by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
A few weeks back, I wrote a post about a lawsuit between the Borgata Casino and world renowned poker player and gambler, Phil Ivey. In the lawsuit, the Borgata accused Ivey and a partner, Cheng Yin Sun, of engaging in an "edge sorting" scheme, which allowed them to shift the odds of Baccarat in their favor and win more than $9.6 million over several visits to the casino. The U.S. Court of Appeals for the Third Circuit described their actions as follows:
The scheme is called "edge sorting," where Sun would identify minute asymmetries on the repeating diamond pattern on the backs of the playing cards to identify certain cards' values, and would have the dealer turn those strategically important cards so that they could be distinguished from all other cards in the deck. Ivey and Sun would then be able to see the leading edge of the first card in the shoe before it was dealt, giving them 'first card knowledge,' and Ivey would bet accordingly.
The Borgata successful moved for summary judgment against both men. It held that casinos and players enter into an implicit contract to, among other things, abide by New Jersey's Casino Control Act ("CCA"). The court determined that, by employing the edge-sorting scheme, Ivey and Sun were using marked cards to play the game, which is prohibited by the CCA. As a result, they breached their contract with the casino. After finding in the casino's favor on liability, the court ordered supplemental briefing on damages. After considering those briefs, the court awarded the casino $10,130,000.
The court held that the appropriate method to assess damages was to restore the status quo ante — i.e., to return the parties to their positions prior to the formation of the contract. It held that Ivey's and Sun's use of marked cards violated the CCA and voided the contract between them and the casino. Because the contracts were void, restoring the parties to their pre-contract position was the appropriate remedy. The casino was, therefore, entitled to the return of all of Ivey's winnings, including the money he won playing craps because "those winnings were directly traceable to his prior Baccarat winnings — i.e., he used Baccarat winnings to play craps."
The court rejected Ivey and Sun's argument that "because edge-sorting is not foolproof, Borgata [could not] establish its damages with the requisite degree of certainty." Ivey and Sun argued that their first card knowledge did not guarantee they would win because they had to rely on chance for the next three to five cards. The court rejected this argument because it "focuses on what might have happened in the future," while the remedy of status quo ante "returns the parties to [the] past, restoring the parties to the position they held before the voided contract was entered into." The court also noted that the application of the status quo ante remedy does not "turn on whether the defendants were successful in their scheme," but rather turns on "voiding a contract that was tainted from the beginning and breached as soon as it was executed."
The court also rejected an alternative theory of recovery advanced by the casino. Borgata had argued that, in addition to the return of Ivey's winnings, it was entitled to its expectation damages or lost profits. The casino claimed that, based on the odds associated with Baccarat, it would have won an additional $5,418,311.40 had Ivey and Sun not shifted the odd in their favor through the edge-sorting scheme. The court held that this theory of damages "focuse[d] on the hypothetical — what the Borgata would have won if the game had not been played with marked cards," and therefore was "too speculative to fashion an appropriate remedy." In doing so, the court observed that it is the speculative nature of this theory of damages that actually entices gamblers to casinos in the first place:
Although basic math can calculate Borgata's potential winnings based on the house edge, the number of hands played, and the average bet, this case involves the whims of Lady Luck, who casts uncertainty on every hand, despite the house odds. Indeed, Lady Luck is like nectar to gamblers, because no on would otherwise play a game he knows he will always lose. We simply don't know and will never know whether defendants would have beaten the odds in a normal game over those four days, by luck or otherwise, and by what amount.
Finally, the court rejected the casino's argument that it was entitled to damages equal to the value of the "comps" that it provided to Ivey and Sun. It held that the "very nature of 'comps' is that there is no expectation the recipient must return those goods or services if the casino does not obtain some or all of its anticipated benefits." Because they were not "tied to an obligation that Ivey win or lose," the casino was not entitled to damages equal to the amount of those "comps" as part of its breach of contract claim.
Pete's Take 