Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 1 of 15 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA 1. NEW GAMING SYSTEMS, INC., Plaintiff, v. No. 08-CV-00698-HE 1. NATIONAL INDIAN GAMING COMMISSION; 2. PHILIP N. HOGEN, CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION; 3. NORMAN H. DES ROSIERS, VICE CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION; 4. SAC & FOX NATION OF OKLAHOMA; 5. SAC & FOX NATION BUSINESS ENTERPRISE, Defendants. REPLY BRIEF OF PLAINTIFF, NEW GAMING SYSTEMS, INC. Steven W. Bugg, OBA #1299 McAfee & Taft A Professional Corporation 10 th Floor, Two Leadership Square 211 N. Robinson Oklahoma City, OK 73102 Telephone: (405 235-9621 Facsimile: (405 235-0439 steven.bugg@mcafeetaft.com Attorneys for New Gaming Systems, Inc.
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 2 of 15 Table of Contents Page No. I. The Standard of Review is De Novo; Deference Is Not Applicable... 1 II. III. IV. Because the NIGC Final Order Is Based Upon the Coleman Letter Which Reached a Wrong Legal Conclusion, the NIGC Final Order Must Be Vacated... 3 The Term Management Contract Does Not Include Supply Agreements; Only Contracts for the Overall Management and Operation of a Gaming Facility... 4 The Equipment Lease Does Not Provide for Management of All or Part of a Gaming Operation... 4 V. The Regulations Defining Management Contracts Are Void For Vagueness And Have Been Arbitrarily Enforced... 8 Conclusion... 10
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 3 of 15 Cases Table of Authorities Page No. Cheyenne-Arapaho Gaming Comm n v. National Indian Gaming Comm n, 214 F.Supp.2d 1155 (N.D. Okla. 2002... 4 Christopher v. Smithkline Beacham Corporation, U.S., 132 S.Ct. 2156 (2012... 8 Federal Communications Comm n v. Fox Television Stations, Inc., U.S., 132 S.Ct. 2307 (2012... 2,8,9,10 First American Kickapoo Operations, LLC v. Multi-Media Games, Inc., 412 F.3d 1166 (10 th Cir. 2005... 6 Forest Guardians v. U.S. Fish and Wildlife Service, 611 F.3d 692, 704 (10th Cir. 2010... 2 Konikov v. Orange County, Florida, 410 F.3d 1317 (11 th Cir. 2005... 10 Machal, Inc. v. Jena Band of Choctaw Indians, 387 F.Supp.2d 659 (W.D. La. 2005... 3 U.S. v. Casino Magic Corp., 293 F.3d 419 (8 th Cir. 2002... 7,8 Usery v. Kennecott Copper Corp., 577 F.3d 1113 (10 th Cir. 1977... 4 Wells Fargo Bank v. Lake of the Torches, 658 F.3d 684 (7 th Cir. 2011... 3,6,7,9 Statutes 25 U.S.C. 2701... 4 25 U.S.C. 2711... 4 25 C.F.R. 502.5... 3 25 C.F.R. 502.15... 3-4 Other Authorities S. Rep. No. 100-446, 1988 U.S. Code Cong. & Ad. News 3071... 4
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 4 of 15 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA 1. NEW GAMING SYSTEMS, INC., Plaintiff, v. No. 08-CV-00698-HE 1. NATIONAL INDIAN GAMING COMMISSION; 2. PHILIP N. HOGEN, CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION; 3. NORMAN H. DES ROSIERS, VICE CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION; 4. SAC & FOX NATION OF OKLAHOMA; 5. SAC & FOX NATION BUSINESS ENTERPRISE, Defendants. REPLY BRIEF OF PLAINTIFF, NEW GAMING SYSTEMS, INC. New Gaming Systems, Inc. ( NGS submits this Reply Brief to address certain issues raised by the National Indian Gaming Commission ( NIGC in its Response Brief filed June 20, 2012 (Doc. #80. I. The Standard of Review is De Novo; Deference Is Not Applicable. At oral argument held April 11, 2012, on the objection of NGS to the administrative record, counsel for NIGC agreed that the determination of whether the Equipment Lease constituted a management contract is a question of law and that the discretion of the NIGC to act in the best interests of a tribe is implicated only after a contract is determined to be a management contract and the NIGC is asked to approve that contract. In reviewing agency
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 5 of 15 action, matters of law are reviewed de novo. Forest Guardians v. U.S. Fish and Wildlife Service, 611 F.3d 692, 704 (10th Cir. 2010. In its Response Brief, NIGC is now apparently revising its position and asserting that this action must be reviewed under an arbitrary and capricious standard and that the determination by the NIGC that the Equipment Lease constitutes a management contract is entitled to deference. See Response Brief at pp. 2, 11. The determinations of whether particular activities constitute management and whether a particular contract is a management contract are issues of law. To provide that the NIGC has discretion to determine whether particular activities constitute management in some contracts but not others results in parties not being able to determine in