Topic:
GAMBLING; GAMES OF CHANCE; INDIANS; LOTTERIES;
Location:
GAMBLING;

OLR Research Report


August 14, 2008

 

2008-R-0441

KENO AND TRIBAL—STATE AGREEMENTS

By: Veronica Rose, Principal Analyst

You asked if state-run or state-authorized keno (a game of chance in which players select numbers and bet that they will match randomly drawn numbers) would violate the state's revenue-sharing gambling agreements with the Mohegans and Mashantucket Pequots.

This office is not authorized to give legal opinions and this report should not be considered one.

SUMMARY

Whether state-run or state-authorized keno would violate the state's revenue-sharing agreements with the Mohegans and Mashantucket Pequots appears to depend on the interpretation of certain phrases in the agreements. The two major issues appear to be (1) whether keno is a “commercial casino game” and (2) whether the state is an “other person” under the agreements. Because there is no Connecticut or controlling federal court ruling on these precise questions, we are unable to provide a definitive answer.

Under separate agreements with the state, the Mohegans and Mashantucket Pequots have agreed to pay the state 25% of their gross slot machine revenue “so long as no other person (emphasis ours) within the State lawfully operates . . .[any] commercial casino games.” If the Connecticut Lottery Corporation (CLC) falls within the definition of “other person” or the proposed keno game is a “commercial casino game,” authorizing it may violate the agreements, thereby relieving the tribes of their obligation to continue making payments to the state. State law prohibits CLC from introducing any games that would violate the agreements.

In construing Michigan state-tribal agreements that gave two tribes gaming exclusivity provided “no other person” was authorized to conduct commercial casino gaming, the court ruled that the phrase “other person” did not apply to state-run club keno games because the state was one of the parties to the agreements. Thus, regardless of whether keno was a commercial casino game, the state could operate it without violating the agreements. (The court did not rule on whether the game was a casino game or commercial casino game.)

Neither state law nor the state's agreements with the Mohegans and Mashantucket Pequots define “commercial casino games.” And the gambling literature suggests a lack of consensus. Several jurisdictions have concluded that their keno games are permissible lottery games under their laws. These include the District of Columbia, Maryland, Massachusetts, New York, and Rhode Island.

Critics contend that keno is more like casino gambling than a lottery game. The Idaho Constitution prohibits it—defining it as an example of a casino game. The National Indian Gaming Commission (NIGC) regulations define it as a casino game for purposes of the federal Indian Gaming Regulatory Act (IGRA). This means that Indian tribes may conduct keno only under negotiated state-tribal compacts.

Both the California Supreme Court and a federal district court in South Dakota have ruled that keno is not a lottery game (Western Telcon v. California State Lottery, 13 Cal. 4th 475 (1996)); Sisseton-Wahpeton Sioux Tribe v. U.S. 804 F. Supp, 1199 (D.S.D.1992)). But the rulings are not binding on Connecticut courts. In Western Telcon, the California Supreme Court ruled that the keno game offered by the California State Lottery (CSL) was not a lottery game because it pitted bettors against CSL, which as banker, bet against each participant. Also, the game did not offer a prize by chance, which is characteristic of lottery games. Instead, CSL could win all the bets and never pay a prize, or it could lose all the bets and pay a prize to each participant.

The Connecticut Division of Special Revenue (DSR), which must approve lottery games, contends that keno is a lottery game and offering it would not violate the state-tribal agreements. The Connecticut Lottery Corporation (CLC), which is responsible for designing lottery games, says it has not researched or taken a position on the issue.

The report discusses the Weston Telcon and Michigan cases at length because the former is frequently cited and the latter involves agreements that are similar to Connecticut's agreements.

IGRA AND INDIAN SLOT MACHINE AGREEMENTS

IGRA provides a statutory framework for resolving legal, regulatory, and jurisdictional issues involving gaming on federally recognized Indian reservations (25 USC 2701 et seq.). Under IGRA, class III gaming (including slot machine, casino, lottery, and pari-mutuel wagering) is lawful on such reservations only if (1) authorized by a NIGC-approved tribal ordinance; (2) conducted in a state that permits such gaming for any purpose by any person, entity, or organization; and (3) conducted under a negotiated tribal-state or procedures prescribed by the Department of Interior secretary.

