June 05, 2013

PokerStars v. Atlantic Club Casino
Looking at PokerStar's Legal Options

In the wake of a New Jersey judge lifting the temporary restraining order (TRO) which had blocked the potential sale of the Atlantic Club Casino to buyers other than PokerStars, PokerStars has declared they "remain committed to New Jersey". The judge's decision to lift the TRO less than two weeks after putting the brakes on the PokerStars-Atlantic Club breakup left some observers in the poker community baffled, while others have pondered what legal and business options remain viable for PokerStars in New Jersey. From a litigation perspective, PokerStars chances of salvaging the Atlantic Club deal look rather grim.

I.  Appeal

Many in the poker community suggested that PokerStars appeal the judge's ruling. Unfortunately, as a matter of procedure, an appeal is a difficult option for PokerStars at this point in time. Generally speaking, a party has the right to appeal only after a case has reached a final judgment, which generally requires either a verdict after trial, or a dismissal or judgment entered on a motion (e.g., a motion to dismiss or a motion for summary judgment). The judge's ruling lifting the TRO is not a final disposition of the case, so PokerStars cannot appeal as a matter of right.

However, PokerStars could file an application with the state appellate court for permission to file what is known as an interlocutory appeal, or an appeal from a non-final ruling. Interlocutory appeals are strongly disfavored because appellate courts prefer cases to be fully litigated prior to appeal. This practice permits the evidentiary record to be fully developed prior to appellate review, and also allows potentially erroneous rulings by the court early in the case to be rendered moot by later developments in the litigation. Consequently, courts generally only grant interlocutory review when a party will suffer substantial prejudice from being forced to wait for a conclusion of the litigation process to have an erroneous ruling reviewed. Examples of situations where an appellate court might be inclined to grant interlocutory review include where a party claims the lower court lacks jurisdiction over the party or claim, or where a lower court has ordered production of privileged documents.

In the present case, the court's denial of PokerStars' TRO request is not a likely candidate for interlocutory review. In order to get a TRO, PokerStars had to convince the trial court judge that it was probable it would ultimately prevail on the merits of the claim. The trial court's denial of the TRO implies that PokerStars is unlikely to ultimately prevail, and thus the appellate courts are less likely to see a need to grant interlocutory review. Also, as a practical matter, appellate courts are more likely to grant interlocutory review of a trial court's granting of a TRO than a denial of a TRO; the imposition of a TRO is much likelier to prejudice a party than the denial of a TRO.

Still, the TRO in this case has some attributes that distinguish it from run-of-the-mill rulings and might make an appellate court interested in granting an interlocutory appeal. In particular, PokerStars may essentially be deprived of the benefit of its bargain if it proceeds to trial and wins, only to have had the Atlantic Club sold to a third-party in the interim. In an emergency telephone hearing on May 7, 2013—the day after PokerStars filed its complaint and the court entered the preliminary TRO—the judge specifically noted the "potential chaos" that might result if a TRO was not granted at least until he had the opportunity to review all of the parties' arguments and evidence on the merits. This same line of reasoning may make an appellate court more inclined to grant interlocutory appeal. Still, the trial court judge ultimately reviewed the parties' submissions and determined a TRO would not be appropriate, implying he felt PokerStars was less likely to ultimately prevail, which detracts from PokerStars' argument for a grant of interlocutory review.

If PokerStars decides to pursue interlocutory appeal of the judge's ruling, they would need to do so by this Thursday, June 6 (New Jersey Rule of Appellate Procedure 2:5-6 requires an appeal to be filed within 20 days of the district court's ruling), unless they file a motion for reconsideration with the trial court. However, appellate courts rarely move quickly, particularly in standard civil litigation arising from a commercial contract dispute. A certain period of time—possibly several weeks—will pass as the Atlantic Club resists the application for interlocutory appeal and as the court considers and issues a decision to grant the appeal; this decision is unlikely to be entered prior to the Division of Gaming Enforcement's (DGE) decision on PokerStars' application for a gaming license (a/k/a an Interim Casino Authorization or "ICA"). Then, unless the appellate court grants a stay and enters its own TRO pending appeal (again unlikely), several months will pass as the parties file briefs on appeal and the appellate court reaches a decision on the merits of PokerStars' request for a TRO. Also, because the judge's denial of the TRO would be weighed by the appellate court under a highly deferential "abuse of discretion" (a/k/a "arbitrary, capricious, or unreasonable") standard of review, PokerStars would be fighting an almost impossible uphill battle to win on appeal.

II.  Fight On

If PokerStars decides not to pursue an interlocutory appeal—and their failure to file an application with the appellate court within a few days after the ruling suggests they do not intend to do so—PokerStars can still press on with their lawsuit against the Atlantic Club. However, continued litigation is probably a rather unsatisfactory option for PokerStars given its ultimate goal of becoming licensed in New Jersey and offering online poker in the state.