advance whether their contract will be deemed a management contract and results in arbitrary or discriminatory enforcement by NIGC, a violation of due process. Federal Communications Comm n v. Fox Television Stations, Inc., U.S., 132 S.Ct. 2307, 2317 (2012. NGS has repeatedly asserted that the NIGC improperly acted in order to assist the Sac & Fox Nation (the Nation and the Sac & Fox Nation Business Enterprise (the Enterprise in avoiding their obligations to NGS under the Equipment Lease. By its order entered April 13, 2012, the Court deferred ruling on the objection of NGS to the administrative record based upon the representations of counsel that the determination of whether the Equipment Lease constituted a management contract was a legal issue subject to de novo review. If instead the standard of review is the arbitrary and capricious standard with deference owed to the agency s determination, then the NIGC s motivations are directly implicated. Nothing could be more arbitrary and capricious than for the NIGC to act to assist the Nation and Enterprise in evading their contractual obligations. NGS renews its objection to the administrative record and requests that the Court grant that objection requiring supplementation of the record. 2
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 6 of 15 II. Because the NIGC Final Order Is Based Upon the Coleman Letter Which Reached a Wrong Legal Conclusion, the NIGC Final Order Must Be Vacated. At footnote 2 on page 16 of the Response Brief, NIGC acknowledges that the NIGC Final Order is based directly upon the Coleman Letter. As NIGC states, the Chairman s Decision affirmed and adopted the Coleman Letter which was subsequently affirmed by the NIGC Final Order. However, the Coleman Letter s conclusion is based upon a clear error of law, rendering it and the subsequent NIGC decisions relying upon it invalid. In rendering her opinion that the Equipment Lease and Promissory Note constituted a management contract, Ms. Coleman relied in significant part upon the existence of the Promissory Note. Ms. Coleman referenced the Note and concluded (emphasis added: NGS s role in operating the gaming devices, together with the financial arrangement between the parties, leads us to the conclusion that the Agreements constitute a management contract. Ms. Coleman did not conclude that the Equipment Lease alone constituted a management contract, but that the Agreements constituted a management contract. Because Ms. Coleman reached the wrong legal conclusion about the Promissory Note, her entire conclusion must be disregarded. As discussed in Section II of the Brief of Plaintiff, to be considered a management contract the Promissory Note must be a collateral agreement that itself provides for management of all or part of a gaming operation. 25 C.F.R. 502.5, 502.15; Machal, Inc. v. Jena Band of Choctaw Indians, 387 F.Supp.2d 659, 667 (W.D. La. 2005; Wells Fargo Bank v. Lake of the Torches, 658 F.3d 684, 701 (7 th Cir. 2011. Because the Promissory Note contains no provisions that could be considered management, Ms. Coleman erred as a matter of law in relying upon the Promissory Note in finding that the Equipment Lease and Note together were a management contract. While the Coleman Letter was not final agency action and was not 3
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 7 of 15 subject to challenge, Cheyenne-Arapaho Gaming Comm n v. National Indian Gaming Comm n, 214 F.Supp.2d 1155, 1167 (N.D. Okla. 2002, it nevertheless has formed the basis for this entire legal proceeding. Because the Coleman Letter erred as a matter of law and because the NIGC Final Order is based directly upon that Letter, the NIGC Final Order must be vacated. III. The Term Management Contract Does Not Include Supply Agreements; Only Contracts for the Overall Management and Operation of a Gaming Facility. In Section I of the Brief of Plaintiff, NGS outlined the statutory construct of the Indian Gaming Regulatory Act ( IGRA, 25 U.S.C. 2701, et seq. and the fact that the NIGC s statutory authority for Class II gaming is limited to approval of management contracts. 