PokerStars in New Jersey—Back to the Silver Age of Poker?

"Here I come to save the day!"

~ Mighty Mouse

American comic books have followed an interesting historical arc. The "Golden Age" spanned the era from the Great Depression through the post-World War II days, and saw the debuts of classic clean-cut All-American heroes like Superman and Captain America. After a period of decline for traditional comics, the "Silver Age" and "Bronze Age" of comics marked a resurgence of classic comic heroes and story lines. A turn in the mid-1980s toward darker and more dystopian themes and the rise of more conflicted heroes and anti-heroes marked the beginning of the "Modern Age" of comics.

Online poker has followed a strikingly similar course. The Golden Age of online poker ran from the rise of sites like Paradise Poker and Party Poker in the late 1990s and early 2000s through the passage of UIGEA in 2006. The Silver Age of online poker saw the rise of PokerStars and Full Tilt as the new heroes for poker players, and came to an end when Black Friday destroyed online poker in the U.S. in 2011. After enduring a Dark Age with no online poker, the Modern Age of online poker began with the rise of regulated online poker in a handful of states, set against a bleak landscape of poker prohibition, populated by a gallery of newly reinvented and rebooted heroes—Party Poker and 888 are back from exile, Caesars has been transformed from super-villain to crusading hero, Full Tilt is an ally of its former archenemy PokerStars, and everyone is threatened by a new cyborg super-villain named "SH3LD0N".

Online poker's historical arc came to mind this week when, after months of speculation and anticipation, the online poker world finally received some transformative news—as first reported by Dustin Gouker at Online Poker Report, PokerStars has been approved by New Jersey gaming regulators to operate an online poker site. But does this key development mark a return to the Silver Age of online poker, or is it another step forward into the Modern Age?


Market Expansion or Cannibalization?

The literally million dollar question is less whether PokerStars will be a major player in the New Jersey online poker market and more where PokerStars' market share will come from. PokerStars will inevitably draw players away from its established competitors. And many in the poker community seem to hold as an article of faith that PokerStars' entry into the market will create a new poker boom, greatly expanding the player base. Respected poker industry insider Nolan Dalla expresses what seems to be the prevalent view that PokerStars will cannibalize little of its player base from established competitors, and that PokerStars will significantly expand the market. But are these presumptions reasonable? Color me skeptical.

When regulated online poker launched in New Jersey, there was an initial surge of play, fueled by a combination of pent-up consumer demand from former online players and a wave of marketing recruiting new players to the pool. That surge, however, quickly subsided. During the heady post-launch days, online poker in New Jersey generated revenues exceeding $2.5 million per month over the first five months, with three months exceeding $3 million in revenue. Yet by six months post-launch, revenues settled into a rate of roughly $2 million per month, plus or minus 10% depending on seasonal variance. As we approach the two-year mark, those revenues are at best stable, and possibly in a slow decline when viewed on a year-over-year basis.

The bullish case for robust market expansion—summarized nicely by Steve Ruddock at Online Poker Report—forecasts PokerStars will expand the market and increase revenues to $3-$4 million per month. That would be an increase of 50% to 100% over current revenues. This optimistic vision is predicated on a combination of PokerStars' established branding and reputation within the poker community combined with an aggressive marketing campaign drawing in new players.

This rose-colored scenario seems implausible. Although the PokerStars brand remains strong among established poker players, those players are almost certainly already playing online on one of the existing poker sites. Even if PokerStars wins over many of these established players, they will be cannibalizing the market, not expanding it. Certainly a PokerStars marketing campaign could attract new players. But nearly two years post-legalization, it is questionable how large a pool there is of people in New Jersey who want to play online poker and who, for whatever reason, have not started playing on one of the existing sites. And, there is the problem of retaining new players once the initial marketing surge is past, a problem reflected in the sharp decline in online poker revenues mere months following legalization.

Ruddock and Dalla both assert that large numbers of New Jersey residents are unaware they can legally gamble online. According to Dalla:

"A recent poll in New Jersey revealed some staggering statistics that about 60 percent of the residents of the Garden State still are not aware that online poker/gambling is legal. Despite numerous marketing campaigns and a flood of advertising, a majority of citizens have no idea they can play poker legally on their computer. One expects that given PokerStars immense success cultivating and growing immature markets in numerous foreign countries over the past decade, with such vast resources they should have little trouble jump starting New Jersey’s online poker market into overdrive."

First off, Dalla doesn't specify or link to the survey he is citing. The only survey with results tracking Dalla's claims I could find dates back to November 2013, when online gaming was just beginning to launch. If this is the survey Dalla relies on, the results are understandable and irrelevant to the current state of the New Jersey market. But even if a more recent survey shows a high percentage of consumer confusion regarding online gaming, it is a mistake to conflate poker and casino gaming in this context. Online poker in New Jersey is most certainly not an "immature market". Online poker was available and heavily advertised for the better part of a decade prior to Black Friday, and has been available again and advertised again over the past two years. Online casino gaming, however, is in its infancy. So, while public knowledge of and comfort with online casino gaming may be low, there is no reason to assume that the same holds true for online poker.

Measuring PokerStars' success may well be a matter of managing expectations. There is nothing wrong with being bullish on PokerStars' impact on the New Jersey market; PokerStars has been the long-term industry leader for a reason. But, nobody should be shocked if the bulk of PokerStars' customers are cannibalized from the existing sites. This is not inherently a bad result, as healthy competition among the poker sites should benefit players. Further, in light of the currently stagnant-to-declining market, success for PokerStars might realistically mean expanding the New Jersey online poker market by 10% in the first year (average monthly revenues of $2.2 million/month), and 25% over three years ($2.5 million/month). Increasing the market by 50%—up to the $3 million in monthly revenues experienced immediately after legalized poker launched—should be considered a home run. Expecting PokerStars to double the market is setting everyone up for disappointment.


Will Regulation Change PokerStars?

