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New Hampshire Lottery Commission v. Barr

United States District Court, D. New Hampshire

June 3, 2019

New Hampshire Lottery Commission, et al.
William Barr, in his official capacity as Attorney General of the United States of America, et al.

          Francis Charles Fredericks, Esq. Anthony Galdieri, Esq. Matthew D. McGill, Esq. Michael A. Delaney, Esq. Theodore B. Olson, Esq. Steven A. Myers, Esq. Matthew J. Glover, Esq. Alain J. Ifrah, Esq. Andrew J. Silver, Esq. Claude M. Stern, Esq. Demetrio F. Aspiras, III, Esq. Derek L. Shaffer, Esq. Avram D. Frey, Esq. Gillian A. Woolf, Esq. Lawrence S. Lustberg, Esq. Meghal J. Shah, Esq. Thomas R. Valen, Esq. Donald S. McGehee, Esq. Mark G. Sands, Esq. Melinda A. Leonard, Esq. Peter S. Cowan, Esq. A Michael Pratt, Esq. Christopher B. Chuff, Esq. Joanna J. Cline, Esq. Patrick J. Queenan, Esq. Robert R. Lucic, Esq. Brian W. Barnes, Esq. Charles J. Cooper, Esq. David H. Thompson, Esq. J. Joel Alicea, Esq. Michael J. Tierney, Esq. Nicole Frazer Reaves, Esq. Stephen N. Zaharias, Esq.


          Paul Barbadoro United States District Judge.

         The Wire Act of 1961 criminalizes certain gambling activities that use interstate wires. In 2011, the Justice Department's Office of Legal Counsel (“OLC”) issued a formal opinion declaring that the Wire Act only punishes activities associated with sports gambling. Last year, the OLC changed its mind. It now asserts that the Act also covers lotteries and other forms of gambling that do not involve sports.

         The New Hampshire Lottery Commission has long offered lottery games such as Powerball that necessarily use interstate wires. Fearing that these games, which produce substantial revenue for the State, will be deemed to be criminal activities under the OLC's current interpretation of the Wire Act, the Commission filed a complaint in this court seeking both a declaratory judgment that the Act is limited to sports gambling and an order under the Administrative Procedure Act setting aside the OLC's new interpretation. One of the Commission's vendors also filed a complaint that has been joined with the current action, seeking declaratory relief.

         Before me are the Government's motion to dismiss for lack of standing and the parties' cross-motions for summary judgment. As I explain below, I agree with the plaintiffs that they have standing to sue. Based on the text, context, and structure of the Wire Act, I also conclude that the Act is limited to sports gambling. Accordingly, I deny the Government's motions and grant the plaintiffs' motions for summary judgment.

         I. BACKGROUND

         A. The Wire Act

The relevant portion of the Wire Act provides:
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.

18 U.S.C. § 1084(a).

         Section 1084(a) consists of two clauses. The first clause makes it a crime for anyone engaged in the business of gambling to use a wire communication facility “for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest.” Id. The second clause prohibits “the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers.” Id.

         The key question this case presents is whether the limiting phrase “on any sporting event or contest” in § 1084(a)'s first clause modifies all references to “bets or wagers” in both clauses or only the single reference it directly follows in the first clause. If, as the OLC concluded in 2011, the sports-gambling modifier limits each reference to “bets or wagers, ” then both clauses apply only to sports gambling. On the other hand, if the OLC's current interpretation is correct, then § 1084(a)'s first clause prohibits the interstate transmission of both sports and non-sports bets or wagers but punishes the interstate transmission of information only if the information assists in the placing of bets or wagers on sports. It also follows from the OLC's current interpretation that § 1084(a)'s second clause is unconstrained by the sports-gambling modifier.

         B. The OLC Opinions

         The path that leads to both OLC opinions begins in 2009, when New York and Illinois asked the Department of Justice whether in-state sales of lottery tickets via the internet would violate the Wire Act if those sales caused information to be transmitted across state lines. The Department referred the matter to the OLC for a formal opinion. In 2011, the OLC responded by concluding that “interstate transmissions of wire communications that do not relate to ‘a sporting event or contest,' 18 U.S.C. § 1084(a), fall outside of the reach of the Wire Act.” See Virginia A. Seitz, Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transaction Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act, Memorandum Opinion for the Assistant Attorney General, Criminal Division, U.S. Dept. Just. 1 (Sept. 20, 2011) (“2011 OLC Opinion” or “2011 Opinion”), Doc. No. 2-4.

