COVID-19: New York Courts Take Unprecedented Action to Limit In-Person Appearances

Unprecedented times call for unprecedented measures. And we’re certainly in unprecedented times.  With the spread of COVID-19 growing exponentially each day, Chief Judge Janet DiFiore, Chief Administrative Judge Lawrence Marks, and the entire courts system have decided to take unprecedented action to limit in-court proceedings to only those essential for the administration of justice.  All non-essential proceedings are suspended until further order, and that now includes the filing of all litigation papers, under an order issued by Chief Administrative Judge Marks on March 22nd. While lawyers may keep working on their litigation matters, the courts will not be accepting any filings, except for those in enumerated essential proceedings.

Here’s a quick summary of the measures that the New York courts have adopted to try to do its part to keep its employees and the litigants that normally appear before it each day safe (UPDATED as of March 23, 2020):

The Appellate Division

For the first time that I can recall, the Appellate Division has suspended oral arguments. Each Department is handling it differently. In the First Department, the Court has cancelled all arguments scheduled for March 17, 18, and 19 and is taking those cases on submission. Beginning with the April term, and until the Court orders otherwise, all appeals will be submitted on the briefs or by oral argument through Skype. The Second Department is also taking its appeals on submission, unless the parties request to argue via Skype.

In the Third Department, the Court has strongly encouraged all attorneys who are scheduled to argue during the March term, which runs from March 23rd to 27th, to submit their appeals on the briefs. If argument is required, the Court is rescheduling the arguments for a later date. And in the Fourth Department, the Court has decided to take all arguments scheduled for the March/April term on submission only, without oral argument. Arguments for the May 2020 term will be rescheduled.

All of the Appellate Division Departments have now also issued orders suspending all non-statutory perfection and filing deadlines for the foreseeable future. In the First Department, for example, all deadlines are suspended, except for those cases that have been perfected for the May or June 2020 terms. All other Departments have suspended all deadlines for all cases (the Second Department, Third Department, and Fourth Department orders are here).

To be clear, and to avoid a trap for the unwary, the Appellate Division’s orders did not suspend the statutory deadlines for filing a notice of appeal or a motion for leave to appeal. Those deadlines were not been extended, in the first instance. But Governor Cuomo later issued an executive order tolling all statutory deadlines until April 19th, which includes the service of notices of appeal or motions for leave to appeal. The executive order provides:

In accordance with the directive of the Chief Judge of the State to limit court operations to essential matters during the pendency of the COVID-19 health crisis,   any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state, including but not limited to the criminal procedure law, the family court act, the civil practice law and rules, the court of claims act, the surrogate’s court procedure act, and the uniform court acts, or by any other statute, local law, ordinance, order, rule, or regulation, or part thereof, is hereby tolled from the date of this executive order until April 19, 2020.

That fills the gap that had been left by the Appellate Division’s deadline suspension order, and ensures that all deadlines have now been suspended for the duration of this order. Although this executive order only tolls deadlines until April 19th, I would fully expect the Governor to extend this order further if the State’s COVID-19 response is still in full effect as we approach that date.

The Court of Appeals

The Court of Appeals at first decided to proceed with the oral arguments scheduled for its March session, which has argument dates on March 17th, 18th, 24th, and 25th. The Court advised counsel, however, that if they are unable to make it due to the public health crisis, the Court was willing to accommodate argument by videoconference.

As the Court began its first arguments in the March session, it was a remarkable sight to see the Judges observing social distancing by moving Chief Judge DiFiore, Judge Rivera, and Judge Stein from their normal positions on the bench to the advocates’ tables in front of the bench, while the remaining Judges spread out along the bench behind them. As they say, a picture is worth a thousand words:

IMG_3572 (002)

And behind the advocates was an eerily empty courtroom that echoed with each argument.

After holding arguments for the first day of session, the Court of Appeals has now decided to suspend the remainder of its argument calendar for March 18th, 24th, and 25th, and will reschedule those appeals for a later date. The Court will also no longer accept any filings, including stay applications, in person at the Clerk’s Office.

The Trial Courts

In the New York trial courts, only pending criminal or civil trials may continue. Any trials that have not yet begun will be adjourned pending further order. Further, as of March 16th, all evictions and eviction proceedings are suspended until further notice. All other matters are limited to those that the courts have deemed essential.  No other court appearances will be held to try to ensure the safety of court staff and the parties.

These are certainly trying and uncertain times. The New York courts are trying to do their part to ensure that essential judicial services can still be provided, while ensuring the safety of court employees and the public alike. For updated information about court closures or other steps the courts have taken, the New York State Bar Association has put together a site that is being updated daily with new information, which can be found here. Stay safe everyone.

 

New York Daily Fantasy Sports Suit: State’s Appeal as of Right to the Court of Appeals Lets the Games Continue, For Now

After the Appellate Division, Third Department declared virtually the entire 2016 Interactive Fantasy Sports Law that had authorized daily fantasy sports games in the New York unconstitutional, it wasn’t long before the State appealed the decision to the Court of Appeals. Doing so imposes an automatic stay of enforcement of the Third Department’s order, which will allow daily fantasy sports games to continue to be offered in New York until the Court of Appeals decides the issue once and for all. In the meantime, let’s take a quick look at how the CPLR and case law interpreting it provides for an appeal as of right and the automatic stay.

Although permission is usually required to take a case to the Court of Appeals, the daily fantasy sports suit happens to have one of the limited jurisdictional bases that allows a party to bypass a motion for leave to appeal and take an appeal as of right. Under CPLR 5601(b)(1), a party may take an appeal as of right to the Court of Appeals from a final Appellate Division order that directly involves a substantial constitutional question. Although the requirements are easy to state (the constitutional question must be (1) directly involved and (2) substantial), their application is much more difficult.

For a constitutional question to be directly involved, it first must have been preserved both at the trial court and at the Appellate Division. A constitutional issue raised only at the Appellate Division, and reached as a matter of the Appellate Division’s interests of justice jurisdiction, is not enough. The constitutional question must also have been necessarily decided by the Appellate Division.  So, if the Appellate Division decided the case on a number of independent grounds, including nonconstitutional ones, the constitutional question is not directly involved for purposes of an appeal as of right. Here, in the DFS suit, that’s not an issue. The only issue that the Appellate Division decided was whether the Interactive Fantasy Sports law violated the constitutional ban on gambling under Article I, § 9. The constitutional question was, therefore, directly involved.

