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Indian Tribes Win Big in California Lawsuit


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In a ruling that has not received deserved press attention, the Ninth Circuit concluded California could not obtain revenue sharing or “taxes” from Indian tribes because the arrangements violate the Indian Gaming Regulatory Act. The case has national significance since it prohibits similar arrangements in numerous states that now benefit from Indian gaming.
In an April 20, 2010 ruling that has not received the press attention that it deserves, the Ninth Circuit upheld a trial court decision that California could not obtain revenue sharing or other additional payments from Indian tribes because it violated the Indian Gaming Regulatory Act (“IGRA”). The split 2 to 1 decision involving the Rincon Band of Luiseno Mission Indians is another in a long string of legal setbacks for the Schwarzenegger administration’s attempts to obtain revenues from Indian tribes in exchange for increasing the number of slot machines that can be operated.

The state will seek rehearing by the full Ninth Circuit. Although such requests are infrequently granted, this decision’s importance will probably cause the appeal to be accepted.

In 2003, the Rincon Band wanted to expand its Harrah’s casino operated under a 1999 compact negotiated by then-Governor Gray Davis. But Gray Davis was recalled in October 2003 and California voters elected Arnold Schwarzenegger. Candidate Schwarzenegger promised to make the tribes “pay their fair share” for casino expansions to help the state decrease its large and growing budget deficits, a promise that he has been attempting to fulfill as governor. In the ensuing negotiations, the state under Schwarzenegger’s administration demanded a percentage of any casino’s win whenever that casino wanted to expand its operations.

Although the Indian tribes pay relatively small amounts pursuant to the 1999 compacts, (i) none of the amounts go to California’s general fund, but are instead used for the benefit of the various Indian tribes, and (ii) the amounts are for the tribes obtaining statewide exclusivity for all casino gaming. After the initial 1999 compact, the state did not have any additional exclusivity to justify the compensation that Governor Schwarzenegger sought.

The Ninth Circuit’s rationale is straightforward, as follows:

“The Indian Gaming Regulatory Act (IGRA), 25 U.S.C. § 2701 et seq., provides that a state must negotiate in good faith with its resident Native American tribes to reach compacts concerning casino-style gaming on Native American lands.

By 2003, Rincon desired to expand its operations beyond what the 1999 compact permitted. Accordingly, in March of that year, Rincon notified the State of its interest in renegotiating certain provisions of the 1999 compact. … The State offered Rincon the opportunity to operate 900 additional devices plus the 1600 devices Rincon already operated, but only if Rincon would agree to pay the State 15% of the net win on the new devices, along with an additional 15% annual fee based on Rincon’s total 2004 net revenue. In exchange for the 15% revenue share demanded, the State offered Rincon an “exclusivity provision.”

Rincon countered that, in order to obtain additional devices, it would agree to some per device fees. Rincon emphasized, however, that the use of any fees it paid had to be limited to paying for the costs of regulating gaming, building infrastructure needed to support gaming operations, and mitigating adverse impacts caused by gaming operations. … Rincon also noted that [it already had] … tribal gaming exclusivity, so it was not seeking whatever further exclusivity might provide.

The list of permissible negotiation topics is circumscribed by one key limitation on state negotiating authority:

“Except for any assessments that may be agreed to under [§ 2710(d)(3)(C)(iii)], nothing in this section shall be interpreted as conferring upon a State . . . authority to impose any tax, fee, charge, or other assessment upon an Indian tribe . . . . No State may refuse to enter into the negotiations . . . based upon the lack of authority in such State . . . to impose such a tax, fee, charge, or other assessment.”

Under § 2710(d)(7)(B)(iii)(II), a court must consider a “demand” for a tax to be made in bad faith. A tax is “a charge, usu[ally] monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue.” Black’s Law Dictionary 1594 (9th ed. 2009). … No amount of semantic sophistry can undermine the obvious: a non-negotiable, mandatory payment of 10% of net profits into the State treasury for unrestricted use yields public revenue, and is a “tax.”’