Poker players expecting the same online experience at the new PokerStars as they had with the Silver Age PokerStars are likely to be disappointed (Chris Grove, editor of Online Poker Report, highlights many of the key issues facing PokerStars). Between being purchased by a publicly traded company (Amaya Inc.) and being licensed by New Jersey to offer online gaming, PokerStars is now subject to a host of regulations which will inevitably change how it operates. Some of the more obvious changes:

• Ring-fencing and liquidity:  The most obvious change from the Silver Age is that players will not have access to PokerStars' global network of players. For that matter, players won't even have access to the broader U.S. market. Being limited to an in-state pool means PokerStars will likely not offer the same broad array of cash games and tournaments as in the Silver Age.
• Age verification:  In the Silver Age, PokerStars nominally had a minimum age for players of 18, though the age requirement seemed more a guideline than a rule. The current regulatory environment means strict enforcement of the minimum age of 21 for players, which will require PokerStars to shift from those parts of its prior marketing models directed at younger players. Frankly, the age 21 requirement will make it more difficult for PokerStars to attract new players on a long-term basis, as potential players are exposed to competing games such as e-sports and daily fantasy sports which do not have the same minimum age requirements.
• Payment processing:  Operating in a regulated environment will make moving money onto and off of PokerStars easier and more secure than in the Silver Age. But, PokerStars will have to comply with anti-money laundering and tax reporting regulations which may affect players used to the previous shadow economy of the unregulated Silver Age poker world.
• Speed to market:  Deployment of new software and innovative games (e.g., Rush Poker, and Spin 'N Go Tournaments) may be delayed by the regulatory approval process.
• Financial market pressures:  PokerStars' new owner, Amaya, will face pressure from its shareholders to meet certain financial benchmarks for revenues and earnings. This will impose limits on the amounts PokerStars will be able to invest in marketing campaigns, tournament guarantees, and player rewards. This is true even if PokerStars views New Jersey as worth running short-term losses to establish a strong market presence, and even if spillover effects such as improving its standing in other states are factored into the equation. At some point, even PokerStars has to worry about return on equity from its New Jersey operation.

Of course, in the regulated New Jersey market, every poker site will have to contend with the same set of regulatory issues. There is no reason to think PokerStars will have trouble adjusting to the new market conditions. But players expecting a return to the Silver Age may be unhappy about some aspects of the regulated version of PokerStars.


End of the Line for "Bad Actor" Laws?

One important effect of the New Jersey decision to approve PokerStars is that the "bad actor" debate may finally be put to rest. Immediately after Black Friday, there were strong policy reasons for legislators to cite in support of keeping PokerStars out of the U.S. market. After all, PokerStars had arguably (unquestionably, outside the poker community echo chamber) offered unlicensed gaming in violation of many state and federal laws, and had allegedly engaged in legally questionable practices in processing player fund deposits, all of which gave it an unfair advantage over companies which had followed the law strictly and stayed out of the U.S. market.

Nearly five years post-Black Friday, those arguments are obsolete, having been overtaken by events. PokerStars' competitors have enjoyed a two-year advantage in establishing a presence in the New Jersey market. More importantly, the sale of PokerStars to Amaya marked the exodus of indicted PokerStars founder Isai Scheinberg and other top executives. Consistent with how Nevada and New Jersey regulators have treated other gaming licensees with connections to individuals with sketchy legal issues, Amaya's clean record should make PokerStars a suitable operator in every state ... but for the impact of politics.

The bad actor (and related "tainted assets" provisions) have been incorporated into Nevada law and have most recently played a pivotal role in blocking passage of an online poker legalization bill in California. Such provisions have rightly been criticized as being economic protectionism for brick-and-mortar and tribal gaming interests dressed up in consumer protection and suitability clothing. But such arguments carried the veneer of legitimacy so long as the company founder remained under federal indictment. Now, with a respected state gaming board having investigated and given its stamp of approval to the new Amaya version of PokerStars, the bad actor bluff has effectively been called. The bad actor issue has always been more a political than a legal issue, but those seeking bad actor provisions will find it difficult to continue to argue that PokerStars is unsuitable in the face of the New Jersey DGE licensing decision.


Conclusion

The return of PokerStars to the United States market is unquestionably good for poker. Yet, PokerStars is burdened with the unrealistic expectation of returning online poker to the Silver Age, when million dollar tournament guarantees fell like manna from heaven, and rakeback flowed like milk and honey. It's simply unfair to saddle PokerStars with such a fevered vision. Far better to appreciate the return of PokerStars for what it is—an important step forward as online poker moves into the Modern Age as a regulated, legitimate, and accepted part of the American gaming experience.

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.

PokerStars v. Atlantic Club Casino—Bad Deal, or Deal Gone Bad?

"Well, with that the argument began—and it went hot and heavy. At first, Jabez Stone had a flicker of hope, but when he saw Dan'l Webster being forced back at point after point, he just sat scrunched in his corner, with his eyes on that japanned box. For there wasn't any doubt as to the deed or the signature—that was the worst of it. Dan'l Webster twisted and turned and thumped his fist on the table, but he couldn't get away from that. He offered to compromise the case; the stranger wouldn't hear of it. He pointed out the property had increased in value, and state senators ought to be worth more; the stranger stuck to the letter of the law. He was a great lawyer, Dan'l Webster, but we know who's the King of Lawyers, as the Good Book tells us, and it seemed as if, for the first time, Dan'l Webster had met his match."

~ "The Devil & Daniel Webster", by Stephen Vincent Benét (1936)

I.  What Does the Contract Say?

When Rational Group US Holdings—parent company for PokerStars—filed suit to enforce an agreement to purchase the Atlantic Club Casino from Resorts International Holdings, the Complaint painted a picture of PokerStars as a white knight rescuing the Atlantic Club from certain disaster, only to be repaid with treachery. Not surprisingly, commentary in the poker community has generally taken PokerStars' side in the dispute, calling the Atlantic Club's termination of the purchase agreement a "loophole" which was grossly unfair given the fact that PokerStars had already paid $11 million of the $15 million purchase price as weekly expense advances to keep the Atlantic Club solvent and operational. The Atlantic Club's demand for an additional $4 million termination fee was portrayed as simply twisting the knife in PokerStars' back.