25 U.S.C. 2711. The legislative history of IGRA provides that only agreements governing the overall management and operation of an Indian gaming facility are management contracts while contracts for the procurement of particular services, materials or supplies are not management contracts. S. Rep. No. 100-446, 1988 U.S. Code Cong. & Ad. News 3071, 3085. In its Response Brief, the NIGC did not address the assertion that only contracts governing the overall management of a gaming facility are management contracts subject to regulation by the NIGC. Rather, NIGC adopted an extremely broad interpretation of its extremely broad regulation, 25 C.F.R. 502.15, and asserted that if any clause is found to provide for management of any part of a gaming facility, the entire contract is void as a management contract. Such a construction conflicts with the design of the statute and exceeds the administrative authority granted and must be rejected. Usery v. Kennecott Copper Corp., 577 F.3d 1113, 1118 (10 th Cir. 1977. IV. The Equipment Lease Does Not Provide for Management of All or Part of a Gaming Operation. NIGC relies upon three clauses identified in the NIGC Final Order for its management contract determination. None of such clauses provide for management activities of part of a gaming operation, much less for the overall management of a gaming operation as required by 4
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 8 of 15 statute. Further, NIGC has cited no cases where similar clauses have formed the basis for a finding that a contract was a management contract. The first clause relied upon by the NIGC is paragraph 1.1 concerning the lease of gaming machines. NIGC asserts that such paragraph grants NGS authority to control the selection of games which constitutes management. NIGC s position is based upon a misreading of paragraph 1.1 and a failure to explain how the powers purportedly granted NGS under paragraph 1.1 are different from a standard lease. Paragraph 1.1 does not specify who will select the leased machines, only that 80% of such machines will be of NGS design and 20% from other manufacturers agreed upon by the parties. Prior to execution of the Equipment Lease, NGS provided multiple demonstrations and descriptions of its machines to representatives of the Nation and Enterprise. By selecting NGS as the supplier of the machines, the Nation and Enterprise inherently selected the machines which they had previously reviewed. Likewise, in the summer of 2004, Amos Black and Bill Sasser, the directors of the Enterprise, were making all management decisions associated with the casino. Sasser Depo. pp. 14-16 (R. NIGC 225. Paragraph 1.1 does not state that NGS will select the machines, and NGS did not in fact select the machines, only supply them. If the mere fact that a lessor supplying its own machines under an equipment lease is deemed to be management because that vendor is choosing the machines for the casino, then all leases are management contracts, a result clearly rejected by the statutory provisions of IGRA. NIGC has never stated how the powers purportedly granted to NGS under paragraph 1.1 differ from a standard lease. NIGC s reliance on paragraph 16.4 concerning selection of an auditor is also misplaced. Paragraph 16.4 only provides that the accounting firm will be mutually selected, not selected 5
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 9 of 15 by NGS, and the scope of the independent audit subject to that requirement is limited to matters applicable to the use of the Equipment. NIGC cites certain cases discussing selection of auditors in completely unrelated contexts, but cites no case where a clause similar to paragraph 16.4 is found to be management of a gaming operation. Finally, the NIGC relies upon paragraph 6 concerning the cash accounting system. NIGC s position continues to reflect a basic misunderstanding of that system and how it operates with the NGS games. In short, the NGS machines are designed to work with the cash accounting system so that by selecting NGS as the supplier of the games, the Nation and Enterprise also selected the cash accounting system. See Brief of Plaintiff, pp. 20-21. The conclusion that the Equipment Lease is not a management contract is clear when one compares the provisions of agreements found to be management contracts with the provisions of the Equipment Lease. NIGC cites three circuit court decisions wherein agreements were found to be management contracts. However, a comparison of the extensive management control contained in such agreements contrasts vividly with the provisions of the Equipment Lease. NGS has previously compared the terms of the Equipment Lease to the provisions of the agreement at issue in First American Kickapoo Operations, LLC v. Multi-Media Games, Inc., 412 F.3d 1166 (10 th Cir. 2005. See Brief of Plaintiff, pp 22-23. The Equipment Lease contains none of the major provisions relied upon by the Tenth Circuit in finding that the operating agreement therein constituted a management contract. A similar result follows in Wells Fargo Bank v. Lake of the Torches, 658 F.3d 684 (7 th Cir. 2011. In that action, a bond indenture and related documents were found to be a management contract because of the excessive control that the loan documents gave to the bond trustee. The bond indenture gave the bond trustee complete control of the cash generated from 6
