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U.S. Department of the Interior Proposes Significant Amendments to Class III Tribal-State Gaming Compact Process

December 19, 2022

U.S. Department of the Interior Proposes Significant Amendments to Class III Tribal-State Gaming Compact Process

December 19, 2022

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The proposed amendment to 25 C.F.R. Part 293 would mark the first substantive amendment since 2008.

On December 6, 2022, the U.S. Department of the Interior (DOI) published a notice of proposed rulemaking to substantively amend 25 C.F.R. Part 293, which controls the tribal-state compact procedures for Class III gaming. The proposed rule adds definitions applicable to tribal gaming under the Indian Gaming Regulatory Act (IGRA), codifies long-standing DOI practices into law, expands DOI’s role in the Class III gaming compact review process, narrows the permissible bargaining chips available to both states and tribes in the negotiations and signals DOI’s intent to crack down on revenue-sharing agreements between states and tribes. States failing to comply with the compacting procedures may be found “negotiating in bad faith” pursuant to 25 U.S.C. § 2710(7)(A)(i), which enables a U.S. district court to compel a state to complete the compact in good faith. Failure to abide by the court’s order can provide for a variety of penalties, the most significant being the state’s loss of bargaining power over the conduct of Class III gaming by an Indian tribe.

Gaming on “Indian lands,” 25 U.S.C. § 2703(4), is subdivided by class. Class I and certain forms of Class II gaming may generally be conducted on Indian lands without any approvals required at the state level. Occasionally, state law may determine the Class II games offered, but every Indian tribe possessing Indian lands may conduct the game of bingo and its variations utilizing technological aids without any state interference. Class III gaming, colloquially known as “Vegas gaming” includes, inter alia, house-banked table games (like black jack, craps and roulette), sports wagering and slot machines. Tribes may conduct Class III gaming only on Indian lands under the terms of a tribal-state compact. IGRA provides that a tribe and the state(s) in which its Indian lands sit must enter into a contract setting forth the procedures governing Class III gaming for it to be wholly controlled by IGRA and not state law. Gross gaming revenue from the Indian gaming industry totaled $39 billion in 2021 and house-banked games and slot machines are a significant component of that figure. Unsurprisingly, this level of revenue commands political attention and can bring about significant legal ramifications.

The proposed amendment to 25 C.F.R. Part 293 would mark the first substantive amendment since 2008. The current rules are less than four standard pages but govern important and delicate sovereign-to-sovereign interactions between states and Indian tribes. They further authorize DOI to approve or disapprove proposed compacts. Once it receives a compact executed by the state and tribe, DOI’s role is limited but momentous. It can explicitly approve or disapprove a compact or tacitly approve by inaction. The reasons for disapproval are currently limited to proposed compacts violating IGRA, any other provisions of federal law and/or the trust obligations of the United States to Indian tribes. Thus, absent a glaring violation of IGRA or other provision of federal law, DOI typically affirmatively approves the proposed compact. DOI may also tactility approve proposed compacts by not acting within the 45-day period provided by 25 C.F.R. § 293.12, but such an approval is “only to the extent that [a proposed compact] complies with [IGRA].” Of course, DOI may explicitly reject a proposed compact and does so, having reviewed approximately more than 1,000 compacts and amendments since 2008.

The most important component of DOI’s notice of proposed rulemaking is proposed “Subpart D,” which expands the role of DOI’s compact review powers and narrows the scope of permissible bargaining chips in a compact negotiation. Specifically, this subpart articulates the appropriate content and scope of a Class III gaming compact, including provisions addressing dispute-resolution, allocation of criminal and civil jurisdiction, costs for defraying state regulation of Class III gaming, the standards of the operation and maintenance of the gaming facility, revenue sharing agreements between the state and a tribe, and remote and Internet gaming provisions.

Importantly, DOI, by virtue of the proposed amendments, is elucidating that each provision of a compact be “directly related to the operation of gaming activities.” This is accomplished by DOI stating what it considers as not directly related to the operation of gaming activities, as adapted from pertinent case law. The amendment provides examples of per se impermissible compact provisions. Some of the forbidden subjects include:

  1. Limiting third-party tribes’ rights to conduct gaming;
  2. Treaty rights;
  3. Tobacco sales;
  4. Compliance with or adoption of state environmental regulation of projects or activities that are not directly related to the tribe’s operation of gaming activities and maintenance of the gaming facility;
  5. Requiring memorandum of understanding, intergovernmental agreements or similar agreements with local governments; and
  6. Nongaming tribal economic activities including activities in or adjacent to the gaming facility, including but not limited to, restaurants, nightclubs, hotels, event centers, water parks, gas stations and convenience stores.

Further, DOI identifies the factors whereby it will determine if proposed revenue-sharing agreements between state and tribe are lawful. IGRA prohibits states from levying taxes on the funds derived from an Indian gaming operation, but states have avoided this requirement by entering into revenue-sharing agreements. Here, DOI is signaling its intent to crack down on such agreements where a tribe has agreed to share its gaming revenues without receiving a “substantial economic benefit” in return. Together, the proposed clarifying and substantive amendments illustrate an ambitious overhaul of an important component of Indian gaming, one not seen in the last 14 years when Part 293 was promulgated.

All tribal gaming regulatory authorities and entities conducting gaming-related business with them should review the proposed changes and consider their potential impact. The proposed rule was published in the Federal Register (87 FR 74916) and is available on the website. Comments must be received on or before March 1, 2023.

For More Information

If you have any questions about this Alert, please contact Frank A. DiGiacomo, Robert L. Ruben, James A. Lewis, any of the attorneys in our Gaming Industry Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.