Another lawsuit has been filed against Stake.us but, unlike previous lawsuits against “America’s Favorite Social Casino,” the latest attempt to shut down the platform in California also seeks civil penalties against the operator’s shareholders, affiliated entities and service providers.
The lawsuit was brought by the Los Angeles City attorney last week. This action marks the first case brought by a city attorney’s office instead of an individual user of the platform.
Unfair competition and false advertising alleged
As with an earlier case originally filed in state court that was ultimately sent to arbitration, the complaint seeks to permanently enjoin Stake.us from operating in California based on the platform disguising its offering of real-money gambling in violation of state and federal laws by falsely advertising itself as a free-to-play social casino.
The complaint goes further than its predecessors by additionally seeking restitution and damages for each violation of the state’s unfair competition and false advertising law along with relief against the following third parties for allegedly aiding and abetting such conduct as follows:
- Veriff – an identity verification software provider that is claimed to “knowingly and intentionally” assist Stake.us’ running of an illegal casino by authenticating Californians for the purpose of accessing the platform.
- Evolution / Hacksaw / Pragmatic Play – game developers claimed to “knowingly and intentionally” assist Stake.us in running an illegal casino by providing casino games to Stake.us for the purpose of accessing unregulated markets (such as California) and directly profiting from revenue earned from such games played on the platform.
- Kick – a streaming platform created by Stake.us’ founders for the specific purpose of streaming content promoting Stake.us.
Stake.us shareholders subject to personal liability
The complaint also seeks to “pierce the corporate veil” in order to render Stake.us’ owners – Ed Craven and Bijan Tehrani – personally liable for the claims raised against the company. Courts consider the following requirements to determine whether to pierce the corporate veil and treat a company as the “alter ago” of its shareholders (see, e.g., Shaoxing Cnty. Huayue Imp. & Exp. v. Bhaumik, 120 Cal. Rptr. 3d 303, 310 (Ct. App. 2011)):
- Unity of interest and ownership between the corporation and its owners that the “separate personalities of the corporation and the shareholder do not in reality exist.”
- It would be an inequitable result “if the acts in question are treated as those of the corporation alone.”
This procedural mechanism allows the court to hold the “alter ego” individuals liable for the obligations of the company “where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” Id.
The complaint alleges the above factors are based on Craven and Tehrani “knowingly and personally” creating, controlling, and profiting from the operation of the Stake.us platform.
Affiliates and indemnification
Assuming Stake.us and its affiliates executed contracts regarding the parties’ respective services, depending on the breadth of the duty to indemnify (if any) provided therein, Stake.us may have a duty to defend and/or otherwise hold harmless its affiliates from damages.
The extent of Stake.us’ obligation will depend on how such is explicitly described in the contract. Some of those suppliers have reportedly withdrawn their games from Stake.Us.
Stake precluded from arbitration?
Stake.us’ Terms and Conditions state that “any and all past, present and future disputes, claims or causes of action between you and Stake or any of its affiliates, subsidiaries, ultimate parent and parent companies, partners, officers, directors, employees, contractors, shareholders, agents, licensors, subcontractors or suppliers, which arise out of or are related in any way to these Terms, the formation of these Terms, the validity or scope of this clause 26 (Dispute Resolution and Agreement to Arbitrate), your Participation in or other access to or use of the Games or the Platform, or any other dispute between you and Stake or any of its affiliates, subsidiaries, ultimate parent and parent companies, partners, officers, directors, employees, contractors, shareholders, agents, licensors, subcontractors or suppliers” shall be subject to arbitration. The foregoing language requires that any dispute against Stake, its affiliates, and/or shareholders relating to the platform be determined in arbitration.
In Dennis Boyle v. Sweepsteaks Ltd., the United States District Court for the Central District of California granted Stake.us’ motion to compel arbitration regarding the plaintiff’s claims that the platform violated California law. The court specifically denied to rule on the issue of illegality of the platform, stating that it was an issue to be determined by the arbitrator based on Stake.us’ terms setting forth a valid agreement to arbitrate between the parties.
This case presents a different scenario – because it was brought by the city attorney on behalf of the People of the State of California (the “People”), a question of law exists whether such agreement exists between the parties.
In In re Uber Techs. Wage & Hour Cases, 313 Cal. Rptr. 3d 867, 874 (Ct. App. 2023), the court determined that the parties were not required to arbitrate unfair competition claims because the people were not private parties to an arbitration agreement and “[t]he relevant statutory schemes expressly authorize the People and the Labor Commissioner to bring the claims (and seek the relief) at issue here.” Absent court-mandated arbitration, there is likely similarly no basis to arbitrate for the reasons presented therein.
What’s next in Stake case?
Now that a complaint has been filed, the city attorney’s office may move for preliminary injunction to prevent Stake.us and its affiliates from operating and/or advertising the platform in California pending the outcome of the case. The effect of such motion could have a significant impact that materially affects the legal landscape for social casino operators in the state.
Moreover, the complaint comes one day prior to AB 831 advancing out of suspense towards a Senate vote. If signed into law, the bill would make it unlawful for: (1) any person or entity to offer an online sweepstakes game, and (2) any entity, financial institution, payment processor, geolocation provider, gaming content supplier, platform provider, or media affiliate to knowingly support directly or indirectly the operation, conduct, or promotion of an online sweepstakes game.