To resolve a dispute about whether the compact (in the case of the Mohegans) and federal procedures (in the case of the Mashantucket Pequots) allow them to operate slot machines, the tribes entered into separate agreements with the state giving them the exclusive right to operate slot machines. In exchange, the tribes have agreed to pay the state 25% of their gross slot machine revenue. The tribes have agreed:

that so long as no change in State law is enacted to permit the operation of video facsimiles or other commercial casino games by any other person and no other person within the State lawfully operates video facsimile games or other commercial casino games, [the tribes] shall not assert the right to operate video facsimile games except in accordance with the [agreements]. In the event that any change in State law is enacted to permit the operation of video facsimiles or other commercial casino games by any other person or any other person within the State lawfully operates video facsimile games or other commercial casino games, [the tribes] shall not be bound by the provisions of [the agreements] . . . provided, however, that in the event that the [tribes] lawfully operate video facsimile games or other commercial casino games under the provisions of the Indian Gaming Regulatory Act, [the tribes] shall not thereby be relieved of [their] obligations hereunder . . . . (see second Amendment to the Memorandum of Understanding, p. 2 and 3).

Neither state law nor the agreements define “commercial casino games.” But all the casino sites we researched list keno as a game offered by casinos.

WHAT IS KENO?

Keno is a game of chance in which players select numbers (typically 10 to 15) and try to match them with numbers (typically 20) randomly generated from a field of one through 80. The more numbers a player matches, the bigger the payout. Payoffs vary depending on game structure and frequency of drawings.

LOTTERY V. CASINO GAME

State-run Keno

Several jurisdictions have concluded that keno is a permissible lottery game under the laws in their jurisdictions. Typically, the conclusion is based on an attorney general's opinion that keno contains the necessary elements of a lottery “chance, prize, and consideration.” In the “fast-draw” version of state-run keno, drawings are typically held every four or five minutes and results displayed on monitors at the point-of-sale, usually licensed establishments such as bars and restaurants.

The jurisdictions currently offering keno as a lottery game include: the District of Columbia, Georgia, Kansas, Maryland, Massachusetts, Missouri, New York (quick draw), Oregon, Rhode Island, and West Virginia. They also include Michigan, which earlier this year settled a long-standing lawsuit with the Little Traverse Bay Bands of Odawa Indians and the Little River Band of Ottawa Indians over the Michigan Lottery's “club keno.”

Jurisdictions that have concluded that keno is not a lottery game include Illinois (see Illinois Att. Gen. Op. No. 06-001, Jan. 24, 2006). The Idaho Constitution prohibits keno—defining it as a casino game (Idaho Const. Art. III-20). And the Wisconsin Constitution prohibits the state from offering keno as a lottery game (Wis. Const. Art. IV 24(5)(c)).

In 2003, the Tennessee attorney general issued an opinion stating that:

whether keno is a game of chance associated with casinos. . .is an issue of fact that can only be conclusively determined by a court of law after considering all relevant evidence. Before authorizing the operation of keno, the Tennessee Lottery Corporation should compile evidence and make factual findings to support its conclusion that the game is not prohibited (Att. Gen. Op. No. 03-058, May 5, 2003).

As far as we have been able to determine, no Tennessee court has ruled on this issue.

Federal Regulations and Pertinent Cases

NIGC regulations define class III gaming as all forms of gaming that are not class I or class II gaming, including any house banking game such as keno (25 CFR 502.4(a)(2)). The regulations define “house banking game” as any game of chance “played with the house as a participant in the game, where the house takes on all players, collects from all losers, and pays all winners, and the house can win” (25 CFR 502.11). The legal effect of this definition is that an Indian tribe wanting to operate keno may do so only under negotiated state-tribal compact or equivalent federal procedures.

A federal district court has found NIGC's classification of keno as a class III game to be a reasonable interpretation of IGRA (Sisseton-Wahpeton Sioux Tribe v. U.S.,. 804 F. Supp. 1199; (D.S.D. 1992)). According to the court, “[k]eno is a 'house percentage banking game' in which the house pays all winners and collects from all losers. The house essentially acts as a player n the game which 'takes on' all other players. Thus, the house has a stake in the outcome of the game” (id., at 1202).

Similarly, in Western Telcon, the California Supreme Court focused on the distinctions between banked games and lotteries in determining whether the California State Lottery (CSL) could, consistent with its statutory authority, operate casino-style keno (Western Telcon v. California State Lottery, 13 Cal. 4th 475 (1996)). In CSL keno, “participants tried to match between one and 10 numbers to a set of 20 randomly selected from a field of one through 80 by a CSL computer and displayed on video screens at designated locations equipped with computer terminals.

According to the Court, CSL keno was not a lottery game because players bet against CSL, which acted as banker. The Court ruled that “a lottery must involve distribution of one or more prizes, rather than mere bilateral waging.” It said CSL keno did not offer a prize by chance. Each player bet on the outcome of the “draw” of random numbers. If the player lost, CSL kept the wager; if the player won, CSL paid the player a preset amount, based only on the amount of the wager, numbers selected, and numbers matched. CSL could win all the bets and never have to pay a prize, or it could lose all the bets and pay a prize to each participant. The payoff to any given player did not depend upon how much money other players bet, either in total or on the same winning numbers. Thus, CSL keno was a banking game “with CSL acting as the bank, rather than a lottery.” CSL was the “the one against the many, which is the supreme test of a banking game.”