What does it mean that the constitutional question is substantial?  That’s a case-by-case decision by the Court. The question doesn’t need to be a winner, but it also can’t already have been decided against the appellant’s position in prior precedent. Otherwise, the Court generally looks at a number of things to determine substantiality, including “the nature of the constitutional interest at stake, the novelty of the constitutional claim, whether the argument raised may have merit, and whether a basis has been established for distinguishing a state constitutional claim (if asserted) from a federal constitutional claim” (The New York Court of Appeals Civil Jurisdiction and Practice Outline, at 4). The question whether DFS is prohibited gambling is an issue of first impression, the courts below certainly found merit in Plaintiffs’ arguments, and New York’s constitutional ban on gambling is unique from the federal constitution. I dare to say that this is undoubtedly a directly involved, substantial constitutional question over which the Court of Appeals has jurisdiction, without even needing a jurisdictional inquiry letter to the parties.

Because it is the State taking the appeal as of right, it also gets the benefit of an automatic stay of enforcement of the Appellate Division’s order under CPLR 5519(a)(1). “CPLR 5519(a)(1) grants an automatic stay to the State, and its political subdivisions, their agencies and officers, pending an appeal from a judgment or order. CPLR 5519(e) provides that a stay will be continued pending resolution of a second-level appeal or until a motion for permission to take such an appeal is denied, provided the governmental appellant serves and files its notice of appeal or motion for leave to appeal within five days after service of an adverse order with notice of entry” (Summerville v City of New York, 97 NY2d 427, 430 [2002]). That’s why the State filed its notice of appeal so quickly, when it otherwise had 30 days to do so. By filing early, the State kept the benefit of the automatic stay that it had obtained when it originally appealed Justice Connolly’s order to the Appellate Division.

Although DFS’s future in New York is unclear, the games can continue now as a result of the automatic stay until the Court of Appeals decides whether DFS violates the New York Constitution’s ban on gambling.

New York Daily Fantasy Sports Suit: Appellate Division, Third Department Holds the Entire Interactive Fantasy Sports Law Unconstitutional

Daily fantasy sports may not be long for New York. Article I, § 9 of the New York Constitution bans gambling, plain and simple. That includes, lotteries, pool selling, book making, and “any other form of gambling.” Now, the Appellate Division, Third Department has added DFS to that list of banned games, affirming a trial court judgment that had held that New York’s Interactive Fantasy Sports Law that declared DFS not to be gambling unconstitutional. A copy of the Third Department’s opinion can be read in full here.

The IFS law (Chapter 237 of the Laws of 2016) attempted to exempt “interactive fantasy sports” from the New York Constitution’s ban on gambling. Specifically, it provides:

img_6573

That was the trick. Although the Constitution does not define what is prohibited as “any other form of gambling,” the Legislature had otherwise provided a definition for the term when the legislation implementing the constitutional ban was enacted in 1965. Penal Law § 225.00 (2) defines “gambling” as “stak[ing] or risk[ing] something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.” A “contest of chance,” in turn, is “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein” (Penal Law § 225.00 [1]). By declaring that DFS was not a contest of chance or a wager on a future contingent event over which the players have no control and, thus, was not gambling, the Legislature tried to claim that it had the power to authorize the games by mere legislation, rather than following the 2-plus year process to amend the Constitution.

The majority of the Appellate Division, however, wasn’t convinced. Rather, the Court held, the Legislature can’t just declare that DFS isn’t gambling. That’s for the Courts to decide, and allowing the Legislature to simply declare that a game isn’t gambling would render the constitutional ban ineffectual:

White Excerpt 1

The Third Department, thus, held that the Penal Law definition of what is prohibited gambling governs the extent of the constitutional ban. That is, the Constitution prohibits any games that depend upon chance in a material degree, notwithstanding that they may also involve the players’ skill. In so holding, the Third Department rejected the State’s argument that the dominating element test for what is gambling should be applied. Under the State’s reasoning, a game wasn’t gambling if skill predominated any element of chance, and it was gambling if the opposite was true. The dominating element test, the Third Department held, however, was fashioned by the Court of Appeals in evaluating lotteries, not gambling, and was rejected by the Legislature when it defined gambling in the 1965 Penal Law implementing legislation as being based on whether chance is involved to a material degree. The Third Department, thus, held that “the Legislature’s own definition of gambling, as included in the Penal Law since 1965, [w]as the appropriate definition for courts to apply when interpreting that word in the pertinent constitutional provision” (Majority Op, at 7).

Turning to DFS, the Court held that “IFS contestants pay an entry fee (something of value) in hopes of receiving a prize (also something of value) for performing well in an IFS contest” (id. at 7-8). That satisfies two of the elements of the Penal Law definition of gambling. So, whether DFS is prohibited gambling would be determined on whether it involved a material degree of chance. And the Third Department held that it did.  Accepting the parties’ stipulation of facts regarding how DFS games work, the Court held

White Excerpt 2

It was as simple as that. Because DFS involves a material degree of chance, the Court held, it is prohibited gambling under the Constitution and cannot be authorized by mere legislation like the IFS Law. The Third Department, thus, affirmed the trial court’s holding that the IFS Law is unconstitutional. But the majority didn’t stop there. It also modified that portion of the trial court judgment that had upheld the IFS Law’s provisions decriminalizing DFS games. Although the Court held that the Legislature had to power to decriminalize DFS, it could not sever the provision from the rest of the IFS Law and, thus, declared it unconstitutional as well.

Justice Stan Pritzker dissented, arguing that the majority went well beyond the appropriate standard of review in this constitutional challenge to the IFS Law. As Justice Pritzker saw it, the Court’s task was to limited to “deciding whether the Legislature rationally determined, after hearing and considering evidence, that IFS contests are not ‘gambling’ as defined under Penal Law § 225.00” (Dissenting Op, at 12). Because ample evidence existed in the legislative record for that determination, Justice Pritzker would have upheld the IFS Law because the Plaintiffs did not meet their initial burden to show that the law was unconstitutional beyond a reasonable doubt.

Indeed, Justice Pritzker reasoned, “the Legislature’s judgment necessarily involved determining whether an IFS contest is a ‘game of chance’ and, as such, analyzing whether the degree of chance is ‘material’ in determining the outcome of an IFS contest. Because it is not seriously disputed that an IFS contest involves a high degree of skill, as was found by Supreme Court, then determining whether the degree of chance inherent in an IFS contest is ‘material’ presented a difficult and nuanced question for the Legislature. And, although it may have been rational to determine that the amount of chance in an IFS contest is material, as did some of the legislators who voted against the bill, it was not at all unreasonable, based upon the legislative record, to conclude otherwise. The difference is that the legislation bears the imprimatur and presumption of constitutionality and, thus, summary judgment should not have been granted in favor of plaintiffs” (Dissenting Op, at 16-17). Furthermore, Justice Pritzker would have held, “Supreme Court incorrectly focused on the fact that the participants do not have actual influence over the athletes. However, this notion was debated by the Legislature and it ultimately concluded that the proper focus is not on the participants’ influence over the real world events and a specific athlete’s performance, but the participants’ unquestionable influence on winning the contest by making skillful choices in assembling a fantasy roster. Indeed, the plethora of evidence that was rationally relied upon by the Legislature in finding that IFS contests are predominantly contests of skill – a finding that Supreme Court accepted – also supports the notion that IFS contestants meaningfully, using certain parameters such as data and salary cap management, influence the outcome of the contests” (id. at 19). Thus, because the Legislature rationally decided that skill predominates over chance in DFS games, Justice Pritzker would have declared that the IFS Law did not violate the New York Constitution’s ban on gambling.

