Flynt et al v. Harris et al

Filing 67

ORDER signed by District Judge John A. Mendez on 1/13/2021 GRANTING IN PART AND DENYING IN PART 59 Motion to Dismiss. (Zignago, K.)

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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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Plaintiffs,

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No.

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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2:16-cv-02831-JAM-JDP

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS SECOND AMENDED
COMPLAINT

Defendants.

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

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(“Plaintiffs”) own cardrooms in California.

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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 1% interest in facilities

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that host casino-style gambling.

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constitutionality of this prohibition, arguing it violates the

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dormant commerce doctrine.

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(“SAC”), ECF NO. 57.

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SAC.

Id.

Plaintiffs want to

They challenge the

See generally Second Am. Compl.

On August 6, 2020, Plaintiffs filed their

In response, Defendants filed another motion to
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dismiss.1

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certainly familiar with the procedural history leading up to this

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latest complaint and motion and it will not be repeated here.

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Mot. to Dismiss (“Mot.”), ECF No. 59.

The parties are

For the reasons discussed below, the Court GRANTS IN PART
AND DENIES IN PART Defendants’ motion to dismiss.

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I.

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BACKGROUND

Subject to some restrictions, California permits in-state
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

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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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Prospective cardroom owners must

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).

Cal. Penal Code § 330.

Cal. Bus. & Prof. Code

This restriction applies to business investments

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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 October 13, 2020.
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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

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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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Id.

Finally, California
See

Section 19858.5 allows

Plaintiffs are California residents who possess state-issued
gambling licenses to operate card clubs in California.

SAC ¶¶ 7-

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9.

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 §§ 19858 and 19858.5 limit their ability to do so.

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On various occasions, Plaintiffs have declined, or divested

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themselves from, otherwise attractive business opportunities

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because the investments would cost them their California gambling

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licenses.

SAC ¶ 4.

SAC ¶¶ 55, 58, 68, 69, 72–75.

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In addition, Flynt modified his ownership interest in a

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Nevada-based exotic dance establishment because the majority

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owner might introduce gambling there.

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majority owner decides to either introduce gambling, or

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independently invest in casino-style gambling, Flynt will be

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required to relinquish his ownership rights entirely.

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66.

SAC ¶¶ 61–64.

If the

SAC ¶¶ 65–

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II.

OPINION

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To state a § 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.”

West v.

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

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19858.5 violate the dormant Commerce Clause of the United States

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Constitution because they: (1) amount to direct regulation of

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transactions and business relationships occurring entirely

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outside of California; (2) prohibit cardroom licensees from

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interstate investment in out-of-state ventures; and

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(3) excessively burden interstate commerce.

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Defendants, however, maintain Plaintiffs fail to allege a

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cognizable theory of liability under the dormant commerce

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doctrine.

Plaintiffs allege §§ 19858 and

SAC ¶ 5.

Mot. at 5-14.

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A.

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).

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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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Sam Francis

Id.

This

Courts

See id.;

Id. (quoting Great Atl. &

The dormant commerce clause doctrine prohibits two types of
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state lawmaking: (1) direct regulation of interstate commerce

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and (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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Daniels

“If a state statute ‘directly regulates or

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

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

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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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Id. at 1146.

If

. . .

Id. (quoting Nat’l Ass’n of

But if the statue

A state law

Pike, 397 U.S. at 142.

Section 19858’s Applicability

As an initial matter, Defendants contest Plaintiffs’
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description of § 19858(a)’s reach.

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SAC, Plaintiffs claim the statute prevents them from entering a

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business relationship with any individual or entity that has a

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more than 1% interest in a gambling operation prohibited in

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California, even if that business relationship is not connected

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to that gambling operation.

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93, 95, 105.

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statute is too broad and that, instead, it “applies only to

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licensees and applicants for a license, and partners, officers,

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directors, or shareholders in the business entity that holds or

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is applying for a license.”

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Mot. at 5–7.

Throughout the

See SAC ¶¶ 4, 25–26, 66–67, 82, 86,

Defendants argue this interpretation of the

Mot. at 5.

There is no existing caselaw describing § 19858(a)’s reach.

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The statute’s legislative history is similarly unhelpful.

