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Colorado River Indian Tribes v. National Indian Gaming Commission

August 24, 2005

COLORADO RIVER INDIAN TRIBES, PLAINTIFF,
v.
NATIONAL INDIAN GAMING COMMISSION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: John D. Bates United States District Judge

MEMORANDUM OPINION

Plaintiff Colorado River Indian Tribes ("Colorado River" or "the tribe") is a federally-recognized Indian Tribe that operates a casino on its tribal lands in Parker, Arizona. The casino conducts what is known as Class III gaming, which includes most conventional forms of casino gaming, such as slot machines, roulette, and blackjack. On January 10, 2001, the tribe interrupted the National Indian Gaming Commission ("NIGC" or "Commission") as it was conducting an audit of the casino to assess the tribe's compliance with the Commission's minimum internal control standards ("MICS"), a set of detailed rules that regulate the day-to-day activities of an Indian casino. The tribe maintained that the NIGC had exceeded its statutory powers in promulgating the MICS for Class III gaming, and that the compliance audit was therefore unlawful. The NIGC left the premises without completing the audit.

On July 17, 2003, the NIGC issued a Final Decision and Order in which it imposed a fine of $2,000 on Colorado River for terminating the audit, and affirmed its authority under the Indian Gaming Regulatory Act ("IGRA") to issue and enforce MICS for Class III operations. Colorado River now brings this action against the NIGC challenging the Final Decision and Order on the ground that the NIGC is without the authority to regulate Class III gaming. Upon a careful review of the text, the structure, and the legislative history of the IGRA, and the entire record in this case, the Court is compelled to agree with Colorado River that the statute does not confer upon the NIGC the authority to issue or enforce MICS for Class III gaming. While surely well-intentioned, the NIGC has overstepped its bounds. The Court therefore vacates the Final Decision and Order, and declares unlawful the MICS as applied to Class III gaming.

BACKGROUND

Because this case involves a challenge to an agency's authority to issue regulations, the relevant background consists not only of the factual and procedural history of the case, but also a brief overview of the applicable statutes and regulations.

I. The Indian Gaming Regulatory Act

For centuries, the Indian tribes have occupied a unique position in American jurisprudence. One defining aspect of the legal status of the Indian tribes has been their treatment as "domestic dependent nations" exercising "inherent sovereign authority over their members and territories." Okla. Tax Comm'n v. Citizen Bank Potawatomi Indian Tribe of Okla., 498 U.S. 505, 509 (1991) (quotation omitted). The sovereignty of the Indian tribes is unusual, however, in that it is subordinate to the federal government. See Washington v. Confed. Tribes of the Colville Indian Reservation, 447 U.S. 134, 156 (1980). The Supreme Court has consistently affirmed the authority of Congress to enact statutes that expand the role of the federal government or the States over Indian affairs at the expense of tribal sovereignty. See United States v. Lara, 541 U.S. 193, 200 (2004); New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 333-34 (1983).

One traditional area of Indian sovereignty in which the federal government has begun to assert a role for itself and the States in recent years is Indian gaming. The federal government historically had not played a direct role in the regulation of gaming activities on Indian lands. For decades, its involvement in Indian gaming was limited to oversight activities such as the approval of tribal ordinances relating to gaming activities, the review of tribal bingo management contracts with outside authorities, and the promotion of tribal gaming enterprises through financial incentives. See California v. Cabazon Band of Mission Indians, 480 U.S. 202, 218-19 (1987). The States, for their part, already had on the books statutes of general application that prohibited or regulated casino gaming, but the Indian tribes resisted the application of those laws to gaming on Indian lands. See S. Rep. No. 100-446, at 1 (1988), reprinted at 1998 U.S.C.C.A.N. 3071. The authority of the States to extend the reach of their general gaming regulations to Indian gaming operations was, for some time at least, an open question of law.

The Supreme Court addressed that question in its 1987 decision in Cabazon Band. See 480 U.S. at 202. The Court observed that the application of state gambling laws to Indian gaming had not been authorized by Congress. The Court also noted that state regulation of Indian gaming "would impermissibly infringe on tribal government," and "[s]elf-determination and economic development are not within reach if the Tribes cannot raise revenues and provide employment for their members" through gaming activities. Id. at 219-21. The Court therefore concluded that the States were without the authority to impose laws that regulate casino gaming on Indian lands. The Court exempted from its decision those state laws that prohibited rather than regulated gambling: States that outlawed gambling in its entirety within their borders were permitted to apply those laws to Indian casinos. See id. at 220-21.

