Caesars Massachusetts Management Co. v. Crosby , 778 F.3d 327 ( 2015 )

United States Court of Appeals
For the First Circuit
No. 14-1681
CAESARS MASSACHUSETTS MANAGEMENT COMPANY, LLC,
CAESARS MASSACHUSETTS DEVELOPMENT COMPANY, LLC,
CAESARS MASSACHUSETTS INVESTMENT COMPANY, LLC, and
CAESARS ENTERTAINMENT CORPORATION,
Plaintiffs, Appellants,
v.
STEPHEN P. CROSBY
and KAREN WELLS,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Lynch, Chief Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.
Joan A. Lukey, with whom C. Thomas Brown, Eugene L. Morgulis,
Ropes & Gray LLP, Justin J. Wolosz, and Choate Hall & Stewart LLP,
were on brief, for appellants.
John M. Stephan, Assistant Attorney General, with whom Martha
Coakley, Attorney General of Massachusetts, Janna J. Hansen,
Assistant Attorney General, and Julia Kobick, Assistant Attorney
General, were on brief, for appellees.
February 13, 2015
*
Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
SOUTER, Associate Justice. The plaintiff-appellant Caesars
Entertainment Corporation and three Massachusetts affiliates
(collectively, Caesars) were subject to an investigatory report by
the Massachusetts Gaming Commission finding them unsuitable as
proposed operators of a casino for which Sterling Suffolk
Racecourse, LLC (SSR) sought a license. This action brought by
Caesars under 28 U.S.C. § 1983 includes counts with (a) official
capacity claims charging denial of Fifth and Fourteenth Amendment
procedural and substantive due process and equal protection of the
laws by the Commission's chairman, Stephen Crosby, and Karen Wells,
Director of the Commission's Investigations and Enforcement Bureau
(IEB), and seeking withdrawal of the report and cessation of any
further reliance on it by the Commission; (b) individual capacity
claims against Crosby on the same grounds, seeking compensatory and
punitive damages; and (c) a claim subject to supplemental
jurisdiction for liability under Massachusetts law for tortious
interference with a contract between Caesars and SSR. The district
court dismissed the federal claims under Federal Rule of Civil
Procedure 12(b)(6) as beyond the scope of federal affordable
relief, and consequently exercised its discretion to dismiss the
state law claim as standing alone. This appeal touches on a
multiplicity of legal and factual issues including Eleventh
Amendment state immunity, qualified immunity of individuals,
control of IEB by Crosby as chairman of the Commission, and
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theories of protected property, among others. In our review de
novo, however, we affirm the dismissal on two pivotal grounds:
Caesars has alleged no cognizable protected property interest said
to have been infringed in violation of Fifth and Fourteenth
Amendment due process, and class-of-one Fourteenth Amendment equal
protection does not extend to redress action taken under state law
authorizing the exercise of highly discretionary judgment in
response to an application to license activity carrying substantial
risks of commercial and social harm.
I.
Caesars' third amended complaint, together with documents
incorporated by reference and matters of public record subject to
judicial notice, see Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir.
2008), disclose the following facts as of relevant times, to be
taken as true under Rule 12(b)(6). Under the authority of the
Massachusetts Expanded Gaming Act, 2011 Mass. Acts ch. 194 (largely
codified at Mass. Gen. Laws ch. 23K), the Commonwealth of
Massachusetts is in the throes of licensing casinos, one for each
of three regions of the state. The statute assigns that
responsibility to a Gaming Commission of five members, of which the
defendant-appellee Stephen Crosby is chairman. The IEB is the
Commission's investigatory arm for examining the suitability of
applicants for a casino license and of persons and corporations
affiliated with an applicant to exercise the license sought (spoken
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of as "qualifiers"). As noted, the applicant for one such license
is SSR, a corporation doing business in Massachusetts and not a
party to this action, and Caesars is a qualifier. SSR wishes to
place a casino in Revere and East Boston.
