Wenner v. Texas Lottery Commission

United States Court of Appeals,

Fifth Circuit.

No. 96-21074.

Scott WENNER, Plaintiff-Appellant,

and

BDM Enterprises, Inc., also known as Heart's Discount Liquor,
Intervenor Plaintiff-Appellant,

v.

TEXAS LOTTERY COMMISSION, Anthony Sadberry, Richard Daly, Jan
Hart, Nora A. Linares, and Linda Cloud, Defendants-Appellees.

Sept. 30, 1997.

Appeals from the United States District Court for the Southern
District of Texas.

Before DUHÉ and BARKSDALE, Circuit Judges, and COBB,1 District
Judge.

HOWELL COBB, District Judge:

This suit arose after the Plaintiff purchased a winning Texas

lottery ticket and the defendants refused to honor it. The

Plaintiff filed suit in the federal district court for the Southern

District of Texas asking the court to order performance. The

district court granted summary judgment for the defendant on

grounds that the purchase of the ticket was illegal under the

Violent Crime Control and Law Enforcement Act of 1994 and

therefore, the contract resulting from the purchase of the ticket

was unenforceable. For reasons stated below, we disagree with the

district court.

1
District Judge of the Eastern District of Texas, sitting by
designation.

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 I. HISTORY AND BACKGROUND

Lotteries in various forms have been a part of the American

life since colonial times. Among the beneficiaries of early

colonial lotteries were such notable institutions as Harvard and

Yale Universities. However, until the early 1980's, States have

traditionally been suspicious of lotteries believing them to be

potentially injurious to their citizens. Congress has long

supported state efforts to closely regulate lotteries or ban them

entirely. State attitudes toward lotteries began to change in part

because of taxpayer resistance to the imposition of new taxes and

state needs for new sources of revenue. A substantial majority of

states have now enacted some form of state lottery. In 1992, Texas

established a state lottery which is operated by the Texas Lottery

Commission (TLC). This case arose when the TLC refused to honor a

winning lottery ticket bought through the services of a private

corporation by an out-of-state player.

Before 1994, the sale of lottery tickets in interstate

commerce was controlled by: 1) 18 U.S.C. § 1084(a), which made it

illegal for one engaged in the business of betting or wagering to

knowingly use a wire facility for transmitting bets or wagers in

interstate commerce; 2) 18 U.S.C. § 1301, which made it illegal to

physically carry lottery tickets in interstate commerce; and 3) 18

U.S.C. § 1953, which made it illegal to transport wagering

paraphernalia in interstate commerce. These code sections created

a web which, under most circumstances, adequately protected state

lottery monopolies. However, Pic-A-State, a Pennsylvania

2
Corporation with its principal place of business in New Jersey, was

able to exploit a loophole2 in this web by creating a computer

network between its agents in every lottery state and transmitting

its customer's lottery ticket orders over that network. Pic-A-

State's operation enabled its customers to legally purchase a

chance in any lottery in the nation. Because Pic-A-State's

operation potentially affected each state's stream of lottery

2
The loophole allowed an entity engaged in this business to
operate as follows:

! Purchaser(s) in State A would "contract" with the local Pic-A-
State outlet for the purchase of lottery ticket from State B.

! Purchaser(s) gives Pic-A-State numbers, the cost of the ticket(s)
and commission (service charge), and receives claim checks for
the actual lottery tickets.

! Pic-A-State, acting as an agent for Purchaser(s) gathers all
orders for State B lottery tickets on a computer disk and
transmits the contents of the disk to a Pic-A-State agent in
State B.

! Pic-A-State wires the purchase money for the tickets to its agent
in State B.

! Pic-A-State's agent in State B fills out the official playslips
and buys the lottery tickets using money form Pic-A-State's
clients in State A.

! Pic-A-State's agent in State B holds the lottery tickets in State
B, they never cross state lines.

If purchaser wins he claims the prize in accordance with
the local lottery commission's rules. This mode of operation
ensured the lottery paper never left the state, the mails were
not used, and a wire facility was not used for ordering
lottery tickets, hence no violation of federal law. When done
correctly, the purchase transactions are totally transparent
to the local lottery commission's selling agent and because
all local state lottery codes and rules are followed, there
were no violations of state law that could render a winning
ticket invalid.

