Bhfs.comBrownstein Hyatt Farber Schreck, LLP Introduction to Gaming Jennifer L. Carleton Kate...

bhfs.comBrownstein Hyatt Farber Schreck, LLP

Introduction to Gaming

Jennifer L. CarletonKate Lowenhar-Fisher

Association of Corporate Counsel LuncheonJune 29, 2010

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A Very Brief History of Gambling in the United States

Gambling has been popular in the United States since colonial times (esp. racehorses, dice, card games and lotteries)

The original 13 colonies used lotteries to raise revenue and build some of the nation’s finest universities

For most of the 18th and 19th centuries, commercial gambling was illegal in the U.S., but it flourished anyway (esp. in the West)

Casino gambling was legalized for a brief period (1820’s-1830’s) in New Orleans

Nevada, which became a state in 1864, legalized commercial gambling operations in 1869, but there was no real regulation

In 1909, anti-gambling forces succeeded in outlawing commercial gambling. Just two years later, social games were legalized again


The Modern Era of Gambling

In 1931, construction on Hoover Dam begins, and Nevada legalizes commercial casinos. The modern era of casino gambling begins

There is no real regulation. Local officials issue licenses in exchange for fees paid per game. The fees are split among municipal, county and state coffers

In 1945, the first state license is required, and fees are based on the percentage of gaming win estimated by the Nevada Tax Commission


Unsavory Elements

Many of the first casinos in Las Vegas are financed by mobsters Perhaps the most famous is the Las Vegas Flamingo, which

Bugsy Siegel opens in 1947. Despite his extensive criminal record, Bugsy receives a gaming license

The Flamingo helps to make Las Vegas the destination for high rollers


The 1950’s: Criminal Crackdown

The Kefauver Committee (U.S. Senate) holds hearings to investigate the criminal influences on the gambling industry

The committee finds widespread evidence of criminal elements and “skimming”

The nation is on the verge of a federal prohibition on gambling

The committee’s findings lead to a crackdown on and cleanup of the casino industry


Nevada Regulatory Framework

Nevada creates the State Gaming Control Board in 1955. Licensing of a casino owner is a privilege revocable by the state

Nevada creates the Nevada Gaming Commission in 1959. The NGC is independent of the Nevada Tax Commission, and its primary function is to establish and administer gaming regulations. The NGC and GCB (the NGC’s enforcement arm) develop extensive application and investigation procedures to screen gaming license applicants

1967 and 1969: Nevada passes corporate gaming laws to eliminate obstacles to the direct involvement of corporations in the casino industry. Casino operators now have greater access to capital through legitimate debt and equity markets. Public companies may acquire casinos

1973: Harrah’s Entertainment is traded on the NYSE


State Regulation of Gambling

Up until 1976, the law governing commercial casino gambling in states outside Nevada is the criminal law

In 1976, a referendum passes in New Jersey

to legalize casinos in Atlantic City.

New Jersey becomes the second state

to legalize casino gambling.

The New Jersey Casino Control Act

passes in 1977, and the first New Jersey

casino, Resorts International, opens in 1978


Regulation Regulation Regulation

About 10 years later, many other states follow...

Every state has its own, unique regulatory framework

All state regulatory frameworks have in common the objective of ensuring the integrity of the gambling games and the suitability of those who control and operate commercial casinos

Rigorous internal controls (operational, accounting, etc.)

Comprehensive personal and financial background investigations of individuals associated with gaming

Local license required for gaming (and liquor)


Gambling in the U.S. Today

Some form of gambling is currently legal in almost every state. Gaming tax revenue!

Forms of legalized gambling include commercial casinos, pari-mutuel wagering, Native American casinos, racinos, charitable gaming and lotteries

Gambling over the Internet is a hot topic in the U.S. Although some debate still exists regarding whether certain federal laws prohibit all forms of interstate Internet gambling, it is the current view of the U.S. Department of Justice that all forms of interstate Internet gambling are illegal

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Indian Gaming Case Study – Intellectual Property License Agreement

▪ Representation of Nevada casino operator in negotiation of a License Agreement to rebrand the flagship resort property of a western Indian nation


Challenges

Negotiation with Tribal Subsidiary

Enforceability of Agreement

Federal Approval


Negotiation with Tribal Subsidiary

Corporation formed under Tribal law The Tribe operates its hotel and casino through a corporation formed under Tribal

law

The authority of the Tribal Corporation to negotiate and execute the License Agreement with the Nevada casino operator was unclear

Both parties to the License Agreement needed to address the possibility that changes in Tribal law could impact their available rights and remedies

Applicable Law/Organizational Documents Tribe’s Constitution

Gaming Compact between the Tribe and the State

Tribe’s Corporate Code

Tribal Corporation By-laws and Articles of Incorporation


Opinions of Counsel

License Agreement required Tribal Corporation’s General Counsel to opine that: The Corporate Board had authorized the execution of the License Agreement The Corporate Board possessed the authority to execute the License Agreement Execution of the License Agreement did not require the consent or authorization of the

Tribal Government Execution of the Agreement and performance under the Agreement by the Tribal

Corporation did not violate any Tribal laws, orders, or agreements No governmental consents were necessary for the Tribal Corporation to execute or

perform under the Agreement The choice of State law to govern the License Agreement did not violate Tribal law

License Agreement required the Tribe’s Counsel to opine that: There were no actions, suits, proceedings or investigations pending or threatened

against the Tribe affecting the ability of the Tribal Corporation to perform under the License Agreement


Changes in Tribal Law - Options

Noninterference Agreement to be executed by the Tribe, pursuant to which the Tribe would agree not to take any legislative action that would have an adverse effect on the Tribal Corporation’s ability to perform its obligations under the License Agreement, or which would materially impair the Licensor’s rights under the License Agreement

Contract provision addressing the effect of a change in Tribal law that prejudiced the Licensor’s rights under the License Agreement, including the right to payments due


Enforceability of Agreement

Indian Tribes and their wholly-owned subsidiaries enjoy sovereign immunity from suit, unless that immunity is waived

In order for the provisions of the License Agreement to be enforceable against the Tribal Corporation, the Tribe must waive the Corporation’s sovereign immunity from suit

Applicable Tribal law

Is the Corporate Board empowered to act independently to waive the Tribal Corporation’s immunity?

