Judgment Heard ’Round the Gambling World

Standing of the Commonwealth to bring suit

First, the appellants argued that the LRA's third-party recovery statute is intended to benefit only natural persons—either dependents of a gambler impacted by losses, or else “informers” who provided information about illegal gambling that was not uncovered by the government. ²⁴ The appellants pointed to canons of statutory interpretation to support their position as well. Their brief cites the United States Supreme Court for the principle that statutes employing the term “person” are ordinarily presumed to exclude the sovereign, especially where other statutes give the sovereign specific remedies, including forfeiture. ²⁵ In 1873, appellants pointed out, the LRA was amended to require forfeitures be made solely for the benefit of the sovereign. ²⁶ But this action cannot be classified as a forfeiture, because such an action would require an indictment and criminal conviction. ²⁷

The appellee, the secretary on behalf of the Commonwealth, argued that the text of the statute requires including a body politic in the definition of “person.” ²⁸ If the framers intended to limit the meaning of the term in the way appellants suggest, the Commonwealth argued, they certainly knew how to do so. ²⁹ To support his argument, appellee pointed to Commonwealth ex rel. Keck v. Shouse, which he read to hold that the term “person” includes the Commonwealth and its agencies. ³⁰ Appellee further supported his textual argument by pointing to the indefinite article, “any,” which modifies “person.” By choosing this language, appellee asserted, the General Assembly clearly authorized a broad array of potential plaintiffs, including the Commonwealth. ³¹

What is more, appellee argued, reading the term “person” in the LRA to include the Commonwealth is entirely consistent with the purpose of the statute—to suppress illegal gambling. ³² Preceding anti-gambling statutes that lacked a third-party recovery provision were ineffective, appellee asserted, and the financial motivation that the LRA added is critical to its success. ³³ Including the Commonwealth as a “person” that could recover gambling losses, and therefore deter gambling operators, furthers the LRA's purpose. ³⁴

Standing of the secretary

Appellants next argued that, even if the Commonwealth could bring suit under the statute, the secretary did not have the authority to bring this claim on its behalf, because only the state attorney general has the ability to bring suit on behalf of the Commonwealth unless a statute specifically confers it elsewhere. ³⁵ No statute grants the secretary that authority, the appellants claimed, and the duties of the position are limited to particular criminal justice-related functions. ³⁶

The appellee contended that the Kentucky Constitution expressly confers on the governor of Kentucky the duty and authority to enforce the Commonwealth's law. ³⁷ Where the General Assembly enacts a statute, but does not specify the manner of carrying it out, the constitution requires the governor to carry it out and gives him the right to choose the means to do so. ³⁸ In addition, the appellee pointed out, a Kentucky statute, KRS § 11.065, makes the secretary a member of the Executive Cabinet and expressly requires and authorizes the secretary to assist the governor with his duties. ³⁹

Definition of a “winner” under the LRA

A third point of contention in the parties' briefs was whether the PokerStars defendants were properly characterized as “winners” for the purposes of the LRA, and thus potentially liable under that statute.

The appellants resolutely argued that Pokerstars was not. ⁴⁰ Only poker players win or lose to other poker players, and here Pokerstars was merely the operator of an online platform for poker games. ⁴¹ Looking to courts' interpretations of identical language in other states' loss recovery statutes, the appellants noted that courts have repeatedly held that a host who does not participate in a wager is not liable as a winner, even if the host receives a “rake.” ⁴² The principal adverse Kentucky precedent, Triplett v. Seelbach, ⁴³ which held that the owners of a poker room are “winners,” should not control here, appellants noted, because that decision was based on a statutory provision allowing a gambling “loser” to sue the proprietor of a place where gambling is conducted for the entire amount of his losses. ⁴⁴ That provision since has been repealed. ⁴⁵

Appellee, on the other hand, contended that PokerStars is liable as a winner under the LRA because it took a rake. ⁴⁶ The Commonwealth cited Triplett, along with other Kentucky cases, to argue that Kentucky precedent is in accord that gambling operators can be treated as winners under the LRA, even if they never themselves placed wagers. ⁴⁷ These cases, appellee argued, should be favored over those of other states. ⁴⁸ Appellee also asserted that appellants incorrectly argued that Triplett is based on a statute that has since been repealed. ⁴⁹ In Triplett, appellee said, the losing players sued under two statutes; the court's ruling in that case depended on the statute KRS § 372.020, which has not been repealed. ⁵⁰

Sufficiency of the pleadings

In its complaint (amended after initial discovery), the Commonwealth alleged only that 34,000 Kentucky residents had lost approximately $290 million on bets of five dollars or more over the course each 24-hour period from October 12, 2006, to April 15, 2011. ⁵¹

Appellants argued that those allegations were insufficient to state a claim for recovery under the LRA. ⁵² The Commonwealth, appellants argued, needed to plead facts as to specific losses by specific residents at specific times. ⁵³ That is because, they said, each loss represents an individual potential LRA claim that requires separate proof of the amount lost. ⁵⁴ In addition, they added, the LRA's third-party recovery provision requires establishing that the loser has not already recovered, which the Commonwealth failed to do in its complaint. ⁵⁵ If the court were to deem satisfactory the generalized nature of the Commonwealth's allegations, the appellants posited, it would undermine the LRA's goal of encouraging informers to share information about illegal gambling with the government. ⁵⁶