         The OLC arrived at this conclusion by first determining that the phrase “on any sporting event or contest” in the first clause of § 1084(a) applies to the transmissions of both “bets or wagers” and “information assisting in the placing of bets or wagers.” 2011 OLC Opinion at 5. Noting that the statutory text could be read either way, the OLC explained that it was “difficult to discern” why Congress would forbid the interstate transmission of all types of bets or wagers but only prohibit the transmission of information assisting in the placing of bets or wagers that concern sports. Id. The more reasonable inference, according to the OLC, was that Congress intended that the prohibitions “be parallel in scope.” Id.

         Next, the OLC concluded that the phrase “on any sporting event or contest” also modifies the references to “bets or wagers” in § 1084(a)'s second clause. Id. at 7. The OLC explained that the references to “bets or wagers” in the second clause are best understood as shorthand references to “bets or wagers on any sporting event or contest” as described in the first clause. Id. The 2011 Opinion also relied heavily on the Act's legislative history to confirm its interpretation of the section's limited scope. See Id. at 6-10.

         In 2018, the OLC reversed course and released a new opinion concluding that “the prohibitions of 18 U.S.C. § 1084(a) are not uniformly limited to gambling on sporting events or contests.” See Steven A. Engel, Reconsidering Whether the Wire Act Applies to Non-Sports Gambling, Memorandum Opinion for the Acting Assistant Attorney General, Criminal Division, U.S. Dept. Just. 23 (Nov. 2, 2018) (“2018 OLC Opinion” or “2018 Opinion”), Doc. No. 2-5. The OLC now reasoned that the plain text of § 1084(a) unambiguously requires that all but one of the section's prohibitions apply to gambling generally. See Id. at 7, 11.

         The OLC based its new reading on the syntactic structure of § 1084(a). Relying heavily on a canon of statutory construction commonly referred to as the “rule of the last antecedent, ” the OLC concluded that the use of the sports-gambling modifier in the section's first clause applies only to the prohibition on the interstate transmission of “information assisting in the placing of bets or wagers” and not the transmission of “bets or wagers” themselves. Id. at 7-8.

         The OLC then concluded that the use of the sports-gambling modifier in § 1084(a)'s first clause should not be carried forward into the section's second clause. Id. at 11. The two clauses are distinct “[a]s a matter of basic grammar” and “[i]t would take a considerable leap for the reader to carry that modifier both backward to the first prohibition of the first clause, then forward across the entire second clause, ” the OLC reasoned. Id.

         The OLC acknowledged its earlier concern that this reading of § 1084(a) would produce anomalous results. Id. at 14-15. It concluded, however, that it was obligated to give the section the meaning suggested by its syntactic structure because the anomalies identified in the 2011 Opinion did not rise to the level of “patent absurdity.” Id.

         On January 15, 2019, the Deputy Attorney General instructed federal prosecutors to adhere to the OLC's 2018 Opinion. See Applicability of the Wire Act, 18 U.S.C. § 1084, to Non-Sports Gambling, U.S. Dept. Just. (Jan. 15, 2019) (“Enforcement Directive”), Doc. No. 2-6. As an exercise of prosecutorial discretion, however, they “should refrain from applying Section 1084(a) in criminal or civil actions to persons who engaged in conduct violating the Wire Act in reliance on the 2011 OLC Opinion prior to the date of this memorandum, and for 90 days thereafter.” Id. The grace period was intended to allow time for businesses “to bring their operations into compliance with federal law.” Id. On February 28, the Deputy Attorney General extended that window through June 14, 2019. See Additional Directive Regarding the Applicability of the Wire Act, 18 U.S.C. § 1084, to Non-Sports Gambling, U.S. Dept. Just. (Feb. 28, 2019), Doc. No. 23-1.

         C. New Hampshire Lottery System

         The Lottery Commission offers multiple types of lottery games. Those games include instant ticket and draw games that offer tickets for sale at brick-and-mortar retailers, multi-jurisdictional games such as Powerball and Mega Millions that permit tickets to be purchased either in stores or through the internet, and “iLottery” games that sell tickets exclusively through the internet. Each game involves the use of interstate wire transmissions.

         The Lottery Commission contracts with a vendor, Intralot, Inc., to provide a computer gaming system (“CGS”) to manage the games and a back-office system (“BOS”) to manage inventory and sales data. Its CGS and BOS servers for traditional retailer-based lottery games are located in Barre, Vermont, with a disaster recovery location in Strongsville, Ohio.

         Brick-and-mortar retailers employ lottery terminals that connect the retailer to the CGS and BOS systems via the internet, a cellular network, or a satellite connection. The terminals send and receive different types of data based on the type of game. For example, in an instant ticket game, a player purchases a pre-printed ticket and scratches it to reveal the result. The lottery terminal then communicates with the CGS to activate the ticket, validate the result, and record the sale and payment of prizes. Draw games require players to purchase sets of No. for a future draw. The retailer requests a wager transaction from the CGS through the terminal. The CGS generates a wager in the system and sends the information to the terminal. In both types of transactions, the data travels between a lottery terminal in New Hampshire and CGS servers in Vermont and Ohio.