Of course, to this point the actual purchase agreement has not been released to the public, so commentary about the case has naturally been shaped by how PokerStars portrayed the purchase agreement. But when it comes to contracts, the devil is in the details. To evaluate the dispute between PokerStars and the Atlantic Club, there is no substitute for reviewing the nitty gritty of the actual purchase agreement.

Via some contacts in the legal community, I was able to obtain copies of all of the court filings related to the temporary restraining order (TRO), including a copy of the Purchase Agreement (attached as an Exhibit to the Complaint). So, without further ado, lets take a look under the hood.


II.  The "Outside Date"

Probably the biggest issue raised by PokerStars was a claim that the "outside date" in the purchase agreement (April 26, 2013) was void for violating this New Jersey gaming statute provision:

"[W]henever any person contracts to transfer any property relating to an ongoing casino operation … under circumstances which require that the transferee obtain casino licensure … the contract shall not specify a closing or settlement date which is earlier than the 121st day after the submission of a completed application for licensure or qualification… Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes."

PokerStars' argument is that its application was not "completed" until April 11, 2013, and thus any contractual provision for an "Outside Date" less than 121 days later (before August 9, 2013) would be void pursuant to law. However, for PokerStars' argument to work, the "Outside Date" in the Purchase Agreement would also have to be the "Closing Date" specified in the Purchase Agreement. Otherwise, the "Outside Date" is something different than a "closing or settlement date" and the statute would not apply.

From the outset, this argument struck me as dubious, primarily because a "closing or settlement date" is generally understood to be the date the actual transfer of property and money occurs between buyer and seller to conclude the transaction. Obtaining any required licenses and other regulatory approvals would usually be a condition precedent to a closing on the sale of a business. A purchase agreement dependent on licensing of the purchaser or similar regulatory approval would never specify a closing date prior to conclusion of the licensing or regulatory approval process. Thus, it seemed fairly clear to me that the "Outside Date" referenced in PokerStars' Complaint and Brief almost certainly was not the same as the contractual "Closing Date".

The Purchase Agreement confirms my expectations, and does so right out of the gate. Section 1.1 provides:

Section 1.1. Purchase and Sale of Interests. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, each Seller shall sell, transfer and deliver to Buyer ..., and Buyer shall purchase from the Sellers, the Interests set forth opposite each Seller's name on Schedule I, for an aggregate purchase price of Fifteen Million Dollars ($15,000,000) ...

Section 1.2 sets out the calculation of the purchase price, and includes references to a "Closing Date", "Closing Date Payment I' and "Closing Date Payment II". [FN1]. Similarly, Section 1.5 sets forth a number of legal documents that are to be executed and delivered "at Closing". In contracts, capitalized words and phrases are generally defined terms, meaning they are a shorthand reference to a particular set of facts, calculations, or conditions used for clarity and consistency throughout the contract. "Closing" and "Closing Date" are defined in Section 1.4 of the Purchase Agreement:

Section 1.4. Time and Place of Closing; Actions Prior to Closing.

(a) Unless this Agreement is earlier terminated pursuant to Article VII hereof, the closing of the transactions contemplated by this Agreement, including the purchase and sale of the Interests (the "Closing"), shall take place not later than the third Business Day following satisfaction or waiver of all the conditions set forth in Article VI hereof (other than those conditions intended to be satisfied or waived at Closing), at the offices of Wilkie Farr & Gallagher LLP, ... unless another time or place shall be agreed to by the parties (the "Closing Date").

As expected, one of the conditions precedent to Closing was for PokerStars to obtain an Interim Casino Authorization (ICA) (Section 6.1):

Section 6.1. Conditions to Each Party's Obligation to Effect the Closing. The respective obligations of each party to this Agreement to effect the Closing is subject to the satisfaction of each of the following conditions on or prior to the Closing Date, any of which may be waived in whole or in part in a writing executed by all the parties hereto:
....

(c) Interim Casino Authority. The ICA will have been obtained and will be in full force and effect.

Because obtaining the ICA was a condition precedent to Closing, the Closing Date was not a specified date in the Purchase Agreement, and in fact could not be specified as that date was pegged to PokerStars obtaining an ICA (which will not occur, if at all, until later this summer).

By contrast, the "Outside Date" is a specified date in the contract. Pursuant to Section 10.1(a), the general definitions section of the Purchase Agreement:

"Outside Date" means April 26, 2013.

Section 10.1(b) also specifically notes that "Closing" and "Closing Date" are defined in Section 1.4. So, by definition the "Outside Date" is not a "closing or settlement date". Given these provisions, PokerStars improperly conflated the Outside Date with the Closing Date in its Complaint (para. 81) and initial Brief (pp. 20-22). [FN2].

PokerStars did back away from this assertion in its Reply Brief (pp. 11-16), instead suggesting that the Outside Date and Closing Date were "inextricably linked". According to PokerStars, termination via the Outside Date provision is only possible if the transaction had not closed, and closing is dependent on PokerStars obtaining an ICA; therefore, the Outside Date implicitly requires closing on or before April 26, 2013, and thus violates the 121-day provision of New Jersey gaming law.

Although PokerStars' argument may have superficial appeal, it falls apart under closer analysis. The Termination provisions of the Purchase Agreement (Section 7.1) state:

Section 7.1. Termination. This Agreement may be terminated at any time prior to the Closing (with respect to Sections 7.1(b) through 7.1(f) hereof, by written notice by the terminating party to the other parties):
....

(b) by the Sellers' Representative or Buyer, if the transactions contemplated hereby shall not have been consummated on or prior to the Outside Date; provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose action or failure to act has been the primary cause of or resulted in the failure of the Closing to occur on or before the Outside Date and such action or failure to act constitutes a breach of this Agreement;
....

The plain language of Section 7.1(b) contemplates that the Outside Date is a deadline for consummating the deal that might occur "prior to Closing". Nothing in Section 7.1(b) requires Closing to occur on or before the Outside Date. [FN3]. Rather, Section 7.1(b) simply provides that, if Closing has not occurred by the Outside Date for whatever reason (including reasons unrelated to the ICA application), then after the Outside Date either party may choose to terminate the Purchase Agreement so long as the party terminating the agreement has not caused the failure to close by breaching any of its duties under the agreement. PokerStars and the Atlantic Club were free to allow the Purchase Agreement to remain in force after April 26, and even through August 9 or later if they had wanted to do so while awaiting the DGE's decision on PokerStars' ICA application. Thus, the Outside Date and Closing Date were not "inextricably linked". [FN4].

