Fond du Lac Band of Lake Superior Chippewa

1720 Big LakeRd.

CIoquet,MN 55720

Phone (218)879-4593

Fax (218) 879-4146

Chainnan

Kevin R. Dupuis, Sr.

Secretary/Treasurer

Ferdmand Martineau. Jr.

Disi. I Representative

Vanessa L. Northrup

Dist. II Representative

Bruce M. Savage

Dist. Ill Representative

Roger M. Smith, Sr.

Executive Director.

Tribal Programs

Miyah M. Danielson

Reservation Business Committee

February 26, 2018

Jonodev 0. Chaudhuri, Chairman

Kathryn Isom-Clause, Vice Chair

Sequoyah Simenneyer, Associate Commissioner

National Indian Gaming Commission

1849 C St. NW, Mail Stop ^1621

Washington, DC 20240

By email to Vannice Doulou@.nigc.gov

Re: Comments of the Fond du Lac Band of Lake Superior Chippewa in

response to the NIGC's invitation for Tribal consultation on IGILA's sole

proprietary interest requirement

Dear Chairman Chaudhuri, Vice-Chair Isom-Clause, and Associate

Commissioner Simermeyer:

I write on behalf of the Fond du Lac Band of Lake Superior Chippewa in

response to your letter dated December 22, 2017, inviting consultation on several

matters affecting Indian gaming. We appreciate the invitation to consult, and we

write to offer our recommendations regarding the third issue listed in that letter -

the Indian Gaming Regulatory Act's requirement that tribes have the "sole

proprietary interest in and responsibility for the conduct of [Indian] gaming." 25

U.S.C. §§27I0(b)(2)(A); §2710(d)(1)(A).

We have also reviewed the Discussion Draft of a proposed regulation to be

added to 25 CFR part 573 to provide standards for the agency to use in

administering the sole proprietary interest requirement. This Discussion Draft

was circulated by the Commission during its recent tribal consultations. We offer

comments on that discussion draft below and in the enclosure to this letter.

As you state in your December 22 letter, the NIGC has previously

addressed the sole proprietary interest requirement through bulletins, legal

opinions, and enforcement actions. And the federal courts have addressed this

requirement as well. The Commission now asks whether it should promulgate

regulations to administer the sole proprietary interest requirement, and if so, how

best to do this.

The Fond du Lac Band has considerable experience regarding IGRA's

sole proprietary interest requirement, based on years that the Band spent in

litigation on this matter. This history is discussed in the NIGC's NOV 11-02

(July 12, 2011) which applied to the Fond du Lac Band, as well as in several court

decisions related to that NOV. Fond du Lac's experience illustrates the

importance of the Act's requirement that tribes "have the sole proprietary interest
National Indian Gaming Commission

February 26, 2018

Page 2

and responsibility for the conduct of [Indian] gaming." 25 U.S.C.

§§2710(b)(2)(A); §2710(d)(l)(A).

Through its issuance of opinions and enforcement actions on the sole proprietary interest

requirement, including the enforcement action that applied to the Fond du Lac Band, the NIGC

has developed a useful body of common law on this matter. We believe this agency law properly

serves the congressional intent in IGRA that the revenues generated by Indian gaming inure to

the benefit of Indian tribes, not outside parties, so that the tribes have resources to address the

longstanding unmet needs of Indian people and reservation communities. Thus, the various

standards that the Commission has developed to date with regard to the sole proprietary

requirement should be maintained and indeed strengthened. We also believe that the

promulgation of regulations to codify these standards would provide very useful guidance to

tribes and to parties doing business with tribes, and would reduce uncertainty in this area and

thereby help eliminate disputes.

1. IGRA's "sole proprietary interest" requirement and the NIGC's development of

law interpreting and applying that requirement.

Congress in IGRA required tribes to "have the sole proprietary interest and responsibility

for the conduct of [Indian] gaming," 25 U.S.C. §§2710(b)(2)(A); §2710(d)(l)(A).

The sole proprietary interest requirement is a core element of IGRA that implements the

key purpose of the Act: to ensure that the benefits of gaming flow to the tribes, and not to third

parties, so that tribes can use the gaming revenues to meet the health, education, housing, and

needs oftheir members.

This key purpose is evident in the text of IGRA, its legislative history and the court

decisions interpreting the Act.

At the time of IGRA's enactment, an increasing number of tribes had successfully

established bingo operations which, collectively, had generated "more than $100 million in

annual revenues to tribes." S. Rep. No. 100-446, at 2 (1988). Congress found that these gaming

revenues "enabled tribes ... to provide a wider range of government services to tribal citizens

and reservation residents than would otherwise have been possible." Id. at 2. For gaming tribes,

as the Court of Appeals for the Eighth Circuit noted, "the income often means the difference

between an adequate governmental program and a skeletal program that is totally dependent on

Federal funding." City of Diduth i'. Fond du Lac Band of Lake Superior Chippewa. 785 F.3d

1207, 1211 (8th Cir. 2015) (quoting S. Rep. No. 100-466, at 3 (1988)).

But Congress was concerned that non-Indian parties would siphon off revenues from

tribal gaming operations. For that reason, Congress mandated that tribes have the "sole

proprietary interest" in Indian gaming. 25 U.S.C. §2710(b)(2)(A), (d)(l)(A)(ii). Congress

imposed this requirement to "ensure that the Indian tribe is the primary beneficiary ofthe gaming

operation," id. §2702(2), consistent with the "principal goal of Federal Indian policy [which is]

to promote tribal economic development, tribal self-sufficiency, and strong tribal govermnent."

