Weighing the legal odds

By Liz Benston

Friday, April 16, 2004 | 5:05 a.m.

WEEKEND EDITION

April 17 - 18, 2004

McDonald's is ridding its menus of "supersize" fries and drinks as part of an effort to introduce healthier items such as salads. But observers see another motivation: lawsuits by obese customers.

The tobacco industry earlier stopped magazine and billboard advertising and started running anti-smoking public-service ads after lawsuits by state governments.

These developments have experts debating whether the gaming industry -- with its deep pockets and dramatic growth into a national economic force -- may face a new wave of individual and class-action lawsuits.

Smokers and overeaters continue to sue tobacco and fast-food companies, despite presumably knowing their own conduct is contributing to their health problems.

Similarly, addicted gamblers may be able to assert claims against casinos even though they should know the odds are against them when they gamble and no one forces them to play.

Courts are "looking for fault on both sides and are willing to make more allowances for the frailties and mental limitations of the plaintiffs," said John Banzhaf, a professor of public interest law at George Washington University Law School in Washington.

"Companies have a somewhat greater obligation to go out of their way to protect people from their psychological weaknesses," said Banzhaf, an anti-tobacco crusader also known for reaching a $12.5 million settlement with McDonald's over the company's marketing of french fries. "Courts have said we have to look not at a reasonably prudent person but a prudent person who has become addicted."

Jean Sternlight, a professor and arbitration expert at the Boyd School of Law at the University of Nevada, Las Vegas, said plaintiffs' lawyers are "getting bolder with suits that years ago might have been seen as losers. And sometimes they win."

"The tobacco industry wins most of the cases brought against it," Sternlight said. "But if they lose even one or two or three, it does have an impact on the industry."

But other legal experts say industries operating lawfully have plenty of legal defenses against consumer lawsuits.

Courts are considering more claims, but are still avoiding issuing judgments that have little basis in tort (wrongful conduct) law, said Michael I. Krauss, a tobacco and gun litigation expert at George Mason University School of Law in Arlington, Va.

"The argument that 'you made me do it,' has not been very well received, and I think correctly so in a free society. People still have free will," Krauss said.

Many recent suits involve some kind of personal weakness rather than claims of outright fraud, which "has more basis in law," he said.

Krauss said the risk of class-action litigation against casinos is still "more talk than action."

"When cases are filed they make Page One, and when they're dismissed they make Page 55. This is not a clear-and-present danger," he said.

Sternlight said federal courts in particular appear to be "tightening up" on class-action claims, a trend likely driven in part by a Republican administration that is more pro-industry.

But observers on both sides of the debate say they can envision a day when casinos are moved by the threat of litigation to change the way they market to customers. That could include posting signs near slot machines warning people that they could lose money or requiring that new members of slot machine player clubs agree not to sue casinos, they say.

These steps would be on top of measures casinos must comply with on a state-by-state basis that are aimed at helping problem gamblers. Nevada, for example, requires casinos to publicize problem gambling hotline numbers.

The gaming industry has taken pains to distance itself from the tobacco industry, the poster child of massive tort actions and long accused of misrepresenting the dangers of smoking. The American Gaming Association was formed in 1995 in large part to acknowledge gambling addiction as a legitimate disorder and to fund problem gambling research.

In the meantime, casinos face actual and threatened litigation alleging two types of claims that are specific to the gambling industry. The allegations are:

Slot machines and other gaming devices were designed and are operated in a fraudulent manner.

Casinos market to and accommodate compulsive gamblers.

These claims are on top of general litigation over advertising claims and contract terms faced by all businesses.

For example, casinos have faced lawsuits filed by gamblers claiming they were induced to lose their money by casinos that plied them with alcohol, or filed by gamblers claiming they were wrongfully ejected by casinos after the gamblers won too much money at blackjack.

These types of suits are usually dismissed by judges or settled quietly and are considered routine, making no waves industrywide.

In contrast, what really concerns the industry are lawsuits alleging its government-approved slot machines are actually designed to deceive gamblers; and suits claiming the standard industry practice of granting credit to gamblers could be promoting compulsive gambling.

A long-running lawsuit -- the details of which are buried in the quarterly financial statements of many major gaming companies -- has come the closest to mimicking tobacco-like fraud claims against casinos, but is far from resolution.

The 1994 suit names more than 60 casinos, slot machine manufacturers and cruise lines. It alleges slot manufacturers and operators have misrepresented the odds of winning and are liable under racketeering and fraud laws. It seeks compensatory and punitive damages of more than $1 billion on behalf of an estimated 50 million gamblers who played video poker or slot machines from January 1988 through April 1994.

This month marks the suit's 10th anniversary since it was filed in Orlando, Fla., by Jupiter resident William Poulos against a small group of casinos. It was later moved to Las Vegas because, the defendants argued, Nevada is where the largest gaming companies are based.

The case's merits have yet to be determined because the first question -- whether the suit can be heard as a class action on behalf of all gamblers -- is still awaiting a decision by the 9th U.S. Circuit Court of Appeals in San Francisco.

