A Legal Setback for Social Casinos
The U.S. Court of Appeals for the Sixth Circuit has ruled that lawsuits against multiple online social casino operators must proceed in Tennessee state court, dealing a painful legal blow to the gaming companies involved.
In a March 16 decision, the court upheld a lower court’s ruling that lead plaintiff Gina Burt lacked Article III standing to pursue the case in federal court. Without standing, federal jurisdiction was no longer an option, sending the lawsuits back to state courts, where gambling laws could be interpreted more strictly.
This ruling could have far-reaching implications for social casinos, which have faced increasing legal scrutiny over their business models. Now, the companies will have to defend themselves under Tennessee’s gambling laws, a venue that may be less favorable to them than federal court.
Background: What Are Social Casinos, and Why Are They Being Sued?
Unlike traditional online casinos, social casinos offer casino-style games, like slots, blackjack, and poker, where players use virtual currency instead of real money. However, some platforms allow players to purchase additional virtual coins or even win prizes that can be exchanged for cash, which raises legal questions about whether they qualify as gambling or not.
The lawsuits at the center of this case were initially filed in Tennessee state court against Playtika, VGW Holdings, Aristocrat Leisure Ltd., and Product Madness, Inc. Plaintiffs claim that these companies ran illegal gambling operations disguised as social casinos, leading to financial losses for Tennessee residents.
The lawsuits seek to recover those losses under Tennessee Code Ann. § 29-19-105, a state law that permits third parties, including family members, to sue on behalf of individuals who have lost money through gambling.
With social casinos continuing to grow in popularity, their legal classification remains uncertain. These lawsuits could set an important precedent, directly challenging how these platforms operate and whether they should be subject to state gambling laws.
Defendants’ Attempt to Move the Case to Federal Court
Hoping for a more favorable legal environment, the defendants, including VGW Holdings and Playtika, attempted to move the lawsuits to federal court. They argued that jurisdiction was appropriate under the Class Action Fairness Act (CAFA) and traditional diversity jurisdiction rules.
However, the U.S. District Court for the Eastern District of Tennessee disagreed and ordered the case to remain in state court. The court ruled that the lawsuit did not meet the definition of a “class action” under CAFA and that the plaintiffs could not aggregate gambling losses to meet the financial threshold required for federal diversity jurisdiction.
The defendants appealed the decision, but the Sixth Circuit upheld the remand, ruling that the lead plaintiff lacked Article III standing, effectively barring federal courts from hearing the case.
Why the Case Was Sent Back to State Court
The Sixth Circuit’s ruling was based solely on standing, not the merits of the case itself. A three-judge panel—Judges Gilman, Gibbons, and Thapar—determined that lead plaintiff Gina Burt had not personally suffered gambling losses, which is a requirement for bringing a case in federal court.
Under federal constitutional law, a plaintiff must show three things to establish Article III standing:
- A concrete and particularized harm.
- A direct connection between the harm and the defendant’s conduct.
- A likelihood that a favorable ruling would address the harm.
The court ruled that Burt failed to meet the first requirement since she was attempting to recover losses suffered by others, not herself. While Tennessee law allows third-party recovery, federal courts do not automatically recognize state standing statutes when determining jurisdiction.
The ruling cited TransUnion LLC v. Ramirez (2021) and Spokeo, Inc. v. Robins (2016) as precedent, reinforcing the principle that just because state law grants someone the right to sue does not mean they automatically have standing in federal court.
Rejection of the Qui Tam Standing Argument
To justify her standing, Burt argued that Tennessee Code Ann. § 29-19-105 functioned as a qui tam statute, which would allow her to sue on behalf of others. Qui tam laws generally permit private citizens to bring legal actions on behalf of the government to enforce laws and recover damages.
The court rejected this argument, explaining that Tennessee’s gambling loss statute does not function as a qui tam law because it does not involve government interests. In genuine qui tam cases, the government is the injured party, either through fraud or financial harm, and there are specific mechanisms for state oversight and intervention to ensure proper enforcement. However, neither of these elements apply here, as Tennessee’s gambling loss statute is designed for private individuals to recover losses, not to protect government interests.
Without the state’s direct involvement, the Sixth Circuit ruled that Burt’s claim could not meet the requirements of a qui tam action.
What This Means for Social Casino Operators
This ruling does not determine whether social casinos violated Tennessee gambling laws, it simply decides where the case will be litigated. However, forcing the companies to defend themselves in Tennessee state court could expose them to greater legal risk.
If Tennessee courts side with the plaintiffs, it could open the door for similar lawsuits in other states, putting more pressure on social casinos to change how they operate. A ruling against the companies might also lead to stricter rules on features like virtual currency and cashable prizes, which some argue make these platforms too much like real-money gambling.
For now, the case will play out under Tennessee state law, where the courts may take a tougher stance on whether social casinos should be considered illegal gambling. The decision could have a big impact on the future of these platforms and how they’re regulated moving forward.
The Bigger Picture: What Comes Next?
Now that the case is back in Tennessee state court, plaintiffs will argue that social casinos operate as illegal gambling and should be held responsible for the financial losses of Tennessee residents.
If the courts side with the plaintiffs, it could set off a chain reaction, leading to more lawsuits in other states and pushing social casinos to rethink how they operate.
The gaming industry will be watching closely: will Tennessee take a firm stance against these platforms, or will the operators successfully defend their business model?