Cheryl Kater v. Churchill Downs Inc.

Citation: 886 F.3d 784Docket: 16-35010

Court: Court of Appeals for the Ninth Circuit; March 28, 2018; Federal Appellate Court

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The Ninth Circuit reversed the dismissal of a class action lawsuit against Churchill Downs regarding its virtual game platform, Big Fish Casino, which was alleged to violate Washington's Recovery of Money Lost at Gambling Act and Consumer Protection Act, and to constitute unjust enrichment. The court found that all online gambling is illegal in Washington, and determined that Big Fish Casino's virtual chips, although not exchangeable for cash, represented a "thing of value" under Washington law due to their transferability between users and the ability to "cash out" winnings. Consequently, the court ruled that the platform constituted illegal gambling. Plaintiff Cheryl Kater successfully claimed under the Recovery of Money Lost at Gambling Act, asserting a loss of over $1,000 in virtual chips, which she could recover from Churchill Downs as the casino's operator.

Big Fish Casino is a virtual casino platform where users can play electronic games like blackjack and poker. The app is free to download, offers initial free chips to new users, and allows for the purchase of additional chips ranging from $1.99 to nearly $250. Users can earn chips through gameplay but must buy more if they run out, as the chips have no cash value according to the platform's Terms of Use. However, there is a mechanism for users to transfer chips, which can enable them to "cash out" winnings on a secondary market, with Churchill Downs allegedly profiting from transaction fees on these transfers.

Plaintiff Kater, who played Big Fish Casino starting in 2013 and lost over $1,000 in chips, filed a class action against Churchill Downs in 2015 for violations of Washington’s Recovery of Money Lost at Gambling Act (RMLGA), the Washington Consumer Protection Act, and for unjust enrichment. The district court dismissed the case, ruling that the virtual chips did not constitute a "thing of value" under the RMLGA, rendering Big Fish Casino legal under Washington law. Kater's motion for reconsideration was denied, leading to her appeal.

The jurisdiction for the appeal is based on 28 U.S.C. 1291, with a de novo review of the dismissal. The RMLGA allows individuals to recover losses from illegal gambling, defining gambling as risking something of value on uncertain outcomes with the expectation of receiving something of value. All forms of online or virtual gambling are illegal in Washington.

Big Fish Casino’s virtual chips qualify as a "thing of value" under Washington law, as defined by Wash. Rev. Code 9.46.0285. The law specifies that a "thing of value" includes any form of credit or privilege that involves the potential transfer of money or property. Kater argues that the virtual chips serve as a form of credit, allowing users to engage in casino games without charge. The complaint asserts that players must possess these chips to participate in the games; without them, users cannot play and must purchase more to continue. 

Churchill Downs disputes this characterization, claiming the chips only enhance gameplay rather than extend it. However, this argument is rejected because the complaint clearly states that virtual chips are necessary for gameplay. Churchill Downs also notes that users receive free chips during play, but this point is not addressed further since it is not included in the complaint.

Support for Kater’s position is found in the Washington Court of Appeals case, Bullseye Distributing LLC v. State Gambling Commission, which established that play points used in a gambling device were deemed "things of value" due to their role in allowing users to play without charge, despite lacking intrinsic monetary value. The court explicitly stated that the determination of "thing of value" was not contingent on the ability to redeem points for money or merchandise. Consequently, following the rationale in Bullseye, Big Fish Casino’s virtual chips are categorized as "things of value" under the relevant statute.

Churchill Downs contends that Big Fish Casino does not constitute illegal gambling, relying on the Washington Gambling Commission's position and analyses from federal courts regarding similar games. However, the argument is rejected, as the Commission's documents do not reflect an official stance on Big Fish Casino or social gaming platforms. The cited pamphlet offers only general guidance and lacks definitive analysis, failing to meet the requirements for deference outlined in W. Telepage, Inc. v. City of Tacoma. Additionally, the federal cases referenced by Churchill Downs involve different state laws and definitions, making them inapplicable here. Under Washington law, the virtual chips used in Big Fish Casino are considered a "thing of value," thereby categorizing it as an illegal gambling game under Wash. Rev. Code 9.46.0237. Consequently, Kater is entitled to recover the value of the virtual chips lost, supported by Wash. Rev. Code 4.24.070, which allows recovery for losses from illegal gambling games. Despite Churchill Downs' argument against Kater's claim based on a Maryland case, Washington's broader statute permits recovery for "money or anything of value." Kater alleges a loss exceeding $1,000 in virtual chips, thus establishing a valid cause of action. Churchill Downs' motion to substitute Big Fish Games, Inc. as the defendant is denied, as the conditions for substitution under Federal Rule of Appellate Procedure 43(b) are not met. The district court's dismissal of Kater's complaint is reversed, and the case is remanded for further proceedings.