A trio of Court of Appeal judges has slammed the conduct of the Victorian government over the reform of the state's gambling sector, casting a shadow over new Premier Daniel Andrew's election victory this week.

A Victorian Court of Appeal judgment on Thursday upheld a $540 million compensation payment for Tatts Group but rejected a similar claim for $687 million by Tabcorp.

The finding would "do little to enhance the state's reputation for reliability and commercial morality in its dealings", the judges said.

The two gaming giants have been fighting the state after the Brumby government took away their duopoly to operate poker machines.

The companies were given 18-year licences by the Kennett Coalition government in 1994 to operate the state's pokies, outside of Crown Resorts' Melbourne casino.

However, in 2008 the then Labor Brumby government decided to make management of the 27,500 pokies in the state's pubs and clubs the responsibility of venue operators, as opposed to Tatts and Tabcorp. This is how the system operates in NSW. The new regime began in August 2012.

Amendments to gaming legislation were made by the Brumby government, which acted on advice that it would not be liable to pay compensation.

Tabcorp, which was previously the state-owned wagering operator, argued it had a right to a payment regardless of whether it was awarded a new licence, as per its 1994 prospectus. The judges said the state had created an expectation "by its stated intentions" that this would be the case.

"The state not only created expectations but profited from the reliance placed upon those expectations by members of the investing public," the judges said, referring to the prospectus as well as a letter from then state treasurer Alan Stockdale to Tabcorp in 1994.

Mr Stockdale is now the president of the Liberal Party.

"The treasurer's letter and the prospectus created the expectation that compensation would be paid upon the expiry of the licences after 18 years," the judges said.

"The forecast returns and the forecast balance sheet were prepared upon the basis of that expectation," they said. "Members of the public invested in reliance upon the expectation which the state created and actively encouraged."

Tatts' claim was successful because it argued on a contractual rather than a statutory basis, that it was entitled to compensation. It referred to an agreement it entered into with the gaming minister in 1995 that provided for a termination payment.

The judges said Tabcorp never sought, nor achieved a binding agreement on termination payments. "It put its trust in the state," the judges said. "That trust was misplaced."

Tatts told the market it "welcomes the decision" but will not recognise the money as income until the matter is finally concluded.

Tabcorp said it would review the decision. The parties have 28 days to lodge a special leave application in the High Court of Australia.

In June, the Supreme Court ordered the government to pay Tatts $540 million in compensation, while Tabcorp's application for about $687 million was dismissed. The government appealed the Tatts ruling and Tabcorp appealed its loss.

Both companies have outperformed the broader market in the past year. Compared with a 2 per cent rise in the S&P/ASX200, in the past 12 months Tabcorp has gained 21 per cent and Tatts has climbed 11 per cent.

Tatts shares closed down 1.7 per cent to $3.44 on Thursday, while Tabcorp shares lost 0.9 per cent to close at $4.18.