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7th Circuit Reverses Dismissal of Complaint Alleging the NCAA Runs an Illegal Lottery

July 16, 2010

Full Disclosure -- our firm represents the plaintiffs in the case discussed below

On July 16, 2010, the Seventh Circuit Court of Appeals issued a decision in George v. NCAA, 623 F.3d 1135 (7th Cir. 2010), Case No. 09-3667, which reversed a decision from the Southern District of Indiana that dismissed a nationwide class action complaint pursuant to Rule 12(b)(6) motion alleging that the NCAA operated illegal lotteries to sell and distribute tickets for certain Division I championship tournaments.

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The complaint explained the process as follows:

Each person who applied for tickets to Final Four games submitted a single application with up to ten entries. Each entry was a chance to win, at the most, two tickets and required a payment of a six-dollar “non-refundable handling fee.” An applicant could win only once. Nonetheless, each applicant was required to submit the full face value of the tickets for each entry submitted. Accordingly, in order to maximize the chances for winning a single pair of $150 tickets, an applicant would have to submit $3,060 (the face value of ten pairs of tickets plus a six-dollar handling fee for each of ten entries). If the applicant were to win, he would receive a pair of tickets via overnight mail and, eventually, a $2,700 refund (the total ticket price for the remaining nine entries). The $60 in handling fees would be forfeited to the NCAA. If the applicant were to lose, he would receive a $3,000 refund (his entire up-front investment minus the handling fees).

The Court distinguished this situation from that in Lesher v. Baltimore Football Club, 496 N.E.2d 785, 789 (Ind. Ct. App. 1986), vacated in part on other grounds, 512 N.E.2d 156 (Ind. 1987), which held that held that a distribution scheme for season tickets to Indianapolis Colts games did not constitute an unlawful lottery. The Court held that the additional “service fee” or “handling fee” of six to ten dollars per ticket or entry was consideration that was not present in Lesher for a prize (scarce tickets) not present in Lesher.

Thus, Plaintiffs have alleged all elements of a lottery: they paid a per-ticket or per-entry fee (consideration) to enter a random drawing (chance) in hopes of obtaining scarce, valuable tickets (a prize).

This decision is significant because it promises to be a landmark decision demarcating illegal lotteries from legal ticket distribution schemes. It may have a large impact on Indiana in particular, given the fact that the NCAA is headquartered in Indianapolis.

However, the decision may be used beyond these limited circumstances. For example, one section of the opinion discusses the equitable doctrine of in pari delicto and holds that this doctrine does not apply (in the context of a 12(b)(6) motion) if the complaint does not state or imply a mutual arrangement to violate the law. This is notable, since a defendant could argue that a plaintiff has the burden of pleading the lack of a mutual arrangement to violate the law in order to satisfy federal pleading standards. Thus, this decision may be helpful to the plaintiffs' bar when arguing the adequacy of their pleadings.

Lessons:

A prize distribution scheme constitutes a lottery if the participants must pay a fee for the opportunity to participate in the prize distribution scheme.
The doctrine of in pari delicto does not require dismissal under Rule 12(b)(6) if a complaint does not state or imply a mutual arrangement to violate the law.

UPDATE
On October 18, 2010, the 7th Circuit granted a petition for rehearing, vacated the opinion, stayed the appeal, and certified three questions to the Indiana Supreme Court in an opinion that you can access here. We will provide additional updates as they happen.

Brad A. Catlin
Price Waicukauski & Riley, LLC
Learn more about Brad and contact us
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TAG 7th Circuit, Federal Pleading, Illegal Lotteries

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7th Circuit Reverses Dismissal of Complaint Alleging the NCAA Runs an Illegal Lottery

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