The IEB's enquiry into Caesars' conduct of business in Nevada
and elsewhere led to a public report recommending that the
Commission find that Caesars had not carried its burden to
demonstrate its suitability by clear and convincing evidence; a
near-certain consequence of the report would be denial of SSR's
application. The IEB gave four reasons: (1) through a subsidiary,
Caesars entered into a licensing agreement with Gansevoort Hotel
Group, LLC, which is partially owned by an individual with alleged
ties to Russian organized crime; (2) Caesars hired Mitchell Garber,
who had formerly served as the chief executive officer of two
internet gambling companies that entered into non-prosecution
agreements with the United States Attorney's Office for the
Southern District of New York; (3) Caesars had a history with
Terrance Watanabe, a former high roller, who sued Caesars for
allegedly encouraging him to gamble while intoxicated; and (4)
Caesars was highly leveraged, to the point that its monthly debt
service exceeded its cash flow.1
1
On January 15, 2015, Caesars' largest subsidiary, Caesars
Entertainment Operating Corporation, filed for Chapter 11
bankruptcy protection. See Chapter 11 Voluntary Petition, In re
Caesars Entertainment Operating Company, Inc., No. 15-bk-1145
(Bankr. N.D. Ill. Jan. 15, 2015), ECF No. 1.
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A competing application was filed by Wynn Resorts, Limited,
for a site in nearby Everett. One of the owners of the Everett
real estate is Paul Lohnes, a long-time acquaintance of Crosby's,
who in the past had invested in one of Crosby's business
enterprises (allegedly at a loss) in which he had actively
participated. When word circulated that a previously undisclosed
co-owner of the Everett land had a felony record, Crosby told his
fellow commissioners of his relationship with Lohnes and
subsequently informed both the Governor, as required by law, and
the Massachusetts Ethics Commission, which advised that, so long as
Crosby used "objective criteria," he was not disqualified to act on
the competing applications by reason of his relationship with
Lohnes. A short while after that, Crosby disclosed the
relationship publicly and recused himself from further
participation in considering the license for the region of the
state in which SSR and Wynn wished to operate.
Caesars alleges not only that Crosby was biased, owing to the
Lohnes connection and Crosby's obligation to recompense him for
their past dealings, but that Crosby took, or required Wells and
the IEB to take, specific actions intended to favor Wynn and Lohnes
and to place SSR and Caesars at a disadvantage. The allegations
say that Crosby urged Wynn to compete for the license and to remain
an applicant at one point when Wynn was poised to withdraw in
exasperation with the proceedings. Crosby allegedly caused Wells
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and the IEB to hold it against Caesars that the Gansevoort
organization may have had illegal dealings with Russian criminal
connections, whereas Wynn was not taxed with a suspect Macau
gambling connection or Lohnes's shady associate. Wynn was
allegedly favored in setting a local referendum date for its
Everett application, whereas Caesars was denied adequate (and
statutorily provided) preparation time for an adjudicatory hearing
to contest the facts of the unfavorable recommendation proposed.
The IEB report, together with informal advice that the SSR
application would be doomed by Caesars' proposed participation,
caused Caesars to accede to SSR's request that it withdraw from
their contractual relationship in order to save any chance of
success that SSR might have.
II.
The district court addressed the procedural due process claim
under the rule announced in Bd. of Regents of State Colls. v. Roth,
408 U.S. 564, 576-77 (1972), that an action for deprivation of
property by state action without due process of law must include a
showing that state law protects an identified property right said
to have been violated. The substantive due process claim for
deprivation of property by the arbitrary exercise of government
power, of course, requires a like demonstration of a property right
infringed. See Centro Medico del Turabo, Inc. v. Feliciano de
Melecio, 406 F.3d 1, 8 (1st Cir. 2005). Caesars claimed property
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in an implied contract with the state, promising a license
applicant fair play in reaching a decision, as well as property in
its contract with SSR. The district court accepted both theories,
but Caesars apparently placed principal reliance on the implied
contract, which was the primary subject of the court's discussion
in concluding that Caesars had adequately pleaded a violation of
due process. It nonetheless dismissed the official capacity claims
as barred by state immunity under the Eleventh Amendment, and
dismissed the individual liability claims on the ground of
qualified immunity, see Maldonado v. Fontanes, 568 F.3d 263, 268-69
(1st Cir. 2009). The equal protection claims were dismissed for
failure of adequate pleading that the competing entities were
similarly situated, and the state cause of action was subject to
discretionary dismissal for want of a federal claim supporting the
exercise of supplemental jurisdiction.
