In the Matter of the Complaint Against

ANDREW R. AMADA
           and
POWER PICK, INC.
          both d/b/a
POWERPICK
8024 N. 24th Avenue #309
Phoenix, AZ 85021-4828
          and at
P.O. Box 37467
Phoenix, AZ 85069-7467

P.S. Docket No. FR 97-423

APPEARANCE FOR RESPONDENT:    Charles E. Buri, Esq.
                                                           Friedl, Richter & Buri, P.A.
                                                           6909 East Greenway Parkway, Suite 200
                                                           Scottsdale, AZ 85254-2149

APPEARANCE FOR COMPLAINANT:  Sara K. Kantorik, Esq.
                                                           Civil Practice Section
                                                           United States Postal Service
                                                           475 L’Enfant Plaza, SW, Room 6249
                                                           Washington, D.C. 20260-0004

The administrative proceedings in this case were initiated on November 3, 1997, when the General Counsel for the United States Postal Service filed a Complaint alleging that Andrew Amada and PowerPick, Inc. violated 39 U.S.C. §3005 by using the mail to conduct a lottery.⁽¹⁾ To prevent PowerPick from conducting business while the administrative proceedings were pending, the Postal Service filed for, and was granted, a preliminary injunction under 39 U.S.C. §3007, by the United States District Court for the District of Arizona. Respondents appealed that injunction to the United States Court of Appeals for the Ninth Circuit.

A hearing was held on the administrative case on March 10, 1998, and an Initial Decision was issued on September 30, 1998, holding that Respondents' lottery pooling service constituted a lottery within the meaning of 39 U.S.C. §3005. Respondents filed a timely appeal to the Judicial Officer, United States Postal Service, and Complainant filed a reply. On January 12, 2000, while that appeal was pending, the Court of Appeals issued its decision on the appeal from the preliminary injunction. The Court of Appeals held that Respondents were not conducting a lottery, vacated the injunction and remanded with instructions to dismiss the complaint. United States Postal Service v. Amada, 200 F.3d 647 (9^th Cir. 2000).

On February 1, 2000, based on the Court of Appeals decision, Complainant filed a Motion to Dismiss the Complaint against Respondents. That motion was granted by the Judicial Officer on February 7, 2000. Respondents have now filed an application for attorney fees under the Equal Access to Justice Act, 5 U.S.C. §504.⁽²⁾ Complainant has filed a reply, opposing the application.

The Equal Access to Justice Act (EAJA), implemented by the Postal Service in 39 C.F.R. Part 960, provides for award of attorney fees and other expenses to a prevailing party in administrative proceedings before the Postal Service, if the applicant meets certain eligibility requirements, unless the Postal Service's position in the action was "substantially justified," or unless special circumstances exist that would make an award of fees unjust. 5 U.S.C. §504(a)(1), 39 C.F.R. §960.1 and §960.5(a).

There is no dispute in this case that Respondents are the prevailing party or that they meet the eligibility requirements. Nor does the Postal Service argue that any special circumstances exist. The issue is whether the Postal Service's position was "substantially justified."

In elaborating on the meaning of this term, the United States Supreme Court stated:

"We are of the view, therefore, that as between the two commonly used connotations of the word 'substantially,' the one most naturally conveyed by the phrase before us here is not 'justified to a high degree,' but rather 'justified in substance or in the main' - - that is, justified to a degree that could satisfy a reasonable person. That is no different from the 'reasonable basis both in law and fact' formulation adopted by the Ninth Circuit and the vast majority of other Courts of Appeals that have addressed this issue." Pierce v. Underwood, 487 U.S. 552, 565, 108 S. Ct. 2541, 2550, 101 L. Ed. 490 (1988).

