Abstract
One of the most dramatic examples of the enormous financial stakes of the often complex, sometimes entirely opaque legal regime surrounding online gambling took a major eyebrow-raising step toward final resolution late last year, when the Kentucky Supreme Court reinstated a massive $870 million judgment, plus interest (totaling about $1.4 billion), against the PokerStars group of online poker sites (since acquired by Flutter Entertainment) under Kentucky's centuries-old gambling loss recovery law.
As the authors described in a prior piece explaining the case, 1 Commonwealth of Kentucky v. Stars Interactive, 2 while it was still pending on appeal at the court, its main significance to industry looking beyond its bottom-line number is not its direct legal relevance to internet gambling today. The facts underlying the case, further detailed below, reflected regulatory conditions that simply do not exist anymore. Instead, they arose during the roughly 15 years of highly publicized, unregulated U.S. internet poker that stretched from the mid-1990s through congressional prohibition in 2006 to “Black Friday” in 2011, when the last large and well-regarded brands exited the unregulated marketplace. By now, statutes of limitations that might have supported similar actions against online gambling operators have long run out.
But the case could still serve as important precedent in related cases in which, unlike in the Stars Interactive case, the online gaming activities are not manifestly unlawful. These include skill games, social casino, and “loot box” games, which generally have been viewed as lacking at least one of the required elements of gambling—consideration, chance, or prize—but nonetheless have been the subject of substantial litigation in recent years. The U.S. Court of Appeals for the Ninth Circuit's decision in Kater v. Churchill Downs, which held that the virtual in-game currency used in many of the games could be a “thing of value” within the meaning of Washington's gambling loss recovery statute highlighted the potential risk for that category of games. 3 Many of the cases alleging that social casino games and other types of online games are illegal gambling draw on the same loss recovery statutes and bases for recovery as were at issue in Kater and Stars Interactive. While the lawsuits against social casino and “loot box” games that have spawned in the wake of Kater differ from Stars Interactive in that those are class action suits rather than suits brought by a state, as was the case in Stars Interactive, the Stars Interactive decision nonetheless arms the plaintiff's bar with a road map with which to prosecute cases pending and future. We already may have seen the opening salvo in that effort with the filing of a case in which one of the allegations relies on the Kentucky statute. 4
With that in mind, understanding the nature, extent, and limitations of the decision is important.
BACKGROUND
The case that has become Kentucky v. Stars Interactive began in 2007, when Kentucky officials began investigating offshore online poker sites. 5 In 2010, the Secretary of Justice and Public Safety of the Commonwealth of Kentucky brought an action on behalf of the Commonwealth of Kentucky (the “Commonwealth”) against the owners and operators of several of the sites, including PokerStars. 6 The suit sought to recover for the state treasury gambling losses allegedly suffered by Kentucky residents from bets placed on the sites between October 12, 2006, and April 15, 2011. 7 The Secretary brought the action under Kentucky's Loss Recovery Act (LRA), which seeks to deter illegal gambling and ameliorate the financial hardship that gambling losses impose upon gamblers and their dependents. 8 The Commonwealth thereafter filed a number of amended complaints, each of which added various online poker playing fora and casinos, as well as some individuals, as party defendants. 9
The relevant parts of the Kentucky statute read:
KRS 372.020
If any person loses to another at one (1) time, or within twenty-four (24) hours, five dollars ($5) or more, or anything of that value, and pays, transfers, or delivers it, the loser or any of his creditors may recover it, or its value, from the winner, or any transferee of the winner, having notice of the consideration, by action brought within five (5) years after the payment, transfer or delivery …
10
KRS 372.040
If the loser or his creditor does not, within six (6) months after its payment or delivery to the winner, sue for the money or thing lost, and prosecute the suit to recovery with due diligence, any other person may sue the winner, and recover treble the value of the money or thing lost, if suit is brought within five (5) years from the delivery or payment.
11
Specifically, the Commonwealth alleged that the defendants hosted online poker games and took a percentage of the amount bet, won, or lost as the “rake” or “commission” for hosting poker games. 12 The complaint alleged that the Kentucky players were “losers” under KRS § 372.020, and that the defendants were “winners” under the statute because receiving a “rake” qualified them as such. 13 The Commonwealth believed that none of the Kentucky “losers” had brought a claim to recover their losses under KRS § 372.020, so the Commonwealth asserted that it was entitled to collect trebled damages from the defendants pursuant to KRS § 372.040. 14 The complaint only presented generic information about the number of Kentucky players, the number of bets, and the players' losses; it did not identify specific transactions at issue, the names of affected residents, the specific locations where gambling took place, the amounts bet, or similar specific information. 15
Kentucky's LRA has a long history: It traces back to England's Statute of Queen Anne, which was enacted in 1710 to accomplish similar goals. 16 Gambling loss recovery statutes in other states, including New Jersey, New York, and Ohio, similarly trace their histories back to the Statute of Queen Anne. 17 The Kentucky state itself dates back to the eighteenth century, although it has periodically undergone amendments. That fact underscores the central challenge the court faced in considering this case. It was asked to apply what effectively was a centuries-old law developed under different social and historical circumstances to a modern context—and to apply it on behalf of an unspecified but allegedly quite large group, rather than a single player, as all previous invocations of the statute had involved. Not surprisingly, given the vintage of the statute and paucity of precedent, the parties' briefing and court decisions are replete with citations to case law that stretches back over a century. The parties' dispute essentially posed the question: What role do loss recovery statutes play in the contemporary world of online gambling?
