Wake Forest Law Review

By Kelsey Mellan

On March 17, 2017, the Fourth Circuit issued a published opinion in Mason v. Machine Zone, Inc. a civil appeal of the district court’s dismissal of a Loss Recovery Statute claim. Plaintiff Mia Mason filed a class action complaint against Machine Zone, Inc. (“Machine Zone”), the developer of a mobile game entitled “Game of War: Fire Age” (“Game of War”). Mason alleged that she lost money participating in an unlawful “game device” – a virtual wheel that makes up a substantial part of Game of War. The district court dismissed Mason’s class action under FRCP 12(b)(6) for failure to state a claim. The Fourth Circuit subsequently affirmed the district court’s decision.

Facts & Procedural History

Machine Zone developed and operates Game of War, a popular video game that can be downloaded for free on mobile devices. Game of War is a strategy game in which players build virtual towns and armies, and “battle” each other in a virtual world. While it is free to play the game, players can purchase virtual “gold” at prices ranging from $4.99 to $99.99. Players can use this gold to “improve their virtual towns” and to obtain virtual “chips” for use during the Game of War “casino.”  This virtual casino is a game of chance in which players can use their virtual chips for an opportunity to obtain prices for use within the game by “spinning” a virtual wheel – a completely randomized feature of the game. The first time a player enters Game of War, he or she is entitled to one free spin of the wheel. However, after the player uses this free spin, must use chips to pay for each additional spin. If a player doesn’t have enough chips to spin, the player must use virtual gold to obtain more chips.

Players who spin the wheel have no control over the outcome of the spin and, thus, no skill on the part of the player influence what the outcome will be. Players obtain prizes from spinning the wheel. If a player wins enough prizes he or she may want to sell his or her account on “secondary markets” for real money. However, this sale on secondary markets, such as Amazon, would violate Machine Zone’s terms of service.

Mason started playing Game of War on her cell phone in early 2014. After using her complimentary spin of the virtual wheel, Mason began purchasing virtual gold in order to obtain more chips to continue spinning the wheel to earn prizes. Between early 2014 and January 2015, Mason spent over $100 to participate in the casino.

Mason filed a class action in the District of Maryland under Maryland’s Loss Recovery Statute. She alleged that she lost money playing an unlawful “game device” and sought “full disgorgement and restitution of any money [Machine Zone] has won” from Mason and similarly situated Maryland residents. The district court determined that Mason failed to state a claim under the Loss Recovery Statute because “she did not lose money” in the virtual casino – and thus, the court dismissed Mason’s complaint.

Plaintiff-Appellant’s Claim Under Maryland’s Loss Recovery Statute

Mason argues that the district court erred in dismissing her class action under FRCP Rule 12(b)(6) because she lost money while playing in the virtual casino – which she claims is an unlawful “game device” under the Loss Recovery Statute. The Fourth Circuit reviewed the district court’s dismissal de novo, accepting Mason’s well-plead allegation as true and drawing all reasonable inferences in her favor.

Maryland’s Loss Recovery Statute states “a person who loses money at a [prohibited] gaming device…may recover the money as if it were a common debt.” The statute defines gaming device as “a game or device which money or any other thing or consideration of value is bet, wagered, or gambled,” and includes a “wheel of fortune.” Pursuant to the Maryland state case, F.A.C.E. Trading, Inc. v. Todd, the Fourth Circuit was required to interpret Maryland’s gambling statutes in a manner that “gives validity not only to the word, but to the spirit of the law. For the purposes of this appeal, the Fourth Circuit assumed that the virtual casino was a prohibited “gaming device” and agreed with the district court that Mason did not lose any money when spinning the wheel in the virtual casino. Therefore, she failed to satisfy a required element for stating a claim under the Loss Recovery Statute.

