Weeks after having their motion for class certification denied and a proposed global settlement rejected, the plaintiffs in three actions against entities and individuals involved in the Full Tilt Poker Internet gambling operation have dismissed their claims without prejudice. This case illustrates the importance of due process considerations in representative actions.
Full Tilt, PokerStars, and Absolute Poker/Ultimate Bet (collectively, the “Poker Companies”) were the largest online gambling sites operating in the United States following Congress’s enactment of the Unlawful Internet Gambling Enforcement Act of 2006, which made it a crime for gambling businesses to “knowingly accept” most forms of payment “in connection with the participation of another person in unlawful Internet gambling.” 31 U.S.C. § 5363. On April 15, 2011, the U.S. Attorney’s Office for the Southern District of New York shut down the Poker Companies’ websites, seized their assets, and issued arrest warrants for their founders. The DOJ brought civil and criminal actions against the Poker Companies and others involved in the operation, which were settled in July 2012.
Online poker players who could not access funds in their Full Tilt accounts also filed three putative class actions in the U.S. District Court for the Southern District of New York. Two of the actions asserted claims for conversion and RICO violations and sought to certify injunctive and damages classes of U.S. residents who held Full Tilt player accounts. The third action asserted claims for breach of contract, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty and sought to certify only a damages class of all players who held Full Tilt accounts, including non-U.S. residents.
On January 7, 2015, the named plaintiffs in the three putative class actions moved the district court for preliminary approval of a settlement reached by the parties and preliminary certification of the settlement class. Because the named plaintiffs sought only injunctive relief in the settlement, they argued that notice to absent settlement class members was not required under Fed. R. Civ. P. 23(b)(2). On May 26, 2015, Magistrate Judge Kevin N. Fox declined to certify the settlement class and approve the settlement, finding multiple Rule 23 defects.
First, the court held that the plaintiffs failed to satisfy the Rule 23(a) commonality factor because they recited, without more, only bare questions alleged to be common to the class, which were insufficient under Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). Second, the court held that the plaintiffs did not establish typicality because they did not assert the same claims, or seek the same relief, for the same alleged wrongful conduct. Importantly, Judge Fox noted that the relief sought in the proposed settlement agreement was not relevant for purposes of his Rule 23 analysis; he instead considered each complaint’s allegations. Third, the named plaintiffs did not satisfy the adequacy of representation requirement, because their interests were not aligned with those of the proposed settlement class. Finally, the court held plaintiffs could not certify their settlement class as a Rule 23(b)(2) injunctive class because all three actions sought damages and were allegedly brought under Rules 23(b)(1) and (b)(3). In the end, the district court found that “the putative class members in the three actions claiming damages cannot be deprived of due process just because the named plaintiffs negotiated a settlement agreement offering only injunctive relief.”
The named plaintiffs’ inability to represent the class adequately, as they lacked issues common with or typical of the class, combined with the non-opt-out element of the proposed settlement, doomed the class from a due process perspective. This case serves as a reminder that in representative actions, due process is first and foremost.