Flynt et al v. Harris et al

Filing 54

ORDER signed by District Judge John A. Mendez on 6/12/2020 GRANTING IN PART AND DENYING IN PART 50 Motion to Dismiss. To the extent that Plaintiffs' dormant commerce doctrine claims rest upon the theory that Sections 19858 and 19858.5 directl y regulate or discriminate against interstate commerce, the Court DISMISSES them without prejudice. Plaintiffs lack standing to allege Sections 19858 and 19858.5 improperly discriminate against out-of-state investors. Moreover, their allegations that these provisions directly regulate interstate commerce fail as a matter of law. Plaintiffs do, however, adequately allege that Sections 19858 and 19858.5 indirectly regulate interstate commerce. To the extent that Plaintiffs' dormant commerce c laims rests upon this theory of liability, the Court DENIES 50 Motion to Dismiss. If Plaintiffs amend their complaint, they shall file an Amended Complaint within 20 days of this Order. Defendants' responsive pleading is due 20 days thereafter. (Huang, H)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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LARRY C. FLYNT; HAIG
KELEGIAN, SR.; HAIG T.
KELEGIAN, JR.,

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No.

Plaintiffs,

2:16-cv-02831-JAM-EFB

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS

v.
STEPHANIE K. SHIMAZU, in her
official capacity as the
Director of the California
Department of Justice, Bureau
of Gambling Control, et al.,

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Defendants.

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Larry Flynt, Haig Kelegian, Sr., and Haig Kelegian Jr. own

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card clubs in California.

Flynt and the Kelegians want to

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substantially invest in out-of-state casinos, but California law

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prohibits them from owning more than a one-percent interest in

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facilities that host casino-style gambling.

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challenged the constitutionality of this prohibition, arguing it

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violates the Due Process Clause and the dormant commerce

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doctrine.

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their due process claim.

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n.2 (9th Cir. 2019)

Compl., ECF No. 1.

In 2016, Plaintiffs

Plaintiffs have since abandoned

See Flynt v. Shimazu, 940 F.3d 457, 460

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This Court previously dismissed Plaintiffs’ suit with

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prejudice, finding the two-year statute of limitations barred

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their claims.

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Prejudice, ECF No. 40.

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940 F.3d at 462-63.

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approach to the continuing violations doctrine, the Ninth Circuit

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found that “the continued enforcement of a statute inflicts a

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continuing or repeated harm” such that plaintiffs suffer a new

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injury each time they abstain from prohibited conduct.

Order Granting Defendants’ Motion to Dismiss with
The Ninth Circuit disagreed.

See Flynt,

Adopting the Sixth and Seventh Circuit’s

Id.

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Applying this doctrine, the Ninth Circuit found Plaintiffs’

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claims fell within the applicable limitations period.

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462-63.

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See id.

On remand, Defendants filed another motion to dismiss.1

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Mot. to Dismiss (“Mot.”), ECF No. 50.

Plaintiffs oppose the

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motion.

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For the reasons discussed below, the Court grants in part and

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denies in part Defendants’ motion to dismiss.

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that Plaintiffs’ dormant commerce doctrine claims rest upon the

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theory that California Business and Professions Code Sections

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19858 and 19858.5 directly regulate or discriminate against

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interstate commerce, the Court dismisses them without prejudice.

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Plaintiffs lack standing to allege Sections 19858 and 19858.5

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improperly discriminate against out-of-state investors.

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Moreover, their allegations that these provisions directly

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regulate interstate commerce fail as a matter of law.

Opp’n, ECF No. 51; see also Defs.’ Reply, ECF No. 52.

To the extent

Plaintiffs

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This motion was determined to be suitable for decision without
oral argument. E.D. Cal. L.R. 230(g). The hearing was
scheduled for May 5, 2020.
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do, however, adequately allege that Sections 19858 and 19858.5

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indirectly regulate interstate commerce.

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Plaintiffs’ dormant commerce claims rests upon this theory of

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liability, the Court denies Defendants’ motion to dismiss.

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I.

To the extent that

BACKGROUND

Subject to some restrictions, California permits in-state

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gambling.

Specifically, it allows both residents and non-

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residents to operate cardrooms.

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obtain a California gambling license, and renew it every two

Prospective cardroom owners must

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years, to operate within the state.

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§ 19876(a).

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California cardroom licensees must comply with California

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gambling laws.

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these state laws.

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Cal. Bus. Prof. Code

To avoid monetary and licensing penalties,

This case arises at the intersection of three of

First, California prohibits cardrooms from engaging in

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casino-like activities (e.g., blackjack, roulette, and other

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house-banked or percentage games).

