Abstract
After the Postle 1 case was decided in U.S. district court a few months back, Steve Ruddock, the editor of Gaming Law Review, reached out to me and asked me if I wanted to do a short article on the case. I originally declined, because to properly discuss Postle, you need to discuss two things: why plaintiff attorneys are choosing federal court rather than state court as a venue, and why Kelly v. First Astri, 2 the case controlling gambling cheating cases in California, is flawed. The U.S. district court judge in the Postle case heavily relied on Kelly to make his decision in granting defendants' motion to dismiss.
Frankly, to properly dissect Postle would be a much longer article, and one for a more academically oriented type of writer. What I felt like I could do here was to give more of a practical guide to how to win such a case in the future. I'm hoping this article will give future plaintiffs a template as to how to distinguish Kelly, whether it be in state or federal court.
For those just tuning in, so to speak, Mike Postle is a professional gambler who was playing in a small stakes no-limit hold'em game at a cardroom in the Sacramento, California, area. Some cardrooms will stream a game online to generate publicity for the cardroom, as viewers can watch the game online. There are several ways the cardroom can accomplish this, but in this particular cardroom, they used RFID-enabled chips and cards. While the “featured” game is usually played for larger stakes, this one was a $1–$3 blind, $100 buy in game, which is more or less probably the most popular game size at cardrooms worldwide.
Postle was a regular in this particular game, and won a stunning, statistically unlikely amount of money. He played as if he could see the opponents' hole cards, and that's what brings us here. 3
The players that were allegedly cheated filed suit in federal court, and the trial court judge granted defendants' motion to dismiss, citing Kelly as controlling, which is discussed below; but for now, the short form which is that by judicially made public policy, gaming debts are unenforceable in California, no matter if the gaming debt was caused by fraud. It is unclear whether this policy, which dates back to the early days of California's statehood, is derived from the early eighteenth century English Statute of Anne or is based on a theory of in pari delicto; namely, that a contract to gamble is by its nature illegal, and thus courts cannot exercise jurisdiction over the matter, leaving the parties to settle the matter on their own. 4
As someone who was a successful professional poker player in the late ’90s, I've long understood that poker was invented almost 200 years ago by card cheats for card cheats, and not a whole lot has changed since then (although the larger games are a lot cleaner now than when I was playing). Assisting me in that early understanding were a number of mentors who were either game protection specialists, or successful casino cheats themselves, and a couple in the first category were in the second category before they went into consulting. Two in particular, an old school Vegas guy and an old school Gardena guy (who produced his own series of videos in the ’80s), were extremely helpful. 5
A couple of weeks later, I decided that I could write an article, as long as I could focus squarely on why Kelly is flawed, and make this a much shorter project. It did surprise me that the attorneys working the plaintiff side of Postle couldn't get past a motion to dismiss. 6 It didn't surprise me they wanted to try the case in federal court, so, perhaps we discuss that first using some personal experience of my own.
Once upon a time, I invented a table game for play in California cardrooms called Newjack. It's essentially blackjack with a few changes: (a) the A is worth one point only; (b) the 2 is the pivot card, with a value of 2 or 12; (c) a “Natural Newjack” was a 22-point value hand, with a 10 value card and a 2, and paid 7:5; (d) if you and the dealer both went over, but to the same total, say 25, the hand was a push instead of a loss. Newjack featured standard blackjack optional rule features such as surrender, double after split, among others.
So, my business partner at the time and I did everything in accordance with what the State of California asked, but there was no state-level gaming enforcement or regulation at that time. The de facto gaming commission at that time was local law enforcement, usually the county sheriffs. There were some disagreements over the legality of Newjack; the chiefs of police in two LA County cities where the games were offered in legal cardrooms opined the game was legal, but the Los Angeles Sheriffs Department (LASD) said it wasn't.
So, we went to court and lost, with the trial court judge saying “if it walks like a duck and talks like a duck, it is a duck.” 7 Unfortunately for us, that's not how the penal law works in California where, while penal statutes are not strictly construed, any ambiguity in the statute must be resolved in defendants' favor. 8 Per Penal Code § 330, “twenty-one” is proscribed, but not “Blackjack.” This led to a number of blackjack variants being introduced, all with the target of 22 and not 21. They all seemed ok with county law enforcement, but not our game.
