A Closer Look at the Paradise/Discovery Case

10 June 2004

Tropical Paradise, the Costa Rica-based company that operates popular online poker site paradisepoker.com, in April sued media conglomerate Discovery in a federal U.S. court for several charges, including breach of contract, unjust enrichment, conversion and negligent misrepresentation. The two companies had entered into a contract in October 2003 whereby Tropical Paradise would pay Discovery $3.85 million to advertise on Discovery's Travel Channel cable network and Web site. Discovery, however, canceled the contract only a few weeks later, and then refused to remit the unused funds to Tropical Paradise for fear that the U.S. government would hold Discovery accountable for aiding and abetting an illegal activity.

According to Tropical Paradise, the two companies signed a television advertising contract on Oct. 5, 2003, and the Travel Channel began broadcasting commercials for paradisepoker.com on Oct. 13. On Oct. 25, Discovery verbally advised Tropical Paradise that it was canceling all advertising associated with gaming activity, but "the parties mutually agreed that Discovery owed Tropical Paradise a refund of $3,249,042."

On Dec. 9, Discovery's vice president for legal affairs sent a letter to Tropical Paradise, stating that Discovery had received a grand jury subpoena and was concerned that "the government might view the payment of a refund to Tropical Paradise as a potential violation of federal money laundering statutes and could seek forfeiture." Discovery would therefore wait for assurance from the Justice Department that it was safe to refund the money.

Tropical Paradise, represented by Sanford M. Saunders and Richard A. Serafini of law firm Greenberg Traurig, filed its first complaint against Discovery on April 20, 2004 in a U.S. court for the District of Maryland, Greenbelt Division. Tropical Paradise said that at that point in time, it still believed that Discovery was in possession of the $3.25 million that should have been refunded to the company. But one month later, on May 20, the company learned that the FBI had seized the funds on April 6, two weeks before the filing of the original complaint.

On May 21, Tropical Paradise filed an amended complaint to address the now-realized fact that the money was no longer in Discovery's hands. Neither Tropical Paradise nor its legal team has been willing to comment on how the confiscation will affect its case or whether the company is considering legal action to retrieve the money from the U.S. government.

Discovery has opted not to comment as well.

The Contracts

Tropical Paradise claims that prior to signing the contract, Discovery provided guidelines to the company to insure that the ads could be legally purchased and aired in the United States. The complaint states: "Discovery used this professed expertise to induce Tropical Paradise to execute the advertising contracts." The guidelines established in the contract required that "the commercials could advertise the ability to access paradisepoker.com to learn the game of to play for free, and the commercials could not include visual, audio, or any implied references to actual gaming."

So the companies entered the contract. Tropical Paradise agreed to pay Discovery $3.5 million to air 308 30-second commercials on the Travel Channel during broadcasts of the program "World Poker Tour" over a six-month period. Tropical Paradise said, "The Television Contract contained a provision that allowed Discovery to cancel any online gaming deals with 24 hours notice, refunding any money assigned to the units for commercial air time, which would not be run as a result of the cancellation." Tropical Paradise paid the $3.5 million in full before the broadcasts began on Oct. 13.

Tropical Paradise entered an Internet contract worth $350,000 with Discovery iMedia on Oct. 14. The same guidelines applied to this contract, which stated that Discovery would run advertisements for paradisepoker.com on its Web site from Oct. 13 to March 28. The Internet contract also stipulated that Discovery iMedia would return to Tropical Paradise on a pro rata basis any unused funds should Discovery choose to cancel the advertising campaign.

The Charges

Tropical Paradise's complaint states that Discovery's vice president indicated to Tropical Paradise that it had been subpoenaed on Dec. 9 and had become concerned that a refund would constitute a federal violation. But Tropical Paradise argues that the grand jury began issuing subpoenas on Sept. 8th, more than two weeks before the signing of the contract. Surely, says Tropical Paradise, Discovery should have been aware of the Justice Department's concerns by the time of the signing, but still entered long-term contracts and assured Tropical Paradise that they were legal.

Tropical Paradise therefore charges two counts of breach of contract (one for the TV contract, one for the Internet contract) against Discovery for failing to refund the money for the unused portion of the contracts, as it stated it would do.

The third charge, unjust enrichment, alleges that Discovery enjoyed the retained an unjust benefit of $3.25 million by refusing to return the funds to Tropical Paradise.

Count Four, conversion, alleges that Discovery elected not to perform the services it was bound to under the contract.

The final two counts charge Discovery with negligent misrepresentation of the TV contract and the Internet contract. These charges allege that Discovery should have known the contract violated U.S. law, and the media giant therefore erred in assuring Tropical Paradise that it could legally advertise its product on the Travel Channel.

Zoom Out

On the surface, the case is a difficult legal battle, but the greater picture shows another advance of the U.S. Justice Department's efforts against I-gaming and its advertisers; it marks the first time ever that the government has seized funds from advertising, which is largely thought to be protected free speech.

"This is the first salvo by the federal government against the online gambling advertising industry," explained Lawrence Walters, an expert in I-gaming and freedom of speech law, "and it's important that this one comes out right because if the parties buckle under and they fall prey to the intimidation by the federal government, everyone else in the industry that seeks to advertise these services will be punished, and the government will be emboldened by any victory in these early stages."

Discovery could issue the challenge--the money was in their possession when confiscated--but Walters doesn't see that happening.

"I don’t get the sense that Discovery is going to put up much of a fight against the government, and that' the problem that we're running into in this whole issue--and that is finding a media giant that has a lot to risk, a lot at stake, and is willing to stand up to the U.S. government.

"It's their rights that are being violated. It's not necessarily the rights of the gambling industry; it's the media advertising rights that are being violated. It's going to take some company that is involved in advertising and the dissemination of media to stand up to the government. It might not be one of these big media giants because they do have a lot to lose. Besides, there are other sources of revenue and other industries that advertise, so it might have to be someone else that depends more heavily on the online gambling industry for its survival, like some gaming portal. That's a problem that we're seeing, and I wouldn't be surprised if a lot of these media giants buckle under and do whatever the federal government wants because they rely on the government for quite a bit of their survival."

Meanwhile, partypoker.com and ultimatebet.com continue to pay World Poker Tour, Inc. for the right to host World Poker Tour events on Travel Channel.

Click here to view a copy of Tropical Paradise's complaint against Discovery.

Bradley Vallerius

Articles by Bradley P. Vallerius, JD manages For the Bettor Good, a comprehensive resource for information related to Internet gaming policy in the U.S. federal and state governments. For the Bettor Good provides official government documents, jurisdiction updates, policy analysis, and many other helpful research materials. Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world.

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