Transcending an Impasse and Crossing the Class II Regulatory Abyss Class II Manufacturers Unite to Hammer Out Alternative Technical Regulations
By D. Michael McBride, III
©2007

A few weeks ago, a very remarkable thing happened. 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 to them with recommendations.

The Working Group has met many times since by telephone, e-mail, video conference, and in person, most recently in Dallas Jan. 3-5, 2007. The work is incomplete, but the NIGC stood down, is listening, and for now, has stopped the crazy locomotive that was barreling down the tracks towards Class II industry oblivion.

We now have a short window to provide a potential workable solution for Class II versus Class III regulatory distinctions. The trust and working relationships between competitive manufacturers, the NIGC, and tribes is unprecedented-but a mandatory step in an attempt to salvage Class II gaming.

This remarkable accomplishment, born out of necessity (and a strong dose of fear) constitutes a unified effort based on trust to save Class II from inevitable destruction. Leading manufacturers such as Rocket Gaming, IGT, Bally, Multimedia Games, and others that gave testimony to the commission on Sept. 19, 2006, led the effort.

NIGC Chair Philip Hogen was pleased. On Dec. 14, 2006, the next day following the three-day meeting, Hogen extended the deadline for public comments for proposed Class II Technical Regulations to Jan. 31, 2007; however, he allowed the proposed Class II classification standards and revised the definitions comment period to close on Dec. 15, 2006.

Those proposed Class II classification standards and new definitions are the heart of the potential destruction-but they may be abandoned if the advisory committee and, in turn, the NIGC adopts the Working Group's proposals to change the technical standards roadmap.

Chair Hogen is responding to considerable federal pressure from the Justice Department, some members of Congress, and states to draw a bright distinction between non-compacted Class II games of bingo, pull-tabs, and games similar to bingo, and the Class III residual category of "all other games."

Chair Hogen is caught between a flourishing Indian Gaming industry bearing fruit from the Indian Gaming Regulatory Act's successful purpose of fostering tribal economic development, and the increasingly demanding constituencies that jealously eye tribal governmental gaming revenue.

The distinctions between Class II and Class III gaming directly impact the balance of revenue used by tribal governments and revenues enjoyed by states through overreaching compact terms since the Supreme Court's 1996 Seminole decision.

"Federal Family" Concerns
Chair Hogen wrote last month that: "[L]acking 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 these."

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-and over three decades before Congress undertook to successfully strengthen tribal governments through civilly-regulated economic development of gaming, instead of criminally prohibiting gambling devices.

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 Class II governmental gaming. Such a rulemaking would hurt a disproportionate number of small tribes highly dependent on Class II tribal government revenue.

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; drawing a point of distinction is very challenging," he wrote.
In trying to keep the "wolves away from the door" of Indian Gaming, Hogen feels compelled to engraft technical restrictions on Class II gaming where none have existed before.

The commission's extra-textual rulemaking effort to "slow the game down" goes well beyond the plain language of IGRA. 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."

If the commission does not act, he believes that Indian Gaming will be "inviting systemic or statutory changes" to the "two-tiered classification system" of IGRA. The commission's noble and paternalistic long term aspirations could inevitably wreck the Class II industry and irreparably hurt tribes unless a new track is built.

Although the commission initially excluded tribal representatives from a November meeting with manufacturers in Montana, the commission has opened up the process again to all interested. The Working Group is now toiling away to craft a sensible solution.

Ominously, at the NIGC Advisory Committee meeting in Washington D.C. on Dec. 5, 2006, Hogen 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?

Class II Bingo: It's the Game-Not the Box!
At the heart of the debate are technology and game speed. But IGRA encourages networking of Class II games and technologic advances.

IGRA provides no restrictions on the speed of play. How do we get a handle on defining terms such as "facsimile," "bingo system," "bingo game," "server," and "player station" as applied to Class II games?

