Appeals court sides with Harrah’s, Pinnacle in Louisiana case

By Steve Green (contact)

Wednesday, Nov. 4, 2009 | 11:03 a.m.

A federal appeals court has upheld a ruling rejecting claims that two Las Vegas companies conspired to monopolize the Louisiana casino market.

The 5th U.S. Court of Appeals last week ruled in favor of Harrah's Operating Co. and Pinnacle Entertainment Inc. in an appeal of a ruling in an antitrust lawsuit filed in 2006 complaining about a deal in which Harrah's sold two riverboat casinos in Lake Charles, La., to Pinnacle for $70 million.

Harrah's had halted gaming operations at the boats after Hurricane Rita in September 2005 damaged the docking area and at least one of the boats.

Jebaco Inc. of New Orleans, which had been receiving rent from Harrah's in the form of per-person boarding fees for the boats, complained it was harmed by the Pinnacle deal because Pinnacle planned to move the boats to locations where Jebaco didn't have the right to receive rent.

Jebaco claimed it had the right to receive at least $2 million annually from the boats through 2023 under a deal with Players International Inc., which had owned the boats and which Harrah's acquired in 2000.

Jebaco also complained the $70 million price was far in excess of the value of the boats and associated dockside facilities; with much of the purchase price actually covering the value of the two gaming licenses.

Jebaco complained in its lawsuit that in 2006, Harrah's and Pinnacle controlled nearly 45 percent of the state's gaming licenses and, as of June 2005, generated almost 60 percent of the state's gaming revenue.

Jebaco complained it was among the parties interested in buying the boats after the hurricane, but bids from parties other than Pinnacle could not "provide the monopolistic and market manipulation value of a contract with Pinnacle."

"The defendants, outside of the scrutiny required by the Gaming Control Law, have joined forces through agreements and contracts to carve up the state of Louisiana in a deliberate and malicious manner, in order to dictate the circumstances under which gaming can take place and where gaming operations may or may not be located," Jebaco charged in its lawsuit.

Jebaco complained the sales deal "effectively thwarts any future competition for Harrah's and Pinnacle" in the New Orleans, Shreveport/Bossier City and Lake Charles areas by requiring a payment of $100 million if Pinnacle transferred the Lake Charles boats or licenses to those areas.

"Through their collusion they have effectively taken two Louisiana gaming licenses from the Lake Charles property and dictated the manner in which and locations at which they are to be utilized," Jebaco complained.

The Jebaco lawsuit also complained that Harrah's took actions before, during and after the hurricane that devalued the Lake Charles boats because it didn't intend to keep them.

While other gaming operators moved their boats to the center of Lake Charles to prevent damage during the hurricane, "Harrah's largely abandoned its riverboats, resulting in damage to the shoreside facilities and one of the vessels," Jebaco complained.

It said Harrah's, even before the storm, was interested in selling the Lake Charles operation because it would have required a substantial investment to update and remarket it "to the upscale brand Harrah's executives deemed necessary to befit the Harrah's name."

And after the hurricane, Harrah's failed to repair or replace the riverboats or docking area and received insurance payments for the damage, but failed to forward any of the insurance proceeds to Jebaco, the suit charged.

The suit alleged Jebaco sustained $34 million in damages and sought triple that amount under the antitrust claims.

U.S. District Judge G. Thomas Porteous Jr. dismissed the lawsuit in 2008, noting the $100 million payment provision for moving the gaming licenses to certain locations was later removed from the purchase agreement.

Porteous noted Louisiana strictly restricts gaming in the state, with Louisiana's 1991 casino law allowing just 15 riverboat casinos. Additionally, a land casino in New Orleans was later authorized.

He rejected Jebaco's claims because the Pinnacle purchase of the boats was approved by the Louisiana Gaming Control Board. In his ruling, he noted Pinnacle intended to move one of the boats to another location in Lake Charles that didn't involve Jebaco; and planned to move the second boat to Baton Rouge.

"The actions of the board, not the defendants, determined whether Harrah's and Pinnacle could proceed," Porteous wrote in his ruling.

"Accordingly, the injury sustained by Jebaco was the result of the board's decision and sanctioned state conduct as it made the final decision, after public vote, to allow the transfer of the license and berth transfer," the judge wrote.

In upholding dismissal of the suit, the 5th Circuit appeals court judges cited additional reasons.

They wrote Friday that in one sense, Jebaco failed to show any antitrust violations because its interest in the case is that of a landlord, not as a gaming competitor.

The court said that if Pinnacle remained at Jebaco's berths and kept paying Jebaco fees, the alleged Harrah's-Pinnacle division of the market would still have occurred -- but Jebaco would have been uninjured.

"Pinnacle's choice to change berths, a choice wholly independent of any antitrust violations, was the cause of Jebaco's injury," the court said.

It said if another firm had purchased the boats, it too might have chosen not to operate at Jebaco's berths.

"No antitrust violation would have occurred, but Jebaco would have suffered the same injury," the court said.

"Jebaco’s loss of its per-patron fees is neither the type of injury antitrust law was designed to prevent, nor did it flow from any anticompetitive conduct of Harrah’s and Pinnacle," the ruling said.

And even as a potential competitor, Jebaco's injury did not involve alleged antitrust violations, the court said.

"Jebaco would have suffered the same harm whether Harrah’s retained its Lake Charles assets or sold them to any party other than Pinnacle," the ruling said.

"Jebaco’s inability to enter the casino market was not a product of antitrust injury. It was not the type of injury the antitrust laws were designed to prevent, nor did it flow from the alleged anticompetitive conduct," the ruling said.

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While Harrah's and Pinnacle were victorious in the appeals court's main ruling, the court rejected a motion by the defendants that similar claims asserted in a state court lawsuit in Louisiana's Orleans Parish be transferred to federal court.

The state lawsuit sought unspecified damages based on claims for breach of the duty of good faith, breach of contract, unfair trade practices and unjust enrichment; and asserted claims to Harrah’s insurance proceeds.