May 18, 2013

Can't Buy Me Love—How the Illuminati Won in PokerStars v. Atlantic Club Casino

"Didn't you take economics? You could have had me for $49.95."

~"Transfer Girl" (Corissa Miller), in "Can't Buy Me Love" (1988)

In my initial post about the PokerStars v. Atlantic Club Casino litigation, I invoked the classic martial arts flick Bloodsport. And what the Atlantic Club did to PokerStars in court this week does evoke the Bloodsport scene where the villain, Chong Li, intentionally snaps the neck of a helpless opponent. But, on further reflection, the PokerStars-Atlantic Club business relationship over the past few months is actually more reminiscent of the classic 80s comedy, "Can't Buy Me Love". Nerdy outcast convinces popular cheerleader to date him. Nerd becomes popular, fame goes to his head. Nerd dumps cheerleader. Cheerleader freaks out. Nerd and cheerleader both get their comeuppances, learn valuable life lessons, and get back together. Cue happily-ever-after scene as the nerd and cheerleader ride into the sunset ... on a lawn mower.

Obviously there are a few differences between reality and the movies. In real life, the unpopular, near-bankrupt Atlantic Club not only convinced the hottest poker site in the universe to hook up, but PokerStars paid the Atlantic Club nearly $15 million for the dubious privilege. But just like the movie, the Atlantic Club got popular and decided to dump PokerStars. PokerStars freaked out. But then things took an odd turn. The Atlantic Club threw out some vicious gossip and innuendo about PokerStars' trashy past, and it was PokerStars left as the outcast while the Atlantic Club enjoys being the most popular casino on the market, with its choice of online poker sites to hook up with. There won't be any happily-ever-after for these former lovebirds.

Friday's court ruling denying PokerStars' request for a temporary restraining order (TRO) to force the Atlantic Club to abide by the parties' purchase agreement was a serious blow to PokerStars' chances of breaking into New Jersey's newly-authorized online poker market. Pursuant to New Jersey law, PokerStars must own a land-based casino in Atlantic City in order to offer online poker. The financially challenged Atlantic Club was a relatively inexpensive gamble for PokerStars when it wasn't clear if Governor Christie would approve online poker. Now, the Atlantic Club is shopping around for a better deal, and it's not clear whether PokerStars has any other options for casinos to purchase. Heck, it's not even clear now if PokerStars can get a gaming license.

I am most emphatically not a conspiracy theorist. But the more I think about the way the PokerStars v. Atlantic Club Casino litigation went down, the more convinced I am that something is rotten in the state of New Jersey. Atlantic Club's actions leading up to the lawsuit suggested they were trying to leverage a higher purchase price, either from PokerStars or a shadow purchaser lurking in the background. But the Atlantic Club's litigation strategy showed that the termination of the PokerStars deal was about much more than money, it was intended to destroy PokerStars' chances to enter the New Jersey iPoker market altogether.

The key evidence of an anti-PokerStars conspiracy is the Atlantic Club's decision to go nuclear in its response to the TRO, focusing its defense on PokerStars' connections to the Black Friday criminal indictments and civil forfeiture cases. These attacks were legally irrelevant to the claims made by PokerStars. As you will recall, PokerStars raised two primary arguments in its initial Complaint and Motion for TRO:  a) Reformation—claiming that the contract termination date was void pursuant to gaming laws requiring a 120-day window between submission of a gaming license application and the closing date for a casino purchase agreement, and b) Promissory Estoppel / Unjust Enrichment—claiming that the Atlantic Club knew the Division of Gaming Enforcement (DGE) would not rule on PokerStars gaming license application prior to the contract's termination date, and yet the Atlantic Club nonetheless improperly misled PokerStars into believing the Atlantic Club had agreed to extend the deadline for PokerStars to obtain its license. [FN1].

The reformation claim is legally and factually straightforward. One simply looks at the contract and the relevant statute, then decides if the contract termination provision violates the statute. Evidence of PokerStars' Black Friday issues is irrelevant to interpreting the contract's termination provision. When the poker media first began reporting even prior to the lawsuit that PokerStars might argue that the contract termination date was invalid under New Jersey gaming law, I immediately had serious doubts that the argument would work (see my comments in response to Diamond Flush's initial reporting of this issue), even without having access to the actual purchase agreement and related documents available to the Atlantic Club's attorneys. After reading the PokerStars Complaint and Brief, I remained skeptical that PokerStars would win on this issue, based only on a general discussion of the purchase agreement's terms. Presumably, the Atlantic Club's attorneys were likewise skeptical of PokerStars' interpretation of the law and were confident about their argument on the termination date issue. In fact, the Atlantic Club actually prevailed on this issue at the court hearing denying PokerStars' request for a TRO, with the court finding that the contract's terms permitted the Atlantic Club to terminate the purchase agreement if PokerStars was not licensed by April 26. Considering the Atlantic Club held such a strong legal position on the reformation claim, there was no good litigation purpose for raising PokerStars' Black Friday issues in response to the reformation claim. [FN2].