It is unquestionable that the Purchase Agreement placed tight time deadlines on PokerStars. Section 5.5(b) required PokerStars to submit an ICA application within three business days, which PokerStars did on December 24 (presumably PokerStars had been working on the ICA application since at least the signing of the original Term Sheet on November 7). From December 24 to April 26 is 123 days; clearly the Purchase Agreement provided more than 121 days for the DGE to consider PokerStars' ICA application. Thus, it was possible pursuant to the Purchase Agreement for PokerStars to obtain an ICA before the Outside Date and still complete Closing as contemplated by Section 1.4(a); of course, this would require PokerStars to have submitted a complete application by December 24. Further, Section 5.5(b) of the Purchase Agreement contemplated that the DGE might determine the ICA application was incomplete and require supplemental filings.

By agreeing to an Outside Date a mere 126 days subsequent to the signing date of the Purchase Agreement, PokerStars put itself in a situation where the ICA approval process needed to go smoothly. The ICA approval process and timelines were known to the parties. There was an inherent risk that PokerStars' ICA application would require additional time to process. Yet PokerStars agreed to an Outside Date that left little margin for error. The Outside Date was a contractual term bargained for by the parties. Absent fraudulent conduct, it would be unfair to set aside a contractual term merely because the provision ultimately worked to the benefit of one of the parties, or resulted in an outcome not anticipated by one of the parties.


III.  Retention of Advance Payments / Termination Penalty / Poker Room Buildout

The linchpin of PokerStars' equitable arguments is the claim that, because PokerStars has already paid the Atlantic Club slightly more $11 million in advances to fund the casino's operations since last November, it would be unfair to terminate the Purchase Agreement considering the total purchase price is $15 million. In fact, once a $4 million termination fee is added to the advance payments, the Atlantic Club will essentially receive the full $15 million purchase price, yet PokerStars will be left with no casino, a result PokerStars understandably considers "inequitable and unjust." (PokerStars Brief, pp. 28-29).

Once again, let's turn to the contract. Section 7.2 of the Purchase Agreement governs the rights and remedies of the parties upon termination (emphasis added):

Section 7.2. Effect of Termination.
....

(c) Remedies of Sellers. Notwithstanding anything to the contrary contained in this Agreement (including, for the avoidance of doubt, Section 7.2(e)), if this Agreement is terminated for any reason pursuant to Section 7.1 (other than by Buyer pursuant to Section 7.1(e)), Buyer shall pay to the Sellers' Representative, for further distribution to the Sellers, within two (2) Business Days of such termination, an amount equal in cash to Four Million Dollars $4,000,000 (the "Termination Payment"), and the Company shall be entitled to retain all Advances paid by Buyer to the Company pursuant to this Agreement and the Binding Term Sheet as of such termination.
....

PokerStars has also complained about paying nearly $320,000 to the Atlantic Club to fund the construction of a poker room in the casino, as well as incurring more than $1 million in additional fees and expenses in connection with the purchase agreement (a safe guess is that most of these fees and expenses were legal fees connected to the casino purchase and the ICA application process). (PokerStars Brief, p. 13). Section 5.17 of the Purchase Agreement addresses the poker room expenses (emphasis added):

Section 5.17. Poker Room. Prior to the Closing, at the request of Buyer, the Company shall cooperate, in all reasonable respects, with respect to the contruction of a poker room at the Property in accordance with the instructions of Buyer; provided, that Buyer shall fund all costs and expenses related to such poker room in advance, and shall obtain and pay for in advance all necessary Permits and insurance coverage related thereto. In no event shall costs or expenses incurred or any amounts otherwise paid by Buyer in connection with this Section 5.17 be deemed an Advance, and in no event, whether or not the transaction contemplated by this Agreement are consummated, shall the Company, the Sellers or any of their Affiliates be liable, directly or by reimbursement of the Buyer or any of its Affiliates, for any such costs or expenses.

Similarly, Section 7.2(b) addresses other fees and expenses:

Section 7.2. Effect of Termination.
....

(b) Fees and Expenses. Except as otherwise expressly provided in this Agreement, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Closing is consummated.
....

Based on these contractual provisions, if the Atlantic Club could properly terminate the Purchase Agreement, then PokerStars really has little reason to complain about the financial penalties it will incur. There are sound business reasons behind each of these financial provisions. First, with respect to outside fees and expenses, it is standard to require each side to bear its own fees and expenses associated with a business transaction. In large part, this standard rule is based on the idea that these types of fees and expenses are simply part of the cost of doing business, and each party to the transaction can control the fees and expenses it incurs as it sees reasonably prudent. Next, with respect to the construction of the poker room, this was a condition of the transaction that was specifically requested by PokerStars for its own benefit, most likely to provide live poker play as a cross-marketing tool to complement its online poker operations. Presumably if the Atlantic Club would have wanted a poker room, it would have already opened one. Sure the Atlantic Club will wind up with a "free" poker room, but the room may well end up being a white elephant of little use to the casino's operations.

Turning to the advance payments, again these payments were for the benefit of PokerStars, which wanted to purchase the Atlantic Club as a going concern rather than as a distressed or insolvent business. Keeping the casino afloat had real value to PokerStars, to the extent that the Purchase Agreement contained an express provision (Section 5.20) requiring the Atlantic Club to provide 24 hours notice prior to filing for bankruptcy, and to give PokerStars at least three days to provide sufficient cash to prevent a bankruptcy filing. Of course, the advance payments also directly benefited the Atlantic Club which has been able to operate through the winter and spring "down" periods primarily by using PokerStars' payments to fund its operations. It's also undeniable that the Atlantic Club will continue to benefit from those advances as it enters the more lucrative summer season and as it seeks another buyer. Nonetheless, the Purchase Agreement would likely never have been agreed to by the Atlantic Club if the advance payments by PokerStars were considered a loan or were to be forfeited back to PokerStars in the event the sale fell through; the Atlantic Club could not risk the negative financial impact of such an arrangement which would likely have made the casino immediately insolvent. Thus, the Purchase Agreement provisions related to the retention of advance payments by the Atlantic Club upon termination were likely an essential term of the deal.

