b'Scope of Exemption Under Federal Lottery\nStatutes for Lotteries Conducted by a State\nActing Under the Authority of State Law\nThe federal lottery statute exemption for lotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d requires that the state exercise\nactual control over all significant business decisions made by the lottery enterprise and retain all but\na de minimis share of the equity interest in the profits and losses of the business, as well as the rights\nto the trademarks and other unique intellectual property or essential assets of the state\xe2\x80\x99s lottery.\nIt is permissible under the exemption for a state to contract with private firms to provide goods and\nservices necessary to enable the state to conduct its lottery, including management services, as\ndiscussed in the opinion.\n\nOctober 16, 2008\n\nMEMORANDUM OPINION FOR THE\nACTING ASSISTANT ATTORNEY GENERAL\nCRIMINAL DIVISION\nFederal law generally prohibits the promotion and advertisement of lotteries in\ninterstate commerce, 18 U.S.C. \xc2\xa7\xc2\xa7 1301\xe2\x80\x931304, 1953(a), but exempts from these\nprohibitions, among other things, lotteries \xe2\x80\x9cconducted by [a] State acting under the\nauthority of State law.\xe2\x80\x9d Id. \xc2\xa7\xc2\xa7 1307(a)(1), 1307(b)(1), 1953(b)(4). We understand\nthat a number of states have proposed to enter into contracts with private management companies for the long-term operation of their lotteries, pursuant to state\nlegislation. Under the terms of these proposed arrangements, the private management company would operate the lottery business under standards established by\nthe state, would make a fixed upfront or annual payment to the state representing a\nprojection of profits from the lottery business, and would have some significant\neconomic interest in the additional profits of the enterprise and would bear some\nsignificant portion of the risk of losses. The Criminal Division has asked us for\nguidance in determining whether a lottery operating under such a long-term\nprivate management arrangement would qualify as a lottery \xe2\x80\x9cconducted by a State\nacting under the authority of State law\xe2\x80\x9d within the meaning of the federal lottery\nstatutes.\nWe conclude that the statutory exemption for lotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d\nrequires that the state exercise actual control over all significant business decisions\nmade by the lottery enterprise and retain all but a de minimis share of the equity\ninterest in the profits and losses of the business, as well as the rights to the\ntrademarks and other unique intellectual property or essential assets of the state\xe2\x80\x99s\nlottery. It is permissible under the exemption for a state to contract with private\nfirms to provide goods and services necessary to enable the state to conduct its\nlottery, including management services, as discussed herein.\n\n129\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nI.\nState-chartered lotteries were prevalent during the colonial period and the early\nyears of the Republic. In the nineteenth century, public sentiment shifted against\ngambling, and by the end of the century most states had banned lotteries of any\nsort, public or private. The State of Louisiana, however, continued to permit the\nLouisiana Lottery Company, a powerful private concern, to operate under a\nmonopoly from the State. Largely unregulated by Louisiana, the Louisiana Lottery\nCompany made significant profits by promoting and selling tickets to the citizens\nof other states where lotteries were illegal. See generally National Institute of Law\nEnforcement and Criminal Justice, Law Enforcement Assistance Administration,\nDepartment of Justice, The Development of the Law of Gambling 1776\xe2\x80\x931976\n(1977) (\xe2\x80\x9cDOJ Gambling Report\xe2\x80\x9d); G. Robert Blakey & Harold A. Kurland, The\nDevelopment of the Federal Law of Gambling, 63 Cornell L. Rev. 923, 927\xe2\x80\x9338\n(1978).\nTo stop this circumvention of other states\xe2\x80\x99 laws and to address the perceived\nevils of the Louisiana Lottery Company, including the corruption of government\nofficials and other problems associated with the commercialization of gambling,\nCongress in the 1890s made it a crime to sell or advertise lotteries through the mail\nor through interstate commerce. See Act of Sept. 19, 1890, ch. 908, \xc2\xa7 1, 26 Stat.\n465 (codified as amended at 18 U.S.C. \xc2\xa7 1302) (prohibiting the use of the mails\nfor lottery-related purposes); Act of Mar. 2, 1895, ch. 191, \xc2\xa7 1, 28 Stat. 963\n(codified as amended at 18 U.S.C. \xc2\xa7\xc2\xa7 1301) (prohibiting interstate traffic in lottery\nmaterials), 1303 (prohibiting mail carriers from participating in lottery activities).\nCongress subsequently extended these prohibitions to broadcast media and to a\nbroader array of gambling activity. See Communications Act of 1934, Pub. L. No.\n73-416, \xc2\xa7 316, 48 Stat. 1064, 1088\xe2\x80\x9389 (codified as amended at 18 U.S.C. \xc2\xa7 1304)\n(prohibiting the broadcast of information concerning a lottery); Pub. L. No. 87218, 75 Stat. 492 (1961) (amending Travel Act) (codified at 18 U.S.C. \xc2\xa7 1953(a))\n(prohibiting interstate transport of wagering paraphernalia). These prohibitions\napplied regardless of whether the lottery was run by a private entity or by a state.\nUnited States v. Fabrizio, 385 U.S. 263, 269 (1966).\nBeginning with New Hampshire in 1963, a number of states decided to institute\nor reinstitute their own state-run lotteries to raise public funds. DOJ Gambling\nReport at 116\xe2\x80\x9321; Blakey, Federal Law of Gambling, 63 Cornell L. Rev. at 950 &\nnn. 114\xe2\x80\x9315. By the end of 1974, thirteen states were conducting their own lotteries. H.R. Rep. No. 93-1517, at 4 (1974) (Committee on the Judiciary). To\naccommodate the promotion of these state-run lotteries, Congress in 1975 enacted\nexemptions to the criminal prohibitions in 18 U.S.C. \xc2\xa7\xc2\xa7 1301\xe2\x80\x931304 and 1953(a)\nfor \xe2\x80\x9clotter[ies] conducted by [a] State acting under the authority of State law.\xe2\x80\x9d\nPub. L. No. 93-583, \xc2\xa7\xc2\xa7 1, 3, 88 Stat. 1916 (the \xe2\x80\x9c1975 Act\xe2\x80\x9d) (codified as amended\nat 18 U.S.C. \xc2\xa7\xc2\xa7 1307(a)(1), 1307(b)(1), 1953(b)(4)). An earlier version of the bill\nwould have \xe2\x80\x9cpermit[ted] the advertisement of any legal lottery, whether it is\n\n130\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nconducted by the State or not,\xe2\x80\x9d but at the urging of the Department of Justice, it\nwas rejected in committee in favor of the more restrictive limitation quoted above. 1\nIn 1988, Congress added an exemption to section 1307 for lotteries that are\n\xe2\x80\x9cauthorized or not otherwise prohibited by the State in which [they are] conducted,\xe2\x80\x9d if those lotteries are \xe2\x80\x9cconducted by a not-for-profit organization or a governmental organization\xe2\x80\x9d or \xe2\x80\x9cconducted as a promotional activity by a commercial\norganization and [are] clearly occasional and ancillary to the primary business of\nthat organization.\xe2\x80\x9d Pub. L. No. 100-625, \xc2\xa7 2(a), 102 Stat. 3205 (codified at 18\nU.S.C. \xc2\xa7 1307(a)(2)). Again, Congress gave serious consideration to legislation\nthat would have \xe2\x80\x9cremove[d] federal restrictions on the advertising of legitimate\nlotteries and gambling activities in interstate commerce, whether conducted by\npublic, private, or charitable interests,\xe2\x80\x9d but declined to adopt such a broad\nexemption. 2\nToday, forty states, as well as the District of Columbia, operate government-run\nlotteries. 3 Although lotteries conducted by for-profit companies remain subject to\n1\nState Conducted Lotteries: Hearing on H.R. 6668 and Companion Bills Before the Subcomm. on\nClaims and Governmental Relations of the H. Comm. on the Judiciary, 93d Cong. 3 (1974); see also\nH.R. Rep. No. 93-1517, at 8 (1974) (Committee on the Judiciary) (\xe2\x80\x9cWhen the subcommittee took\nfavorable action on bill 6668 and reported it to the full committee it recommended a series of\namendments which would have extended the exceptions in the bill to lotteries \xe2\x80\x98. . . authorized and\nlicensed in accordance with State law.\xe2\x80\x99 These amendments were rejected by the full committee, and are\nthe amendments referred to in the statement of additional views appended to this report. The Justice\nDepartment opposed this series of amendments and, as has been noted, they were not accepted by the\nfull committee and were not reported to the House.\xe2\x80\x9d).\n2\nH.R. Rep. No. 100-557, at 3 (1988); see also id. at 9 (noting that the bill \xe2\x80\x9cwould [have] permit[ted] the advertising of \xe2\x80\x98state-authorized\xe2\x80\x99 lotteries, and not merely \xe2\x80\x98state-conducted\xe2\x80\x99 lotteries\xe2\x80\x9d)\n(quoting testimony of Douglas W. Kmiec, Deputy Assistant Attorney General, Office of Legal\nCounsel, Department of Justice); 131 Cong. Rec. 25,508 (1985) (statement of Rep. Frank) (introducing\nearlier version of bill that would have exempted any lottery \xe2\x80\x9cauthorized and regulated by the State in\nwhich it is conducted\xe2\x80\x9d).\n3\nSee Ariz. Rev. Stat. Ann. \xc2\xa7\xc2\xa7 5-501 to 5-525 (2002 & Supp. 2007); Cal. Gov\xe2\x80\x99t Code \xc2\xa7 8880 (2005\n& West Supp. 2008); Colo. Rev. Stat. \xc2\xa7\xc2\xa7 24-35-201 to 24-35-222 (2006); Conn. Gen. Stat. \xc2\xa7\xc2\xa7 12-800\nto 12-834 (2000 & West Supp. 2008); Del. Code Ann. tit. XXIX, \xc2\xa7\xc2\xa7 4801\xe2\x80\x934824 (2003 & Supp. 2006);\nD.C. Code \xc2\xa7\xc2\xa7 3-1301 to 3-1337 (2007 & Supp. 2008); Fla. Stat. Ann. \xc2\xa7\xc2\xa7 24.101\xe2\x80\x9324.124 (2003 & West\nSupp. 