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the analysis of this statute begins and ends with its plain

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language.

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state gambling license” if “the person, or any partner, officer,

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director, or shareholder of the person, has any financial

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interest in any business or organization that is engaged in any

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form of gambling prohibited by Section 330 of the Penal Code,”

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whether inside or outside of California.

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§ 19858(a).

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“natural person, corporation, partnership, limited partnership,

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trust, joint venture, association, or any other business

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organization.”

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Thus,

Section 19858(a) prohibits a person from “hold[ing] a

Cal. Bus. & Prof. Code

Section 19805(ae) describes a “person” as a

Cal. Bus. & Prof. Code § 19805(ae).

Defendants argue that, because “person” is defined to

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include business entities, § 19858(a) only applies to

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individuals, entities, and their partners who apply for or hold

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California cardroom licenses.

Mot. at 6.
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As such, § 19858(a)

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does not apply to any individuals or entities that are not

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applying for, or that do not hold, a California cardroom

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license.

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intuitively makes sense, Defendants’ reasoning is not

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persuasive.

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Id.

While this more conservative application

The provision deems a person unsuitable to hold a state

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gambling license if the person, “or any partner, officer,

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director, or shareholder or the person, has any financial

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interest” in an organization engaged in prohibited gambling.

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Cal. Bus. & Prof. Code § 19858(a) (emphasis added).

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“every.”

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webster.com/dictionary/any, (accessed Jan. 6, 2021).

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to indicate one selected without restriction.

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suggests that a person applying for, or holding, a gambling

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license in California cannot have a business affiliation with

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any person or entity that has gambling interests prohibited in

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California.

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forming a business partnership, unrelated to gambling, with a

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person who has interests in a casino.

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“Any” means

Merriam-Webster Dictionary, https://www.merriam-

Id.

It is used
Its use here

This could, theoretically, prohibit a licensee from

Thus, the scope of § 19858(a)’s applicability is left

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somewhat uncertain.

Defendants argue its reach is limited.

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its plain text is not so restrictive.

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provision itself cannot be ignored.

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U.S. 19, 31 (2001) (“It is a cardinal principle of statutory

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construction that a statute ought, upon the whole, to be so

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construed that, if it can be prevented, no clause, sentence, or

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word, shall be superfluous, void, or insignificant.”) (internal

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quotation marks and citations omitted).
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But

The language of the
TRW Inc. v. Andrews, 534

Accordingly, the Court

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declines to follow the narrow applicability of § 19858(a)

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requested by Defendants.

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with the provision’s broader reach in mind.

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2.

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The subsequent analysis is conducted

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

States cannot enact laws that

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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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state statute directly regulates out-of-state business, “[t]he

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critical inquiry is whether the practical effect of the

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regulation is to control conduct beyond the boundaries of the

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state.”

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Id. (quoting Healy v. Beer Inst., 491 U.S.
State laws that regulate extraterritorially

Id.

In determining whether a

Healy, 491 U.S. at 336.

Counts One and Two of Plaintiffs’ SAC are, in effect,

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repeat extraterritorial regulation claims.2

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Count One alleges § 19858 violates the dormant Commerce Clause

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because it “directly regulates transactions occurring wholly

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outside of California” by “prohibit[ing] and interfer[ing] with

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transactions . . . that have nothing to do with in-state

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cardrooms.”

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SAC ¶¶ 85, 86 (emphasis added).

See SAC ¶¶ 83–88.

Count Two alleges

Plaintiffs have clarified that Counts One and Two of their SAC
are not discrimination claims. See Opp’n at 8 n.6. As such, the
Court need not address Defendants’ arguments at pages 10–12 of
their motion.
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§ 19858 “restrict[s] the opportunities of cardroom licenses to

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invest their money in out-of-state businesses.” SAC ¶ 93

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(emphasis added).

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not substantively different from those raised in Plaintiffs’

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first amended complaint. See First Amended Complaint (“FAC”),

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ECF No. 32.

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extraterritorial application of [California Penal Code § 330]”

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onto “out-of-state transactions and entities.”

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FAC also alleged § 19858 prevents residents from “invest[ing]

These allegations of direct regulation are

There, Plaintiffs alleged § 19858 “mandate[s]

The

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their money in out-of-state businesses.”