The Court added, "But a position can be justified even though it is not correct, and we believe it can be substantially (i. e., for the most part) justified if a reasonable person could think it correct, that is, if it has a reasonable basis in law and fact." Id. at 566 n. 2. This standard has since been applied throughout the Federal judiciary. Morgan v. Perry, 142 F.3d 670, 684 (3d Cir. 1998); Gilbert v. Shalala, 45 F.3d 1391, 1394 (10^th Cir. 1995); Marcus v. Shalala, 17 F.3d 1033, 1036 (7^th Cir. 1994); Beta Sys., Inc. v. United States, 866 F.2d 1404, 1406 (Fed. Cir. 1989). The Government does not lose an EAJA claim simply because it lost a case on the merits. Morgan v. Perry, supra at 685; Cooper v. U.S. Railroad Retirement Board, 24 F.3d 1414, 1416 (D.C. Cir. 1994). The Postal Service has the burden of proving that its position was substantially justified. Gilbert v. Shalala, 45 F.3d 1391, 1394 (10^th Cir. 1995); Cummings v. Sullivan, 950 F.2d 492, 495 (7^th Cir. 1991); Russell v. Sullivan, 930 F.2d 1443, 1445 (9^th Cir. 1991); Naekel v. DOT, 884 F.2d 1378, 1379 (Fed. Cir. 1989).

There is no dispute over the essential facts of this case. PowerPick operates a lottery pooling service for persons who wish to participate in playing Lotto and Powerball games conducted by the Arizona Lottery. The Arizona Lottery is run by the State of Arizona, as authorized and regulated by state statutes.⁽³⁾ PowerPick’s players have a choice of being placed in pools of 25 or 50 players. PowerPick offers a variety of options in terms of the amount of money players wish to bet and which games they wish to play, but the basic concept is that each player will share equally, with other players in his/her pool, any prize won by that pool. The advantage to players is that each player has many more chances to win, albeit a smaller amount, than if the player just bought tickets individually.

PowerPick charges a fee for its services. For example, from players who wish to participate in a 50-player pool, with a total of eight drawings over a four-week period, PowerPick will collect $22.00 per person - a total of $1,100.00. PowerPick will buy a total of 256 tickets ($256.00), 32 for each drawing. The remainder of the money goes toward office expenses, general overhead, promotional activities, and profit. For any pool that is not filled, i.e., does not have exactly 25 or 50 players, PowerPick uses its own funds to buy enough tickets to fill the pool. PowerPick would then keep its proportionate share of any winnings. The services provided by PowerPick include assigning players to specific pools, selecting lottery numbers to be played (this is done by PowerPick’s computer), purchasing the lottery tickets from a licensed Arizona Lottery vendor, holding the tickets, keeping records of which tickets are purchased for each pool, informing all players of the numbers they are playing in advance of each drawing, collecting winnings from the Arizona Lottery, keeping an account record for each player, and paying out winnings to the players. PowerPick also publishes a small, bimonthly newspaper for its players, featuring various promotional activities and news items.

PowerPick uses the United States mail for sending its newspapers and other information to customers, and for receiving payments from customers. PowerPick solicits business through newspaper advertisements and through its own bimonthly newspaper.

PowerPick has no control over what numbers are selected as winners in any drawing. Drawings are conducted by the Arizona Lottery. PowerPick is not affiliated with the Arizona Lottery, nor does it claim to be, and is not licensed to sell lottery tickets. The State of Arizona is aware of PowerPick’s activities and has never charged PowerPick with selling lottery tickets without a license.

PowerPick also provides several "bonuses" to its players. These are described in the PowerPick Player’s Handbook that is sent to each customer who responds to PowerPick’s solicitation. These bonuses are called "free" by PowerPick because there is no separate, identified cost to the customer, and they are available to all customers who buy into one of the pools. In order to obtain them, however, the customer must purchase an entry into one of the lottery pools. Included are a "Frequent Player Bonus" (extra lottery numbers, purchased by PowerPick and assigned to the account of one who qualifies as a "frequent player"); "Referral Bonus" (free play to a player who recruits a friend, if the friend places an order with PowerPick); "MegaPool Bonus" (extra Powerball tickets purchased by PowerPick and shared among all current players regardless which 25 or 50 player pool the customer is in); and "Scratcher Tickets" (small cards sold by the Arizona Lottery for $1 to $3, with a latex area to scratch off and reveal the prize, if any - PowerPick distributes some number of these cards to its customers, depending on the dollar amount of the customer’s order).

Complainant’s contention was that lottery pools, even though the pool operator does not control the drawings that determine winners, contain the three elements of a lottery - prize, chance and consideration - and, therefore, the operators are "engaged in conducting a lottery, gift enterprise, or scheme for the distribution of money or of real or personal property, by lottery, chance, or drawing of any kind, . .," within the meaning of 5 U.S.C. §3005.