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revenues3 and prevented each state from maintaining exclusive

control over its lottery, the states lobbied Congress to close this

loophole by amending the code.4 On September 13, 1994, Congress

enacted the Interstate Wagering Amendment as part of the "Violent

Crime Control and Law Enforcement Act of 1994". This amendment

closed the loophole through which Pic-A-State was operating by

revising 18 U.S.C. §§ 1084, 1301, and 1953.

Pic-A-State promptly challenged the constitutionality of the

Interstate Wagering Amendment in the Federal District Court for the

Middle District of Pennsylvania (Pennsylvania Court). Pic-A-State

also sought to enjoin the enforcement of the revised code sections

until the merits of its challenge could be heard. Because, it met

the dual burdens of showing irreparable harm and the probability of

3
From the state's standpoint, the main effect of this industry
was to place each of the state's lotteries in competition with each
other. This was done by shifting lottery ticket revenue from a
customer's state whose prizes were relatively small to a competing
state whose lottery prizes had grown large because of jackpot
roll-overs. From a player's perspective, it was far more
attractive to purchase a chance in the lottery that has the larger
prize.

A roll-over occurs when no winner emerges from the
preceding drawing. In many state lotteries, the jackpot is
combined with the next game's jackpot and so on until a winner
is drawn.
4
The states wanting to further exploit their lottery
monopolies by entering into multi-state compacts offering
multi-state games did not want competition from Pic-A-State.
Further, the states realized that direct control of a Pic-A-State
type of operation was either beyond their individual powers or that
the resultant state codes would likely be unwieldy and potentially
unenforceable thereby reducing flexibility for the states and the
players. We note this to illustrate the difficulty that the states
would have in trying to eliminate Pic-A-State with their own
regulations. Because the district court did not reach the merits
of these defenses neither do we.

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success on the merits the Pennsylvania Court enjoined the

Department of Justice (DOJ) from enforcing revised code sections

against Pic-A-State.

In November 1994, while the injunction was in effect, Scott

Wenner bought two Texas Lottery tickets for face value plus a

one-dollar per ticket service charge from a Pic-A-State outlet in

Croyden, Pennsylvania. One of Wenner's tickets matched all six

numbers drawn by the TLC, entitling Wenner to the grand prize of

$10,000,000. Wenner promptly claimed his prize. In January, 1995,

the TLC refused to honor Wenner's claim alleging violations of both

federal and Texas law.

In February 1995, the Pennsylvania Court denied Pic-A-State's

constitutional challenge to the Interstate Wagering Amendment and

dissolved the injunction. The Third Circuit affirmed and Pic-A-

State ultimately dissolved.

Wenner filed suit in the Southern District of Texas seeking a

declaratory judgment that his winning ticket was valid and an order

enforcing the contract arising therefrom. BDM Enterprises, which

sold the actual lottery ticket, intervened seeking its one-percent

seller's bonus. The TLC raised a number of defenses, most notably:

1)Wenner purchased his ticket in violation of the Interstate

Wagering Amendment; 2) Wenner purchased his ticket in violation of

various sections of the Texas Lottery Code; and 3) Wenner's claim

against the TLC was barred by sovereign immunity.5 Both parties

5
We include the sovereign immunity defense only for the sake
of completeness. The magistrate judge disallowed the TLC's attempt
to raise this defense in an amended pleading and the district court

5
moved for summary judgment.

The district court granted summary judgment in favor of the

TLC. It reasoned that, despite the pendency of the injunction,

Wenner's purchase of the ticket through Pic-A-State violated the

Interstate Wagering Amendment and therefore the resulting contract

was unenforceable. We disagree with the district court and

therefore reverse and remand.

II. DISCUSSION

This Court reviews the district court's grant of summary

judgment de novo. Melton v. Teachers Insurance & Annuity Assoc. of

America, 114 F.3d 557, 559 (5th Cir.1997) (citations omitted). We

view the evidence in the light most favorable to the non-movant in

applying the same standard as the district court. Hibernia Nat'l.