The promissory estoppel / unjust enrichment claims are based on various actions and statements by the Atlantic Club which are alleged to have improperly misled PokerStars to believe that the Atlantic Club had agreed to extend the purchase agreement termination date until after the DGE ruled on PokerStars' application for a gaming license. The evidence to support or refute these claims would be limited to the parties' actions during the period of their business relationship. The Atlantic Club could have responded to PokerStars' claims by arguing that the actions and statements in question were proper and not misleading under the circumstances. Evidence of PokerStars' Black Friday issues which arose two years ago prior to any business relationship would have no relevance to a defense of the promissory estoppel / unjust enrichment claims.

Not only was the Atlantic Club's use of PokerStar's Black Friday issues unnecessary to the litigation, it was also unwise as a business decision. In commercial litigation, it is always important for attorneys to remember that the goal of the litigation is to maximize their client's profit. Here, the TRO hearing was an important legal skirmish, but it does not terminate the litigation nor conclusively decide a winner. All the TRO hearing did was determine which side the court felt was more likely to win based on a limited consideration of key evidence and legal arguments. In theory, the case will continue forward and PokerStars could ultimately win at trial or on appeal.

What the TRO hearing was about, from a business-legal perspective, was which party would have greater leverage going forward. PokerStars and the Atlantic Club had already discussed extending the termination date in exchange for additional funds from PokerStars, and had even exchanged various offers for such an extension. Thus, the Atlantic Club knew PokerStars would likely be willing to continue negotiations on a revised deal regardless of which side prevailed at the TRO hearing. Had PokerStars won at the TRO hearing, they would most likely have agreed to a revised purchase agreement with additional funds in exchange for an extended termination date simply to foreclose the legal risk of losing later in the litigation process. Now that the Atlantic Club has prevailed on the TRO, the Atlantic Club has legal risk from the continuation of the litigation, both the risk of PokerStars later winning on either the contract termination issue or the somewhat stronger unjust enrichment claims which have yet to be addressed by the court. In normal commercial litigation, one would expect the Atlantic Club and PokerStars to work out a settlement of their claims at this point. Further, one would expect PokerStars to make a new, more lucrative offer to buy the Atlantic Club. The Atlantic Club, in turn, would be expected to welcome a financially strong, highly motivated potential purchaser like PokerStars to bid up their other competing suitors for a better purchase price.

Which brings us back to the apparent insanity of the Atlantic Club's litigation strategy. The Atlantic Club's business executives and litigation team presumably want to maximize the Atlantic Club's ultimate sale price. Cutting PokerStars out of the bidding war makes no business sense because PokerStars is known to be a serious potential buyer in the market for an Atlantic City casino, has deep pockets, and can also resolve its claims against the Atlantic Club as part of any potential deal (those claims will factor into the ultimate purchase price of the casino regardless of the buyer). Further, being in the position of seller, the current Atlantic Club owners will have no dog in the New Jersey iPoker fight after any sale closes, so from the perspective of the Atlantic Club, if they sell to a different buyer, they should be indifferent to whether PokerStars eventually obtains a gaming license. The Atlantic Club could have fully defended itself in the TRO hearing without raising PokerStars' Black Friday issues, and certainly could have done so without raising the far more damaging questions about Isai Scheinberg's involvement in the deal. By using the Black Friday and Scheinberg issues in the TRO dispute, the Atlantic Club essentially declared that PokerStars was unsuitable for a New Jersey gaming license, making it impossible for the Atlantic Club to do business with PokerStars.