From here, the State will undoubtedly appeal the Third Department’s ruling as of right to the Court of Appeals. Although few jurisdictional predicates exist for as of right appeals to the Court of Appeals, this case satisfies one because the decision directly involves a substantial constitutional question. Once the State serves the notice of appeal, it also gets the benefit of an automatic stay under CPLR 5519 (a) (1), which should preserve the status quo and allow DFS games to continue while the State pursues its appeal. Although not much will change in the near future, the long term viability of DFS in New York is very much in flux.

Within a year or so, we should know once and for all whether DFS games are prohibited gambling banned by the Constitution, or whether the Legislature can rationally decide that they are not gambling and can be authorized by a mere legislative enactment. It’s now up to the seven Judges of the Court of Appeals to make that call.

Court of Appeals Leave Grants for September-December Decision Days 2019

Happy New Year! It’s now 2020 and the Court of Appeals is back in session. It’s time to check in on the cases in which the Court of Appeals has granted leave to appeal from the beginning of the 2019-2020 term.

September 2019 Session

Daniels v New York City Transit Authority, 171 AD3d 601 (1st Dept 2019)

Issue: Whether the trial court abused its discretion by allowing expert witness testimony on non-mandatory “industry standards” and by admitting evidence of data concerning accidents at other subway stations.

Appellate Division Holding: The First Department held that the trial court properly allowed the expert testimony regarding gap standards promulgated by the American Public Transit Association and the Public Transportation Safety Board because they were generally accepted in the industry. The Court also affirmed the trial court’s decision to admit the data concerning accidents at other subway stations.

Matter of Juarez v New York State Office of Victim Services, 169 AD3d 52 (3d Dept 2019)

Issue: Whether New York State Office of Victim Services exceeded its authority under Executive Law article 22 to adopt regulations for the approval of crime victims’ counsel fee requests by amending its regulations to provide that such awards may be considered only for fees incurred in successful administrative reconsideration reviews and judicial review (9 NYCRR 525.9 [a],[c]).

Appellate Division Holding: The Third Department annulled the amended regulations as in excess of authority, and remitted the matter to the Office of Victim Services for reconsideration of the fee requests.

November 2019 Session

Matter of Estate of Youngjohn v Berry Plastics Corp., 169 AD3d 1237 (3d Dept 2019)

Issue: Whether 2009 amendments to the Workers’ Compensation Law authorizing full payment of Schedule Loss Use (SLU) awards in one lump sum at the request of the injured employee altered the rule that where an injured employee dies without leaving a surviving spouse, child under 18 years old, or dependent, only that portion of claimant’s SLU award that had accrued at the time of death is payable to the claimant’s estate, along with reasonable funeral expenses.

Appellate Division Holding: The Third Department held that the 2009 amendments did not alter the longstanding rule that the claimant may only recover that portion of the SLU award that had accrued at the time of his death, and thus modified the Workers Compensation Board’s award that had limited the claimant’s recovery only to reasonable funeral expenses.

December 2019 Decision Days

Aybar v Aybar, 169 AD3d 137 (2d Dept 2019)

Issue: Whether, following the United States Supreme Court decision in Daimler AG v Bauman (571 US 117 [2014]), a foreign corporation may still be deemed to have consented to the general jurisdiction of New York courts by virtue of having registered to do business in New York and appointed a local agent for the service of process.

Appellate Division Holding: The Second Department held that a foreign corporation cannot be deemed to have consented to general jurisdiction by mere presence in New York.

Noteworthy: #AppellateTwitter’s Sean Marotta is counsel of record to one of the parties in Aybar. Looking forward to the briefs in the Court of Appeals!

Cole v Cole, 172 AD3d 680 (2d Dept 2019)

Issue: Whether the trial court properly awarded physical custody of the children of the marriage to the plaintiff and whether the Appellate Division properly directed the parties to contribute pro rata to the children’s future unreimbursed health care expenses.

Appellate Division Holding: The Second Department held that the trial court’s custody award was supported by the record, but that it should have required the parties to contribute pro rata to the children’s future unreimbursed health care expenses under Domestic Relations Law § 240 [1-b] [c] [5].

 

Through the first four months of the term, the Court has maintained its sleepy grant rate, granting only 5 cases, 2 from the Second Department, 2 from the Third Department, and 1 from the First Department. The pace should pick up in the Spring, especially as we head toward the end of the term and Decision Days in June.

Zervos v Trump Heads to the Court of Appeals to Decide Whether the Supremacy Clause Precludes State Courts From Exercising Jurisdiction Over a Sitting President

Ten months after the First Department held that the Supremacy Clause of the United States Constitution does not divest state courts of jurisdiction over a state law case against a sitting President, the First Department has granted President Trump leave to appeal to bring that question of first impression in New York to the Court of Appeals. First, a little background on the case and what lies ahead at the Court of Appeals. And second, a quick appellate practice tip that explains why it took so long for the First Department to certify this important question.

In October 2016, while President Trump was running for office, Summer Zervos, a former Apprentice contestant, held a press conference and claimed that Trump had made repeated unwanted sexual advances toward her. Trump denied the claims, calling Zervos’ story “totally false” and “all big lies,” among other things. Shortly after Trump was elected President, Zervos sued him for defamation in New York Supreme Court. Trump moved to dismiss the complaint, arguing that the state courts were precluded from exercising jurisdiction over him while he was the sitting President, or alternatively for a stay of the action until his presidency ends.

Supreme Court, New York County denied Trump’s motion, holding that nothing in the Supremacy Clause precluded the state courts from exercising their jurisdiction under the state constitution to decide a civil case brought against a sitting President. The court reasoned that allowing the defamation action to go forward would not threaten to intrude on the President’s official duties, and thus could not constitute state interference with federal government operations. The Court also denied Trump’s arguments for dismissal on the merits, and an appeal ensued.

In March 2019, the First Department, in a divided 3-2 opinion, affirmed the denial of Trump’s motion to dismiss. In particular, the majority held,

Trump 1

The dissent disagreed, and would have held Trump immune from suit because “subjecting the President to a state trial court’s jurisdiction imposes upon him a degree of control by the State of New York that interferes with his ability to carry out his constitutional duty of executing the laws of the United States. Since the Supremacy Clause guarantees that any effort by the individual states to annul, minimize, or otherwise interfere with those laws will be struck down, it follows that any effort by a state court to control the President must likewise fail” (Dissenting Op, at 34).

