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Item 1. Legal Proceedings

2020-07-29 compared with 2020-04-29 · 32 added, 42 removed, 39 unchanged (65% of the section changed)

LEGAL PROCEEDINGS

The following descriptions include updates and additions since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, relating to the proceedings involving the Company.

The following descriptions include updates since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, relating to the proceedings involving the Company.

In addition to the matters described below, we are also involved in ordinary routine litigation matters which are incidental to our business.

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Kater Class Action Suit

On April 17, 2015, a purported class action styled Cheryl Kater v.

Churchill Downs Incorporated (the "Kater litigation") was filed in the United States District Court for the Western District of Washington (the "Washington District Court") alleging, among other claims, that the Company’s "Big Fish Casino" operated by the Company’s then-wholly owned mobile gaming subsidiary Big Fish Games, Inc.

("Big Fish Games") violated Washington law, including the Washington Consumer Protection Act, by facilitating unlawful gambling through its virtual casino games (namely the slots, blackjack, poker, and roulette games offered through Big Fish Casino), and seeking, among other things, return of monies lost, reasonable attorney’s fees, treble damages, and injunctive relief.

On November 19, 2015, the Washington District Court dismissed the case with prejudice and, on December 7, 2015, the plaintiff’s motion for reconsideration was denied.

The plaintiff filed a notice of appeal on January 5, 2016 to the United States Court of Appeals for the Ninth Circuit.

As previously disclosed, on January 9, 2018, the Company sold Big Fish Games to Aristocrat Technologies, Inc., a Nevada corporation ("Purchaser"), an indirect, wholly owned subsidiary of Aristocrat Leisure Limited, an Australian corporation, pursuant to the Stock Purchase Agreement, dated as of November 29, 2017, by and among the Company, Big Fish Games and the Purchaser.

Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to indemnify the Purchaser for the losses and expenses associated with the Kater litigation for Big Fish Games, which is referred to in the Stock Purchase Agreement as the "Primary Specified Litigation."

On March 28, 2018, the United States Court of Appeals for the Ninth Circuit reversed and remanded the Washington District Court’s dismissal of the complaint against the Company.

On June 12, 2018, the United States Court of Appeals for the Ninth Circuit denied the Company’s petition for rehearing en banc filed by the Company on May 11, 2018.

On July 20, 2018, the Company filed a motion to compel arbitration in the Washington District Court, which was denied on November 2, 2018.

On April 17, 2015, the Kater litigation was filed in the Washington District Court alleging, among other claims, that the Company’s "Big Fish Casino" operated by the Company’s then-wholly owned mobile gaming subsidiary Big Fish Games, violated Washington law, including the Washington Consumer Protection Act, by facilitating unlawful gambling through its virtual casino games (namely the slots, blackjack, poker, and roulette games offered through Big Fish Casino), and seeking, among other things, return of monies lost, reasonable attorney’s fees, treble damages, and injunctive relief.

As previously disclosed, on January 9, 2018, the Company sold Big Fish Games to Aristocrat, an indirect, wholly owned subsidiary of Aristocrat Leisure Limited, an Australian corporation, pursuant to the Stock Purchase Agreement.

Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to indemnify Aristocrat for the losses and expenses associated with the Kater litigation for Big Fish Games, which is referred to in the Stock Purchase Agreement as the "Primary Specified Litigation."

After the Washington District Court dismissed the case with prejudice on November 19, 2015, the United States Court of Appeals for the Ninth Circuit reversed and remanded the Washington District Court’s dismissal of the complaint on March 28, 2018.

The complaint was amended on March 20, 2019, to add Big Fish Games as a party and to assert claims on behalf of an additional plaintiff, Suzie Kelly.

On May 10, 2019, the Company filed an answer as to the claims asserted by plaintiff Kater, and joined Big Fish Games in moving to compel arbitration as to all claims asserted by plaintiff Kelly.

Big Fish Games also moved to compel arbitration against plaintiff Kater.

On June 13, 2019, defendants moved to stay discovery pending resolution of the motion to compel arbitration.

On August 21, 2019, the Washington District Court partially granted the motion and stayed discovery pending a ruling on the motions to compel arbitration against plaintiffs Kater and Kelly, except as to discovery requests plaintiff Kater served on the Company before amending the complaint.

On September 12, 2019, the Washington District Court ordered that the case would be stayed entirely (except for the aforementioned discovery requests), pending the United States Court of Appeals for the Ninth Circuit’s ruling on arbitration issues raised in other cases which may be relevant to the arguments raised in the pending motions to compel arbitration.

