Court quashes $19m side deal in casino creation

Encore Boston Harbor, shiny and new in 2018.
Photo by Pi.1415926535 via Wikimedia Commons CC BY-SA 3.0

A $19m side deal in a major casino real estate transaction is invalid and unenforceable as a matter of public policy, the Massachusetts Supreme Judicial Court ruled this morning.

The ruling demonstrates the rarely seen hand but overriding importance of public policy in the law of obligations. The state high court was answering a certified question from the First Circuit.

First, some context.

For the record, nobody does corruption in America like northeasterners. It's been eye opening for me, living in this part of this country for the first time in my life, since moving here in 2011: the weird way roads and bridges remain perpetually under construction for decades—the orange barrel is said to be Rhode Island's state flower; the revolving doors that shuffle politicians between corporate boards and regulatory bodies and back again. Everywhere I've lived—"developed" world or not—I've seen the continuum of corruption that runs from smoke-filled rooms to the open-and-legal-yet-shocking. But you have to take your hat off to the New York-Boston corridor, where milking the system is a way of life. If the taxpayer is a cash cow, then this is Big Ag.

It's for that reason that I have found myself strangely attracted, like a rubbernecker to a car wreck, to everything having to do with the creation of a Wynn-operated casino complex, the Encore Boston Harbor, in the once rusty, quaint, and relatively sleepy Boston suburb of Everett. 

I liked Everett when I discovered it. It's rough around the edges, but genuine. I had to be there now and then, and I found both a corner bar and a gym I liked. Everett reminded me of the working-class neighborhoods of my hometown Baltimore. First news of a casino project in Everett broke when I arrived in New England in 2011, so I became interested in the natural social science experiment that ensued.

A piece of the development of the Encore project landed in the courts. When Wynn enterprises sought to site a casino in Everett, they offered to buy land from an outfit called FBT Everett Realty, LLC, for $75m. And because Wynn also was looking for a casino license, the real estate transaction drew the attentive oversight of the Massachusetts Gaming Commission.

As anyone who studies development will tell you, these major land acquisitions are always suspect. I remember when Baltimore announced plans to build the twin Ravens and Orioles stadiums in the heart of downtown, and there were rumblings, however futile, about the strangely coincidental land rush that had occurred in the area prior to the announcement. Too many buyers had political connections, and they profited handsomely by flipping their deeds over to the quasi-public stadium projects. That's how economic opportunity works in America, at least for people who pay the lower tax rates for capital gains.

In Massachusetts in 2011, the commonwealth had newly opened itself to big-time, Las Vegas-style gambling, so the commission was under heavy scrutiny to do its due diligence. Though it couldn't prove the precise relationship, as the Supreme Judicial Court explained, the commission suspected that an FBT co-owner was "a convicted felon with possible connections to organized crime": naturally, a red flag in gaming regulation. To its credit, the commission put the brakes on the real estate transaction and conditioned its casino approval on a renegotiation. FBT had to buy out its suspicious stakeholder, and the purchase price was dramatically reduced to $35m.

One minority owner of FBT was unhappy with the new deal and demanded compensation for the reduction. It happened that the same minority owner had bought out the interest of the problematic co-owner and still owed him money. To quell the quarrel and get the deal done, Wynn made a side deal in which it would pay the minority owner $19m, a proportional share of the price reduction that had satisfied the commission.

Wynn didn't pay, and the minority owner sued, alleging breach of contract, common law fraud, and unfair trade practices under the commonwealth's powerful and wide-ranging consumer protection statute, "chapter 93A." Ultimately resulting in the instant case, the First Circuit asked the Massachusetts Supreme Judicial Court to assess the enforceability of the side deal.

The high court opened its analysis with the supreme public policy of America, "The general rule of our law is the freedom of contract" (quoting Massachusetts precedent that in turn quoted the U.S. Supreme Court in Smith v. The Ferncliff (1939)). "However," the court qualified, "it is 'universally accepted' that public policy sometimes outweighs the interest in freedom of contract, and in such cases the contract will not be enforced" (also quoting state precedents).