LOWER COURT DECISIONS
In a series of interlocutory orders, the Commonwealth of Kentucky Franklin Circuit Court, Division II, held resoundingly in favor of the Commonwealth. It found that the Commonwealth of Kentucky was a proper plaintiff, because the language of KRS § 372.040 was sufficiently broad to allow the Secretary to sue on behalf of the Commonwealth to recover the losses of the Kentucky players. 18 It granted partial summary judgment in favor of the Commonwealth on the issue of liability, and, in response to data PokerStars produced detailing the bets that Kentucky players had lost, 19 assessed defendants' liability at $290 million. 20 The court then trebled defendants' liability after finding that the three requirements for trebling in KRS § 372.040 were all satisfied, and rendered a judgment against PokerStars for $870 million. 21 PokerStars appealed to the Commonwealth of Kentucky Court of Appeals.
The Court of Appeals reversed. Of the various issues argued by the parties in their briefs, the court considered two dispositive: the Commonwealth's standing to sue, and the sufficiency of the plaintiff's pleadings. 22 Regarding the Commonwealth's standing, the appeals court held that KRS § 372.040 provided standing only to plaintiffs who were natural persons, not to a sovereign like the Commonwealth. The court also concluded that the Commonwealth's complaint against PokerStars was insufficient, because it detailed the cumulative losses among Kentucky residents over a given timeframe, rather identify the particular transactions underlying those totals. 23 This, the court said, violated Kentucky's notice theory of pleading, which the court said “contemplates that the plaintiff will be able to identify a particular act of illegal gambling prior to receiving a judgment.” 24 As a result, the court reversed the circuit court and tossed the judgment in its entirety.
This time, the Commonwealth of Kentucky appealed. Unsurprisingly, given the amount of money at stake, the Kentucky Supreme Court, to which appeals are discretionary, agreed to hear the case. In its appeal, PokerStars made six arguments: (1) that the Commonwealth is not “any other person” under KRS § 372.040, and thus did not have standing; (2) that PokerStars was not a “winner” within the meaning of KRS § 372.020, and so could not be used under the statute; (3) the trial court imposed the wrong amount of damages; (4) the judgment violates PokerStars' due process rights; (5) the Commonwealth's failure to allege specific players, dates, money lost, and players violates pleading standards in the Kentucky Rules of Civil Procedure; and (6) allowing the Commonwealth to sue under the Loss Recovery Act goes against statutory limits on the state's forfeiture powers. 25
KENTUCKY SUPREME COURT DECISION
On December 17, 2020, in an opinion inflected with disapprobation of the conduct of PokerStars, the Kentucky Supreme Court ruled 4–3 in favor of the Commonwealth of Kentucky, reversing the judgment of the Court of Appeals and reinstating the judgment of the Circuit Court holding PokerStars liable for treble damages of $870 million, which, with interest, now approximates $1.4 billion. 26 The Supreme Court's opinion framed the dispute squarely within the context of society's struggle against the “insidious problem” of organized crime, noting specifically that PokerStars carried out illegal gambling operations for years, “surviv[ing] and even flourish[ing] under every enforcement effort,” including criminal indictments against PokerStars and its founder, until its capital funds were frozen, “which finally led to the cessation of its illegal operations in the United States.” 27 The court in its opinion focused primarily on the issues of the Commonwealth's standing, the definition of “winner” under the Loss Recovery Act, the amount of damages, and the sufficiency of the pleadings.
