Cheryl Kater v. Churchill Downs Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CHERYL KATER, individually and on No. 16-35010
behalf of all others similarly situated,
Plaintiff-Appellant, D.C. No.
2:15-cv-00612-
v. MJP

CHURCHILL DOWNS INCORPORATED,
a Kentucky corporation, OPINION
Defendant-Appellee.

Appeal from the United States District Court
for the Western District of Washington
Marsha J. Pechman, Senior District Judge, Presiding

Argued and Submitted February 6, 2018
Seattle, Washington

Filed March 28, 2018

Before: MILAN D. SMITH, JR. and MARY H.
MURGUIA, Circuit Judges, and EDUARDO C.
ROBRENO, * District Judge.

Opinion by Judge Milan D. Smith, Jr.

*
The Honorable Eduardo C. Robreno, Senior United States District
Judge for the Eastern District of Pennsylvania, sitting by designation.
2 KATER V. CHURCHILL DOWNS

SUMMARY **

Washington Gambling Law

The panel reversed the district court’s dismissal of a
purported class action against Churchill Downs alleging
violations of Washington’s Recovery of Money Lost at
Gambling Act and Consumer Protection Act, and unjust
enrichment; and held that Churchill Downs’ virtual game
platform “Big Fish Casino” constituted illegal gambling
under Washington law.

All online or virtual gambling is illegal in Washington.
Big Fish Casino’s virtual chips have no monetary value and
could not be exchanged for cash, but Big Fish Casino did
contain a mechanism for transferring chips between users,
which could be used to “cash out” winnings.

The panel held that the virtual chips extended the
privilege of playing Big Fish Casino, and fell within Wash.
Rev. Code § 9.46.0285’s definition of a “thing of value.”
The panel concluded that Big Fish Casino fell within
Washington’s definition of an illegal gambling game. See
Wash. Rev. Code § 9.46.0237.

The panel held that plaintiff Cheryl Kater stated a cause
of action under Recovery of Money Lost at Gambling Act
where she alleged that she lost over $1,000 worth of virtual
chips while playing Big Fish Casino, and she could recover
the value of those lost chips from Churchill Downs, as

**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 KATER V. CHURCHILL DOWNS 3

proprietor of Big Fish Casino, pursuant to Wash. Rev. Stat.
§ 4.24.070.

COUNSEL

Alexander G. Tievsky (argued), Roger Perlstadt, and Ryan
D. Andrews, Edelson PC, Chicago, Illinois, for Plaintiff-
Appellant.

Matthew R. Berry (argued), Susman Godfrey L.L.P, Seattle,
Washington; Robert Rivera, Susman Godfrey L.L.P.,
Houston, Texas; for Defendant-Appellee.

OPINION

M. SMITH, Circuit Judge:

In this appeal, we consider whether the virtual game
platform “Big Fish Casino” constitutes illegal gambling
under Washington law. Defendant-Appellee Churchill
Downs, the game’s owner and operator, has made millions
of dollars off of Big Fish Casino. However, despite
collecting millions in revenue, Churchill Downs, like
Captain Renault in Casablanca, purports to be shocked—
shocked!—to find that Big Fish Casino could constitute
illegal gambling. We are not. We therefore reverse the
district court and hold that because Big Fish Casino’s virtual
chips are a “thing of value,” Big Fish Casino constitutes
illegal gambling under Washington law.

FACTUAL AND PROCEDURAL BACKGROUND

Big Fish Casino is a game platform that functions as a
virtual casino, within which users can play various electronic
4 KATER V. CHURCHILL DOWNS

casino games, such as blackjack, poker, and slots. Users can
download the Big Fish Casino app free of charge, and first-
time users receive a set of free chips. They then can play the
games for free using the chips that come with the app, and
may purchase additional chips to extend gameplay. Users
also earn more chips as a reward for winning the games. If
a user runs out of chips, he or she must purchase more chips
to continue playing. A user can purchase more virtual chips
for prices ranging from $1.99 to nearly $250.