At the time when this decision came out, it seemed ripe to head directly to the Court of Appeals. The issue is one of first impression in New York, and the case has been closely followed across the country. Because the Appellate Division order was nonfinal—it merely affirmed the denial of motion to dismiss, thereby leaving the whole case pending—there was only one way that the parties could immediately get to the Court of Appeals. They had to ask the First Department to grant leave to appeal on a certified question of law. The Court of Appeals’ jurisdiction doesn’t allow it to grant leave on a nonfinal order like this one; only the Appellate Division could.

But, yet, the parties didn’t seem to be in a rush to ask the Appellate Division to certify the question to the Court of Appeals for further review. In fact, Zervos did not immediately serve the order with notice of its entry, as required by CPLR 5513(b) to start the clock for Trump’s time to move for permission to appeal. So Trump waited until November 2019, 8 months after the March decision, to make the leave motion to the First Department. That’s an unusually long time to wait.

It could have been much shorter had Zervos’ counsel served the First Department’s March 2019 order with notice of its entry immediately after it was issued. But if the prevailing party never serves the order with notice of its entry, as required under CPLR 5513(b), the time to seek permission to appeal never begins to run. So, conceivably, a case could go on for years, and the losing party would still have the right to move for permission to appeal from the order that was never served with notice of entry. Don’t make that mistake. Don’t subject your client to the risk that your opponent’s counsel will one day, years later decide to seek permission to appeal from an old Appellate Division order that was never served with notice of its entry. (By the way, the Court entering the order on the electronic docket, which is then sent to the losing counsel, DOES NOT count as service of the order with “written notice of its entry.” You have to draft a separate notice of entry document with the Appellate Division order attached to it, and e-file or otherwise serve that). If you’ve won, always serve the order with notice of its entry as soon as the order is issued to start your opponent’s time to make the motion for leave to appeal. And if you haven’t, hope you have Zervos’ counsel on the other side.

The First Department has now sent the Zervos case up to the Court of Appeals for a decision on whether state courts are precluded from exercising their jurisdiction granted under the State Constitution over cases involving only state law brought against a sitting President. It should be a fascinating case, and will definitely liven up the Court of Appeals’ term.  Or, as Professor Steve Vladeck explained yesterday on Twitter:

Trump 2

Only time will tell.

New York Daily Fantasy Sports Suit: The Third Department Hears Oral Argument on Whether DFS is Prohibited Gambling

Oral argument of an appeal is often an appellate attorney’s most fun moment in a case. You’ve labored over lengthy briefs on the issues at hand, thought about how you want the appellate court to decide your case, and pored over the briefs and record for hours creating an iron clad argument that will tip the court in your favor. Now the time has come when you get to stand up at that podium with a panel of Judges staring at you and engage them in a conversation about why the law says you should win.

Your case is called. You stand up and introduce yourself. May it please the Court. You start in on your well crafted first few lines, and then it begins. A barrage of questions from a hot bench, or worse yet, a cold bench where you have ten minutes to fill with no one seemingly interested. Thankfully, the advocates in White v Cuomo got a mixture of the two at oral argument before the Appellate Division, Third Department.

Because the State appealed Justice Connolly’s order holding the DFS Law unconstitutional, it was up first. Deputy Solicitor General Victor Paladino, relying on the point ably made in the State’s brief, emphasized that the Legislature had undertaken a thorough look at DFS and rationally decided that it was not gambling. When a new game is proposed in NY, he argued, the Legislature gets to decide in the first instance whether the game is gambling or not, and DFS is not. Unlike sports gambling where bettors wager on the outcome of a game over which they have absolutely no control, the relevant contest for DFS is the not the sports game, but the task of putting together the best lineup for the day to compete against other DFS players. Yes, the scores of that lineup are determined by professional players over whom the DFS player has no control, but the DFS player very much controls which players are selected. It’s just like being a general manager, Paladino argues, and that takes skill. Because the Legislature rationally concluded that the DFS contest is not gambling, and the Court is required to defer to that legislative choice, the State argued that Judge Connolly’s order should be reversed.

In contrast, Neil Murray argued for the Plaintiffs, there is only one definition of gambling in NY and when a game meets it, the Legislature can’t merely say that the game isn’t gambling. Murray argued that not only is DFS a game of chance, because a material degree of chance is involved in the result (a player could get hurt, the weather could impact game conditions, etc.), but it’s also a wager on a contingent future event over which the bettor has no control (that is, DFS is effectively wagering on player performances). Either way, because DFS fits the definition of gambling under the Penal Law section that implements the constitutional ban, the Legislature could not authorize it by mere legislation. A constitutional amendment was required.

If you watch the argument, which can be found here, the Judges did a very good job of hiding where they stood on the outcome. Only Judge Pritzker seemed to indicate through his questioning—he asked about the very heavy burden that the Plaintiffs face to establish the DFS Law’s unconstitutionality beyond a reasonable doubt—that he favored the State’s position. The remaining Judges (Presiding Justice Garry, Justice Clark, Justice Mulvey, and Justice Molly Reynolds Fitzgerald, who had only been sworn in just a few days earlier) kept a tight lid on which way they were leaning. The questions were fair and clearly showed that the Judges were well prepared for the thorny issues facing them. In light of that, it’s hard to predict where this will turn out, though I still lean slightly in favor of the State’s position given the extremely heavy burden that the Plaintiffs face and the deference usually accorded to legislative determinations. You can hear me on Capitol Pressroom with David Lombardo talking about the case here.

Whichever way this comes out, it will not be the end of the case. Because the issue of DFS’s constitutionality presents an adequate jurisdictional predicate for an appeal as of right to the Court of Appeals, the case is likely be headed there next for a final answer to the question: can DFS continue in NY without an amendment to the constitutional ban on gambling?

The Appellate Division’s decision is expected by early January 2020.

New York Daily Fantasy Sports Suit: What Happens When an Amicus Isn’t Actually a Friend of the Court

It isn’t often that New York appellate courts deny someone the right to submit an amicus brief in a pending appeal. It happens, but it’s rare. In fact, the only time that I remember seeing a New York appellate court turn away a proposed amicus brief was when the proposed amicus had a direct financial interest in the outcome of the appeal. The party, thus, wasn’t a true friend of the Court.

