SAN FRANCISCO — In a ruling of particular interest to online adult businesses, a federal appeals court has decided that a national community standard to define Internet obscenity “does not raise grave constitutional doubts.”

The ruling by the 9th U.S. Circuit Court of Appeals affirmed fraud, conspiracy, obscenity and money-laundering convictions and sentences for Jeffrey Kilbride and James Schaffer, but remanded to the lower court for correction three counts described as felonies as misdemeanors.

A three-judge panel weighed a joint appeal of the first convictions in the jurisdiction of the 9th Circuit for Internet obscenity not involving child pornography and the first convictions ever under the federal CAN-SPAM Act.

The appellants’ arguments focused on an unconstitutional jury instruction that allowed a jury in Arizona to convict Schaffer and Kilbride of obscenity based on lay witness testimony as to community standards existing in places all over the U.S.

On Wednesday, the court agreed with Kilbride and Schaffer’s contention that a national standard is more appropriate for Internet communications and that the lower court failed to instruct the jury to that standard.

“Our holding that application of a national community standard to define Internet obscenity does not raise grave constitutional doubts on its face is not to be interpreted as a holding that any constitutional challenge to such application will necessarily be meritless,” the court said in its ruling.

The opinion, written by Judge Betty Binns Fletcher, also said that the 9th Circuit panel’s decision joins U.S. Supreme Court Justices O¹Connor and Breyer’s holding that “a national community standard must be applied in regulating obscene speech on the Internet, including obscenity disseminated via email.”

Gary Jay Kaufman of The Kaufman Law Group and Greg Piccionelli of Piccionelli & Sarno — attorneys for Schaffer and Kilbride respectively — argued the case before a three-judge panel of the 9th Circuit.

Piccionelli said he was glad that the 9th Circuit to made this long-overdue change in obscenity law.

“It has been clear to those of us practicing in the Internet law area for the last 15 years that the old formulation of letting the most conservative communities in America dictate what is or is not obscene on the Internet is deeply destructive to our fundamental freedoms,” Piccionelli told XBIZ.

Kaufman told XBIZ that the ruling was a pyrrhic victory for the appellants because their convictions still stand.

“While the court agreed that a national standard was proper, the justices affirmed Schaffer and Kilbride’s convictions, holding that because their former trial counsel [who were not their appellate counsel] had failed to properly object at trial, the error was not ‘plain’ and therefore did not require reversal,” he said.

Nevertheless, Kaufman was pleased about the decision and even said that the landmark ruling could have legs throughout other jurisdictions, besides the 9th Circuit.

“This holding sounds the death knell for the long-standing Miller test for determining whether materials are obscene when the materials are published via the Internet or in email communications,” he said. “

“What the court is saying, in effect, is that the days of trying to fit horse-and-buggy law to the digital age are over. And it makes sense – how can you subject a person to criminal prosecution for having the bad luck to open their email or log onto a website in Boise, Idaho rather than Los Angeles?”

Kilbride and Schaffer began their bulk email operation in 2003, using international servers and mismatching “reply to” and “from” addresses, making it difficult to trace the spam emails, according to court filings.

The Justice Department said they registered their domains under the name of a “fictitious employee at a shell corporation” and that the two had set up in the Republic of Mauritius, another CAN-SPAM violation.

They also are alleged to have used overseas banks to launder and hide money from the IRS.

Schaffer also was charged with 2257 violations, after the Justice Department discovered he had not maintained appropriate records for the adult performers featured on Boobs.com, Cumshots.com and FaceSat.com, three websites he operated overseas through The Compliance Company and Ganymede Marketing.

With the convictions, both were fined $100,000 and forced to hand over $1.1 million of their $2 million in spam profit.

They also were ordered to pay America Online $77,500 after the conglomerate claimed to have had 1.5 million customers complain about spam.

Colin Hardacre, also of The Kaufman Law Group, told XBIZ he had mixed emotions in the case.

“It’s tough,” Hardacre said. “We won the battle, but lost the war. We have been living with this case for two years now and to change the law this way is definitely bittersweet.”