Id. §2701(4). As one federal court stated, "Congress enacted the IGRA to promote and regulate

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

Page 3

gaming on tribal lands for the benefit of the tribes..City ofDuluth v. Fond du Lac Band of

Lake Superior Chippewa, 830 F. Supp. 2d. 712, 718 (D. Minn. 2011) affd in relevant part and

rev'd in part, 702 F.3d 1147 (8th Cir. 2013) (emphasis added).^

Congress did not define the phrase "sole proprietary interest," and instead authorized the

NIOC to determine when and how that statutory requirement was to be satisfied in light of the

newly emerging Indian gamingindustry and the unforeseen situations that might impair effective

regulatory oversight of that industry. Congress also authorized the NIOC to implement IGRA

both by promulgating rules and through enforcement actions. 25 U.S.C. §§2705, 2706, 2713.

Whenthe NIGCpromulgated its initial regulations underIGRA, it concluded that the meaning of

the "sole proprietary interest" requirement was best left to determination in the context of

specific circumstances. 58 Fed. Reg. 5804 (Jan. 22, 1993)."

That approach allowed the Commission to acquire experience as Indian gaming

developed, and afforded the Commission the flexibility to address unanticipated circumstances

as they occurred. The Commission correctly recognized that it could not anticipate, in advance,

the various ways in which third parties might seek to structure arrangements with tribes, where

those arrangements, as the Commission found, too often sought to bypass IGRA's requirements

to the detriment oftribal interests and contrary to congressional intent.

As the then-Chairman of the NIGC, Philip N. Hogen, reported to the Senate Indian

Affairs Committee by letter dated February 1, 2005, the Commission had "became more and

more concerned about contracts [with Indian tribes] that included egregious terms benefilting

contractors rather than tribes."^ The NIGC found that non-Indian parties were undermining

IGRA's "sole proprietary interest" requirement by structuring their agreements with tribes

through the use of various consulting and development contracts that were designed to both

avoid IGRA's requirements for approval of management contracts, and to mask violations of the

"sole proprietary interest" mandate. In his 2005 letter to the Senate Indian Affairs Committee,

then-NIGC Chairman Hogen explained the agency had a responsibility to review these types of

' See also Rincon Band ofLiiiseno Indians V. Schwarzenegger, 602 F.3d 1019,1035 (9th

Cir. 2010) ("IGRA's statedpuiposesinclude ensuring that tribes are the primary beneficiaries of

gaming and ensuring that gaming is protected as a means of generatingtribal revenue.")

(emphasis in original); Wells Fargo Bank v. Lake ofthe TorchesEcon. Dev. Corp., 658 F.3d 684,

694 (7th Cir. 2011)("Congress enacted [IGRA] to providea comprehensive regulatory

framework for gamingoperations by Indian tribesthat wouldpromotetribal economic selfsufficiency and strong tribal governments.")

" The federal courts have upheld the Commission's authority to implement the sole

proprietary intereststandard through case by case adjudication. See CityofDuluth v. Fond du

Lac Band ofLake Superior Chippewa, 702 F.3d 1147, 1152-54(8th Cir. 2013) (NIGC had

authority to define statutory termsthrough adjudicative decisions as well as formal rulemaking).

^ Acopy ofChairman Hogen's February 1, 2005 letter to the Senate Committee on Indian

Affairs is enclosed.

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

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alternative contract arrangements to ensure that they did not violate the expressed congressional

intent that tribes have the "sole proprietary interest" in gaming on Indian land:

[T]he Commission [began] to realize that some contractors were apparently

receiving an ownership interest in tribal casinos because they were certainly not

providing services worth the enormous sums of money they were receiving.

Id. at 5.

In his letter to the Senate Committee, the Chairman cited several examples where

agreements between tribes and non-Indian partners were structured for tribes to provide large

"rent" payments to the non-Indian interests for use of a casino building and equipment, years

after the tribe had paid for the property in full—in other words, to require the tribes to "rent"

back property and facilities they already owned. These "rent" payments sometimes constituted

more than 30 percent of the tribe's net gaming revenues. The NIGC Chairman explained the

illegality ofsuch arrangements:

In one agreement, for example, the tribe had a 10-year obligation to pay its

contractor 35% of its net gaming revenues each month as so-called "rent" for

gamingequipment and the casino building, all of whichthe tribe had already paid

for in full within the first 6 months ofthe 10-year term.

These agreements, and others like them, violate IGRA's sole proprietary

interest requirement because the developer's compensation is paid from the

casino's profits, and it is paid in such a way and in such quantity as to bear little

or no relationship to the value of the services provided or to the risk assumed.

Rather, profits are distributed to the developer as to one with a fractional

ownership interest—a proprietary interest—in an enterprise and its profits. The

Commission's review has enabled tribes to avoid such illegal and unconscionable

agreements and has thus assured that thev ai-e the primary beneficiaries of their

casinos.

Id. at 5-6 (emphasis added).

The NIGC Chairman added: "the review of contracts, both for management contract and

sole proprietary interest violations, has, without exaggeration, saved Indian tribes tens of

millions of dollars. In so doing, review has helped ensure that tribes are the primary

beneficiaries oftheir casinos, as IGRA intends. 25 U.S.C. §2702(2)." Id. at 4.

Both before and since Chaiiman Hogen's 2005 report to the Senate, the Commission,

through its general counsel, issued more than 50 opinions on the sole proprietary interest

requirement. The Commission also took several enforcement actions, finding that various

contractual arrangements between gaming tribes and non-Indian paities violated IGRA's "sole

proprietary interest" standard. This has resulted in the development of an extensive body of

common law under which the Commission has defined the basic elements for testing whether, in

a contract between the tribe and a third party, the tribe maintained the sole proprietary interest

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

Page 5

and responsibility for its gaming operations. In general, the Commission has concluded that

where a non-Indian party takes little risk, makes little capital investment and receives

compensation in the form of a percentage of gaming revenues that is disproportionate to any

services provided, the non-Indian party has an impermissible ownership interest in a tribe's

gaming activity. See NIGC's NOV 11-02 at 11-14 (July 12, 2011) (summarizing agency law on

"sole proprietary interest" issue).