Finally, the $4 million Termination Payment provision also makes business sense. By entering into the Purchase Agreement, the Atlantic Club was barred from discussing a better deal with any other potential buyer, potentially locking the casino into a sale below market value. This period of exclusivity was arguably of great benefit to PokerStars. The Termination Payment is a mechanism which encouraged PokerStars to consummate the sale while also providing compensation to the Atlantic Club in the event the deal fell through. A Termination Payment "penalty" of essentially $1 million per month of the Purchase Agreement's exclusivity period is steep, but hardly out of line given the financial scale of the overall transaction.

The financial consequences of a termination of the Purchase Agreement—regardless of cause—were negotiated by the parties and spelled out in great detail in the contract. Assuming the Atlantic Club properly terminated the Purchase Agreement for failure to close the deal prior to the Outside Date, PokerStars should have to live with the bargained-for consequences of its deal. It is neither unjust nor inequitable to require a party to live up to the legal terms of its contract, even if doing so imposes a steep financial price.


IV.  Conclusion

In analyzing the failed PokerStars-Atlantic Club Casino deal, it is important to keep in mind that the parties were sophisticated businesses which negotiated a complex financial transaction. The lengthy and detailed Purchase Agreement memorializing the numerous terms, conditions, and provisions of the deal was presumably reviewed by executives and legal counsel for both parties. Legal counsel for a deal of this magnitude are notorious for parsing every sentence, even every word, of a contract as important as this Purchase Agreement (and are paid handsomely for their expertise).

There is a strong legal presumption that the Purchase Agreement contains the entire contract between the parties (Section 10.7 contains what is known as an "integration clause", which essentially provides that the written contract is the sole and final expression of the parties' agreement). The mere fact that one of the parties—PokerStars—now claims it had a different understanding of the terms of that contract is of little relevance. PokerStars bargained for and agreed to the Purchase Agreement as it was signed by the parties. In fairness to PokerStars, it is entirely possible that making the deal happen required Poker Stars to concede many of the more onerous terms contained in the Purchase Agreement. If so, PokerStars may well have taken a calculated gamble that it could receive ICA approval before the Outside Date, knowing there was a significant downside risk to any delay in the licensing process. On the other hand, PokerStars may well have been simply out-negotiated by the crafty Atlantic Club folks (who had managed the casino to the brink of insolvency). Regardless, if the terms of the Purchase Agreement provide that the Atlantic Club can walk away from the deal and keep the money advanced by PokerStars, it's a little late in the day for PokerStars to start whining about how "unfair" the contract is.

One of the ironies of the PokerStars-Atlantic Club Casino debacle is that PokerStars (and its attorneys) come off looking like fools, which is quite a contrast to the general image of PokerStars as being run by sophisticated businessmen who are at the pinnacle of the online gaming industry. The failure of this deal is certainly an embarrassing setback for PokerStars, but it is not the end of the game by any means. PokerStars still has options available to obtain a license in New Jersey. The Atlantic Club fiasco simply means PokerStars moves forward with egg on its face at best, and mortally wounded at worst.

Tomorrow:  A look at PokerStars' legal options in the wake of the Atlantic Club Casino debacle.

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[FN1] Interestingly, Section 1.2 of the Purchase Agreement indicates that PokerStars was to be given credit against the $15 million purchase price for $6,434,000 in advances paid to the Atlantic Club Casino prior to signing the Purchase Agreement on December 21, 2012. Those prior advances were made pursuant to the preliminary Term Sheet reached between the parties on November 7, 2012. The amount of these prior payments, coupled with the need for roughly $4.5 million in additional advances (see Section 1.3) during the four months the Purchase Agreement was in effect underscores the severity of the financial troubles faced by the Atlantic Club in the Fall of 2012. To be blunt, the Atlantic Club was hemorrhaging nearly $2 million per month during the six months PokerStars was subsidizing the casino. PokerStars' claim to have saved the Atlantic Club from bankruptcy is most likely true.

[FN2]. The Atlantic Club's lawyers did a nifty bit of advocacy on this point by attaching to their Brief a table summarizing six other casino purchase agreements which contained both Outside Dates and Closing Dates, and which had similar provisions for termination of the purchase agreement if Closing did not occur by the Outside Date. Some of these purchase agreements contained provisions for automatic or optional extensions of the Outside Date in the event regulatory approval or certain other specified conditions were the reason for the delay in Closing. Those provisions for extension of the Outside Date are notably absent from the PokerStars-Atlantic Club purchase agreement.

[FN3]. In fairness to PokerStars and its attorneys, one provision of the Purchase Agreement (Section 5.5(c)) does suggest that the parties intended for Closing to occur before the Outside Date (emphasis added):

Section 5.5. Governmental Approvals.
....

(c) Without limiting Section 5.5(a) or Section 5.5(b) hereof, Buyer, its Affiliates and the Sellers shall (i) each use its reasonable best efforts to avoid the entry of, or to have vacated or terminated, any decree, order, or judgment that would restrain, prevent or delay the Closing, on or before the Outside Date, including defending through litigation on the merits any claim asserted in any court by any Person, and (ii) each use its reasonable best efforts to avoid or eliminate each and every impediment under any antitrust, competition or trade regulation Law that may be asserted by any Governmental Entity with respect to the Closing so as to enable the Closing to occur as soon as reasonably possible (and in any event no later than the Outside Date), including implementing, contesting or resisting any litigation before any court or quasi-judicial administrative tribunal seeking to restrain or enjoin the Closing provided that the parties shall not be obliged to take any action which is likely to damage their business or that of any of their Affiliates.

The problem with the Purchase Agreement is that the Closing conditions and Termination provisions noted above do not contain similar limiting language linking the Closing Date to the Outside Date.