Most of the suit's complaints against the industry have survived challenges by industry lawyers. A federal judge in Las Vegas denied motions in 1997 that would have dismissed the suit outright, paving the way for plaintiffs to argue for class-action certification. Another judge denied class-action status in 2002, but allowed for an appeal. The appeals court heard arguments in January.

Amended and expanded since it was filed, the suit has three more plaintiffs and names additional casinos and gaming suppliers as defendants.

If the appeals court denies class-action certification, the suit would return to federal court in Las Vegas to be pursued on behalf of the four gamblers. If it wins class-action status, it also returns to federal court for litigation.

Both sides say they are ready for Round 2 of a drawn-out fight.

"If it proceeds as a class, the defendants are looking at enormous potential liability," said David Barrett, a lead counsel for the plaintiffs with partner David Boies, the New York attorney best known for doggedly pursuing the Justice Department's antitrust case against Microsoft Corp.

"We have pressed forward for a number of years and have indicated to the court that even if class certification has been denied, we plan to pursue this on an individual basis," Barrett said.

Las Vegas-based defense attorney Dennis Kennedy said he is confident that the appeals court will affirm the federal court action and deny class certification.

At the heart of the claim is that manufacturers, aided by casinos, have deliberately created fraudulent machines that lure players with false notions of winning.

"Electronic slot machines and the 'cards dealt' or 'drawn' in video poker do not, in fact, possess the characteristics of games of chance or operate as defendants have misled their patrons to believe," the complaint says.

"On the contrary, such machines operate pursuant to computer programs which determine, in advance, the outcome of each particular play. Such programs do not replicate the random and unpredictable nature of their nonelectronic counterparts. Rather, they are predictable, they limit the possible outcomes on particular plays, and they can be reset by the machine operators.

"Defendants knowingly perpetuate and enhance the credibility of this false perception through their advertising, promotional efforts and concealment of information known to them which is not generally available or understandable to the gaming public," the complaint continues.

Casino representatives criticize the suit as frivolous and ignorant of the state laws governing how slot and video poker machines function.

Slot machines are programmed to generate random outcomes with each play -- events determined by computer chips that are independently tested, industry experts say. Casinos can adjust machine pay tables so the machines pay back certain percentages of bets over time, but casinos don't know the outcome of each bet beforehand, they say.

The racketeering claims -- which allege a close-knit nationwide conspiracy against gamblers -- are vague at best and untrue, casinos argue. The casinos also deny any fraud.

"Plaintiffs' personal preconception or misunderstanding of the nature of a 'slot machine' is not sufficient to sustain a claim for fraud or negligent misrepresentation," according to a reply on behalf of several gaming companies. "Plaintiffs' contention not only defies the legal and common meaning of these terms, but also borders on the absurd."

Class action

U.S. District Judge Roger Hunt in Las Vegas said the gamblers in the slot fraud case met some of the qualifications for class-action status. But Hunt dismissed the motion for class-action certification because there wasn't enough evidence to show that the proposed class was "cohesive" enough to settle common claims against the industry.

In his ruling, Hunt said people have different motivations and experiences when they play slot machines.

"Like the decision to buy a music CD, the decision to play an electronic slot or video poker machine is a complex matter," Hunt wrote.

That kind of reasoning will ultimately snarl future attempts to net casinos in a massive class-action suit, gaming attorneys say.

Class-action claims against the industry will be "extremely difficult" to win because they involve people with different backgrounds who wagered varying amounts with multiple results, said Kennedy, who has successfully defended tobacco companies against class-action suits in Nevada.

As for state regulations governing the industry, Nevada law requires that gamblers get a fair shake. But where that line is drawn remains in flux.

In the late 1980s, Nevada regulators discovered that slot manufacturer Universal Distributing had programmed machines to show two winning symbols and a third that was almost on the pay line, misleading customers into thinking they had almost won a jackpot and inducing them to continue gambling. The so-called "near miss" debacle yielded admissions by some in the gaming industry that many slot machines were misleading to some degree.

Machines that mimic those once offered by Universal -- the largest and most popular maker of video slots before being driven into obscurity by the scandal -- were outlawed in Nevada in 1989.

The next year, Nevada regulators tightened technical rules, including those governing how slot machines work. The rules have been tweaked over the years as part of regulators' ongoing monitoring of the fairness and security of slot machines, resulting in a requirement that the machines' random-number generators display a truly random outcome on the pay line, Gaming Control Board member Scott Scherer said.

Similarly, video poker makers can't lure gamblers with machines programmed to draw "near misses" such as cards that are nearly a royal flush or nearly a straight, for example.

Slot symbols that aren't on the pay line aren't governed by the same rules, Scherer said. That means slot manufacturers -- as long as they are not pre-determining the symbols on the pay line -- have some leeway in offering games that show winning symbols near the pay line, he said.

Barrett, Poulos' attorney, said slot machines are still misleading regardless of the fact that the pay line shows a random outcome.

At the core of the lawsuit is the claim that winning symbols that spin by on machines' "virtual wheels" appear more frequently than they show up on the pay line when the wheels stop, making the odds appear better than they are, he said.

