1 District Judge of the Eastern District of Texas, sitting by

designation.

1 United States Court of Appeals,

Fifth Circuit.

No. 96-21074.

Scott WENNER, Plaintiff-Appellant,

and

BDM Enterprises, Inc., also known as Heart's Discount Liquor,

Intervenor Plaintiff-Appellant,

v.

TEXAS LOTTERY COMMISSION, Anthony Sadberry, Richard Daly, Jan

Hart, Nora A. Linares, and Linda Cloud, Defendants-Appellees.

Sept. 30, 1997.

Appeals from the United States District Court for the Southern

District of Texas.

Before DUHÉ and BARKSDALE, Circuit Judges, and COBB, 1 District

Judge.

HOWELL COBB, District Judge:

This suit arose after the Plaintiff purchased a winning Texas

lottery ticket and the defendants refused to honor it. The

Plaintiff filed suit in the federal district court for the Southern

District of Texas asking the court to order performance. The

district court granted summary ju dgment for the defendant on

grounds that the purchase of the ticket was illegal under the

Violent Cri me Control and Law Enforcement Act of 1994 and

therefore, the contract resulting from the purchase of the ticket

was unenforceable. For reasons stated below, we disagree with the

district court.2 I. HISTORY AND BACKGROUND

Lotteries in various forms have been a part of the American

life since colonial times. Among the beneficiaries of early

colonial lotteries were such notable institutions as Harvard and

Yale Univ ersities. However, until the early 1980's, States have

traditionally been suspicious of lotteries believing them to be

potentially injurious to their citizens. Congress has long

supported state efforts to closely regulate lotteries or ban them

entirely. State attitudes toward lotteries began to change in part

because of taxpayer resistance to the imposition of new taxes and

state needs for new sources of revenue. A substantial majority of

states have now enacted some form of state lottery. In 1992, Texas

established a state lottery which is operated by the Texas Lottery

Commission (TLC). This case arose when the TLC refused to honor a

winning lottery t icket bought through the services of a private

corporation by an out-of-state player.

Before 1994, the sa le of lottery tickets in interstate

commerce was controlled by: 1) 18 U.S.C. § 1084(a), which made it

illegal for one engaged in the business of betting or wagering to

knowingly use a wire facility for transmitting bets or wagers in

interstate commerce; 2) 18 U.S.C. § 1301, which made it illegal to

physically carry lottery tickets in interstate commerce; and 3) 18

U.S.C. § 1953, which made it illegal to transport wagering

paraphernalia in interstate commerce. These code sections created

a web which, under most circumstances, adequately protected state

lottery monopolies. However, Pic-A-State, a Pennsylvania2 The loophole allowed an entity engaged in this business to

operate as follows:

! Purchaser(s) in State A would " contract" with the local Pic-AState outlet for the purchase of lottery ticket from State B.

! Purchaser(s) gives Pic-A-State numbers, the cost of the ticket(s)

and commission (service charge), and receives claim checks for

the actual lottery tickets.

! Pic-A-State, acting as an agent for Purchaser(s) gathers all

orders for State B lottery tickets on a computer disk and

transmits the contents of the disk to a Pic-A-State agent in

State B.

! Pic-A-State wires the purchase money for the tickets to its agent

in State B.

! Pic-A-State's agent in State B fills out the official playslips

and buys the lottery tickets using money form Pic-A-State's

clients in State A.

! Pic-A-State's agent in State B holds the lottery tickets in State

B, they never cross state lines.

If purchaser wins he claims the prize in accordance with

the local lottery commission's rules. This mode of operation

ensured the lottery paper never left the state, the mails were

not used, and a wire facility was not used for ordering

lottery tickets, hence no violation of federal law. When done

correctly, the purchase transactions are totally transparent

to the local lottery commission's selling agent and because

all local state lottery codes and rules are fol lowed, there

were no violations of state law that could render a winning

ticket invalid.