2008); Ga. Code Ann. \xc2\xa7\xc2\xa7 50-27-1 to 50-27-55 (2006); Idaho Code \xc2\xa7\xc2\xa7 67-7401 to 67-7452 (2006\n& Supp. 2008); 20 Ill Comp. Stat. Ann. \xc2\xa7\xc2\xa7 1605/1\xe2\x80\x931605/27 (West 2008); Ind. Code Ann. \xc2\xa7\xc2\xa7 4-30-1-1\nto 4-30-19-4.2 (1996 & Lexis/Nexis Supp. 2008); Iowa Code \xc2\xa7 99G (2004 & West 2008); Kan. Stat.\nAnn. \xc2\xa7\xc2\xa7 74-8701 to 74-8721 (1992); Ky. Rev. Stat. Ann. \xc2\xa7\xc2\xa7 154A.010\xe2\x80\x93154A.990 (2006 & West 2007);\nLa. Rev. Stat. Ann. \xc2\xa7\xc2\xa7 47:9000\xe2\x80\x9347:9081 (Supp. 2008); Me. Rev. Stat. Ann. tit. VIII, \xc2\xa7\xc2\xa7 371\xe2\x80\x93389 (1997\n& Supp. 2007); Md. Code Ann., State Gov\xe2\x80\x99t \xc2\xa7\xc2\xa7 9-101 to 9-125 (2004 & Lexis/Nexis Supp. 2007);\nMass. Ann. Laws. ch. 10, \xc2\xa7\xc2\xa7 22-35, 36-40, 56-58 (2000 & Lexis/Nexis Supp. 2008); Mich. Comp.\nLaws Ann. \xc2\xa7\xc2\xa7 432.1\xe2\x80\x93432.47 (2001 & West Supp. 2008); Minn. Stat. Ann. \xc2\xa7\xc2\xa7 349A.01\xe2\x80\x93349A.16 (2004\n& West Supp. 2008); Mo. Rev. Stat. \xc2\xa7\xc2\xa7 313.200\xe2\x80\x93313.353 (2001 & West Supp. 2008); Mont. Code\nAnn. \xc2\xa7\xc2\xa7 23-7-103 to 23-7-412 (2007); Neb. Rev. Stat. Ann. \xc2\xa7\xc2\xa7 9-801 to 9-841 (2003 & Lexis/Nexis\nSupp. 2007); N.H. Rev. Stat. Ann. \xc2\xa7\xc2\xa7 284-21-a to 284-21-v (Lexis/Nexis Supp. 2007); N.J. Stat. Ann.\n\xc2\xa7\xc2\xa7 5-9-1 to 5-9-25 (1996 & West Supp. 2008); N.M. Stat. Ann. \xc2\xa7\xc2\xa7 6-24-1 to 6-24-34 (2008); N.Y. Tax\nLaw \xc2\xa7\xc2\xa7 1600\xe2\x80\x931620 (2004 & McKinney Supp. 2008); N.C. Gen. Stat. \xc2\xa7\xc2\xa7 18C-101 to 18C-172 (2007);\nN.D. Cent. Code \xc2\xa7\xc2\xa7 53-12.1-03 to 53-12.1-10 (2007 & Supp. 2007); Ohio. Rev. Code Ann.\n\n131\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nthe criminal prohibitions in 18 U.S.C. \xc2\xa7\xc2\xa7 1301\xe2\x80\x931304 and 1953(a), some states are\nconsidering legislation that would authorize long-term agreements with private\nmanagement companies to operate lotteries for the states, subject to prescribed\nstandards, in return for a significant share of the profits of the lottery enterprise.\nThe Criminal Division has sought our views on whether lotteries operated under\nsuch arrangements would fall within the scope of the federal exemption for\nlotteries \xe2\x80\x9cconducted by a State acting under the authority of State law.\xe2\x80\x9d The\narrangements proposed by the states, as we understand them, would be authorized\nby state legislation, and the question comes down to whether lotteries so operated\nwould be \xe2\x80\x9cconducted by\xe2\x80\x9d the states. 4\nII.\nFor the reasons set forth herein, we believe that the statutory exemption for\nlotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d requires that the state manage and direct the\ncourse of the lottery venture\xe2\x80\x94by exercising actual control over all significant\nbusiness decisions made by the enterprise\xe2\x80\x94and that the state retain all but a de\nminimis share of the equity interest in the profits and losses of the business, as\nwell as the rights to the trademarks and other unique intellectual property and\nassets essential to the state\xe2\x80\x99s lottery. As we discuss more fully below, preserving\nthe state\xe2\x80\x99s ownership interests in the lottery business will help to ensure that the\nlottery will be operated by the state and solely for the public benefit of the state,\nwhich we believe the federal lottery statutes require. In our view, these requirements flow from the text and structure of the statutes, from their legislative\nhistory, and from relevant court decisions. In interpreting the scope of the\nexemption for lotteries \xe2\x80\x9cconducted by a State,\xe2\x80\x9d we find that principles of agency\nand partnership law are instructive by analogy.\n\xc2\xa7\xc2\xa7 3770.01\xe2\x80\x933770.99 (2005 & Lexis/Nexis Supp. 2008); Okla. Stat. Ann. tit. 3A, \xc2\xa7\xc2\xa7 701\xe2\x80\x93735 (West\nSupp. 2008); Or. Rev. Stat. \xc2\xa7\xc2\xa7 461.010 to 461.740 (2007); 72 Pa. Cons. Stat. \xc2\xa7\xc2\xa7 3761-101 to 3761-314\n(1995 & West 2008); R.I. Gen. Laws \xc2\xa7\xc2\xa7 42-61-1 to 42-61-17 (2006); S.C. Code Ann. \xc2\xa7\xc2\xa7 59-150-10 to\n59-150-410 (2004 & Supp. 2007); S.D. Codified Laws \xc2\xa7\xc2\xa7 42-7A-1 to 42-7A-65 (2004 & Supp. 2008);\nTenn. Code Ann. \xc2\xa7\xc2\xa7 4-51-101 to 4-51-206 (2005 & Supp. 2007); Tex. Gov\xe2\x80\x99t Code Ann. \xc2\xa7\xc2\xa7 466.001 to\n466.453 (2004 & Vernon Supp. 2008); Vt. Stat. Ann. tit. XXXI, \xc2\xa7\xc2\xa7 651\xe2\x80\x93678 (2000 & Supp. 2007); Va.\nStat. Ann. \xc2\xa7\xc2\xa7 58.1-4000 to 58.1-4027 (2004 & Supp. 2007); Wash. Rev. Code Ann. \xc2\xa7\xc2\xa7 67.70.010 to\n67.70.905 (2001 & Lexis/Nexis 2008); W. Va. Code \xc2\xa7\xc2\xa7 29-22-1 to 29-22-28 (2004 & Lexis/Nexis\nSupp. 2008); Wis. Stat. Ann. \xc2\xa7\xc2\xa7 565.01 to 565.50 (West 2006).\n4\nSuch a lottery would not appear to qualify under any other exemption to the federal lottery statutes. The private management company contemplated in the various state proposals would not be a\n\xe2\x80\x9cnot-for-profit organization\xe2\x80\x9d for purposes of the exemption enumerated in 18 U.S.C. \xc2\xa7 1307(a)(2)(A);\nnor would the lottery be managed \xe2\x80\x9cas a promotional activity\xe2\x80\x9d that \xe2\x80\x9cis clearly occasional and ancillary to\nthe primary business of that organization,\xe2\x80\x9d id. \xc2\xa7 1307(a)(2)(B). Similarly, even if the private\nmanagement company were to maintain a close working relationship with the state government, it\nwould be highly unlikely to qualify as a \xe2\x80\x9cgovernmental organization\xe2\x80\x9d under section 1307(a)(2)(A).\nNone of the remaining exemptions in sections 1307 and 1953(b) would have any conceivable\napplication to a state-sponsored lottery. See 18 U.S.C. \xc2\xa7\xc2\xa7 1307(b)(2), 1953(b)(1), (b)(3), (b)(5).\n\n132\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nA.\nThe verb \xe2\x80\x9cconduct\xe2\x80\x9d means \xe2\x80\x9c[t]o manage; direct; lead; have direction; carry on;\nregulate; do business.\xe2\x80\x9d Black\xe2\x80\x99s Law Dictionary 295 (6th ed. 1990). See Webster\xe2\x80\x99s\nThird New International Dictionary 474 (1993) (defining verb \xe2\x80\x9cconduct\xe2\x80\x9d to mean\n\xe2\x80\x9clead,\xe2\x80\x9d \xe2\x80\x9cdirect,\xe2\x80\x9d \xe2\x80\x9ccontrol,\xe2\x80\x9d or \xe2\x80\x9cmanage\xe2\x80\x9d); 2 Oxford English Dictionary 791 (1978)\n(similar). In the context of the federal lottery statutes, we believe the phrase\n\xe2\x80\x9cconducted by the State\xe2\x80\x9d contemplates that the state will \xe2\x80\x9cmanage\xe2\x80\x9d the business,\n\xe2\x80\x9cdirect\xe2\x80\x9d the affairs of the business, \xe2\x80\x9ccarry on\xe2\x80\x9d its operations, and \xe2\x80\x9cdo business\xe2\x80\x9d as\na state-run enterprise, for the benefit of the state.\nAlthough \xe2\x80\x9cregulate\xe2\x80\x9d is suggested in the dictionaries as one synonym for \xe2\x80\x9cconduct,\xe2\x80\x9d merely regulating the lottery, or licensing a private lottery concession\npursuant to detailed standards prescribed by the state, plainly cannot be sufficient\nto satisfy the requirements of the statutory exemption. That the exemption requires\nmore than state regulation or licensing is confirmed by 18 U.S.C. \xc2\xa7 1307 as a\nwhole. The exemption for lotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d in section 1307(a)(1) is\nfollowed immediately in section 1307(a)(2) by the exemption for a lottery\n\xe2\x80\x9cauthorized or not otherwise prohibited by the State in which it is conducted\xe2\x80\x9d and\n\xe2\x80\x9cconducted by\xe2\x80\x9d a \xe2\x80\x9cnot-for-profit organization,\xe2\x80\x9d a \xe2\x80\x9cgovernmental organization,\xe2\x80\x9d or\n\xe2\x80\x9cas a promotional activity by a commercial organization\xe2\x80\x9d that is clearly occasional\nand ancillary to the business of the organization. Were the phrase \xe2\x80\x9cconducted by a\nState\xe2\x80\x9d construed to include lotteries authorized, licensed, or regulated by the state\n(for example, pursuant to state law and subject to state-imposed standards), the\nexemption in section 1307(a)(1) would swallow those separately enumerated in\nsection 1307(a)(2), a result that is strongly disfavored as a matter of statutory\ninterpretation. See Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S.\n825, 837 & n.11 (1988) (\xe2\x80\x9c[W]e are hesitant to adopt an interpretation of a\ncongressional enactment which renders superfluous another portion of that same\nlaw.\xe2\x80\x9d). Furthermore, the parallel use of the phrase \xe2\x80\x9cconducted by\xe2\x80\x9d in section\n1307(a)(2)\xe2\x80\x99s exemptions for certain lotteries run by not-for-profit organizations\nand as occasional promotional activities by commercial organizations strongly\nsuggest that \xe2\x80\x9cconducted by\xe2\x80\x9d cannot mean \xe2\x80\x9cregulated by,\xe2\x80\x9d because not-for-profit\norganizations and commercial entities do not, in any conventional sense of the\nword, \xe2\x80\x9cregulate.\xe2\x80\x9d\nThe only federal decision to address the meaning of the statutory exemption for\nlotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d is consistent with this reading. In United States v.