2. The Fond du Lac Band's experience with the sole proprietary interest requirement.

As described in the NIGC's NOV 11-02 and a series of related federal court decisions/

the Fond du Lac Band has experienced, first-hand, the problems that arise where a tribe does not

have the sole proprietary interest in or responsibility for a gaming enterprise.

In the early days of IGRA, the Band entered into an agreement with the City of Duluth

under which the Band established a casino on a parcel of tribal trust and reservation land held by

the Band within the City. The agreement was made at a time when the Commission was only

just first constituted, and before it had developed any regulations or issued any opinions on any

matters.

The agreement, made in 1994, sought to restructure a pre-IGRA agreement that had

created a joint venture between the Band and the City and which was no longer allowed by

IGRA. The 1994 agreement provided that, for an initial term (from 1994 until 2011), the Band

would pay the City 19 percent of the Casino's gross revenues from gaming machines, with

payments for a second term (from 2011 to 2036) to be negotiated at the end of the first term.

These payments were denominated as "rent" to be paid by the Band for "subleasing" the gaming

facility from a joint Band-City Commission, even though the Band was the owner of the facility

it was "subleasing." NOV 11-02 at 7, 15-16. Under the agreement, the City further held the

right to review and veto any changes to the Band's gaming ordinance as well as the right to

review and object to the Band's decisions on gaming licenses. NOV 11-02 at 2, 8, 17.

As the Band-City agreement neared the end of its initial term, the Band saw that the

NIGC's law interpreting the sole proprietary interest had developed and that under the

Commission's more developed standards, the Band's agreement with the City was contrary to

the law. The Band stopped making payments to the City, and raised its concerns with the City

and the NIGC. See NOV 11-02 at 5-6. The City however responded by filing suit against the

Band seeking to compel the Bandto continue to make payments under the agreement. The Band

coimter-claimed and challenged the legality ofthe agreement.

"* CityofDuluth V. Fond du Lac Band ofLakeSuperior Chippewa^ 708 F. Supp. 2d 890 (D.

Minn. 2010) {Duluth /); CityofDuluth i'. Fond du Lac Band ofLake Superior Chippewa, 830 F.

Supp. 2d. 712 (D. Minn. 2011) {Duluth II), aff'd in part and rev'd inpart, 702 F.3d 1147 (8th

Cir. 2013){Duluth III); CityofDuluth v. Fond du Lac Band ofLake Superior Chippewa, 977 F.

Supp. 2d 944 (D. Minn. 2013) {Duluth IV), rev'd and remanded, 785 F.3d 1207 (8th Cir. 2015)

{Duluth V), on remand, 2015 WL 4545302 (D. Minn. July 28, 2015) {Duluth VI). See also

City ofDuluth v. National Indian Gaming Commission, 89 F.Supp.3d 56 (D.D.C. 2015).

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

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The NIGC, in a comprehensive opinion issued in July 20II, examined both the temis of

the City-Band agreement as well as its implementation, concluded that it did not comply with the

sole proprietary interest requirement and directed the Band to cease operating under that

agreement. NOV 11-02 (July 12, 2011). "Based on a thorough review of the parties*

submissions and the 1994 Agreements," the Commission "concIude[d] that the 1994

Agreements, as written and as implemented, violate IGRA's mandate that the Band retain the

sole proprietary interest in and responsibility for its gaming activity," id. at 7, and issued a

Notice of Violation against the Band. The Commission found that the 1994 Agreements were

illegal because (i) the level of compensation being paid by the Band to the City bore no relation

to any investment made or services provided by the City to the Band, and (ii) the City had

control over the Band's gaming operations through a right to review and power to approve (or

veto) Band regulations ofthe Band's gaming operations.

In particular, the Commission found that the 19 percent of gross revenues paid to the

City—which totaled approximately $75 million from 1994 to 2009—was equivalent to between

26.6 percent and 33.5 percent of the net profits. NOV 11-02 at 16-17. The Commission found

that theCity, in return, had made no capital investment in theCasino since 1994, nor had any on

going financial or other risk. Id. at 17. As the Commission said, "The Band is paying rent on a

property it already owns and, according to the Summary Appraisal Reportsupplied by the Band,

for a far higher rental rate than market rental rates." Id. at 7.

Further, the Commission concluded that the City did not provide any services to the

Casino beyond the municipal services provided to any other citizen or business located in the

City, and found that the $75 million already paid to the City bore no "rational relationship" to

any services provided by the City. NOV at 9, 17. The NIGC, applying its precedent, also found

that the intangible value of the City's support in 1986 for the Secretary's trust acquisition of the

Casino site was not the type of quantifiable economic benefit that would justify a revenue

sharing arrangement. Id. at 10. ("support of a trust acquisition is not of tangible economic

benefit justifying a share of gaming revenue").

The City retained the services of an economist, who undertook an analysis of tribal-state

gaming compacts which the City submitted to the NIGC and relied upon to argue that the 1994

City-Band contract was similar to existing tribal-state compacts. The NIGC considered this

argument, but found such a comparison to be misplaced because IGRA establishes a

comprehensive legal framework for tribal-state gaming compacts which does not apply to

agreements between tribes and cities. Id. at 10;see also 25 U.S.C. §2710(d).

The NIGC also considered the level of control that the City exercised over the Casino

under the agreement. The NIGC found that under the agreement the Band cannot "modify its

gaming ordinance or regulations, as they apply to the Fond Du Luth casino, unless the City of

Duluth consents to the modification or the modification is required by Federal law or a tribalstate compact." NOV 11 -02 at 8. The NIGC also found that "the Accord provides the City with

the right to review and object to the Band's licensing decisions." Id. The NIGC concluded tliat

"the City's power to directly control the regulation ofthe Band's gaming activity infringes on the

Band's authority as confirmed by Congress. Accordingly, the Band does not retain the sole

proprietary interest in, and responsibility for, the gaming activity." Id.