After the case was stayed, a dispute arose regarding communication between Big Fish Games and its users related to revised terms of use.

On November 19, 2019, the District Court granted plaintiffs' motion relating to the communications pursuant to Federal Rule of Civil Procedure 23(d), and on December 19, 2019, the District Court approved a revised communication proposed by defendants.

On February 20, 2020, while the case was stayed, and before completing discovery and before resolution of motions to compel arbitration, plaintiffs filed a motion with the District Court to certify a class for injunctive relief only and for a preliminary injunction prohibiting the sale of virtual casino chips or coins or other virtual tokens or credits from within Washington or to individuals located in Washington.

The District Court denied that motion without prejudice orally on March 4, 2020.

On April 10, 2020, the Company joined Big Fish Games in renewing its motion to compel arbitration in the Washington District Court as to all claims asserted by plaintiff Kelly, and Big Fish Games also renewed its motion to compel arbitration against plaintiff Kater in the Washington District Court on April 10, 2020.

In accordance with the terms of the Stock Purchase Agreement, the Company is working closely with the Purchaser to vigorously defend this matter in both the Washington District Court and in any further appellate proceedings, and the Company believes that there are meritorious legal and factual defenses against the plaintiffs' allegations and requests for relief.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

Prior disclosures in our filings with the Securities and Exchange Commission have identified the extensive procedural history associated with this case.

As previously disclosed, on May 22, 2020, the parties entered into an agreement in principle to settle the Kater litigation and the Thimmegowda litigation.

The agreement in principle remains contingent on final court approval by the Washington District Court.

Under the terms of the settlement, which will take effect only after final court approval of the proposed class settlement:

(i) a total of $155.0 million will be paid into a settlement fund.

CDI will pay $124.0 million of the settlement from its available cash;

Aristocrat will pay $31.0 million of the settlement;

(ii) all members of the nationwide settlement class who do not exclude themselves will release all claims relating to the subject matter of the lawsuits;

and (iii) Aristocrat has agreed to specifically release CDI of any and all indemnification obligations under the Stock Purchase Agreement arising from or related to the Kater and Thimmegowda litigations, including any claims of diminution of value of Big Fish Games and any claims by any person who opts out of the proposed class settlement.

On July 24, 2020, the plaintiffs filed a motion for preliminary approval of the settlement.

Thimmegowda Class Action Suit

On February 11, 2019, a purported class action styled Manasa Thimmegowda v.

Big Fish Games, Purchaser, Aristocrat Leisure Limited, and the Company, was filed in the Washington District Court alleging, among other claims, that “Big Fish Casino,” which is operated by Big Fish Games, violated Washington law, including the Washington Consumer Protection Act, and seeking, among other things, return of monies lost, reasonable attorney’s fees, injunctive relief, and treble and punitive damages.

On May 10, 2019, all of the defendants moved to compel arbitration of the claims, and the Company, the Purchaser and Aristocrat Leisure Limited also moved to dismiss the action for lack of personal jurisdiction.

On June 13, 2019, defendants moved to stay discovery pending resolution of those motions.

On September 12, 2019, the Washington District Court ordered that the case would be stayed entirely, pending the United States Court of Appeals for the Ninth Circuit’s ruling on arbitration issues raised in other cases which may be relevant to the arguments raised in the pending motion to compel arbitration.

After the case was stayed, a dispute arose regarding communication between Big Fish Games and its users related to revised terms of use.

The District Court denied that motion without prejudice orally on March 4, 2020.

On April 10, 2020, the defendants filed renewed motions to compel arbitration and the Company filed a renewed motion to dismiss asserting lack of personal jurisdiction.

The Company is working to vigorously defend this matter, and believes that there are meritorious legal and factual defenses against plaintiff’s allegations and requests for relief.

On February 11, 2019, the Thimmegowda litigation was filed in the Washington District Court alleging, among other claims, that “Big Fish Casino,” which is operated by Big Fish Games, violated Washington law, including the Washington Consumer Protection Act, and seeking, among other things, return of monies lost, reasonable attorney’s fees, injunctive relief, and treble and punitive damages.

Prior disclosures in our filings with the Securities and Exchange Commission have identified the extensive procedural history associated with this case.

As previously disclosed, on May 22, 2020, the parties entered into an agreement in principle to settle the Kater and Thimmegowda litigations.