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Second, California prohibits a person from “hold[ing] a state

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gambling license to own a gambling establishment if,” among other

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things, he “has any financial interest in any business or

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organization that is engaged in any form of gambling prohibited

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by Section 330 of the Penal Code.”

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§ 19858(a).

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“within [and] without [the] state.”

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carves out a limited exception to § 19858’s prohibition.

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Cal. Bus. & Prof. Code § 19858.5.

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California cardroom licensees to hold up to a 1% financial

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interest in entities that host gambling prohibited by California

Cal. Penal Code § 330.

Cal. Bus. & Prof. Code

This restriction applies to business investments

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Id.

Finally, California
See

Section 19858.5 allows

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law, so long as the gambling is legal in the state where it

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occurs.

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Flynt and the Kelegians are California residents who possess

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state-issued gambling licenses to operate card clubs in

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California.

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Plaintiffs stand “ready, willing, and able to compete for the

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opportunity to invest in and/or operate out of-state-casinos,”

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but Sections 19858 and 19858.5 limit their ability to do so.

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various points since 2014, Plaintiffs have declined otherwise

First Amended Compl. (“FAC”) ¶¶ 8-10, ECF No. 32.

At

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attractive business opportunities because the investments would

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cost them their California gambling licenses.

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II.

FAC ¶ 4.

OPINION

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To state a section 1983 claim, “a plaintiff must allege the

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violation of a right secured by the Constitution and laws of the

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United States, and must show that the alleged deprivation was

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committed by a person acting under color of state law.”

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Atkins, 487 U.S. 42, 48 (1988).

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violated their rights to be free from California’s regulation of,

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and discrimination against, interstate commerce.

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Defendants, however, maintain Plaintiffs failed to allege a

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cognizable theory of liability under the dormant commerce

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doctrine.

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Jr.’s failure to exhaust his state administrative remedies bars

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his claim.

Mot. at 5-10.

West v.

Plaintiffs allege Defendants

FAC ¶ 5.

Moreover, Defendants contend Kelegian,

Mot. at 14-15.

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A.

Exhaustion Requirement

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California law provides that “[a]ny person aggrieved by a

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final decision or order of the commission that limits,

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conditions, suspends, or revokes any previously granted license”
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may petition the Sacramento County Superior Court for review.

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Cal. Bus. & Prof. § 19932(a).

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of administrative remedies is a jurisdictional requirement and

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‘absent a clear indication of legislative intent [a court]

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should refrain from inferring a statutory exemption from [the

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State's] settled rule requiring exhaustion of administrative

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remedies.’”

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958, 961 (9th Cir. 2009).

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“Under California law, exhaustion

City of Oakland, Cal. v. Hotels.com LP, 572 F.3d

In 2014, the California Bureau of Gambling Control found

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that Kelegian, Jr. violated California’s 1% rule.

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ECF No. 32.

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fines and assessments.

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required him to “refrain from any and all investment in out-of-

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state casino-style gambling facilities.”

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Jr. did not petition for review of this decision.

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FAC ¶¶ 69-70,

As a result, Kelegian, Jr. had to pay $210,000 in
FAC ¶ 71.

Moreover, the state bureau

FAC ¶ 71.

Kelegian,

Defendants argue this failure to exhaust administrative

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remedies precludes judicial review.

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disagree, arguing Defendants waived their exhaustion argument by

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not raising it in their original motions to dismiss.

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n.5.

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that plaintiffs need not exhaust state administrative remedies

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before initiating a section 1983 suit in federal court.

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v. Township of Scott, Pennsylvania, 139 S. Ct. 2162, 2167-68

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(2019) (citing Patsy v. Bd. of Regents of State of Fla., 457

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U.S. 496, 501 (1982)).

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Kelegian, Jr.’s claims on this ground.

Neither argument controls.

Mot. at 14-15.

Plaintiffs

Opp’n at 6

Rather, it is well-established

Knick

The Court therefore declines to dismiss

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B.

Dormant Commerce Doctrine

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“The Commerce Clause of the United States Constitution
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assigns to Congress the authority ‘[t]o regulate Commerce with

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foreign Nations, and among the several States.’”

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Foundation v. Christies, Inc., 784 F.3d 1320, 1323 (quoting U.S.

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Const. art. I, § 8, cl. 3) (modifications in original).

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affirmative grant of authority to federal lawmakers contains an

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implied restriction on states’ powers to regulate.

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refer to this limitation as either the dormant Commerce Clause

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or, more precisely, the dormant commerce doctrine.