Although there were no court decisions that addressed the legality of lottery pools, Complainant relied on several Postal Service Decisions that have held that lottery pooling services constitute lotteries within the meaning of 39 U.S.C. §3005. The Canadian Express Club, P.S. Docket No. 28/52 (P.S.D. December 23, 1991); Canadian Express Services, P.S. Docket No. 28/149 (P.S.D. December 30, 1988); Universal Life Church, P.S. Docket No. 7/62 (P.S.D. February 14, 1980); Thomas Giel d/b/a Florida Lotto Players, P.S. Docket No. 34/178 (I.D. October 20, 1989).⁽⁴⁾ Respondent's business is nearly identical to those in The Canadian Express Club and Canadian Express Services.

Whether a position has a reasonable basis in law is measured by the law as it existed, not by the law made in this case. Owen v. United States, 861 F.2d 1273, 1275 (Fed. Cir. 1988); Kay Manufacturing Company v. United States, 699 F2d 1376, 1379 (Fed. Cir. 1983). Until the Court of Appeals so ruled in this case, no court had held that lottery pools did not fall within the common law definition of a lottery.⁽⁵⁾ On the other hand, the Court of Appeals for the Second Circuit upheld the validity of a search warrant under the criminal lottery statute in a case involving some sort of lottery pooling enterprise, stating that "[T]here was clearly probable cause to believe that CEC was violating 18 U.S.C. §1302." United States Postal Service v. C.E.C. Services, 869 F.2d 184, 186 n. 1 (2d Cir. 1989). Also, of course, the District Court in the instant case found probable cause to believe Respondents were violating 39 U.S.C. §3005.

The rationale of the earlier Postal Service Decisions that held pooling services similar to PowerPick to be "engaged in conducting a lottery," is consistent with the legislative history of the portion of §3005 dealing with State lotteries. 39 U.S.C. §3005(d) provides:

Nothing in this section shall prohibit the mailing of (1) publications containing advertisements, lists of prizes, or information concerning a [State-conducted] lottery, (2) tickets or other materials concerning such a lottery within that State to addresses within that State ….

This subsection was written to permit State-run lotteries to operate. The following excerpt from the legislative history (Department of Justice testimony) suggests that it was intended to be a narrow exception to the general prohibition against lotteries:

In explaining the Department’s recommendations, the witness stated that the Department would not favor any change in the law which would have the effect of opening up the channels of commerce to individuals who would seize upon the existence of a State authorized lottery to "commercialize the process."⁽⁶⁾

The earlier Postal Service Decisions, and Complainant's initiation of action against the Respondents in this case, are consistent with avoiding commercialization of the process.

I find that Complainant's position was substantially justified. Respondents' application is denied.

Bruce R. Houston
Chief Administrative Law Judge

¹ 39 U.S.C. §3005 provides, in pertinent part, as follows:
(a) Upon evidence satisfactory to the Postal Service that any person, . . ., is engaged in conducting a lottery, gift enterprise, or scheme for the distribution of money or of real or personal property, by lottery, chance, or drawing of any kind, the Postal Service may issue an [appropriate] order . . ..
² Respondents also filed an application for attorney fees and expenses with the Court of Appeals. The Postal Service, represented by the U.S. Attorney, opposed this on the grounds that it was prematurely filed and that the Postal Service position was substantially justified. On March 1, 2000, the Court of Appeals denied the application without stating reasons.
³ Arizona Revised Statutes, Title 5, Chapter 5 (A.R.S. §5-501, etc.).
⁴ See also, Audit Office, P.S. Docket No. FOR 98-304 (P.S.D. August 25, 1998), and Fulfillment and Processing Center, P.S. Docket No. FOR 96-202 (P.S.D. August 30, 1996).
⁵ The Court of Appeals agreed with the Postal Service that the common law definition of a lottery used consistently by the courts - prize, consideration, and chance - was appropriate here, rejecting Respondents' argument that a more restrictive definition should apply. 200 F.3d 647 at 651.
⁶ 1974 U.S. Code Congressional and Administrative News 7007, 7011. See discussion in Universal Life Church, P.S. Docket No. 7/62 at 5-7 (I.D. August 31, 1979).