\nNorberto, 373 F. Supp. 2d 150 (E.D.N.Y. 2005), the court considered whether the\nexemption in section 1307(b)(2) for lotteries \xe2\x80\x9cauthorized by the law[s] of [a]\nforeign country\xe2\x80\x9d requires that the foreign country affirmatively approve the\nconduct in question. See id. at 156. The defendants objected to such a reading on\nthe ground that it would essentially read into that exemption a requirement\n(paralleling section 1307(a)(1)) that the lottery be \xe2\x80\x9cconducted by\xe2\x80\x9d the foreign\ngovernment. The court rejected this contention, on the ground that a state\xe2\x80\x99s\n\n133\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\naffirmative authorization of an activity was not equivalent to its conducting that\nactivity. To make this point, the court contrasted \xe2\x80\x9cthe State of New York which\nhas a state run lottery\xe2\x80\x9d with \xe2\x80\x9cthe United Kingdom[, which] authorizes a private\ncompany known as \xe2\x80\x98Camelot\xe2\x80\x99 to be the government sanctioned operator of its\nNational Lottery.\xe2\x80\x9d Id. at 156\xe2\x80\x9357. Consistent with our conclusion here, the court\nindicated that the British arrangement\xe2\x80\x94which the court understood to involve the\nuse of a government-licensed and regulated management company to operate the\nlottery\xe2\x80\x94would not qualify as a lottery conducted by a state. Id. 5\nThe Rhode Island Supreme Court reached a similar conclusion in two advisory\nopinions addressing whether state lottery proposals were consistent with the\nRhode Island Constitution\xe2\x80\x99s prohibition on gaming except where \xe2\x80\x9coperated by the\nstate.\xe2\x80\x9d R.I. Const. art. 6, \xc2\xa7 15. The statutory proposals would have permitted a\nprivate gaming company and an Indian tribe to run a casino subject to close\nregulatory supervision by the state, and the court was asked to determine whether\nthe proposed arrangements left the state with sufficient control to satisfy the\nrequirements of the constitutional provision. Interpreting the word \xe2\x80\x9coperate\xe2\x80\x9d as we\ninterpret \xe2\x80\x9cconduct\xe2\x80\x9d here (as entailing active control over the enterprise), the court\nheld that the state must possess \xe2\x80\x9cthe power to make decisions about all aspects of\nthe functioning of [the] business enterprise.\xe2\x80\x9d In re Advisory Opinion to House of\nRepresentatives, 885 A.2d 698, 706 (R.I. 2005) (\xe2\x80\x9cCasino II\xe2\x80\x9d) (emphasis in\noriginal) (quoting In re Advisory Opinion to Governor, 856 A.2d 320, 331 (R.I.\n2004) (\xe2\x80\x9cCasino I\xe2\x80\x9d)). Thus, even though the state gaming commission would have\nhad regulatory control over the casino under the proposal, and under one proposal\nwould have had veto authority over certain decisions, the court found it disqualifying that \xe2\x80\x9cHarrah\xe2\x80\x99s would make day-to-day decisions having to do with the\nfunctioning of the proposed casino while the Lottery Commission merely would\nenforce the applicable regulations.\xe2\x80\x9d Casino I, 856 A.2d at 331\xe2\x80\x9332; see also Casino\nII, 885 A.2d at 707 (\xe2\x80\x9cMere regulatory power over the most fundamental aspects of\nthe gaming business\xe2\x80\x94selection of the casino service provider\xe2\x80\x94certainly falls\nshort of \xe2\x80\x98operating\xe2\x80\x99 \xe2\x80\x98all aspects\xe2\x80\x99 of the facility.\xe2\x80\x9d).\nThis interpretation of \xe2\x80\x9coperate\xe2\x80\x9d\xe2\x80\x94as necessarily including \xe2\x80\x9cthe power to make\ndecisions about all aspects of the functioning of [the] business enterprise\xe2\x80\x9d\xe2\x80\x94is\nconsistent with our interpretation of the verb \xe2\x80\x9cconduct\xe2\x80\x9d in sections 1307 and\n1953(b). The court concluded that the state had to have \xe2\x80\x9cactual control,\xe2\x80\x9d which\nmeant that it could not cede the power to \xe2\x80\x9cmake day-to-day decisions having to do\nwith the functioning of\xe2\x80\x9d the lottery. In addition, while ultimately concluding that\nthe statutory proposal did not leave the state with sufficient authority to \xe2\x80\x9coperate\xe2\x80\x9d\nthe lottery, the Rhode Island Supreme Court drew favorable attention to features of\n5\nIt is significant to note that while the British government regulates the activities of Camelot, the\nprivate company retains a substantial portion of the profits of the enterprise and is authorized to make\nbusiness decisions for the lottery without the approval of the British government. See http://www.\nnatlotcomm.gov.uk/UploadDocs/Contents/Documents/Final%20ITA-Full.pdf (last visited Aug. 5, 2008).\n\n134\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nthe proposal that \xe2\x80\x9cappear[ed] to vest operational control in the state.\xe2\x80\x9d Casino II,\n885 A.2d at 708. These features included the right of the state \xe2\x80\x9cto direct daily\nrevenue,\xe2\x80\x9d id. at 709; the responsibility of the gaming company to comply with\ndetailed accounting procedures, id. at 709 & n.11; the right of the state to monitor\nall \xe2\x80\x9cgaming devices,\xe2\x80\x9d id. at 710; the right of the state to set the number of video\nlottery terminals and non-slot table games to be played at the casino, id.; the right\nof the state to set the odds of winning, id.; and \xe2\x80\x9call other powers necessary and\nproper to fully and effectively execute and administer the provisions of this\nchapter for its purpose of allowing the state to operate a casino gaming facility,\xe2\x80\x9d\nid. at 711. Similarly here, a state\xe2\x80\x99s authority over these aspects of lottery operations would be important in establishing that it is \xe2\x80\x9cconducting\xe2\x80\x9d the lottery and\ntherefore that the lottery is eligible for section 1307(a)(1)\xe2\x80\x99s statutory exemption.\nThere is a question whether the statutory exemption would allow for an arrangement in which the state\xe2\x80\x99s lottery is conducted jointly by the state and by a\nprivate for-profit management company\xe2\x80\x94in effect, through a partnership or joint\nventure between the state and the private company. It might be suggested that even\nif the private company participates in the conduct of the business, by exercising\nsignificant control over some business decisions and participating significantly in\nthe profits and risks of the venture, the lottery could still be \xe2\x80\x9cconducted by the\nState\xe2\x80\x9d as long as the state participates in the joint conduct of the lottery. We do not\nbelieve, however, that that is the better reading of the statutes.\nThe overall structure of the statutory scheme strongly suggests that to qualify\nfor the exemption the lottery must be conducted by the state and only by the state,\nnot jointly by the state and a private for-profit entity. Section 1307(a) sets forth\nseveral parallel exemptions for lotteries that are \xe2\x80\x9cconducted by a State,\xe2\x80\x9d \xe2\x80\x9cconducted by a not-for-profit organization or a governmental organization,\xe2\x80\x9d or \xe2\x80\x9cconducted\nas a promotional activity by a commercial organization\xe2\x80\x9d where the lottery is\nclearly only occasional and ancillary to the business of the commercial organization. 18 U.S.C. \xc2\xa7\xc2\xa7 1307(a)(1), 1307(a)(2). These various options are stated\ndisjunctively in the statute; the statute does not appear to allow for an option\nwhereby a lottery might be conducted jointly by more than one of these entities at\nthe same time (though admittedly the statute does not expressly foreclose that\npossibility). The very narrow scope of the exemption for \xe2\x80\x9cclearly occasional and\nancillary\xe2\x80\x9d \xe2\x80\x9cpromotional\xe2\x80\x9d lotteries conducted by \xe2\x80\x9ccommercial organization[s]\xe2\x80\x9d\nunderscores the evident objective of the federal lottery prohibitions to prevent the\nbroader commercial promotion of lotteries that serve the profit-making interests of\nprivate companies, as opposed to the public interests of state and local governments and charitable organizations.\nThis conclusion is strongly reinforced by the legislative history of the lottery\nstatutes. Although enacted in phases over time, marking the evolving nature of\ninterstate commerce, the federal lottery statutes as a whole reflect a consistent and\nfocused policy by Congress to prohibit private for-profit concerns from engaging\n\n135\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nin the promotion of lotteries and thereby to prevent recurrence of the perceived\nevils that were associated with the Louisiana Lottery Company. As explained by\nlawmakers at the time, the 1975 Act that created the exemption for state-conducted\nlotteries sought to accommodate the states\xe2\x80\x99 renewed interest in using lotteries to\ngenerate state revenue for the benefit of the public interest 6 while avoiding the risk\nof corruption and commercialization driven by private interests that Congress\nbelieved to be presented by privately operated lotteries, such as the Louisiana\nLottery Company. 7 Indeed, the House Committee on the Judiciary considered a\nversion of the 1975 Act, passed out of a subcommittee, that would have exempted\nany lottery \xe2\x80\x9cauthorized and licensed in accordance with state law.\xe2\x80\x9d H.R. Rep. No.