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

Page 7

Based on all these facts, the NIGC directed the Band to "cease performance under the

1994 Agreements ofthose provisions identified in this NOV as violating IGRA." Id. at 18.

The NIGC's decision was then the subject of litigation. In the City's suit against the

Band to enforce the agreement, the Band argued, and the federal courts agreed, that the NIGC's

decision, set out in the NOV, established that the agreement was no longer lawful and that the

Band should be relieved offurther obligations under that agreement.^ The NIGC's decision was

also addressed in a second suit by the City against the NIGC in which the City challenged the

Commission's authority to have issued the NOV and the Commission's interpretation ofthe sole

proprietary interest requirement.^ In their rulings in these cases, the federal courts recognized the

NIGC's authority to determine whether tribal agreements with third parties - however

denominated - complied with the IGRA's sole proprietary interest requirement, upheld the

NIGC's 2011 determination that the Band's agreement with the City violated that requirement,

and relieved the Fond duLac Band of all further obligations under the agreement.^

The NIGC ruling that declared the 1994 City-Band contract contrary to the sole

proprietary interest requirement ended the dramatic diversion of Band revenues to the City that

had gone on for years. Millions of dollars in funds from the Band's gaming operation that would

have been paid to the City are now devoted instead to funding critical tribal government

programs and services - elder care, head start programs, medical, dental, nursing and behavioral

health services, education, roads maintenance, funding of a tribal judicial system and police

force, maintenance of an environmental resources program, and more - as intended by IGRA.

3. Recommendations.

The Commission's opinions provide an extensive body of common law which defines

and informs the meaning of the sole proprietary interest requirement, and which has been given

effect by the courts.^ While this body of administrative common law helps to define the sole

^ Duluth 11, 830 F. Supp. 2d. 712 (D. Minn. 2011). affd in relevantpart, Duluth III, 702

F.3d 1147 (8th Cir. 2013). See also Duluth V, 785 F.3d 1207 (8th Cir. 2015), and on remand,

Duluth VI, 2015 WL 4545302 (D. Minn. July 28, 2015).

^ City ofDuluth v. National Indian Gaming Commission, 89 F.Supp.3d 56 (D.D.C. 2015).

(finding that the NIGC acted in exercise ofits enforcement authority when issuing the NOV, and

applying Chevron deference, upheld the agency's interpretation ofthe "sole proprietary interest"

standard and its application to the agreements).

^ Duluth II, 830 F. Supp. 2d. 712 (D. Minn. 2011), ajf'din relevant part,Duluth III, 702

F.3d 1147 (8th Cir. 2013). See also Duluth V, 785 F.3d 1207 (8th Cir. 2015), and on remand,

Duluth VI, 2015 WL 4545302 (D. Minn. July 28, 2015).

See, e.g., cases discussed at notes 5 and 6 supra. See also Bettor Racing, Inc. v. Nat'l

Indian Gaming Comm'n, 812 F.3d 648, 652 (8th Cir. 2016) (upholding NIGC's NOV against a

third party which operated a pari-mutuel betting business at the tribe's casino without an NIGC

approved management contract, and which used a scheme under which the tribe paid the

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

Febiiiary 26, 2018

Page 8

proprietary interest requirement, there would be benefits to tribes and to the regulated

community generally if the Commission were to promulgate regulations to codify the common

law rules. Such regulations would provide a single readily available source of administrative

guidance that would reduce potential disputes about the scope or meaning of the applicable

standards governing the sole proprietaiy interest requirement.

Ifthe Commission decides to develop regulations, the Commission should ensure that the

protections afforded to tribes by the sole proprietary interest requirement are not weakened from

current agency standards and, if anything, should be strengthened.

The sole proprietary interest requirement is still an important protection that the

Commission must remain vigilant in enforcing. While many tribes have developed the expertise

necessary to effectively finance and manage their gaming enterprises, there are still likely to be

tribes that are not yet in such a position, or which may be vulnerable to over-reaching by third

parties that seek to take advantage of tribes. This problem is illustrated by the Commission's

recent settlement agreement with the Cheyenne and Arapaho Tribes of Oklalioma, SA-17-01

(April 11, 2017). There, an unscrupulous employee used his position to deprive the tribe ofthe

opportunity to purchase the land that the tribe was leasing for its gaming operation, and instead

arranged to have title to that land transferred to a private entity which then charged the tribe an

exorbitant rent (including 1% ofthe gross gaming revenues) - in violation ofthe sole proprietary

interest requirement of IGRA - depriving the tribe of more than $1 million in tribal income over

an 18-month period.

Based on the Band's experience in this area. Commission regulations on the sole

proprietary interest requirement should contain the following essential elements:

• The rule should provide that any arrangement between a tribe and a third party

will be evaluated based on the Commission's consideration of all of the facts

and circumstances pertaining to the arrangement and the true economic impact

ofthe arrangement.

• The rule should require evaluation of the terms of the arrangement with the

third party without regard to the form of the agreement, i.e, lease, services

agreement, purchase agreement, management contract, etc., and without

regard to the specific form that the payment to the third party takes, i.e.,

profit-sharing, fee-for-services, rent, bonus, etc.

• The rule should require that the size of the payment be assessed as a

percentage of net revenues (not gross revenues) absent some compelling

justification for using gross revenues.

company"bonuses"that effectively gavethe company a high percentage (65%to 78%) of the

net revenues.)