[FN4]. In another bit of nifty advocacy, the Atlantic Club's attorneys obtained affidavits from three prominent prior members of the New Jersey DGE stating that the statutory 121-day period before any closing date was merely intended to ensure a reasonable period for review of any ICA application, and did not prohibit the parties from imposing a shorter "Outside Date" or "Drop Dead Date" terminating the purchase agreement prior to the closing date. (See Affidavits of Thomas Auriemma, Frank Catania, Sr., and Steven Perskie). Technically, construction and interpretation of the statute at issue is a matter for the court, and the opinions of these individuals are irrelevant. As a practical matter, these opinions gave the judge some cover for declaring that the statute did not bar the termination of the Purchase Agreement; after all, he was only agreeing with the "experts" in that area of the law.

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.

Atlantic Club Casino Drops a Neutron Bomb on PokerStars

The already contentious lawsuit between former—and possibly future—business partners PokerStars and Atlantic Club Casino just turned nasty. The lawsuit in New Jersey state court centers on whether Atlantic Club properly terminated a contract to let PokerStars purchase the casino because PokerStars missed a key deadline tied to obtaining a gaming license. Because the parties' legal filings this week are not yet available to the general public [FN1], I cannot analyze and comment on the relative strengths and weaknesses of the opposing legal arguments. One widely reported argument raised by Atlantic Club, however, does have intriguing legal implications.

A key defense raised by Atlantic Club is that it was purportedly unaware of the most serious Black Friday-related charges against PokerStars and its then-CEO, Isai Scheinberg, until after entering into the purchase agreement. Indeed, Atlantic Club claims it was in the dark about the extent of the Back Friday charges until after PokerStars submitted its New Jersey gaming license application in March. According to Atlantic Club, "significant information emerged publicly that Plaintiffs’ principals were associated with serious criminal activities more extensive and unresolved than previously disclosed." Further, Atlantic Club claimed to have been unaware that former PokerStars executives Scheinberg and Paul Tate had been indicted on a number of federal charges related to offering online gaming illegally in the United States and disguising monetary transactions related to such illegal gaming. Perhaps most significantly, Atlantic Club contends that Scheinberg has been actively involved in the negotiations for the purchase of the casino and in PokerStars' licensing efforts, which implies PokerStars may be in violation of their settlement agreement with the Department of Justice which required Scheinberg to give up any managing role in the company.

As a litigator, my first impression was that Atlantic Club included these allegations mostly in an attempt to throw some dirt at PokerStars. As you will recall, PokerStars had raised certain claims such as breach of the duty of good faith, promissory estoppel, and unjust enrichment which are based in equity (i.e., principles of fairness). In essence, PokerStars claimed Atlantic Club was not acting fairly and in good faith in terminating the purchase agreement. However, a litigant seeking an equitable remedy is generally required to come to court with "clean hands", meaning the party has itself acted fairly and in good faith. By contrast, issues of law—such as PokerStars' claim for breach of contract—apply rules without regard for fairness (though it never hurts to dirty up an opponent even on purely legal issues). So, Atlantic Club's response bringing up PokerStars' Black Friday legal issues is an obvious attempt to undermine PokerStars' entitlement to equitable relief.

Another obvious purpose of raising the Black Friday scandal is to undermine PokerStars' credibility with the court. Given the nature of the charges in the criminal indictments and civil complaints—violations of gaming laws, bank fraud, and money laundering—Atlantic Club is painting PokerStars as an unsavory characters, folks the court should send packing. Of course, this raises interesting questions for Atlantic Club as to why they were doing business with PokerStars in the first place. The official Atlantic Club line is that they were unaware of the serious nature of the Black Friday allegations until the American Gaming Association (AGA) filed a brief in opposition to PokerStars gaming license application. This explanation is pure bovine excrement. The general public might not know about the Black Friday charges, but it was big news in the gaming industry. A gaming executive, even one at a land-based casino, would have known enough about Black Friday and PokerStars' prominent connection to the criminal and civil cases to have done some basic due diligence investigation of PokerStars before getting into bed with them on a multimillion dollar business deal that depended on gaming commission approval.  Still, even if the accusations tar Atlantic Club indirectly, the more PokerStars is talking about Black Friday in court, the less likely they are to win their case on the merits.

Which brings us to my personal "neutron bomb" theory. A neutron bomb is a nuclear device much like conventional hydrogen bombs, but specifically designed so that the majority of the bomb's energy is released as neutron radiation instead of explosive energy. The purpose of a neutron bomb is to maximize lethality to people, while minimizing damage to structures. So, a neutron bomb's destructive radius is relatively small, yet it causes death by radiation to people within close proximity (~1500 meters) to the detonation point. Many of those exposed to lethal doses of radiation linger for days or weeks before dying, with no viable treatment options.

The more I think about Atlantic Club's decision to throw Black Friday mud at PokerStars, the less sense it makes if this were a simple contractual dispute. PokerStars has a legitimate shot at winning the breach of contract claim, and specific performance of the contract—requiring the parties to abide by the purchse agreement and selling the casino to PokerStars if they obtain licensing—is the most likely remedy (money damages are often viewed as inadequate if the contract involves sale of property or a similar unique transaction). If there is a real chance the parties will be ordered by the court to continue forward with the deal, then Atlantic Club's muckraking only poisons an already tense relationship for a questionable amount of litigation benefit.

Atlantic Club's focus on PokerStars' Black Friday issues makes complete sense, however, if Atlantic Club has another buyer lined up and simply wants to kill off the PokerStars' deal at any cost, even if that means making PokerStars too radioactive for a gaming license. When the American Gaming Association (AGA) raised the Black Friday issues in its brief to the New Jersey Division of Gaming Enforcement (DGE), those issues did not seem to gain much traction publicly. The Black Friday issues would have been easy for the DGE to minimize in reaching a decision on PokerStars' application for a gaming license. But now those accusations have been made publicly, in court, in a high-profile case, and include accusations that PokerStars has breached its DOJ settlement agreement to keep Scheinberg out of the operations side of PokerStars. Even worse, those accusations are not coming from potential business rivals to PokerStars, as with the AGA brief. Instead, it's the Atlantic Club, a current gaming licensee and party to the proposed sale who claims that its own business partner is unsuitable for licensing. That fact alone is going to make it much more difficult for the DGE to simply whitewash PokerStars' Black Friday issues.