Time to add one more to my list.  In White v Cuomo, the case about whether daily fantasy sports are prohibited gambling under Article I, § 9 of the New York Constitution, the Appellate Division, Third Department, on Thursday, denied Rivers Casino’s motion to file an amicus brief in the case. Rivers’ brief had sought to provide the Court with an alternate definition of prohibited gambling, arguing that the term in the Constitution can’t be understood by the definition the Legislature later put in the Penal Law. Instead, it argued, the constitutional term can only be defined by its original meaning at the time the constitutional amendment was adopted in 1894, and at that time all forms of gambling were prohibited regardless of whether skill or luck dominated. Thus, DFS is prohibited gambling, Rivers sought to argue.

But now having denied Rivers’ amicus motion, the Court won’t consider those arguments. Why would the Court have denied Rivers’ motion when these kinds of motions are routinely granted, and none of the parties opposed Rivers’ motion? Let’s see if we can figure it out.

The Rules for Amicus Curiae Briefs

The rules for amicus submissions in pending appeals are fairly straightforward. Under Rule 500.23 of the Court of Appeals’ Rules of Practice, the Court looks at these criteria for determining whether to grant amicus relief:

Court of Appeals Amicus Rules

The Joint Appellate Division Rules are similar:

Appellate Division Amicus Rules

So, under the rules, New York’s appellate courts want to know:

  • who is the proposed amicus party;
  • what their interest in the case is;
  • what issues they want to brief for the court to consider;
  • that the issues are not mere duplications of the parties’ arguments, and bring something different for the court to consider, but do not raise new issues not raised or addressed by the parties or the court from which the appeal was taken; and
  • the proposed amicus party is a true friend of the court, and not someone who has a direct financial interest in the outcome of the litigation.

Although the Appellate Division’s Rules don’t have a formal timeliness component, the Court of Appeals has made clear that for an amicus motion to be considered, it must be made returnable at least one month before the appeal is scheduled for oral argument. Failure to comply will likely lead the Court to deny the motion, because the Judges wouldn’t have enough time to consider it before hearing the appeal. I’d venture to say that the Appellate Division likely applies a similar, albeit unexpressed, rule.

The Denial of Rivers’ Amicus Motion

The courts have a great deal of discretion in deciding whether to accept a proposed amicus brief, and unfortunately don’t have to give any reason for their decisions. So, we’re left to guess why the Third Department denied Rivers’ motion. In Rivers’ motion, it explained its interest in the case:

This appeal has important implications for Rivers’ business and for the regulated gambling industry more broadly. The industry has relied upon the settled understanding that the Constitution’s prohibition on gambling bound the Legislature, such that the only way to authorize a form of gambling was through constitutional amendment. To say the least, Chapter 237 fundamentally upsets the legal framework upon which this industry has justifiably relied (Rivers’ Proposed Amicus Brf, at 1).

It identified the issues it wanted the Third Department to consider—whether the constitutional ban on gambling must be interpreted according to its own terms based upon their original meaning—and Rivers’ arguments certainly differ from the parties’ focus on the statutory test for what is prohibited gambling. And the motion was submitted well before the case is scheduled for argument during the November term. Rivers’ motion seems to satisfy most of the Rules’ requirements for amicus submissions.

Here are the two potential issues that could have led to the Court deciding to deny Rivers the right to participate in the case. First, the issue that Rivers sought to raise is a new one to the case, and wasn’t raised by the parties or addressed by Judge Connolly at Supreme Court. That presents a problem under New York precedent. The Appellate Division has previously held that a proposed amicus party can’t raise new issues different from those argued by the parties (see e.g. Colgate-Palmolive Co. v Erie County, 39 AD2d 641 [4th Dept 1972] [“an Amicus curiae is not a party, and cannot assume the functions of one; he must accept the case before the court with issues made by the parties, and may not control the litigation. Nor may he introduce any issues; only the issues raised by the parties may be considered” (quotation marks and alterations omitted)]). And the Court of Appeals’ rules provide that expressly.

That may not be a fatal flaw, however. There’s certainly an argument that the scope of the constitutional definition of gambling has always been in the case, and Rivers’ argument for an originalist interpretation is merely an extension of the parties’ arguments, a new and different way of looking at the issue. But, the Court certainly was within its discretion to have concluded that Rivers’ proposed amicus brief sought to improperly raise a new constitutional issue that no one had addressed before and to have denied Rivers’ motion on that basis.

Second, although the Appellate Division’s rules don’t contain an express requirement for a proposed amicus party to disclose their financial stake in the case or whether a party is backing or funding the amicus submission, whether an amicus party is a true friend of the court, rather than a party with a direct financial interest in the outcome of the case, is certainly something that the Court can, and often does, consider. Indeed, the Court of Appeals’ rules expressly require those disclosures in an amicus motion.

Here, Rivers’ motion does not disclose who contributed to or was financially backing the amicus submission. Rivers states that it has paid a bunch of money for a casino license in reliance on its understanding that the only forms of gambling that will be allowed in New York are those that have secured a constitutional amendment to be excepted from the constitutional ban, like horse racing and casino gambling. Could the Court have been concerned that Rivers’ interest was a purely economic concern about competition to its brick and mortar casino, and wasn’t a true friend of the court seeking to assist the Court with its decision? That’s what some have guessed, including former Court of Appeals Judge Robert Smith:

We’ll never know exactly why the Third Department decided against considering Rivers’ amicus brief in support of the plaintiffs’ position that DFS is unconstitutional gambling, but it certainly seems the Court had justifiable grounds for deciding as it did.

 

New York Daily Fantasy Sports Suit: The Amici Bring an Interesting Twist to Whether DFS Violates the NY Constitution’s Ban on Gambling

The State and the Plaintiffs aren’t the only ones who want to be heard on whether the New York Interactive Fantasy Sports Law violates New York’s constitutional ban on gambling. And New York courts are happy to hear their opinions. In White v Cuomo, three parties have sought and been granted leave to file amici briefs—FanDuel and DraftKings in support of the State, and Rivers Casino, one of New York’s four licensed brick and mortar casinos, in support of the Plaintiffs.

Let’s take a quick run through the amici briefs to see what new arguments they bring to the table.

FanDuel and DraftKings

FanDuel’s and DraftKings’ arguments are remarkable similar to the State’s arguments in its opening brief. They both argue that DFS is not gambling prohibited by the New Yor Constitution because the skill required dominates chance-based elements. Thus, it is a bona fide contest for a prize, they argue.

What distinguishes FanDuel’s and DraftKings’ arguments from the State’s is the legal test that they each apply. While the State seeks to have the Appellate Division apply the “dominating element” test that holds that a game constitutes prohibited gambling when chance dominates any skill involved instead of the “material degree” test that holds a game is gambling when chance is involved in a material respect, which Supreme Court applied to hold the IFS Law unconstitutional, FanDuel and DraftKings argue that the tests are substantively identical. It’s just that Supreme Court got it wrong under both.