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

Page 9

• The rule should require that there be a rational and substantial relationship

between the size of the aggregate payment to the third party and the fair

market value of benefits provided by the third party to the tribe.

• The rule should require that the payment to the third party be justified by

tangible economic benefits provided to the tribe, not intangible benefits such

as the third party's "support" for a trust acquisition or similar accommodation.

• The rule should examine the term ofthe arrangement, with a presumption that

the term is excessive if it extends beyond the 5-7 years applicable to

management agreements, absent other factors that would justify a longer term

(such as a substantial loan that requires a long-term repayment plan).

• The rule should require that the third party does not fully or partially exercise

operational control over the gaming enterprise or possess other indicia of

ownership.

• The rule should require that the third party does not exercise any authority

(including a right to veto) over any governmental act of the tribe, including

the tribe's rigk to amend the tribal gaming ordinance or to issue, deny,

modify or revoke a tribal gaming license.

• The rule should require that the third party does not have access to the books and

records of the gaming operation in a fashion that is commonly associated with

ownership.

We had an opportunity to review the Commission's Discussion Dralt of a possible

regulation regarding the sole proprietary interest requirement, and we enclose with these

comments some suggested revisions in light of the above recommendations. We also suggested

that these regulations be placed in Part 560 instead of Part 573 which sets out the procedures for

enforcement. While the sole proprietary interest requirement could trigger an enforcement

action under Part 573, the draft regulations on sole proprietary interest set out substantive

standards rather than procedures. Given this, we thought that the Commission might instead use

one of the reserved, but unused parts, such as Part 560, for regulations on the sole proprietary

interest.

We are also aware of concerns expressed by some tribal representatives that any

Commission regulations on the sole proprietary interest requirement not undermine innovative

measures for financing tribal gaming operations, especially where a tribe may face challenges in

establishing or operating a gaming enterprise. But we also believe, based on the Commission's

experience in addressing this requirement, that the Commission can and would continue to

engage in the very fact-specific analysis that it has done to date, to ensure that any innovative

arrangement still complies with the requirement that payments made by the tribe to a third party

are in consideration for a tangible economic benefits to the tribe, and commensurate with the fair

market value of any services, investment, or other tangible thing of value provided by the third

party to the tribe.

Fond du Lac Band of Lake Superior Chippewa
National Indian Gaming Commission

February 26, 2018

Page 10

We appreciate the opportunity to provide these comments and look forward to working

with theCommission should theCommission decide to develop regulations onthis matter.

Respectfully submitted,

Kevin Dupuis, Sr., Chairman

Enclosures

Fond du Lac Band of Lake Superior Chippewa
Sole Proprietary Interest -NIGC's discussion draft regulation

with Fond du Lac Band's Suggested Revisions

Use in Subpart F, Part 560:

a) Among the requirements of the Indian Gaming Regulatory Act is the requirement that the

Tribe have the sole proprietary interest in and responsibility for the conduct of Indian

gaming. In determining whether the sole proprietary interest requirement has been violated,

the Chair may examine all facts and circumstances concerning the arrangement between the

Tribe and a third party without regard to the form of the arrangement - (i.e., lease, services

agreement, purchase agreement, management contract, loan, etc.) - and without regard to the

specific form of the payments to the third party (i.e., profit-sharing, fee-for-services, rent,

bonus, transfer of assets, etc.)

b) In evaluating whether the sole proprietary interest mandate has been violated, the Chair

will consider the totality of circumstances concerning the arrangement between a Tribe and a

third party, and will take the following factors into consideration, any one of which may lead

to a conclusion that the sole proprietary interest standard has been violated:

1. the amount of revenue paid to or retained by the third party and, in those cases

where a third party receives a percentage share of the tribe's revenue, the share

should be evaluated as a percentage of net revenue, absent some compelling

justification for using gross revenue;

2. the value of any other property or asset transferred to or acquired by the third party;

3. whether the third party received or was entitled to a share of the gaming revenue

for no return, service, or asset provided to the gaming operation, or for a return,

service or asset that was not of commensurate value;

4. whether the third party provided to the Tribe any tangible economic benefit for the

payments it received (whether such tangible benefits are in the form of services,

financial investment, or property or other asset), and whether the fair market value

of the benefit provided by the third party to the Tribe bears a rational and

substantial relationship to amount of the payments or other value received by the

third party;

5. whether the amount of revenue given to or retained by a management contractor

(whether such contractor was approved or unapproved) exceeds the statutory cap

set forth in IGRA for management contractors;

6. whether the third party holds or exercises a right of control, in whole or part, over

the gaming operation or can exercise or modify any governmental authority ofthe

tribe, such as, but not limited to:

155107-1
a. a right or power to exclude the Tribe from the premises of the gaming

operation or part thereof, or otherwise limit access of the Tribe to the

gaming operation;

b. a right or power to operate the gaming enterprise, or any part thereof as the

proprietor;

c. a right or power to seek a judicial appointment of a receiver over the

gaming operation;

d. a right or power to make decisions as a co-owner, partner, or joint venturer

with the Tribe;

e. a right or power as a holder of stock or option or any other interest that

reflects an ownership interest in a gaming operation.; and

f. a right or power to approve or veto any governmental act of the Tribe,

including, for example, the Tribe's right to amend the tribal gaming

ordinance, regulations, or other tribal laws, or to issue, deny, modify or

revoke a tribal gaming license

7. the term of or duration ofthe contractual relationship between the Tribe and the

third party, with a presumption that the term is excessive ifit extends beyond the 5

to 7 year term limit that is applicable to a management contract, and whether the

Tribe has a commercially reasonable opportunity to terminate the agreement prior

to the expiration ofits term;

8. in the case of a loan from the third party to a Tribe, whether the loan adheres to or

deviates from the customary lending practices for similar kinds offinancing;

9. whether there is any grant or assignment ofTribal proprietary rights to the third

party, including, but not limited to:

a. the third party's right to access to records or financial information

regarding the gaming operation or part thereof;

b. the third party's right to place gambling devices that are controlled by a

third party in the gaming operation or part thereof; and

c. the grant of a security interest in the gaming operation to a third party.

c) The Chair has discretion to take other factors not listed in subparagraph (b) into

consideration for purposes of determining whether the sole proprietary interest mandate has

been violated.

d) Any enforcement action for violation ofthe sole proprietary interest requirement must specify

the factors relied on by the Chair and the reasons for relying onthem.