\n93-1517, at 8. A Department of Justice witness testified, however, that \xe2\x80\x9cthe\nDepartment would not favor any change in the law which would have the effect of\nopening up the channels of commerce to individuals who would seize upon the\nexistence of a State authorized lottery to \xe2\x80\x98commercialize the process,\xe2\x80\x99\xe2\x80\x9d and the\nCommittee subsequently amended the bill to exempt only lotteries that were\n\n6\nSee S. Rep. No. 93-1404, at 8 (\xe2\x80\x9cIt is the recommendation of the Committee that the Federal\nGovernment should not allow its laws to impede or prevent the lawfully authorized efforts of States to\nraise revenues and benefit its own citizens\xe2\x80\x9d); 120 Cong. Rec. 22,145 (1974) (statement of Sen.\nKennedy) (\xe2\x80\x9cState lotteries . . . are not operating for private gain, but to supplement revenue in order to\nsupport essential public services.\xe2\x80\x9d); 120 Cong. Rec. 12,599 (1974) (statement of Rep. Rodino) (\xe2\x80\x9cI\nwould like to point out that the revenue being derived from State authorized lotteries is being used for\nthe purposes of education in many States. In some States it is being used to fund programs designed to\nserve the interests of the elderly.\xe2\x80\x9d); id. at 12,600 (statement of Rep. Cohen) (\xe2\x80\x9cSince there is no\noverriding Federal interest in prohibiting State controlled lotteries, the Federal Government should not\ninterfere with the sovereignty of the individual States or in their selection of revenue-raising\nmeasures.\xe2\x80\x9d); id. at 12,604 (statement of Rep. Daniels) (\xe2\x80\x9cThe lottery . . . is a painless means of raising\nmuch needed revenue\xe2\x80\x9d).\n7\nSee 120 Cong. Rec. 12,601 (1974) (statement of Rep. Sarasin) (the 1890 anti-lottery acts were\n\xe2\x80\x9cintended to correct the abuses of a privately run illegal lottery,\xe2\x80\x9d not to prevent \xe2\x80\x9cthe situation which\nexists today, where the States use lotteries to fund such worthwhile programs as education, environmental research, programs to aid the elderly, and for maintenance of open spaces and recreation\nareas\xe2\x80\x9d). See also State Conducted Lotteries: Hearing on H.R. 6668 and Companion Bills Before the\nSubcomm. on Claims and Governmental Relations of the H. Comm. on the Judiciary, 93d Cong. 29\xe2\x80\x9330\n(1974) (statement of William S. Lynch, Chief of the Organized Crime and Racketeering Section of the\nCriminal Division of the Department of Justice) (\xe2\x80\x9c[T]oday most State-operated lotteries are conducted\nby means of a central computer with information key-punched into its memory banks concerning every\naspect of the lottery operation. This method prevents ticket alterations and duplications, improper\nclaims, and thefts. It further operates to hinder organized criminal groups from infiltrating or stealing\nfrom these State lotteries.\xe2\x80\x9d), quoted in H.R. Rep. No. 93-1517, at 5\xe2\x80\x936; 120 Cong. Rec. 22,145 (1974)\n(statement of Sen. Kennedy) (\xe2\x80\x9cNone of the abuses which existed in lotteries run for private profit a\ncentury ago are present in the lotteries of these States.\xe2\x80\x9d); 120 Cong. Rec. 12,600 (1974) (statement of\nRep. McClory) (\xe2\x80\x9cPolicing and disclosure policies have been built into the [Illinois lottery] system with\nthe expectation of making impossible the kind of graft or corruption which existed in 19th century\nlottery systems.\xe2\x80\x9d); id. at 12,604 (statement of Rep. Daniels) (\xe2\x80\x9cThirteen States now conduct State\nlotteries under the full protection of State law and regulation. During the several years of experience\nthere have been none of the scandals that had been forecast and the lotteries have brought in millions of\ndollars in revenue for education and other needs.\xe2\x80\x9d).\n\n136\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\n\xe2\x80\x9cconducted by a State.\xe2\x80\x9d Id. at 5\xe2\x80\x937 (quoting testimony of Deputy Attorney General\nHenry E. Petersen).\nIn 1988, Congress again considered statutory language\xe2\x80\x94this time, supported\nby the Justice Department\xe2\x80\x94that would have \xe2\x80\x9cremove[d] federal restrictions on the\nadvertising of legitimate lotteries and gambling activities in interstate commerce,\nwhether conducted by public, private, or charitable interests.\xe2\x80\x9d H.R. Rep. No. 100557, at 3 (1988); see also id. at 9 (noting that the bill \xe2\x80\x9cwould [have] permit[ted]\nthe advertising of \xe2\x80\x98state-authorized\xe2\x80\x99 lotteries, and not merely \xe2\x80\x98state-conducted\xe2\x80\x99\nlotteries\xe2\x80\x9d) (quoting testimony of Douglas W. Kmiec, Deputy Assistant Attorney\nGeneral, Office of Legal Counsel, Department of Justice); 131 Cong. Rec. 25,508\n(1985) (statement of Rep. Frank) (introducing earlier version of bill that would\nhave exempted any lottery \xe2\x80\x9cauthorized and regulated by the State in which it is\nconducted\xe2\x80\x9d). Again, however, Congress rejected the proposal, and members\nexpressed concerns that private for-profit companies could not be trusted to\noperate lotteries in a publicly beneficial manner. See, e.g., 134 Cong. Rec. 10,317\xe2\x80\x93\n318, 11,261, 11,376 (1988) (statements of Rep. Wolf). Congress instead passed a\nversion of the bill that gave exemptions to lotteries that were \xe2\x80\x9cauthorized or not\notherwise prohibited by the State in which [they are] conducted,\xe2\x80\x9d but only if those\nlotteries were \xe2\x80\x9cconducted by a not-for-profit organization or a governmental\norganization\xe2\x80\x9d or \xe2\x80\x9cas a promotional activity by a commercial organization.\xe2\x80\x9d Pub. L.\nNo. 100-625, \xc2\xa7 2(a), 102 Stat 3205 (codified at 18 U.S.C. \xc2\xa7 1307(a)(2)).\nWe believe this history reflects a consistent legislative judgment against permitting private for-profit companies to conduct lotteries. It would appear to be\ninconsistent with this judgment to permit the injection of a private company\xe2\x80\x99s\nprofit-making interests into the conduct of the state lottery, because doing so\nwould raise the risk that the lottery business would serve a private commercial\nmotive, rather than serving solely the public interest of the state.\nThe law of partnership offers useful guidance, by analogy, on the sorts of arrangements with a private management company that would convert a lottery\nbusiness \xe2\x80\x9cconducted by a State\xe2\x80\x9d into a joint enterprise between the state and the\nprivate entity. Perhaps most significantly, partnership law would suggest that a\nbusiness becomes a partnership (as distinguished from a principal-agent relationship) when a single entity does not exercise actual control over all significant\nbusiness decisions. Under the Uniform Partnership Act (\xe2\x80\x9cUPA\xe2\x80\x9d), which has been\nwidely adopted and followed, \xe2\x80\x9cthe power of ultimate control\xe2\x80\x9d is an essential\nelement that \xe2\x80\x9cdistinguishes a partnership from a mere agency relationship.\xe2\x80\x9d\nUniform Partnership Act \xc2\xa7 202 cmt. 1 (1997); see also, e.g., Kidz Cloz, Inc. v.\nOfficially For Kids, Inc., 320 F. Supp. 2d 164, 171 (S.D.N.Y. 2004) (under New\nYork law, demonstrating \xe2\x80\x9cthe parties\xe2\x80\x99 joint control and management of the\nbusiness\xe2\x80\x9d is necessary to prove the existence of a partnership); Harbaugh v.\nGreslin, 436 F. Supp. 2d 1315, 1321 (S.D. Fla. 2006) (same under Florida law).\nSimilarly, mutual control is a hallmark of a joint venture. See, e.g., Taylor v.\n\n137\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nTexaco, Inc., 510 F. Supp. 2d 1255, 1262 (N.D. Ga. 2007) (under Georgia law,\n\xe2\x80\x9cThe element of mutual control is a crucial element of a joint venture\xe2\x80\x9d); Black\xe2\x80\x99s\nLaw Dictionary 843 (7th ed. 1999) (defining \xe2\x80\x9ceach member\xe2\x80\x99s equal voice in\ncontrolling the project\xe2\x80\x9d as a \xe2\x80\x9cnecessary element\xe2\x80\x9d of a joint venture). These\nconcepts closely mirror, in our view, the proper meaning of \xe2\x80\x9cconducted by a\nState,\xe2\x80\x9d consistent with the text and legislative history and purpose of the federal\nlottery statutes.\nIn our view, it is also relevant to note that the sharing of a significant interest in\nthe profits and losses of the business is recognized as \xe2\x80\x9ccharacteristic of a partnership.\xe2\x80\x9d Steelman v. Hirsch, 473 F.3d 124, 130 (4th Cir. 2007); see also, e.g., Mallis\nv. Bankers Trust Co., 717 F.2d 683, 690 (2d Cir.1983) (under New York law, \xe2\x80\x9cthe\ncrucial element of a joint venture is the existence of a mutual promise or undertaking of the parties to share in the profits . . . and submit to the burden of making\ngood the losses\xe2\x80\x9d) (quotation marks omitted); Thomas v. Price, 718 F. Supp. 598,\n605 (S.D. Tex. 1989) (under Texas law, \xe2\x80\x9cMajor incidents of the partnership\nrelationship are an agreement among the participants to share profits and losses\nand a mutual right of control to manage the partnership\xe2\x80\x9d); Black\xe2\x80\x99s Law Dictionary\nat 843 (defining \xe2\x80\x9cshared profits and losses\xe2\x80\x9d as a \xe2\x80\x9cnecessary element\xe2\x80\x9d of a joint\nventure). The UPA creates a rebuttable presumption that a person \xe2\x80\x9cwho receives a\nshare of the profits of a business\xe2\x80\x9d is a partner in the business. Uniform Partnership\nAct \xc2\xa7 202(c)(3). Importantly, however, the presumption does not attach if the\nprofits were received \xe2\x80\x9cin payment . . . for services as an independent contractor or\nof wages or other compensation to an employee.