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United States v. Durham, 902 F.3d 1180, 1203 (10th Cir. 2018).

Sam Francis

Id.

This

Courts

See id.;

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Imposing the dormant commerce doctrine’s limits on state

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regulation is necessary to “ensure that state autonomy over

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‘local needs’ does not inhibit ‘the overriding requirement of

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freedom for the national commerce.’”

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Pac. Tea Co. v. Cottrell, 424 U.S. 366, 361 (1976)).

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Id. (quoting Great Atl. &

The dormant commerce doctrine prohibits two types of state

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lawmaking: (1) direct regulation of interstate commerce and

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(2) discrimination against interstate commerce.

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Sharpsmart, Inc. v. Smith (“Daniels”), 889 F.3d 608, 614 (9th

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Cir. 2018).

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discriminates against interstate commerce, or . . . its effect

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is to favor in-state economic interests over out-of-state

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interests,’ it is ‘struck down . . . without further inquiry.’”

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Chinatown Neighborhood Ass’n v. Harris, 794 F.3d 1136, 1145 (9th

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Cir. 2015) (quoting Brown-Forman Distillers Corp. v. N.Y. State

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Liquor Auth., 476 U.S. 573, 579 (1986)).

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Daniels

“If a state statute ‘directly regulates or

If, however, a state statute “regulates evenhandedly” and

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“has only indirect effects on interstate commerce,” courts

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proceed to ask whether those indirect effects “impose[] a
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‘significant burden on interstate commerce.’”

Id. at 1146.

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not, Ninth Circuit precedent “preclude[s] any judicial

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‘assessment of the benefits of [a state] law[] and the

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wisdom in adopting’ it.”

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Optometrists & Opticians v. Harris, 682 F.3d 1144, 1156 (9th

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Cir. 2012)) (modifications in original).

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imposes a “significant burden” on interstate commerce, courts

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must weigh that burden against the law’s intrastate benefits.

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If

See Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

. . .

Id. (quoting Nat’l Ass’n of

But if the statue

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Chinatown Neighborhood Ass’n, 794 F.3d at 1145-46.

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will survive “Pike balancing” so long as the burden it imposes

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on interstate commerce is not “clearly excessive in relation to

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the putative local businesses.”

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A state law

Pike, 397 U.S. at 142.

Discrimination Against Interstate Commerce

Within the context of the dormant commerce doctrine,

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“discrimination simply means differential treatment of in-state

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and out-of-state economic interests that benefits the former and

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burdens the latter.”

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Herkimer Solid Waste Mgt. Auth., 550 U.S. 330, 338 (2007)

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(internal quotations omitted).

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discriminate against out-of-state interests in three ways:

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facially, purposefully, or in effect.

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Optometrists & Opticians LensCrafters, Inc. v. Brown, 567 F.3d

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521, 525 (9th Cir. 2009).

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earlier iteration of Section 19858 was discriminatory on its

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face, they do not allege that the law in its current form is

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facially discriminatory.

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prohibits both residents and non-residents with California

United Haulers Assoc., Inc. v. Oneida-

A statutory scheme can

Nat’l Ass’n of

Although Plaintiffs contend an

Correctly so.

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California law

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cardroom licenses from owning more than a 1% interest in casino-

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style gambling entities.

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Prof. Code §§ 19858, 19858.5 The text of these provisions does

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not discriminate.

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Cal. Penal Code § 330; Cal. Bus &

Plaintiffs do, however, argue that the purpose and effect

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of these laws are discriminatory.

See Opp’n at 9-11; FAC ¶¶ 3,

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5.a, 6, 26, 29, 41, 44-45.

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officials, including former-Governor Gray Davis have said that

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Section 19858 was “primarily [] intended to prohibit out-of-

The complaint alleges that state

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state gambling interests from owning cardrooms in California.”

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FAC ¶ 45.

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businesses that would be interested in obtaining [California]

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cardroom licenses are indeed casinos.”

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the laws serve as a barrier to all out-of-state competition with

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in-state cardrooms.

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the injury Plaintiffs claim.

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Plaintiffs argue discovery will show that “the only

Id.

Opp’n at 11.

If true,

But this injury does not align with

The standing doctrine’s “‘injury in fact’ test requires

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more than an injury to a cognizable interest.

It requires that

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the party seeking review be himself among the injured.’”

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v. Defenders of Wildlife, 504 U.S. 555, 563 (1992) (quoting

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Sierra Club v. Morton, 405 U.S. 727, 734-735 (1972)).

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Plaintiffs are California residents with California gambling

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licenses.