"The failure to disclose the true odds (on the face of the machine) and making the odds appear better than they really are ... is completely unfair and misleading," Barrett said.

The industry faces a similar lawsuit in Canada -- the first in North America involving U.S. gaming companies to achieve class-action status.

Like the U.S. suit, the Canadian case argues that slot machines are fraudulent and therefore deceptive to all gamblers -- not just problem gamblers.

But the suit is being litigated on behalf of all gamblers who are "addicted" to video slots -- a figure estimated by plaintiffs' attorneys at more than 100,000 people -- rather than on behalf of all gamblers.

The case was filed in 2000 by a disbarred attorney who said he became addicted to video lottery machines. It names the Quebec lottery as well as slot makers International Game Technology of Reno (through a subsidiary called Video Lottery Corp. Inc.), WMS Industries Inc. of Chicago and Spielo Manufacturing Inc. of Moncton, New Brunswick. The suit is in the discovery stage.

Class-action suits against casinos could be more likely in Canada, where social policy helps small claimants, legal experts say.

In Quebec, class-action suits are more prevalent because the government pays for the plaintiffs' legal costs once the suit is certified, said Morden Lazarus, an attorney representing IGT and a vice president of the International Association of Gaming Attorneys.

Problem gamblers

Another series of suits in recent years alleges that casinos have inappropriately marketed to compulsive gamblers or failed in efforts to ban gambling addicts.

Such suits have generally been dismissed outright or settled under undisclosed terms in the early stages. No such case has made it to trial in recent memory.

Finding casinos liable is difficult because gambling is sanctioned by states that have casinos, according to I. Nelson Rose, a gaming law expert at Whittier Law School in Costa Mesa, Calif.

"The state is making a policy decision that says 'we've weighed costs and benefits' " of casinos, Rose said. "Therefore it's hard to then say that this is something that violates state public policy. As long as casinos obey the law ... they are within the public policy decisions made by government."

Nevada law goes a step further, saying that individuals can't use "a mental or behavioral disorder" as a reason to sue a gaming company to recover a gambling debt.

But one court has issued a little-publicized decision involving a compulsive gambler that marked a significant defeat for the gaming industry.

Several years ago a bankruptcy trustee for an attorney driven into bankruptcy sued several casinos, seeking to recover money the attorney had lost gambling.

In a surprise defeat, the casinos were forced to return roughly $400,000 -- or most of the cash that Murray Armstrong had lost at the gaming tables.

Two of the suits resulted in judgments against casinos owned by Harrah's Entertainment Inc. in Shreveport, La., and Tunica, Miss.

The cases mark the first time a court has decided that a trustee could recover gambling losses in bankruptcy court and could open the door to future suits by trustees, Arkansas attorney Thomas S. Streetman, who represented Armstrong's trustee, said.

"I do believe there will be a fallout from this once people become aware of it," Streetman said. "A lot of attorneys aren't aware of it because it's a bankruptcy case."

"It's not unusual at all to find people in bankruptcy court simply because they have lost everything they own" by gambling, he said.

In the two cases involving Harrah's, a federal court and an appeals court found that the company should have checked into Armstrong's financial records before extending credit.

Harrah's said it relied on Armstrong's previous gambling history and carried out an investigation sufficient to satisfy Louisiana gaming law before issuing markers to Armstrong. The company said it issued credit to Armstrong in the ordinary course of business -- a defense Streetman called "see no evil, hear no evil" in court.

The court found in the Shreveport case that Armstrong, who obtained funds from illegal Ponzi schemes, check kiting and embezzlement from clients, had his credit raised to $50,000 when he only had $4,000 to $6,000 in his bank account.

The casino further raised his credit to $100,000, although casino bosses noted that Armstrong had a friend apply for credit so Armstrong could continue to gamble. After noting internally that "we appear to have Mr. Armstrong in over his head," casino officials issued more credit to Armstrong, the court said.

The trustee filed suit to recover cash Armstrong had spent at the casino and bank funds transferred to Harrah's to pay off Amstrong's markers.

Another related headache for the industry is litigation alleging casinos failed to exclude from their premises gamblers who participated in private or government-sponsored exclusion programs.

For example, a gambler filed suit against Michigan casino regulators and casinos in 2003 on behalf of all gamblers participating in a state-sponsored self-exclusion program, saying it didn't work. The state was dismissed from the suit and the casinos have filed to dismiss the case.

Anxiety

Regardless of how the current and proposed suits play themselves out, the casino industry will be watching with interest.

Not including lotteries, racetracks and Indian casinos, the U.S. commercial casino industry has grown into a behemoth taking in more than $28 billion in annual revenue -- triple what the movie industry collects at the box office.

More and more people are becoming gamblers, and attorneys are therefore likely to find additional opportunities to sue.

"There's a lot of anxiety about this," said David O. Stewart, a partner with Ropes & Gray in Washington. He is defending casinos in three separate suits.

"If you get an infinite number of cases, someone's (eventually) going to win," which could spawn copycat suits, he said.

"If there's a risk, you don't pooh-pooh it. You pay attention to it," he said.0