I just finished a unit of 1L torts in which the class sees the interaction of tort with contract and equity principles in the assumption of risk. Specifically, we see how theories in equity, if rarely, can quash a cause of action or vitiate an affirmative defense. I hasten to clarify that public policy, like equity, is not a rule of law. It's like someone saying to the court "I should win, despite the rule, because that's what's best for society." It's why the judge gets to wear a sharp black robe, sit on a dais, and wield a gavel: to bring human judgment to bear when the usual operation of law would defy common sense. It's why judges cannot be replaced by AI. Yet.

Gaming regulation is among the "core police powers" of the political branches, the court reasoned. And the legislature clearly empowered the gaming commission to ensure "the integrity of the gaming licensing process" with "strict oversight" and "a rigorous regulatory scheme." The $19m side deal was within the scope of the commission's broad mandate. The deal had not been disclosed to the commission and it was inconsistent, the court opined, with the property sale that the commission approved.

The court had little trouble concluding: "Secret deals in violation of the public terms and conditions required for gaming licensure are unenforceable violations of public policy. They place in grave doubt the integrity of the public process for awarding the license, and thereby defeat the public's confidence in that process."

The Encore project has been a powerful economic boost to communities north of Boston, including Everett, delivering an infusion of business in the billions of dollars. The construction phase especially yielded social and economic benefits, creating jobs and opportunity.

Of course, the secondary effects of "sin" businesses such as casinos don't turn up until the projects have been in operation for awhile, and then especially as they age and decline in high-end commercial appeal. To date, there is conflicting evidence on the social impact of Encore with regard to factors such as crime and the environment. For me, the jury is still out on whether north Boston will see a net benefit from Encore in the long term. I hope it does, but I'm skeptical.

Game on.

The case is Gattineri v. Wynn MA, LLC, no. SJC-13416 (Mass. Nov. 3, 2023). Justice Scott L. Kafker wrote the unanimous opinion of the court. The case in the First Circuit is Gattineri v. Wynn MA, LLC, no. 22-1117 (1st Cir. Mar. 22, 2023) (referring questions).

Mass., EU courts wrestle with requisite harm in defamation, data protection cases

The vexing problem of proof of damages in defamation and privacy has turned up recently in the Massachusetts Court of Appeals and the Court of Justice of the European Union. Meanwhile, the Massachusetts Gaming Commission borrowed European privacy principles for new data security rules.

Tiny turkey. Stéphanie Kilgast via Flickr CC BY-NC-ND 2.0

'Stolen' Turkey Money in Massachusetts

The Appeals Court in April vacated dismissal in a business dispute over turkeys. Nonprofit and business collaborators fell out over spending on variably sized turkeys for a charitable food event. The defendant wrote on social media that the plaintiff "stole" money intended for charitable purposes.

The complaint, which was filed by a Massachusetts lawyer, was messy—narrative in excess, numbering in disarray, and allegations jumbled between liability theories—so it was difficult for the trial court to parse the pleadings. With the aid of oral argument on appeal, the court teased out the defamation count and determined that it had been dismissed for want of pleaded loss.

However, Massachusetts is among jurisdictions that continue to recognize the historical doctrines of libel per se and slander per se. Those doctrines allow some pleadings to proceed without allegation of loss, and for good reason. Reputational harm is exceedingly difficult to prove, even when it seems self-evident. After all, whom should a plaintiff call to testify to prove her damaged reputation, people who now think an awful falsity about her? Witnesses will be less than eager. Even in case of a business plaintiff that suffers economic loss, it can be exceedingly difficult to tie specific losses to specific assertions of falsity.

