OFFICE OF THE ATTORNEY GENERAL

. STATE OF TEXAS

JOHN CORNYN

January 14,2002

The Honorable Eddie Lucia, Jr. Chair, Committee on Border Affairs Texas State Senate P.O. Box 12068 Austin, Texas 78711 Opinion No. JC-0450

Re: Whether section 2001.556 ofthe Occupations Code prohibits arevenue-share leasing agreement between amanufacturer ofbingo equipment and
adistributor ofbingo equipment (RQ-0417-JC)

Dear Senator Lucia:

You askwhether section 2001.556 ofthe Occupations Code prohibits arevenue-share leasing agreement between a manufacturer of bingo equipment and a distributor of bingo equipment.’ Section 2001.556 prohibits price fixing by manufacturers, distributors, and suppliers of bingo equipment and provides that the price ofbingo equipment “inthe competitive marketplace shall be established by the manufacturer, distributor, or supplier and may not be established in concert with another manufacturer, distributor, orsupplier.” TEX.Oct. CODE ANN.52001.556(b) (Vernon 2002). If under a revenue-share leasing agreement the manufacturer controls the price the distributor charges to bingo-game conductors for leased equipment, the agreement violates section 2001.556.
Section 2001.556, aprovision ofthe Bingo Enabling Act, id. ch. 2001, provides:

(a) Amanufacturer, distributor, orsupplier may not by express or implied agreement with another manufacturer or distributor fix the price at which bingo equipment or supplies used or intended to be used in connection with bingo conducted under this chapter may be sold. (b) The price ofbingo supplies and equipment inthe competitive marketplace shall be established by the manufacturer, distributor, or supplier and may not be established in concert with another manufacturer, distributor, or supplier.

‘Letter from Honorable Eddie Lucia, Jr.,Chair, Committee onBorder Affairs, Texas State Senate, toHonorable John Comyn, Texas Attorney General (Aug. 13,200l) (on file with Opinion Committee) [hereinafter Request Letter].The Honorable Eddie Lucia, Jr. - Page 2 (JC-0450)

Id. fj2001.556.

This office addressed this provision atlength inAttorney General Opinion JC-0269, inwhich
we were asked whether under section 2001.556 amanufacturer ofbingo equipment and adistributor ofbingo equipment could agree asto the price atwhich the distributor would sell bingo equipment to acharity. We were also asked whether our answer would change ifthe bingo equipment were leased rather than sold. Relying on the express language ofthe statute, particularly the wording of subsection (a) of section 2001.556, and the overarching purpose ofthe Bingo Enabling Act to regulate relationships between interests inthe bingo industry, we concluded that the statute prohibits avertical price-fixing agreement between amanufacturer and adistributor as well as horizontal price-fixing agreements between two or more manufacturers orbetween two ormore distributors. See Tex. Att’y Gen. Op. No. JC-0296 (2000) at 3-6; see also id. at 5 (“section 2001.556 appears to have adifferent purpose than antitrust law

. . . . [I]t appears that this provision is concerned less with free enterprise and competitive pricing than with strict regulation ofmanufacturers and distributors ofbingo equipment and their relationships with persons who conduct bingo.“). We also concluded that section 2001.556 does not distinguish between bingo-equipment sales and leases, relying particularly upon the broad language of subsection (b):

[Slubsection (b)of [section 2001.5561 states more broadly that “[t]he price ofbingo supplies and equipment inthe competitive marketplace shall be established by the manufacturer, distributor, or supplier and may not be established in concert with another manufacturer, distributor, or supplier.” TEX. Oct. CODEANN. 5 2001.556(b) (Vernon 2000). Based on the broad language of subsection (b), which is not limited to sales, we conclude that the section 2001.556 prohibition on price fixing applies to pricing of bingo equipment generally, and applies to the pricing ofleases aswell as sales.
Id. at 6. Your request letter indicates that you disagree with our construction of section 2001.556,
asdo two briefs we received on this matter2 However, neither the request letter nor the briefs raise authorities we did not consider in our earlier opinion nor do they point to any subsequent developments in the law. Thus, rather than extensively reanalyze the statute or our prior opinion here, we simply apply section 2001.556 aswe construed itin Attorney General Opinion JC-0296.

*SeeBrief from Brian J. O’Toole, Kasling, O’Toole & Hemphill, L.L.P., to Honorable John Comyn, Texas Attorney General (Oct. 12, 2001) (on behalf of Trend Gaming Systems, L.L.C., and GameTech International); Brief from Jane Thompson, Thompson Allstate Bingo Supply, Inc., to Susan D. Gusky, Chair, Opinion Committee, Office of Texas Attorney General (Oct. 8,200l) (on file with Opinion Committee).The Honorable Eddie Lucia, Jr. - Page 3 (JC-0450)

You ask about the legality under section 2001.556 of a“revenue-share leasing agreement” between amanufacturer and adistributor, which you describe as follows:

