Title: Wolf v. Oregon Lottery Commission
Citation: N/A
Docket Number: S054681
State: Oregon
Issuer: Oregon Supreme Court
Date: March 27, 2008

FILED: March 27, 2008
IN THE SUPREME COURT OF THE STATE OF OREGON
LARRY WOLF,
an Oregon elector
and president of the Oregon Education Association,
VARNER SEAMAN, &gt;MAUREEN CRAWFORD
and NICHOLAS BLOSSER,
Respondents on Review,
v.
OREGON LOTTERY COMMISSION
and COMMISSIONERS KERRY TYMCHUK,
BRUCE ANDREWS, STAN ROBSON, and RICHARD SOLOMON,
in their official capacities,
Petitioners on Review.
(CA A125420; SC S054681)
On review from the Court of Appeals.*
Argued and submitted November 5, 2007.
Denise G. Fjordbeck, Senior Assistant Attorney General, Salem, argued the cause
and filed the brief for Petitioners on Review.  With her on the brief were Hardy Myers,
Attorney General, and Mary H. Williams, Solicitor General.
Margaret S. Olney, of Smith, Diamond &amp; Olney, Portland, argued the cause and
filed the brief for Respondents on Review.
Before De Muniz, Chief Justice, and Gillette, Durham, Balmer, Kistler, and
Walters, Justices.**
GILLETTE, J.
The decision of the Court of Appeals is reversed.  The rule is held valid.
*Judicial Review of permanent rule adopted by the Oregon Lottery Commission. 
209 Or App 670, 149 P3d 303 (2006).
**Linder, J., did not participate in the consideration or decision of this case.
GILLETTE, J.
Under Oregon law, any person dissatisfied with an administrative rule
promulgated by an Oregon administrative agency may challenge the validity of that rule
in an original proceeding filed in the Court of Appeals.  ORS 183.400. (1)  This is such
a case.  The Oregon Lottery Commission (the Lottery), after notice and a series of
hearings, promulgated a rule, former OAR 177-040-0026 (2004), dealing with the
payments that the Lottery would make to businesses (called "retailers") that make video
lottery games available to the public. (2)  Among other things, the rule provided that
"[t]he compensation amount the Lottery shall pay to a retailer for the sale of video lottery
game shares is calculated on a percentage of net receipts during a business year."  The
rule established two options for payment, with retailers empowered to select which option
they wished to use.  Petitioners challenged the rule on the ground, among others, that the
Lottery did not have statutory authority to promulgate the rule.  A panel of the Court of
Appeals agreed, and invalidated the rule.  Wolf v. Oregon Lottery Commission, 209 Or
App 670, 149 P3d 303 (2006).  We allowed the Lottery's petition for review and now
reverse the decision of the Court of Appeals.
The statute that controls the outcome of this case is ORS 183.400, which
sets out the procedure for mounting a facial challenge to administrative rules and
describes the scope of judicial review.  That statute provides:
"(2) The validity of any applicable rule may also be determined by a
court, upon review of an order in any manner provided by law or pursuant
to ORS 183.480 or upon enforcement of such rule or order in the manner
provided by law.
"(3) Judicial review of a rule shall be limited to an examination of:
"(a) The rule under review;
"(b) The statutory provisions authorizing the rule; and
"(c) Copies of all documents necessary to demonstrate compliance
with applicable rulemaking procedures.
"(4) The court shall declare the rule invalid only if it finds that the rule:
"(a) Violates constitutional provisions;
"(b) Exceeds the statutory authority of the agency; or
"(c) Was adopted without compliance with applicable rulemaking
procedures.
"(5) In the case of disputed allegations of irregularities in procedure
which, if proved, would warrant reversal or remand, the Court of Appeals
may refer the allegations to a master appointed by the court to take evidence
and make findings of fact. The court's review of the master's findings of
fact shall be de novo on the evidence.
"(6) The court shall not declare a rule invalid solely because it was
adopted without compliance with applicable rulemaking procedures after a
period of two years after the date the rule was filed in the office of the
Secretary of State, if the agency attempted to comply with those procedures
and its failure to do so did not substantially prejudice the interests of the
parties."