First, an interesting provision in the Purchase Agreement (Section 10.2(c)) states that the parties waive the right to a jury trial and agree to have any dispute heard by a trial court judge. The trial court judge has already ruled that PokerStars is unlikely to prevail on the merits. Unless some type of "smoking gun" evidence of improper behavior by Atlantic Club pops up—e.g., emails showing Atlantic Club was pursuing other buyers during the contractual exclusivity period—it seems unlikely the judge will change his mind based on a trial. Even if a different judge handles the trial, having a judge already weigh in on the merits of the case will give Atlantic Club a leg up at trial, as many trial court judges are reluctant to contradict another trial court judge absent a clear error. Frankly, the TRO skirmish in these types of lawsuits often decides the ultimate outcome, or at least gives the prevailing party substantial leverage going forward.

Further, a review of the actual Purchase Agreement demonstrates PokerStars is on shaky legal ground with respect to its claims. As I've discussed in greater detail previously, PokerStars' argument that the "Outside Date" used by Atlantic Club to terminate the deal violates New Jersey's gaming statutes is unlikely to carry the day. The remaining claims for promissory estoppel and unjust enrichment are equally weak in light of the express terms of the Purchase Agreement. With respect to promissory estoppel, PokerStars is claiming that Atlantic Club misled them into paying advances and incurring expenses in seeking a gaming license. Yet PokerStars was already required to do those very things by the contract. Similarly, PokerStars is claiming Atlantic Club has been unjustly enriched by keeping the advance payments and a termination penalty essentially equal to the total purchase price. But again, PokerStars agreed to those very terms in the contract. A court is unlikely to grant PokerStars equitable relief from the Purchase Agreement it negotiated and agreed to, absent evidence of actual fraudulent conduct by Atlantic Club. Courts simply will not invoke principles of equity to save a party from a bad deal of their own making.

Finally, the time and expense of proceeding to trial will be significant, particularly in light of the likelihood of prevailing at trial. Going through discovery, motions, and trial will easily cost PokerStars north of half a million dollars, and quite possibly well over a million dollars in legal fees alone (trust me, even in less pricey venues than New Jersey, a month of depositions will run over $200,000, and a week of trial can easily run over $250,000). Also, a trial date is likely more than nine to eighteen months away. If there is little chance of prevailing on the merits, the expense and hassle of continued litigation may well give PokerStars good reason to cut their losses, pay the termination fee, and walk away.

III.  Pursue Other Options

PokerStars has been incredibly confident that the New Jersey gaming authorities would grant them a license; Isai Scheinberg even allegedly told Atlantic Club executives he felt there was a "90% chance " PokerStars would get a New Jersey license. At this point, given statements by Atlantic Club questioning PokerStars' qualifications for getting a gaming license, it seems unlikely PokerStars will put in additional money to resurrect the Atlantic Club purchase (if Atlantic Club would even entertain a sweetened offer from PokerStars).

Although PokerStars would need a physical base in Atlantic City to offer online poker, the Atlantic Club is only one option for PokerStars. PokerStars could continue to pursue a New Jersey gaming license with an eye toward purchasing another casino or even partnering with a casino to offer online poker. New Jersey certainly offers PokerStars better odds of being licensed than in other states, given its unique combination of poor economic conditions for the state's casinos coupled with the lack of any "bad actor" clauses in the state's online poker statutes. Thus, even though the Atlantic Club deal may be dead, New Jersey may well remain PokerStars' best opportunity to break into the regulated United States online poker market. The only question would be how much the failed Atlantic Club deal, including the Atlantic Club's incendiary comments about PokerStars' "criminal" connections, would impair PokerStars' ability to navigate the licensing process. Still, PokerStars will need to jump the licensing hurdle sometime, somewhere, if they want to operate in the United States, and New Jersey may well remain their best opportunity to do so.


2 comments:

  1. How could P*, attorney, etc. allow such a weak contract given the Atlantic Club was facing default at the time of the negotiations? They provided them near asking price and got shown the door.

    I am torn for a movie title. Take the Money and Run or to go with Dumb and Dumber?

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  2. @ Ken: I am likewise rather baffled by how PokerStars and their attorneys signed off on the Purchase Agreement with such a short window for getting a license. It's possible Stars had felt out the NJ DGE and was confident the licensing process would go smoothly and quickly. It's possible Stars' attorneys simply did not realize the significance of the Outside Date provision. The retention of advances is an undertandable provision, because there would be no way ACC could ever repay those funds, and it was a price of doing business. But there certainly has to be some explaining to do between Stars' attorneys and executives who negotiated the deal. Frankly, one reason that Stars may have even filed the suit was to preserve a claim for legal malpractice (the suit permits the attorneys to establish whether there had been any screwup in the paperwork).

    Regardless, the Purchase Agreement was a pretty bad deal for Stars.

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