\xe2\x80\x9d Id. This result supports the\nnotion that some de minimis portion of profits or revenues may be shared among\nthe parties without creating a partnership, because de minimis profit-sharing is\nconsistent with a principal-agent relationship, rather than a true partnership. 8 We\nbelieve this concept is relevant in interpreting the exemption for lotteries \xe2\x80\x9cconducted by a State,\xe2\x80\x9d because the sharing of a significant interest in the profits and\nlosses of the lottery enterprise would be expected to diminish significantly the\nstate\xe2\x80\x99s incentive to exercise actual control over the management of the business\nand would mean also that the lottery would not be conducted solely in the public\ninterest of the state, as Congress has mandated, but rather at least partially in the\nprofit-maximizing interest of the private firm. 9\n\n8\nCf. TIFD III-E, Inc. v. United States, 459 F.3d 220, 233\xe2\x80\x9335 (2d Cir. 2006) (holding that foreign\nbanks\xe2\x80\x99 investment in a partnership was properly classified as debt, not equity, for tax purposes where\nthe banks had the contractual right to recoup their investment at an agreed upon rate of return plus an\nopportunity to participate in the profits of the partnership that was, as a practical matter, limited to\n2.5% of the banks\xe2\x80\x99 total investment\xe2\x80\x94\xe2\x80\x9ca relatively insignificant incremental return over the projected\neight-year life of the partnership\xe2\x80\x9d).\n9\nAlthough there may be no bright-line rule for identifying what would constitute a significant, or\nmore than de minimis, ownership interest in the state\xe2\x80\x99s lottery business, examples of rules from other\nstatutory and regulatory contexts may be useful by analogy. See, e.g., 15 U.S.C. \xc2\xa7 78n(d)(1) (Williams\nAct provision requiring any person making tender offer for class of stock of publicly traded corporation\n\n138\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nFor these reasons, we believe that an arrangement by which a state engages in\nthe business of operating a lottery jointly with a private firm that shares substantially in the profits and risks of the enterprise would not be consistent with the\nstatutory exemption. The concerns that apparently led Congress to prohibit private\ncompanies from conducting lotteries would still apply if a private company and a\nstate were jointly to own and operate the lottery venture. See H.R. Rep. No. 931517, at 5\xe2\x80\x936; 120 Cong. Rec. 22,145 (1974) (statement of Sen. Kennedy) (warning\nagainst the abuses of \xe2\x80\x9clotteries run for private profit\xe2\x80\x9d and stating the view that\nsuch abuses would not be present in state-conducted lotteries). We therefore\nbelieve that the exemption for lotteries \xe2\x80\x9cconducted by a State\xe2\x80\x9d requires that the\nlottery be \xe2\x80\x9cconducted by\xe2\x80\x9d the state alone, and not be conducted jointly by the state\nand by a private for-profit corporation, whether through a formal partnership or\nthrough some other form of joint business venture.\nB.\nOur conclusion that the state must exercise actual control over all significant\nbusiness decisions of the lottery and retain all but a de minimis share of the equity\ninterest does not mean that the state in conducting the lottery enterprise may not\ncontract with private firms to provide goods and services necessary to the lottery.\nStates that operate their own lotteries routinely contract with private businesses to\nprint and sell lottery tickets, promote the lottery, insure against loss, consult about\ngames, and perform a wide range of other functions as part of operating the\nlottery. 10 We do not read the lottery statutes to foreclose these types of arrangements; that a state contracts with a private company to assist in certain functions\nto file disclosure report with SEC if, after consummation of offer, the person would own more than 5%\nof the class); H.R. Rep. No. 91-1655, at 3 (1970) (justifying Williams Act disclosure requirement on\nground that \xe2\x80\x9cshareholders should be fully informed\xe2\x80\x9d of acquisitions of equity interests exceeding 5%\nbecause \xe2\x80\x9c[t]hese acquisitions may lead to important changes in the management or business of the\ncompany\xe2\x80\x9d); 26 C.F.R. \xc2\xa7 1.368-2T(l)(2)(iii) & ex. 4 (2008) (IRS rule providing that \xe2\x80\x9cde minimis\xe2\x80\x9d\nvariations in shareholder identity or proportionality of ownership are disregarded in determining\nwhether transaction qualifies for tax treatment as \xe2\x80\x9creorganization\xe2\x80\x9d under 26 U.S.C. \xc2\xa7 368(a)(1)(D), and\ngiving as example of such de minimis variation a 1% difference in stock ownership).\n10\nSee, e.g., Dalton v. Pataki, 5 N.Y.3d 243, 271 (2005) (\xe2\x80\x9cThe Division of the Lottery regularly\ncontracts with outside vendors and other entities for various equipment and services to assist in the\noperation of the state lottery,\xe2\x80\x9d under state constitutional provision prohibiting lotteries unless \xe2\x80\x9coperated\nby the state\xe2\x80\x9d); State ex rel. Ohio Roundtable v. Taft, No. 02AP-911, \xc2\xb6 32, 2003 WL 21470307, *6\n(Ohio App. June 26, 2003) (\xe2\x80\x9cOhio undisputedly contracts with various vendors for the operation and\npromotion of the lottery, whether for existing in-state games or the new multi-state Mega Millions,\xe2\x80\x9d\nunder state constitutional provision prohibiting lotteries unless \xe2\x80\x9cconduct[ed]\xe2\x80\x9d by \xe2\x80\x9can agency of the\nstate\xe2\x80\x9d); Mo. Rev. Stat. \xc2\xa7 313.270 (2001) (\xe2\x80\x9cThe director, pursuant to rules and regulations issued by the\ncommission, may directly purchase or lease such goods or services as are necessary for effectuating the\npurposes of sections 313.200 to 313.350, including procurements which integrate functions such as\nlottery game design, supply of goods and services, and advertising.\xe2\x80\x9d); Minn. Stat. \xc2\xa7 349A.07(1) (2004)\n(\xe2\x80\x9cThe director may enter into lottery procurement contracts for the purchase, lease, or lease-purchase of\nthe goods or services.\xe2\x80\x9d).\n\n139\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nassociated with the lottery, even where the contractor is compensated for its\nservices by a relatively small fixed percentage of the revenues of the lottery, does\nnot mean that the state itself is no longer conducting the lottery. The private\ncontractor in such circumstances\xe2\x80\x94though providing valuable assistance to the\nstate\xe2\x80\x94is not \xe2\x80\x9cconducting\xe2\x80\x9d the lottery within the meaning of the statutes.\nThe delegation of management responsibilities to a private contractor presents a\nmore difficult question. As discussed above, the verb \xe2\x80\x9cconduct\xe2\x80\x9d itself connotes\nmanagement. Thus, unlike the delegation of other activities necessary to a lottery,\nsuch as promoting the lottery or printing tickets, an overbroad delegation of\nmanagement responsibility would definitely call into question whether the state,\nand only the state, is exercising actual control over all significant business\ndecisions of the lottery. For instance, simply imposing operating standards, even if\nfreely amendable, would not be enough to give the state the necessary control over\nall significant business decisions of the lottery. Nor would a regulatory system of\nlegal authorization and license alone be sufficient. Accordingly, we believe that\nthere must be significant limits on the authority the state may delegate and still\nqualify for the exemption under section 1307(a)(1).\nPrinciples of agency law are instructive in defining the appropriate line in\njudging a management services contract. To be said to \xe2\x80\x9cconduct\xe2\x80\x9d a lottery, the\nstate must maintain and exercise control over all significant aspects of the lottery\noperation. To the extent that such authority is delegated to a private management\ncompany, the management company should operate more in the role of an agent of\nthe state, see Restatement (Third) of Agency \xc2\xa7 1.01 (2006), than a partner that\nshares in the authority to make significant business decisions. This conclusion is\nfully consistent with the opinions of the Rhode Island Supreme Court in the\nCasino I and Casino II cases discussed above. In particular, a state official or\nagency must have the authority to direct or countermand operating decisions by\nthe management company at any time. Cf. Restatement (Third) of Agency \xc2\xa7 8.09,\ncmt. c (citing id. \xc2\xa7 1.01, cmt. f(1)) (\xe2\x80\x9cThe power to give interim instructions is an\nintegral part of a principal\xe2\x80\x99s control over an agent and a defining element in a\nrelationship of common-law agency.\xe2\x80\x9d). 11 The state need not always choose to\nexercise this authority if it is satisfied from its oversight that the management\ncompany is operating the lottery properly, but the existence of this authority is\nvital for the state to exercise actual control over the business\xe2\x80\x94and to ensure that it\nhas not shared such control with a private company.\nFor the same reason, we believe that to \xe2\x80\x9cconduct\xe2\x80\x9d the lottery through the agency of a management company, a state must maintain ready access to information\nregarding all lottery operations. To this end, as a necessary corollary of its\n11\nUnlike a principal at common law, which can contract away the right to direct its agents\xe2\x80\x99 actions,\nid., a state may not waive this responsibility, nor may it limit its authority to a veto power. Cf. Casino\nII, 885 A.2d at 706 (\xe2\x80\x9c[T]he power to choose is qualitatively different from the lesser power of vetoing\nanother\xe2\x80\x99s choice.