Atlantic Club seems intent on leveraging Scheinberg's apparent influence over PokerStars into evidence that PokerStars is unsuitable for licensing. Of course, without a gaming license, the purchase agreement is dead, whether now or in three months after the DGE's decision on PokerStars' application. In a similar case, DGE pressured MGM Resorts to sell off its New Jersey gaming operations because of DGE concerns that MGM's partner in its Macau operations, Pansy Ho, was too closely tied to her father, Stanley Ho, who is reputed to be connected to Chinese organized crime. DGE would be open to accusations of inconsistency if it now grants a gaming license to a company like PokerStars which has as a behind-the-scenes leader a man indicted for violating United States bank fraud and money laundering laws.

Further, Atlantic Club may be injecting Scheinberg into the debate to create a basis for having Scheinberg subpoenaed to testify in the United States about his current role in PokerStars, either in the litigation with PokerStars, or before the DGE as part of the licensing process, or both. Of course, Scheinberg would almost certainly decline to appear in the United States to avoid being arrested on his outstanding Black Friday charges, but doing so would likely sink the lawsuit and the gaming license.

New Jersey is PokerStars' best and possibly last chance to obtain a gaming license in the United States. If PokerStars continues to pursue the Atlantic Club litigation, Atlantic Club will ratchet up its attacks on PokerStars' Black Friday issues, which in turn will increase the pressure on the DGE to take a hard line in the licensing process. PokerStars could easily win the TRO battle and keep the Atlantic Club purchase agreement alive, only to find that the fight has fatally poisoned its chances to obtain the gaming license it needs both to complete the Atlantic Club purchase and to pursue licensing in other states. The Atlantic Club, on the other hand, would walk away relatively unscathed, $15 million richer, with its business operations intact and ready for sale to another, higher bidder.

With Scheinberg and Black Friday, the Atlantic Club may have created itself a litigation neutron bomb. If PokerStars presses their current lawsuit, don't be surprised if their hopes for a gaming license take a significant, even fatal, hit.

UPDATED (5/17/2013; 3:52 PM):  As I was editing and hitting "publish" on this post, news broke that, following today's hearing, the judge in the PokerStars-Atlantic Club Casino case lifted the TRO. This will permit Atlantic Club to move forward with a sale to another buyer. This ruling effectively ends the effort by PokerStars to buy the casino, but PokerStars could still continue to fight to recover the $15 million it has sunk into the casino to keep it operational during the term of the purchase agreement. The more intriguing question is whether the Scheinberg-Black Friday issues have already made PokerStars too radioactive for licensing in New Jersey, and effectively elsewhere in the United States.

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[FN1].  Although there have been a lot of filings by both parties this week, New Jersey's state court system does not provide online access to court records, and my New Jersey legal contacts have not been able to obtain copies of documents directly from the court (likely because the judge has the file for a key hearing on PokerStars' request for a temporary restraining order later today). However, at least two journalists—John Brennan of the "Meadowlands Matters" blog for and "Diamond Flush" of the eponymous poker blog—have either been provided copies of the parties' recent filings or had access to those filings and have provided excellent, detailed summaries of the legal jujitsu. Brennan's posts summarize Atlantic Club's resistance to the TRO, reviews the timeline of key events, notes the views of a number of "big gun" experts retained to support Atlantic Club's view of a key gaming law issue, and summarizes PokerStars' reply to Atlantic Club's arguments. Diamond Flush—who confirms she has a confidential source with access to the legal proceedings—has provided substantially more detailed summaries of the Atlantic Club's resistance to the TRO and supporting affidavits, as well as PokerStars' reply to those arguments. Most intriguing, however, was Diamond Flush's reporting (which I don't recall seeing covered elsewhere) of the details of an emergency court hearing held on May 7 in which Atlantic Club attempted to have the initial TRO rescinded prior to the original hearing date of May 17. The presiding judge denied that request, which is not unusual, though the hearing is quite interesting as it helps understand how the parties and the judge are framing the issues.

PokerStars v. Atlantic Club Casino—What to Watch for in Atlantic Club's Response

As most folks in the poker world are aware, the Rational Group—parent of online poker behemoth PokerStars—has filed suit against Resorts International and other defendants with respect to a dispute over an agreement for PokerStars to purchase the Atlantic Club Casino. The purchase of the Atlantic Club was—and maybe still is—the best vehicle for PokerStars' entry into the legal U.S. online poker market. The apparent failure of the deal has been covered by former corporate attorney turned poker journalist Dave "FTrain" Behr for Flushdraw.com (Part 1 and Part 2). Behr (at Flushdraw.com) along with poker journalists DiamondFlush (at DiamondFlush.com) and Chris Grove (at QuadJacks.com) have each provided excellent analyses of the initial Complaint and accompanying Motion for Temporary Restraining Order (TRO) and supporting Brief (thanks to Grove and QuadJacks for obtaining and sharing the original pleadings).

At this point, there's not much for me to add to the excellent work noted above, mostly because to this point we—and the Court—have seen only one side of the case. However, my 18-year career has been spent mostly as a litigator specializing in defending a variety of civil lawsuits, primarily insurance, financial, and commercial in nature. As a civil defense attorney, when looking at an initial Petition or Complaint, my first instinct is to ask, "What's missing? What didn't the Plaintiff or Petitioner tell the Court?" Often what's not mentioned in the Petition or Complaint are matters that go to the heart of the dispute. With respect to the PokersStars v. Atlantic Club Casino Complaint, there are several key factual issues that need to be fleshed out in the Atlantic Club's Response due later today. Three issues in particular deserve to be put on a "watch list" for when Atlantic Club files its Response.

I.  What does the Purchase Agreement state regarding the "Outside Date" and PokerStars' Obligation to Become Licensed?

The first, and most critical issue, is the exact contractual definition of "Outside Date", and the contractual significance of that date. Regrettably, the Purchase Agreement itself is not yet publicly available (though it was filed with and available to the Court). However, PokerStars makes repeated reference to various provisions of the Purchase Agreement throughout its Complaint and Brief, including quoting or even block-quoting several key provisions.