The agreement in principle with respect to the Thimmegowda litigation is described above, under the "Kater Class Action Suit."

Kentucky Downs, LLC, et al.

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in the Franklin Circuit Court, Commonwealth of Kentucky.

Petitioners are appealing the vote of the Kentucky Horse Racing Commission, which awarded WKY Development, LLC, our joint venture with Keeneland, a license to conduct live racing and pari-mutuel wagering in Christian County, Kentucky and denied Petitioners’ application for a license to conduct live racing and pari-mutuel wagering in Christian County, Kentucky.

Petitioners appealed the vote of the Kentucky Horse Racing Commission, which awarded WKY Development, LLC, our joint venture with Keeneland, a license to conduct live racing and pari-mutuel wagering in Christian County, Kentucky and denied Petitioners’ application for a license to conduct live racing and pari-mutuel wagering in Christian County, Kentucky.

WKY Development, LLC is a joint venture owned 95% by the Company and 5% by Keeneland.

In late 2019, the parties submitted briefs on threshold legal issues per a directive from the Franklin County Court and, thereafter, on February 27, 2020, Petitioners filed a voluntary motion to dismiss their appeal with prejudice.

In late 2019, the parties submitted briefs on threshold legal issues per a

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

directive from the Franklin County Court and, thereafter, on February 27, 2020, Petitioners filed a voluntary motion to dismiss their appeal with prejudice.

The Court granted that motion and dismissed the appeal with prejudice on April 8, 2020.

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The plaintiffs appealed this decision to the District Court, which affirmed the Louisiana Racing Commission’s ruling.

The plaintiffs filed an appeal of the District Court’s decision with the Louisiana Fourth Circuit

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

Court of Appeals, which reversed the Louisiana Racing Commission’s ruling and remanded the matter to the Louisiana Racing Commission for further proceedings on June 13, 2018.

The plaintiffs filed an appeal of the District Court’s decision with the Louisiana Fourth Circuit Court of Appeals, which reversed the Louisiana Racing Commission’s ruling and remanded the matter to the Louisiana Racing Commission for further proceedings on June 13, 2018.

The Louisiana Fourth Circuit Court of Appeals denied the Fair Grounds Defendants’ Motion for Rehearing on July 12, 2018 and the Louisiana Supreme Court denied the Fair Grounds Defendants’ Writ of Certiorari seeking review of that decision on November 14, 2018.

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At a hearing on February 18, 2020, the District Court granted preliminary approval of the settlement agreement and set certain deadlines relating to actions to be taken by class members.

A fairness hearing with the District Court relating to the terms of the settlement agreement was set for April 27, 2020, but has been postponed as a result of court closures due to the COVID-19 pandemic.

The settlement agreement requires, among other items, the Fair Grounds Defendants to (i) pay a certain out-of-pocket amount that is within the amount for which we established an accrual in the third quarter of 2019, and (ii) support legislation that would allocate a specified amount of video poker purse funds to quarter horse purses for races at Fair Grounds with maximum annual payout caps that are not deemed material.

A fairness hearing with the District Court relating to the terms of the settlement agreement was set for April 27, 2020, but has been postponed to October 7-9, 2020, as a result of court closures due to the COVID-19 pandemic.

The settlement agreement requires, among other items, the Fair Grounds Defendants to (i) pay a certain out-of-pocket amount that is within the amount for which we established an accrual in the third quarter of 2019, and (ii) support legislation that allocates a specified amount of video poker purse funds to quarter horse purses for races at Fair Grounds with maximum annual payout caps that are not deemed material.

On June 13, 2020, the legislation addressed in the settlement agreement was passed by the legislature and signed into law by the Governor of Louisiana.

The settlement includes a release of claims against the Fair Grounds Defendants in connection with the proceeding, although individual plaintiffs may opt-out.

If there are opt-out claims in excess of $50,000, the settlement will be voided, unless the parties agree to stipulate otherwise.

The settlement agreement is subject to certain conditions, including court approval and the passage of certain legislation.

The settlement agreement is subject to certain conditions, including court approval.

After the parties entered into the settlement, legal counsel for six objecting, named plaintiffs filed an amended petition with the District Court.

After a hearing on July 20, 2020, the District Court dismissed the amended petition.

The objecting plaintiffs have filed a notice of their intention to seek a writ with the United States Court of Appeals for the Fourth Circuit related to the dismissal of the amended petition.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Legal Proceedings