Court Ruling Puts Massachusetts Casinos At Risk

by Goodwin
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Yesterday, the Massachusetts Supreme Judicial Court (SJC) released its decision in Abdow v. Attorney General, handing a victory to proponents of a Massachusetts electoral initiative that seeks the repeal of the Massachusetts 2011 gaming law. The SJC rejected any notion that gaming stakeholders have property or contract rights that would prevent Massachusetts from abolishing gaming, wholly or partially. For the time being, the SJC has left the decision entirely to the political process, and the next decision will be the electorate’s in November.

The controversy traces back to the Massachusetts Legislature’s enactment of the state’s gaming law in 2011, which created the Massachusetts Gaming Commission and authorized it to license casino and slot-machine gambling in Massachusetts for the first time in the state’s history. The law authorizes the Commission to award up to three regional casino gaming licenses (“Category 1” licenses, which permit the licensee to operate casinos with both table games and slot machines) and up to one slot-machine gaming license (“Category 2” license, which permits the licensee to operate a slot machine parlor only). The 2011 gaming law also transferred regulatory authority over the racing industry to the Commission. At present, only the Category 2 license has been awarded, and the recipient, Penn National Gaming, has paid the requisite $25 million license fee. As yet, no Category 1 license has been awarded.

In August 2013, ten Massachusetts voters submitted an initiative petition seeking to have the state’s voters repeal the 2011 gaming law. But the Massachusetts Attorney General refused to certify the initiative for submission to the voters, arguing that the initiative, if approved, would constitute an unconstitutional taking without compensation of gaming license applicants’ property rights, specifically their implied contractual right to have the Commission act on their license applications. The proponents of the initiative then sought judicial review from the SJC.

While the SJC’s review of the Attorney General’s decision was pending, the Court ordered the Attorney General to prepare a summary of the initiative, and the initiative’s proponents were permitted to gather (and succeeded in gathering) the number of voter signatures required for the measure to be included on the November 6, 2014 general election ballot.

In the decision announced yesterday, the SJC rejected every argument that had been advanced in opposition to the initiative appearing on the ballot. First, the SJC rejected the argument that the initiative, if approved, would work an unconstitutional taking of any property belonging to gaming license recipients or applicants. The SJC held that gaming licensees have no compensable property interest in their Commission-issued gaming licenses, because the recognition of such interests would be “wholly inconsistent with the long-standing principle that the Legislature cannot surrender its broad authority to regulate matters within its core police power, which includes the regulation of gambling and the prerogative to ban forms of gambling that previously had been legal.”

The Court further noted that the 2011 gaming law did not itself evidence any legislative intent to create a property interest in gaming licenses. Rather, the Court described the prospective gaming licenses as “revocable privileges,” which the Commission has “full discretion” to withhold.

The SJC also rejected the argument that even though applicants may have no compensable property interest in the gaming licenses themselves, they have such an interest arising from an implied contractual right to have the Commission make a final decision regarding license applications. On this point, the SJC held that the license application process is as much within the state’s core police power as the licenses themselves, and the state is free to abolish both as an incident of its power to regulate gambling, even to the point of prohibition. According to the Court, the license applicants have no compensable property interest, and, therefore, the passage of the repeal initiative could not constitute an unlawful taking.

The SJC readily rejected additional arguments, advanced by gaming industry proponents, that the initiative purportedly violated various general state-law rules governing ballot initiatives. The SJC held that the initiative satisfied the requirement that such measures relate to matters of statewide rather than local concern. The Court observed that the initiative’s proposed change in state law, including changes in the definition of permissible and impermissible gambling, would operate statewide.

According to the Court, while certain communities — specifically those that would otherwise become host to the gaming establishments licensed by the Commission under the gaming law — might stand to be affected more or differently than others, that did not restrict the initiative’s operation to particular localities. The SJC further concluded that the initiative’s subjects were sufficiently related to one another as to allow voters to make an informed decision whether to approve the measure, and that the Attorney General’s summary of the initiative was fair.

Accordingly, the SJC overturned the Attorney General’s earlier decision regarding the initiative, and ordered the Attorney General to certify the initiative petition for inclusion on the November 2014 ballot.

Abdow’s Implications and the Future of Massachusetts Gaming

As a legal matter, the SJC’s decision in Abdow serves as a clear warning to anyone seeking to do business or to invest in fields, like gaming, which are both politically controversial and subject to heavy regulation. The SJC’s decision teaches that such ventures are inherently risky propositions, and that one of those risks is the potential that political forces may cause the regulatory terrain to shift under one’s feet, even to the point of abrogating an entire business model, perhaps with little or no recourse in court. Those who would nonetheless do business in such a field, or invest their money in entities that do, must be mindful of that risk when deciding whether the investment is worth it.

More specifically, the immediate effect of the SJC’s decision is to clear the way for proponents of the gaming repeal initiative to take their cause directly to the Massachusetts electorate, which will decide whether to approve the initiative in the November 6, 2014 general election.

The outcome of the election could have serious implications for numerous gaming stakeholders in Massachusetts. If the electorate approves the initiative and repeals the 2011 gaming law, gaming license applicants and recipients — many of whom have already expended millions of dollars on application fees or license fees (or both), and have incurred additional expenses to submit their applications and to plan construction — will find themselves unable to proceed with casino and slot parlor projects that have been many years in the making.

Whether any of the incurred expenses may be recouped, either from the state or from private counterparties, is an issue the SJC’s decision leaves open. There is also the question whether they would be able to unwind, without liability, already-assumed contractual obligations to third parties — e.g., contractors, employees, vendors — whose services might no longer be needed. Further litigation may well be required to resolve these issues.

Government at both the state and local level will also be affected if the ballot initiative is successful. The state’s budget process, as well as those undertaken by local governments in planned or prospective host communities, anticipate the receipt of significant tax revenue from licensed gaming facilities. If the voters decide to repeal the gaming law and to block those facilities from being established, state and local government budgets will need to be significantly reworked.

In light of these potential ramifications, there is no question that opponents of the initiative — including gaming license applicants and recipients, their investors, and planned or prospective host communities — will expend significant time, effort, and money in an all-out push to persuade the voters to reject the initiative. The proponents of the initiative will push just as hard for passage. These next several months will be interesting indeed. Whether they will be “interesting” in the ugly-baby sense of interesting all depends on one’s perspective.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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