False advertising over legality of gambling devices

FortuNet, Inc. v. GameTech Arizona Corp., 2008 WL 5083812 (D. Nev.)

FortuNet, a Nevada corporation that is involved in the development and manufacture of electronic gambling devices such as bingo games, sued competitor GameTech, a Delaware corporation, for RICO and false advertising violations. (Intriguing side note: the court found that the state unfair competition claims were preempted by Nevada gaming law.) GameTech allegedly falsely advertised it was Nevada-licensed when it had no Nevada gaming license, required to manufacture, sell, or distribute the devices from Nevada.

There are actually two defendants, a parent company located in Nevada, and a wholly-owned subsidiary with no employees of its own, located in California, that developed the gaming devices at issue, which GameTech wasn’t licensed to develop in Nevada. GameTech went through some serious contortions to do large portions of the work in the California facility, making clear that its motives were to arbitrage legal differences. Its website, which covered both the parent and the subsidiary, used a disclaimer that “Some or all of our products may not be legal in your jurisdiction.” Many key development activities actually took place in Nevada; GameTech has since secured a Nevada gaming license for its subsidiary and discontinued using California.

Plaintiffs had no evidence of actual deception. Though courts may presume deception from literal or intentional falsity, plaintiffs may not recover damages without other proof of damages, unless the defendant engaged in direct comparative advertising or the market is essentially a duopoly. Once injury is established, however, the amount of damages need not be precisely shown and the plaintiff can recover the defendant’s profits.

FortuNet argued that GameTech’s website, which lists the Nevada parent as the contact entity, necessarily implied that all devices sold on the site were licensed in Nevada, as did ads distributed at trade shows with similar statements. But the court determined that the listing was literally true, and would be misleading, if at all, only in context. FortuNet was thus required to present evidence that the website or the ads actually conveyed the implied message, but there was no evidence that any consumer received that message.

FortuNet also claimed falsity in GameTech’s ads which identified the subsidiary, rather than the parent, as the owner of the registered trademark for one of the devices. The court agreed that this could be literally false, but noted that there was no evidence that a misstatement of trademark ownership as between a parent and subsidiary would be material to consumers or injure FortuNet.

FortuNet also argued that one of the devices was falsely advertised as a Class II gaming device, when it was really a Class III device that requires greater regulation and licensing. The Indian Gaming Regulatory Act distinguishes gaming devices using physical, tangible media (Class II) from electronic gaming devices (Class III). GameTech argued that its device was Class II because it could be played in a tangible paper medium. The court, looking at a number of other cases about the proper classification of similar games, found a genuine issue of material fact about whether the ads were false. However, FortuNet failed to show injury sufficient to entitle it to damages. There was no comparative advertising, and no other evidence of harm to FortuNet in particular given that there were several competitors in the market. Injunctive relief on this claim remained available, but the parties didn’t brief it, so the court ordered further briefing.