The historical approach allows a plaintiff to demand presumed damages. That's a messy solution, because the jury is entrusted with broad discretion to assess the damages. On the plaintiff side, perhaps that's OK; we just juries to measure intangible losses all the time, as in the case of general damages for injuries, or pain and suffering. The defense bar and allied tort reformers have rebelled against presumed damages, though, arguing that they afford juries a blank check. That unpredictability makes it difficult for defendants and insurers to assess their liability exposure. Defense-oriented tort reformers have been successful in extinguishing per se defamation actions in many U.S. states.

Massachusetts splits the difference, I think in a healthy way. Per se actions are preserved, but the plaintiff is entitled to nominal damages, plus proved actual losses, but not presumed damages. I mentioned recently that the E. Jean Carroll case has spurred overblown commentary about the potential of defamation law to redress our misinformation problem. The unavailability of per se actions in many states is one reason that defamation is not up to the job. A defamation action for nominal damages helps, though, coming about as close as U.S. jurisdictional doctrine allows to a declaration of truth—which is what defamation plaintiffs usually most want.

Allegation of a crime, such as theft or misappropriation of charitable funds, fits the class of cases that qualify for per se doctrine, whether libel or slander. There is some room debate about whether social media better fits the historical mold of libel or slander, but that's immaterial here. The allegation of "stolen" money fit the bill.

The Appeals Court thus vacated dismissal and remanded the claim for defamation and related statutory tort. The court clerk entered the Memorandum and Order for Judges Mary Thomas Sullivan, Peter Sacks, and Joseph M. Ditkoff in Depena v. Valdez, No. 22-P-659 (Mass. App. Ct. Apr. 28, 2023).

Austrian post box.
High Contrast via Wikimedia Commons CC BY 3.0 DE

Non-Consensual Political Analysis in Austria

The Court of Justice of the European Union (CJEU) also recently tussled with a problem of proof of damages. The court held early in May that a claimant under the EU General Data Protection Regulation (GDPR) must claim harm for a personal data processing violation, but need not meet any threshold of seriousness.

The court's press release summarized the facts in the case:

From 2017, Österreichische Post collected information on the political affinities of the Austrian population. Using an algorithm, it defined "target group addresses" according to socio-demographic criteria. The data thus collected enabled Österreichische Post to establish that a given citizen had a high degree of affinity with a certain Austrian political party. However, that data processed were not communicated to third parties.

The citizen in question, who had not consented to the processing of his personal data, claimed that he felt great upset, a loss of confidence and a feeling of exposure due to the fact that a particular affinity had been established between him and the party in question. It is in the context of compensation for the non-material damage which he claims to have suffered that he is seeking before the Austrian courts payment of the sum of €1,000.

The plaintiff endeavored to quantify his emotional upset, but in the absence of communication of the conclusions about the plaintiff to to any third party, the claim of harm was thin. Emotional suffering resulting from the mere processing of personal data in contravention of one's advance permissions seems minimal. Accordingly, the Austrian courts, following the example of neighboring Germany, were inclined to disallow the plaintiff's action for failure to demonstrate harm.

Harm has been a sticking point in privacy law in the United States, too. Privacy torts are a relatively modern development in common law, and they don't import the per se notion of historical defamation doctrine. Tort law balances culpability with harm to patrol the borders of social contract. Thus, intentional battery is actionable upon mere unwanted touching, while merely accidental infliction of harm requires some degree of significance of injury. Defamation law arguably defies that dynamic, especially in per se doctrine, in part for the reasons I explained above, and in part because, for much of human history, personal integrity has been as essential for survival as physical security.

Not having inherited the paradigm-defying dynamic, privacy law has posed a puzzle. Scholars disagree whether damages in privacy should follow the example of business torts, requiring at least economic loss; the example of emotional distress torts, requiring at some threshold of severity; or defamation per se torts, recognizing some sui generis harm in the disruption of personal integrity. As personal data protection has grown into its own human right independent of privacy, the problem has been amplified, because, exactly as in the Austrian case, a right against the non-consensual processing of data that are personal, but not intimately personal, is even more difficult to generalize and quantify.

