In 2006, Illinois Governor Rod Blagojevich signed into law the 2006 Horse Racing Act. The Act required the state's four highest grossing casinos to pay 3% of their adjusted gross revenue into a fund. The fund was kept separate from other state funds and was not available to any state agency or program. Instead, the money in the fund was paid to five horseracing tracks in Illinois. The purpose of the Act, according to legislative findings, was to assist the horseracing industry, which had suffered financially after casinos were allowed to operate in Illinois. The casinos challenged the Act in state court. The Illinois Supreme Court upheld the Act against state and federal constitutional challenges. A few months later, the United States brought political corruption charges against Blagojevich. In an affidavit attached to the criminal complaint, an FBI agent described conversations in which Blagojevich discussed receiving money in return for his support of the Horse Racing Act. The casinos returned to state court and sought post-judgment relief based on this information. The state court denied relief, concluding that the legislature's motive in passing the Act was irrelevant to its constitutionality. The casinos then brought suit in federal court against Blagojevich, the racetracks, and the owner of two of the racetracks. The complaint alleged a RICO conspiracy and sought a constructive trust to prevent the racetracks from receiving any money. Blagojevich moved to dismiss on legislative immunity grounds. One or more of the defendants also moved to dismiss the RICO claim on res judicata and for failure to state a claim and moved to dismiss the constructive trust claim on several grounds: that it was barred by the Tax Injunction Act, that it was premature, that there was no unjust enrichment, res judicata, and Colorado River abstention. Judge Kennelly (N.D. Ill.) rejected the legislative immunity claim and denied the motions to dismiss the RICO claim, but dismissed the constructive trust claim on the grounds that the Tax Injunction Act eliminated jurisdiction. Blagojevich appealed the legislative immunity ruling and the casinos appealed the constructive trust ruling.

In their opinion, Judges Bauer, Posner (dissenting), and Sykes reversed both with respect to the legislative immunity claim and the constructive trust claim. With respect to legislative immunity, the Court cited Tenney for the proposition that state officials are absolutely immune from damages suits arising from their legislative activity. Although the Supreme Court has never applying that principle to a governor, the Court saw no reason that it would not apply and noted that other circuits have so extended the principle. The principle applies even when the legislative activity is illegal or improper. The Court rejected the casinos’ argument that Blagojevich’s immunity should be decided in reference to state law, relying on the Supreme Court's decision in Lake Country Estates. The Court also expressed its view that the Illinois Supreme Court's decision in Jorgensen (where it rejected Blagojevich’s claim of legislative immunity) would not control even if state law did apply. Jorgensen was not a damages case, but was a constitutional attack on Blagojevich's judicial pay raise veto. Therefore, Blagojevich is immune and the RICO claim should be dismissed. The Court moved on to consider the Tax Injunction Act argument. That Act prohibits a federal court from interfering with the collection of state taxes where there is a sufficient remedy in state court. The only real issue presented under the Act is whether the 3% casino surcharge is a tax. The Court concluded that it was not because it had none of the normal indicia of a tax. The Act never referred to as a tax, the only targets of the Act are four casinos, the only beneficiaries of the Act are five racetracks, the money is segregated from all state funds, the money is not available to any state program or agency, the Act has a regulatory purpose (protecting the racetracks from competition), and the Act was enacted under the state's police power, not its taxing power. Therefore, the Tax Injunction Act does not apply and the constructive trust claim can be considered. Given the Court's treatment of the Tax Injunction Act issue, it proceeded to consider the defendants’ alternate grounds to dismiss the constructive trust claim. First, it rejected the argument that the Illinois Supreme Court's decision on the casinos’ constitutional challenge had any preclusive effect on the case. Both the causes of action and the parties were different. Next, it rejected the argument that the state court’s denial of post-judgment relief had preclusive effect on the case. In fact, the state court denied relief because the allegations of corruption were unrelated to the constitutional challenge before the court. The Court rejected the collateral estoppel and Colorado River abstention arguments for much the same reason -- a constitutionality challenge is fundamentally different from a RICO claim. Finally, the Court rejected defendants' argument that their actions were not the proximate cause of the casinos' injuries.

Judge Posner dissented both with respect to the legislative immunity issue and the Tax injunction Act issue. With respect to immunity, he agreed that the general rule is that a state official is entitled to legislative immunity. But if Illinois grants its officials less than complete immunity, federal common law should do the same. There is no federal interest served in affording a state official more protection in federal court that he would enjoy in a state court. Because it was not clear in Jorgensen whether the Illinois Supreme Court would grant legislative immunity in a civil damages case, judge Posner would certify the question to that court. With respect to the Tax Injunction Act issue, Judge Posner agreed that the only question was whether the surcharge was a tax -- and he concluded that it was. He agreed that not every state receipt of money was a tax, but he distinguished between taxes and fees by asking whether the charge was based on a reasonable estimate of the cost of some service provided. The charge imposed on the casinos here is not a fee for a service but a subsidy for the racetracks. Therefore, it is a tax and the Tax Injunction Act applies.