The Court noted that “superficially, some banking games may resemble some forms of lottery” but the two categories of gambling are distinguishable “not by the manner of play but by the nature of the betting itself. . . . In a lottery, the operator does not bet against any of the participants, but merely offers up a prize for distribution to one or more of them. In a banking game, in contrast, the operator does compete with the other participants and has a direct interest in the outcome of the game (id., at 485-88).

Michigan Case

The Little River Band of Ottawa Indians and Little Traverse Bay Bands of Odawa Indians entered into separate gaming compacts with the state in 1999. Each tribe agreed under its compact to pay the state 8% of the net slot machine revenue so long as:

there is a binding Class III Compact in effect between the State and Tribe and no change in state law is enacted to permit or permits the operation of electronic games of chance or commercial casino games by any other person (except a person operating such games in the city of Detroit pursuant to the Initiated Law of 1996, MCL 432.201 et seq.) and no other person (except a federally recognized Indian Tribe operating pursuant to a valid Compact under IGRA or a person operating in the City of Detroit pursuant to the Initiated Law of 1996, MCL 432.201) within the state lawfully operates electronic games of chance or commercial casino games. . . .

In 1990, the Michigan Lottery Bureau introduced “keno” with drawings four times per week in authorized establishments. In 2002, the bureau started daily drawings. In 2003, it introduced “club keno” with drawings every five minutes. The tribes claimed that club keno was a commercial casino game that violated the tribal-state compacts, which gave the tribes and non-Indian casinos the exclusive right to operate such games. As a result, they stopped making payments to the state claiming that their obligations terminated when the state introduced club keno.

The state contended that club keno was neither an electronic game of chance as defined under the state-tribal compacts nor a commercial casino game that, within the compacts' meaning, could nullify revenue sharing, but was an extension of a lottery game that predated the compacts. It sued the tribes in federal court alleging that their failure to make the payments was a breach of the compacts. The Little Traverse Bay Band filed a counterclaim, seeking a refund of payments it had made to the state after the introduction of club keno (State of Michigan v. Little River Band of Ottawa Indians et. al, 2007 U.S. Dist. Lexis 31213 (W.D. Mich. (2007)).

The court did not rule on whether keno was a commercial casino game. Rather, it focused largely on whether the state was an “other person” within the meaning of the compacts' provisions giving the tribes gaming exclusivity so long as “no other person” operated commercial casino games. It concluded that:

the use of the word “other” makes it unnecessary to decide what the parties meant by “casino game,” commercial casino game,” or “change in State law,” despite the parties' extensive arguments on these additional issues. If no “other person” is involved, then it becomes immaterial whether the “law,” whether statutory or administrative, has been changed or whether the State's Club Keno lottery game is operating as a “commercial casino game.” The State is not an “other person” operating the game (id., at 24).

The parties settled their dispute in March 2008 agreeing (1) to reduce the tribes' gambling payments to the state (from 8% to 6%); (2) that keno and other similar gaming by the state will not be considered new commercial gaming if such gaming does not involve large-scale use of electronic machines; and (3) that if new commercial gaming occurs in any of the tribes' market areas, payments will not be terminated but will be suspended and can be reinstated later at a reduced rate if the tribes' casino business continues to grow.

CONNECTICUT LAW AND LOTTERIES

State Law

Connecticut law does not define “lottery.” But it authorizes CLC to “operate and manage the lottery” and “introduce new lottery games, modify existing lottery games, utilize existing and new technologies. . .except that the corporation shall not offer any interactive on-line lottery games, including on-line lottery games for promotional purposes” (CGS 12-806(2) and (4)). It also prohibits CLC from taking any action with respect to the introduction or modification of lottery games that would violate the compact or any agreements the state has with the Mohegans and Mashantucket Pequots Tribal (CGS 12-807). And it requires DSR to adopt regulations governing the games that CLC offer.

Agency Position

According to the CLC legislative liaison, Jim McCormack, CLC has not researched the issue of whether keno would violate the state's revenue-sharing agreements with the tribes and CLC has no position on the issue at this time. According to Paul Bernstein, DSR's legislative liaison, DSR believes that state-authorized keno would not violate the agreements because “it would be an extension of lottery products.”

State–Tribal Agreements

Under the procedures and compact governing class III gaming at the Foxwoods and Mohegan Sun casinos, a lottery is any:

game for which tickets are sold, the winning ticket or tickets being secretly predetermined or ultimately selected in a chance drawing, and in which the holders of winning tickets receive money or something of value.

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