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them from substantially investing in out-of-state casinos while

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retaining their licenses.

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not out-of-state casinos barred from procuring a California

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gambling license and competing with local cardrooms.

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therefore lack standing to allege discrimination on an out-of-

Lujan

Their alleged injury is that California law prevents

See FAC ¶¶ 72, 75.

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Plaintiffs are

They

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state investor’s behalf.

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RK Ventures, Inc. v. City, 307 F.3d 1045, 1056 (9th Cir. 2002)

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(addressing the issue of standing sua sponte).

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that Plaintiffs’ dormant-commerce claim rests on this theory of

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liability, the Court grants Defendants’ motion to dismiss.

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2.

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See Lujan, 504 U.S. at 563; see also

To the extent

Direct Regulation of Interstate Commerce

“Direct regulation [of interstate commerce] occurs when

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state law directly affects transactions that take place across

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state lines or entirely outside of the state’s borders.”

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Daniels, 889 F.3d at 614.

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“directly control[]” commerce occurring “wholly outside” the

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state’s boundaries.

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324, 336 (1989)).

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are per se invalid under the dormant commerce doctrine,

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“regardless of whether the statute’s extraterritorial reach was

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intended by the legislature.”

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States cannot enact laws that

Id. (quoting Healy v. Beer Inst., 491 U.S.

State laws that regulate extraterritorially

Id.

In determining whether a state statute directly regulates

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out-of-state business, “[t]he critical inquiry is whether the

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practical effect of the regulation is to control conduct beyond

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the boundaries of the state.”

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Plaintiffs contend their extraterritorial-regulation argument

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directly mirrors the one recognized in Daniels, 889 F.3d at 615-

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616.

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commerce challenge to the California Medical Waste Management

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Act (MWMA).

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preliminary injunction against the Department’s MWMA

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enforcement.

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injunction.

Healy, 491 U.S. at 336.

Daniels addressed a medical waste handler’s dormant

Id. at 612. Plaintiff sought and obtained a

Id. at 613.

The Ninth Circuit upheld the

In doing so, it found Plaintiff was likely to
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succeed on his claim that the Department’s extraterritorial

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application of the MWMA violated the dormant commerce doctrine.

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Id. at 615-616.

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But Daniels is not a perfect match for this case.

In

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Daniels, the Ninth Circuit found itself “faced with an attempt

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to reach beyond the borders of California and control

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transactions that occur wholly outside of the state after the

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material in question . . . ha[d] been removed from the state.”

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Id. at 615.

Put simply: the state was regulating activity it

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had no business regulating.

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however, regulate conduct that is wholly unrelated to, or occurs

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wholly outside of, the state.

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ownership of cardrooms within California’s borders and prevent

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illegal gambling interests from becoming too intertwined with

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legal gambling operations.

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extraterritorial effects, such as requiring Plaintiffs to

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restructure out-of-state business deals or forego them entirely.

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See FAC ¶¶ 49-77.

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law per se invalid if those effects “result from a regulation of

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in-state conduct.”

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1145-46 (collecting cases).

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of-state consequences flow from California’s valid regulation of

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its in-state cardrooms.

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Sections 19858 and 19858.5 do not,

These provisions regulate the

These provisions have

But extraterritorial effects do not render a

Chinatown Neighborhood Ass’n, 794 F.3d at
Sections 19858 and 19858.5’s out-

Plaintiffs argue this case differs from cases like

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Chinatown Neighborhood Ass’n and Nat’l Ass’n of Optometrists &

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Opticians LensCrafters, Inc. v. Brown where the Ninth Circuit

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upheld state statutes with extraterritorial effects.

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8-9.

Opp’n at

Specifically, they argue the laws upheld in those cases
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did not bar California residents from going to another state and

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engaging in business that was lawful outside California.

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argument misgauges the scope of Sections 19858 and 19858.5.

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Plaintiffs do not allege these provisions restrict all

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California residents from investing in out-of-state casinos.

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Nor do Plaintiffs allege these laws prevent all California

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residents from owning casinos in states where casino-style

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gambling is lawful. California law only restricts these business

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practices when they intersect with the ownership or operation of

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This

a card club located in California.
Finally, Plaintiffs argue Sections 19858 and 19858.5

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impermissibly regulate wholly out-of-state conduct because “the

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Statutes’ effect is not only on the cardroom licensees, but

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instead, applies to all of the licensee’s partners, officers,

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directors, and shareholders, regardless of their location.”

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Opp’n at 8 (citing FAC ¶¶ 26, 57-63) (emphasis in original).

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The Court declines to address the merits of this argument.

