The Seminole Hard Rock Hotel & Casino in Tampa, Florida

Legal Distinction Between Class II and III Gaming Causes Innovation, Anguish

Rob Capriccioso
10/4/11

More than 20 years after the Indian Gaming Regulatory Act (IGRA) became federal law, the three-tier class system it created is still evolving, often in ways that no one could have predicted. It’s no coincidence that change is coming more quickly now as tribes are gaining greater political influence.

This class system does not apply outside of Indian country, so it is a unique bureaucracy unto itself—filled with unique pitfalls. Why are there separate classes of Indian gaming?

Slot Machines

The simple answer is that the politicians say it should be so, and although the three classes of Indian gaming were established under IGRA, today there are really only two classes that Washington cares about: Class II and Class III.

Class I, intended to regulate gaming associated with tribal ceremonial or celebration-related events, like at pow wows, where tribes have been playing gambling games—often between associated tribes or family groups—for centuries, is seen by D.C. as small potatoes. Going up the ladder of federal attention, Class II encompasses bingo and games associated with it, such as pull-tabs, which are often sold in bingo halls by sponsoring charities, and non–banking card games like poker. Class III, the big attention-getter because it’s the biggest revenue-generator, includes everything else—horse racing, lotteries and what are commonly known as casino games, such as banking-card games like baccarat and blackjack, roulette, craps and slot machines. These are generally the most lucrative games for a casino.

As more tribes build casinos, mastering (or manipulating) the intricacies of the law—and political interpretations of the classes it created—has become akin to finding pots of gold at the end of the rainbow. When the Seminole Tribe of Florida was embroiled in a long battle with the state to get a Class III contract until it finally won one in 2010, it was able to game the system, if you will—inventing and investing in technology that enabled the tribe to offer new ways to play Class II games. In fact, the tribe’s entire Hard Rock group of casinos was populated by such games and continued until early 2010, when the tribe was finally able to secure a true compact from that state so they could have traditional slots.

Like the Seminoles, many tribes in many states have been forced to innovate due to the constraints of Class II and their desire to compete financially with the non-Indian big boys. In order to retain their Class II characteristics, these tribal games had to be bingo, yet still had to have the look and feel of a slot machine in order to be commercially viable. That meant developing graphics and electronics that were never seen before. In addition, since slot machines by description are devices with coin slots and hoppers in which winning coins are dropped—and to be Class II, a bingo game could not share the characteristics of a slot machine, which was classified as a Class III device—tribes developed cashless systems and sold those to the public as better than the coin-in, coin-out experience.

“Since the early 1990s virtually every change to the gaming floor, tribal or otherwise, has come from tribal gaming,” Joe Valandra, former chief of staff of the National Indian Gaming Commission (NIGC), says of the innovations tribes have made under Class II. Tribal gaming experts note that despite initial marketing challenges and skepticism, cashless systems are now preferred by casinos all over the world, because they are easier and cheaper to regulate, and require far less labor to run.

“Non-Indian casinos have never had to put up with those kinds of struggles and invest in that kind of innovation,” says Jerome Levine, an expert on tribal law and gaming with the Holland & Knight law firm. “And the attendant political and legal challenges were immense.”

The politics started long ago, before and as the IGRA was being written, with one widely repeated inside-the-Beltway rationale being that classes were developed as the best way for the federal government to oversee the regulatory needs associated with each type of gaming. Levine says that the theory is “plausible,” but may actually be a “rationalization.” He believes that the major gaming stakeholders, including charities, regional poker interests in California, state lotteries, racetracks and non-Indian casinos, began to see tribes as a threat after the California v. Cabazon Band of Mission Indians decision of 1987. That Supreme Court case, decided in favor of the Cabazon Band of Mission Indians over California, is widely regarded as the ruling that opened the door to Indian gaming. And naturally, the major gaming players at the time almost immediately began exerting their political influence in hopes of diminishing the challenge posed by an unknown mass of tribal competitors. Those operating Class III–like non-Indian gaming (the states and the heavy hitters in Las Vegas and Atlantic City) had the most to lose, and had the most power and money to shape the tribal gaming system.