3 Corporation with its principal place of business in New Jersey, was

able to exploit a loophole 2 in this web by creating a computer

network between its agents in every lottery state and transmitting

its customer's lottery ticket orders over that netw ork. Pic-AState's operation enabled its customers to legally purchase a

chance in any lottery in the nation. Because Pic-A-State's

operation pot e ntially affected each state's stream of lottery3 From the state's standpoint, the main effect of this industry

was to place each of the state's lotteries in competition with each

othe r. This was done by shifting lottery ticket revenue from a

customer's state whose prizes were relatively small to a competing

state whose lottery prizes had grown large becau se of jackpot

roll-overs . From a player's perspective, it was far more

attractive to purchase a chance in the lottery that has the larger

prize.

A roll-over occurs when no winner emerges from the

preceding drawing. In many state lotteries, the jackpot is

combined with the next game's jackpot and so on until a winner

is drawn.

4 The states wanting to further exploit their lottery

monopolies by entering into multi-state compacts offering

multi-state games did n ot want competition from Pic-A-State.

Further, the states realized that direct control of a Pic-A-State

type of operation was either beyond their individual powers or that

the resultant state codes would likely be unwieldy and potentially

unenforceable thereby reducing flexibility for the states and the

players. We note this to illustrate the difficulty that the states

would have in trying to eliminate Pic-A-State with their own

regulations. Because the district court did not reach the merits

of these defenses neither do we.

4 revenues 3 and prevented each state from maintaining exclusive

control over its lottery, the states lobbied Congress to close this

l oophole by amending the code. 4 On September 13, 1994, Congress

enacted the Interstate Wagering Amendment as part of the "Violent

Crime Control and Law Enforcement Act of 1994". This amendment

closed the loopho le through which Pic-A-State was operating by

revising 18 U.S.C. §§ 1084, 1301, and 1953.

Pic-A-State promptly challenged the constitutionality of the

Interstate Wagering Amendment in the Federal District Court for the

Middle District of Pennsylvania (Pennsylvania Court). Pic-A-State

also sought to enjoin the enforcement of the revised code sections

until the merits of its challenge could be heard. Because, it met

the dual burdens of showing irreparable harm and the probability of5 We include the sovereign immunity defense only for the sake

of completeness. The magistrate judge disallowed the TLC's attempt

to raise this defense in an amended pleading and the district court

5 success on the merits the Pennsylvania Court enjoined the

Department of Justice (DOJ) f rom enforcing revised code sections

against Pic-A-State.

In November 1994, while the injunction was in ef fect, Scott

Wenner bought two Texas Lottery tickets for face value plus a

one-dollar per ticket service charge from a Pic-A-State outlet in

Croyden, Pennsylvania. One of Wenner's tickets matched all six

numbers drawn by the TLC, entitling Wenner to the gra nd prize of

$10,000,000. Wenner promptly claimed his prize. In January, 1995,

the TLC refused to honor Wenner's claim alleging violations of both

federal and Texas law.

In February 1995, the Pennsylvania Court denied Pic-A-State's

constitutional challenge to the Interstate Wagering Amendment and

dissolved the injunction. The Third Circuit affirmed and Pic-AState ultimately dissolved.

Wenner filed suit in the Southern District of Texas seeking a

declaratory judgment that his winning ticket was valid and an order

enforcing the contract arising therefrom. BDM Enterprises, which

sold the actual lottery ticket, intervened seeking its one-percent

seller's bonus. The TLC raised a number of defenses, most notably:

1)Wenner purchased his ticket in violation of the Int erstate

Wagering Amendment; 2) Wenner purchased his ticket in violation of

various sections of the Texas Lottery Code; and 3) Wenner's claim

against the TLC was barred by sovereign immunity. 5 Both partiesissued the summary judgment on other grounds before

reconsideration. The TLC raised this defense in its appellate

brief claiming a "de facto" pleading of sovereign immunity. It

offers no authority for the propriety of such a pleading practice,

nor could we find authority for it in the Federal Rules of Civil

Procedure or the case law. The district court, however, never

reached this defense and neither do we.

We also take this opportunity to point out that the TLC's

appellate brief was wholly inadequate. The TLC appears to

have done little more than plagiarize the d istrict court's

thoughtful and well written opinion and as such ne ver addressed the points Wenner raised on appeal.

6 moved for summary judgment.

The district court grante d summary judgment in favor of the

TLC. It reasoned that, despite the pendency of the injunction,

Wenner's purchase of the ticket throu gh Pic-A-State violated the

Interstate Wagering Amendment and therefore the resulting contract

was unenforceable. We disagree with the district court and

therefore reverse and remand.