Standing to sue
The court dedicated the bulk of its opinion to the issue of the Commonwealth of Kentucky's standing to sue PokerStars for recovery of Kentuckians' gambling losses. According to the court, the Commonwealth has standing based on its plain reading of “any other person” in KRS § 372.040. When KRS § 372.040 is read in conjunction with another statute providing general rules for the interpretation of statutes, KRS § 446.010(33), which states “unless the context requires otherwise … ‘person’ may extend and be applied to bodies-politic and corporate … ,” the court held that its meaning was clear, and that nothing prohibited understanding “person” to include the Commonwealth. 28 Assessing cases in which statutory context had led the court to conclude that a state was not a person, the court determined that none of those circumstances applied. For example, the court cited a string of cases under 42 U.S.C. § 1983 under which courts were curtailed from interpreting the word “person” to apply to states. 29 But this was because, the court reasoned, the states possessed sovereign immunity, which could only be waived if clearly and specifically stated. 30 In this case, the Commonwealth was the plaintiff, so sovereign immunity did not apply. 31
Next, the court dispensed with PokerStars' argument that the Commonwealth was not within the “class of persons” authorized to sue under KRS § 372.040 because the Commonwealth was not an injured party. In making that argument, PokerStars relied on a separate statute, KRS § 446.070, establishing a right of recovery for a “person injured by the violation of any statute . … ” 32 The court rejected that position, ruling that KRS § 446.070 applies only when the particular statute on which a suit is initiated does not provide a specific cause of action. Here, by contrast, KRS § 372.040 “provides its own statutory remedy for violation of the civil statute.” 33
The Commonwealth's standing in this case, the court next reasoned, is also an extension of its power to prosecute criminal cases. In the state's 13-year effort to stop international gambling sites, the court noted, “the only successful effort came from freezing the money used for illegal gambling.” 34 KRS § 372.040 has the effect of “deputizing any person … to help with the enforcement of the criminal illegal gambling statutes by authorizing the filing of civil lawsuits to render the illegal gambling unprofitable.” 35 The Commonwealth, having the sole authority to enforce criminal statutes, the court reasoned, would not be disqualified from invoking a statute that effectively provides additional enforcement tools against criminal activity, deterring it by authorizing treble damages. 36
This led the court to a more pragmatic rationale for finding that the Commonwealth had standing: the practical needs of law enforcement to protect citizens of the state. “Some criminal entities are so strong, organized, and insidious that they are almost impossible to deal with using traditional police tools and methods,” the court wrote. 37 The circuit court's massive judgment against PokerStars, the court concluded, was an appropriate amount to deter illegal gambling that had harmed the Commonwealth. 38 Citing studies invoked by the Commonwealth, the court noted that “the social cost to Kentucky from gambling addiction is a minimum of $81,000,000 per year.” 39 And that number is before factoring in increases caused by the ease of availability of gambling that sites such as PokerStars facilitated. The court stated that problem gamblers at times turn to crime to pay off gambling debts. 40 Associated costs, the court concluded, would likely be a burden on the state for years. 41
The court wrapped up its analysis of the standing issue by laying out its perspective in simple terms: If the statute allows any person apart from the loser to sue for treble damages, how could the Commonwealth be excluded from suing to protect both its citizenry and the public purse? 42
Whether PokerStars was a “winner”
The court then turned to PokerStars' argument that it was not a “winner” of the money Kentucky residents lost within the meaning of KRS § 372.020, because PokerStars took a “rake” and did not participate in the games as a contestant. The court rejected this argument out of hand: “Casinos and online poker sites like PokerStars would not exist if they were not ‘winners,’” the court wrote. 43 “They say the house always wins.” 44 To bolster its conclusion, the court pointed to 130-year-old precedent in which the court's predecessor held that the owners of a poker-room, who took a certain percent of each pot, were liable under the state's gambling loss recovery statute without it being proven that the owners won money by actually playing. 45 The court reached the same conclusion in a similar case seven years later. 46 The court's reasoning then, it said, applies just as well today—that the owner's joint interest in the winnings with the actual winning player gives the owner a joint interest in the winnings, and thus responsibility for them as a wrong-doer. 47 “Based on PokerStars' conspiracy with the winning players to violate the laws of the Commonwealth of Kentucky,” the court concluded, “PokerStars is a winner under the Loss Recovery Act.” 48 The age of the relevant precedent was no reason to abandon it, the court said. 49
Amount and calculation of damages
The court next considered PokerStars' claims regarding the amount and calculation of damages. It started with PokerStars' contention that the measure of damages violated the excessive fines and due process clauses of the U.S. and Kentucky constitutions. 50 The court disagreed, it wrote, because the excessive fines clause of the U.S. Constitution and Section 17 of the Kentucky Constitution only prohibit fines that are disproportionate. Here, the court said, the amount of damages—three times the money lost by Kentucky gamblers on PokerStars' site in five years—was “the very definition of mathematically proportionate.” 51 Neither was it the case that PokerStars' due process rights were violated, the court said, because the background law was clear, not an “open question,” as PokerStars suggested it was. 52 Instead, the statute is clear that awards are based on “the value of the money or thing lost.” 53