Bank v. Carner, 997 F.2d 94, 97 (5th Cir.1993). Summary judgment

shall be granted if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law. Fed.R.Civ.P. 56(a). The party seeking summary

issued the summary judgment on other grounds before
reconsideration. The TLC raised this defense in its appellate
brief claiming a "de facto" pleading of sovereign immunity. It
offers no authority for the propriety of such a pleading practice,
nor could we find authority for it in the Federal Rules of Civil
Procedure or the case law. The district court, however, never
reached this defense and neither do we.

We also take this opportunity to point out that the TLC's
appellate brief was wholly inadequate. The TLC appears to
have done little more than plagiarize the district court's
thoughtful and well written opinion and as such never
addressed the points Wenner raised on appeal.

6
judgment has the initial burden of showing that there is an absence

of any genuine issue of material fact. Celotex v. Catrett, 477

U.S. 317, 325, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The

burden then shifts to the non-moving party who must show the

existence of a genuine issue of material fact. Id. It is incumbent

on the non-moving party to bring forth facts and not merely rest on

denials nor rely on the allegations within its pleadings. Anderson

v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2514-

15, 91 L.Ed.2d 202 (1986).

Consequently, a summary judgment will be vacated only if the

evidence viewed in the light most favorable to the non-movant shows

a genuine issue of material fact or the moving party is not

entitled to judgment as a matter of law. Catrett, 477 U.S. at 323,

106 S.Ct. at 2553.

The dispositive issue in this case is whether the TLC was

entitled to judgment as a matter of law. There is no dispute as to

the material facts. The district court held that the TLC was

entitled to a judgment as a matter of law reasoning that the

contract arising from Wenner's ticket is unenforceable because the

purchase of the ticket violated federal law. See Southwestern

Underground Supply & Envtl. Serv., Inc. v. Amerivac, Inc., 894

S.W.2d 15, 18 (Tex.App.-Tyler 1982). The court reasoned that,

"[A]n applicant, which procured a wrongful issuance of the

temporary injunction, [cannot] claim to be absolved of its illegal

activity committed during the pendency of the wrongfully issued

injunction." In granting the TLC's motion for summary judgment,

7
the district court reasoned that, "A wrongfully issued preliminary

injunction restraining temporarily the prosecution of a penal

statute does not render the statute itself invalid or "not in

force', ...." (emphasis added). We disagree because: 1) the

Pennsylvania court issued the injunction in conformance with the

law of the Third Circuit and is therefore, presumptively correct;6

and 2) a legally issued injunction froze the status quo which

existed prior to the enactment of the Interstate Wagering Amendment

of the Violent Crime Control and Law Enforcement Act of 1994

therefore, maintaining the legality of Pic-A-State's activities

performed while the injunction was in effect. Accordingly, the

contract arising from the ticket purchase was not unenforceable

because of an illegality, the TLC was not entitled to a judgment as

a matter of law, and therefore, the summary judgment must be

vacated.

A. Injunction

The district court has traditionally had the equitable power

to fashion any remedy necessary and appropriate to do justice in a

particular case. Hecht v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587,

591, 88 L.Ed. 754 (1943). "The essence of equity jurisdiction has

been the power of the chancellor to do equity and to mould each

decree to the necessities of the particular case. Flexibility

rather than rigidity have distinguished it. The qualities of mercy

and practicality have made equity the instrument for nice

6
There is no evidence in the record that the DOJ overcame or
could overcome that presumption.

8
adjustment and reconciliation between public interest and private

needs...." Id.

The district court in contemplation of exercising its

traditional equitable powers must weigh several factors to

determine whether a party's request for equitable relief should be

granted. Id. Among the factors that must be considered are: 1)

the probability of irreparable damage to the moving party in the

absence of relief; 2) the possibility of harm to the non-moving

party if relief is granted; 3) the likelihood of success on the

merits; and 4) the public interest. United States v. Price, 688

F.2d 204, 211 (3rd Cir.1982); accord A.O. Smith Corp. v. F.T.C.,

530 F.2d 515, 525-26 (3rd Cir.1976).

On September 16, 1994, the Pennsylvania Court issued a TRO

barring the DOJ from enforcing revised code sections against Pic-A-

State. The court issued the order after Pic-A-State made a showing

of irreparable harm to its business and probable success on the

merits. Ten days later, the Pennsylvania Court, after hearing the

DOJ's motion to vacate and finding the circumstances and equities

unchanged, issued a preliminary injunction continuing the ban

against the DOJ's enforcement of the revised code sections against

Pic-A-State, its agents and employees until the challenge could be

heard on its merits.

