Regulatory Updates

NIGC's Proposed Class II Regulations: At Odds with the First Purpose of Indian Gaming?

Knute Knudson
Knute Knudson

Knute Knudson, VP of Native American Development
IGT

The NIGC is considering promulgating up to four regulations governing the operation of Class II games. The regulations, proposed in October 2007, include: classification standards for bingo, lotto, other games similar to bingo, pull tabs and instant bingo as Class II gaming when played through an electronic medium using ''electronic, computer, or other technologic aids''; a definition for electronic or electromechanical facsimile; minimum internal control standards for Class II gaming (MICS); and technical standards for electronic, Ccomputer, or other technologic aids used in the play of Class II games.

The comment period for the proposed regulations closed on March 9th. Now the NIGC must decide whether to publish some or all of the regulations as proposed; publish some or all of the regulations with amendments; or publish no new Class II regulations.

At this stage it appears most likely the Commission will publish all four proposed regulations - possibly with amendments to what has been proposed. Publication of these regulations is a serious matter for tribes and for those of us who support tribal gaming.

The NIGC commissioned a study to gauge the economic impact of their proposed rules. That study (The Potential Economic Impact of the October 2007 Proposed Class II Gaming Regulations) was published in February of this year. Dr. Alan Meister, the author of the NIGC's study, concluded: “In general, the NIGC's October 2007 proposed Class II gaming regulations would have a significant negative impact on Indian tribes.”

Dr. Meister identified specific negative impacts stemming from the proposed rules including: a decrease in gaming revenue; a decrease in non-gaming revenue; a decrease in the variety and quality of Class II gaming machines; gaming facility closures; an increase in capital, deployment, compliance, regulatory, training, revenue-sharing, and financing costs; a decrease in the number of tribal member jobs; and a decrease in innovation in the Class II gaming machine market. A decrease in leverage that tribes would have in the negotiation/renegotiation of Class III gaming compacts with states; restriction of new entry into the Class II machine market; and a change in the degree of competition experienced by Class III gaming facilities as Class II machines become less desirable substitutes for Class III games in the eyes of consumers and as more Class III gaming is introduced.

Many who support these proposed Class II regulations hang their hats on the notion that the NIGC must create a regulatory “bright line” between Class II and Class III games - a bright line that would bar tribes from using current technology in the operation of the game of bingo.

There are two problems with such thinking: While Congress never sought a “bright line” between Class II and Class III games, Congress did, in its complete and explicit definition of bingo, already define a clear difference between Class II and Class III games; and Congress intended that tribes have access to the most sophisticated Class II technology, not be shackled to outdated modes of game play.

The 9th Circuit Court, looking at what Congress did intend in IGRA in the case U.S. v. 103 Electronic Gambling Devices, 223 F. 3d 1091, determined that the three elements of bingo mandated in IGRA were the sole means to determine if a game was bingo and thus Class II. IGRA defines bingo as a game in which players: “(1) play for prizes with cards bearing numbers or other designations; (2) cover numbers or designations when objects, similarly numbered or designated, are drawn or electronically determined; and (3) win the game by being the first person to cover a designated pattern on such cards.”

The Court's opinion noted: “Whatever a nostalgic inquiry into the vital characteristics of the game as it was played in our childhoods or home towns might discover, IGRA's three explicit criteria, we hold, constitute the sole legal requirements for a game to count as class II bingo.

There would have been no point to Congress's putting the three very specific factors in the statute if there were also other, implicit criteria.” Thus, a game that includes the three elements of bingo laid out in IGRA is Class II bingo.

As to technology, in creating the Indian Gaming Regulatory Act, Congress anticipated what it could not foresee regarding Class II games. The Committee Report accompanying IGRA at the time of enactment noted that: “The Committee specifically rejects any inference that tribes should restrict Class II games to existing game sizes, levels of participation, or current technology. The Committee intends that tribes be given the opportunity to take advantage of modern methods of conducting Class II games and the language regarding technology is designed to provide maximum flexibility.” (Senate Select Committee on Indian Affairs - Committee Report, 1988 U.S.C.C.A.N. at 3079.)

The result of the clear definition of bingo in IGRA and Congress' stated intent to allow tribes maximum technical flexibility is a mandate that sophisticated technical aides may be provided to assist in the play of games that are played within Congress' definition of bingo.

It is popular in some quarters to claim that such electronic bingo games are “indistinguishable” from Las Vegas style slot machines. However, that popular notion just isn't so. The fact is players, regulators, and every federal judge to take up the question have had no trouble distinguishing between Class II electronic bingo games and Las Vegas slot machines.

Tribes today have negotiated agreements to pay as much as a 25% of their slot machine revenue to states for the exclusive right to offer Class III slot machines to their customers rather than offer Class II games with electronic aids. Tribes pay this premium for Class III game operation despite the fact that
operation of Class II games requires payment of no premium by tribes to states. Why do tribes agree to this? Because, even given the most advanced Class II technologic aids, the player, the customer, can easily detect the difference between a Class II game and a Class III game. And, given the option, players will choose the more appealing Class III game.

The Declaration of Policy of the Indian Gaming Regulatory Act notes several purposes to the Act. Foremost among those is “to provide a statutory basis for the operation of gaming by Indian tribes as a means of promoting tribal economic development, self-sufficiency, and strong tribal governments;” The secondary purpose of the Act is to shield Indian gaming from corrupting influences. The third
purpose of the Act includes the “establishment of a National Indian Gaming Commission...to meet congressional concerns regarding gaming and to protect such gaming as a means of generating tribal revenue.”

At the National Indian Gaming Association's Tribal Leaders Meeting last December in San Diego NIGC Chairman Hogen commented about Class II rules, saying, "I don't want to leave the tribes in a less legally defensible position." That's an admirable goal in the proper context.

However, in the context of the IGRA and in the context of every federal court ruling on Class II games, tribes operating Class II games are already in a very strong legal position. There is not a demonstrated need to shore up the legal defensibility of tribes operating Class II games. This is particularly so given that every regulatory provision that forces tribes to operate games that are less appealing and thus, possibly, more legally defensible, also makes compliant games less valuable as a means to promote tribal economic development and so less consistent with Congress' intent in IGRA.

The ultimate result of attempting to put tribes in a more legally defensible position on Class II games would be to limit tribal Class II bingo to only games played by hand on paper cards - as it was played in our childhoods or home towns.

However, I believe tribes (and Congress' intent in IGRA) will be best served if there is a balance between the legal defensibility of tribal gaming on the one hand and the first policy of IGRA - promoting tribal economic development, self-sufficiency, and strong tribal governments on the other hand.

It is critical that the NIGC not chase a goal never annunciated by Congress for a “bright line” and, in so doing, compromise a goal explicitly stated by Congress. Congress rejected “any inference that tribes should restrict Class II games to existing game sizes, levels of participation, or current technology.” and instead intended “...that tribes be given the opportunity to take advantage of modern methods of conducting Class II games...with legislative language regarding technology “designed to provide maximum flexibility.”

If NIGC publication of Class II regulations is for real, published regulations must be consistent with the first purpose of IGRA “as a means of promoting tribal economic development, self-sufficiency, and strong tribal governments.” That was foremost among Congress' purposes in establishing the Indian Gaming Regulatory Act and should remain foremost in the NIGC's vision as the Commission seeks to meet the balance of Congress' purposes in the Act.

Knute Knudson is Vice President of Native American Development for IGT. He can be reached by calling (775) 448-1528 or email knute.knudson@igt.com.