There is no apparent rational business reason for the Atlantic Club to pursue a litigation strategy that effectively disqualifies PokerStars from the bidding competition for the casino and jeopardizes PokerStars' chances to obtain a gaming license. Unless, of course, those were the Atlantic Club's real goals. What looks irrational turns diabolically clever if one considers that the Atlantic Club has almost certainly been in talks with one or more potential purchasers who are looking to block PokerStars from gaining a foothold in the United States iPoker market. Caesars Entertainment and Boyd Gaming (50% owner of the Borgata) are obvious foes of PokerStars both in New Jersey and nationally, though other iPoker platforms, out of state casinos, and even tribal casinos would all have business interests in keeping PokerStars out of New Jersey. To one or more of these PokerStars competitors, spending several million dollars to buy out the Atlantic Club might well make good business sense. If they are able to sabotage PokerStars' gaming license as well, then that's a great business deal. In fact, to many of PokerStars' competitors, the ability to unleash a vicious proxy attack on PokerStars' suitability for licensing probably was a far more valuable part of any potential deal than acquiring the Atlantic Club itself.

At this point, it seems certain PokerStars will not be able to buy the Atlantic Club, blocking PokerStars from the New Jersey iPoker market for the short term. What is less certain is whether PokerStars will move forward with the gaming license process in hopes of finding a new casino to target for acquisition or as an iPoker partner. It's difficult to know how much damage the Atlantic Club inflicted on the PokerStars gaming license application. The Black Friday issues were old news that PokerStars was presumably ready to address. But having those issues raised publicly, in court, by a business partner as evidence that PokerStars is unqualified for licensing likely escalates the attention the DGE will pay to those issues in the licensing process. More significantly, the Atlantic Club's accusations about the involvement of Scheinberg in the acquisition and licensing processes will almost certainly draw unwanted additional scrutiny from the DGE and possibly the DOJ. Scheinberg reportedly gave the Atlantic Club his estimate that PokerStars had a 90% chance of obtaining a New Jersey gaming license. Right now, if Scheinberg would offer me only 2:1 odds, I would lay a healthy wager against a PokerStars license.

Of course, PokerStars has to take some of the blame for its current problems. Obviously their Black Friday issues stem from a post-UIGEA business decision to remain in the United States market, and a good case can be made that PokerStars should be penalized in some way—up to and including being barred from holding a gaming license—for operating in apparent violation of various state and federal laws. Yet, PokerStars at least deserves a fair hearing to determine whether they broke the law, and if so, whether that is sufficient to preclude licensing. PokerStars also has only itself (and its attorneys) to blame for signing a draconian, one-sided purchase agreement, and for failing to understand and meet the deadlines in that contract. Finally, PokerStars has to be kicking itself for pursuing litigation rather than further negotiation. If the Atlantic Club had made its Black Friday and Scheinberg accusations prior to litigation, those statements could have been used as evidence of the Atlantic Club failing to act in good faith in support of its contractual duties, particularly the duty to assist PokerStars' efforts to obtain a gaming license. By initiating litigation, PokerStars gave the Atlantic Club the pretextual opening it needed to raise those issues: "Your Honor, we hate to say it, but in response to the issues raised in PokerStars' Complaint, we feel compelled to point out that PokerStars has been accused of money laundering and bank fraud, and we just found out this Scheinberg guy we've been dealing with is a fugitive under federal indictment. But anyway, about Section 7.2 of the purchase agreement ...." PokerStars is probably thinking right now that another few days of negotiating and another several million dollars on the deal would be preferable to what happened in court this week.

PokerStars made some mistakes in the Atlantic Club deal, and it's not yet clear whether the damage will be contained to a lost casino deal or will spread to PokerStars' gaming license efforts. The Atlantic Club looks poised to cash in on its backstabbing of PokerStars. The only remaining question is, what company ordered the hit on PokerStars? The smart money is on whoever wins the bidding war for the Atlantic Club.

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[FN1].  UPDATE (5/29/2013):  The initial version of this post incorrectly labeled the first claim as one for "breach of contract" rather than a claim for "reformation". Reformation is an equitable remedy that permits a court to rewrite a contract so that it is in accord with the parties' intentions, while breach of contract is a legal remedy available when a party breaches a requirement of a contract. The analysis of whether the "Outside Date" provision of the contract violates New Jersey gaming statutes is the same under either legal theory.

[FN2].  The Atlantic Club could try to justify raising the Black Friday issues in connection with the breach of contract claim by asserting that those issues would likely preclude PokerStars from ever obtaining a gaming license as required by the purchase agreement. But this argument would be pretextual, as the breach of contract claim was purely retrospective—because PokerStars failed to meet a past deadline for obtaining a gaming license, the only question was whether that deadline was enforceable. Speculation about how DGE might rule this summer on PokerStars' pending gaming license application is irrelevant to analyzing a past deadline.

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