The decision in Cabazon Band led to the enactment of the Indian Gaming Regulatory Act. Pub. L. 100-497, § 2, Oct. 17, 1988, 102 Stat. 2467, codified at 25 U.S.C. § 2701. Under pressure from States seeking the authority to regulate Indian gaming within their borders in the wake of the Supreme Court decision, and without gambling statutes or regulations of its own, Congress created a comprehensive scheme of regulation over Indian gaming with authority divided among the federal government, the States, and the Indian tribes. The statute reflected a hard-won compromise among the various interests with a stake in Indian gaming:

S. 555 is the outgrowth of several years of discussions and negotiations between gaming tribes, States, the gaming industry, the administration, and the Congress, in an attempt to formulate a system for regulating gaming on Indian lands. In developing the legislation, the issue has been how best to preserve the right of tribes to self-government while, at the same time, to protect both the tribes and the gaming public from unscrupulous persons. An additional objective inherent in any government regulatory scheme is to achieve a fair balancing of competitive economic interests.

S. Rep. No. 100-446, at 1.

To carry out the federal government's responsibilities in the scheme, the IGRA created the National Indian Gaming Commission ("NIGC"), an independent federal regulatory agency within the Department of the Interior. 25 U.S.C. § 2704. The IGRA also divided Indian gaming into three classes. Class I gaming consists of social gaming for minimal prizes and traditional forms of Indian gaming in connection with tribal ceremonies. See id. § 2703(6). Class II gaming encompasses bingo, pull-tabs, bingo-like games, and certain "non-banking" card games. See id. § 2703(7)(A). Finally, Class III gaming includes all other forms of gaming, including those ordinarily found in a casino, such as slot machines, roulette, blackjack, and other house banked games. See id. § 2710(d)(1); 25 C.F.R. § 502.4.

The IGRA subjects each class of gaming to a distinct regulatory scheme. The statute commits the regulation of Class I gaming entirely to the Indian tribes. See id. § 2710(a) ("Class I gaming on Indian lands is within the exclusive jurisdiction of the Indian tribes and shall not be subject to the provisions of this chapter."). The statute creates a complex scheme of shared regulation on the part of the NIGC and the Indian tribes over Class II gaming. See id. § 2710(a)(2) ("Any class II gaming on Indian lands shall continue to be within the jurisdiction of the Indian tribes, but shall be subject to the provisions of this chapter."). Finally, as to Class III gaming, the statute authorizes the States and tribes to enter into tribal-State compacts to address regulatory issues. See id. §2710(d)(3)(A) ("Any Indian tribe having jurisdiction over the Indian lands upon which a class III gaming activity is being conducted, or is to be conducted, shall request the State in which such lands are located to enter into negotiations for the purpose of entering into a Tribal-State compact governing the conduct of gaming activities."). The legal question at the heart of this case is whether the IGRA also contemplates an active role for the NIGC in the regulation of Class III gaming.

II. The Minimum Internal Control Standards

The dramatic growth in Indian casino gambling in the 1990s prompted the NIGC to consider the need for a set of objective standards to ensure the integrity of gaming on Indian lands. On January 5, 1999, following public notice and the opportunity for comment, the NIGC promulgated regulations that set out minimum internal control standards ("MICS") for Class II and Class III Indian gaming. 64 Fed. Reg. 590 (Jan. 5, 1999), codified at 25 C.F.R. § 542. The MICS regulate the day-to-day operations of an Indian casino. They run to more than seventy pages in the Federal Register, and touch on almost every aspect of casino gaming, including cage and credit operations, game play and integrity, surveillance, and internal audits.

One example of the sweeping nature of the regulations can be found in the rules relating to the "coin drop" or coin bucket for gaming machines. The MICS contain three different sets of coin drop procedures, each corresponding to a different sized facility. See 25 C.F.R. §§ 542.21, 542.31, 542.41. The procedures include rules relating to the number of employees who must be involved in the removal of the coin drop, e.g., id. § 542.21(g)(1), the kind of employees who must be involved in the removal of the coin drop, e.g., id. § 542.21(g)(1), (g)(3), the timing of the removal of the coin drop, e.g., id. § 542.21(g)(2), the tagging and transportation of the coin drop, e.g., id. § 542.21(g)(4), the manner in which the coin drop must be housed while in the machine, e.g., id. § 542.21(g)(5), and the purposes to which a coin drop may be put, e.g., id. § 542.21(g)(6).