II. DISCUSSION

This Court reviews the district court's grant of summary

judgment de novo. Melton v. Teachers Insurance & Annuity Assoc. of

America, 114 F.3d 557, 559 (5th Cir.1997) (citations omitted). We

view the evidence in the light most favorable to the non-movant in

applying the same standard as the district court. H ibernia Nat'l.

Bank v. Carner, 997 F.2d 94, 97 (5th Cir.1993). Summary judgment

sha ll be granted if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law. Fed.R.Civ.P. 56(a). The party seeking summary7

judgment has the initial burden of showing that there is an absence

of any genuine issue of material fact. Celotex v. Catrett, 477

U .S. 317, 325, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The

burden then shifts to the non-moving party who must show the

existence of a genuine issue of material fact. I d. It is incumbent

on the non-moving party to bring forth facts and not merely rest on

denials nor rely on the allegations within its pleadings. A nderson

v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2514-

15, 91 L.Ed.2d 202 (1986).

Consequently, a summary judgment will be vacated only if the

evidence viewed in the light most favorable to the non-movant shows

a genuine issue of mat erial fact or the moving party is not

entitled to judgment as a matter of law. C atrett, 477 U.S. at 323,

106 S.Ct. at 2553.

The dispositive issue in this case is whether the TLC was

entitled to judgment as a matter of law. There is no dispute as to

the material facts. The district court held that the TLC was

e ntitled to a judgment as a matter of law reasoning t hat the

contract arising from Wenner's ticket is unenforceable because the

purchase of the ticket violated federal law. S ee Southwestern

Underground Supply & Envtl. Serv., Inc. v. Amerivac, Inc., 894

S.W.2d 15, 18 (Tex.App.-Tyler 1982). The court reasoned that,

"[A]n applicant, which procured a wrongful issuan ce of the

temporary injunction, [cannot] claim to be absolved of its illegal

activity committed during the pendency of the wrongfully issued

i njunction." In granting the TLC's motion for summary judgment,6 There is no evidence in the record that the DOJ overcame or

could overcome that presumption.

8 the district court reasoned that, "A wrongfully issued preliminary

i n junction restraining temporarily the prosecution of a penal

statute does not render the statute itself invalid or "not in

force', ...." (emphasis added). We disagree because: 1) the

Pennsylva nia court issued the injunction in conformance with the

law of the Third Circuit and is therefore, presumptively correct; 6

and 2) a legally issued injunction froze the status quo which

existed prior to the enactment of the Interstate Wagering Amendment

of the Violent Crime Control and Law Enforcement Act of 1994

therefore, maintaining the legality of Pic-A-State's activities

performed while the injunction was in effect. Accordingly, the

contract arising from the ticket purchase was not unenforceable

because of an illegality, the TLC was not entitled to a judgment as

a matter of law, and therefore, the summary judgment must be

vacated.

A. Injunction

The district court has traditionally had the equitable power

to fashion any remedy necessary and appropriate to do justice in a

particular case. H echt v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587,

591, 88 L.Ed. 754 (1943). "The essence of equity jurisdiction has

been the power of the chancellor to do equity and to mould each

decree to the necessities of the particular case. Flexibility

rather than rigidity have distinguished it. The qualities of mercy

and practicality have made equity the instrument for nice9

adjustment and reconciliation between public interest and private

needs...." Id.

The district court in contemplation of exercising its

traditional equitable powers must weigh several factors to

determine whether a party's request for equitable relief should be

granted. I d. Among the factors that must be considered are: 1)

the probability of irreparable damage to the moving party in the

absence of relief; 2) the possibility of harm to the non-moving

party if relief is grante d; 3) the likelihood of success on the

merits; and 4) the public interest. United States v. Price, 688

F.2d 204, 211 (3rd Cir.1982); accord A.O. Smith Corp. v. F.T.C.,

530 F.2d 515, 525-26 (3rd Cir.1976).

On September 16, 1994, the Pennsylvania Court issued a TRO

barring the DOJ from enforcing revised code sections against Pic-AState. The court issued the order after Pic-A-State made a showing

of irreparable harm to its business and probable success on the

merits. Ten days later, the Pennsylvania Court, after hearing the

DOJ's motion to vacate and finding the circumstances and equities

unchanged, issued a preliminary injunction continuing the ban

against the DOJ's enforcement of the revised code sections against

Pic-A-State, its agents and employees until the challenge could be

heard on its merits.