155107-1
e) This regulation does not otherwise affect gaming operations that are expressly authorized

in the Indian Gaming Regulatory Act, such as those permitted under 25 U.S.C.

2710(b)(4)(B), whichallows a Tribe to license third parties to conductclass II gaming on the

Tribe's reservation under certain conditions specific in that subsection.

155107-1
'fVQ

o ^

February 1, 2005

The Honorable John McCain, Chainnan

The Honorable Byron Dorgan, Vice-Chairman

The Honorable Daniel Inouyc, Member

Committee on Indian Affairs

United States Senate

836 Hart Office Building

Washington, DC 20510

Re; Contract reviewand IGRA's sole proprietaryinterest requirement

Dear Senators:

This is in response to the December 15, 2004, letter of Senators Campbelland Inouye, then

the Chairman and Vice-Chairman, respectively, of the Committee on Indian Affairs. The

letter expresses concerns about the National Indian GamingCommission's review of gaming-related contracts for violations of the sole proprietary interest requirement of the Indian

Gaming Regulatory Act ("IGRA"). SenatorMcCain has previously expressed interest in this

issue in the contextof the Mohegan Sun Management contract We appreciate the concerns

of the Committee.Consequently, we thought it might be helpfulif we provided our thoughts

on the issue.

Reduced to its essentials, the December 15 letter is concerned that the Commission's con

tract review has discouraged otherwise-willing contractors from working with Indian tribes,

and thus has deprived the tribes of opportunities to develop or expand casinos. The letter is

further concerned that the Commission brought about thatstate of affairs bythe ad hoc ap

plication of a new standard for violations of IGRA's sole proprietary interest requirement,

without noticeor guidance to the tribes or their contractors in a manner that is not subject to

review, thus depriving aU concerned of their statutory and constitutional protections under

the Administrative Procedure Act.

We wish to assure you, Senators, that thisis not the case. Webelieve that we havehelped the

tribes and that we have saved them tens of millions of dollars by providing guidance on this

issue. In a nutshell:

• The Commission's review of gaming-related contracts is intended to assure that the

Indian tribes are the primary beneficiaries of their gaming operations, as IGRA re

quires. Our review has identified for tribes casino development contracts that were

not only illegal but also unconscionable. Proposed under the guise of mutuallybeneficial ventures, somewere so one-sided that the tribes would realixe nearly noth

ing from the gamingoperation.

Exhibit X

NIGC000447
Sens. McCain, Dorgan, and Inoiiye, p. 2

February 1, 2005

• The Commission's review of contracts, which are voluntarily submitted by the par

ties, attempts toidentify potential IGRA violations before they occur, and tlius avoid

both the necessity of enforcement actions against tribes and the myriad problems

that can arise when paxties suddenly discover that their operating agreement was exe

cuted in violation of applicable law. When our review identifies IGR-A violations in

contracts already in effect, tribes ate often able to renegotiate tliem without our hav

ing to bring enforcement actions and interrupting casino operations.

• The Commission's review is not a new exercise, nor does it apply new standards,

previously undisclosed. Since 1993, Indian tribes and their contractors have, at tlie

Commission's encouragement, submitted some 440 contracts for review, specifically

for a determination that they are not subject to, or that they comply with, IGRA's

requirements for management contracts. The review for sole proprietary interest vio

lations became part of this review about 6 years ago as the Commission became

more and more concerned about contracts that included egregious terms benefiting

contractors rather than tribes. Before that, the issue had lain dormant since January

1993, when the Commission, inadopting regulations on tribal ordinances, pro\nded a

formal statement on sole proprietary interest in the Federal Register and indicated

that it would provide further guidance inindividual cases.

• The Commission's reiriew does not infringe on the rights of Indian tribes or their

contractors. The Commission is charged with IGRA's enforcement, and I may bring

enforcement actions for all IGRA violations, including the requirement that a tribe,

in all of its contractual undertakings, maintain the sole proprietary interest in, and re

sponsibility for, all gaming activity. This is so whether or not the parties have submit

ted their contracts for review. Forevery alleged IGRA violation, the parties are enti

tled to administrative review before the full Commission under the Administrative

Procedures Act and to subsequent judicial review ifthey are still aggrieved.

Amore detailed legal andfactual discussion follows.

Legal background

To begin with, IGRA requires, as one ofthe necessary conditions for a tribe to open and

operate a casino, a gaming ordinance approved by me, as the Commission Chairman. 25

U.S.C. §§ 2710(b)(B); 2710(d)(1)(A). For approval of a gaming ordinance, IGRA requires,

among other things, that "the Indian tribe will have the sole proprietary interest and respon

sibility for the conduct ofany gaming activity." 25 U.S.C. §2710(b)(2)(A). The Commission

therefore adopted regulations providing that tribal gaming ordinances include a provision to

that effect. 25 C.F.R. § 522.4(b)(1).

As such, should a tribe and a contractor execute an agreement thatgives to the contractor

some proprietary interest in tlie gaming operation, the agreement violates both the tribal

gaming ordinance and IGRA, which empowers me to correct those, and all other, violations

NIGC000448
Senb. McCain, Dorgan, and Inouyc, p. 3

I'cbruary 1, 2005

through enforcement actions. Therefore, any agreement that violates IGRA's sole proprie

tary interest requirement places the tribe at risk of fines and closure of its casino.

