Federal appeals court orders refund of website gambling losses

A federal appeals court ruled last week that a Washington State resident can demand a refund for the money that she paid to gamble in a “free” online casino.

Cheryl Kater claimed in her suit that she paid $1,000 for extra gaming tokens to continue playing on the Big Fish Casino website after her supply of complimentary tokens ran out.

The ruling from the U.S. 9th Circuit Court of Appeals appeared to have limited application to Ms. Kater who sued the casino and Churchill Downs Inc., its corporate owner. But the appeals court decision held clues that the suit was a precursor to a potential class-action lawsuit.

In the opinion he wrote for the three-judge panel, Circuit Judge Milan Smith Jr. instructed Ms. Kater to apply to Churchill Downs for a refund of her money. But the case was also remanded to the district judge who dismissed it, in effect ordering a new trial that Ms. Kater brought on behalf of herself and “all others similarly situated.”

Moreover, it seemed foolhardy to hire three attorneys from a Chicago-based law firm that specializes in class action lawsuits to press a complaint about $1,000. Just the cost of a single flight to bring the attorneys from their Chicago offices to the appeals court’s Seattle chambers would have exceeded the amount in controversy.

Ms. Kater’s lawsuit cited Washington State’s Recovery of Money Lost at Gambling Act as the basis for her refund demand. The state law authorizes persons who lose money “or anything of value” at an illegal gambling game to recover their losses.

Churchill Downs, best known for hosting the Kentucky Derby at its iconic racetrack, argued that it did not owe a refund because visitors to its online casino paid nothing to play; and, if it cost nothing to play then no money could be lost. But that claim was contradicted by the casino’s sale of gaming tokens—for prices ranging from $1.99 to $250—that enabled gamblers such as Ms. Kater to continue playing after their initial supply of complimentary chips ran out.

That wasn’t the company’s only contradiction. As Ms. Kater’s lawsuit pointed out, players who collect substantial winnings can sell their chips to other players in a “black market” that was accessible through an application from Big Fish Casino. Facilitating such “under the table” payments was in conflict with the casino’s Terms of Use Agreement which stated the gaming chips have no monetary value and cannot be exchanged “for cash or any other tangible value.”

The company’s claims notwithstanding, a different picture emerges from its 2017 annual report to the U.S. Securities and Exchange Commission. In 2017, Churchill Downs reaped $466.0 million in total revenues from its Big Fish Casino subsidiary. Since the gaming website did not pay-out any winnings, it followed that most of the revenues were paid-in from sales of extra chips.

At the crux of Judge Smith’s opinion was the state law’s definition of “anything of value” as the standard for construing what constitutes a gambling loss.

The casino’s “free” gaming chips had value, Judge Smith wrote, because “they are a credit that allows a user to place another wager or re-spin a slot machine.”

“Despite collecting millions in revenue, Churchill Downs, like Captain Renault in Casablanca, purports to be shocked—shocked!—to find that Big Fish Casino could constitute illegal gambling. We are not,” Judge Smith wrote.

In its immediate aftermath, the ruling came under scrutiny from various trade industry news organizations that scrambled to measure its long-term impact on the multi-billion dollar online gambling industry. While several gambling news websites portrayed gloomy repercussions from it, it was unclear whether the opinion had any precedential value at all. Of particular interest was the consummation of Big Fish Casino’s sale on January 9, almost three months prior to the appeals court’s March 28 decision.

But Judge Smith denied Churchill Downs’ request to have the lawsuit transferred to Big Fish Casino because of the subsidiary’s pending sale for $990 million to Aristocrat Inc., an Australia-based maker of video poker machines. The denial appeared to pre-date the sale’s completion. In the March 28 opinion, though, Judge Smith said in a footnote: “It is not enough to claim that a transfer will occur; rather, substitution is proper where ‘a transfer…has occurred.’”

Edward Zuckerman