The Court of Appeals began its analysis by observing that, in this case, in
challenging the Lottery's rule, petitioners do not contend that the Lottery violated
rulemaking procedures; they confine themselves to arguing that the rule exceeded the
Lottery's statutory authority, and that it violated the provision of Article XV, section 4(3),
of the Oregon Constitution that dictates how the Lottery must spend its proceeds.  Wolf,
209 Or App at 672.  The court then briefly examined the terms of the challenged rule,
which included a tiered compensation scheme that bases compensation on a percentage of
net revenues.  Id. at 673-74.  
Turning first to the subconstitutional question, see Planned Parenthood
Assn. v. Dept. of Human Res., 297 Or 562, 564-65, 687 P2d 785 (1984) (describing
proper sequence for analyzing challenges to administrative rules), the Court of Appeals
focused its analysis on ORS 461.445, the statute that authorizes the Lottery to enact rules
like the one in question.  That statute provides:
"In establishing its schedule of payments to contractors, the Oregon
State Lottery Commission shall undertake to develop a system that
maximizes the net revenue to the state for the public purpose consistent with
providing a reasonable rate of return for contractors."
(Emphasis added.)  The pivotal phrase, the court noted, was the direction to "undertake to
develop" the system contemplated by the statute.  Wolf, 209 Or App at 674.  The Lottery 
had argued that the word "undertake," which is central to that phrase, means "attempt," so
that the statutory directive to the Lottery is to attempt to create a schedule of payments to
contractors that "maximizes the net revenue to the state," while providing a "reasonable
rate of return" to contractors.
The Court of Appeals rejected the Lottery's view because, it said, to accept
that view would render the statute "hortatory."  Id. at 674.  Noting that the word
"undertake" has a vast array of other meanings beyond "attempt" (such as "guarantee,"
"promise," "contract," and "covenant"), the Court of Appeals concluded that the word
must have a substantive connotation and that the dictionary did not provide an answer. 
Instead, the court stated,
"[a] more meaningful method of interpreting the term is to ask whether the
legislature would enact operative legislation (as opposed to a general,
introductory policy statement preceded by a 'whereas' clause or its
functional equivalent) containing explicit, substantive standards (such as
'maximize[] the net revenue' and 'reasonable rate of return'), couched in
mandatory terms ('shall undertake'), if the legislature's intention was merely
to give advice.  We conclude that, in context, the term 'undertake' imposes a
genuine mandate.  The Lottery is charged with the duty to develop a system,
and to do so subject to an express constraint: to maximize state revenue
consistent with providing retailers a reasonable rate of return."
Id. at 675 (emphasis in original).  For that reason, the Court of Appeals rejected the
Lottery's argument -- that ORS 461.445 merely directs the Lottery to make an effort to
devise a system that would maximize net revenues, while providing a reasonable rate of
return to retailers.  
We do not agree with the Court of Appeals' analysis.  It is true, of course,
that the legislature, in enacting ORS 461.445, intended to require that the Lottery
"establish a compensation system" by rule.  But when one views the statute in its entirety,
it becomes clear that the word "undertake," as used in the statute, must mean "attempt."  
Under ORS 461.445, the Lottery is to "undertake to develop a system" that
has two goals, viz., "maximiz[ing] the net revenue to the state" and "providing a
reasonable rate of return" to retailers.  In that context, the outcome -- a "system" -- is to be
the result of a process -- "develop[ment]"-- by the Lottery that harmonizes two competing
goals.  Moreover, interplay of those two goals will differ to some degree for each of the
hundreds of retailers with whom the Lottery deals.  (Each has different costs in rent,
taxes, personnel, and physical facilities, to name only the most obvious examples. 
Moreover, each of those factors may vary to some degree for each retailer from year to
year.)  Yet the Lottery's "system" is to be imposed by a set of rules, which are quasi-legislative policy choices of general applicability.  See ORS 183.310(9) (defining "rule"). 
Such rules will, of necessity, affect some retailers differently than others.  No system is
possible that precisely strikes the statutory balance as to every retailer.  Therefore, the
statute cannot mean that the Lottery "guarantees," "promises," "contracts," or "covenants"
to produce such a system. (3)  The Lottery must seek to achieve the goals listed in ORS
461.445, but the validity of any "system" the Lottery creates through rules is not
contingent upon its meeting the two competing goals vis-à-vis each and every retailer.  It
follows, we believe, that the word "undertake," as used in ORS 461.445, can only mean
"attempt," because the best that can be hoped for in a rule (or a series of rules) is a rough
approximation of the specified goals.  That is, it is the attempt, not the wholly accurate
outcome, that the legislature has directed the Lottery to make.