The same set of minimum internal control standards are applicable to Class II and Class III gaming operations. Each tribe is required to promulgate its own internal control standards that provide a level of control that equals or exceeds the minimum internal control standards in the regulations, and each gaming facility is also required to implement an internal control system that, at a minimum, complies with the tribal internal control standards. See id. § 542.3(c), (d). The regulations state explicitly that the MICS supersede less stringent gaming regulations in State-tribal contracts. See id. § 542.4. Finally, the regulations provide that an independent certified public accountant must verify that the casino's internal controls comply with the tribal minimum internal control standards. See id. § 542.3(f).*fn1

III. Gaming at Colorado River

Plaintiff Colorado River Indian Tribes ("Colorado River") is a federally-recognized Indian Tribe with tribal lands in Arizona and California. The tribe operates a Class II and Class III gaming facility at the BlueWater Resort and Casino ("BlueWater") on its tribal lands in Parker, Arizona. Consistent with the terms of the IGRA, the tribe conducts its gaming activities at BlueWater in accordance with regulations enacted pursuant to a tribal ordinance, and rules contained in a tribal-State Class III gaming compact with the State of Arizona. See 25 U.S.C. § 2710(d)(1) ("Class III gaming activities shall be lawful on Indian lands only if such activities are authorized by an ordinance or resolution that is adopted by the governing body of the Indian tribe having jurisdiction over such lands . . . and conducted in conformance with a Tribal-State compact entered into by the Indian tribe and the State . . . .").

The tribal ordinance takes the form of a gaming code. US 3911-3953.*fn2 Section 501 of the tribal gaming code creates a body known as the Tribal Gaming Agency ("TGA"), and confers upon it civil regulatory authority over all gaming activities conducted on its tribal lands. US 3921-22, 4333 ¶¶ 1-2. Section 908 of the gaming code in turn requires the TGA to enact internal control standards to govern the day-to-day operations of BlueWater. US 3946-47. The TGA adopted a set of internal control standards in 1995, and those standards remain in effect to this day. US 3946-47, 4333 ¶ 2. At the time of the administrative proceedings in this case, the TGA of Colorado River employed twenty-nine individuals, virtually all of whom were tasked with regulatory activities, and received an annual budget of $1.2 million. US 4334, ¶ 13.

The tribal-State compact between Colorado River and the State of Arizona also requires the tribe to create a set of internal control standards. An earlier version of the Compact gave the TGA free rein to create the internal control standards it wishes. US 4128-29. However, the most recent version of the Compact provides that the standards must be at least as stringent as "the minimum internal control standards set forth in Appendix H of this Contract." Pl.'s Mot. Summ. Judg., Ex. C at 37. By agreement, Colorado River and the State of Arizona have adopted the federal minimum internal control standards as Appendix H of the Compact. Id., Ex. D. The Compact authorizes the State of Arizona to monitor and investigate the tribe's Class III gaming operation to ensure compliance with the Compact, at the tribe's expense. The TGA has reimbursed the State roughly $250,000 per year for its expense in overseeing the tribe's Class III gaming activities. US 4334-35.*fn3

IV. The Contested Audit

On December 14, 2000, the NIGC advised Colorado River by letter that it intended to conduct an on-site audit of the BlueWater Casino to determine its compliance with the federal Class III MICS. See US 3175. The letter emphasized that the audit would be "specific to Regulation 542, Minimum Internal Control Standards." Id. An MICS compliance audit can extend over the course of several weeks, and includes a review by an audit team of the records for specific test dates as well as the real time observation of the tribe's procedures in all aspects of the gaming operation. See Compl. ¶ 18; Answer ¶ 18. The NIGC explained that the audit of the BlueWater Casino would commence on January 9, 2001, and that the NIGC would request the opportunity to examine all gaming revenue documents from certain selected dates. See id. There is no indication in the record that the NIGC suspected at the time that the casino was violating any particular regulation. US 4477.

The audit team arrived at the gaming facility on January 9, 2001. The team examined documents on that day without incident, and returned the next day to continue an examination of the tribe's gaming documents. On that second day, a dispute arose between the tribe and the audit team regarding the scope of the audit. The dispute led to a series of meetings between the audit team and tribal officials, at which the officials made it known that they did not believe that the NIGC possessed the authority to examine Class III Indian gaming records. The audit was terminated (by whom, the parties disagreed), and the NIGC departed the premises without completing the audit. See Compl. ¶ 22; Answer ¶ 22; US 4448-50.

On January 23, 2001, the then-Chairman of the NIGC issued a Notice of Violation against Colorado River for its refusal to allow the audit team access to the full scope of the requested Class III documents and areas of the facility. See US 3184. The Chairman explained that Colorado River's conduct violated 25 U.S.C. § 2706(b)(4), which authorizes a representative of the NIGC to "demand access to and inspect, examine, photocopy, and audit all papers, books, and records respecting gross revenues of class II gaming conducted on Indian lands and any other matters necessary to carry out the duties of the Commission under this chapter," and 25 C.F.R. §§ 571.5, which permits the representative to enter the premises of an Indian gaming operation for the same purposes. On May 11, 2001, the Chairman proposed a Civil Fine Assessment against Colorado River of $20,000.00. See US 3226.

