PokerStars claims Kentucky judgment violates due process and the Eight Amendment proscription against excessive fines

PokerStars Petitions US Supreme Court Over $1.3 Billion Kentucky Verdict

Another important case related to online gambling may be making its way into the US Supreme Court soon.

As it promised to do, Stars Interactive Holdings is petitioning SCOTUS for a writ of certiorari for the judgment levied against it in Kentucky. That judgment, upheld by the state’s own Supreme Court in a close decision, is for the eye-watering sum of $1.3 billion.

In plain English, a writ of cetiorari is the first step in a SCOTUS appeal. If granted, it would require the lower court – that is, the Kentucky Supreme Court – to forward its case records to the federal Supreme Court for review. Receiving it would not guarantee that Stars gets a hearing, but it would lead to a vote by the Supreme Court justices on whether the case warrants one.

An unprecedented judgment

The case in question has been slow-moving and relates to events more than a decade in the past. PokerStars, the flagship brand of Stars Interactive Holdings, was serving US customers, including Kentucky residents, up until the events of April 2011, known as Black Friday in the industry.

At that point, the US Department of Justice cracked down on and seized the domains of several poker sites still serving US customers. Online gambling had become formally illegal five years earlier, with the passage of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA).

Under Kentucky law, anyone impacted by unlawful gambling can sue for the player’s losses, not only the player in question. In 2013, Kentucky officials decided that this included the state as a whole, for aggregate losses incurred by its citizens.

The original case took two years to reach its conclusion, with the court finding in favor of the state. Based on some creative accounting by the plaintiff, the judge awarded $870 million in total damages, which is far greater than the actual net loss of state citizens.

PokerStars appealed and won. However, the state pressed on, and this January, the Kentucky Supreme Court reinstated the original verdict. In the meantime, PokerStars itself had changed hands twice. At the time it was serving players in Kentucky, it was a private company. While the original lawsuit was taking place, it went public via reverse takeover by the Canadian company Amaya. During the Kentucky Supreme Court appeal, it was acquired by the gambling giant Flutter.

The Kentucky Supreme Court additionally applied interest to the original judgment, bringing the total to $1.3 billion. Stars requested a rehearing but was denied.

The case for SCOTUS review

There are two basic points Stars is asking SCOTUS to consider in deciding whether to issue the writ of certiorari. Both are similar, and are questions of constitutionality.

First, it claims that a civil judgment of this magnitude and disproportionality violates the rights to due process enshrined in the original constitution. Secondly, and perhaps more importantly, it points to the Eighth Amendment and its provisions against “excessive fines.” This phrase appears next to the better known proscription against “cruel and unusual punishment.”

In other words, Stars isn’t challenging whether a judgment should have been made against it in the first place. Rather, it’s challenging the amount of the fine, which it points out is 30 times the actual harm caused to state residents, and 50 times its own revenue during the period in question.

This comes down to how the original Kentucky court calculated the damages. Rather than looking at players’ net losses, it considered aggregate gross losses. For instance, if Albert loses $50 to Betty, and Betty then loses $40 back to Albert, that’s a $10 net loss for Albert. However, the court treated the full $90 which changed hands as “losses” for the purposes of calculating damages, even though most of that money just ended up back where it started.

The court then tripled that amount to add punitive damages, as provided for in the state’s Loss Recovery Act (LRA). It’s these calculations that Stars characterizes as an abuse of the law, and a matter of national interest warranting SCOTUS review.

The question of when to measure losses

The original Franklin Circuit Court calculated the real damages at $290 million, trebled to $870 million for punitive purposes. That $290 million calculation treated each hand dealt and each tournament played independently.

In the petition, Stars points out the irony that this calculation violated the Court’s own initially stated reasoning. It acknowledged that the LRA refers to losses “within twenty-four hours,” and that including swings within that period could “allow the player to receive a windfall” if the same money traded hands multiple times. However, it mistakenly (according to Stars) concluded that the State’s figures complied with this.

Stars pointed out that doing the calculation this way gives a result of $68 million. It says that, rather than backtracking, the Court then changed its reasoning and kept the original figures. Its new reasoning was that the day-by-day rather than bet-by-bet calculation applies only when the suit is brought by the gambler in question, not a third party. In the end, it held that when suits are brought by “any other person,” there is no requirement to offset winnings and losses.