In deciding whether the loss of virtual money fell under the Loss Recovery Statute, the Fourth Circuit looked to Cates v. State, a Maryland case which noted that the predecessor to the Loss Recovery Statute encompassed a public policy “not to help one who loses at gambling, but to discourage illegal gambling by putting the winner on notice that the courts will force him to disgorge his winnings.” In the case of Game of War, Machine Zone did not “win” any money. Rather, Mason participated in the virtual casino by “spinning” the virtual wheel where no money was at stake – only virtual prizes and chips. Thus, Mason could not have lost or won money as a result of her participation in the virtual activity. Moreover, the Fourth Circuit determined that the fact that Mason could sell her account on “secondary markets” was irrelevant – as the entire account would be sold, not just the virtual prizes or chips.  Thus, the Fourth Circuit rejected Mason’s contention that the existence of a secondary market showed that she lost money as a result of her participation in Game of War’s virtual casino.

 Disposition

 Accordingly, the Fourth Circuit affirmed the district court’s conclusion that Mason did not “lose money” within the meaning of the Loss Recovery Statute as a result of her participation in the Game of War casino.

DSC03525-B

By Paige Topper

On December 23, 2015, in the civil case of Calderon v. GEICO General Insurance Co., a published opinion, the Fourth Circuit affirmed a district court’s decision classifying the employee position of Investigator in an insurance company as non-exempt from the Fair Labor Standards Act’s (“FLSA”) provision regarding overtime pay.

Administrative Exemption Under FLSA

Under the FLSA, employers are generally required to pay overtime to employees for each hour worked in excess of a 40-hour week. However, there are exemptions to this general rule. The exemption at issue in this case is § 213(a)(1), which exempts “any employee employed in a bona fide executive, administrative, or professional capacity.” Here, the plaintiffs argued that they did not fall within this exemption and thus were entitled to overtime pay while the defendant, GEICO, claimed that the employees were in fact exempt from receiving overtime pay because their title of “Investigators” falls under this provision.

GEICO’s Special Investigation Unit

The heart of this case lies in the distinction between GEICO’s Claims Adjusters and its Investigators working in GEICO’s Special Investigations Unit (“SIU”). Claims Adjusters had the primary job of adjusting insurance claims by investigating, assessing, and resolving the claims. This position required the employees to determine how much GEICO will pay on a claim and then negotiate a settlement if necessary.

On the other hand, Investigators within the SIU, while still a part of GEICO’s Claims Department, principally focused on identifying claims that are potentially fraudulent. Investigators had a set list of procedures for determining whether a claim is fraudulent. Among these procedures, Investigators had to submit interim reports and a final report to their Supervisor for review.

GEICO Classified Investigators as Exempt Under the FLSA

GEICO has continuously classified its Investigators as exempt under the FLSA provision requiring the employer to pay overtime. Specifically, the company examined the Investigators’ classification in 2004 in light of a court decision that GEICO had misclassified a different position as exempt. At that time, the Senior Vice President and the Senior Vice President of Human Resources concluded that despite the court’s decision as applied to Auto Damage Adjusters (which was later reversed) the Investigators were still properly exempt. In 2007, GEICO reviewed the applicability of exemptions for its various employee classifications. GEICO again concluded that the Investigators were properly exempt under the administrative exemption of the FLSA.

In 2010 the named plaintiff, Samuel Calderon, filed suit against GEICO alleging that GEICO improperly classified the Investigator position as exempt from overtime pay under the FLSA. The current case is a class action including all individuals who were or had been employed by GEICO as Investigators within three years of the filing of this action. An additional class action claim was added for unpaid overtime pay under New York’s Labor Law.

This was the second time the Fourth Circuit heard this case. Initially, the district court granted plaintiffs’ motion for partial summary judgment and denied GEICO’s motion for summary judgment, finding that as a matter of law GEICO’s classification of Investigators did not fall within the FLSA’s administrative function exemption. Then the parties filed cross-motions for summary judgment on several remedy issues. The district court determined that because GEICO acted in good faith and not willfully the statute of limitations for plaintiffs’ claims was only two years. Furthermore, the district court held that the plaintiffs were not entitled to liquidated damages or prejudgment interest.

Upon appeal, the Fourth Circuit concluded that it lacked jurisdiction because there was no final judgment, as the district court had not found all the facts necessary to compute the amount of damages awarded to the plaintiffs. Therefore, on remand the district court determined the amount of damages entitled to each plaintiff and entered judgment in favor of the plaintiffs. Both parties appealed again raising the same issues as their original appeals.