\xe2\x80\x9d).\n\n140\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nauthority over lottery operations, a state should have the right to demand and\nreceive information from the management company concerning any aspect of the\nlottery operations at any time. Cf. Restatement (Third) of Agency \xc2\xa7 8.12(3) (agent\nhas duty \xe2\x80\x9cto keep and render accounts to the principal of money or other property\nreceived or paid out on the principal\xe2\x80\x99s account\xe2\x80\x9d); La. Civ. Code art. 3003 (2005)\n(\xe2\x80\x9cAt the request of the principal . . . the mandatary [agent] is bound to provide\ninformation and render an account of his performance of the mandate.\xe2\x80\x9d).\nIn addition, the management company must have the affirmative duty to provide the state with any information the company reasonably believes state officials\nwould want to know to enable the state to conduct the lottery. Cf. Restatement\n(Third) of Agency \xc2\xa7 8.11 (\xe2\x80\x9cAn agent has a duty to use reasonable effort to provide\nthe principal with facts that the agent knows, has reason to know, or should know\nwhen (1) subject to any manifestation by the principal, the agent knows or has\nreason to know that the principal would wish to have the facts or the facts are\nmaterial to the agent\xe2\x80\x99s duties to the principal; and (2) the facts can be provided to\nthe principal without violating a superior duty owed by the agent to another\nperson.\xe2\x80\x9d). These notifications will \xe2\x80\x9cenable[] the [State] to update and sharpen\ninstructions provided to the [management company]\xe2\x80\x9d as the lottery operation\nevolves. Id. cmt. d. We conclude also that a management company must give the\nstate advance notice of any operating decision that bears significantly on the\npublic interest, such as decisions on the kinds of games to be offered to the public\nand decisions affecting the relative risk and reward of the games being offered, so\nthat the state will have a reasonable opportunity to evaluate and countermand that\ndecision. The affirmative duties to report material information, and to inform the\nstate in advance of significant decisions, are critical to ensuring that the state\xe2\x80\x99s\nlegal authority to direct the actions of the lottery translates into actual, practical\ncontrol over the lottery\xe2\x80\x99s operations.\nAs for the ownership of assets, we do not foreclose the possibility that the state\nmay, consistent with the limits of the exemption, permit the private management\ncontractor to own and provide most of the assets needed for the lottery. Many such\nassets\xe2\x80\x94computers, printing equipment, possibly the gaming equipment\xe2\x80\x94are\nlikely to be widely available for lease or purchase from other sources if the private\ncompany were to withdraw from the contract with the state. Thus, we do not think\nthat a state\xe2\x80\x99s contracting with a private management company to provide these\nassets for its lottery would necessarily put the lottery business under the effective\ncontrol of the private contractor, so as to make the private company the state\xe2\x80\x99s\npartner in conducting the lottery. Even some non-fungible assets\xe2\x80\x94software,\ngames, accounting systems\xe2\x80\x94can be redeveloped or replaced, and therefore could\nalso be leased by a state for use in its lottery without elevating the role of the\ncompany providing the assets to that of a partner or joint venturer in the lottery.\nOther assets, such as the trade name and trademarks of the state lottery, may\nperhaps be truly essential to the state\xe2\x80\x99s ownership and control of the lottery, in the\n\n141\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nsense that the state could not continue \xe2\x80\x9cconducting\xe2\x80\x9d its lottery (at least not without\nserious disruption) unless it retained ownership of these assets after discharging\nthe management company. Ownership of these assets could be viewed as inextricably intertwined with the conduct of the lottery. Were a state to transfer such\nessential assets to a private company assisting the state in the management of the\nlottery, the state could become so dependent upon the management company for\nthe continued operation of the business as to call into significant question whether\nthe state is actually conducting the lottery.\nAs we have discussed above, we believe that the ownership by the private\nmanagement company of a significant equity interest in the profits of the lottery\nwould go beyond the scope of the exemption. We understand that some states have\nproposed to enter into agreements with private management firms under which the\nprivate company would assist in the management of the lottery and receive a\nsignificant share of the lottery\xe2\x80\x99s profits or bear a significant share of the risk of\nlosses. In return, it has been proposed that the management company would make\na significant upfront payment to the state or make annual disbursements to the\nstate. We believe that such an arrangement would not be consistent with the\nlimited exemption for lotteries \xe2\x80\x9cconducted by a State.\xe2\x80\x9d If a private management\ncompany were to oversee the lottery\xe2\x80\x99s operations and receive a significant share of\nthe lottery\xe2\x80\x99s profits (particularly in return for an investment of capital), we think it\nclear that the company would not be a mere contractor or agent, assisting the state\nin operating a lottery that the state conducts, but rather a co-participant in the\nconduct of the lottery with substantial managerial responsibilities and a significant\nequity stake in the lottery\xe2\x80\x99s success or failure. In such circumstances, the private\nmanagement company\xe2\x80\x99s incentives and ability to influence the lottery would be\nsignificant. Where a state has a reduced stake in the profits or losses of a lottery,\nits incentive to exercise the actual control over all significant business decisions\nrequired by the exemption is necessarily diminished. Indeed, in practical respects,\nan arrangement in which the state cedes to a private firm a significant economic\ninterest in the profits and losses of the business may be functionally quite similar\nto an arrangement whereby the state licenses a lottery concession to a private\ncompany. As described above, these incentives and characteristics are precisely\nwhat Congress sought to avoid in enacting the exemption for lotteries \xe2\x80\x9cconducted\nby a State.\xe2\x80\x9d See supra notes 6\xe2\x80\x937 (contemplating that state-conducted lotteries\nwould be operated for the public benefit). 12\n12\n\nSee also Colo. Const. art. XVIII, \xc2\xa7 2(7) (\xe2\x80\x9cUnless otherwise provided by statute, all proceeds from\nthe lottery, after deduction of prizes and expenses, shall be allocated to the conservation trust fund of\nthe state for distribution to municipalities and counties for park, recreation, and open space purposes.\xe2\x80\x9d);\nDel. Const. art. II, \xc2\xa7 17(a) (\xe2\x80\x9cAll forms of gambling are prohibited in this State except . . . [l]otteries\nunder State control for the purpose of raising funds\xe2\x80\x9d); Ga. Const. art. I, \xc2\xa7 2, \xc2\xb6 8(c) (\xe2\x80\x9cProceeds derived\nfrom the lottery or lotteries operated by or on behalf of the state shall be used to pay the operating\nexpenses of the lottery or lotteries, including all prizes, without any appropriation required by law, and\nfor educational programs and purposes as hereinafter provided.\xe2\x80\x9d); La. Const. art. XII, \xc2\xa7 6(A)(1) (\xe2\x80\x9cThe\n\n142\n\n\x0cScope of Exemption Under Federal Lottery Statutes for State-Conducted Lotteries\n\nThat said, we think it is permissible for a state to compensate private contractors with some portion of the lottery\xe2\x80\x99s revenues or with some financial incentives\nthat are contingent on the lottery\xe2\x80\x99s achievement of certain revenue objectives. For\nexample, a state may agree to increase a private management company\xe2\x80\x99s fee by a\ncertain amount if the lottery\xe2\x80\x99s revenues grow by a specified percentage in a given\nyear. So long as the management company is not to receive more than a de\nminimis share of the lottery\xe2\x80\x99s profits, such an agreement would not significantly\ndiminish the state\xe2\x80\x99s incentive to exercise actual control over the lottery.\nFinally, it has been suggested that a private management company should be\nrequired to deposit lottery revenues into accounts owned by and maintained in the\nname of the state or state agency overseeing the lottery, and that the company be\npermitted to disburse funds from these accounts only on terms set forth in the\nmanagement agreement. We believe that such accounting practices could be\nhelpful in ensuring that the state, and not the private management company, is\nactually conducting the lottery business. Although we are not able to say that any\nparticular accounting practice is mandated by the statutes, the more transparent the\naccounting procedure, 13 the more likely it will be that the state is in fact exercising\nactive ownership and control over the enterprise.