         The Lottery Commission also offers a variety of multi-jurisdictional games, including Powerball, Mega Millions, Tri-State Lotto, and Lucky for Life. Like the in-state games, ticket sales for these games typically occur through communications between lottery terminals in New Hampshire and CGS servers in Vermont and Ohio.[1] For verification purposes, bets for multi-state games are then sent from those CGS locations to two independent control system servers in New Hampshire over the internet. The Lottery Commission also shares sales and transaction data with member states over the internet. Finally, once a jackpot is won, the participating lotteries transfer their portions of the jackpot to the jurisdiction that sold the winning ticket. This is typically done via a wire transfer or an automated clearing house process.

         In September 2018, the Lottery Commission also began to offer e-instant and draw games, including Powerball and Mega Millions, via its internet platform or “iLottery.” NeoPollard Interactive LLC, its vendor, operates a separate CGS with servers located in New Hampshire. The system uses geo-location data from a player's computer or mobile device to ensure the player can only make a bet or wager while physically located in New Hampshire. Although all financial transactions and bets must begin and end in New Hampshire, the Commission states that it cannot guarantee that intermediate routing of data or information ancillary to a transaction does not cross state lines.

         Given the way in which these systems operate, the Lottery Commission contends that the implementation of the 2018 OLC Opinion may result in the suspension of all lottery sales by the Commission, resulting in an annual loss of over $90 million in state revenue.

         D. Lottery Systems and “iGaming” in Amici States

         The State of New Jersey, the Commonwealth of Pennsylvania, and the Michigan Bureau of State Lottery[2] have filed amicus briefs in support of the plaintiffs.[3] They describe the impact the 2018 OLC Opinion would have on their respective state-run lotteries. The lottery systems in those states are substantially similar to New Hampshire's, including the types of games offered and their reliance on interstate wires.

         In addition, New Jersey and Pennsylvania have legalized some forms of online gambling or “iGaming.” Those states permit state-licensed private companies to offer online casino and poker games to players within the state. New Jersey also has a shared agreement with Delaware and Nevada allowing online poker players from those states to play together.

         E. Procedural History

         The Lottery Commission filed its complaint and a concurrent motion for summary judgment on February 15, 2019. The Commission seeks both a declaratory judgment that the Wire Act does not extend to state-conducted lottery activities and an order setting aside the 2018 OLC Opinion pursuant to the Administrative Procedure Act (“APA”), 5 U.S.C. § 701 et seq. Later that day, NeoPollard Interactive LLC, the vendor that supports New Hampshire's iLottery system, and its 50% owner, Pollard Banknote LTD (collectively “NeoPollard”) filed a complaint and a concurrent motion for summary judgment. NeoPollard seeks a judgment declaring that the Wire Act is limited to gambling on sporting events. I consolidated the NeoPollard action with the Lottery Commission action on February 22, 2019.

         The Government responded by filing a motion to dismiss the complaints pursuant to Rule 12(b)(1), because the plaintiffs lack standing to sue, and Rule 12(b)(6), because the complaints fail to state viable claims for relief. With the parties' consent, I converted the Government's request for relief pursuant to Rule 12(b)(6) into a Rule 56 motion for summary judgment.

         II. ANALYSIS

         The Government has challenged the plaintiffs' standing to sue. I address the Government's standing argument first because a court lacks subject matter jurisdiction unless the plaintiffs have Article III standing. See Pollard v. Law Office of Mandy L. Spaulding, 766 F.3d 98, 101 (1st Cir. 2014). I then turn to the parties' cross-motions for summary judgment, which raise two issues: (1) whether the Lottery Commission's APA claim fails because the 2018 OLC Opinion is not “final agency action, ” and (2) whether the Wire Act is limited to sports gambling. I conclude by considering the scope of the remedy.

         A. Standing

         The Government argues that the plaintiffs lack standing because they do not face an imminent threat of prosecution. I disagree.

         The plaintiffs, as the parties invoking the court's jurisdiction, bear the burden of establishing standing. Susan B. Anthony List v. Driehaus, 573 U.S. 149, 158 (2014). The level of proof required to meet this burden depends on the stage of the proceedings. Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). At summary judgment, the plaintiffs must support their standing with specific evidence in the record. Id.; accord Clapper v. Amnesty Int'l USA, 568 U.S. 398, 412 (2013). Because the jurisdictional facts are not in dispute in this case, the plaintiffs' standing turns on a pure question of law.

