Situated v. Nat'l Collegiate Athletic Ass'n

• Decision Date: 16 July 2010
• Docket Number: No. 09-3667.,09-3667.
• Citation: 613 F.3d 658
• Parties: Tom GEORGE, Chris Vitron, Lori Chapko and Edward Snead, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

613 F.3d 658

Tom GEORGE, Chris Vitron, Lori Chapko and Edward Snead, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,

v.NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Defendant-Appellee.

No. 09-3667.

United States Court of Appeals,Seventh Circuit.

Argued March 29, 2010.

Decided July 16, 2010.

Leonard W. Aragon, Attorney, Robert B. Carey, Attorney (argued), Hagens Berman Sobol Shaprio, Phoenix, AZ, for Plaintiffs-Appellants.

Benjamin R. King, Michael L. Mallow, Attorney (argued), Loeb & Loeb, Los Angeles, CA, for Defendant-Appellee.

Before CUDAHY and KANNE, Circuit Judges, and DARRAH, District Judge. ^*

DARRAH, District Judge.

Plaintiffs brought this proposed nationwide class action against the National Collegiate Athletic Association (“NCAA”) and Ticketmaster, alleging that both defendants operated illegal lotteries to sell and distribute tickets for certain Division I championship tournaments. The NCAA moved to dismiss Plaintiffs' Second Amended Complaint. The district court dismissed all claims with prejudice, and this appeal followed.

BACKGROUND

The named plaintiffs are residents of Arizona, Oregon, and New York. Each applied for tickets to NCAA men's basketball games through NCAA-owned websites, and each of them forfeited service fees when they were not selected as winners in the process. Plaintiffs claim the NCAA's ticket-distribution system, which the NCAA has operated since at least 1994, is an illegal lottery and a means of increasing revenues at Plaintiffs' expense. Plaintiffs believe the number of potential class members to be in the hundreds of thousands.

The ticket-distribution system has been used for inter alia the NCAA's Division I men's and women's basketball and hockey championship tournaments. In their Second Amended Complaint, Plaintiffs specifically describe the application of the NCAA's system for distributing tickets to the 2009 Men's Basketball Tournament. For the final games of that tournament, during which the top four teams (the “Final Four”) compete for the Championship title, 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. 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).

Plaintiffs allege that these retained “service” or “handling” fees, as well as the NCAA's use of the applicants' money, constitute consideration for a chance to win the right to purchase “highly prized” tickets for priority seating at venues that “are much too small to meet ticket demand” and that the NCAA's ticket-distribution system constitutes an unlawful lottery. (Second Am. Compl. ¶¶ 46-47.)

Plaintiffs allege that “the number of applicants greatly exceeds the number of tickets on virtually every occasion,” that the NCAA falsely advertises the availability of certain seats and “manipulate[s]” the purportedly random drawings “to accommodate business needs,” and that the resale market value of the tickets is high due to their scarcity. (Second Am. Compl. ¶¶ 25, 47, 49.) Plaintiffs further allege that the “service fees” and “handling fees” charged by the NCAA bear “no relationship to the costs of running the lottery and grossly exceed[ ] any costs associated with the lottery.” (Second Am. Compl. ¶ 41.) According to Plaintiffs, the NCAA reaps huge profits by holding and using the money received from applicants (approximately $100 million in 2008).

Plaintiffs' Second Amended Complaint asserts six claims, five of which remained at the time the NCAA filed its motion to dismiss. ¹ Count I seeks a declaratory judgment that the NCAA's ticket-allocation process constitutes illegal gambling in violation of Indiana law; ² Count II is a claim for unjust enrichment; Count III alleges a civil conspiracy between the NCAA and Ticketmaster; Count V is for monies had and received; and Count VI claims the NCAA violated the Indiana Deceptive Consumer Sales Act (“DCSA”), codified at Ind.Code § 24-5-0.5-1 et seq.

The district court dismissed the entire Second Amended Complaint with prejudice on the NCAA's Motion to Dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b).