In issuing a temporary injunction, the Pennsylvania District

Court specifically found that: 1) a denial of the equitable relief

sought by Pic-A-State would result in irreparable damage to Pic-AState's business; and 2) Pic-A-State was likely to succeed on the7 The Pen nsylvania Court noted that, in the absence of the

injunction Pic-A-State's business would likely have suffered

irreparable damage even if it prevailed on its challenge to the

amendment. The reason Pic-A-S tate sought the injunction was that

the revised code provisions placed Pic-A-State in the position that

to protect its business, it had to continue operating while waiting

for the court to decide the merits of its challenge. By operating,

Pic-A-State risked criminal prosecution under the rev ised code

sections in the event its challenge was unsuccessful.

Alternatively, Pic-A-State could have shutdown to avoid the risk of

criminal prosecution but, it very likely wo uld have lost its

business even if it prevailed on the constitutional challenge. The

essential purpose of an injunction is relieve this type of dilemma.

8 This explains why the Pennsylvania Court required no bond be

posted by Pic-A-State.

9 We further note that the TLC voiced no objection to accepting

proceeds from Pic-A-State agents located in Texas for non winning

lottery tickets.

10 merits. It is important to note that the immediate harm asserted

b y Pic-A-State would have resulted from having to suspend its

business to avoid criminal prosecut ion while awaiting the

adjudication of its constitutiona l challenge to the Wagering

Amendment

. 7 We infer from the record, that because the loophole

had existed for over ninety (90 ) years and the DOJ did not

demonstrate to the court that it would be harmed by the injunction,

that there was no harm to the non-moving party. 8

Even though Pic-A-State made a credible showing that it would

suffer irreparable harm in the absence of the injunction and it was

likely to prevail on the merits, the Pennsylvania Court was

required to consider the "public interest" before issuing the

inju nction. P rice, 688 at 211. 9 The record indicates that

Pennsylvania Court was fully aware of what type of business Pic-AState was operating. More particularly, the court knew Pic-A-1 0 W e note this only to point out that the government, having

failed to show it woul d be harmed at the district court, likely

could not make the requisite showing of obvious error or abuse of

discretion to overcome the presumption the injunction was correctly

issued

. A .O. Smith Corp. v. F.T.C., 530 F.2d 515, 525 (3rd

Cir.1976).

11 State's customers were from the general public. It is clear to us

that the public interest would hardly be served if Pic-A-State were

allowed to transact business during the pendency of the injunction

and its unsuspecting customers were denied the right to collect any

benefit therefrom. We cannot believe the Pennsylvania Court, when

deciding whether to issue the injunction, would have ignored

something so obvious.

We also think it is significant that the DOJ made no further

motions to lift the injunction and did not appeal the injunction to

the Third Circuit. The Third Circuit considers a number of factors

in reviewing the grant or denial of a preliminary injunction. Two

of the factors which most pertinent to this case are: 1) the law

has conferred power to grant or dissolve an injunction to the

discretion of the trial court and not to the appellate court; 2)

unless the trial court abuses its discretion, com mits an obvious

error in applying the law, or makes a serious mistake in

considering the proof, the appellate court must take the judgment

of the trial court as presumptively correct. 10 A .O. Smith, 530 F.2d

at 525.

In short, we find nothing in the record to indicate that the

injunction issued by th e Pennsylvania Court was in any way

wrongful. We also do not attach any significance to the fact that12

Pic-A-State did not ultimately prevail on the merits of its claim.

The propriety of this injunction is determined by the circumstances

in existence at the time it was issued, not after Pic-A-State's

challenge was decided on the merits.

We are thus bound by the principles of comity and full faith

and credit to respect the Pennsylvania Court' s decision to issue

the injunction and must conclude the injunction was correctly and

legally issued. It is therefore, not within the authority of the

Federal District Court for the Southern District of Texas or this

Court to revisit the issue of whether the injunction was properly

issued and conclude to the contrary.