So, we appealed and we lost there as well. 9 In a remarkably worded decision, the court held that “It is the potential for a banked game under Newjack's rules, and not the current mode of play, which determines whether Newjack is a banking game.” 10 The court went on and further opined that
However in Newjack, the player-dealer position does not have to rotate among the players. If the other players decline to accept the player-dealer position, one player can act as a player-dealer for repeated hands and such a player need not go broke after a few hands. A player with a significant amount of money to bet can hold the position of player-dealer for a long time, and thus keep the inherent playing advantage for him or herself. 11
This decision is plainly wrong on a number of levels: the analysis is an impermissible expansion of construction of a penal statute, the court's reasoning is based on facts which did not exist in the instant case, and perhaps most egregiously, the published rules of Newjack were in conformity with state guidelines at the time. Moreover, the passage in question is ambiguous, and perhaps intentionally so. The court's decision could fairly be read as conferring penal liability on an actor because of the passive actions of a third party (the decision to not be player-dealer).
Moreover, the Oliver decision flies in the face of the same division of the California Court of Appeal's decision in Huntington Park Club Corporation v. County of Los Angeles, 12 which allowed player-banked games in California. What the appellate court did was essentially to construct a judicial bill of attainder on Newjack. Virtually every other blackjack variant was approved for play by LASD, and then later by the California Department of Justice. Every other game in the state, whether it be a blackjack variant or not, had the same identical betting structure as did Newjack.
In sum, the court was more or less just making up facts to suit its agenda. What is particularly unfortunate about this case was that in our system of government, the judicial system is to protect minority interests. As an entity with no political power nor with access to that power, my business partner and I could fairly say that we're a minority interest. Instead, the court sided with special interests. There was a large LA County casino who had an interest in a game company started by one of their employees, and they were very public about wanting us to lose the case. That game company was purchased by a large, internationally known gaming company, for their table game portfolio, a number of years ago.
So, I can't help but think that this case, along with Kelly, would drive future prospective plaintiffs to federal court, because counsel might believe that they would never get a fair trial in a gaming case in state court. Those attorneys may well be right.
Consider Vu v. California Commerce Club, Inc., 13 a state court case which was decided in a different appellate division than Kelly, two years before the Kelly decision, and was cited by the defense in the Postle case. Vu involved a lawsuit to recover monies allegedly lost in an “Asian Stud” 14 game at a Los Angeles County cardroom.
In finding for defendant, the court noted,
Causation of damages in contract cases, as in tort cases, requires that the damages be proximately caused by the defendant's breach, and that their causal occurrence be at least reasonably certain. (Civ. Code, §§ 3300, 3301.) No such certainty or probability appertains with respect to plaintiffs' gambling losses, assertedly the result of cheating. Assuming arguendo that an adequate causal connection could be established between the club's alleged breach of security obligations and the cheating that plaintiffs allegedly encountered, no such relationship appears between the cheating and plaintiffs' losses. That is because winning or losing at card games is inherently the product of other factors, namely individual skill and fortune or luck. It simply cannot be said with reasonable certainty that the intervention of cheating such as here alleged was the cause of a losing hand, and certainly not of two weeks' or two years' net losses (as alleged by [plaintiffs] respectively).
15
Here, the main difference between Vu and Kelly was proximate causation of damages. In Kelly, a named defendant testified as to precisely how the cheating occurred. In Vu, there wasn't even indirect evidence, other than hearsay, let alone the direct evidence that was supplied in Kelly.
One could argue that Vu is distinguishable because it can be fairly implied that the Vu court could have simply had done what the Kelly court did and just say California public policy forbids all recoveries of gambling losses, whether by tort theory or contract theory, and chose not to. It's a fair implication that the Vu court could exercise jurisdiction over a gambling loss caused by fraud. However, there is an equally fair argument to be made that the Vu court only went as far as it needed to go in resolving the matter in terms of constitutional jurisprudence.
Finally, I should probably note that in the “Asian Stud” games, as played in LA County cardrooms, cheating was rampant, and almost impossible to protect. I remember one coworker who was responsible for being a floor supervisor in the Asian Stud section ( cardrooms generally had a dedicated area for playing this particular game), and he would complain about how many decks they went through in a shift, as they were always being marked. 16 I can also tell you of a regular game at another LA County cardroom, one that featured some high profile people in that game, and you could see the marks on the cards (they were using translucent daub, also known as a “glim”) from quite a distance away. 17 It was like the marks were painted on with a big paint brush, it was that obvious. Unfortunately, plaintiffs couldn't establish admissible evidence that they were cheated, and that's probably the main reason why they lost.
As bad as the holding was in Oliver, Kelly is arguably even worse, particularly if you look at the history of the case and understand the political situation at the time the case was decided.
