Seventh Circuit George v. NCAA Decision Asks More Questions Than It Answers
Last week, the Seventh Circuit Court of Appeals reversed course in a case alleging that the NCAA’s former distribution method of certain sporting event tickets was an illegal lottery. George, et al. v. NCAA, No. 09-3667. In response to a petition for rehearing, the court, rather than deciding the state law question itself, asked the Supreme Court of Indiana to weigh in on the interpretation of the state statute at issue and stayed its case pending that outcome.
The plaintiffs in the class action suit alleged that the ticket-distribution model previously used to sell NCAA Division I basketball and hockey tickets constituted an illegal lottery. Ticketmaster had been a defendant in the suit but settled early.
Because the complaint was dismissed on the pleadings, the court took as true all well-pleaded facts. “Plaintiffs explain 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.” The NCAA then conducted a drawing to determine who got tickets. Chosen applicants received their two tickets and a refund of the ticket price for the other entries. Those not chosen received a refund of the ticket price for all entries. In both cases, however, the NCAA kept the processing fee.
The plaintiffs argued that “the handling fees, along with the NCAA’s temporary retention of the applicants’ money, qualified as consideration paid for the chance to win tickets,” and the tickets were prizes because they were scarce and worth more than face value. Plaintiffs claimed that this type of system constitutes a “lottery” and violates the Indiana gambling statute.
The NCAA claimed that the scheme does not qualify as a lottery under Indiana case law, an exception for “bona fide business transactions” applies, and an in pari delecto defense (the concept that both sides of the transaction are equally guilty of wrongdoing) precludes recovery.
The district court dismissed the case, and the plaintiffs appealed. Originally, the panel held (over a dissent) that the plaintiffs “pled sufficient facts to show that the NCAA system constituted an illegal lottery.” It found that, under Indiana law, there are “three elements necessary to establish a lottery: (1) a prize, (2) an element of chance, and (3) consideration for the chance to win a prize.” The court concluded that “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).” The plaintiffs alleged and the court considered significant that the handling charge “bears no relation to the NCAA’s actual cost in administering the ticket-distribution process and was not refunded.” It also held that neither the bona fide business transactions exemption nor the defense of in pari delecto applied.
The NCAA subsequently petitioned for rehearing. In granting that request and vacating its earlier opinion, the court stated “that the question of whether this ticket-distribution system constitutes a lottery under Indiana law is a close one, and our holding could have far-reaching effects on sports-ticket distribution systems utilized by the NCAA and others.”
Specifically, it asked the Indiana Supreme Court to answer three questions: 1) whether the distribution method alleged by the plaintiffs describes an illegal lottery under Indiana law; 2) if so, whether the “bona fide business transactions” exception found in the statute would apply; and 3) whether, under Indiana law, the in pari delecto defense applies to the plaintiffs’ allegations.
Many states’ gambling statutes are similar to Indiana’s, and, although the NCAA changed its ticket allocation policies, other organizations still use similar models. Moreover, depending on how the court rules, it could have an influence on poker, fantasy sports and interactive promotions regulation. We’ll report back when the Indiana Supreme Court rules.