Will the Kentucky Gamble Pay Off for Plaintiffs’ Attorneys?
It’s been almost six months since the Kentucky domain name seizure bomb was dropped on the i-gaming industry. We’ve covered the legal machinations in detail along with analysis of experts. But, one thing I haven’t read much about is the background on the representation in this case. When I heard that this was a contingency case, I was intrigued and confused.
But, first, let’s look at the merits of the case for just a minute. To this layman, the issues at hand seem to be: whether domain names are property, where they are “located” and whether a domain name constitutes a “gambling device.” Well, the latter seems pretty simple to me but the “property” issue will be interesting to watch. As someone involved in brokerage services of businesses and having sold one myself, there’s a practical argument to be made for a domain name being property, at least IP. The domain names (brands) are listed as part of an asset sale. But, whether it meets a legal definition of property remains to be seen.
For frustrated prosecutors, legal chokepoints have been targeted repeatedly since the i-gaming industry began in 1995. These include (now) domain name registrars, advertising/broadcasting outlets, and payment processors.
Electronic Frontier Foundation (EFF) attorney Matthew Zimmerman was quoted in the National Law Journal as saying, “ Kentucky finds it difficult to get after the people it doesn’t like, so it flays around to find someone it can hold responsible.” He further noted that, if this case was successful, it would elicit First Amendment challenges as well those based on the dormant commerce clause. This is an “anyone-in-the-Internet business issue” he said.
John Morris of Center for Democracy and Technology (CDT) said this was the first of its kind in attempting to use domain names to control something on the Internet. But, for me, the real back-story is who is actually bringing this case. I’m always drawn to determine the motivations behind actions like these. Let’s start with a little history as found in Kentucky documents. As it turns out, in October 2007 (a full year before EiG 2008 when 1,200 people stood in awe as we told them of this turn of events), the former Ky. Governor Ernie Fletcher and the Justice and Public Safety Cabinet issued a Request for Proposals (RFP). It basically said that the state’s legal services were strapped and they were seeking private attorneys to work with them on a contingency basis.
On October 5, 2007, the RFP was let asking for the following: Investigation of potential claims for itself by the Commonwealth or its citizens or its residents for losses sustained in relation to illegal gambling enterprises or gambling transactions; protecting and pursuing the right to recovery of the Commonwealth and other parties on those claims; determining whether referral for criminal investigation or prosecution is warranted; and after determining whether litigation is appropriate representing the Commonwealth in proceedings to recover those claims.
At the quick October 12 deadline for responses, Lexington law firm Hurt, Crosbie and May appeared to be the only respondent with a no fee, 25% contingency proposal. In looking over their experience, these attorneys tout lots of years representing various state agencies in the state. Bill May, for example, illustrated years of practice as general counsel for the Kentucky Lottery. Bill Hurt did work with various state agencies and, as well, had experience in complicated cases as defense attorney in the Fen Phen class action case.
Very soon (October 31), then Governor Fletcher granted an “employment contract” to that firm by Executive Order. At the end of that year, there was a change in governorship. That office was won by Steve Beshears who had advocated for casino gambling in the state as part of his campaign platform. Later, June 30, 2008, Kentucky renewed the contract saying it was not practical to rebid but stated that Kentucky would pay $100 as good faith measure of their commitment. At some point, Robert Foote, an Illinois class action attorney, joined the legal team. In the Louisville Courier Journal, he charged that “operators ‘steal $170 million from Kentucky every year.”
While we’ll never know, Foote’s firm is rumored to have gambled over $1 million to establish “sufficient minimum contacts” of these operators with Kentucky residents. Sounds like that could have provided some fun for some local law interns.
But, several who have been present in the court room verify that the figure of $1 billion had been bandied about as the “estimate” of what had been lost by Kentucky residents to online gambling sites. (They must either have more residents than we think or they’re in the “whale” category in a big way.) So, doing the math based on that premise, the plaintiff’s attorneys were seeing a windfall potential of $250 million…..not chump change and perhaps worth the upfront gamble to do this on speculation.
As you can see, this was a pretty unusual set of circumstances. While the industry is used to having state Attorneys General on their trail, this was not the case here. In fact, in November, 2008, IMEGA tried to draw the Kentucky Attorney General into the fray; but, the AG’s office filed a motion to dismiss the AG from these proceedings which the Court granted.
How was this to work? First of all, someone on the plaintiff’s side came up with the idea of snagging the domains. Perhaps they had watched the Bodog domain name shenanigans and the light bulb went off. Perhaps they figured that, like that case, no one would show up and they would get a default judgment. Then, they get possession of the domains and begin bargaining with the site owners to: 1) block Kentucky residents (presumably the top priority) and 2) sell the domains back to the owners so they could get back to the business in the rest of the world.
These sorts of relationships are not completely unknown. One might remember the tobacco settlements in the ‘90s which were akin to this. These efforts wound up with a master settlement between the four largest tobacco companies and the Attorneys General of 46 states to the tune of $246 billion. Plaintiff’s attorneys' fees in this case totaled $11 billion, in some cases amounting to $110,000/hour. So, how was this scenario was to work in the Kentucky domain name case? To the “white hats”, that’s simply pursuing the right to recovery." To the “black hats”, it wa a shakedown or extortion.
The legal wranglings continue with the recent appeal by these plaintiffs’ attorneys to the Kentucky Supreme Court. But, the real side show will be to watch if this gamble pays off for the plaintiffs’ attorneys involved who have paid out real money and lots of non-billable hours to bring these actions.