used these days, but remain on the books as a potential tool for prosecution of adult website operators. Child pornography and human trafficking laws impose significant age verification obligations on a website operator involved with the creation, publication, or advertising of sexually-explicit content.

3. Age Verification, Model Releases, and Records Keeping Obligations

Adult webmasters must take steps to ensure that performers and website users are over the age of 18 in the U.S. Federal law imposes numerous records keeping obligations. Title 18 U.S.C. s. 2257 (and associated federal regulations) require that performers in sexually explicit media provide government-issued ID’s, and that all producers (including secondary producers such as webmasters) maintain records associated with the performer. We recommend that our clients use our firm’s mobile app; Quick2257, to compile mandatory performer age records. Model releases must be obtained and kept separately from the Section 2257 age records. These releases should be drafted by an experienced adult website lawyer, and cover issues such as right of publicity, invasion of privacy, STD’s, sexual harassment, condom usage, and character/persona rights. The publication of sexually explicit media on a website generally requires a Section 2257 disclosure statement, which identifies the location of the mandatory records. Some user-generated content or profiles are exempt from these obligations. For example, tube sites and adult dating sites can position themselves to take advantage of Section 2257 exemptions, if operated properly.

4. Intellectual Property Issues

A variety of intellectual property issues face adult website operators including trademark, copyright, and DMCA safe harbor. The adult website industry has also been targeted by numerous ‘patent trolls’ based on certain technology utilized to display the erotic media. Website operators must become familiar with the copyright registration process when producing adult imagery. Trademark concerns should be evaluated before selecting a brand name or website domain. If eligible, a trademark registration should be submitted to the U.S. Patent and Trademark Office, to protect the site’s brand name. Infringement and piracy is rampant on the internet, particularly in the adult industry. Adult website operators typically develop an intellectual property rights enforcement strategy which includes policing for infringement, transmission of cease and desist letters, DMCA takedown notices, UDRP domain name arbitrations, and litigation when necessary. Those online service providers who permit uploading of content by independent third party users must familiarize themselves with the Digital Millennium Copyright Act (“DMCA”), which provides ‘safe harbor’ from copyright infringement claims. However, the DMCA imposes stringent requirements in order to assert safe harbor status. The website operator must: 1) designate an agent for receipt of infringement notices by filing a notice with the Copyright Office; 2) Post a legally-compliant Notice & Takedown Policy, describing how to submit a DMCA notice or counter-notification; 3) fairly implement a repeat copyright infringer policy; and 4) notify its subscribers of the Repeat Infringer Policy. Intellectual property is any adult website’s most valuable asset. IP rights should be identified, registered, and enforced. We encourage copyright holders to use our mobile app; QuickDMCA to efficiently transmit DMCA takedown notices to websites facilitating the infringement of their content.

5. Obscenity, Prostitution, Indecency, and Underage Materials

This section will evaluate core content-related concerns with the production and distribution of sexually-explicit material. Pornography is legal, and constitutionally protected under the First Amendment. Obscenity is illegal, and can result in serious criminal penalties. The difference between the two is governed by the Miller Test, which focuses on whether the content is patently offensive, appeals to the prurient interest in sex, and whether it lacks serious literary, artistic, scientific, or political value. Even cartoons or pure text can be deemed obscene, under current case law. Adult website operators must be intimately familiar with the Miller Test, and avoid publication of obscene materials. The production of erotic material is also likely protected by the First Amendment, although only 2 states have court rulings which affirm the legality of adult content production; California and New Hampshire. In other states, the potential applicability of prostitution laws to the act of paying adults to engage in sexual activity is unsettled. Indecent materials are legal for adults to view and publish, but can be illegal if made available to children. Online age verification is a difficult issue, since existing technology limits the ability of a website operator to identify the age of the individual behind the computer keyboard or smart phone. However, advances in technology and database information has allowed for more effective online age verification options. We permit our clients to use the patented birthdateverifier.com device for online age verification. Other solutions exist, but none are foolproof. Bio-metrics (such as fingerprints or facial recognition) will eventually make it easier to identify the age of website users. A more serious issue arises with the age of persons depicted in sexually explicit material. Child pornography and exploitation offenses are some of the most serious crimes in the nation, at both the state and federal levels. Adult website operators must make every effort to ensure that underage materials are not published on their sites. Apparent underage material posted to a website by third parties must be reported by the website operator to the CyberTip Hotline, operated by NCMEC, pursuant to 18 U.S.C. s. 2258A. Even if all performers are over 18, webmasters should never promote their content as including any child pornography, ‘lolita’ or ‘underage’ material. Federal ‘pandering’ laws have been used to prosecute online advertisers who promote erotic material as depicting underage individuals even if all models are over 18. However, erotic content which involves performers who happen to look young, but are over 18, is not illegal. Attempts to make such ‘virtual’ child pornography illegal have been rejected by the U.S. Supreme Court, as a violation of the First Amendment.