III.
The first step in seeking relief from a deprivation of
property without due process in violation of the Fifth and
Fourteenth Amendments is a legally plausible allegation of a
"protected property interest" recognized under state law. See
Centro Medico, 406 F.3d at 8 (citing Roth, 408 U.S. at 577).
Caesars has not made an allegation sufficient to complete that
first step.
Two, and possibly three, claims of a protected property
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interest have been pressed or at least indicated before us.2 The
district court devoted principal attention to a theory of protected
property interest for which there was then some Massachusetts
authority, to the effect that submitting a bid for a public
contract creates an implied contract giving rise to a right of
property protected against unfairness in considering the bid. See
Paul Sardella Constr. Co. v. Braintree Hous. Auth., 329 N.E.2d 762,
767 (Mass. App. Ct. 1975), aff'd, 356 N.E.2d 249 (Mass. 1976). For
the purpose of federal-question property analysis, this precedent
may well have suffered from circularity, but in any event while
this appeal was pending the theory's application to casino license
application was clearly repudiated by the Supreme Judicial Court of
Massachusetts in Abdow v. Att'y General, 11 N.E.3d 574, 582-88
(Mass. 2014) (holding that, because the regulation of gambling
falls within a state's core police power, neither a casino licensee
2
We are not sure that Caesars does refer to a third
theory, though if it does any argument for it is circular. Caesars
quotes, out of its context, an observation of the district court
that it would violate due process for state actors to conspire
deceitfully and purposely to deprive an applicant for a state-
provided license of the opportunity to compete for it. Appellants'
Br. 29. But in making that statement the court simply was not
enquiring into the existence of the property said to have been the
subject of deprivation. Suffice it to say that there is no
freestanding right to due process that is itself a form of property
that the right to due process is guaranteed to protect. See Town
of Castle Rock v. Gonzales, 545 U.S. 748, 772 (2005) (Souter, J.,
concurring) ("[I]n every instance of property recognized by this
Court as calling for federal procedural protection, the property
has been distinguishable from the procedural obligations imposed on
state officials to protect it.").
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nor an applicant for a casino license possesses the type of
entitlement necessary to conclude that the license or application
is property under state law). See Appellants' Br. 31 n.8
(conceding this point).
That decision has left Caesars with only its alternative
theory of property, which it repeatedly states as a general rule
that "[c]ontracts between private parties, as the Caesars Entities
enjoyed with SSR . . .[,] give rise to a protected property
interest for constitutional purposes." Id. at 27 (citation and
internal quotation marks omitted). At this level of generality,
however, the statement is too blunt to address the specific
question in this case, which is whether any property interest
created by a private contract like the Caesars-SSR agreement is
protected property as against non-party state actors whose untoward
conduct eliminates an applicant or its qualifiers from competition
for a casino license.
An examination of the state cases recognizing property rights
created by private contract will show why the general statement
misses the narrower question pertinent here. To be sure, contracts
may be a form of property under state law. See Bos. Elevated Ry.
Co. v. Commonwealth, 39 N.E.2d 87, 109 (Mass. 1942) ("Valid
contracts are property, whether the obligor be a private
individual, a municipality, a state, or the United States."
(quoting Lynch v. United States, 292 U.S. 571, 579 (1934))); see
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also 31 Williston on Contracts § 78:68 (4th ed.) (discussing
contracts as property in the context of bankruptcy estates). The
mere existence of a contract or its breach, however, is not
sufficient to show a "protected property interest" for purposes of
a due process claim of improper government interference. See
Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev., 421 F.3d 1, 10
(1st Cir. 2005) ("We have held with a regularity bordering on the
echolalic that a simple breach of contract does not amount to an
unconstitutional deprivation of property."). Rather, the critical
enquiry is whether the aggrieved party to the contract has a
legitimate claim of "entitlement" to the benefits of the contract
that government action may not abridge. See Allen v. Bd. of
Assessors, 439 N.E.2d 231, 233 (Mass. 1982) (quoting Roth, 408 U.S.
at 577).