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 10 of 15 the casino by requiring all of the cash to be deposited into a trust account to be released by the bond trustee only upon certain conditions. The bond indenture placed substantial restrictions on capital expenditures and restricted the removal of the general manager without the bondholders consent. Also, if the financial coverage ratio declined, the casino was required to retain an independent management consultant and to implement the consultant s recommendations. Further, the control of the bond trustee increased substantially after default. Upon default, the bond trustee could require replacement of existing management and the installation of a new management team. Id. at 698. Again, none of the provisions relied upon by the Seventh Circuit in the Lake of the Torches decision are present in the Equipment Lease. Conversely, the Equipment Lease expressly provides that the Enterprise shall make all final decisions. Equipment Lease 1.4. Finally, in U.S. v. Casino Magic Corp., 293 F.3d 419 (8 th Cir. 2002, the court was required to consider the effect of multiple agreements and whether the cumulative control provided by such agreements rendered them as collectively a management contract. Initially, the tribe and Casino Magic had entered into a consulting agreement which the NIGC determined did not constitute a management contract. NIGC noted that even though Casino Magic was advising and consulting on many aspects of the gaming operation, because the tribe retained ultimate control, the consulting agreement was not a management contract. Id. at 421-422. However, the parties then entered into a construction and term loan agreement. As a condition of the loan, the casino was required to accept and comply with all recommendations of the consultant, and the consulting agreement could not be terminated while the loan was outstanding. The court held that through the requirements of the loan agreement, Casino Magic had effectively converted its 7
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 11 of 15 consulting agreement into a management contract by mandating that its recommendations be implemented. None of such provisions are present in the Equipment Lease. The Equipment Lease is not a management contract and management of the casino remained in the board of directors of the Enterprise, not NGS. The Equipment Lease specifically provides that the Enterprise board retained management authority and control and Mr. Sasser, one of the directors, testified that the Enterprise board in fact exercised management control over the casino, not NGS. Sasser Depo. pp 14-16 (R. NIGC 225. V. The Regulations Defining Management Contracts Are Void For Vagueness And Have Been Arbitrarily Enforced. In Section V of the Brief of Plaintiff, NGS asserted that the regulations defining management contracts are void for vagueness because they do not provide parties fair warning of the types of provisions that will constitute management. In two recent decisions, the Supreme Court addressed the void for vagueness doctrine and reiterated the requirement that parties be provided fair notice of the conduct regulated. Even when speech is not at issue, the void for vagueness doctrine addresses at least two connected but discrete due process concerns: first, that regulated parties should know what is required of them so they may act accordingly; second, precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or discriminatory way. Federal Communications Comm n v. Fox Television Station, Inc., U.S. _, 132 S.Ct. 2307, 2317 (2012. The Court described the harm that can arise from vague regulations in Christopher v. Smithkline Beacham Corporation, U.S., 132 S.Ct. 2156, 2168 (2012 noting the unfair surprise that can arise when the regulations do not provide fair warning of the conduct prohibited. An agency adopting ambiguous regulations and then demanding deference of its interpretation of those regulations: 8