In other words, the IGRA provides that states MUST negotiate with the tribes in good faith. Any compensation from these required negotiations cannot be a tax. Therefore, the amounts to be negotiated are limited to obtaining reimbursement for the costs of roads, police, fire protection, and other services provided by the local government to the sovereign Indian governments. States can negotiate away their ability to approve other gaming that would otherwise compete with the Indian casinos (i.e., “exclusivity”), but California already gave the Indians exclusive gaming rights in 1999. This left California with nothing more of substance for future negotiations.

Dissenting Judge Jay Bybee described the enormous impact of this decision as follows:

“The majority now holds that such fee demands cannot include general revenue sharing derived from the operation of gaming activities, but are limited to fees spent on the regulation of gaming alone. This restriction takes from the State its primary incentive in negotiating gaming compacts with the tribes.

The impact of the majority’s decision may not be readily apparent from its opinion, but the holding that California has negotiated in bad faith because its demand for general revenue sharing is a tax and not an authorized subject of negotiation does not just upset the apple cart—it derails the whole train. If the majority is correct, then there is nothing for California to do but to authorize whatever devices the Band wants. The Band wins. Everything.

Moreover, the damage is not confined to the Rincon Band. The revenue sharing provision that the majority strikes from the negotiations is found in fifteen other compacts that California has recently negotiated or renegotiated with tribes. All of those compacts were approved by the Secretary of the Interior. Those tribes now have a powerful argument that their compacts must be renegotiated (again) in light of the majority’s decision. The damage, moreover, is not confined to our circuit. Every state that has negotiated a compact in recent years—including Connecticut, Florida, Michigan, New York, New Mexico, Oklahoma, and Wisconsin—has negotiated a similar revenue sharing provision, one that was also approved by the Secretary. The result is going to be chaos as tribe after tribe seeks to reopen negotiations concluded and duly approved. Nothing in IGRA compels our intervention in these negotiations".”

There are currently around 65,000 Indian-controlled slot machines operating in California.

The state of California successfully negotiated other deals with certain tribes, but those deals are now at risk. California’s finance department states that existing tribal contracts with other tribes (i.e., before the effect of this court case) generate around $370 million annually. Assuming the Ninth circuit’s ruling stands unaltered, most of these payments are now illegal, so California’s budget mess just got worse. This was of little consequence to the majority judges on the Ninth Circuit who wrote:

“In so holding, we are mindful that many states, and especially California, are currently writhing in the financial maw created by the clash of certain mandatory state expenditures at a time when state revenues have plummeted from historic levels. However, we are also keenly aware of our nation’s too-frequent breach of its trust obligations to Native Americans when some of its politically and economically powerful citizens and states have lusted after what little the Native Americans have possessed.”

In at least three similar California cases at the trial court level, tribes have won the right to expand their casino operations without paying any compensation to the state of California. The Indians who paid California for casino expansions are now saying that the additional payments are illegal. A judge in at least one case involving the Pauma Band already halted the previously-agreed upon compensation to the state of California.

The Ninth Circuit directed the District Court to proceed with a 60-day negotiation between the state of California and the tribe. A court-appointed arbitrator will resolve any impasse through a baseball arbitration process established by Congress when it passed the IGRA.

If Indians do not need to share profits with California (or any other state), casino projects that otherwise might not have been feasible before will become economically viable. Expect a rapid expansion in Indian gaming since states must negotiate “in good faith”, yet have practically nothing to offer in the prescribed negotiations.

Many states can avoid California’s situation by simply avoiding the courts since some states have not consented to jurisdiction to be sued over the issuance of compacts. Under a U.S. Supreme Court decision, states can claim their own sovereign immunity, so there is no available tribunal to enforce the Indian’s ability to obtain expansions. But, California waived their right to avoid suit.

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
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