In issuing a temporary injunction, the Pennsylvania District

Court specifically found that: 1) a denial of the equitable relief

sought by Pic-A-State would result in irreparable damage to Pic-A-

State's business; and 2) Pic-A-State was likely to succeed on the

9
merits. It is important to note that the immediate harm asserted

by Pic-A-State would have resulted from having to suspend its

business to avoid criminal prosecution while awaiting the

adjudication of its constitutional challenge to the Wagering

Amendment.7 We infer from the record, that because the loophole

had existed for over ninety (90) years and the DOJ did not

demonstrate to the court that it would be harmed by the injunction,

that there was no harm to the non-moving party.8

Even though Pic-A-State made a credible showing that it would

suffer irreparable harm in the absence of the injunction and it was

likely to prevail on the merits, the Pennsylvania Court was

required to consider the "public interest" before issuing the

injunction. Price, 688 at 211.9 The record indicates that

Pennsylvania Court was fully aware of what type of business Pic-A-

State was operating. More particularly, the court knew Pic-A-

7
The Pennsylvania Court noted that, in the absence of the
injunction Pic-A-State's business would likely have suffered
irreparable damage even if it prevailed on its challenge to the
amendment. The reason Pic-A-State sought the injunction was that
the revised code provisions placed Pic-A-State in the position that
to protect its business, it had to continue operating while waiting
for the court to decide the merits of its challenge. By operating,
Pic-A-State risked criminal prosecution under the revised code
sections in the event its challenge was unsuccessful.
Alternatively, Pic-A-State could have shutdown to avoid the risk of
criminal prosecution but, it very likely would have lost its
business even if it prevailed on the constitutional challenge. The
essential purpose of an injunction is relieve this type of dilemma.

8
This explains why the Pennsylvania Court required no bond be
posted by Pic-A-State.
9
We further note that the TLC voiced no objection to accepting
proceeds from Pic-A-State agents located in Texas for non winning
lottery tickets.

10
State's customers were from the general public. It is clear to us

that the public interest would hardly be served if Pic-A-State were

allowed to transact business during the pendency of the injunction

and its unsuspecting customers were denied the right to collect any

benefit therefrom. We cannot believe the Pennsylvania Court, when

deciding whether to issue the injunction, would have ignored

something so obvious.

We also think it is significant that the DOJ made no further

motions to lift the injunction and did not appeal the injunction to

the Third Circuit. The Third Circuit considers a number of factors

in reviewing the grant or denial of a preliminary injunction. Two

of the factors which most pertinent to this case are: 1) the law

has conferred power to grant or dissolve an injunction to the

discretion of the trial court and not to the appellate court; 2)

unless the trial court abuses its discretion, commits an obvious

error in applying the law, or makes a serious mistake in

considering the proof, the appellate court must take the judgment

of the trial court as presumptively correct.10 A.O. Smith, 530 F.2d

at 525.

In short, we find nothing in the record to indicate that the

injunction issued by the Pennsylvania Court was in any way

wrongful. We also do not attach any significance to the fact that

10
We note this only to point out that the government, having
failed to show it would be harmed at the district court, likely
could not make the requisite showing of obvious error or abuse of
discretion to overcome the presumption the injunction was correctly
issued. A.O. Smith Corp. v. F.T.C., 530 F.2d 515, 525 (3rd
Cir.1976).

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Pic-A-State did not ultimately prevail on the merits of its claim.

The propriety of this injunction is determined by the circumstances

in existence at the time it was issued, not after Pic-A-State's

challenge was decided on the merits.

We are thus bound by the principles of comity and full faith

and credit to respect the Pennsylvania Court's decision to issue

the injunction and must conclude the injunction was correctly and

legally issued. It is therefore, not within the authority of the

Federal District Court for the Southern District of Texas or this

Court to revisit the issue of whether the injunction was properly

issued and conclude to the contrary.