In its simplest form, this issue is approached with some
frequency in suits by employees of the government itself
challenging their discharge. In these cases, Massachusetts courts
have consistently held that some sort of for-cause termination
provision is necessary in order for a contractual benefit of
continued employment to qualify as "protected property" for
purposes of due process. E.g., In re Powers, 987 N.E.2d 569, 584
(Mass. 2013); German v. Commonwealth, 574 N.E.2d 336, 339 (Mass.
1991); Harris v. Bd. of Trs. of State Colls., 542 N.E.2d 261, 265
(Mass. 1989); Knox v. Civil Serv. Comm'n, 825 N.E.2d 101, 105
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(Mass. App. Ct. 2005); Costello v. Sch. Comm., 544 N.E.2d 594, 597-
98 (Mass. App. Ct. 1989); see also Clukey v. Town of Camden, 717
F.3d 52, 56-58 (1st Cir. 2013) (collecting examples of
circumstances in which other public employment benefits are
protected under due process). That is to say, contractual property
protected as against a contracting government requires some
independently imposed or agreed-upon limitation on the government's
freedom to act. Thus, in suits relating to applications or
renewals of state-issued permits or licenses (which may be
memorialized in contracts with the state), Massachusetts courts
have held that, if the state actor retains discretion to grant or
withhold the permit or license, there is no protected property
interest. E.g., Roslindale Motor Sales, Inc. v. Police Comm'r, 538
N.E.2d 312, 314-15 (Mass. 1989); R.V.H., Third, Inc. v. State
Lottery Comm'n, 716 N.E.2d 127, 130 (Mass. App. Ct. 1999); accord
KES Brockton, Inc. v. Dep't of Pub. Utils., 618 N.E.2d 1352, 1356
(Mass. 1993). In some, albeit rare, instances, even an issued
license is not a protected property interest if the recipient is on
notice that the license is subject to termination or restriction.
E.g., Lotto v. Commonwealth, 343 N.E.2d 855, 857 (Mass. 1976); Take
Five Vending, Ltd. v. Town of Provincetown, 615 N.E.2d 576, 580-81
(Mass. 1993).
These, latter, discretionary licensing cases focus the issue
in this case. Of course, at this point Caesars is not claiming
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property in a contract to which the state is a party, but it is
claiming property in a contract (with SSR). But because its value
is an expected benefit that is dependent on the response of the
state to a license application, the analysis of property as
expected value is therefore the same as in the licensing cases just
cited.3 See generally VMark Software, Inc. v. EMC Corp., 642
N.E.2d 587, 590 n.2 (Mass. 1994) (describing the general rule for
recovery for breach of contract actions under Massachusetts law as
"expectation damages," wherein "the wronged party [is] . . . placed
in the same position as if the contract had been performed"
(internal quotation marks omitted)). The issue, then, is whether
Massachusetts law would recognize in the request for action by the
Commission a source of expectable value sufficiently reliable to be
protected as property. The licensing cases point to a negative
answer, and the casino licensing law does the same with
unmistakable emphasis.
To begin with, such an expectation seems to be in mortal
tension with Abdow: if there would be no deprivation of protectable
property in a casino operation by a legislative repeal of all
casino licensing authority after licenses had been issued, it is
difficult to imagine that the Massachusetts courts would find a
3
We are not concerned here with whatever rights Caesars
and SSR may have in relation to each other, whether the license be
granted or not. The only damage identified to us is understood to
be the loss of valuable benefit anticipated from operating under
the casino license sought.
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protectable interest in any claimed expectation of obtaining such
a license applied for but yet to be issued. See 11 N.E.3d at 586.4
In fact, expectation of value on the part of any applicant
appears untenable as a property interest under the terms of the
licensing statute itself, which invests the Commission with an
apparently unlimited scope for discretionary judgment, reflecting
the commercial and social risks presented by casino operation, see
Selectmen v. State Racing Comm'n, 86 N.E.2d 65, 70 (Mass. 1949)
(observing that, while Massachusetts has legalized some forms of
gambling, "because of the nature of the business," it "can be
abolished at any time that the Legislature may deem proper for the
safeguarding and protection of the public welfare"). The very
breadth of the subjects as identified for IEB investigation speak
to the degree of that discretion: "integrity, honesty, good
character and reputation of the applicant," Mass. Gen. Laws ch.