Several manufacturers of bingo cardminding equipment operate through “revenue share” leasing arrangements with their distributors. Under a typical revenue share arrangement, a manufacturer leases equipment to the distributor in exchange for a percentage ofthe revenues that the distributor earns by subleasing the equipment. The distributor leases the equipment to conducting organizations at aparticular bingo hall, in exchange for aportion of the revenues that the conductors receive from their bingo customers. The conductor retains the ability to setthe prices tothe end customer, which results in fluctuation ofthe conductor’s lease payment to the distributor, and in turn the distributor’s lease payment to the manufacturer. This arrangement reduces the financial risk to the charity in alease with the distributor. Obviously, the amount ofmoney the manufacturer receives is dependent on the amount ofmoney the distributor receives from the conductors. Therefore, it is common in the industry for the manufacturer to have the right to approve the terms of the distributor’s contract with theconductors. Ifthe distributor proposed to lease the equipment to conductors at, for example, 5% of the conductors’ revenue, the transaction likely would not make economic
sense to the manufacturer and the manufacturer could refuse to lease equipment atthat rate to its distributor. Request Letter, supra note 1, at 1 (emphasis added). Although you have not expressly stated whether these agreements control the price atwhich the distributor leases equipment tobingo-game conductors, we assume this to be the case, based on your statement that the manufacturer has “the right to approve the terms ofthe distributor’s contract with the conductors.” Id.; see also id. at 3-4 (“[T]he revenue share lease necessarily requires some sort of agreement or approval from the manufacturer regarding the distributor’s contract with the conductor.“). As we understand it,under
arevenue-share leasing agreement, the bingo-game conductor leases equipment from adistributor for apercentage of the conductor’s revenue rather than a fixed monetary price. This percentage share is in fact the price the distributor charges the conductor for the use of the equipment. An agreement that allows amanufacturer to dictate the percentage ofrevenue the distributor will take from the conductor, controls the price the conductor pays the distributor. Ifthese agreements do indeed control the price atwhich the distributor leases equipment to bingo-game conductors, then they involve price fixing between a manufacturer and distributor and are prohibited by section 2001.556.The Honorable Eddie Lucia, Jr. - Page 4 (JC-0450)

You suggest that even if section 2001.556 applies to leases in general, it does not apply to revenue-share leases, citing section 2001.405 of the Occupations Code. That statute provides as follows: Bingo may not be conducted at a leased premises if rental

under the lease is to be paid, in whole or part, on the basis of a percentage ofthe receipts ornet proceeds derived from the operation of the game or by reference to the number of people attending a game.
TEX.OCC.CODEANN.82001.405 (Vernon 2002). You argue that itis significant that “[tlhere isno similar prohibition against setting an equipment lease payment based on the amount of revenue derived from the use ofthe equipment,” because “[hlad the Legislature orthe Lottery Commission sought toprevent percentage leases for cardminding equipment, certainly they could have done so.” Request Letter, supra note 1,at 3. We disagree. The legislature’s express prohibition of certain kinds ofrental arrangements in section 2001.401, which essentially precludes the landlord ofagame from having an economic stake in the game, has no bearing on what is and is not permissible in contractual relationships between bingo-equipment manufacturers and distributors under section 2001.556. Moreover, we do not necessarily conclude that section 2001.556 prohibits all revenueshare leasing agreements, which would involve consideration ofprovisions beyond the scope ofyour request. See, e.g., TEX.OCC.CODE ANN.§200 1.407 (Vernon 2002) (generally governing equipment and supply transactions). Rather, we conclude that section 2001.556 prohibits revenue-share leasing agreements in which the manufacturer and the distributor agree on the price that the distributor will charge the conductor.

In sum, ifunder arevenue-share leasing agreement the manufacturer controls the price that the distributor charges to bingo-game conductors for leasing equipment, the agreement violates section 2001.556. As this office does not review or construe specific contracts,3 we answer your question generally and do not express any opinion with respect to any particular contract.

3See,e.g., Tex. Att’y Gen. Op. Nos. JC-0032 (1999) at4(contract interpretation beyond purview ofthis office); DM-383 (1996) at 2 (interpretation of contract not appropriate function for opinion process); DM-192 (1992) at 10 (“This office, in the exercise of its authority to issue legal opinions, does not construe contracts.“); JM-697 (1987) at 6 (“review of contracts is not an appropriate function for the opinion process”).The Honorable Eddie Lucia, Jr. - Page 5 (JC-0450)

SUMMARY

Arevenue-share leasing agreement violates section 2001.556 of the Occupations Code, which precludes a bingo-equipment manufacturer, distributor, or supplier from agreeing tofixthe price of bingo equipment, ifunder the agreement the manufacturer controls the price that the distributor charges to bingo-game conductors for leasing equipment.

Attorney General of Texas

HOWARD G. BALDWIN, JR. First Assistant Attorney General

NANCY FULLER Deputy Attorney General -General Counsel

SUSAN DENMON GUSKY Chair, Opinion Committee Mary R. Crouter Assistant Attorney General, Opinion Committee