\n\nnet proceeds from the operation of the lottery shall be deposited in a special fund created in the state\ntreasury entitled the Lottery Proceeds Fund.\xe2\x80\x9d); N.D. Const. art. XI, \xc2\xa7 25 (\xe2\x80\x9c[T]he legislative assembly\nshall authorize the state of North Dakota to join a multi-state lottery for the benefit of the state of North\nDakota\xe2\x80\x9d); Mo. Const. art. III, \xc2\xa7 39(b)(2), (3) (\xe2\x80\x9cThe money received by the Missouri state lottery\ncommission from the sale of Missouri lottery tickets, and from all other sources . . . shall be appropriated solely for public institutions of elementary, secondary and higher education.\xe2\x80\x9d); N.H. Const. pt. 2, art.\n6-b (\xe2\x80\x9cAll moneys received from a state-run lottery and all the interest received on such moneys shall,\nafter deducting the necessary costs of administration, be appropriated and used exclusively for the\nschool districts of the state.\xe2\x80\x9d); N.J. Const. art. IV, \xc2\xa7 7, \xc2\xb6 2.C (\xe2\x80\x9cIt shall be lawful for the Legislature to\nauthorize the conduct of State lotteries restricted to the selling of rights to participate therein and the\nawarding of prizes by drawings when the entire net proceeds of any such lottery shall be for State\ninstitutions and State aid for education\xe2\x80\x9d); Tenn. Const. art. XI, \xc2\xa7 5 (\xe2\x80\x9c[T]he legislature may authorize a\nstate lottery if the net proceeds of the lottery\xe2\x80\x99s revenues are allocated to provide financial assistance to\ncitizens of this state to enable such citizens to attend post-secondary educational institutions located\nwithin this state.\xe2\x80\x9d); Va. Const. art. X, \xc2\xa7 7-A (\xe2\x80\x9cLottery proceeds shall be appropriated from the Fund to\nthe Commonwealth\xe2\x80\x99s counties, cities and towns, and the school divisions thereof, to be expended for\nthe purposes of public education.\xe2\x80\x9d); Wis. Const. art. IV, \xc2\xa7 24(6)(a) (\xe2\x80\x9c[N]et proceeds of the state lottery\nshall be deposited in the treasury of the state, to be used for property tax relief for residents of this state\nas provided by law.\xe2\x80\x9d).\n13\nSee, e.g., Cal. Gov\xe2\x80\x99t Code \xc2\xa7 8880.41 (\xe2\x80\x9cThe director shall make and keep books and records that\naccurately and fairly reflect each day\xe2\x80\x99s transactions, including, but not limited to, the distribution of\ntickets or shares to lottery game retailers, receipt of funds, prize claims, prize disbursements or prizes\nliable to be paid, expenses and other financial transactions of the lottery . . . .\xe2\x80\x9d); id. \xc2\xa7 8880.42 (\xe2\x80\x9cThe\ndirector shall provide a monthly cumulative sales report to the commission and the Controller within 15\ndays after the end of each month.\xe2\x80\x9d).\n\n143\n\n\x0cOpinions of the Office of Legal Counsel in Volume 32\n\nIII.\nIn sum, in order to satisfy the federal lottery statute exemption for lotteries\n\xe2\x80\x9cconducted by a State,\xe2\x80\x9d the state must exercise actual control over all significant\nbusiness decisions made by the lottery enterprise and retain all but a de minimis\nshare of the equity interest in the profits and losses of the business, as well as the\nrights to the trademarks and other unique intellectual property or essential assets of\nthe state\xe2\x80\x99s lottery. It is permissible under the exemption for a state to contract with\nprivate firms to provide goods and services necessary to enable the state to\nconduct its lottery, including management services, as discussed herein.\nSTEVEN G. BRADBURY\nPrincipal Deputy Assistant Attorney General\nOffice of Legal Counsel\n\n144\n\n\x0c'


b'December 18, 1978\n\n78-98\n\nMEMORANDUM OPINION FOR THE GENERAL\nCOUNSEL, CENTRAL INTELLIGENCE AGENCY\nSupremacy Clause (Art. VI, cl. 2)\xe2\x80\x94 Central\nIntelligence Agency\xe2\x80\x94 Polygraph Examinations of\nEmployee of CIA Contracts\n\nYour Office has requested our views on State law that may bear on your\nAgency\xe2\x80\x99s administration o f polygraph examinations o f certain key employees\nof United States corporations having classified contracts with the Central\nIntelligence Agency (CIA).\nI.\nO ur discussion begins with the question whether the CIA is authorized as a\nmatter o f Federal law to adm inister polygraph examinations in order to protect\nadequately classified information from public disclosure.\nSeveral provisions o f law, o f both general and particular applicability,\nsupport the C IA \xe2\x80\x99s authority. As a general matter, Executive Order No. 12065,\n43 F.R. 28949 (June 28, 1978), reprinted in 50 U .S.C . \xc2\xa7 401 Note (Supp. II\n1978), requires Federal agencies to ensure the security of classified informa\xc2\xad\ntion. The pertinent provisions of that order provide:\nNo person may be given access to classified information unless\nthat person has been determ ined to be trustworthy and unless access\nis necessary for the performance of official duties.\n(\xc2\xa7 4 -101\')\nControls shall be established by each agency to ensure that\nclassified information is used, processed, stored, reproduced, and\ntransmitted only under conditions that will provide adequate protec\xc2\xad\ntion and prevent access by unauthorized persons.\n(\xc2\xa7 4-103)\n\n\'Inform ation Security Oversight O ffice D irective No. I (approved Septem ber 29,1978) issued\npursuant to Executive O rder No. 12065. \xc2\xa7\xc2\xa7 5-202(d), 6-204. states that:\nA person is eligible for access to classified inform ation only after a show ing o f trustworthiness\nas determ ined by agency heads based upon appropriate investigations in accordance with\napplicable standards and criteria. (\xc2\xa7 IV. B. 2.)\n\n426\n\n\x0cAgency heads listed in Section 1-201 may create special access\nprograms to control access, distribution, and protection of particu\xc2\xad\nlarly sensitive information classified pursuant to this Order or prior\nOrders.\n(\xc2\xa7 4-201)\nThe order also mandates that \xe2\x80\x9c classified information disseminated outside the\nExecutive branch shall be given protection equivalent to that afforded within\nthe Executive branch.\xe2\x80\x9d \xc2\xa7 4-105. This provision, in conjunction with those\nabove, appears to require security precautions in instances where classified\ninformation is to be given to the employees of CIA contractors.\nSeveral other provisions o f law are relevant. First, the Director of the CIA is\nmade responsible by statute \xe2\x80\x9c for protecting intelligence sources and m ethods.\xe2\x80\x9d\n50 U .S.C . \xc2\xa7\xc2\xa7 403(d)(3), 403g (1976). Second, Executive Order No. 12036,43\nF.R. 3674 (Jan. 26, 1978), reprinted in 50 U .S.C . \xc2\xa7 401 Note (Supp. II 1978),\nrequires the CIA to \xe2\x80\x9c protect the security of its installations, activities,\ninformation and personnel by appropriate means, including such investigations\nof applicants, employees, contractors, and other persons with similar associations\nwith the CIA as are necessary.\xe2\x80\x9d \xc2\xa7 1-811. This provision as well as others in the\norder (see \xc2\xa7\xc2\xa7 2-206(d), 2-208(c)), explicitly allows for investigations of those\ncontractors handling sensitive information.\nIt seems evident that, on the basis of the foregoing authorities, the CIA is\nauthorized and required to conduct investigations of its contractors\xe2\x80\x99 employees\nin order to ensure the security of classified information. In light of this duty and\non the basis of information supplied by your Agency, the use of polygraph\nexaminations is an authorized Federal function. Although there is no Federal\nlaw explicitly authorizing such a process, that lack cannot be deemed\ncontrolling. See, U nited S tates v. M acdan iel, 32 U.S. (7 Pet.) 1, 13-14 (1833).\nWhere a statute imposes a duty, it authorizes by implication all reasonable and\nnecessary means to effectuate the duty. U nited States v. Jones, 204 F. (2d)\n745, 754 (7th Cir. 1953); U nited States v. K elly, 55 F. (2d) 67 (2d Cir. 1932);\n2A Sutherland, Statutes and Statutory Construction, \xc2\xa7 55.04, at 384 (4th ed.\n1973).2 The use o f polygraph tests, we are told, provides a means whereby\ninformation submitted by employees can be evaluated and verified with a view\ntoward determining whether employees may be entrusted with classified\ninformation. We are also informed that this technique elicits information that\ncould not otherwise be elicited, and, therefore, tightens security in a way which\ncould not otherwise be done. In the view of the CIA, these factors make\npolygraph examinations an \xe2\x80\x9c extraordinarily useful device.\xe2\x80\x9d On this basis, a\npolygraph examination can be seen as a reasonable and necessary means to the\neffectuation of duties imposed on the CIA under Federal law and, therefore,\nunder the authorities cited above, its use is authorized.3\n\n2The same general rule is set forth in Executive O rder No. 12036, S 1-811, which authorizes\n"appropriate m eans\xe2\x80\x9d to protect security.\n3W e understand that those to be tested are know ingly perform ing work for the CIA , are inform ed\nof the C IA \xe2\x80\x99s involvem ent in the testing, and consent to it. That being the case, we do not believe\nthat any problem s arise under the prohibition on the C IA \'s perform ance of internal security or law\nenforcem ent functions, see 50 U .S .C . \xc2\xa7 403(d)(3) (1976), even as that prohibition was interpreted\n(Continued)\n\n427\n\n\x0cWe believe, however, that a caveat is in order. Executive Order No. 12036,\n\xc2\xa7 1-811, allows for \xe2\x80\x9c such investigations o f . . . contractors . . . as are n eces\xc2\xad\nsa ry . \xe2\x80\x9d This requirem ent might be read to preclude the administration of\npolygraph tests on an undifferentiated basis to all employees of a contractor.