Particularly, FanDuel and DraftKings trace the “dominating element” test back to a 1904 Court of Appeals’ decision in People ex rel. Ellison v Lavin (179 NY 164, 170-171 [1904]), where the Court held:

Throwing dice is purely a game of chance, and chess is purely a game of skill. But games of cards do not cease to be games of chance because they call for the exercise of skill by the players, nor do games of billiards cease to be games of skill because at times, especially in the case of tyros, their result is determined by some unforeseen accident, usually called luck. The test of the character of the game is not whether it contains an element of chance or an element of skill, but which is the dominating element that determines the result of the game.

The dominating element test was long applied in New York, until at least the 1965 Penal Law amendments that defined gambling to include any contest the outcome of which “depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.” Penal Law § 225.00 (1) (emphasis added). The State argues that these amendments changed the test for gambling to the stricter “material degree” test. FanDuel and DraftKings, on the other hand, argue for two reasons that the amendment changed nothing at all.

First, after the 1965 Penal Law amendments, New York courts continued to apply Lavin’s dominating element test to determine when a game depended on chance to a material degree. If skill dominated, the courts held, the game didn’t depend in a material degree on an element of chance, and it wasn’t prohibited gambling.  And vice versa.

Second, FanDuel and DraftKings argue, the legislative history underlying the 1965 Penal Law amendments do not identify any explicit desire to overrule the Court of Appeals’ common law “dominating element” test. The Court, in other contexts, has been very reluctant to find a wholesale abrogation of the common law absent the Legislature’s expressed intention to do so. That simply isn’t present here, they argue.  Instead, the Bartlett Commission that proposed these revisions actually said they weren’t intending to make many changes of substance at all, and the “dominating element” vs. “material degree” test conflict does not appear anywhere in the Commission’s report. Thus, FanDuel and DraftKings argue, the Legislature can’t have intended to replace more than 60 years of precedent applying the “dominating element” test to determine whether a game is prohibited gambling without so much as a word on the subject.

This interpretation is in line with numerous holdings across the country, they argue, including many holding that fantasy sports and daily fantasy sports, in particular, are not gambling because they are contests for which the players pay set entry fees, compete against others in picking the best roster, and play for a set prize pool. One such holding was from New Jersey, and was eventually endorsed by the Third Circuit and Congress. Where DFS games involve “(1) prizes [that] are established and announced in advance; (2) outcomes [that] reflect the ‘relative knowledge and skill of the participants’; and (3) the result is not determined by the outcome for a real-world team or teams or an athlete’s performance in a single real-world sporting event (FanDuel and DraftKings Amici Brf, at 14, quoting Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(1) (E) (ix) (2006)), they are not gambling.

Rivers Casino

On the other side, Rivers Casino appeared in support of the Plaintiffs’ arguments that the IFS Law is unconstitutional, arguing that the law had fundamentally upset the casino gambling industry’s legitimate expectations that gambling can only be authorized in New York by a constitutional amendment. That’s what the casinos had to do, and so too should the fantasy sports industry, it argues.

Beyond the “we had to get a constitutional amendment, and so should you” rhetoric, Rivers Casino’s legal argument is fairly straightforward. It offers a definition of constitutionally prohibited gambling that is far more strict than any party to this case has previously discussed and doesn’t rely at all on the skill vs. chance dichotomy. As Rivers’ puts it,

Before considering the meaning and scope of the Penal Law, this Court first must decide if DFS constitutes gambling as that term is used in the Constitution. For reasons explained below, the term gambling as used in the Constitution means simply: to wager on games of skill or chance. Whether DFS is viewed as a game of skill or chance, or should be subject to criminal penalties in New York, it is still unauthorized “gambling” as that term is used in the Constitution. From there, the Legislature presumably may decide to criminalize DFS, or to prescribe civil penalties, but the Legislature cannot somehow “authorize” DFS. Chapter 237, therefore violates the Constitution’s general prohibition against gambling. (Rivers’ Brf, at 3-4).

To support this argument, Rivers breaks out the early 1900s dictionaries, which appear to define gambling as wagering money on games of either chance or skill, without differentiation. Rivers, thus, argues that selling access to the DFS pool is prohibited gambling under the Constitution, even if it involves a measure of skill. Indeed, at the time the constitutional ban was implemented for the first time, the Legislature also amended the Penal Law to criminalize wagering on “the skill, speed, or power of endurance of man or beast” involving “any unknown or contingent event whatsoever” (Rivers Brf, at 8, quoting L. 1895, ch. 1, § 1, amending § 351 of the Penal Law). That, Rivers argues, is a conclusive construction that even games of skill are subject to the constitutional ban.

Rivers also argues that the constitutional ban itself was intended to prohibit the Legislature from authorizing any form of gambling by merely calling it not gambling. The debates surrounding the constitutional ban show that the intent was to take the decision about what is gambling and what is not out of the Legislature’s purview, because, the convention delegates believed, the temptation to grab the gambling tax revenues and run would always be strong and often too strong to resist. Thus, Rivers argues, while the Legislature can decide how to enforce the constitutional ban on gambling, it can’t redefine it and authorize what the Constitution prohibits.

Oral Argument

In addition to seeking leave to file an amici brief, FanDuel and DraftKings also sought leave to participate in the oral argument of the appeals. The Third Department, however, denied that request. It’s not often in New York appeals that an appellate court will grant oral argument to an amicus party. In fact, the only time I’ve seen it is when it’s the State asking for divided argument. That’s not a hard and fast rule, but it seems to be the way that these high profile cases play out.

With the case now fully briefed, and the amici briefs in, we now have to wait until November for the oral argument, with a decision expected in late December 2019 or January 2020.

NY Daily Fantasy Sports Suit: Plaintiffs Argue that a Rose is a Rose and DFS is Gambling, Notwithstanding the Legislature’s Attempt to Say Otherwise

What kind of world do we live in, the Plaintiffs in White v Cuomo want to know in their constitutional challenge to New York’s Interactive Fantasy Sports Law that authorized and regulated daily fantasy sports games in New York for the first time. “[A] Shakespearean world inhabited by Romeo and Juliet where substance trumps form, and a rose is, in fact, a rose; or . . . in a parallel universe of alternative facts, like the one inhabited by Humpty Dumpty—and now by the New York State Legislature—where ‘gambling’ is not ‘gambling’ simply because the Legislature has decided to call it something else” (Plaintiffs’ App Div Brf, at 2). To the Plaintiffs, a rose is still a rose, and DFS is wagering money on real life athletes in real life games over which the bettors have no control. That’s gambling, they argue, and barred by Article I, § 9 of the New York Constitution.