The facts of Kelly are fairly straightforward. At the time, tribal casinos in California were offering (Class II) player-banked blackjack. They had legal authority to because of the Indian Gaming Regulatory Act (IGRA), as long as the tribe didn't bank the game themselves, and the players took turns banking the game, and because of state law, which defines “21” as necessarily a banking game. In California, if 21 becomes player banked and not house banked, it is no longer a § 330 proscribed game.
Kelly was playing Class II blackjack and was cheated by defendant, a company providing management services to a San Diego area tribe, to the tune of $200,000. Unlike the Vu case, there was direct evidence of cheating and there was no argument that the cheating was the proximate cause of plaintiff's poor result. The court of appeal ruled that because the transaction was construed as a gambling debt, and that the collection of gambling debts in California are proscribed as a matter of public policy, plaintiff could not recover his losses and summary judgment in favor of defendant was affirmed.
While it is clear from the pleadings that Kelly was suing on a theory of tort (larceny/conversion), the court trotted out 11 cases in support of its analysis; except for one case, they were based almost exclusively on contract theory. The overwhelming majority of these cases involved the house chasing a customer for money owed given on credit. While the court's historical knowledge of gambling on credit in California was impressive, it was no less nonresponsive to the issue in front of them.
The California public policy on gambling debts being unenforceable dates back to 1851, or less than a year after statehood. In Bryant v. Mead, 18 plaintiff ran a (licensed) gambling hall in San Francisco, and was attempting to collect a debt on bad checks given to plaintiff. While the gambling hall was licensed as gambling was not proscribed in California until 1872; in fact poker was still legal after the equivalent of today's Penal Code § 330 was enacted. 19 Although there have been attempts to enact a statute permitting recovery of gambling debts, none have ever succeeded. As gambling was a disfavored business in the law until 1984, when the Gaming Registration Act was passed, it was easy for courts to use a theory of in pari delicto to dispose of them. The Gaming Registration Act took the cardrooms out of the Penal Code and into the Business and Professions Code, which was the first step to making cardrooms a regulated business in California.
The one case cited by the court which comes closest to Kelly is a 1946 case, Wallace v. Opinham. 20 In Wallace, plaintiff complained he lost $9,250 in an illegal game of blackjack where he was cheated by use of marked cards.
The Wallace court summarily disposed of the case, stating that plaintiff “could not prove the alleged fraud and deceit, by means of which he lost his bets, without evidence that the fraud was exercised incident to his participation in [a] game of cards which is prohibited by statute. It follows that the parties thus were in pari delicto with respect to their unlawful playing of blackjack.” 21
The major difference between Wallace and Kelly is, of course, Wallace played in a game which was certainly illegal. Kelly played in one which wasn't (although the Kelly court would disagree). By comparison, the Postle plaintiffs played in a legal, regulated cardroom.
Next, the court analyzed the decision in Crockford's Club Ltd. V. Si-Ahmed. 22 In Crockford's, defendant wrote a number of bad checks to plaintiff, a UK casino, to cover gambling losses of £400,000. Crockford's obtained a default judgment in the UK, and then used that judgment to obtain a judgment in California against defendant.
While Crockford's is similar to Kelly that the incident occurred in a “sovereign nation” (compare a tribal reservation to a foreign country), the court held that the judgment was enforceable. The court noted that the transaction took place in the UK and not California, and while this decision is clearly an outlier, the court nonetheless stated that, “it cannot be seriously maintained that [the] enforcement of said judgment is so antagonistic to California public policy interests as to preclude the extension of comity in the present case.” 23
The Crockford's court's reasoning was rejected by the decision in Metropolitan Creditors Service v. Sadri,
24
the court noting here that:
Indeed, the prohibition against legalized gambling on credit goes all the way back to 1710 in the Statute of Anne, which permitted gambling “at the palaces of St. James, or Whitehall when the sovereign is in residence” but limited such gambling to “ready money only.” (9 Anne, ch. 14, § 9.) Thus, it matters little that gambling itself has become more accepted in California. The cornerstone of the Hamilton rule against enforcement of gaming house debts is not simply that the game played is unlawful, but that the judiciary should not encourage gambling on credit by enforcing gambling debts, whether the game is lawful or not.