The problem is not only a European one. In the United States, courts and scholars have disagreed over when claims in the burgeoning wave of state data protection laws, such as the Illinois Biometric Information Privacy Act, can satisfy the "case or controversy" constitutional requirement of jurisdiction. Failure to see a sui generis harm in privacy violations means, arguably, that there is no "case or controversy" over which courts, particularly federal courts, have competence.

The CJEU balked at Austrian courts' unwillingness to see any wrong upon a claim of only intangible loss. But the court agreed that the plaintiff must demonstrate harm. Hewing to the text of the GDPR, the court reasoned that a plaintiff must show a violation of the regulation, a resulting harm, and a causal connection between the two. Thus, harm is required, but there is no requirement that the harm meet some threshold of seriousness or economic measure.

The CJEU decision was touted in headlines as "clarifying" the law of damages under the GDPR, while the stories beneath the headlines tended to do anything but. Some writers said that the court raised the bar for GDPR claims, and others said the court lowered it. Confusion stems from the fact that the court's decision spawns subsequent many questions. Conventionally, the GDPR leaves the quantum of damages to national courts. So how must a claim of de minimis harm be measured on remand? Are nominal damages sufficient compensation, or must the data protection right be quantified?

Moreover, Sara Khalil, an attorney with Schönherr in Vienna, observed that the court left out a component of tort liability that national courts sometimes require: culpability. Is there a minimal fault standard associated with recovery for mere data processing? Because tort law ties together the elements of harm and fault, at least in some jurisdictions, the one question necessarily begets the other.

RW v. Österreichische Post AG, No. C-154/21 (May 4, 2023), was decided in the First Chamber of the CJEU.

Data Security in Gambling in Massachusetts

Policymakers and courts on both sides of the Atlantic are wrestling with the problems of contemporary personal data protection. And while the gap between the GDPR and patchwork state and federal regulation in the United States has stressed international relations and commerce, it's no wonder that we see convergence in systems trying to solve the same problems.

To wit, the Massachusetts Gaming Commission has employed recognizably European privacy principles in new data security rules. For Israeli law firm Herzog Fox & Neeman, attorneys Ariel Yosefi, Ido Manor, and Kevin David Gampel described the overlap. The commission adopted the regulations for emergency effect in December 2022; final rules were published in April.

The attorneys detailed the requirements of gambling operators:

• to establish and plainly disclose to players comprehensive data privacy policies, including measures regarding data collection, storage, processing, security, and disclosure, the latter including the specific identities of third-party recipients; 
• to guarantee player rights including access, correction, objection, withdrawal of consent, portability, and complaint;
• to eschew purely automated decision-making; and
  
• to implement physical, technical, and organization security practices.

The regulations are 205 CMR 138 and 205 CMR 248 (eff. Mar. 9, 2023, publ. Apr. 28, 2023).

U.S. State Department dabbles in gamer diplomacy

Flickr by Casey Fiesler, CC BY 2.0

The U.S. State Department announced in April that it will sponsor 10-week virtual student exchange programs to connect teens from the United States, Bahrain, Israel, and the UAE to collaborate in developing "social impact video games."  "Game Exchange" is part of a State Department grant award to Games for Change, a Woodside, N.Y.-based nonprofit that, by its own description, "empowers game creators and social innovators to drive real-world impact through games and immersive media."  Game Exchange aims to reach 3,000 middle and high school students over two years by pairing classrooms across borders.  I am a believer in "sports diplomacy" by the State Department and in the related work of organizations such as Soccer Without Borders, so I guess I should get behind this STEM equivalent.  Read more at Games for Change or at The Washington Post (bafflingly not pay-walled at last check).  Hat tip to Jennifer Batista at IP Media Law and Updates from New York City-based Frankfurt Kurnit Klein & Selz.