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the Court’s prior analysis of Plaintiffs’ direct regulation-

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based dormant commerce claims still stands.

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Id.

FAC ¶ 80.

For this reason,

Plaintiffs, as before, hinge their extraterritorial-

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regulation argument on Daniels, 889 F.3d at 615-616.

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at 9–10.

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Medical Waste Management Act to “attempt to reach beyond the

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borders of California and control transactions that occur wholly

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outside of the state after the [medical waste] . . . ha[d] been

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removed from the state.”

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state tried to use its own law to regulate the way medical waste

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was being disposed of in other states.

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This is misguided.

See Opp’n

In Daniels, California used the

Daniels, 889 F.3d at 615.

There, the

Not so here.

Sections 19858 and 19858.5 do not regulate conduct that is

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wholly unrelated to, or occurs wholly outside of, the state.

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previously explained, these provisions regulate the ownership of

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cardrooms within California and prevent illegal gambling

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interests from becoming too intertwined with legal gambling

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operations.

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such as requiring Plaintiffs to restructure out-of-state

These provisions have extraterritorial effects,

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As

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business deals or forego them entirely.

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66, 68, 69, 72–75.

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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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See SAC ¶¶ 55, 58, 61–

But extraterritorial effects do not render a

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

The Court finds Plaintiffs lack a cognizable legal theory
for their claim that §§ 19858 and 19858.5 directly regulate

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interstate commerce.

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dismissed.

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3.

Counts One and Two of Plaintiffs’ SAC are

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.

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

Plaintiffs allege §§ 19858 and 19858.5 impose a significant

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burden on interstate commerce not only by preventing Plaintiffs

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from substantially investing in casino-style gambling, but also

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by preventing, or significantly curtailing, Plaintiffs from doing

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business with anyone who has substantial investments in casino-

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style gambling.

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case with Flynt and his business partner and majority owner of

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the Nevada-based exotic dance establishment.

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Plaintiffs allege that, if Flynt’s business partner decides to

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independently invest in a casino, Flynt will have to divest his

See SAC ¶¶ 25-26, 66–67.

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As is allegedly the

SAC ¶¶ 66–67, 105.

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interest in the dance club.

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of the plain language of § 19858, this might be necessary.

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Id.

Based on the Court’s analysis

Plaintiffs argue §§ 19858 and 19858.5’s ability to regulate

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industries unrelated to gambling adds to the significance of

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their burden on interstate commerce.

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contend these burdens are “clearly excessive” in relation to

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California’s claimed interest in crime prevention—namely because

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this interest no longer exists.

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state officials on both sides of the political spectrum have

Opp’n at 15.

SAC ¶¶ 99, 102.

Plaintiffs

They allege

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repudiated the notion that §§ 19858 and 19858.5 are still

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necessary to prevent crime.

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the state has exempted various cardrooms from complying with the

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1% rule only further undermines this putative benefit.

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¶¶ 43, 45, 100.

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SAC ¶¶ 34–41, 45, 48–52, 100.

That

See SAC

Defendants again fail to illustrate how these allegations

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are insufficient as a matter of law.

The Court denies

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Defendants’ motion to dismiss Count Three of Plaintiffs’ SAC.

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B.

Leave to Amend

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Plaintiffs request leave to amend any portion of the SAC

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deemed deficient.

See Opp’n at 15.

The Court need not grant

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leave to amend where amendment would be futile.

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Globe Aviation Sec. Servs., 454 F.3d 1043, 1049 (9th Cir. 2006).

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Plaintiffs have amended their complaint twice.

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nonetheless, failed to present a cognizable legal theory in

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support of their claim that §§ 19858 and 19858.5 directly

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regulate interstate commerce.

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futile.

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prejudice is appropriate.

Deveraturda v.

They have,

Amendment, at this point, would be

Accordingly, dismissal of Counts One and Two with
Plaintiffs’ request for leave to amend
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is DENIED.

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III.

ORDER

For the reasons set forth above, Counts One and Two of

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Plaintiff’s SAC are DISMISSED WITH PREJUDICE.

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to dismiss Count Three is DENIED.

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IT IS SO ORDERED.
Dated:

January 13, 2021

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Defendants’ motion