Here are my general personal observations, not on behalf of any clients or my firm:
(1) The language regarding a general proportionality test to measure whether tribal revenue sharing payments roughly correspond to benefits conferred by the state is broader than past formulations. Importantly, the Department’s recognition that exclusivity is not the sole benefit that can be conferred to support revenue sharing opens the door to tribal exploration of other benefits that can support revenue sharing. Outside of California, which is the only state to have affirmatively waived its 11th Amendment immunity for suit under IGRA, this is often necessary as a practical matter to entice states to the bargaining table. (Even in California, so long as there is a Governor who doesn’t give a rip what federal law requires, some means of inducement appears necessary – unless a tribe wants a decade of litigation.) Barring the Holy Grail of a Seminole fix, tribes need the ability to be creative. For Interior, though, there is a balancing act between allowing tribes some flexibility and giving states carte blanche to turn any of the ordinary elements of a compact into a club to demand revenue sharing…
(2) The analysis of the State’s supposed concession in deducting participation fees from net win implies a lack of understanding on Interior’s part regarding the issue here. Interior says this concession lacks meaning because the NIGC already provides for the deduction of participation fees in calculating net revenue. True. But like most (if not all) revenue sharing percentages, this one is calculated on net win, which is gross revenue, not net revenue. The real point here should be that the method of calculating the percentage paid to the State is what is meaningless – it should not matter how revenue sharing is calculated, only whether the revenue sharing that results is proportional to the economic benefits provided by a state’s concessions.
(3) Interior’s dismissive analysis of the State’s claim that it should get credit for continuing to allow the Tribe’s participation in the Revenue Sharing Trust Fund makes sense. As I understand this Tribe’s compact, the State was “allowing” the Tribe to continue to receive its $1.1 million annual RSTF draw until it operates more than 349 machines. But this isn’t a real concession – the current framework of the 1999 compacts already provides for all California tribes operating less than 350 machines to receive these payments, and this Tribe is a third party beneficiary of those compacts. It almost seems like the State was trying to claw back these payments, since this Tribe would pay 15% of net win even if it operated only one machine.
(4) Interior’s agreement with the State’s position that, in comparison to the terms of the State’s 1999 compacts, “allowing” the Tribe to operate 750 machines is a meaningful concession by the State is stunning, and potentially tragically wrong. First, I would hope that Interior would view each compact as a stand-alone document, under which revenue sharing payments need to be justified based on the unique facts of each agreement. Second, Interior is wrong on the facts–although admittedly occurring after this letter was authored, the 9th Circuit last Friday affirmed a lower court decision finding that thousands of machines remain available under the “pool” established in California’s 1999 compacts. Third, and most significantly, Interior’s position in the past has been that the number of machines “allowed,” types of games “permitted,” hours of operation, and other core compacting issues cannot be the basis for revenue sharing with States. (Go back and look at the letter rejecting the revenue sharing provisions Forest County Potawatomi negotiated with Wisconsin.) Rather, to justify revenue sharing, the State must offer something meaningful above and beyond the usual topics to be negotiated in a compact. By opening the door to states to justify revenue sharing based on these standard compact terms, Interior may have opened Pandora’s box. Consider the case of a state that has already negotiated a compact providing for a tribe in a remote location to operate a modest number of machines for 16 hours a day, with that tribe believing that the terms allow it to fully serve the market. Should a tribe in a larger market have to pay the state for the supposed “right” to operate more machines for more hours? Or, put another way, is the state free to deny the second tribe the “right” to fully serve the market unless the tribe coughs up more money to the state? If standard compact terms allow the state to justify revenue demands, IGRA’s requirement that states negotiate in good faith will likely be further eviscerated. Unless Interior corrects this, expect this little paragraph to generate lots of mischief in compact negotiations throughout the country.
(5) I think Interior likely came to the right result in its analysis of exclusivity, particularly in light of the Rincon decision construing Prop 1-A. Unfortunately, Interior’s analysis itself seems somewhat lacking, and in fact depends in part on mistaken assumptions. Specifically, Interior finds that because there have been no card clubs established in the “CGA” since 1999, this market is not conducive to new gaming competition. Yet the CGA extends into the northern reaches of the greater metro San Francisco area, which is a market supplying customers to tribal casinos located quite some distance away. Interior also doesn’t seem to know that since 1997, there has been a statutory moratorium on new card clubs, which ends in 2015. Bargaining for an extension of a statutory prohibition on new competition is precisely the point of revenue sharing payments being made for exclusivity. Where Interior gets it right, though, is that card rooms alone probably do not represent enough of a threat to justify a 15% payment of net win, and Interior also is correct to look at the level of payments in relation to payments by competitors, as that directly impacts the value of exclusivity. To undertake a full and complete analysis, though, Interior should be relying on a real market assessment provided by the Tribe, rather than on supposition and guesswork. Given the stakes involved, and the fact the Tribe undoubtedly has already done feasibility studies and other economic analysis, asking for the minor additional step of having the Tribe roughly quantify the value of the benefits received versus the revenue sharing payments to be made hardly seems like too much to ask. (Such analysis reportedly was integral to Interior’s approval of the Seminole Tribe’s agreement with Florida and of amendments to Michigan compacts.)