The Court of Appeals, however, appears to have read that word as imposing
a more demanding standard, and that, in our view, led to the Court of Appeals'
misunderstanding of the scrutiny that it could apply to the system that the Lottery created.  
That misunderstanding is reflected in its treatment of the concept of "rate of
return" -- a concept that had dominated petitioners' arguments.  After consulting various
texts and other sources, the court concluded that 
"the phrase 'rate of return' in the video lottery context means the profits
received by a retailer from the proceeds of video lottery games -- that is, the
revenue minus the operating cost of providing those games (for example,
labor) -- expressed as a percentage of the total capital investment (for
example, furniture or remodeling, or the opportunity cost of using space for
lottery games instead of other revenue-generating uses).  It follows that
ORS 461.445 requires that the Lottery, in developing a compensation
system for retailers, obtain and consider data not only on retailers' revenue,
but also on their operating costs and capital investments."
Wolf, 209 Or App at 678.  
The court also relied on another provision of the enactment that authorized
the Lottery to permit video poker, but which had been included in the Oregon Revised
Statutes as a note, rather than being codified:  Oregon Laws 1991, chapter 62, section 13. 
Section 13(1) contemplated that the Commission would contract for an "outside review"
of the cost of operating video lottery games and the manner in which revenue from the
operation of those games was shared between retailers and the Lottery, with the review
culminating with a report to the Lottery.  Or Laws 1991, ch 962, § 13(1), compiled as a
note after ORS 461.544 (1991) (so providing).  The Court of Appeals took special notice
of section 13(2), which provided, "After considering the findings and recommendations
of this report, the lottery commission shall modify its provisions for the payments to
contractors."  The court announced that the text of section 13, read in context, "required
the Lottery to measure retailers' compensation for providing video lottery games in terms
of revenue, operating costs, and capital expenditures ('space * * * for the operation' of
machines)."  Wolf, 209 Or App at 678-79 (emphasis in original).  Finally, after going
beyond the words of the legislation itself and reviewing the legislative history, the Court
of Appeals also stated that,
"in using the term 'rate of return,' the legislature intended to assign to the
Lottery the task of formulating a compensation system for retailers taking
into account their revenues, operating costs, and total capital investment,
in such a way as to provide a 'reasonable rate of return.'  Our remaining
inquiry is whether the Lottery did so."
Id. at 681 (emphasis added).  
That last, emphasized statement illustrates the error in the Court of
Appeals' analysis:  As we have explained, the law required only that the Lottery try to
achieve the statutory goals.  By inquiring into whether the Lottery "did so," the Court of
Appeals was asserting that the statute meant not that the Lottery was to try, but that it had
to succeed at providing a reasonable rate of return.  As we have explained, review by that
standard asked more of the Lottery than the statute did.  Having mistaken its role in
scrutinizing the Lottery's rule, the Court of Appeals then turned to consider "the role that
the rulemaking record can play in our inquiry."  Id.  (emphasis added).  As we shall
explain, the resulting inquiry also was erroneous.
The Court of Appeals acknowledged the limitations on judicial review set
out in the text of ORS 183.400, the part of the Administrative Procedures Act that grants
it the authority to consider facial challenges to agency rules.  Id. at 682.  As noted earlier,
that statute provides, in part:
"(3) Judicial review of a rule shall be limited to an examination of:
"(a) The rule under review;
"(b) The statutory provisions authorizing the rule; and
"(c) Copies of all documents necessary to demonstrate compliance with
applicable rulemaking procedures."
ORS 183.400(3) (emphasis added).  The court also acknowledged this court's opinion in
AFSCME Local 2623 v. Dept. of Corrections, 315 Or 74, 79, 843 P2d 409 (1992), where
this court stated:
"Aside from questions that might arise concerning the facts surrounding the
process of adopting a rule -- questions not raised in this case -- judicial
review under ORS 183.400 is limited to the face of the rule and the law
pertinent to it.  Numerous individual fact situations can arise under any rule,
but judicial review of the rule as applied to each of those situations is
reserved to other forums."[ (4)]
(Emphasis added.)  