However, the Complaint and Brief cite to, paraphrase, but do not quote the relevant contractual provisions which apparently set an "Outside Date" for completion of certain aspects of the deal (referred to as Section 7.2), and also set forth the requirements for PokerStars to obtain a casino license (referred to as Section 5.5.). The failure to quote contractual terms is always a red flag to a litigator, because the precise contractual language is nearly always critical to the proper construction and interpretation of a contract.

In this particular case, the exact terms of the Purchase Agreement related to licensing and the "Outside Date" are critical because PokerStars is arguing those provisions run afoul of the following provision of the New Jersey gaming statutes:

[W]henever any person contracts to transfer any property relating to an ongoing casino operation … under circumstances which require that the transferee obtain casino licensure … the contract shall not specify a closing or settlement date which is earlier than the 121st day after the submission of a completed application for licensure or qualification… Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes.

PokerStars argues that its application was not "completed" until April 11, 2013, and thus any contractual provision for an "Outside Date" less than 120 days later (before August 9, 2013) would be void pursuant to law.

The problem with PokerStars' argument is that it is not clear whether the Purchase Agreement actually violates the statute. First, the term "Outside Date" is not defined. To violate the statute, the "Outside Date" must be a "closing or settlement date". A "closing date" is generally understood to be the date when control and ownership is transferred to the purchaser, and payment is made to the seller. A "settlement date" is generally understood to be the date payment is made for a previous transfer of goods or property. In the context of gaming control regulations connected to licensing of a previously unlicensed owner, "closing or settlement date" would appear to be the date when the purchaser takes control of the casino after receiving its license; the 120 day statutory requirement is to ensure there is sufficient time for gaming officials to consider, investigate, and make a determination as to the purchaser's suitability for licensing.

However, for those of us who have been involved in large business sales, it seems unlikely that the "closing date" is the same as a licensing date. Closing on a large business sale like this requires significant "due diligence", including transferring deeds, clearing liens, assigning contracts and accounts, and reviewing employment and labor contracts (the PokerStars Complaint and Brief take Atantic Club to task for failing to provide paperwork on several of these types of due diligence issues). The more common practice where regulatory approval is required for a transaction would be to designate a deadline for obtaining necessary approvals or licenses, and a later date for the actual closing of the transaction.

In the present case, PokerStars' obtaining licensing by a particular date might be a condition precedent for closing the deal, not the closing date itself. In other words, the "Outside Date" might refer to a deadline by which PokerStars was to be licensed to keep the deal alive, with a later formal closing date (perhaps tied to the date of licensing; e.g., "Closing shall occur within 30 days of PokerStars receiving a valid gaming license."). Or, the "Outside Date" might be a deadline on the entire deal itself; if all requirements are not met by that date, then the Purchase Agreement terminates. In such a case, the "Outside Date" would operate not as a closing date, but as the expiration date on an option to buy the casino (and it is unquestioned that the Purchase Agreement provided more than sufficient time from the date of signing in which PokerStars could have submitted a "completed application" and still had 120 days before the "Outside Date"). Similarly, there might be other deadlines in the Purchase Agreement which are not tied to licensing which PokerStars missed because of the licensing delays.

Of course, without the Purchase Agreement, we are in the dark as to what was meant by the term "Outside Date", and whether that "Outside Date" was the equivalent of a "closing or settlement date" pursuant to the relevant statute. But the Atlantic Club will need a convincing argument that the closing date statute has not been violated to avoid being found in breach of the Purchase Agreement.

II.  What is the Atlantic Club's explanation for appearing to mislead PokerStars into thinking the "Outside Date" would not be enforced?

In its claims for unjust enrichment and promissory estoppel, PokerStars outlines a number of communications and actions by the Atlantic Club which PokerStars claims unfairly gave the impression that the Atlantic Club was not going to enforce the "Outside Date" and terminate the Purchase Agreement. Both of these claims are equitable in nature, based on principles of fairness where one party has misled another party to its detriment. Principles of equity generally will not operate to void valid contractual provisions; equity is not intended to save parties from bad deals, only to remedy unfair conduct.

Here, the Purchase Agreement will again be key. Often contracts have "non-waiver of default" provisions that state a party can choose not to invoke a remedy for one default without waiving the right to later pursue a remedy for a future default. Here, the Atlantic Club might argue it was cooperating with PokerStars to make the deal work until it became obvious that the closing time frame was too far removed from the original "Outside Date" and it needed to terminate the Purchase Agreement and pursue other options.

The Atlantic Club will also need to answer what I view as PokerStars' strongest argument—PokerStars has paid advances of $11 million, and is potentially on the hook for an additional $4 million penalty, which is roughly equivalent to the full purchase price of the deal. Thus, termination of the Purchase Agreement essentially works a forfeiture of the entire purchase price. Generally speaking, the law frowns on forfeitures. However, if forfeiture of advance payments is a remedy spelled out in the Purchase Agreement, it likely is enforceable as a bargained-for condition of the contract.

More troubling is the allegation that the Atlantic Club demanded certain advances on construction costs associated with refurbishing the casino for PokerStars, including building out a poker room. Some of these demands for advance payments were made after the time when it appears the Atlantic Club was already considering terminating the Purchase Agreement. How the Atlantic Club responds to these complaints is also important. However, even if some of these actions by the Atlantic Club are found to be improper, the Court may nonetheless determine that the appropriate remedy is only reimbursement of specific payments made after the date the Atlantic Club determined the deal would not meet the contractual deadline. PokerStars' preferred remedies of either specific performance of the contract or reimbursement of all payments may both be rejected even if PokerStars demonstrates detrimental reliance on some of the Atlantic Club's statements and demands.

III.  Spot the malpractice.

Assuming that the major issues are whether the "Outside Date" complies with New Jersey law, and whether the Purchase Agreement provides for forfeiture of advance payments if PokerStars did not obtain a gaming license, the obvious question will be "What lawyer dropped the ball?" These issues are so legally obvious, so critical to the business deal, and of such a major financial magnitude that the attorneys drafting the Purchase Agreement and giving the parties advice on how to proceed pursuant to that contract have to be sweating profusely about how to explain any potential loss in Court to their respective clients.

Get your popcorn. This lawsuit promises to be legal Bloodsport.