In the Plaintiffs’ opening brief to the Appellate Division, Third Department, they make four principal arguments in support of Justice Connolly’s decision declaring the IFS Law unconstitutional: (1) DFS falls within the Penal Law’s definition of prohibited gambling, and the Legislature’s rationale for an opposite finding ignores the realities that DFS is a game involving a material degree of chance and are wagers on future contingent events; (2) the New York Attorney General admitted that DFS is prohibited gambling when it prosecuted DraftKings and FanDuel before the IFS Law was adopted; (3) DFS looks like gambling and is regulated like gambling, so it must be gambling; and (4) the Legislature was not free to define gambling to exclude DFS because it had applied the constitutional gambling ban to all forms of sports wagering over more than 100 years. Let’s take a closer look at each of the arguments.

DFS is Gambling Under the Penal Law Because it Involves a Material Degree of Chance and Wagers on Future Contingent Events

The Plaintiffs start with the Penal Law definition of gambling. Under Penal Law § 225.00(2), “[a] person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.” According to Plaintiffs, that means “[t]he key elements, therefore, of gambling are (1) whether a contestant stakes or risks something of value, (2) upon a contest of chance or a future contingent event not under his control or influence, (3) with the understanding he will receive something of value in the event of a certain outcome” (Plaintiffs’ App Div Brf, at 32).

DFS fits all three, they argue. DFS players pay an entry fee to the companies to participate—that’s something of value. The players have absolutely no control over how the athletes they select for their fantasy teams perform in the real life games—that’s a wager on a future contingent event not under their control. And if their fantasy team outperforms others, they win a prize—that’s receiving something of value in the event of a winning outcome. So, the Plaintiffs contend, DFS is gambling as the Legislature has defined it in the Penal Law.

The Legislature’s opposite conclusion in the IFS Law, they argue, lacks a rational basis and shouldn’t be accorded the presumption of constitutionality on which the State strongly relies. Attacking the Legislature’s rationale, the Plaintiffs first argue that DFS is a game of chance. There is no real distinction between the fantasy DFS game and betting on a real sports contest, the Plaintiffs contend, because the performances on which DFS is based are real life athletes in real games on any given night over whom the DFS players have absolutely no control. An athlete they choose for their DFS team could get hurt in the first inning, or have an off night shooting the ball, or could miraculously score the game winning goal in the Miracle on Ice, but in the end, the DFS player’s performance is all based on things well outside of his or her control.  There’s unquestionably a material degree of chance involved, they contend. And just like poker, the mere fact that the players use their skill to play their hands, or for DFS to assemble their teams, doesn’t eliminate that material degree of chance.

But even if DFS didn’t involve a material degree of chance, as the Legislature found and the State contends on this appeal, the Plaintiffs argue that DFS is nevertheless a wager on future contingent events over which the DFS players have no control, and so it is prohibited gambling. As the Plaintiffs put it, “it is indisputable that the outcome of any IFS contest must inevitably be based upon a future contingent event—the performance of real-life athletes in real-life games. It is equally indisputable that an IFS contestant has absolutely no control over how those athletes will perform in those games, as the State itself has stipulated” (Plaintiffs’ App Div Brf, at 47). Indeed, the Plaintiffs argue, the mere fact that those real life players are being used in a fantasy game doesn’t magically transform the bets on their performances from gambling to not gambling. Supreme Court, therefore, properly declared the IFS Law unconstitutional, the Plaintiffs assert.

The New York Attorney General’s Prior Admissions

Unsurprisingly, the Plaintiffs support much of their argument with citations to the New York Attorney General’s position and public statements that DFS is gambling prohibited by the New York Constitution in People v DraftKings. Back before the adoption of the IFS Law, the Attorney General commenced criminal proceedings against DraftKings and FanDuel for what the Attorney General claimed was illegally offering DFS games that constituted prohibited sports betting. In particular, the Attorney General told the New York Daily News:

Daily fantasy sports is much closer to online poker than it is to traditional fantasy sports … FanDuel and DraftKings take a bite out of every bet. That is what bookies do, and it is illegal in New York … In fact, as our court papers lay out, these companies are based on business models that are identical to other forms of gambling . . . Consider the final moments of a football game where the outcome has been decided and the winning quarterback takes a knee to run out the clock and assure victory. Let’s say it’s Eli Manning, and the Giants are defeating the Eagles or the Cowboys. Statistically, this play would cost the quarterback one yard – a yard that could make the difference between someone on DraftKings or FanDuel winning or losing tens of thousands of dollars. What did that have to do with the bettor’s skill? It’s the classic risk involved in sports betting. Games of choice involve some amount of skill; this does not make them legal. Good poker players often beat novices. But poker is still gambling, and running a poker room – or online casino – is illegal in New York (Plaintiffs’ App Div Brf, at 50).

Throughout the criminal proceedings, the Attorney General took a strong position that DFS was prohibited gambling, for many of the same reasons that Judge Connolly invalidated the IFS Law. The Plaintiffs now use the Attorney General’s own arguments as evidence that DFS remains the same kind of banned gambling that it was then. Indeed, quoting from a former Attorney General’s opinion, the Plaintiffs attempt to equate DFS to straight sports betting, which the Attorney General has long held needed a constitutional amendment to be authorized.

If DFS Looks Like Gambling and is Regulated Like Gambling, It Must be Gambling

What do they say about ducks? If it looks like a duck, and quacks like a duck, then it’s a duck. Well, that’s how the Plaintiffs frame their third argument for why DFS is gambling banned by the New York Constitution.

Listing off a number of factors that make DFS look like gambling, the Plaintiffs cite to the bets on real life athletes in real life games over whom the DFS players have no control, that the DFS operators rake a piece of the prize pool, that the Legislature put the IFS within the Racing, Pari Mutuel Wagering and Breeding Law where other forms of gambling are regulated, and that the law offers protections for “compulsive” players, aka problem gamblers. Although the Legislature excluded “registered” DFS operators from the criminal prohibition, the mere fact of registration does not change the underlying nature of the DFS game. DFS is still DFS whether or not the operator is register, and it’s still gambling, the Plaintiffs argue.

The Legislature Was Not Free to Exclude DFS From the Definition of Gambling

Even though the term “gambling” is not defined in Article I, § 9 of the New York Constitution, that does not grant the Legislature unlimited license to define the term in any manner it wishes, the Plaintiff argue. Words must be construed to have their ordinary meanings, and thus “the Legislature [could not] ignore certain kinds of gambling, let alone pass laws to enable rather than to prevent it, as it has done here . . . Otherwise, as Supreme Court pointed out in this case, the prohibition against gambling, a protection embodied in the Bill of Rights in Article I of the New York Constitution, would exist only at the sufferance of the Legislature” (Plaintiffs’ App Div Brf, at 61-62).