B. Effect of the Injunction

It is well settled that the issuance of a prohibitory

injunction freezes the status quo, and is intended "to preserve the

relative positions of the parties until a trial on the merits can

be held." University of Texas v. Camenisch, 451 U.S. 390, 395, 101

S.Ct. 1830, 1834, 68 L.Ed.2d 175 (1981). Preliminary injunctions

commonly favor the status quo and seek to maintain things in their

initial condition so far as possible until after a full hearing

permits final relief to be fashioned. Id.; Opticians Assoc. of

Am. v. Independent Opticians of Am., 920 F.2d 187, 197 (3rd

Cir.1990) (citations omitted). It follows that a district court

issuing a temporary injunction upon the dissolution of a

preliminary restraining order is acting to preserve the status quo.

In this case, we have no doubt that Pic-A-State sought to maintain

the status quo existing prior to the enactment of the Interstate

12
Wagering Amendment11 of the "Violent Crime Control and Law

Enforcement Act of 1994".

There is no dispute that before Congress enacted the Violent

Crime Control and Law Enforcement Act of 1994, Pick-A-State was a

legal corporation, operating a legal business in over thirty

states. Pic-A-State's operation enabled its customers to buy

chances in the lotteries from the various lottery states without

violating federal law. In light of the fact that Congress'

enactment of Interstate Wagering Amendment would have outlawed Pic-

A-State's business, it is obvious that Pic-A-State sought to

preserve the pre-enactment status quo until the merits of its

constitutional challenge to the amendment could be heard.

Therefore, it is our opinion that: the injunction suspended

the Interstate Wagering Amendment as applied to Pic-A-State; Pic-

A-State's operations under the injunction were legal; and that

obligations arising from Pic-A-State's operation are not

unenforceable because of the Interstate Wagering Amendment of the

"Violent Crime Control and Law Enforcement Act of 1994".

Finally, in summary, we find it incredible that the TLC urges

us to adopt a position that sanctions the TLC's receipt of proceeds

for the sale of its lottery tickets through Pic-A-State, and yet

find that the TLC has no obligation to those unsuspecting patrons

who provided it with such a benefit. For reasons already stated,

Pic-A-State legally operated under the protection of the injunction

and thus, had the right to collect fees for the service it

11
18 U.S.C. § 1301 et al. as amended.

13
provided. Pic-A-State benefitted by maintaining its business until

its constitutional challenge to the Interstate Wagering Amendment

could be heard. The TLC benefitted insofar as it received proceeds

from the sales of its lottery tickets through Pic-A-State

operations in all lottery states for the six months the injunction

was effective. It may have also benefitted from not paying

Wenner's claim.12 Under the TLC's position, only the unsuspecting

and unknowing Pic-A-State patrons, who paid the bill for the TLC's

and Pic-A-State's benefits, should be denied any chance to

benefit.13 We cannot subscribe to this wholly inequitable position.

In light of the foregoing, we conclude that the TLC was not

entitled to a summary judgment as a matter of law and therefore,

was not entitled to a summary judgment under Fed.R.Civ.P. 56(a).

Accordingly, we vacate the district court's summary judgment and

remand for further proceedings consistent with this opinion.

VACATED AND REMANDED.

12
A perplexing question remains; What happened to the
$10,000,000 jackpot that is the subject of this suit? Does the TLC
still have it or was it rolled over into another jackpot? Since
Wenner's ticket was undisputedly a winning ticket, did the TLC
begin a new game with a minimum prize jackpot? The record gives no
indication and the TLC's counsel was unable to provide any insight.
Perhaps the trial court can sort this out on remand. We point out
that the TLC may have accrued a considerable benefit by holding a
prize of this magnitude or it may have earned a substantial benefit
from additional ticket sales if the jackpot was eventually rolled
over.
13
The TLC argued that while Pic-A-State was operating under the
injunction, it had a duty to post a disclaimer that in effect
notified its patrons that winning tickets would be unenforceable
because of the Interstate Wagering Amendment. We find no authority
for the proposition that a party who obtained an injunction to
protect its interests while litigating its claim must then destroy
its own interests through a such a self-inflicted wound.

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