This is also a Working Group objective. Examining the NIGC's technical standards proposal has drawn one strong conclusion: Class III, standalone slot machines standards do not apply to player stations for Class II bingo games.

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.

Those decisions have become the bedrock of Class II gaming design, development, and regulation. 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." However, the commission's rulemaking would impose technical standards meant for Class III standalone slot machines on Class II player stations.

Congress intended that technologic aids and maximum flexibility be allowed in Class II gaming. It has dawned on the current commission and some manufacturers that arrived late to the Class II industry, that Class II games are not in "the box," but are in the server as a "game system," and that the games are competitions amongst players.

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 Dec. 5, 2006 meeting in Washington D.C., when he stated: "It's the game system! Not the Box!"

"I'm Going Off the Rails on a Crazy Train!"-Ozzy Ozbourne
The commission's three year attempt to slow down electronically aided bingo games and build a regulatory track bringing sharp distinctions between Class II and III has blazed a circuitous and conflicting trail through uncharted territory.

Although founded on laudable long term motivations, the commission's haphazard 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 "is built on Class II bingo." A crazy train, indeed.

On Dec. 8, 2006, Sen. John McCain noted in comments to Congress that Indian Gaming has experienced explosive growth from $200 million upon passage of the Indian Gaming Regulatory Act in 1988, to over $23 billion today. Recent NIGC commissioned estimates, by Alan Meister of the Analysis Group to quantify economic impact, have pegged, electronically aided Class II bingo as an approximate $2.6 billion industry. This is a figure that Hogen said "took our breath away."

We should not underestimate the importance of the Class II gaming industry.

Class II gaming is very important to tribes and the 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. Ironically, old school, standalone, and non-networked Class III slot machines are becoming obsolete and stuck in time.

But Congress did not intend that Class II games remain stuck in time. Is commerce "artificial" today because more people use debit and credit cards than paper cash to buy things? Is engaging in electronic transactions a "facsimile" of commerce?

Bingo should not be chained to paper either.

Working Group Framework
Chair Hogen said the commission mentioned several times in December that it is committed to three goals in the regulation of Indian Gaming: to preserve the integrity of the industry, to provide security for the industry, and 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. The commission wants technologically neutral rules that will encourage market innovation, discourage "predatory patents," and promote cost-efficient technologies that will help manufacturers remain in the Class II industry.

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 564 federally-recognized Indian Tribes and Alaska Native groups. Class II revenue is vital to most gaming tribes-large and small-across the country.

"Indians Are Not Taxed"
The Seminole decision in 1996 upset the careful IGRA balance Congress struck when it provided that states must negotiate Class III compacts in good faith with tribes.

Otherwise, tribes could sue states to enforce the good faith requirement in federal court. The Supreme Court struck down that balance and ever since, states have either refused to negotiate compacts or increasingly insisted on "revenue sharing" and limits on the number and kind of games before agreeing to Class III compacts with tribes.

The disproportionate shifting of negotiating power to the states has effectively placed a state "tax" on Class III Indian Gaming, even though the U.S. Constitution requires that "Indians are not taxed," and the IGRA specifically prohibits states from taxing Indian Gaming.

As a result, tribes need Class II gaming more than ever before. Even in states where Class III gaming predominates, such as California, Class II remains important, because the tribal right to engage in Class II provides important leverage to negotiate fairer agreements with states to maintain adequate funding levels for tribal government.

"Life or Limb"
Small tribes need Class II gaming government revenue to supplement basic needs. Tribal attorney Dan Decker recently illustrated the horrendous and morbid analysis most Montana Indians have to undertake in seeking health care.

Indian Health Service providers decide whether a particular medical service or procedure impacts a tribal member's "life or limb" to determine if they will provide the service because IHS funding is so limited. A Native citizen cannot get medical attention from IHS unless he or she is in imminent jeopardy of losing one's life or an arm or leg. Only then will IHS provide medical assistance.