Even the day-by-day calculation may, depending on one’s perspective, overstate the harm. Stars says that net losses by Kentucky residents playing on the PokerStars platform during that time period amounted to just $26 million, less than a tenth of the damages calculated by the State.

A matter of national interest

Unfortunately for Stars, the fact that a judgment may have been unfair isn’t enough for the Supreme Court to hear a case. It receives about 7000 to 8000 such cases in a typical year, and rules on only 100 to 150 of those.

For Stars to get its writ of certiorari, SCOTUS will need to see this as a constitutional issue of national interest. Stars argues that this case meets that bar because it:

“…deepens a split over whether a substantial damages award constrains the size of punitive damages. Five federal appeals courts have recognized strict due process limits on punitive damages in these circumstances, whereas the Eleventh Circuit, the Kentucky Supreme Court, and multiple other States do not factor the size of the underlying damages award into their due process analysis.”

Stars says that this creates the risk of arbitrary results depending on the forum in which a case is heard. It also, in somewhat less direct terms, accuses Kentucky and its courts of abusing an archaic law for what amounts to a cash grab.

“The low barriers to entry for these suits, combined with the potentially explosive damages, create incentives for States and the plaintiffs’ bar to use litigation against deep-pocketed corporate defendants as a revenue-raising tool.”

It notes that the LRA dates back to “when John Adams was president” and that it hasn’t produced a case resulting in a court decision in 60 years. Neither has it ever been applied this way, with the State itself as plaintiff.

Similar cases

The good news for Stars is that SCOTUS has, in the past, considered similar cases. It brings up many of these in its petition, several of which involve insurance companies. One which stands out is State Farm Mutual Automobile Insurance Company v. Campbell, from 2003.

Curtis Campbell was involved and ultimately held responsible for a fatal car accident. He and the other parties were willing to settle for $50,000, the limit of what his insurance would cover. However, State Farm rejected the settlement, opting to fight. It lost the case, and the jury awarded the victims $185,000.

State Farm would only pay the original $50,000. Campbell was on the hook for the remainder. He sued in turn, and that jury found in his favor, calling for $2.6 million in compensatory damages, and a whopping $145 million in punitive damages. Ultimately, SCOTUS ruled that $145 million was indeed excessive.

That opinion granted that there was no hard rule to determine what is “excessive.” However, it cautioned that any punitive damages that are more than “a single digit multiple” of the underlying real damages would be at risk of a similar ruling.

A small multiple of a big number

In this case, however, the multiple in question is only triple. The question is whether the “real” damages have any bearing on reality. Stars will claim that they amount to an intentional distortion in order to drive up the value of the judgment.

Stars has one additional fall-back argument to cover its bases there.

It says in “multiple cases,” five federal appeals courts have capped punitive damages at a 1:1 ratio with the real damages, when the latter are already “significant.” It’s only the Eleventh Circuit and certain state courts that disagree. This is relates to the “split” it talks about between Kentucky and other courts.

“The split is especially intolerable because the Kentucky Supreme Court adopts a different approach from the federal circuit with jurisdiction over Kentucky—the Sixth—a result that will lead to forum shopping and inconsistent judgments for defendants located in the same State.”

The hope is that SCOTUS will see that as an inconsistency it must resolve. To that end, it points to possible ramifications in other industries if this sort of judgment can stand.

“Kentucky reached the enormous damages figure in part by aggregating thousands of individual poker losses of $5 or more. In other contexts, from the Copyright Act to the Cable Communications Policy Act to the California Labor Code, plaintiffs have likewise attempted to combine thousands of claims for fixed statutory damages into a single, ‘devastatingly large damages award, out of all reasonable proportion to the actual harm.’ This case presents an opportunity for the Court to impose constraints on a practice that has drawn concern from lower courts and commentators.”

Court filing

This is a significant case, especially if SCOTUS agrees to hear it. The process is likely to take quite some time, however. In the meantime, eager readers can sift through the petition themselves, as we’ve included it in full here:

Petition for Certioriari - Stars Interactive Holdings v. Commonwealth of Kentucky
- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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