Big Fish Casino’s Terms of Use, which users must
accept before playing any games, state that virtual chips have
no monetary value and cannot be exchanged “for cash or any
other tangible value.” But Big Fish Casino does contain a
mechanism for transferring chips between users, which can
be utilized to “cash out” winnings: Once a user sells her
chips on a secondary “black market” outside Big Fish
Casino, she can use the app’s internal mechanism to transfer
them to a purchaser. Plaintiff-Appellant Kater alleges that
Churchill Downs profits from such transfers because it
charges a transaction fee, priced in virtual gold, for all
transfers. In other words, Kater alleges that Churchill
Downs “facilitates the process” of players cashing out their
winnings.

Kater began playing Big Fish Casino in 2013, eventually
buying, and then losing, over $1,000 worth of chips. In
2015, Kater brought this purported class action against
Churchill Downs, alleging: (1) violations of Washington’s
Recovery of Money Lost at Gambling Act (RMLGA), Wash.
Rev. Code § 4.24.070; (2) violations of the Washington
Consumer Protection Act, Wash. Rev. Code § 19.86.010;
and (3) unjust enrichment. The district court dismissed this
case with prejudice, holding that because the virtual chips
are not a “thing of value,” Big Fish Casino is not illegal
 KATER V. CHURCHILL DOWNS 5

gambling for purposes of the RMLGA. 1 Kater moved for
reconsideration, but the district court denied her motion.
Kater then timely appealed.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction over this appeal pursuant to
28 U.S.C. § 1291. We review the dismissal of Kater’s
complaint de novo. Petrie v. Elec. Game Card, Inc.,
761 F.3d 959, 966 (9th Cir. 2014). Our review “is limited to
the complaint, materials incorporated into the complaint by
reference, and matters of which the court may take judicial
notice.” Metzler Inv. GMBH v. Corinthian Colls., Inc.,
540 F.3d 1049, 1061 (9th Cir. 2008).

ANALYSIS

Pursuant to the RMLGA:

All persons losing money or anything of
value at or on any illegal gambling games
shall have a cause of action to recover from
the dealer or player winning, or from the
proprietor for whose benefit such game was
played or dealt, or such money or things of
value won, the amount of the money or the
value of the thing so lost.

Wash. Rev. Code § 4.24.070. “Gambling” is defined as the
“[1] staking or risking something of value [2] upon the
outcome of a contest of chance or a future contingent event
not under the person’s control or influence, [3] upon an

1
The parties agree that the viability of Kater’s other claims is
contingent on Big Fish Casino constituting illegal gambling.
6 KATER V. CHURCHILL DOWNS

agreement or understanding that the person or someone else
will receive something of value in the event of a certain
outcome.” Id. § 9.46.0237; see State ex rel. Evans v. Bhd. of
Friends, 247 P.2d 787, 797 (Wash. 1952) (“[A]ll forms of
gambling involve prize, chance, and consideration . . . .”
(quoting State v. Coats, 74 P.2d 1102, 1106 (Or. 1938))). All
online or virtual gambling is illegal in Washington. See
Rousso v. State, 239 P.3d 1084, 1086 (Wash. 2010).

I. Big Fish Casino’s Virtual Chips Are a “Thing of
Value” Under Washington Law

The parties dispute whether Big Fish Casino’s virtual
chips are a “thing of value” pursuant to Washington’s
definition of gambling. Pursuant to Washington law, a
“thing of value” is:

[A]ny money or property, any token, object
or article exchangeable for money or
property, or any form of credit or promise,
directly or indirectly, contemplating transfer
of money or property or of any interest
therein, or involving extension of a service,
entertainment or a privilege of playing at a
game or scheme without charge.

Wash. Rev. Code § 9.46.0285. Kater’s primary argument is
that the virtual chips are a “thing of value” because they are
a “form of credit . . . involving extension of . . .
entertainment or a privilege of playing [Big Fish Casino]
without charge.” Id.

