For Class II manufacturers, it was time to act.

Three years of contentious discussion on the nature of the bingo game under Class II as defined by the Indian Gaming Regulatory Act had come to a head in a public hearing last September 19, held by the National Indian Gaming Commission in Washington, D.C.

The NIGC agreed to the meeting to hear testimony from tribal leaders, state governments, gaming manufacturers and others on proposed regulations published in the Federal Register last May and August, aimed at providing a “bright line” in the law between Class II electronic bingo and traditional Class III slot machines.

The public comment period was to end January 31, after which the NIGC could have imposed new technical standards for Class II slots as a final rule. The agency was proposing three documents as new regulations: “Classification Standards” that would set out a litany of requirements manufacturers would have to meet for their gaming devices to be considered as Class II under IGRA; a new set of “Technical Standards” for the manufacture of Class II games; and a new definition of “Facsimile” under the law as it applies to facsimiles of bingo permissible as Class II games.

The testimony received at that meeting was the most powerful indicator to date that NIGC’s proposed Class II standards would be disastrous to manufacturers and to tribes. The manufacturers and tribes let the federal agency know in September that its proposed standards were unacceptable, and several prominent manufacturers threatened to simply stop producing Class II products if the standards went through.

After the meeting, manufacturers formed what would be known as the Technical Standards Work Group, with the mission of drafting a plan to submit to NIGC as an alternative to the proposed regulations.

At a second meeting in December, NIGC Chairman Phil Hogen and his staff agreed to look at an alternative draft from the vendor working group and the Tribal Advisory Committee, a group of tribal operators and experts that had been advising the federal agency on the draft regulations.

In a remarkable feat of organization and cooperation, the group drafted alternative Technical Standards for Class II electronic bingo and submitted them to NIGC.

Meanwhile, comments had been streaming in from manufacturers and tribes criticizing the original proposed standards as unworkable. “These proposed rules are unnecessary and should be significantly revised to reduce new layers of federal bureaucracy,” Chadwick Smith, principal chief of the Cherokee Nation in Oklahoma, wrote in his comments on the rules.

The NIGC was willing to listen.
“This being an extremely important issue to the Indian gaming industry, the commission is carefully reviewing all of the comments, recommendations and concerns before publishing a final rule,” said Shawn Pensoneau, spokesman for the NIGC, at the beginning of February.

On February 9, Hogen issued a statement withdrawing the original proposed Class II standards, announcing that NIGC will revise them with deference to concerns from the industry.

“We’ve listened carefully to the useful comments from the industry, and hopefully we will refine our rule and have a better product,” Hogen says.

Officials of both tribes and manufacturers have hailed the willingness of Hogen and his NIGC staff to work with the industry, and to back off from a proposal they called unworkable.

Political Pressures.
The proposed rules published in May and August 2006 were the products of two years of effort by NIGC to redefine Class II gaming in response to pressures from the federal Department of Justice and from prominent politicians in Class II states.

Early in 2004, the Justice Department informed NIGC that they had received complaints from lawmakers in some states that Class II bingo games were virtually undistinguishable from traditional Class III slot machines. Advances in technology had, in fact, speeded up the game of bingo, with the results displayed as slot machine reel results in player terminals that employed familiar game software from the Class III world.

In March 2004, Hogen informed the tribes that the agency would begin work on new technical standards for Class II games.

“Since IGRA was enacted in 1988, there have been dramatic changes in gaming technology and methods,” Hogen wrote at the time. “With these advances in gaming technology and changes in gaming methods, the statutory line between permissible Class II technological aids and Class III gaming devices has become increasingly blurred.” He said the NIGC intended to develop “clear, precise, objective and verifiable uniform classification and technical standards” to distinguish the two classes.

The commission selected a Technical Standards Tribal Advisory Committee to assist in drafting the new rules. The panel included prominent slot officials from tribal casinos, such as Charlie Lombardo, then senior vice president of gaming operations for the Seminole tribe and one of the architects of the Class II slot system at the Seminoles’ Hard Rock casinos in Tampa and Hollywood, Florida. (Lombardo is now a consultant for the tribe, but remains on the advisory panel.)