That said, a complete discussion of the Commission's review of gaming-rclated contracts -

agreements for the development and construction of casinos, loan agreements, gaming

equipment leases, etc. —also requires a briefdiscussion of management contracts. As sum

marized above, the Commission's review of contracts for sole proprietary interest violations

has long been part of a voluntary compliance program, namely the voluntary submission of

management contracts by tribes and their contractors for a determination by the Commis

sion that the contracts do not offend IGRA's stringent requirements. The Commission en

courages this review in order to both advance IGRA's purposes and ensure compliance.

Specifically, the Commission's review ensures that Indian tribes are the primary beneficiaries

of their casinos and that enforcement actions for IGRA violations are avoided.

As you are aware, tribes and dieir contractors submit to me, as Chairman, all contracts for

the management of Indian casinos, together with any collateral agreements, i.e. any agree

ment related to a management contract, or to the rights, duties, and obligations that a man

agement contract creates. 25 U.S.C. § 2711(a); 25 C.F.R. § 553.2; 25 C.F.R. § 502.5.

IGRA has manystrictrequirements for the approval of management contracts, and a list of

them is unnecessary here. Suffice it to say that a management contract that I have not ap

proved is void, and managementof a casino under a void agreement has a number of unde

sirable consequences. The tribe is subject to fines and the closure of its casino in an en

forcement action; the contraclor has to vacate the casino; the tribe has to run the casino by

itself; and the contractor is subject to legal action to disgorge to the tribe the proceeds of the

contract.

The history of the Commission's voluntary contract review

Given IGRA's restrictions on management contracts, and the consequences for managing

without an approved contract, the Commission had, by 1993,received a number of requests

for guidance on whether specific agreements were, under IGRA, management contracts that

require approval and background investigations. Accordingly, on July 1, 1993, the Commis

sion issued Bulletin 93-3, "Submission of Gaming-Related Contracts and Agreements for

Review," which invited tribes and their contractors to submit what the December 15 letter

calls "non-management contracts" - again, gaming equipment contracts, development

agreements, loan agreements, etc. - to the Commission for review in order to determine if

they were management contracts.

On October 14, 1994, the Commission issued Bulletin 94-5, "Approved Management Con

tracts V. Consulting Agreements (Unapproved Management Contracts are Void)," which

provided additional guidance on the issue. Notbg that what distinguishes a management

contract from other gaming contracts "depend[sj on the specific facts of each case," the

Commissionrestated its willingness to provide voluntary review. Tribes and their contractors

did not hesitate to accept the Commission's offer. Since July 1993, the Commission has re

ceived some 440 requests to review contracts.

NIGC000449
Sens. McCain, Dorgan, and Inouyc, p. 4

February 1, 2005

The Commission's review for violations of IGR-A's sole proprietary interest requirement is

simply a partof the voluntary review of gaming-related agreements thatit has conducted for

more than 11 years. The Commission reviews such agreements both to seeif they are man

agement contracts and tosee ifthey violate the sole proprietary interest requirement.

The sole proprietary interest review has its origins inJanuary 1993, when the Commission

adopted regulations concerning, among other things, die submission, review, and approval

oftribal gaming ordinances. In response to a specific inquiry by a commenter, the Commis

sion provided guidance on the meaning of the sole proprietary interest requirement. The

Commission found;

1. An agreement whereby consideration is paid or payable to the gaming operation for

the right to place gambling devices that are controlled by the vendor in such gaming

operation isinconsistent with the requirement that a tribe have the sole proprietary

interest.

2. Regarding collateral loans, a tribe may not grant a security interest in a gaming op

eration ifsuch an interest would give a party odier than the tribe the right to control

gaming in theevent of a default bythe tribe.

3. Because IGRA specifies that a tribe (not its members) must have the sole proprietary

interest, stock ownership in a tribal gaming operation by individual tribal members

would also be inconsistent with IGRA.

58 F.R. 5804 (Jan. 22,1993).

Having said this, the Commission felt further general guidance tobe inappropriate, but con

cluded with apublic offer to "provide guidance in specific circumstances" upon request. Ibid.

Results ofthe Commission's contract review:

Tribes are the primary beneficiaries oftheir casinos

Far from shutting down opportunities for tribes to build or expand casinos, the review of

contracts, both for management contract and sole proprietary interest violations, has, with

out exaggeration, saved Indian tribes tens of millions of dollars. In so doing, review has

helped ensure that tribes are the primary beneficiaries oftheir casinos, as IGRA intends. 25

U.S.C. § 2702(2).

The Commission has, for example, discovered agreements under which contractors have

tried not only to take financial advantage of tribes but also to subvert IGRA's requirements

for management contracts and for regulatory oversight. Contractors have presented tribes

with so-called "consulting agreements" by which they offered to "assist" tribes in building

and running a casino. Representative ofsuch agreements is compensation of35% ofa tribe's

net gaming revenue for aperiod of5to 7years, well in excess ofIGRA's 30% cap on com

pensation from net revenue in management agreements. 25 U.S.C. §2711 (c)(1). The contracNIGC000450
Sens. McCain, Dorgan, and Inouye, p. 5

Februar)' 1, 2005

tors also insisted on preferential payments, i.e. payments from tlie tribe before all obbgations other than operating expenses, and thus create tlie possibility that the tribe is left with ver>'

little or is left in debt to tlie contractor.

Contractors have attempted to safeguard their financial interests by arrogating to themselves

significant management responsibilities, while at the same time claiming that the "consulting agreement" is not amanagement contract and not subject to my approval. Those manage

ment responsibilities have included such things as appointing the casino's general manager, who has direct supervisory authority over aU casino departments and employees; developing the casino sinternal controls; developing the casino's budget; deciding which games to offer;

and directing casino marketing and advertising.