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sufficiently allege a facial challenge, a plaintiff “must

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establish that no set of circumstances exist under which the Act

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would be valid.”

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(1987).

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19858.5 directly regulated interstate commerce with respect to

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licensees and non-licensees.

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Plaintiffs fail to allege Sections 19858 and 19858.5 directly

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regulate interstate commerce with respect to California cardroom

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licensees.

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itself, revive Plaintiffs’ facial challenge.

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as the basis for an as-applied challenge.

To

United States v. Salerno, 481 U.S. 739, 745

Plaintiffs therefore had to allege Sections 19858 and

As previously discussed,

The laws’ application to non-licensees cannot, in

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Nor can it serve

Plaintiffs, as

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licensees, lack standing to challenge Sections 19858 and 19858.5

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on non-licensees’ behalf.

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Lujan, 504 U.S. at 563.

The Court finds Plaintiffs lack a cognizable legal theory

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for their claim that Sections 19858 and 19858.5 directly

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regulate interstate commerce.

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dormant commerce claims rest upon a direct-regulation theory,

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the Court grants Defendants’ motion to dismiss.

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3.

To the extent that Plaintiffs’

Indirect Regulation of Interstate Commerce

A state’s evenhanded regulation of intrastate activity will

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nonetheless violate the dormant commerce doctrine if its indirect

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effects on interstate commerce impose a “significant burden” that

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is “clearly excessive in relation to the putative local

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benefits.”

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Opticians v. Harris, 682 F.3d at 1156-57.

Pike, 397 U.S. at 142; Nat’l Ass’n of Optometrists &

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Plaintiffs allege Sections 19858 and 19858.5 impose a

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significant burden on interstate commerce in two respects.

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First, the State’s 1% rule not only prevents Plaintiffs from

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substantially investing in casino-style gambling; it also

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prevents Plaintiffs from doing business with anyone who has

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substantial investments in casino-style gambling.

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enforced, this restriction all but completely bars California

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cardroom licensees from investing in out-of-state gambling

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ventures.

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ability to invest in businesses unrelated to gambling.

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for example, owns an out-of-state “exotic dance establishment.”

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FAC ¶ 83.

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Nevada casino, Flynt will have to divest his interest in the

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dance club—even though the dance club itself does not host

Opp’n at 12-13.

FAC ¶ 83.

As

Second, the laws restrict Plaintiffs’
Flynt,

If Flynt’s business partner independently invests in a

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gambling that is illegal under California law.

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argue Sections 19858 and 19858.5’s ability to regulate industries

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unrelated to gambling adds to the significance of their burden on

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interstate commerce.

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Id.

Plaintiffs

Opp’n at 3.

Plaintiffs contend these burdens are “clearly excessive” in

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relation to California’s claimed interest in crime prevention—

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namely because this interest no longer exists.

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allege state officials on both sides of the political spectrum

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have repudiated the notion that Sections 19858 and 19858.5 are

FAC ¶ 85.

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still necessary to prevent crime.

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State has exempted various cardrooms from complying with the 1%

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rule only further undermines this putative benefit.

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¶¶ 28, 36, 40-41.

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allegations are insufficient as a matter of law.

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that Plaintiffs’ dormant commerce doctrine claims rest upon an

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indirect-regulation theory of liability, the Court denies

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Defendants’ motion to dismiss.

That the

See FAC

Defendants fail to illustrate how these

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FAC ¶¶ 39, 44-46.

They

III.

To the extent

ORDER

For the reasons set forth above, the Court GRANTS IN PART

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and DENIES IN PART Defendants’ motion to dismiss.

To the extent

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that Plaintiffs’ dormant commerce doctrine claims rest upon the

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theory that Sections 19858 and 19858.5 directly regulate or

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discriminate against interstate commerce, the Court DISMISSES

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them WITHOUT PREJUDICE.

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Sections 19858 and 19858.5 improperly discriminate against out-

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of-state investors.

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provisions directly regulate interstate commerce fail as a matter

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of law.

Plaintiffs lack standing to allege

Moreover, their allegations that these

Plaintiffs do, however, adequately allege that Sections
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19858 and 19858.5 indirectly regulate interstate commerce.

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the extent that Plaintiffs’ dormant commerce claims rests upon

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this theory of liability, the Court DENIES Defendants’ motion to

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dismiss.

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To

If Plaintiffs amend their complaint, they shall file an

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Amended Complaint within twenty (20) days of this Order.

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Defendants' responsive pleading is due twenty days thereafter.

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IT IS SO ORDERED.
Dated: June 12, 2020

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