GEICO’s Classification of Investigators was Incorrect

GEICO argued that the district court erred in finding that Investigators were not exempt from the FLSA. However, the Fourth Circuit indicated that FLSA exemptions are to be narrowly construed against employers. The Fourth Circuit turned to the regulations to identify whether the plaintiffs were covered under the administrative exemption. The regulations indicate that the exemption covers employees (1) who are paid $455 a week or more, (2) whose primary duty is the performance of office work that is directly related to the management of general business operations of the employer, and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to significant matters.

The Court determined that plaintiffs were entitled to summary judgment because their positions as Investigators were not directly related to the management of GEICO’s general business. Specifically, the Fourth Circuit explained that the directly related element is met when an employee performs work directly related to assisting with the running or servicing of the business. Here, the Investigators’ primary responsibility was too far removed from GEICO’s management or general business operations to satisfy the second element. The Investigators had no supervisory responsibility and they did not recommend or develop GEICO’s business policies with regards to the claims under investigation. The Fourth Circuit concluded that although the Investigators work was important to GEICO, the directly related element hinges on the nature of the work and not the outcome of that work.

The Fourth Circuit looked to both FLSA regulations and Department of Labor opinion letters to support its conclusion. Furthermore, the Court found unpersuasive GEICO’s argument that Investigators nevertheless performed some of the same duties that Claims Adjusters perform and were thus exempt. The Court countered this argument by pointing out that the title of Claims Adjuster alone does not warrant an exemption—the directly related element must be determined on a case-by-case basis. Second, while the Court acknowledged that the Investigator position may have duties that support GEICO’s claims-adjusting process, this has to do with the ultimate consequence of the position rather than the nature of the work, which is the true focus for the directly related element.

Plaintiffs’ Arguments over Remedies

Next, the Fourth Circuit addressed the plaintiffs’ various complaints regarding the remedies awarded to them. First, the plaintiffs argued that the district court erred in determining that GEICO did not act willfully under the FLSA. Whether a party acted willfully in violation of the FLSA impacts the statute of limitations. If the violations were not willful then the limitations period is two years, but if the violations were willful then the period is extended to three years. The Fourth Circuit concluded that due to the close and complex nature of the elements at issue in this case, GEICO did not act willfully in deciding to exempt Investigators from overtime pay.

Second, the plaintiffs alleged that the district court erred in its calculation of compensation to be awarded to the plaintiffs. Specifically, the plaintiffs claimed that there was no agreement between them and GEICO to receive straight-time pay for all hours worked in a given workweek. The Fourth Circuit determined that although the plaintiffs did not always work the same number of hours in a day, they received fixed salaries for the many years that the plaintiffs worked for GEICO. Therefore, an agreement for straight-time pay had been established.

Third, the plaintiffs contended that the district court erred in its denial of plaintiffs’ request for liquidated damages. Although the FLSA provides for an award of liquidated damages, a district court may refuse the award if the employer showed that it acted in good faith. The Fourth Circuit found that, again because the issue was very close and GEICO reviewed the classification on multiple occasions, the district court was allowed to refuse to award liquidated damages.

Finally, the plaintiffs argued that the district court abused its discretion in declining to award prejudgment interest. On this final issue, the Fourth Circuit agreed with the plaintiffs, noting that under the FLSA prejudgment interest is typically necessary, in the absence of liquidated damages, in order to make the plaintiff(s) whole.

Fourth Circuit Affirmed in Part and Denied in Part

As a result of statutory interpretation and supporting authorities, such as the opinion letters, the Fourth Circuit concluded that GEICO misclassified Investigators as exempt under the FLSA for overtime pay and thus affirmed the district court’s grant of plaintiffs’ motion for partial summary judgment. The Fourth Circuit further affirmed the district court’s decisions on the statute of limitations, the calculation of compensation, and the denial of liquidated damages. The Court reversed and remanded on the last issue of awarding prejudgment interest to the plaintiffs.