The court also held against PokerStars with regard to the proper calculation of damages. PokerStars urged the court to calculate damages on the amount of the rake, rather than players' losses. 54 But Kentucky has never calculated damages under the Loss Recovery Statute based on an operator's rake, the court said. 55 Next, the court considered PokerStars' position that players' losses should be offset by their winnings for the purposes of calculating damages. 56 Citing a nineteenth-century case, the court said that it would offset losses in this way had both parties been players. 57 But because PokerStars was a winner by way of taking a rake, it was liable for the entire amount lost. 58 PokerStars could have offset its own losses by suing the winners itself, the court said, and the Commonwealth could not sue the individual winners because PokerStars had refused to identify winners during discovery for five years. 59
Sufficiency of the pleadings
Finally, the court considered whether it was improper for the Commonwealth to plead Kentucky players' aggregate losses, rather than detailing specific facts about particular losses in its complaint. 60 It was not, the court said. 61 Kentucky has a notice standard of pleading, “where the central purpose of pleadings remains notice of claims and defenses.” 62 The Commonwealth met that “bare-bones” standard, the court said, and any information the Commonwealth lacked was only due to PokerStars' withholding of the information from discovery. 63
By reinstating the circuit court's 2015 judgment, and applying a 12 percent compound interest rate, the Kentucky Supreme Court's judgment makes PokerStars and its parent company, Flutter Entertainment, liable for penalties of $1.4 billion. 64
The dissent
Justice Vanmeter penned a dissent, which was joined by Chief Justice Minton and Justice Hughes. In the dissent, Justice Vanmeter argued that many of the majority's reasons for its holding were policy reasons, which, while compelling, were not sufficient. 65 Rather, statutory authority was the only basis for recovery. And with regard to the statutes, the dissent charged, the majority “largely ignore[d] the historical context and case law” interpreting them. 66
The Loss Recovery Act's historical development indicates that the Commonwealth is not a “person” within the meaning of the statute, according to the dissent. An earlier version of the statute, dating to 1852, originally provided that one-half of the losses recovered shall be for the person suing, and the other half for the Commonwealth. 67 But the legislature amended the gaming statutes in 1873 to delete the recovery benefit to the Commonwealth, and the same year amended the gambling forfeiture statute to mandate that all seized property be retained by the Commonwealth, rather than dividing the property between the state and the private seizor, as had been the case under a prior version of the statute. 68 These two changes, taken together, indicated an intention by the legislature “to provide exclusively to the Commonwealth the certain recovery of money or tangible items seized under the forfeiture provision, while providing the less certain recovery, following a lawsuit, to private persons.” 69 Thus, the legislature had not intended to confer on the Commonwealth standing to sue in KRS § 372.040.
In addition, the dissent asserted, the majority misused KRS § 446.010(33), the statute which says that “‘person’ may extend and be applied to bodies-politic and corporate. … ” “‘May’ is clearly permissive,” the dissent stated. 70 The majority opinion's interpretation of that provision, therefore, was overly broad. Instead of reversing the decision of the Court of Appeals, the dissent concluded, it would have upheld it. 71
POKERSTARS' REACTION
After the Kentucky Supreme Court's judgment, Flutter Entertainment, which had acquired The Stars Group, of which PokerStars was part, earlier in 2020, petitioned the court for rehearing of its December 17, 2020 decision. 72 In April 2021, the court denied its rehearing petition. 73 In response, Flutter has suggested that it is considering seeking review by the U.S. Supreme Court, and exploring unspecified other legal avenues. 74 Review by the U.S. Supreme Court is discretionary, and petitions for certiorari are rarely granted.
MORAL OF THE STORY
In the words of the classic Kenny Rogers song, “you got to know when to hold ’em, know when to fold ’em.” By not resolving this case years ago, PokerStars clearly ignored that wise instruction. By going “all in” on a litigation strategy, Flutter now faces a massive judgment. Already, the Commonwealth has taken steps to enforce the award, taking possession of the $100 million bond previously posted by the company as a condition of appeal and seeking a judicial order designed to transfer the PokerStars trademarks back to the entities that were the subject of the judgment. (The PokerStars group previously had transferred them to affiliated entities, presumably in an effort to shield them from attachment in the event of a negative outcome.)
More broadly, the case also illustrates the creativity with which antiquated statutes can be applied and highlights the importance of updating those statutes to reflect changing realities. British Queen Anne surely never imagined the statute she was creating would ever be applied in this way, nor did the many Kentucky legislative assemblies that first enacted and later revised the statute over the last 200-plus years. We expect much of the gaming and related industries are hopeful it never will be again.
That said, as previously noted, at least one other plaintiff has picked up the Kentucky cudgel in a new litigation, seeking to brandish the statute as a basis for recovery there. The differences between that case and Stars Interactive are material and substantial. Nonetheless, how that case progresses will be closely watched and may prove a bellwether for whether the PokerStars litigation journey is viewed historically as a lonely, ill-fated odyssey or as the harbinger of events to come.