We agree. The virtual chips, as alleged in the complaint,
permit a user to play the casino games inside the virtual Big
Fish Casino. They are a credit that allows a user to place
another wager or re-spin a slot machine. Without virtual
 KATER V. CHURCHILL DOWNS 7

chips, a user is unable to play Big Fish Casino’s various
games. Thus, if a user runs out of virtual chips and wants to
continue playing Big Fish Casino, she must buy more chips
to have “the privilege of playing the game.” Id. Likewise,
if a user wins chips, the user wins the privilege of playing
Big Fish Casino without charge. In sum, these virtual chips
extend the privilege of playing Big Fish Casino.

Churchill Downs contends that the virtual chips do not
extend gameplay, but only enhance it, and therefore are not
things of value. This argument fails because, as alleged in
the complaint, a user needs these virtual chips in order to
play the various games that are included within Big Fish
Casino. Churchill Downs argues that this does not matter,
because users receive free chips throughout gameplay, such
that extending gameplay costs them nothing. But because
Churchill Downs’ allegation is not included in the
complaint, we do not further address this contention. See
Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001).

Notably, the only Washington court to analyze section
9.46.0285 supports our conclusion. In Bullseye Distributing
LLC v. State Gambling Commission, the Washington Court
of Appeals held that an electronic vending machine designed
to emulate a video slot machine was a gambling device.
110 P.3d 1162, 1163, 1167 (Wash. Ct. App. 2005). To use
the machine, players utilized play points that they obtained
by purchase, by redeeming a once-a-day promotional
voucher, or by winning a game on the machine. Id. at 1163–
64. In reviewing an administrative law judge’s decision, the
court concluded that the game’s play points were “things of
value” because “they extend[ed] the privilege of playing the
game without charge,” even though they “lack[ed] pecuniary
value on their own.” Id. at 1166. Because the play points
were a “thing of value,” the machine fell within the
8 KATER V. CHURCHILL DOWNS

definition of a gambling device, and therefore was subject to
Gambling Commission regulation. Id. at 1167.

Contrary to Churchill Downs’ assertion, nothing in
Bullseye conditioned the court’s determination that the play
points were “thing[s] of value” on a user’s ability to redeem
those points for money or merchandise. Instead, Bullseye’s
reasoning was plain—“these points fall within the definition
of ‘thing of value’ because they extend the privilege of
playing the game without charge.” Id. at 1166. Based on
the reasoning in Bullseye, we conclude that Big Fish
Casino’s virtual chips also fall within section 9.46.0285’s
definition of a “thing of value.” 2

Churchill Downs nonetheless argues that Big Fish
Casino cannot constitute illegal gambling based on the
position of the Washington Gambling Commission and
federal district courts that have analyzed similar games. We
disagree.

Churchill Downs argues that we should defer to the
Gambling Commission’s conclusion that Big Fish Casino is
not illegal gambling. It cites to a slideshow deck used by
two non-Commission members during a presentation to the

2
Kater makes a second argument, which we reject. She argues that
the chips are a “thing of value” because users can sell them for money
on the “black market.” However, Big Fish Casino’s Terms of Use
prohibit the transfer or sale of virtual chips. As a result, the sale of virtual
chips for cash on a secondary market violates the Terms of Use. The
virtual chips cannot constitute a “thing of value” based on this prohibited
use. See Mason v. Mach. Zone, Inc., 851 F.3d 315, 320 n.3 (4th Cir.
2017).
 KATER V. CHURCHILL DOWNS 9

Commission, and the accompanying meeting minutes, 3 but
these documents do not indicate that the Commission
adopted a formal position on social gaming platforms, let
alone Big Fish Casino specifically. It also cites to a two-
page Commission pamphlet discussing online social
gaming. But the pamphlet provides only “general
guidance,” to which we do not defer because the pamphlet
“lacks an official, definitive analysis of the issue in
question.” W. Telepage, Inc. v. City of Tacoma Dep’t of Fin.,
998 P.2d 884, 891–92 (Wash. 2000) (requiring agency
interpretation to be “clear and definitive,” such as a rule,
interpretive guideline, or policy statement).