Tribes make up the shortfall and provide Class II gaming revenue to fill the funding gap to provide medical treatment for Indians diagnosed with incurable or chronic diseases, life-threatening illnesses beyond three to six months of anticipated survival, disabilities, infirmities, dental care, and preventative health care.

Within Montana, as in many parts of Indian Country, very small Class II bingo operations with only scores of Class II electronic bingo player stations are common-but this revenue is vital. Changing over to complex and expensive technical regulations, and outlawing existing games, would decimate rural tribal economies.

In many places like Alabama, Florida, and Montana, the states will not negotiate meaningful compacts with tribes-Class II is all the tribes have. Also, in most of these states tribes have to compete with state-sanctioned, non-Indian Gaming. The commission's proposed classification regulations threaten to freeze those tribes in technologically-disadvantaged positions and jeopardize tribal assets.

Working Group Mission and Implementation
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 electronic player stations.

The goal is to allow manufacturers "maximum flexibility" to design electronic bingo systems that can take advantage of the latest technological innovations in various components, hardware, and software used in the game system.

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 game systems to remain for a long period of time (or indefinitely), while the industry transitions to the new standards and inevitably better technology.

Where do we go from here? With great relief, many of the commissioners said on Dec. 5 they have not made up their minds if they will enact any of the proposed Class II classification standards, the definitions, and/or the technical standards.

The Working Group meetings convened immediately thereafter. Most would argue that the definitions of bingo provided in the IGRA, the existing definitions promulgated by the commission in 2002, and recent rulings from courts are working just fine for defining Class II bingo and allowing for the vibrant, market-driven, technological innovation to flourish while remaining adequately regulated.

The Working Group's framework of industry representatives, the commission, and tribal monitors coming together to hammer out workable standards, is the best model-and much preferred to the commission unilaterally enacting unworkable and arbitrary standards that might kill the industry and poison the economies of many tribes.

Tribes should thank the commission for adopting this new path and turning away from protracted and expensive conflict.

Look for a rapid and aggressive continuation of the Work Group's efforts, much of which will be done before you read this. The Work Group will most likely have final proposals to NIGC's Advisory Committee before in-person meetings scheduled for Jan. 16 in conjunction with the Western Indian Gaming Conference, Jan. 17 and 18, 2007, at the Pechanga Reservation in Temecula, Calif. Tribes should continue to submit comments to the commission.

Hopefully the commission will stand by its three principles of "regulating and preserving the integrity of Indian Gaming, to preserve tribal assets," and stand down from rulemaking that could kill Class II gaming.

It is encouraging that the commission appears committed to only adopting regulations that will allow Class II gaming to continue to provide healthy tribal assets.

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D. Michael McBride III, a Tulsa lawyer, chairs an Indian law and gaming practice group that represents tribes and those doing business with tribes. McBride is recognized by peers for his contributions to "Native American Law" by Best Lawyers in America and for "Business Law" and "Political Law" by Oklahoma Super Lawyers published by Law and Politics and Oklahoma Today magazines. McBride is a general member of the International Masters of Gaming Law and an Editor of the Gaming Law Review. He is Chair of the Federal Bar Association's Indian Law Section, the largest Indian law organization in the country. He can be reached in Tulsa at (918) 583-3145, mmcbride@sneedlang.com. A short version of this article will appear in the January 2007 issue of Indian Gaming Magazine and this extended article is reprinted with permission.

Editor's Note: An abridged version of this article appeared in the January 2007 issue of Indian Gaming Magazine.

SIDE BAR:
Look for a rapid and aggressive continuation of the Work Group's efforts. The Work 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 held on Jan. 17 and 18, 2007, at the Pechanga Reservation in Temecula, Calif. Tribes should continue to submit comments to the Commission. Hopefully the commission will stand by its three principles of "regulating and preserving the integrity of the Indian Gaming industry and to preserve tribal assets" and stand down from rulemaking that could kill Class II gaming. It is encouraging that the Commission appears committed to only adopting regulations that will allow Class II gaming to continue to provide for healthy tribal assets.