Kentucky is looking for a huge payout
One of the most frustrating stories to come out of gambling since the passage of the UIGEA in 2006 has been the ongoing battle between the state of Kentucky and PokerStars, which is now owned by Flutter Entertainment. In 2008 Kentucky Governor Steve Beshear seized 141 domain names of gambling companies that he said were breaking Kentucky law by offering their products to Kentucky residents. Calling gambling sites leeches, he blamed them for his failings amid the 2008 financial meltdown. The seizure order was taken to a Kentucky Circuit Court, where Judge Thomas Wingate agreed to allow the seizures to go ahead, saying that the domain names were a form of physical property, which he called gambling devices, and thus said the court had the right to enforce a seizure of the domains. Among the more famous domain names seized were Bookmaker.com, Sportsbook.com, Golden Palace.com, FullTiltPoker.com and PokerStars.com. Lawyers for the sites challenged the seizures in court and a Kentucky appellate court agreed with the lawyers saying the domain names were not gambling devices and ordered the domains be released.
In 2011, the FBI seized several gambling domains in what became known as Black Friday and Blue Monday. Consequently, the state of Kentucky dropped its appeal for nine of the domain names that were now in the hands of the federal government. Those included Absoloutepoker.com, Ultimatepoker.com, DoylesRoom.com, FullTiltPoker.com, TruePoker.com, PokerStars.com, Bookmaker.com and Bodog.com. DoylesRoom, AbsolutePoker.com, UltimateBet.com and TruePoker.com all folded their operations, while Bookmaker and Bodog relinquished the .com domains and instead registered a .eu extension, which was outside of the reach of the U.S. government. Eventually Bodog got its .com domain back, but that site is not used for American players, who instead were tuned over to Bovada.lv. And both Bookmaker.com and TruePoker.com were bought by other companies and turned into gambling information sites and forums. The majority of the other 131 domains really had little value and it appears the state decided it wasn't worth continuing their attempts to seize those sites. Although it has been reported that some sites may have made a secret deal with Kentucky to convince the state not to pursue the domain name seizures any further.
Stars and Full Tilt
The story of PokerStars and FullTiltPoker, however, was another story.
Without going into a lot of detail, after the seizure of FullTiltPoker, the Department of Justice (DoJ) quickly realized that FullTiltPoker did not have the funds to repay its players as the company did not segregate post up funds from operating capital. So, the DoJ called FullTiltPoker a Ponzi scheme. However, PokerStars did segregate funds and thus had the money to pay all U.S. players, plus they had a lot of capital left over. Consequently, the U.S. federal government cut a deal with the PokerStars owners for $731 million.
In that agreement, PokerStars paid $184 million for FullTiltPoker.com, even though it really provided the company no benefit, and that money was then used to pay back all American FullTilt players who were calling for the government's head and threatened to show their disgust with the government at the polling booths. The remainder went to the government, part of which was used to pay back any other U.S. poker players, who submitted proof of outstanding funds owed, to the DOJ, and the remaining amount was put in U.S. coffers to cover the costs of prosecuting these cases and any ongoing suits. In doing so, PokerStars admitted no wrongdoing and the DOJ agreed to completely exonerate the company for any past actions.
Lawsuits and Appeals
Kentucky was clearly very angry at the outcome, so they coerced the federal government to give the state $6 million of the settlement money for relinquishing its claims for AbsolutePoker.com, UltimateBet.com and FullTiltPoker.com from the money the feds received from PokerStars and then decided to sue PokerStars for money they said that the company took from Kentucky residents between 2006 (the passage of the UIGEA) and 2011, the date of the FBI seizures.
According to the motion filed by the state in 2013, 35,000 Kentucky residents spent over $290 million on poker at PokerStars.com and the state was entitled to receive all of those funds, since Kentucky rules allow the state to take any money that was laid out, not just rake or profit. In 2015 Kentucky Circuit Court Judge Thomas D. Wingate, the same judge who oversaw the domain seizure case, ruled that PokerStars not only operated illegally, but cheated the government. Furthermore, the court said PokerStars had to pay triple the losses under a 1798 Kentucky law called the Loss Recovery Act, saying that PokerStars "willfully violated Kentucky anti-gambling laws." Wingate said that PokerStars didn't have to pay the $870 million at once, but would be charged 12% annual interest on the amount until they turned over all funds owed to the state.
The ruling was challenged at an appellate court in 2018. They overturned Wingate's decision, saying that the Loss Recovery Act could only be used by individuals who lost money and could not be filed on behalf of the commonwealth. Since no individual Kentucky residents came forward to file a suit, the appeals court said the state had no standing and if a state could sue on behalf of its citizens it would lead to unfair, absurd, and unjust results.