Nor are we persuaded by the reasoning of other federal
courts that have held that certain “free to play” games are not
illegal gambling. Each case Churchill Downs cites for this
proposition involves the analysis of different state statutes,
state definitions, and games. See Mason v. Mach. Zone, Inc.,
851 F.3d 315 (4th Cir. 2017) (applying Maryland law);
Phillips v. Double Down Interactive LLC, 173 F. Supp. 3d
731 (N.D. Ill. 2016) (applying Illinois law); Soto v. Sky
Union, LLC, 159 F. Supp. 3d 871 (N.D. Ill. 2016) (applying
California law). Our conclusion here turns on Washington
statutory law, particularly its broad definition of “thing of
value,” so these out of state cases are unpersuasive.

Because the virtual chips are a “thing of value,” we
conclude that Big Fish Casino falls within Washington’s

3
We grant Kater’s motion to take judicial notice of the slideshow,
meeting minutes, and pamphlet because they are publicly available on
the Washington government website, and neither party disputes the
authenticity of the website nor the accuracy of the information. See
Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998–99 (9th Cir. 2010)
(citing Fed. R. Evid. 201).
10 KATER V. CHURCHILL DOWNS

definition of an illegal gambling game. See Wash. Rev.
Code § 9.46.0237.

II. Kater Can Recover the Value of the Virtual Chips
Lost Under the RMLGA

Since Big Fish Casino, as alleged in the complaint,
constitutes an illegal gambling game, Kater can recover “the
value of the thing so lost” from Churchill Downs. See Wash.
Rev. Code § 4.24.070. Citing Mason, Churchill Downs
argues that Kater did not lose money at gambling because
there was no possibility of her winning money. In Mason,
the plaintiff could not recover money spent on virtual gold
in a different game because the Maryland statute limited
recovery to individuals who “lose[] money at a gaming
device,” Md. Code Crim. Law § 12-110, and did not
“encompass virtual resources available and used only within
[the game].” 851 F.3d at 320. But Washington’s statute is
broader than Maryland’s. Washington law permits a
plaintiff to recover “money or anything of value” lost from
an illegal gambling game “from the dealer . . . or from the
proprietor for whose benefit such game was played.” Wash.
Rev. Code § 4.24.070. As previously stated, this language
encompasses the value of the virtual chips Kater purchased.

We hold that Kater has stated a cause of action under the
RMLGA. She alleges that she lost over $1,000 worth of
virtual chips while playing Big Fish Casino, and she can
recover the value of these lost chips from Churchill Downs,
as proprietor of Big Fish Casino, pursuant to section
4.24.070. 4

4
We deny Churchill Downs’ motion to substitute Big Fish Games,
Inc. as Defendant-Appellee in place of Churchill Downs pursuant to
 KATER V. CHURCHILL DOWNS 11

CONCLUSION

For the foregoing reasons, we reverse the district court’s
dismissal of Kater’s complaint. We remand for further
proceedings consistent with this opinion.

REVERSED and REMANDED.

Federal Rule of Appellate Procedure 43(b). A Rule 43(b) substitution is
appropriate only where “necessary,” which “means that a party to the
suit is unable to continue, such as where a party becomes incompetent or
a transfer of interest in the company or property involved in the suit has
occurred.” Sable Commc’ns of Cal. Inc. v. Pac. Tel. & Tel. Co., 890 F.2d
184, 191 n.13 (9th Cir. 1989) (citation omitted) (quoting Ala. Power Co.
v. ICC, 852 F.2d 1361, 1366 (D.C. Cir. 1988)). Churchill Downs argues
it is transferring Big Fish Games, the subsidiary entity that purportedly
operates Big Fish Casino, to Aristocrat. But it is not enough to claim
that a transfer will occur; rather, substitution is proper where “a transfer
of interest . . . has occurred.” Id.