From the 1894 addition of the constitutional ban on gambling, the Legislature and the Attorney General have always understood that sports betting is illegal gambling. DFS is no different than sport betting, because the bets are still placed on real life performances over which the DFS players have no control. Thus, it too is illegal gambling, and the Legislature wasn’t free to ignore over 100 years of history to find otherwise. Indeed, the Plaintiffs argue,

Courts are not required to stand by helplessly while the Legislature interprets the Constitution any way it wants. The difference between what Plaintiffs and the State cite as precedent turns on the distinction between the “interpretation” versus the “implementation” of a constitutional mandate. It is the Judiciary’s sole prerogative to interpret “gambling”; it falls to the Legislature to implement laws to prevent it. Thus, the determination on whether daily fantasy sports falls within the definition of “gambling” is for the Judiciary, not the Legislature, to decide. Supreme Court properly interpreted the term (Plaintiffs’ App Div Brf, at 68).

Plaintiffs’ Cross Appeal

Finally, Plaintiffs argue on their cross appeal of Judge Connolly’s decision that he also should have declared the Legislature’s attempt to decriminalize DFS without substituting some other penalty unconstitutional. As the Plaintiffs view the constitutional commands, Article I, § 9 requires the State to pass laws to prevent gambling. The removal of the criminal sanction in the IFS Law is permitted, therefore, only if the Legislature substitutes some other penalty in its place.  “It could, for example, have enacted a civil law prohibiting gambling and imposing civil fines to prevent any person or entity from operating IFS. Instead, it left a statutory and regulatory vacuum by decriminalizing gambling while not substituting something else in its place to prevent it” (Plaintiffs’ App Div Brf, at 70).

This legal limbo, where DFS has been decriminalized but still violates the constitutional ban, cannot withstand scrutiny, the Plaintiffs’ argue. Either the IFS law falls in its entirety, or it doesn’t. As an example, the Plaintiffs point out that DraftKings and FanDuel are still operating with impunity, and without any statute or regulation to stop them from continuing to violate the Constitution. “This is precisely why Chapter 237 should be struck down in its entirety, and not just partially, as Supreme Court did. The Legislature did not exclude IFS from the Penal Law definition of ‘gambling’ because it intended to substitute in its place some alternative measure to prevent it. Quite to the contrary, it inserted the exclusion for the obvious and sole purpose of enabling IFS to occur, so that the State could regulate and tax it. This is precisely why the exclusion is unconstitutional because it had the effect—an effect that was the Legislature’s deliberate objective—to enable that which is constitutionally prohibited” (Plaintiffs’ App Div Brf, at 72).

Next up in my run through the Appellate Division briefs, a not so surprising application for two DFS titans to participate in the appeal.

 

 

Court of Appeals Holds Commercial Contracts Can Waive Right to Seek Declaratory Judgment to Interpret the Terms of the Agreement and Yellowstone Relief

Contracts are often ambiguous. They are usually long, with many terms, and you never know how they will apply in circumstances that the parties never contemplated. That’s why the power to go to court to ask for an interpretation of the agreement and how it applies to the unique facts that the parties face has been so important in New York, the self-proclaimed commercial center of the world.

Not anymore, says the majority of the Court of Appeals in 159 MP Corp. v Redridge Bedford, LLC (No. 26). The right to freedom of contract trumps all. And sophisticated parties with counsel are allowed to agree to waive the right to seek a declaratory judgment to interpret the terms of a commercial contract if they do so in the agreement. Public policy can’t invalidate the express terms of the waiver, and a suit seeking to interpret the agreement and a stay of the period in which to cure any default while the court decides the issues—better known as a Yellowstone injunction—must be dismissed.

In 159 MP Corp., commercial tenants executed two 20-year commercial leases to occupy a building in Brooklyn and run a grocery store. The leases were typical boilerplate commercial agreements, but had been revised by handwritten additions and deletions, including this paragraph in the lease rider:

159 MP - 1

After the building owner sent notices of default to the tenants, the tenants commenced a declaratory judgment action seeking a declaration that they hadn’t defaulted under the leases and a Yellowstone injunction to prohibit the owner from terminating the leases or bringing removal proceedings while the court decided the issues. The owner, however, moved to enforce the waiver clause, arguing that the action should be dismissed.

Supreme Court, Kings County denied the Yellowstone injunction and dismissed the complaint, holding that the clear terms of the waiver clause prohibited the declaratory judgment action. The Court held that the waiver didn’t prevent an action for damages or prohibit the tenants from raising any interpretation arguments in defense of a removal proceeding, but just precluded this action for declaratory relief.

The Appellate Division, Second Department affirmed, with one Justice dissenting, on this issue of first impression in New York. Like Supreme Court, the Appellate Division agreed that the waiver should be enforced according to its terms, and noted that the tenants were not left without available relief. The lone dissenting Justice, however, argued that the waiver clause is void as against public policy because “the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants, providing a mechanism for a commercial tenant to protect its valuable property interest in the lease while challenging the landlord’s assessment of its rights” (159 MP Corp. v Redbridge Bedford, LLC, 160 AD3d 176, 204 [1st Dept 2018] [Connolly, J., dissenting]).

On appeal, the Court of Appeals majority too held that the waiver clause should be enforced according to its plain terms. In doing so, the majority rejected the tenants’ argument that the waiver clause violates New York public policy. The public policy, the majority emphasized, actually cuts the other way in favor of the freedom of contract: “In keeping with New York’s status as the preeminent commercial center in the United States, if not the world, our courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of the common law” (Opn, at 6). Thus, the majority held, “because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after ‘balancing’ the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger” (id. at 8). According to the majority, that balancing in most cases, including this one, weighs in favor of the freedom of contract.

159 MP - 2159 MP - 3

The availability of a Yellowstone injunction, the majority noted, is premised on having a valid action. Without one, the request for a stay is academic. But, the majority emphasized, a Yellowstone injunction isn’t necessary because a commercial tenant can’t be evicted from a property without first being able to defend its rights in a removal proceeding, where it will have the chance to argue about how the agreement should be interpreted and that it didn’t breach the lease. Thus, the majority reasoned, “there is no strong societal interest in the ability of commercial entities to seek such a remedy that would justify voiding an unambiguous declaratory judgment waiver negotiated at arm’s length, merely because this incidentally precluded access to Yellowstone relief” (Opn, at 16).

Judge Rowan Wilson, in dissent, would have voided the waiver clause on public policy grounds. As Judge Wilson put it,

159 MP - 4

Judge Wilson forecasts that the majority’s prioritization of the freedom of contract over access to the courts for interpretation of commercial agreements will incentivize building owners to “include a waiver of declaratory and Yellowstone relief in their leases as a matter of course. Those clauses will enable them to terminate the leases based on a tenant’s technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations” (Dissenting Opn, at 2-3). Those dire consequences of the majority’s departure from the longstanding New York rule, he argues, are not worth the cost.

The Court of Appeals’ opinion can be found here.

 

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