As the Commission sreview and analysis developed, itprevented this kind ofcontract from

ever taking effect, or allowed tribes to renegotiate such contracts if they had already been

signed. As aresult, the tribes have remained in control of, and have remained the primary beneficiaries of, their casinos. When notified that such agreements appeared to be manage

ment contracts that did not meet IGRA's limitations on payment from net revenues, or

other ofits stringent requirements, tribes were able to negotiate more favorable financial

arrangements and realized savings ofmilhons. In addition, contractors were prevented from

managing Indian casinos without first undergoing the necessary background checks and suit

ability determinations. 25 U.S.C. § 2711(e). The Commission's review has thus advanced

another of IGRA's essential purposes. It has ensured that casinos, and those who manage them, are free from corrupting influences. 25 U.S.C. §2702(2).

As contractors realized that they were no longer able to circumvent management contract

review by calling acontract a"consulting agreement" or a"development agreement," they began eliminating provisions that allowed them to control the day-to-day operations of casi

nos. In other words, they began to look for other ways to extract large sums ofmoney from

tribes without taking on responsibilities that would raise red flags in a review for manage ment contracts.

This change in approach led die Commission to realize that some contractors were appar- endy receiving an ownership interest in tribal casinos because they were certainly not provid ing services worth the enormous sums of money they were receiving. By reviewing contracts

for sole proprietary interest violations as well as management contract violations, the Com

mission has saved tribes many motemillions of dollars.

In one agreement, for example, the tribe had a10-ycar obligation to pay its contractor 35%

of its net gaming revenues each month as so-called "rent" for gaming equipment and the

casino building, aU ofwhich the tribe had already paid for in fiill within the first 6months of

the 10-yearterm.

In an even more egregious example, the tribe had a5-year obligation to pay rent equal to aU

ofthe developer's costs, plus interest, plus an additional "rent" of75% ofnet revenue. Fol

lowing that, the tribe had a 10-year obligation to pay 16% of gross revenue, an amount

NIGC000451
Sens McCain, Dotgan, and Inouyc, p. 6

Fcbniary 1, 2005

rouglily equal to 50% of net tevenue, and ad of tliese payments were to be made long after

the developer ceased ptovnding services ofany kind.

These agreements, and others like them, violate IGRA's sole proprietary interest requirement because the developer's compensation is paid from the casino sprofits, and itis paid in such

away and in such quantity as tobear litde or no relationship to the value of the services pro

vided orto the risk assumed, llather, profits are distributed to the developer as to one with a

fractional ownership interest - a proprietary interest - in an enterprise and its proBts. The

Commission's review has enabled tribes toavoid such illegal and unconscionable agreements

and has thus assured that they are the primary beneficiaries oftheir casinos.

Results of the Commission's contract review continued:

Enforcement actions are unnecessary

The Commission's review ofgaming-related contracts, again, whether for management con

tract or sole proprietary interest violations, is sound regulatory practice with a number of

other straightforward, beneficial effects. By identifying IGRA violations before they occur, enforcement actions are not required, nor are the ^es of up to $25,000 per day or the clo

sure ofcasinos. 25 U.S.C. §27l3(a)-(b). By identifying violations in contracts soon after exe

cution, we are often able to negotiate resolutions without the need for enforcement actions.

Whenever violations may be discovered, by proceeding in this way, the parties are able to

avoid the uncertainty and loss of business occasioned by fonnal action taken against tribes

for contracts executed in violation of applicable law.

Due process

Finally, the Commission's review does not infringe upon die rights of tribes or their contrac

tors. My authority is explicit in IGRA. Without limitation, I am empowered to bring en

forcement actions against all IGRA violations. 25 U.S.C. §2713.

Again, however, one of the putposes of contract review is to eliminate IGRA violations and

thus to avoid enforcement actions whenever possible. Doing so by means of an advisory opinion in response to avoluntary request for review violates no one's rights.

1want to stress again that our review is informal and voluntary. The parties are not obliged

to seek review, nor are they obliged to heed our advisory opinion if they do. Indeed, in the

rare instances when the Commission has reached out and asked to review contracts, the re

quest is, of necessity, still voluntary. We have no jurisdiction over the contractors to compel their compUance, and we have brought no enforcement actions against the tribes pursuant to

which we might compel them to submit contracts. The tribes and their contractors are free

to decline our request, just as they are free not to seek an advisory opinion in the first pkce. As such, our review is an informal, prophylactic exercise that seeks negotiated solutions

rather than formal enforcement In other words, our review simply does not implicate the

parties' statutory orconstiturional rights.

NIGC000452
Sens. McCain, Dorgan. and Inouyc, p. 7

Fcbiiiary 1, 2005

ITie Comnaission is at great pains, however, to protect those rights when voluntary, coopera

tive action ceases and I bring a formal enforcement action. The parties arc then entitled to

complete review before the full Commission under the Administrative Procedures Act, and

they are entided to subsequent judicial review in District Court ifthey are stall aggrieved 25

U.S.C. §§ 2713(a)(2), (3); 2713(b)(2); 2713(c).

Given, then, the advisory nature ofthe Commission's contract reviews, and given the full

panoply ofadmimstrative and judicial review available to aggrieved parties, the statutory and

due process rights ofthe tribes and oftheir contractors are not infringed in any way.

In conclusion, I hope that our explanation provides you with a more complete understand

ing of our reasons for addressing the sole proprietary interest issue in the manner that we

have. I would be most pleased to meet with you personally to discuss this matter further, or

any other matter ofconcern to the Committee. I thank you for your time, interest, and con cern.

Sincerely,

/s/ Philip N. Hogen

Philip N. Hogen

Chairman

NIGC000453