23K, § 12(a)(1); "financial responsibility, character, reputation,
integrity and general fitness . . . to warrant belief by the
commission that the applicant will act honestly, fairly, soundly
and efficiently," id. § 12(a)(7); "any . . . reason, as determined
by the commission, as to why it would be injurious to the interests
of the commonwealth in awarding the applicant a gaming license,"
id. § 12(b).
4
Abdow was concerned with the state's exercise of core
police power by legislation or referendum, but its denial of a
property interest was stated more broadly.
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The authorized judgment inherent in these spacious mandates is
at odds with judicial reviewability for the purpose of property
protection, as the statute expressly confirms. "The commission
shall have full discretion as to whether to issue a license.
Applicants shall have no legal right or privilege to a gaming
license and shall not be entitled to any further review if denied
by the commission." Id. § 17(g). This language is at war with any
claims by an applicant or its contracting parties to have an
expectation of value subject to property protection against state
discretionary action. See Town of Castle Rock v. Gonzales, 545
U.S. 748, 756 (2005) ("Our cases recognize that a benefit is not a
protected entitlement if government officials may grant or deny it
in their discretion."). On the contrary, participating in an
application for a casino license is accorded no status more
substantial than an act of hope alone, see Abdow, 11 N.E.3d at 585
("[T]he possibility of abolition is one of the many foreseeable
risks that casinos, slots parlors, and their investors take when
they choose to apply for a license and invest in a casino or slots
parlor."), and "dashed hopes [alone] . . . cannot yield a
constitutionally protected property interest," Redondo-Borges, 421
F.3d at 9.
In Caesars' attempt to establish something more at stake it
rests heavily, not on a contract case, but on the licensing case of
Kennie v. Natural Resources Department of Dennis, 889 N.E.2d 936-14-
(Mass. 2008). But we think Kennie is persuasive in illustrating
the difference between a hope to get a casino license and
traditional, preexisting property right giving rise to something
more, even though the property is subject to reasonable regulation.
That case stands for entitlement as a matter of state law to a fair
administrative process on an application for a permit to construct
a dock as an adjunct to waterfront property, so long as it does not
infringe the rights of neighbors or public use of waterways and
submerged land, but Kennie does not so much as suggest the
recognition of some property interest to be discerned in Caesars'
position. The property interest asserted in Kennie was the right
to make lawful improvements to the shoreline land. Id. at 943(noting the "constitutionally protected right to make
improvements," though the "right is, of course, subject to some
government regulation"). Here, in contrast, Caesars' claim has no
analog to the property in land and no reasonable expectation of a
right to engage in an extraordinary business raising serious
commercial and social risks.
Since Caesars cannot allege any protected property interest at
stake, the procedural and substantive due process claims have no
foundation and are correctly dismissed for failure to state a claim
subject to relief. In concluding as we do, we do not forget that
the Supreme Judicial Court has not given a controlling decision on
just the question before us, but we think the likelihood of an
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answer in Caesars' favor is too slight to justify requesting that
Court for its opinion, under Mass. S.J.C. R. 1:03.
IV.
Caesars' remaining federal claims are that the defendants
violated the Fourteenth Amendment guarantee of equal protection of
the laws in forcing it out by treating it differently and to its
disadvantage, for the very purposes of disfavoring it and favoring
Wynn for the benefit of Lohnes. The issue raised by dismissal of
these claims is whether the law construing § 1983 recognizes a
claim for wrongful treatment of a casino license applicant or its
associate as a class-of-one plaintiff, within the principle of
Vill. of Willowbrook v. Olech, 528 U.S. 562 (2000) (per curiam).
That case held that an arbitrary demand for a 33-foot easement
instead of the 15-foot easement required of similarly situated
applicants for municipal utility connections states a cognizable
claim, even though the complaining property owner did not fall
within any identifiable class of the disfavored, but stood as a
unique victim.