Kentucky appealed that decision to the Kentucky Supreme Court, which in December 2020, in a 4-3 ruling, overturned the appellate court ruling and ordered PokerStars to pay $1.3 billion to the state - the original $870 million ruling, plus 12% interest accrued since the original 2015 decision.
Not surprisingly Flutter Entertainment, which now owns the Stars Group, having purchased it from Amaya Gaming in 2020, cried foul. Aside from the fact they had nothing to do with the company when the alleged wrongdoings took place, they are also saying that the judgement is absurd since PokerStars would have only made $18 million from rake in the 5 years under question and the rule that the state can take any moneys bet and not just revenue is preposterous. Consequently, Flutter has issued a statement that they will be challenging this ruling to the Supreme Court of the United States and are actually arguing that the same 1798 law that the state of Kentucky used to justify the settlement will help exonerate them. According to Stars, the Loss Recovery Act has a provision called the Excessive Fines Clause that prohibits cruel and unusual punishment.
"These monstrous damages cry out for this Court’s review," the petition to the Supreme Court by Flutter states. "Even in matters of state concern, this Court applies constitutional brakes to damages that run wild."
Why the case should be overturned
There are several reasons why the U.S. Supreme Court (SCOTUS) should and must overturn the Kentucky Supreme Court decision.
First, the original argument by the appellate court was completely valid and the state had no right to sue PokerStars on behalf of Kentucky residents. If it does, then how in the world is the state going to "reimburse" every single person who bet money at PokerStars from 2006 to 2011 and how will Kentucky residents prove how much they bet. If the money simply goes into Kentucky general coffers, then it completely invalidates Kentucky’s stated reasoning for suing PokerStars in the first place, which was to help Kentucky residents recover their money.
Second, the agreement by PokerStars to pay the federal government $714 million to clear it of any wrongdoing should supersede the Kentucky claim, since federal courts take jurisdiction in these types of cases and SCOTUS will know this. Moreover, Kentucky received $6 million from the feds out of the funds received from PokerStars, which should be seen as fair remuneration and make any subsequent claims null and void. And Flutter is nine years removed from the original owners of PokerStars, who the suits were originally launched against.
Third, Flutter Entertainment has a large presence in the United States now and is employing tens of thousands of Americans, which has been made possible by both the 2011 DoJ opinion which said that the Wire Act only applies to sports betting, the 2018 repeal of PASPA by SCOTUS and dozens of laws passed by states which allows Flutter to operate legally there. To impose this fine on Flutter would send a sour message to the states and could cause issues with any states that have "bad actor" clauses as part of the process to license operators.
Fourth, the amount awarded to Kentucky is absurd. A company should only be held liable to a maximum of the amount of money they made. If SCOTUS allows this judgement to go ahead, then it will set a precedent that allows any company that operated in the United States to be sued for every single penny they received from the sale of their products, and not just profits. By the logic used under he 1778 law, if General Motors was found to have acted inappropriately in 2020 and ordered to forfeit their earnings for the year, the government of Kentucky could sue them for every dollar that a Kentucky resident spent on cars and other GM products in that year and not just the money they made from the sales. By its very description that is excessive.
Finally, if SCOTUS doesn’t act and allows the $1.3 billion award to go ahead, then it’s almost certain other states will follow suit and start suing Flutter for any amount they believe their citizens wagered from 2006 to 2011 in their states at PokerStars.com. If that total turns out to be in the tens of billions of dollars, it’s almost certain Flutter would simply withdraw all its services, which includes FanDuel, Betfair, TVG and other businesses in the United States, rather than paying the unrealistic fine. This would cause tens of thousands of jobs lost, a great deal of turmoil, and what was set to be an industry ready to help states and the federal government turn their fortunes around through this pandemic, in turmoil. And other companies like Caesars, which took over William Hill and DraftKings would no doubt always be looking over their other shoulders wondering when an unfair judgement would fall on them.
Kentucky deserves zero
So, SCOTUS has a decision to make and it's clear what that should be. If found guilty Flutter should owe Kentucky $18 million plus interest, but in reality the state of Kentucky deserves nothing. PokerStars was exonerated in 2011 and got Uncle Sam out of a great heap of trouble by agreeing to pay back all FullTilt players and giving the government an additional $514 million for their debts at the time. A deal is a deal and the U.S. government said that payment cleared the company of any further actions.
PokerStars lived up to their end of the deal and now it's time for SCOTUS to rule that Kentucky's suit afterwards had no merit to begin with as soon as the DoJ exonerated them.