6. Website Contracts, Policies, Terms, and Conditions

The operation of an adult website will require the careful drafting of numerous online agreements, contracts, policies, terms and conditions. The following is a partial list of the agreements typically associated with adult website operation: 1) User Terms & Conditions; 2) Advertiser Agreement; 3) Privacy Policy; 4) Affiliate Agreement; 5) Section 2257 Disclosure Statement; 6) Anti-Spam Policy; 7) Human Trafficking / Abuse Policy; 8) DMCA Notice & Takedown Policy; 9) Repeat Infringer Policy; 10) Model Agreement; 11) Website Development Agreement; 12) Copyright/Trademark Assignments; 13) Photographer (Work for Hire) Agreement; 14) Subpoena Compliance Policy; and, 15) Section 2257 Data Acquisition Form. Each of these documents is intended to address a unique set of legal concerns. Correct implementation and utilization of these important agreements and policies is essential to mitigate legal risks.

7. Promotion & Marketing

The Federal Trade Commission regulates adult website operations in the U.S. The FTC has used its authority to enforce consumer protections laws even against website operators located in other countries – often with the assistance of foreign consumer protection agencies. Any promotional device that may be considered ‘unfair’ or ‘deceptive’ can result in an FTC investigation, and the imposition of significant fines, penalties, and disgorgement of profit. Use of ‘free’ promotions to generate interest in online goods or services is a risky endeavor, and should only be undertaken in consultation with experienced advertising lawyers. The FTC, and related state agencies, have pursued adult website operators for all manner of allegedly deceptive activity involving spamming, insufficient legal disclosures, and deceptive advertising. In the often-competitive world of adult entertainment marketing, all promotional campaigns should be rigorously evaluated for compliance with state and federal advertising regulations.

8. FOSTA/SESTA

In April, 2018, President Trump signed a law entitled FOSTA/SESTA. The bill was initially drafted to combat human trafficking through websites, however its scope broadened significantly before the law passed. FOSTA made some radical changes to the functioning of the internet. First, it created a new crime of “promoting or facilitating” prostitution using an interactive computer service. Second, it removed the legal immunity from liability that online platform operators previously enjoyed, in connection with acts of prostitution or human trafficking. Finally, it lowed the standard for proving sex trafficking crimes against website operators. The combined effect of these changes was widespread censorship of sexually-oriented speech from the internet. Since online platform operators are no longer immune from claims relating to prostitution, many have chosen to avoid all risk by prohibiting all discussion or expression relating to sex. It can be difficult for an online platform operator to know whether user content in some way promotes or facilitates prostitution, so many have taken a conservative approach to legal compliance. Adult website operators must learn about FOSTA/SESTA in order to properly evaluate the new legal risks created by this legislation.

9. Conclusions & Recommendations

Adult website operation can be profitable, but comes with inherent legal risks due to the controversial nature of the content. The adult entertainment industry is a highly regulated field, and requires careful attention to legal detail. An experienced attorney, familiar with the First Amendment, Adult Entertainment and Internet Law will be an essential part of the team. Operational risks can be substantially reduced by addressing relevant legal issues prior to launch.

Additional legal information about adult website operation can be found here:

Shooting the Messenger, Stanford Law and Policy Journal
http://www.sin20.com/audio/by/title/01_06_09_-_larry_walters_-_the_new_doj_2257_revisions_you
https://www.firstamendment.com/site-articles/dmca-agent/
https://www.firstamendment.com/articles/SexLiesChildren.pdf;
https://www.firstamendment.com/site-articles/tube-sites/
https://www.firstamendment.com/site-articles/website-review/
https://www.firstamendment.com/site-articles/free-sites/
https://www.firstamendment.com/site-articles/copyright-enforcement/

Ngai Pindell and Anthony Cabot, editors. Regulating Internet Gaming: Challenges and Opportunities.Las Vegas: UNLV Gaming Press, 2013.

Internet gaming sparks controversy from corporate board rooms to legislative hallways. Unlike traditional casinos, the Internet permits people to engage in gaming activities from virtually anywhere over computers and mobile devices. Governments and policy makers looking at this activity struggle with such questions as whether regulation can assure that Internet gaming can be restricted to adults, the games offered are fair and honest, and players will be paid if they win. This book is a timely collection of eleven chapters discussing key considerations and model approaches to internet gaming regulation and outlining the important questions and emerging answers to regulating gaming activity outside of land-based casinos.

Some of the regulatory insights are taken from lessons learned in the land-based casino industry and others from the relatively newer experiences of international internet gaming providers. Contributors are among the world’s leading experts on Internet gaming. They focus on structural concerns including record-keeping, managing different taxing regimes, maintaining effective controls, protecting customer funds, and preventing money laundering, as well as on policy concerns ensuring responsible play, the detection of fraud, reliable age verification, and the enforcement of gaming laws and norms across jurisdictions.

Internet gaming is an emerging field, especially in the U.S., and the contributors to this book provide regulatory examples and lessons that will be helpful to lawyers, policy makers, gaming operators and others interested in this burgeoning industry.