Between the advisory committee’s forming in 2004 and the publishing of the first proposed rule in May 2006 was an often-contentious back-and-forth between the NIGC and the tribal panel, during which a total of four draft rules were sent for comment to the panel, which sent back four sets of objections and suggestions on those proposed rules.

The NIGC position focused on IGRA’s definition of bingo as a game “in which the holder of the card covers such numbers or designations when objects, similarly numbered or designated, are drawn or electronically determined…” and “in which the game is won by the first person covering a previously designated arrangement of numbers or designations on such cards.”

NIGC’s proposed Classification Standards, published last May 25, and the proposed Technical Standards published August 11, interpreted that language as requiring the player to physically interact with the bingo game at the terminal. Consequently, the proposed standards included requirements that the bingo card on Class II terminals be “daubed”—physically touched by the player—several times during a game. The standards also required a delay of several seconds at the start of each game to allow at least five players to participate in each ball draw.

Other proposed changes would have required a several-second wait between electronic ball releases, and would have required that all players in a bingo game wager on the same potential bingo patterns.

“This was a critical element, and it’s the least understood,” says Knute Knudson, vice president of Native American development for International Game Technology. “The language proposed by NIGC cuts at the heart of the rules of bingo, with its pay patterns and probability proposals. They were saying that each player had to play for the same patterns, the same pays and the same probabilities. What that means is that these other options normally available in bingo games everywhere in the world would not be available in the games they would require.”

Public comments to the proposed rule attacked it on many other fronts as well

• Requiring more than two players—and delaying the game to allow for multiple players—had no basis in IGRA, which requires only that bingo be a game between at least two players, and not one player against a machine.

• The proposed rules would define a bingo “facsimile” as restricted to games that incorporate “all the fundamental characteristics” of bingo—hence, the physical “daubing”—where IGRA does not use the word “all,” requiring only that electronic versions of bingo incorporate the fundamentals of the game.

• The NIGC lacks the statutory authority to implement requirements that have no basis in the original language of IGRA.

• Prior case law has upheld the valid Class II status of games currently in the field, where the proposed rules would invalidate them.

The public comment period on the proposed rules originally was set to expire on September 30, after which the NIGC could have imposed the rules as final. However, the public hearing on September 19, during which NIGC officials heard testimony from the industry, prompted the agency to extend the comment period to November 15, and ultimately to January 31 of this year.

It’s Not in the Box.
That September meeting would ultimately start the ball rolling toward a new set of proposed standards that is still being drafted—with substantial input from the manufacturers that will have to follow them in producing Class II games and systems.

“In September, the manufacturers got together, and Rocket Gaming CEO Ron Harris was able to brief them,” recalls Bally Technologies Chief Technology Officer Bob Luciano, who made the arrangements that facilitated the September NIGC hearing. “It was clear the Classification Standards were way out of whack, and the Technical Standards were out of whack.”

What was “out of whack,” says Luciano, was that the proposed standards concentrated on the Class II terminal—the box on the floor—rather than the system, which is where a Class II bingo game actually takes place.

The changes required in the NIGC’s proposed standards, moreover, would have created an entirely new type of game that ran contrary to the intent of Congress when it passed IGRA, he said.

“The congressional debate in the case of IGRA clearly indicated that there was not to be any limitation on technology or technological advances, and that a tribe should be able to pursue bingo with enhancements in technology and communications capability,” Luciano says. “It indicates that tribes should be able to have any form of the game of bingo that it is possible to create.”

The problem with the Classification Standards, he says, is that they “created a very specific, limited form of bingo, and the intent of IGRA was very clear in that it was not to limit bingo.”

It also would create a form of bingo that no one was willing to tackle from the manufacturing end. At the September 19 meeting, the newly formed panel of manufacturers—consisting of IGT, Bally, Multimedia Games, Rocket Gaming and Planet Bingo—made it clear to NIGC officials that the new standards would make producing Class II games economically unviable.

“I said just that at the meeting on September 19,” says IGT’s Knudson. “I answered on behalf of IGT, saying that the player station interface that would result from those proposed rules would not be economically viable, and that we would withdraw from the existing Class II market.”