Caesars complains here as a class of one. It alleges no other
applicants or potential applicants who were subject to the
disadvantageous treatment it claims to have suffered and no
membership in a class whose differential treatment might be
suspect. Id. at 565.
We think that no class-of-one cause of action can be
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recognized against state actors given the remarkable breadth of
discretion provided by the Massachusetts casino licensing statute.
The persuasive authority here is Engquist v. Oregon Dep't of
Agric., 553 U.S. 591 (2008), which limited the scope of the Olech
rule. Engquist dealt with the singular treatment claim of a
government employee-at-will who was forced out of her job without,
as she claimed, any reasonable justification as judged by
established employment criteria or practice. Engquist's specific
holding distinguished government action under the "arm's-length
regulation," involved in Olech from government treatment of its own
employees in positions filled subject to discretionary judgment
about whom to employ, where "treating seemingly similarly situated
individuals differently . . . is par for the course." Id. at 604.
That is, pure legal discretion in government hiring and firing,
absent contractual restrictions forming terms of employment, is not
itself unreasonable, making judicial review both inappropriate, see
id. at 599-600, and potentially destructive of a systemically
justifiable way of doing public business, id. at 607-09.
Although Engquist's specific subject was public employment,
its reasoning extends beyond its particular facts, and we agree
with those federal courts that have found the case applicable
beyond government staffing. See, e.g., Douglas Asphalt Co. v.
Qore, Inc., 541 F.3d 1269, 1273-74 (11th Cir. 2008) (applying
Engquist to government contracting); Flowers v. City of
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Minneapolis, 558 F.3d 794, 799-800 (8th Cir. 2009) (applying
Engquist to police investigations); but see Analytical Diagnostic
Labs, Inc. v. Kusel, 626 F.3d 135, 141-43 (2d Cir. 2010) (noting
some tension among the federal courts on how far Engquist's
reasoning extends beyond the public employment context). The scope
of the Engquist rationale, we think, is expressed in the Supreme
Court's explanation that public hiring for at-will employment is an
example of those "forms of state action . . . which by their nature
involve discretionary decisionmaking based on a vast array of
subjective, individualized assessments . . . [in which] treating
like individuals differently is an accepted consequence of the
discretion granted." 553 U.S. at 603. The price of such
discretion as is considered reasonable at the systemic level is
thus the absence of a crucial element of Olech's class-of-one cause
of action, "the existence of a clear standard against which
departures, even for a single plaintiff, could be readily
assessed." Id. at 602.
These quotations from the Engquist majority opinion describe
the circumstances of the casino licensing scheme at issue here.
Our enquiry into the property requirement in the due process
discussion has already shown the breadth of discretionary
Commission judgment authorized by the general terms of the required
IEB investigation into an applicant's "overall reputation," which
encompasses the subject matters mentioned earlier "without
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limitation." Mass. Gen. Laws ch. 23K, § 12(a). The possibility of
mandating or deriving a baseline against which to assess a claim of
"treating seemingly similarly situated individuals differently,"
Engquist, 553 U.S. at 604, is in fact even further from possibility
in casino licensing than in public hiring. Nor is there any room
to suggest that broad discretionary judgment is somehow out of
place in licensing an activity that is disclosed in this record as
attracting criminal elements at home and from abroad, and raising
risks of criminal abuse and threats to projected public revenue.
The IEB's and Commission's responsibility could not be further from
the examples of approving utility connections or the placement of
private docks, and the virtually plenary discretion that defines
the state activity places this case squarely within the Engquist
rule limiting class-of-one redress. The equal protection counts
must accordingly be dismissed.
V.
Since the federal claims were dismissed on the pleadings, the
district court properly declined to exercise supplemental
jurisdiction over the remaining state law claim for tortious
interference with contractual relations. See Carnegie-Mellon Univ.
v. Cohill, 484 U.S. 343, 350 (1988); Rodríguez v. Doral Mortg.
Corp., 57 F.3d 1168, 1177 (1st Cir. 1995).
VI.
The judgment of the district court is affirmed.
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