Regulatory Updates

Transcending an Impasse and Crossing the Class II Regulatory Abyss

D. Michael McBride, III
D. Michael McBride, III

by D. Michael McBride III, Attorney at Law

A few weeks ago, on the brink of regulatory catastrophe, over 50 Class II industry executives and engineers, and several key National Indian Gaming Commission representatives monitored by tribal regulators, legislators and lawyers came together in a hastily-called Class II technical standards “Working Group” meeting in Las Vegas. The Working Group hammered out the framework for technical standards to bring “sensible” clarity regarding distinctions between Class II and Class III games. The Working Group, appointed by the NIGC's Advisory Committee, will report back with recommendations. The work is not done but the NIGC is listening, and for now, has stopped the locomotive that was barreling down the tracks towards Class II gaming. We now have a short window to provide a potential workable solution for Class II verses Class III regulatory distinctions. The trust and working relationship between competitive manufacturers, the NIGC and tribes is unprecedented – but a mandatory step in an attempt to salvage Class II gaming.

Leading manufacturers that gave testimony on Sept. 19, 2006 led the effort. NIGC Chairman Philip Hogen was pleased. On December 14, 2006, Chairman Hogen extended the deadline for public comments for proposed Class II Technical Regulations to January 31, 2007. However, he allowed the proposed Class II classification standards and revised definitions comment period to close on December 15, 2006. Those proposed Class II classification standards and new definitions are the heart of the potential destruction – but they might be abandoned if the Advisory Committee and in turn, the NIGC adopts the Working Group's proposals to change the technical standards roadmap.
Chairman Hogen is responding to pressure from the Justice Department, Congress, and states to draw a bright distinction between non-compacted Class II games of “bingo” and pull-tabs and "games similar to bingo" and the Class III residual category of “all other games.” The distinctions between Class II and Class III gaming directly impact the balance of revenue utilized by tribal governments and revenues enjoyed by states through overreaching compact terms since the Supreme Court's 1996 Seminole decision.

Chairman Hogen wrote in this magazine last month that “Lacking a crystal ball, Congress did not know what technology would bring to the gaming world when it passed IGRA in 1988. It did know, however, that there would be technological advances, and it wanted to assure that tribes could take advantage of those.” Particularly vexing to regulators is the concept of what constitutes a "facsimile" of a game (an old bench mark for electronic Class III games), “games of chance” (which include bingo) and "gambling devices" - targets of criminal enforcement by the Justice Department under antiquated "gambling" laws enacted a half century ago. To the Commission's credit it has realized that taking wholesale Class III technical standards and attempting to cram them into player stations aiding Class II games will result in illogical, unworkable and prohibitively expensive regulations that will implode the Class II governmental gaming and hurt a disproportionate number of small tribes highly dependent on Class II revenue.

Chairman Hogen is motivated by a need to solve ambiguities and inconsistencies within IGRA: “Congress specifically said that a compact was required for 'slot machines of any kind' and for 'facsimiles of any game of chance.' Yet Congress also said that Class II games such as bingo could be played with 'electronic and technologic aids.' Both terms could be read broadly and when one does so, they overlap, and drawing a point of distinction is very challenging,” Chairman Hogen wrote. The Commission's effort to “slow the game down” goes well beyond the plain language of IGRA. Chairman Hogen has warned that if the Commission does not enact sharp distinctions between Class II and Class III now, “states will act to end or limit the 'franchise' on electronic gaming many tribes now enjoy or Congress will redraw the lines to the tribes' disadvantage.”

Chairman Hogen recently called the Megamania and Diamond Games court decisions decided just a half decade ago “old,” and the player stations reviewed therein “primitive.” Those opinions defined the contours of IGRA's Class II distinctions. He said that technology has moved well beyond the primitive models the courts considered. But has it?

At the heart of the debate are technology and the speed of the games. But IGRA encourages networking of Class II games and technologic advances. IGRA provides no restrictions on the speed of the play.

No one doubts that the particular player stations considered by recent court decisions are largely no longer in use – but the analytical distinctions the courts applied to those games hold true and remain as a part of the well-established regulatory framework for Class II. Tribes and manufacturers have long standing investments and strong property interests in the existing Class II games. The critical distinctions are that the bingo game system matters, not the particular player station or game cabinet “box.” Congress intended that technologic aids and maximum flexibility be allowed in Class II gaming. The Class II game play transcends a particular player station. After spirited written and oral comments from the industry, tribes and the Commission's own Advisory Committee, the reality of where Class II games are played is hitting home with the Commission. Advisory Committee member Charlie Lombardo hit the point home with everyone at the December 5, 2006 meeting in Washington D.C. when he said, “It's the game system, not the box!”

Although founded on laudable long term motivations, the Commission's effort to lay a regulatory railroad grade could lead to the rapid potential destruction of the Indian gaming industry - an industry that the NIGC acknowledges that “is built on Class II bingo.”

Recent NIGC commissioned estimates by Alan Meister of the Analysis Group to quantify economic impact have pegged Class II, electronic aided bingo at an approximately $2.6 billion industry.
Because of the technologic innovation and creativity tribes and game designers have applied to "increase player participation" regarding bingo, pull tabs and similar games, we have witnessed the greatest technologic advances in the gaming industry occurring within Class II Indian gaming. Server-based gaming leads all of the gaming industry – non-Indian and Indian alike. Congress did not intend that Class II games remain stuck in time.

The Commission has stated several times in December that it is committed to three goals in the regulation of Indian gaming: First, to preserve the integrity of the industry; second, to provide security for the industry; and third, to protect tribal assets. To do this the NIGC is also committed not to hurt tribes by killing the Class II industry through regulations that are illogical, prohibitively expensive or irrelevant to regulatory goals. This commitment is encouraging.

The Commission recognizes that Class II bingo gaming is the cornerstone of the Indian gaming industry. While compacted Class III gaming accounts for nearly $21 billion of revenue, Class III gaming is disproportionately concentrated within a very small number of the approximately 567 federally-recognized Indian tribes and Alaska Native groups.

In revising the Technical Standards, the Working Group should focus on suggestions that will define the primary “functions” of bingo games played on electronic bingo systems, not necessarily on the electronic player stations. Because of the tremendous cost of implementing the proposed regulations and significant detriment particularly smaller tribes will suffer if existing Class II systems are outlawed, the Working Group should propose a matrix to “grandfather” and allow certain electronic player stations and games systems to remain for a long period of time or indefinitely while the industry transitions to the new standards and inevitable better technology.

With great relief to many the Commissioners said on December 5 that they have not made up their minds yet if they will enact any of the proposed Class II classification standards, the definitions and/or the technical standards. The Working Group framework of industry representatives and the Commission, monitored by tribes, coming together to hammer out workable standards is the best model. Tribes should thank the Commission for adopting this new path and turning away from protracted and expensive conflict.

The Working Group will most likely have final proposals to NIGC Advisory Committee before in person meetings to be scheduled in conjunction with the Western Indian Gaming Conference January 17 & 18, 2007 at the Pechanga reservation in Temecula, California. Tribes should continue to submit comments to the Commission.

D. Michael McBride III chairs the Indian Law & Gaming Practice Group at Sneed Lang P.C. in Tulsa, Oklahoma. He is a member of the International Masters of Gaming Law and can be reached by calling (918) 583-3145 or email mmcbride@sneedlang.com