Other manufacturers said the same thing.

“Most of the manufacturers said the market isn’t going to be large enough to go forward under the proposed classification standards,” says Gary Loebig, executive vice president of sales for Multimedia Games. “Had the standards gone through, six tribes in five states wouldn’t go anywhere—they’d just be dead as far as offering gaming. The rest would go to Class III, and would thus lose their bargaining power.”

A week after the September 19 hearing, NIGC sent a letter to all members of the manufacturer panel asking for information supplemental to their testimony. The manufacturers’ panel jointly responded on October 25, saying that the NIGC “may not yet understand the full scope of harm that is threatened by these proposed regulations,” and that “we have therefore taken this opportunity to set aside our competitive interests to more fully brief the Commission on the likely effects of this proposed rule.”

The unified approach of the manufacturers, who said, among other things, that the NIGC’s proposal would create bingo that was “limited to a form not known in any regulated bingo market in the world,” struck a chord with NIGC officials, who agreed to meet with the panel on November 2 to take further testimony. The day after that meeting, an independent study group enlisted by NIGC released its report on the potential economic impact of NIGC’s proposed rules.

That study, authored by Dr. Alan Meister of Analysis Group, Inc., predicted nearly $2 billion a year in lost Class II revenues and the loss of thousands of jobs if the proposed regulations were adopted as written. The Meister study also verified what the manufacturers told NIGC officials at the November 2 meeting—compliance would cost the manufacturers an estimated $1.4 billion. “I think that caused the NIGC to step back a bit, and to be open to a dialogue with the tribes and manufacturers,” says Loebig.

The NIGC invited the manufacturer panel to attend the meeting between Hogen and the Tribal Advisory Committee on December 5 in Washington. At that meeting, Lombardo—who as a member of the TAC had been involved in the process since it started in 2004—joined with the manufacturers in relating what the fundamental flaws of the proposed Classification Standards were, with respect to the intent of IGRA.

“One of the points we made was that the Class II box is just a dumb slave,” Lombardo explains. “It contains no game outcome capabilities, and has nothing to do with the play of the game of bingo; the game of bingo is actually played on the server. By putting the emphasis on the box, which is what NIGC was doing, their standards were actually closer to a Class III game than if the standards had focused on the server.

“We told the chairman that by emphasizing the box, the proposed standards were actually bringing us closer to Class III. The other thing we did was to show the chairman that there is a lot of brain power and capability in our industry; let’s use it. We asked if we could do some alternative standards.”

Hogen agreed, telling the panel he would entertain alternative standards—as long as they were submitted to him by January 31, the end of the comment period. The industry had a huge challenge before it.

March of the 50 Days
With eight weeks to draft an alternative to the 83-page proposed regulations, the group of manufacturers, attorneys and operators wasted no time. Harris, the CEO of Rocket Gaming, organized four separate meetings of all the professionals involved, as well as a network of phone conferencing ensuring they would be in constant contact, in a remarkable example of diverse forces working together for a common goal.

On December 11, the first meeting of the Technical Standards Work Group began what would be a 50-day marathon of work drafting alternative technical standards for Class II games.

That first meeting, in Las Vegas, would last three days and would be attended by a total of 69 people. Subsequent meetings would be held in Dallas, in Pechanga as part of the California Nations Indian Gaming Association conference, and in Washington, D.C.

“This was the first time in history manufacturers have been able to get together and have a united front,” comments Harris.

It’s been called the “March of the 50 Days,” or the “C2 Road Trip.”

“In addition to the four meetings, I can’t tell you how many four- to eight-hour conference calls we had between the same people,” says Lombardo. “We took all the standards related to the box out of the proposed Technical Standards. Anything dealing with technical standards on how to build a box, anything that deals with a slot machine, was taken out.”

“It was a Herculean effort,” says Michael McBride, an attorney representing a number of Oklahoma tribes who was in on every one of the group’s sessions. “We worked through nights, weekends, holidays… There were five holidays during the period we worked on the alternative standards. We removed superfluous stuff that did not belong there. It appeared that the commission had taken standards from non-tribal gambling jurisdictions, and those standards simply were not appropriate in Class II.”