         Rooted in Article III's case-or-controversy requirement, the constitutional core of standing requires a showing that a plaintiff “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016).[4] An injury in fact must be “concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” Lujan, 504 U.S. at 560 (internal quotation marks and citations omitted). “The imminence requirement is met ‘if the threatened injury is “certainly impending” or there is a “substantial risk” that the harm will occur.'” Massachusetts v. U.S. Dep't of Health & Human Servs., 923 F.3d 209, 222 (1st Cir. 2019) (quoting Driehaus, 573 U.S. at 158).

         To establish an imminent injury in the context of a pre-enforcement challenge to a criminal statute, a plaintiff must demonstrate that he faces a threat of prosecution because of his present or intended conduct. “[J]ust how clear the threat of prosecution needs to be turns very much on the facts of the case and on a sliding-scale judgment that is very hard to calibrate.” N.H. Hemp Council, Inc. v. Marshall, 203 F.3d 1, 5 (1st Cir. 2000). Courts have variably described the requisite likelihood of enforcement as “sufficiently imminent, ” “credible, ” “substantial, ” and “realistic.” See Driehaus, 573 U.S. at 159, 164 (“sufficiently imminent, ” “credible, ” and “substantial”); Holder v. Humanitarian Law Project, 561 U.S. 1, 15 (2010) (“credible”); Babbitt v. United Farm Workers Nat'l Union, 442 U.S. 289, 298 (1979) (“credible” and “realistic”); Hemp Council, 203 F.3d at 5 (“realistic”).[5]

         Caselaw demonstrates where different types of pre-enforcement claims fall on the imminence spectrum. At the “clearly credible threat” end of the spectrum are pre-enforcement claims brought after an enforcer has actually threatened the plaintiff with arrest or prosecution. See, e.g., Steffel v. Thompson, 415 U.S. 452, 459 (1974) (protester had standing to bring pre-enforcement claim challenging constitutionality of state criminal trespass law after being warned to stop handbilling and threatened with arrest and prosecution). Further along the spectrum, but still satisfying the imminence requirement, are cases where a plaintiff has engaged in behavior that a statute arguably makes unlawful, the plaintiff intends to continue to engage in the allegedly unlawful behavior, and though the enforcement process has not yet begun, the risk of future prosecution is substantial. See Driehaus, 573 U.S. at 161-66; see also Humanitarian Law Project, 561 U.S. at 15-16 (plaintiffs faced credible threat of prosecution where there was history of prosecution under challenged law and “Government ha[d] not argued . . . that plaintiffs will not be prosecuted if they do what they say they wish to do”); Babbitt, 442 U.S. at 302 (plaintiffs' fear of prosecution credible where, inter alia, “State ha[d] not disavowed any intention of invoking the criminal penalty provision” against entities that violate the statute). At the far end of the spectrum, where a threat of prosecution cannot be considered imminent, are cases in which “an unambiguous disclaimer of coverage by the prosecutor” would likely eliminate the threat of prosecution. Hemp Council, 203 F.3d at 5.

         The plaintiffs in this case easily satisfy the imminence requirement. First, they have openly engaged for many years in conduct that the 2018 OLC Opinion now brands as criminal, and they intend to continue their activities unless they are forced to stop because of a reasonable fear that prosecutions will otherwise ensue. Second, the risk of prosecution is substantial. After operating for years in reliance on OLC guidance that their conduct was not subject to the Wire Act, the plaintiffs have had to confront a sudden about-face by the Department of Justice. Even worse, they face a directive from the Deputy Attorney General to his prosecutors that they should begin enforcing the OLC's new interpretation of the Act after the expiration of a specified grace period. Given these unusual circumstances, the plaintiffs have met their burden to establish their standing to sue.

         The Government challenges this conclusion by arguing that the likelihood that the plaintiffs will face prosecution under the Wire Act is low, because the 2018 OLC Opinion does not explicitly conclude that state agencies, state employees, and state vendors are subject to prosecution under the Act. I reject this argument because the record tells a different story.

         It is worth remembering that the 2011 OLC Opinion responded to a request from two states for an opinion as to whether they could sell lottery tickets online without violating the Wire Act. In concluding that the Wire Act did not apply to non-sports gambling such as lotteries, the 2011 Opinion did not even hint at the possibility that states would be exempt from the Act's proscriptions. Had the OLC believed that states were excluded from the Act's coverage, it could have responded to the states' request by simply informing them that they were not subject to the Act. To infer from the OLC's silence on this point that it might conclude in the future that state actors are not subject to the Wire Act requires an unwarranted speculative leap. This is especially true given the fact that a Department of Justice official warned the Illinois lottery in 2005 that the ...

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