\nRather, some evaluation and determ ination as to the need with respect to a\nparticular contractor\xe2\x80\x99s em ployees, or to certain classes o f such employees,\nwould appear to be more consonant with this provision. Since polygraph testing\nis apparently now being adm inistered only to \xe2\x80\x9c key em ployees,\xe2\x80\x9d who either\nhave access to a great deal o f classified information or have an unusually\ncomprehensive knowledge o f CIA projects, it appears that the need is taken\ninto account.\nII.\nMassachusetts has enacted the following statute:\nAny em ployer who subjects any person employed by him, or any\nperson applying for em ploym ent, to a lie detector test, or causes,\ndirectly or indirectly, any such employee or applicant to take a lie\ndetector test, shall be punished by a fine o f not more than two\nhundred dollars. This section shall not apply to lie detector tests\nadministered by law enforcem ent agencies in the performance of their\nofficial duties.\n[Chapter 149, \xc2\xa7 19B, M ass. Gen. Law]\nOne question is whether this statute may legitimately be applied to either the\nCIA itself or its contractor in M assachusetts. Your office believes that, by its\nown terms, the statute does not encom pass CIA polygraph examinations. The\ninterpretation o f the statute is a function which must be performed by the\nappropriate State officials, although it is proper for you to urge on them your\ninterpretation. We address here only the question o f the validity o f the statute,\nassuming that it does impinge on the perform ance of a Federal function. For the\nreasons that follow, we believe that M assachusetts may not apply the statute to\neither the CIA or its contractors.\nA.\nIt is a fundamental principle o f Federal constitutional law that, by reason of\nthe Supremacy Clause, Article VI, cl. 2, the legitimate activities of the Federal\nGovernment may not be impeded by a State. M ayo v. U nited States, 319 U.S.\n441, 445 (1943). We thus do not believe that M assachusetts can prohibit the\nCIA from conducting polygraph exam inations the CIA is authorized to conduct\nunder Federal law.\nConcededly, the situation here is different from the usual Supremacy Clause\nquestion. In the ordinary case, courts are called upon to review State laws that\nconflict with a Federal statute or regulation. Although the D irector\xe2\x80\x99s authoriza\xc2\xad\ntion o f polygraph exam inations does not, in term s, proceed from statute or\n\n(C ontinued)\nin Weissman v. C M , 565 F. (2d) 692 (D .C . C ir. 1977). N or are we aware o f any other general\nprohibition, in either a statute or Executive order, on the use o f polygraph testing by intelligence\nagencies.\n\n428\n\n\x0cregulation, we do not believe that this is of any real consequence. It is not the\nabstract inconsistency between the express terms of State and Federal law\nwhich is the concern underlying the Supremacy Clause. C f , L os A lam os\nSchool B oard v. W ugalter, 557 F. (2d) 709, 714 ( 10th Cir. 1977) (potential or\nperipheral conflicts between State and Federal law will not render a State law\ninvalid). Rather, the evil that the clause addresses is obstruction to the\naccomplishment and execution of lawful Federal purposes and objectives.\nHines v. D avidow itz, 312 U.S. 52, 67 (1941). This may occur not only when\nState law conflicts with the express terms o f the Federal law, but also when\nState law impedes the performance of activities conducted under the authority\nof Federal law. See, U nited States v. P ublic Service Com m ission, 422 F. Supp.\n676 (D. Md. 1976) (three-judge court) (authority of the General Services\nAdministration to conduct cross-examinations in State utility rate proceedings\nbeyond time limit imposed by the State); In Re N ew York State Sales Tax\nR ecords, 382 F. Supp. 1205 (W .D . N .Y . 1974) (exercise of grand jury powers\nprevails over state nondisclosure law); see also, U nited States v. C ity o f\nChester, 144 F. (2d) 415, 420 (3rd Cir. 1944). Since we have concluded that\nthe administration of polygraph examinations is an activity authorized by\nFederal law, we do not believe that it may be impeded by State law.\nWe recognize that, in certain circum stances, State law applies to, and\ncontrols, the exercise of various Federal functions. [This obtains, however,\nonly where the application of State law would not undermine those functions.]\nM ayo v. U nited States, supra, at 446. We are informed that the application of\nthe statute to the CIA would result in its inability to perform satisfactory\nsecurity checks, and this in turn would substantially impair its procurement\noperations. On this basis, we do not believe that the above rationale justifies\napplication of the Massachusetts statute.\nThe Supremacy Clause question often becomes one o f assessing congres\xc2\xad\nsional intent, i.e.., whether in the statutes under which the Executive branch is\nimplementing some regulation or program, Congress intended Federal action to\noverride inconsistent State laws. In some instances an examination of the\nlegislative history and the structure o f a statute reveals that Congress did not\nintend to interfere with State regulation. W here, however, there is a clear\nconflict between the implementation of a legitimate Federal function and a\nState law, and there is no evidence that Congress contemplated that the Federal\ninterest would be subordinated, the State enactment must yield. We believe that\nconflict to exist here.\nIII.\nThe question remains whether, even though the Massachusetts statute may\nnot be applied to the CIA itself, it is applicable to the C IA \xe2\x80\x99s contractor. We\nreiterate that we express no views as to the interpretation of the statute insofar\nas the C IA \xe2\x80\x99s contractor is generally concerned. Rather, we discuss only\nwhether the statute may legitimately be applied to the contractor in connection\nwith its work for the CIA.\nThis question does not admit of an easy answer. It is clear that the mere fact\nthat a particular entity is performing work for the Federal Government does not\nexempt it altogether from State regulation. R ailw ay M ail A ssociation v. C orsi,\n326 U.S. 88, 95-96 (1945) (applying State nondiscrimination law to postal\n429\n\n\x0cunion); Stew art an d C o. v. Sandrakula, 309 U.S. 94 (1940) (State safety\nrequirement applicable to Federal contractor); P ublic Housing Adm inistration\nv. B ristol Township, 146 F. Supp. 859 (E.D . Pa. 1956) (Federal contractor\nrequired to adhere to building code requirements). On the other hand, it also\nseems clear that a com pany\xe2\x80\x99s performance o f work for the Federal Government\nmay at times exempt it from State or local regulation. L eslie M iller, Inc. v.\nArkansas, 352 U.S. 187, 190 (1956); P acific C oast D airy > v. D epartm ent o f\nAgriculture o f California, 318 U .S. 285 (1943); C ontractors Association o f\nEastern Pennsylvania v. S ecretary o f L abor, 442 F. (2d) 159, 166 (3rd Cir.\n1971).\nThe approach the courts take in assessing the application of State statutes\nimposing burdens on Federal contractors is much the same as their approach\nwith regard to statutes imposing burdens on the Federal Government itself.\nThat is, the courts look to whether the statute would frustrate the operation of\nFederal functions. R ailw ay M ai! Association v. C orsi, supra, at 95-96; Leslie\nM iller, Inc. v. A rkansas, supra, at 190; S tew ard and C o. v. Sandrakula. supra,\nat 103-04. Under this standard, the application of the Massachusetts law to the\ncontractor would frustrate Federal functions to the same extent as if the law\nwere to apply to the CIA itself. According to the CIA, such an application\nwould inevitably result in the contractor\xe2\x80\x99s refusal to allow his employees to take\npart in the polygraph examination program, which, in turn, would result in less\nthan adequate security and ultimately would jeopardize CIA procurement. In\nour opinion, the decisions under the Supremacy Clause would not allow State\nlaw to cause this sort of disruption o f a Federal program, even if the State law is\nbeing applied only to a contractor.\nIV.\nFor the foregoing reasons, we do not believe that the Massachusetts law in\nquestion may legitimately be applied to either the CIA or its contractors so as to\npreclude authorized polygraph exam inations. However, a word o f caution is\nappropriate. The application of State law to Federal contractors is generally\ndependent on the particular facts and circumstances; see, M ayo v. U nited\nStates, 319 U .S ., at 447-448; L os A lam os School B oard v. Wugalter, 557 F.\n(2d), at 712, 714. This is a question which necessarily entails a judgment predi\xc2\xad\ncated on any number of different factors. M oreover, as the considerable volume\nof case law in the State-Federal conflict area demonstrates, disputes of this type\noften result in litigation and resolution pursuant to standards that are often\ndifficult to apply with precision. It is, therefore, an area in which prelitigation\npredictions should be cautious.\n\nLarry A. Ham m ond\n\nD eputy A ssistan t A ttorney G eneral\nOffice o f L egal Counsel\n\n430\n\n\x0c'