Are there any limitations or restrictions on the ability of the Tribe to waive the immunity of the Tribal Corporation? (i.e. choice of law or venue restrictions)


Waiver of Sovereign Immunity

Tribal Court

The Tribal Corporation could not be sued, even in the Tribe’s own courts, without a waiver of its sovereign immunity

Does the Tribe have a well-established trial and appellate court, as well as published case law?

Federal Court

A waiver of sovereign immunity that would allow for claims to only be brought in federal court is not likely to be enforceable

A Tribe is not a “citizen” of any state for purposes of diversity jurisdiction; however, the incorporation of a Tribal entity pursuant to state law can create diversity for purposes of federal jurisdiction


Waiver of Sovereign Immunity (cont’d)

Governing Law. “The License Agreement shall be governed by general contract law principles and commercial law as adopted in the State. Any claims permitted to be asserted under the limited waiver of sovereignty provisions of the License Agreement shall be adjudicated in, and each party hereby consents to jurisdiction and venue of, any federal court located within the State and, in the event federal courts do not have jurisdiction, then any State court where venue is proper.”

Waiver Authority. “The Council of the [Tribe] has authorized ________________ to negotiate and execute a limited waiver of sovereign immunity of [the Tribal Corporation] and the [Tribe] as it applies to the License Agreement within the parameters set forth above.”


Federal Approval

Indian Gaming Regulatory Act (“IGRA”) - 25 U.S.C. §§ 2701 - 2721

Congress vested the National Indian Gaming Commission (“NIGC”) with broad authority to issue regulations in furtherance of the provisions of IGRA

All agreements related to Indian gaming must be reviewed by the NIGC

The relationship between the Licensor and the Licensee cannot be deemed by the NIGC to be a “management contract” or create an “impermissible proprietary interest”


Management Contracts

A management contract is defined under the NIGC regulations as “any contract, subcontract, or collateral agreement between an Indian tribe and a contractor or between a contractor and a subcontractor if such contract or agreement provides for the management of all or part of a gaming operation.”

Management contractors are subject to a determination of suitability by the NIGC, which involves a time-consuming, expensive and thorough investigation

There are mandatory provisions and substantial limitations, including fee limits, on management contracts contained in the Code of Federal Regulations

Management contracts that have not been approved by the NIGC are void


Management Contract Terms There is no definitive guidance on when an agreement that concerns the

operation of an Indian casino is considered a management contract

Those provisions to be avoided include supplying operating capital, the establishment of operating hours, the hiring, firing, training, and promoting of employees, the maintenance of the casino’s books and records, and the preparation of the casino’s financial statements and reports

Management contracts have a fee cap set a 30% of casino net revenues or 40% of net revenues if the capital investment required and the gaming operation's income projections justify the higher fee

The NIGC has stated that any entity that provides planning, organizing, directing, coordinating, or controlling services to an Indian gaming operation is deemed to be "managing" those gaming operations


Impermissible Proprietary Interest

The NIGC has taken the position that no entity other than a tribe may possess a "proprietary interest" in the tribe’s gaming activity

This determination is fact specific and there is little guidance from the NIGC on what constitutes a proprietary interest

While there is no prohibition on compensation for services based on a percentage of tribal gaming revenues, agreements containing such compensation provisions are subject to a high degree of scrutiny by the NIGC

Development, financing, and operational agreements that meet or exceed management contract caps have been found by the NIGC to be “excessive”


Delayed Effectiveness

After the License Agreement was executed and submitted to the NIGC, the NIGC provided commentary and proposed revisions

The NIGC would not discuss or negotiate any of the provisions of the License Agreement with the Licensor

The License Agreement did not become effective until the date the parties received written confirmation by an authorized representative of the NIGC indicating that the Agreement was not required to be approved by the NIGC


NIGC Revisions to License Agreement

The NIGC required amendments to the License Agreement, including:

Deletion of most of the Licensor’s approval rights, such as approval of a third-party management contractor and any of the Licensee’s standard operating procedures related to gaming

Specific limitations on the ability of the Licensor’s personnel to consult, assist, advise or direct the Licensee in any way with respect to matters involving gaming

Deletion of any reference to gaming procedures or systems

Addition of representations and warranties by the Licensor that it would not require the Licensee to modify or supplement any of its gaming-related management decisions or gaming-related operational procedures


Federal Approval

After the License Agreement was amended to the satisfaction of the NIGC, it issued a “declination letter” stating that the License Agreement was not a management contract and consequently not subject to review by the NIGC pursuant to IGRA

This was only the second time that the NIGC has approved an intellectual property license agreement for an Indian casino


Our Contact Information

Jennifer L. Carleton Shareholder

Brownstein Hyatt Farber Schreck, LLP

100 North City Parkway, Suite 1600 Las Vegas, NV 89106-4614

[email protected] tel 702.464.7086

fax 702.382.8135

Kate C. Lowenhar-Fisher

ShareholderBrownstein Hyatt Farber Schreck, LLP

100 North City Parkway, Suite 1600Las Vegas, NV 89106-4614

[email protected] 702.464.7013

fax 702.382.8135

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