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 12 of 15 creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby frustrat[ing] the notice and predictability purposes of rulemaking. [Citations omitted] It is one thing to expect regulated parties to conform their conduct to an agency s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference. The vagueness of the definition of management contract was raised by the Seventh Circuit in the Lake of the Torches case. Congress was in no position to specifically identify the red flags that would indicate management and therefore left to the NIGC the task of delineating in more concrete terms which arrangements deserved scrutiny. Wells Fargo Bank v. Lake of the Torches, supra at 697. The court noted that unfortunately, the NIGC has not provided the definitive guidance Congress anticipated. Id. at 697. The NIGC was urged to provide definitive guidance on what renders a contract a management contract. Id. at 697, fn. 13. In that action, the court was only able to act and find the bond indenture constituted a management contract because the indenture so clearly provided management control to the bond trustee in certain circumstances. Such control is not present in the Equipment Lease. When NGS and the Nation and Enterprise entered into the Equipment Lease in 2003, there was no authority indicating that the types of activities cited by the NIGC would render the Equipment Lease a management contract. Indeed, even today, NIGC has cited no authority where provisions similar to those complained of in the Equipment Lease have supported a finding of a management contract. The parties specifically agreed that the Equipment Lease would not constitute a management contract, that NGS would have no management authority, and that the Enterprise would make all final decisions regarding the casino. Equipment Lease Recital B, 1.4, 22. All parties were represented by counsel in negotiating the Equipment 9
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 13 of 15 Lease. Equipment Lease 31. The Nation and Enterprise were represented by Mike McBride who was then attorney general of the Nation. The attorney general surely would not have permitted the Nation to sign contracts that were void as management contracts. The term management contract as applied to the Equipment Lease was sufficiently vague that persons of common intelligence could guess as to its meaning and differ as to its application. Konikov v. Orange County, Florida, 410 F.3d 1317, 1329 (11 th Cir. 2005. The lack of a clear definition of management contract has further provided the NIGC with the ability to act in an arbitrary and discriminatory way. Federal Communication Comm n v. Fox Television Stations, Inc., supra. The record reflects that NGS and its Equipment Lease have been singled out for enforcement by the NIGC. NGS has provided evidentiary support for its assertion that the NIGC acted in order to aid the Nation and Enterprise in avoiding their contractual obligations. Such arbitrary and discriminatory enforcement actions are precisely the harm that is available when regulations are vague. Conclusion The NIGC Final Order must be reversed because it is contrary to law and constitutes arbitrary and capricious action. The Court should determine that the Equipment Lease is not a management contract and is valid and enforceable. In the alternative, the Court should find that the NIGC definition of management contract is vague and lacks enforceable standards and has been arbitrarily applied and is therefore void. /s/ Steven W. Bugg Steven W. Bugg, OBA #1299 McAfee & Taft A Professional Corporation 10 th Floor, Two Leadership Square 211 N. Robinson 10
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 14 of 15 Oklahoma City, OK 73102 Telephone: (405 235-9621 Facsimile: (405 235-0439 steven.bugg@mcafeetaft.com Attorneys for New Gaming Systems, Inc. CERTIFICATE OF SERVICE I hereby certify that on this 31 st day of July, 2012, I electronically transmitted the attached document to the Clerk of the Court using the ECF system for filing and transmittal of a Notice of Electronic Filing to the following ECF registrant: D. Michael McBride III, Esq. Crowe & Dunlevy, P.C. 500 Kennedy Building 321 South Boston Tulsa, OK 74103-3313 918/592-9824 918/592-6317 (FAX mcbridem@crowedunlevy.com Jimmy L. Goodman, Esq. Amanda Leigh Maxfield Green, Esq. Crowe & Dunlevy 20 N. Broadway, Suite 1800 Oklahoma City, OK 73102 405/235-7700 405/239-6651 (FAX goodmanj@crowedunlevy.com maxfiela@crowedunlevy.com Attorneys for Sac & Fox Nation and Sac & Fox Nation Business Enterprise Robert Don Evans, Jr., Esq. US Attorney's Office-OKC 210 W Park Ave, Suite 400 Oklahoma City, OK 73102 405/553-8831 405/553-8885 (FAX Don.Evans@usdoj.gov 11
Case 5:08-cv-00698-HE Document 84 Filed 07/31/12 Page 15 of 15 Ty Bair, Esq. US Dept of Justice Environ Div-663-DC P O Box 663 Washington, DC 20044 202-307-3316 tyler.bair@usdoj.gov Attorney for National Indian Gaming Commission; Philip N. Hogen, and Norman H. DesRosier /s/ Steven W. Bugg Steven W. Bugg 12