A state appeals panel has ruled courts should take another look at whether the city of San Jose exceeded its constitutional authority in levying and distributing fees on so-called cardroom gambling parlors.
Sutter’s Place, which operates Bay 101 Casino, sued San Jose and its Division of Gaming Control, alleging an annual fee is an unconstitutional tax the city imposed without voter approval and a violation of federal due process rights. There is only one other such business in San Jose, Casino M8trix, according to court documents.
In a 2018 bench trial, Santa Clara County Superior Court Judge Paul Bernal concluded the fee is reasonably linked to the city’s regulatory costs. After a three-year stay for settlement negotiations, Sutter’s Place continued challenging the ruling before the California Sixth District Appellate Court.
California Sixth District Appellate Justice Adrienne Grover
| California Courts of Appeal
Justice Adrienne Grover wrote the panel’s opinion, filed Aug. 30; Justices Mary Greenwood and Cynthia Lie concurred.
On appeal, Sutter’s Place argued Judge Bernal didn’t fairly scrutinize the fee, improperly excluded expert testimony and should’ve allowed a separate trial on the due process challenge to the fee itself.
According to court records, both Bay 101 and Casino M8trix have since June 2010 been allowed to operate 49 card game tables and stay open around the clock. Each pays around $8 million per year through a voter approved special income tax, a permit fee of roughly $1,500 and a cardroom regulation fee.
“The amount of the cardroom regulation fee changes each fiscal year and is allocated equally between the two cardrooms,” Grover wrote. “For the seven fiscal years that are the basis of this lawsuit, (Sutter’s Place) paid defendants a cardroom regulation fee between $826,871 and $1,012,142 per year.”
The city maintains it sets the regulation fee at the start of each fiscal year with a goal of covering its costs and nothing more, noting it absorbs any expenses that exceed the initial estimate. Among Judge Bernal’s findings supporting the city’s position was that the regulations allow both entities an “otherwise prohibited gambling business, protected from further outside competition.” He granted the city more than $44,000 in court costs but denied its request for legal fees.
San Jose didn’t dispute the framing of the fee as a tax but argued it falls under a state law exception for reasonable regulatory costs. The panel said Bernal “failed to address the prescribed scope of the exception” because a government is obligated to show how its costs align with activities permissible under state law, and further said that error prejudiced the overall ruling. However, the panel didn’t completely accept the casino’s argument that everything the city calls a reasonable cost falls outside the exemption.
“On remand,” Grover wrote, “the trial court must review specific activities and associated costs within the four categories plaintiff has identified to determine whether they relate to issuing licenses and permits; performing investigations, inspections and audits; or the administrative enforcement and adjudication thereof.”
The panel did say Bernal properly evaluated the way San Jose allocated the fees between the two businesses and found the exclusion of certain testimony from a Sutter’s Place expert witness was appropriate and, even if it were a judicial error, ultimately harmless to the outcome.
On remand, the panel explained, San Jose bears the burden of demonstrating which fee costs are permitted under state law, which means Sutter’s Place might not be able to recover a complete refund. If a new trial results in a determination some portion of the fees weren’t permitted, Sutter’s Place could then be entitled to a trial to pursue remedies under its due process claims, such as a court order forcing the city to change course going forward.
Grover explained Sutter’s Place cannot “argue that the amount of any valid charge imposed in the relevant years exceeded the reasonable costs of the governmental activity, as plaintiff has not properly raised that argument on appeal.”
Because they reversed Bernal’s judgment, the panel also reversed the award of court costs and said that issue can resurface once a new trial results in a prevailing party.
Lawyers from the firm of McManis Faulkner represented Sutter’s Place.
San Jose is represented by the office of City Attorney Richard Doyle.
The city did not respond to a request for comment.