Nonetheless, the court rejected the Lottery's argument that, under those
standards, the rulemaking record made before the Lottery commission in its deliberations
over the appropriate content of former OAR 177-040-0026 (2004) was irrelevant to the
court's judicial review function.  The court stated, "Neither the statutes nor the cases
construing them support the Lottery's position."  Wolf, 209 Or App at 682.  The court then
undertook an extensive examination of both the evidence presented to the Lottery during
the rulemaking process and the statements made by various Lottery commissioners at that
time to determine whether the Lottery had created a system that met the statutory goals. 
And, based on that examination, the court concluded that former OAR 177-040-0026
(2004) bore "no discernable relationship" that that court could identify to the rate of
return described in the governing statute.  Therefore, the court held that the rule was
invalid.  Wolf, 209 Or App 691-92.
It was error for the court to consider the record in the way that it did, and
further error to utilize that record as a justification for striking down the Lottery's rule. 
The governing statute, ORS 183.400(3), could not be phrased more plainly.  The record
on review (aside from information concerning whether the statutory procedures for
rulemaking were followed, an issue not presented by this case) consists of two things
only: the wording of the rule itself (read in context) and the statutory provisions
authorizing the rule.  ORS 183.400 (3)(a), (b).  See Planned Parenthood Assn., 297 Or at
572-74 (illustrating process).  See also ORS 183.400(4)(a), (b) (court may declare rule
invalid "only if" the rule violates a constitutional provision or "exceeds the statutory
authority of the agency") (emphasis added).
This court's statement in AFSCME Local 2623, that judicial review is
limited under ORS 183.400 to the face of the rule and the law pertinent to it, is precisely
on point.  Nothing in that decision invites a reviewing court to consider, in addition to the
relevant statutes and the wording of the rule (read in context), particular evidence that
was offered in the course of the rulemaking proceeding or the comments of individual
rulemakers concerning that evidence and their thoughts about their rulemaking task. 
Indeed, an inquiry into the thinking processes of administrators and agency heads who
were performing their quasi-legislative function as rulemakers is impermissible, given the
limited scope of the issues under ORS 183.400(3).
It follows from the foregoing that the Court of Appeals should have limited
its inquiry to the wording of the rule, read in context, and the applicable statute, ORS
461.445.  When that is done, it becomes apparent that the rule passes the statutory test:
The legislature directed the Lottery to attempt to establish a payment scheme that would
maximize state revenues while providing contractors with a reasonable rate of return. 
Former OAR 177-040-0026 (2004) fulfilled the legislative directive.  It is true that the
rule did not speak either in terms of "maximizing revenue" or of "reasonable rate of
return," but the absence of those phrases does not show that the Lottery was not following
the statute.   By regulating a contractor's net receipts from lottery games shares, the rule
necessarily established what revenues the Lottery would receive and, derivatively, what
each retailer's particular rate of return would be.  The rule was not facially invalid on the
statutory ground urged by petitioners.  The Court of Appeals' contrary conclusion was
error.
The question arises concerning what disposition to make of this case.  As
noted, petitioners challenged the rule in question on both statutory and constitutional
grounds.  Because of its view of the case, the Court of Appeals did not need to address
petitioners' constitutional challenge to the rule.  Ordinarily, we now would remand the
case to the Court of Appeals to address petitioners' constitutional arguments.  However,
both parties ask us to dispose of the remaining issue in this opinion.  We believe that it is
desirable to do so in this case.  
We have considered petitioners' constitutional arguments.  Petitioners assert
that former OAR 174-040-0026 (2004) is invalid, because the rates set by the Lottery in
that rule exceed permissible "costs of administration" of the Lottery, contrary to that
requirement in Article XV, section 4(3), of the Oregon Constitution. (5)  Petitioner's
argument in this respect is doubly mistaken.  First, the argument shares a flaw with
petitioners' statutory arguments, i.e., it assumes that the reviewing court can look behind
the wording of the rule, read in context.  That is not correct, as we already have
explained.  Second, the "costs of administration" mentioned in section 4(3), and on which
petitioners rely, are the Lottery's administrative costs.  See Ecumenical Ministries v.
Oregon State Lottery Comm., 318 Or 551, 567, 871 P2d 106 (1994) (so explaining). 
Therefore, they are not the costs of retailers that the Lottery's rule makes allowance for. 