In the end, a 19-page document would be submitted to Hogen as an alternative to the 83 pages of proposed regulations that had appeared in the Federal Register.

“We settled on 19 pages, which we submitted to the Tribal Advisory Committee, which in turn submitted it to the NIGC,” says Harris. “We were able to negotiate technical standards from a series of meetings with the entire industry—not just manufacturers. It is an industry-consensus document. It doesn’t favor any one tribe, and we think it’s a good, solid set of regulations.”

“These 19 pages represent a tremendous, hard-fought work product,” adds McBride. “It was highly debated and vetted among engineers, from titans of Class II gaming down to small manufacturers, and tribal gaming attorneys and regulators who were monitoring the effort. A tremendous amount of talent and skill came to bear in this highly compressed time frame.”

The alternative Technical Standards were delivered to the NIGC on time, and the NIGC listened. With the February 9 press release and subsequent notice in the Federal Register, the commission officially withdrew the proposed rules published last May and August. “We remain committed to bringing consideration of these important issues to an early conclusion,” wrote Hogen, “but as it is likely that our finished product would depart in several areas from that published in the Federal Register in 2006, we are withdrawing those earlier proposals. We are busily working on revisions.”

What Happens Next
Clearly, NIGC Chairman Hogen is open to implementing the alternative Technical Standards, although his approach at press time was non-committal.

“These documents take a different approach,” Hogen said. “The focus of the earlier draft was on the player stations; the focus of this is on the system the facilities use. There may well be some merit to that. We are still addressing those proposals. No decisions have been finalized, but we are taking seriously all the concerns that have been stressed.”

Hogen says the goal now is to publish a new proposed rule with a short public comment period—“in weeks rather than months,” he says. Another meeting between NIGC officials and tribal and manufacturer work groups was scheduled for late February.

What is unclear is whether the NIGC will submit two new documents as proposed rules—Classification Standards as well as Technical Standards. It is the industry’s position that the Technical Standards are all that is needed. “What we proposed as the new Technical Standards draw the bright line between Class II and Class III the chairman was looking for,” says Lombardo. “At the very least, new proposed rules don’t need to be nearly as restrictive.”

Knudson says he does not believe any further action is required by the NIGC, although he doubts that the commission will simply let the matter drop. “

We don’t know what happens next, but a number of options are open to the NIGC,” he says. “Our preferred alternative would be that they do nothing, because we believe—and from a legal standpoint we believe we are on solid ground—that there is adequate definition of the difference between Class II and Class III in the Indian Gaming Regulatory Act, and in the appellate court decisions that have come down in the past few years—in the 9th Circuit, the 8th Circuit, the 10th Circuit and the DC Circuit Courts. We believe there are adequate provisions in the law giving us definitions of Class II and Class III.”

The more likely action by NIGC at this point will be publication of a new proposed rule for Class II Technical Standards, hopefully, says Knudson, without new Classification Standards.

“They could publish the Technical Standards and assume that’s the bright line between Class II and Class III,” he says. “That would be our second-most preferred route.”

Knudson says the industry is wary that NIGC is under significant political pressure to publish new proposed rules dealing with the same three areas the original proposals dealt with.

“I think they are under considerable pressure politically, from the Department of Justice, from the Governors’ Association, from the Attorneys General Association, to move forward with all three options—Technical Standards, Classification Standards and Facsimile Standards,” Knudson says, noting that Hogen, in the end, remains cognizant that NIGC is only chartered to regulate “certain aspects” of Indian gaming, and that he has a legal responsibility to be cognizant of the economic development ramifications of his actions.

“To his credit, I think he knows that,” says Knudson, “and to his credit, I think that Commissioner Chuck Choney knows it. They know the law.”

In fact, if there is one constant among comments from the advisory panels, it is the openness of Hogen and the NIGC staff to alternatives. “I am extremely impressed with how the chairman has handled this entire thing, because he has been under a lot of pressure,” says Lombardo. “I have a lot of respect for the chairman.”

“To the commission’s credit, they brought in the most knowledgeable experts in the industry, and had them bring their knowledge to bear in creating the standards,” adds McBride. “Hopefully, they will use that knowledge in their decision.”