Appellee responded that the complaint was sufficiently pleaded. Kentucky's pleading standard, appellee contended, only requires that a complaint provide a short and plain statement that demonstrates the pleader is entitled to relief. ⁵⁷ And the defendants' motion to dismiss demonstrated that defendants were fully on notice of the nature of the Commonwealth's claim. ⁵⁸ In addition, appellee argued that the proper standard for reversal of the trial court's determination that the complaint was sufficiently pleaded is abuse of discretion, and the appellants did not offer any evidence to support such a finding. ⁵⁹

Proper method of calculating losses

The sheer size of the damages awarded by the circuit court—$870 million after trebling—predictably drew scrutiny from the litigants about the method by which it was calculated. Calculation of damages under the LRA is complicated when the losses of repeat players are at issue. Simply, the statute does not address whether courts should award recovery of all of a player's losses irrespective of their winnings, known as a “gross” loss figure, or offset their losses by the amount they won, known as a “net” loss figure. Calculation of damages is further complicated when the targets of a third-party recovery action are not themselves players, but only operators, as is the case in Stars Interactive.

According to the appellants, binding Kentucky precedent, reflected in the nineteenth-century precedent Elias v. Gill, requires courts to limit recovery under the LRA to a player's net losses by accounting for the player's winning hands. ⁶⁰ Such a rule is necessary to avoid providing a windfall for a loser—a gross calculation of losses, appellants said, would eliminate the risk of losing money, while preserving hope for gain. ⁶¹ The appellants then challenged the circuit court's interpretation of another case, Caldwell v. Caldwell, ⁶² which (continuing the trend of hoary precedents) predates Elias and which the circuit court interpreted as holding that use of gross loss measurements is proper in third-party suits. Caldwell is narrower than that, appellants said. ⁶³ Its holding was limited to suits by creditors of a losing gambler and did not refer to suits by any other third party. ⁶⁴

In support of the circuit court's decision, appellee first employed a textual argument. It argued that appellants ignore the plain text of KRS § 372.040, which does not mention “rake,” “profit,” or “amount received.” ⁶⁵ It allows recovery of “treble the value of the money or thing lost,” and that is what the circuit court awarded here. Next, appellee turned to case law. According to the Commonwealth's reading of Kentucky precedent, “netting” has never appeared in a case with similar facts. ⁶⁶ Caldwell stands for the proposition that any party seeking to recovery under the LRA other than the losing player himself is not obligated to set off losses. ⁶⁷ And, unlike Elias, appellee claimed, the winner in this case, PokerStars, never lost money on the games. ⁶⁸ Appellee argued that because appellants do not seek to net their lost bets, but rather the bets lost by other players, they need to provide evidence of an authority permitting them to assert other players' losses. ⁶⁹ Appellants did not do so, appellees noted, and no such authority exists. ⁷⁰

Trebling damages

For their part, appellants contended that trebling damages assessed against defendants for a final damages figure of $870 million was contrary to settled Kentucky precedent. Citing Hartlieb v. Carr (a comparatively sprightly nearly 70-year-old decision), appellants argued that trebling damages is within the discretion of the court, and its purpose was to provide an incentive for informers to come forward with information about illegal gambling operations at a time when government and police resources were much less effective than they are today. ⁷¹ The incentive that trebling creates is not needed in this case, appellants argued, because the Commonwealth has an incentive to suppress illegal gambling independent of the financial payoff from trebled damages. ⁷² Finally, appellants contended that the sheer size of the damages awarded by the circuit court violate the excessive fines and due process clauses of the U.S. and Kentucky constitutions. ⁷³

Appellees responded that the amount of damages awarded by the circuit court was not excessive; the judgment was large because of the large size of PokerStar's illegal gambling business. ⁷⁴ It added that trebling is not discretionary, as the LRA plainly provides that damages shall be trebled. ⁷⁵

Entry of default judgment as a discovery sanction

The final major point of contention in Stars Interactive was the circuit court's decision to enter default judgment against the defendants on the issue of liability as a discovery sanction. Both parties focused their argument on whether the appellants' discovery violations—failing to produce defendant company officers for deposition and produce poker data—met factors that Kentucky courts use to determine whether default judgment can be awarded as a discovery sanction, from the case RT Vanderbilt Co. v. Franklin, a decidedly out-of-place 10-year-old decision. ⁷⁶ Factors include whether the noncompliance was willful or in bad faith, whether the opposing party was prejudiced, whether the party was warned that default could result from noncompliance, whether less drastic sanctions were considered or imposed, and whether the sanction bears some reasonable relationship to the seriousness of noncompliance. ⁷⁷