Petitioners' constitutional arguments are not well taken in the context of a proceeding
under ORS 183.400.
The decision of the Court of Appeals is reversed.  The rule is held
valid. (6)
1. ORS 183.400 is set out in the text at ___ Or at ___ (slip op at 3-4).
2. The rule provided:
"(1) The compensation amount the Lottery shall pay a
retailer for the sale of video lottery game shares is calculated
on a percentage of net receipts during a business year.  'Net
receipts' means the amount of money that is received at a
retailer's premises from the sale of video lottery game shares
after the payment of prizes.  At the time a retailer signs a
Retailer Contract, the retailer must choose in writing to
receive compensation in accordance with either subsection (a)
or subsection (b) of this section.  If the retailer fails to choose
as required, the Lottery shall compensate the retailer pursuant
to subsection (a) of this section for the first business year the
contract is in effect.  For each subsequent business year the
contract is in effect, no less than 60 days before the beginning
of the upcoming business year, the retailer may submit a
written notice to the Lottery that the retailer chooses to be
compensated under the alternative compensation method for
the upcoming business year.  If the retailer does not submit or
fails to timely submit a written notice, the Lottery shall
compensate the retailer using the retailer's current
compensation method for the next business year.
"(a) 3-Tier Option:
"Net Receipts per Year -- Compensation -- Percent of Net
Receipts
"up to $175,000 -- 32.5%
"$175,000 to $475,000 -- 26%
"$475,000 and up -- 17%
"For example, if a retailer's annual net receipts
are $600,000, the retailer would receive over the
course of the business year: 32.5% of the first
$175,000 ($56,875), and 26% of the next
$300,000 ($78,000), and 17% of the remaining
$125,000 ($21,250), for a total of $156,125.
"(b) 2-Tier Option:
"Net Receipts per Year -- Compensation -- Percent of Net
Receipts
"up to $650,000 -- 26%
"$650,000 and up -- 19%
"For example, if a retailer's annual net receipts
are $1,000,000, the retailer would receive over
the course of the business year:  26% of the first
$650,000 ($169,000), and 19% of the remaining
$350,000 ($66,500), for a total of $235,500.
"(2) The compensation rates for the sale of video
lottery game shares set forth in this rule are limited to
compensation for the sale of shares for video poker games as
described in OAR 177-200-0070."
The foregoing rule has since been renumbered as OAR 177-040-0027, and its scope now is limited to video poker retailers, rather than to the broader
spectrum of retailers who offered various Lottery games to the public at the time that the
former rule was adopted.  However, with respect to video poker retailers, the issues the
Court of Appeals addressed in this case remain viable.
3. The Court of Appeals implicitly recognized that point when it rejected
petitioners' argument that the statute did not permit the Lottery to balance the competing
interests of retailers against revenues to the state but, rather, required it to maximize
revenue by selecting the lowest rate of return for retailers that would keep them operating
the games.  The Court of Appeals ultimately solved the problem this way:
"We * * * conclude that ORS 461.445 requires the Lottery to establish a
retailer compensation system that balances two competing objectives:
maximizing state revenue and providing retailers with a reasonable rate of
return.  In doing so, [however,] the Lottery is not obligated to establish a
rate of return that is the lowest one that the market will sustain[, i.e., one in
which the retailers receive only so much as will cause them to continue to
participate in the program]."
Wolf, 209 Or App at 676.
4. We note in passing that the phrase, "the face of the rule," means the
wording of the rule when read in the context of the other rules of which it is a part.  We
did not mean to suggest by the use of that phrase in AFSCME Local 2623 that the rule
was to be read in isolation.
5. Article XV, section 4(3), of the Oregon Constitution provides:
"There is hereby created the State Lottery Commission
which shall establish and operate a State Lottery. All proceeds
from the State Lottery, including interest, but excluding costs
of administration and payment of prizes, shall be used for any
of the following purposes: creating jobs, furthering economic
development, financing public education in Oregon or
restoring and protecting Oregon's parks, beaches, watersheds
and critical fish and wildlife habitats."
6. Our holding in this case arises out of the limited scope of review allowed
under ORS 183.400.  We do not by our holding suggest that petitioners could not in the
future seek relief under another procedure, such as a contested case, or through a
declaratory judgment.  See, e.g., ORS 183.410 (declaratory judgment proceeding before
agency).