Larry Flynt Wins a Hand on California Casino Regulations

SACRAMENTO, Calif. (CN) — Extending Hustler founder Larry Flynt’s fight against a longstanding California organized crime rule, a federal judge on Monday allowed a deeper look at a law barring cardroom operators from investing in out-of-state casinos.

The porn mogul, who owns Hustler Casino and Larry Flynt’s Luck Lady Casino in Southern California, says he’s been denied opportunities to expand his gambling portfolio outside the Golden State due to an “anachronistic” 1986 law intended to keep the mob out of legal cardrooms and casinos. Flynt says the law is not only outdated but an attempt to regulate interstate commerce.

Larry Flynt at a Free Speech Coalition event in Los Angeles, Calif., on Nov. 14, 2009. (Photo by Glenn Francis).

In a 14-page ruling Monday, U.S. District Judge John Mendez in the Eastern District of California sided in part with Flynt and denied California officials’ attempt to squash the resilient casino owners’ lawsuit. 

The sticking point for Mendez, a President George W. Bush appointee, appears to be Flynt’s argument that the law could have the unintended effect of forcing him to divest from his nongambling businesses, such as his chain of strip clubs.

Flynt said in briefs that he would have no choice but to divest if one of his partners decided to independently open a casino outside California. He claims the law adds “excessive burdens” to California cardroom holders and notes that California politicians — including former governors — have said the ownership restrictions are due for an update. Flynt and fellow cardroom owners Haig Kelegian Sr. and Haig Kelegian Jr. capped off their argument by saying lawmakers have granted other businesses exemptions from the law.

More than three years after filing their lawsuit, the plaintiffs’ courtroom gambles appear to have finally started paying off.

“Defendants fail to illustrate how these allegations are insufficient as a matter of law,” the ruling states. “To the extent that plaintiffs’ dormant commerce doctrine claims rest upon an indirect-regulation theory of liability, the court denies defendants’ motion to dismiss.”

The California Gambling Control Commission and Attorney General Xavier Becerra’s office did not respond to a request for comment late Monday.

Mendez initially rejected the matter with prejudice in 2017, deciding plaintiffs’ claims fell outside a statute of limitations. But Flynt and his co-plaintiffs appealed and a Ninth Circuit panel in 2019 ordered Mendez to restart the clock.

“That all three licensees continue to be precluded from exploring other investment opportunities is not a consequence of the commission’s decision, as the dissent would have us conclude, but rather a result of the continued existence of the statutes themselves and the realistic threat of future enforcement,” Ninth Circuit Judge Diarmuid F. O’Scannlain wrote.

The case is being closely watched by gambling operators who have sought changes to the law for years.

At issue is California Business and Professions Code Section 19858, enacted in 1986 by the Legislature under the mantle of crime prevention. Known as the Gambling Registration Act, the section was an attempt by state lawmakers to keep organized crime out of California gambling operations by limiting cardroom operators’ financial resources.

The legislation not only prevents residents with California gaming licenses from investing in outside casinos, it bars out-of-state residents who own gambling activities from obtaining California cardroom licenses.

Flynt says the law has outlived its purpose because casinos now are thoroughly regulated to weed out organized crime. He cited a 2002 state-funded nonpartisan study that recommended updating state law and allowing publicly traded companies to operate cardrooms.

More recently in 2016, then-Governor Jerry Brown vetoed a bill that would have exempted the owners of Hollywood Park Casino from the gambling law. But in the veto message, Brown said lawmakers should “thoughtfully examine those laws and amend them so that all participants in the industry receive the same benefits and opportunities.”

The plaintiffs are not seeking punitive damages but want the court to find the law unconstitutional. They are represented by Paul Cambria Jr. with Lipsitz Green Scime Cambria.

On remand from the Ninth Circuit, Mendez, who made the decision without hearing oral arguments, did side with the state by ruling that the law does not directly regulate interstate commerce. He also found the plaintiffs lack standing to continue with their argument that California is discriminating against out-of-state investors.

But Mendez cracked the door open by allowing Flynt to continue arguing that the law indirectly regulates interstate commerce. He gave the plaintiffs 20 days to amend their complaint.

The case stems from a $210,000 fine the state’s gambling commission issued Kelegian Jr. in June 2014 for his ownership in an out-of-state casino. To renew the licenses at his two California cardrooms, Kelegian Jr. was forced to divest his out-of-state holdings and he and Flynt filed their lawsuit in December 2016.

In the amended complaint, plaintiffs claim they are “ready, willing and able” to invest in non-California and perhaps foreign casinos if it were not for the ownership restrictions.

“Thus, with respect to Mr. Flynt’s investment in an out-of-state adult entertainment establishment, the California ownership restrictions currently impact the ability of a cardroom licensee to maintain an ownership interest in an entity that has nothing to do with gambling, to the extent that the majority owner in that entity elects to pursue an ownership interest in an out-of-state casino-style gambling entity in excess of 1%,” the complaint states.

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