Appellants contended that defendants' conduct fell short of what the Vanderbilt factors require. ⁷⁸ They argued that defendants, as a corporation, were not acting in bad faith when they failed to produce the officers for deposition because corporations do not have control over their officers. ⁷⁹ Additionally, appellants argued, the Commonwealth was not prejudiced by the inability to depose the officers, because it never contended that the officers possessed unique information that they could not obtain elsewhere. ⁸⁰ They also asserted that they were never given a timely warning that their failure to produce the officers might result in default judgment. ⁸¹ Regarding the production of data, appellants relied on similar arguments, and added that the court's failure to give defendants the opportunity to produce the data after the court overruled their objections and before it entered the default should preclude the application of the penalty as a discovery sanction. ⁸²

Appellee sought to challenge appellants' characterization of the facts as “revisionist history,” contending instead that their tactics were nothing more than deliberate stonewalling of discovery. ⁸³ Appellee added, pointing to the record, that appellants were warned of the consequences of their behavior. ⁸⁴ Appellee also argued that the legal standard for overturning a circuit court's imposition of discovery sanctions is abuse of discretion. ⁸⁵ Given the totality of the facts and circumstances, appellees argued, the appeals court was in no position to overturn the circuit court's entry of default judgment. ⁸⁶

Standing to sue

In assessing whether the Commonwealth has standing to sue under KRS § 372.040, the appeals court first considered whether the secretary has the authority to bring a claim on behalf of the Commonwealth as a sovereign. ⁸⁹ The court concluded that he did. ⁹⁰ Although appellants argued that the governor's executive order, upon which the secretary relied, impermissibly expanded the secretary's power, the court held that the governor properly employed the secretary in exercise of his duty and authority to enforce the laws of the Commonwealth. ⁹¹ The governor's utilization of the secretary to help him do that, the appeals court pointed out, was specifically authorized by KRS § 12.210, which gives the governor or any department with the governor's approval the authority to employ private counsel to render legal services for an official entity, and KRS § 11.065, which authorizes and requires the secretary to assist the governor with his duties. ⁹² As a result, the secretary's engagement of private counsel to represent the Commonwealth was not improper.

Nonetheless, the appeals court held that the Commonwealth did not have standing to bring the suit. ⁹³ Employing canons of statutory interpretation to determine the meaning of the phrase “any other person,” the appeals court held that the phrase's plain meaning, when considered in conjunction with the statute's intended purpose, refers only to natural persons. ⁹⁴ The court reached this conclusion, despite the state supreme court's holding in Shouse that the word “person” “may extend and be applied to bodies-politic. … ” ⁹⁵ In the appeals court's view, the Shouse court did not intend to articulate a “steadfast rule that the Commonwealth will always be considered a ‘person’ in whichever statute the word may be used.” ⁹⁶ Rather, whether a sovereign is so included depends on the context and purpose of the statute under which the claim is brought, which is here the LRA. ⁹⁷

The background and purpose of the LRA, in the appeals court's view, exclude a sovereign from bringing suit under the third-party recovery provision. ⁹⁸ The court noted that earlier versions of the LRA required a third-party claimant to turn over half of the treble damage recovery to the Commonwealth; in 1873, that requirement was removed. ⁹⁹ That same year, the gambling forfeiture statute was amended to mandate that all seized property be retained by the Commonwealth. ¹⁰⁰ Together, in the court's estimation, these amendments evinced an intention by the legislature to provide recovery under the LRA exclusively to private citizens, while providing an alternative route to recovery for the Commonwealth under the forfeiture statute. ¹⁰¹ This reading, the court wrote, is consistent with the dual purposes of the LRA, which are to deter gambling while providing dependents of gambling losers a means of recovery in instances where the loser does not wish to pursue legal action against his winner. ¹⁰² While allowing the Commonwealth to recover on behalf of losers may accomplish the first objective, it would fail the second, since losses would not be returned to the losers or their dependents. ¹⁰³

As a result, the court concluded, the Commonwealth did not have standing to bring this claim. ¹⁰⁴

Sufficiency of the pleadings

Next, the appeals court considered the sufficiency of the Commonwealth's pleadings. It determined that its complaint was not adequately pleaded. ¹⁰⁵ Kentucky has long adhered to the notice pleading theory, according to which a claim for relief just needs to be stated with brevity, conciseness, and clarity. ¹⁰⁶ Despite the Commonwealth's protestations, the court held that because it failed to identify the particular transactions at issue, the Commonwealth's final complaint did not provide the appellants with even the most basic notice of what gambling transactions were at issue. ¹⁰⁷ It continued: “While the LRA is not subject to a heightened pleading standard, the statute itself contemplates that the plaintiff will be able to identify a particular act of illegal gambling prior to receiving a judgment.” ¹⁰⁸ “Thus, before there can be a cause of action in a third party, there must be a specific, definite person who failed to bring suit.” ¹⁰⁹ Basic facts, including the identities of the parties, the date of the conduct, and the nature of gambling losses at issue, the court concluded, simply must be present for a complaint under the LRA to be sufficient. ¹¹⁰ Without that information, the court wrote, “any private person with knowledge of the general nature of [a]ppellants' electronic gaming format could allege an LRA claim in a wholly conclusory and generic fashion and walk away a billionaire without ever having identified a single gaming transaction with specificity.” ¹¹¹