B. Effect of the Injunction

It is well settled that the issuance of a prohibitory

injunction freezes the status quo, and is intended "to preserve the

relative positions of the parties until a trial on the merits can

be held." U

niversity of Texas v. Camenisch, 451 U.S. 390, 395, 101

S.Ct. 1830, 1834, 68 L.Ed.2d 175 (1981). Preliminary injunctions

commonly favor the status quo and seek to maintain things in their

initial condition so far as possible until after a full hearing

permits final relief to be fashioned. Id. ; O pticians Assoc. of

Am. v. Independent Opticians of Am., 920 F.2d 187, 197 (3rd

Cir.1990) (citations omitted). It follows that a district court

issuing a temporary injunction up on the dissolution of a

preliminary restraining order is acting to preserve the status quo.

In this case, we have no doubt that Pic-A-State sought to maintain

the status quo existing prior to the enactment of the Interstate11 18 U.S.C. § 1301 et al. as amended.

13 Wagering Amendment 11 of the "Violent Crime Control an d Law

Enforcement Act of 1994".

There is no dispute that before Congress enacted the Violent

Crime Control and Law Enforcement Act of 1994, Pick-A-State was a

legal corpora tion, operating a legal business in over thirty

states. Pic-A-State's operation enabled its customers to buy

chances in the lo tteries from the various lottery states without

violating federal law. In light of the fact that Congress'

enactment of Interstate Wagering Amendment would have outlawed PicA-State's business, it is obvious that Pic-A-State sought to

preserve the pre-enactment status quo until the merits of its

constitutional challenge to the amendment could be heard.

Therefore, it is our opinion that: the injunction suspended

the Interstate Wagering Amendment as applied to Pic-A-State; PicA-State's operati ons under the injunction were legal; and that

obligations arising from Pic-A-State's operation are not

unenforceable because of the Interstate Wagering Amendment of the

"Violent Crime Control and Law Enforcement Act of 1994".

Finally, in summary, we find it incredible that the TLC urges

us to adopt a position that sanctions the TLC's receipt of proceeds

for the sale of its lottery tickets through Pic-A-State, and yet

find that the TLC has no obligation to those unsuspecting patrons

who provided it with such a benefit. For reasons already stated,

Pic-A-State legally operated under the protection of the injunction

and thus, had the right to collect fees for the service it1 2 A perplexing question remains; What happened to the

$10,000,000 jackpot that is the subject of this suit? Does the TLC

still have it o r was it rolled over into another jackpot? Since

Wenner's ticket was undisputedly a winning ticket, did the TLC

begin a new game with a minimum prize jackpot? The record gives no

indication and the TLC's counsel was unable to provide any insight.

Perhaps the trial court can sort this out on remand. We point out

that the TLC may have accrued a considerable benefit by holding a

prize of this magnitude or it may have earned a substantial benefit

from additional ticket sales if the jackpot was eventually rolled

over.

1 3 The TLC argued that while Pic-A-State was operating under the

injun ction, it had a duty to post a disclaimer that in effect

notified its patrons that winning ticke ts would be unenforceable

because of the Interstate Wagering Amendment. We find no authority

for the proposition that a party who obtained an injunction to

protect its interests while litigating its claim must then destroy

its own interests through a such a self-inflicted wound.

14 provided. Pic-A-State benefitted by maintaining its business until

its constitutional challenge to the Interstate Wagering Amendment

could be heard. The TLC benefitted insofar as it received proceeds

from the sales of its lottery tickets through Pic-A-State

operations in all lottery states for the six months the injunction

was effective. It may have also benefitted from not paying

Wenner's claim. 12 Under the TLC's position, only the unsuspecting

and unknowing Pic-A-State patrons, who paid the bill for the TLC's

and Pic-A-State's benefits, should be den ied any chance to

benefit. 13 We cannot subscribe to this wholly inequitable position.

In light of the foregoing, we conclude t hat the TLC was not

entit led to a summary judgment as a matter of law and therefore,

was not entitled to a summary judgment un der Fed.R.Civ.P. 56(a).

Accordingly, we vacate the district court's summary judgment and

remand for further proceedings consistent with this o pinion.

VACATED AND REMANDED.15