25
There are two issues worth noting about Metropolitan. First, the historical reference and citing of the Statute of Anne; second, that this is a case where a casino was trying to get money back it lent out to defendant; in sum, a contracts case. The Statute of Anne distinguishes between contract actions (debt recovery) and tort actions (cheating or other fraud). In the former, debt recovery is proscribed. In the latter, the victim of the cheating or fraud can recover a sum five times the amount lost as it is not considered to be a debt because theft occurred. 26
Going back to Bryant in 1851, it is reasonable to assume the court relied on the Statute of Anne in making its judgment, no matter that the court didn't discuss the statute explicitly. The Metropolitan court did, however, and that should be useful to plaintiffs such as the ones in the Postle case and the Kelly case.
Finally, the court felt like it needed to weigh in on the legality of Class II blackjack in California. Using the analysis in Oliver, the panel opined that because it was a banking game, it was thus illegal, which forbade recovery on an in pari delicto theory.
There are three problems with this approach. First, the court clearly misread IGRA. 27 While Class II clearly does not include “banking card games,” it is well understood that blackjack can be played as a house banked or a player banked card game. 28 Second, as Huntington Park taught us, player banked games are legal in California. If they are legal in California, then tribes have authority to offer them to their patrons. 29 Third, it is unlikely that a California court can exercise jurisdiction to adjudicate the legality of games played in tribal casinos in that state; any such disputes are the sole jurisdiction of the federal court system. 30
Perhaps the best way to look at Kelly is to understand the time in history when it was written. Kelly was decided at a time where tribal gaming was just about to take off in California, but had not been fully regulated yet. Tribes had started to operate Class III gaming without a compact authorizing them to do so. In November 1998, California voters passed Proposition 5, which would authorize the governor to start negotiating compacts with eligible tribes so those tribes could offer casino-type gaming on their reservations. Proposition 5 would later be held unconstitutional, as what the electorate passed was a statute, whereas a constitutional amendment was required. 31
As the tribes paid no tax on the revenues, many counties would restrict services to them. For example, if you were playing at a tribal casino in San Diego County in 1998 and started getting chest pains, you'd better find a way to the hospital because the paramedics probably weren't coming for you.
Obviously, things have changed since then. It begs the question if Kelly happened today, a state court might adjudicate things differently.
Additionally, while California is thought to be the most liberal state in the USA, and this is perhaps true, what is equally true that once you get outside of the Los Angeles or San Francisco/San Jose metropolitan areas, it becomes conservative rather quickly. San Diego County is much more conservative than LA County or for that matter, San Francisco, San Mateo, Santa Clara, or Alameda Counties. As gaming is an emotional subject for many judges, taking all of this into consideration, it's no surprise that the Kelly court ruled the way it did, for better or worse.
Which leads us back to Postle. I think in retrospect, a practitioner has sort of a Hobson's choice in terms of forum selection. A federal court gets you a more qualified judge on average, and one that is not politically beholden to any number of special interest groups, like judges in state jurisdictions nationwide. Federal judges are appointed to a lifetime term; state court judges are generally elected. But that same federal judge or justice isn't going to write you new law or overrule bad law; they're unable to. The state court judge, which is almost universally an elected position, is usually triangulating as to not offend the donor base. Cardrooms have a lot of political clout in California, and participate heavily in the political process, just like other industries do. The best solution here for the Postle plaintiffs may well have been to go with a firm that knows the local courthouse well, but finding one to take a case on contingency may well be a challenge within itself.
By the summer of 2023, Californians will likely be able to legally bet on sports. One, perhaps two things will occur for this to happen. Either the tribes, which will have their own ballot initiative proposal on the 2022 ballot, 32 have their proposal approved by the electorate, or the legislature creates their own initiative, or one is created by interest groups aligned with cardrooms and tracks, or some combination of the three. It is understood that California is the largest gaming jurisdiction in the USA, and second in the world, across all verticals (it is slightly bigger than Nevada, but Macau remains the worldwide champ).
The advent of sports betting gives California an opportunity to reform how it regulates gambling and, in particular, clean up its spotty history of jurisprudence, regulation, and enforcement when it comes to gambling and money laundering activities. One area should be enacting a statute to permit recovery in gambling cheating cases. There was one attempt in 2011, 33 but the bill didn't get out of committee.
It's well understood that California is the fifth largest economy in the world. When you have the fifth largest economy in the world, and are the biggest gaming state in the USA, even bigger than Nevada, and perhaps the world, it should be as a matter of course that you have regulation and enforcement worthy of that status. One could argue that the state's needs to regulate and enforce gaming statutes in a more concise, sophisticated manner may have worked in Postle's favor here.
The state would be well advised to understand why this particular result happened here, and enact legislation to better protect cardroom customers.