LEGAL STANDARD

A district court's grant of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is reviewed de novo. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir.2008). All well-pleaded facts are accepted as true, and all reasonable inferences are drawn in the plaintiff's favor. Id. The allegations in the complaint “must plausibly suggest that the plaintiff has a right to relief, raising that possibility above a ‘speculative level’; if they do not, the plaintiff pleads itself out of court.” Equal Employment Opportunity Comm'n v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir.2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 1973 n. 14, 167 L.Ed.2d 929 (2007)).

ANALYSIS

Lottery

Indiana law defines a lottery as “a scheme for the distribution of prizes by lot or chance.” Lesher v. Baltimore Football Club, 496 N.E.2d 785, 789 (Ind.Ct.App.1986) ( Lesher ), vacated in part on other grounds, 512 N.E.2d 156 (Ind.1987), (quoting Kaszuba v. Zientara, 495 N.E.2d 761, 763 (Ind.App.Ct.1986); Tinder v. Music Operating, Inc., 237 Ind. 33, 142 N.E.2d 610, 614 (1957) ( Tinder )). These cases identify 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 NCAA does not dispute this.

The NCAA argues that its distribution process only grants an opportunity to purchase tickets at full price, which the NCAA contends is not a prize. This argument misconstrues the nature of the ticket-distribution process as pled by Plaintiffs.

As detailed above, Final Four games, in particular, required a significant up-front investment-as much as $3,060. Included in this cost were “non-refundable handling fees.” Unsuccessful applicants were refunded a portion of their up-front investment at some later point in time, but all handling fees were retained by the NCAA.

In dismissing Plaintiffs' Second Amended Complaint, the district court cited Lesher, a case from the Indiana court of appeals, which held that a distribution scheme for season tickets to Indianapolis Colts games did not constitute an unlawful lottery. 111 Ill.Dec. 400, 512 N.E.2d at 789-90.

In Lesher, all applicants submitted the face value of the tickets sought plus a handling fee. Id. at 787-88. Winners were selected at random. Id. Losers received a full refund of the ticket price and the handling fee. Id. at 787-88. Defining a prize as “something of more value than the amount invested,” the Lesher court held that the applicants merely “invested the price of the tickets and received in exchange either the tickets or the entire amount invested,” such that “those receiving tickets got nothing of greater value than those who received refunds.” Id. at 789-90. Because the court found that no prize had been awarded, it held that the scheme was not a lottery. Id. at 790.

Here, Plaintiffs allege they were required to invest the additional “service fee” or “handling fee” of six to ten dollars per ticket or entry, which bears no relation to the NCAA's actual cost in administering the ticket-distribution process and was not refunded. Win or lose, the service fee was forfeited by all entrants and retained by the NCAA. Thus, Plaintiffs have alleged the existence of consideration not present in Lesher, where the handling fee was refunded to those who did not secure tickets.

Plaintiffs have also alleged the existence of a prize not present in Lesher. They specifically allege that the scarcity of the tickets makes those tickets far more valuable than the cost of purchase. Although the plaintiffs in Lesher attempted to make a similar argument, that case was decided on a motion for summary judgment, and the court determined that the plaintiffs had not presented evidence necessary to establish that fair-market value was higher than face value. See id. at 789 (“Because they did not come forward with evidence disputing the fact of value and because the court had evidence as to the market value of the tickets, Lesher and Dillon's argument on appeal regarding the value of scarce commodities is of no benefit to them now.”). This case, by contrast, was dismissed on a motion challenging the sufficiency of the complaint. To defeat that motion, Plaintiffs need only have alleged that the fair-market value of the tickets exceeded their face value such that those tickets constitute something of more value than the amount invested. Plaintiffs have done so.

The NCAA also argues that Plaintiffs have not alleged an element of chance. In Indiana, the “chance” element is met if “the winning of a prize is dependent primarily on, if not solely, upon chance [rather than skill].” Tinder, 142 N.E.2d at 615. For an event in which the demand for tickets exceeds the supply and the right to purchase tickets is allocated at random, the element of chance is plain. Applicants for NCAA tickets do not obtain their reward through any exercise of skill or judgment. Nonetheless, the NCAA...