Some tribal gaming experts believe that Class III was created in an attempt to keep tribal gaming at bay. After all, tribes weren’t able to operate a Class III–level facility in the late 1980s, and tribes could not have Class III gaming unless they struck deals with the state they were in. It was thought that this barrier would keep the tribes from posing much of a threat to the heavyweights. “Class III was a compromise between tribes and states, but it was not expected that this area would become about 85 percent of all tribal gaming,” Valandra says.

However, as tribes like the Seminoles became adept at making Class II work, they began earning more money, and they began being able to pay for more lawyers and lobbyists, in turn earning more political influence. Thus, tribes were increasingly able to play a major role in determining their fates as Class III entities, as they did in many states throughout the 1990s and 2000s.

Some states even today are hesitant to grant the compacts needed for tribes to operate as Class III players, so the evolution of Class II is expected to continue. “There are still a significant number of tribes that have been unable to obtain Class III compacts,” says Joseph Webster, a tribal law and gaming expert with the Hobbs, Straus, Dean and Walker law firm, “and for those tribes the availability of profitable Class II games is vital. In addition, many tribes that have Class III compacts recognize that Class II games can provide an important supplement to the games permitted under their compacts, as well as provide leverage when they sit down with state officials to negotiate amendments or compact renewals.” He believes that tribal innovations in Class II are also likely to continue, noting that some interesting concepts have been discussed by some tribes for using the Internet to link Class II games between reservations.

“Class II has a very important future,” adds Valandra. “Throughout the history of tribal governmental, Class II gaming has led the way. The basis of the Cabazon case was Class II. My point is that, legally, Class II helped shape the sovereignty issues for gaming, and that role continues.”

Levine concurs: “Unless the IGRA Class III tribal-state compact requirement changes, there will always be some tribes that have strained relationships with states, particularly where states have overreached in taxing tribes in order to agree to a Class III compact, and in those breaches, Class II will continue to play a role.”

Taking into account the constraints of the system, some tribes find that it’s easier to become a Class II facility that evolves into a Class III one, rather than to try to be a Class III entity right out of the gate. There are often delays caused by the Class III political requirements (a compact must be negotiated by the governor and then approved by the state legislature, which could take two or more years to complete), whereas Class II operations merely require a routine approval of a standard gaming ordinance by the NIGC chairman, which takes, at most, 60 days. “I am seeing more of a move back to Class II,” Valandra says. “Given the superior competitive advantages of Class II when combined with the sovereignty issues, I am seeing more and more tribal gaming facilities adding Class II to their gaming floors.”

Given this evolving class system, will there one day be no need for it in Indian gaming?

“That depends on whose need you are examining,” Levine says. “Tribes don’t need the classifications at all. They are inhibitors of tribal sovereignty and self-sufficiency, and were invented precisely for that purpose. States claim they need Class III to ensure regulatory protections for their citizens, which some doubt since the tribal regulatory commissions are usually equal to or more advanced than many of the state regulatory bodies (tribes need to protect their own money, after all), but states claim they also need tribal revenues so tribes are paying their supposed fair share on the commerce being conducted.

“Many tribes would argue, however, that the return to the tribe is limited at best, and that what the state really ‘needs’ is the leverage that requiring a tribe to enter into a tribal-state compact brings into the picture.”

Evolution, it turns out, is complicated. While IGRA was supposed to reduce state leverage over tribes, the Supreme Court, in a case involving the Seminoles, held in 1996 that tribes cannot force states into court to test whether the state is negotiating a compact in bad faith—even though that was built into IGRA as a safeguard to prevent states from overreaching. “The original balance in IGRA was intended to create a level playing field for negotiation of a compact,” says Valandra. “The Seminole case upset the balance and has complicated the negotiation process since.”

Unless and until something changes in the class system, that complication is always going to be there, prompting Class II innovation.

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