Colorado River appealed the Notice of Violation and Civil Fine Assessment through the NIGC's administrative appeal process, and the appeal was referred to the United States Department of the Interior Office of Hearings and Appeals ("OHA"). See US 3497. The parties agreed to bifurcate the appeal, so that the legal issue of the Commission's statutory authority to adopt and enforce Class III minimum internal control standards would be decided first. Only if it was determined that the NIGC in fact possessed the necessary authority would the factual questions -- whether Colorado River (rather than the NIGC) was responsible for the termination of the audit, and whether that termination justified the proposed fine -- be considered. See US 3355.

On May 2, 2002, a Presiding Official of the OHA issued a Recommended Decision concluding that the NIGC lacks the statutory authority to regulate Class III gaming through minimum internal control standards or conduct a Class III gaming audit to ensure compliance with those standards. US 4445-79. The governing regulations give the parties the opportunity to file objections with the Commission to any aspect of the recommended decision of a Presiding Official decision. 25 C.F.R. § 577.14(b). On May 13, 2002, the Chairman of the NIGC filed objections with the Commission. US 4492-96.

On May 30, 2002, the NIGC -- with one Commissioner not participating -- issued a Memorandum Decision and Order reversing the Recommended Decision. US 4510-19. The NIGC located its authority to issue the MICS for Class III gaming operations in section 2706(b)(10) of the IGRA, which states that the NIGC "shall promulgate such regulations and guidelines as it deems appropriate to implement the provisions of this chapter." 25 U.S.C. § 2706(b)(10); US 4514-15. The NIGC explained that its authority to conduct a Class III compliance audit derived from section 2706(b)(4) of the statute, which gives the NIGC the power to "audit all papers, books, and records respecting revenues of class II gaming conducted on Indian lands and any other matters necessary to carry out the duties of the Commission under this chapter." 25 U.S.C. § 2706(b)(4); US 4516. The NIGC remanded the case to the presiding official for a hearing on the remaining factual issues in the case. US 4519.

The parties entered into a factual stipulation on remand in which they agreed to many of the relevant facts and stipulated that the fine would be reduced to $2,000. Compl., Ex. D, at 1-2. Following a hearing on October 24, 2002, the Presiding Official concluded that the tribe had interrupted the work of the NIGC audit team on the second day of the audit, and that this interference with the authorized audit was "technically" a violation of the minimum internal control standards. Compl., Ex. C, at 45. On July 17, 2003, the NIGC affirmed in a Final Decision and Order. The order found that Colorado River had "committed a violation of NIGC regulations by halting a . . . compliance audit then in progress," and reduced the fine to $2,000 consistent with the stipulation. Compl., Ex. C, at 6. The order observed that Colorado River "retains the right to seek judicial review of the Commission's decision . . . reaffirming the Commission's authority to establish MICS for Class III gaming and conduct a compliance audit." Id. at 8.

On January 7, 2004, Colorado River commenced the present action against the NIGC and its commissioners under the Administrative Procedure Act ("APA") challenging the legal basis for the Commission's Final Decision and Order. The Complaint seeks a declaration that the Final Decision and Order is in excess of the NIGC's statutory authority, an order setting aside the Final Decision and Order, and a permanent injunction preventing the NIGC from enforcing the Class III gaming minimum internal control standards against the Tribes. Compl. ¶ 1. The parties filed cross-motions for summary judgment, and the National Indian Gaming Association, the Oneida Tribe of Indians of Wisconsin, and a group of six other Indian tribes, each filed an amicus brief in support of the position of Colorado River. The Court held a hearing on the cross-motions for summary judgment on April 12, 2005.

STANDARD OF REVIEW

Under 5 U.S.C. § 706, a court reviewing the action of an agency "shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action." The reviewing court shall "hold unlawful and set aside agency action, findings, and conclusions found to be ... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). The court should abide by the agency's factual findings if they are "supported by substantial evidence" and affirm the agency's orders so long as there is a rational connection between the facts found and the choice made. See Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir. 2004). The agency's decisions are entitled to a "presumption of regularity," Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415 (1971), and although "inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one." Id. at 416.

When a court reviews an agency's interpretation of a statute, the court turns to the two-step analysis outlined in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The first step is determining whether Congress has spoken directly to the "precise question at issue," for if it has, "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43. If, however, the statute is silent or ambiguous on the specific issue, "the question for the court is whether the agency's answer is based on a permissible construction of the statute." Id. at 843 (emphasis supplied). When the agency's construction of a statute is challenged, its "interpretation need not be the best or most ...


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