Gulch Gaming, Inc. v. State of SD

• Citation: 781 F. Supp. 621
• Decision Date: 20 December 1991
• Docket Number: No. CIV. 91-3023.,CIV. 91-3023.
• Parties: GULCH GAMING, INC., Plaintiff, v. STATE OF SOUTH DAKOTA; Mark W. Barnett, in his official capacity as Attorney General of South Dakota; Donald Gromer, in his official capacity as Executive Secretary of the South Dakota Commission on Gaming; and Charles Lien, Karen Crew, Karl Fischer, Evans Nord, and Kristi Wagner, in their official capacities as Members of the South Dakota Commission on Gaming.
• Court: U.S. District Court — District of South Dakota

781 F. Supp. 621

GULCH GAMING, INC., Plaintiff, v. STATE OF SOUTH DAKOTA; Mark W. Barnett, in his official capacity as Attorney General of South Dakota; Donald Gromer, in his official capacity as Executive Secretary of the South Dakota Commission on Gaming; and Charles Lien, Karen Crew, Karl Fischer, Evans Nord, and Kristi Wagner, in their official capacities as Members of the South Dakota Commission on Gaming.

No. CIV. 91-3023.

United States District Court, D. South Dakota.

December 20, 1991.

COPYRIGHT MATERIAL OMITTED

Timothy J. Dougherty, Dougherty & Dougherty, Steven Sanford, Cadwell, Sanford & Deibert, Sioux Falls, S.D., for plaintiff.

Thomas C. Adam, May, Adam, Gerdes & Thompson, Pierre, S.D., for defendant.

Thomas H. Harmon, Tieszen Law Office, Pierre, S.D., for Black Hills Novelty Co., amicus curiae.

MEMORANDUM OPINION

DONALD J. PORTER, District Judge.

INTRODUCTION

Plaintiff Gulch Gaming, Inc. challenges the constitutionality of a portion of the South Dakota gaming statute. Plaintiff was denied an operator's license to operate slot machines and gaming tables in Deadwood, South Dakota because the majority ownership interest in the corporation is held by nonresidents of South Dakota. The relevant statutory provision requires:

Before any person is licensed as an operator or retailer, he shall show that he is of good moral character, and that he is a bona fide resident and citizen of the state of South Dakota, or if a partnership, corporation, or association shall show that a majority of the ownership interest in the partnership, corporation, or association is held by bona fide residents and citizens of the state of South Dakota.

SDCL 42-7B-25. Two of the three owners of Gulch Gaming, Inc. are Florida residents and the third is a resident of South Dakota. Each of these individuals owns a one third interest in the corporation.

Plaintiff contends that SDCL 42-7B-25 violates three provisions of the United States Constitution: (1) the Commerce Clause; (2) the Equal Protection guarantee of the Fourteenth Amendment; and (3) the Privileges and Immunities Clause. South Dakota and the South Dakota Commission on Gaming, collectively "South Dakota" or the "State," defend the statute on the grounds that licensed gaming is not a fundamental right and thus enjoys no constitutional protection. Defendant's secondary argument includes the contention that the State of South Dakota has legitimate purposes for the residency requirement that allow the statute to pass constitutional scrutiny. Both plaintiff and defendant filed motions for summary judgment.

BACKGROUND

In 1986 the people of South Dakota voted to amend the state constitution to allow limited types of gambling in the city of Deadwood, South Dakota. Article III, § 25 provides in part:

It shall be lawful for the Legislature to authorize by law, limited card games and slot machines within the city limits of Deadwood, provided that 60% of the voters of the City of Deadwood approve legislatively authorized card games and slot machines at an election called for such purpose.

S.D. Const. art. III, § 25. The South Dakota legislature then authorized the operation of limited card games and slot machines in Deadwood, SDCL 42-7B-1, and established the South Dakota Commission on Gaming to regulate the gaming activities. SDCL 42-7B-3; SDCL 42-7B-6.

The South Dakota Commission on Gaming is authorized to issue five types of licenses: (1) slot machine manufacturer or distributor licenses; (2) operator licenses; (3) retail licenses; (4) support licenses; and (5) key employee licenses. SDCL 42-7B-22. The majority ownership requirement at issue affects only the operator and retail licenses. Plaintiff's application for an operator's license was denied on the sole basis of failure to comply with the requirement that a majority of the ownership interest in the corporation be held by South Dakota citizens. Both plaintiff and defendant concede that Gulch Gaming, Inc. was otherwise qualified to hold the license.

SUMMARY JUDGMENT

The standard for granting judgment as a matter of law is embodied in Rule 56 of the Federal Rules of Civil Procedure. This rule states in part:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Fed.R.Civ.P. 56(c). When considering a motion for summary judgment, all reasonable inferences drawn from the facts are to be viewed in a light most favorable to the non-moving party. McCuen v. Polk County, 893 F.2d 172, 173 (8th Cir.1990). In the instant case, no material facts are in dispute. The parties simply hold differing views regarding the purpose and effect of the statute at issue. Accordingly, this Court will rule on the parties' cross motions for summary judgment by addressing each of plaintiff's contentions separately.

I. COMMERCE CLAUSE

A. Introduction

Article I, section 8, clause 3 of the United States Constitution, the Commerce Clause, grants Congress the power to regulate commerce among the States.¹ Although explicitly speaking only to Congressional power, the Commerce Clause has also long been interpreted to limit the ability of States to pass legislation that interferes with interstate commerce. Thus the Clause acts as a grant of Congressional power as well as "a restriction on permissible state regulation," even in the absence of Congressional action. Hughes v. Oklahoma, 441 U.S. 322, 326, 99 S.Ct. 1727, 1731, 60 L.Ed.2d 250 (1979); see also Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 128, 98 S.Ct. 2207, 2215, 57 L.Ed.2d 91 (1978). This limitation on State power is "by no means absolute," as the States retain their general police power to regulate areas of "legitimate local concern" even though such regulation may affect interstate commerce. Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 35, 100 S.Ct. 2009, 2015, 64 L.Ed.2d 702 (1980). States may not, however, regardless of the purported purpose, "discriminate against articles of commerce coming from outside the State unless there is some reason, apart from their origin, to treat them differently." Philadelphia v. New Jersey, 437 U.S. 617, 626-27, 98 S.Ct. 2531, 2536-37, 57 L.Ed.2d 475 (1978). In this way, the Commerce Clause prohibits States from isolating themselves economically and preserves the economic unity of the United States.

When analyzing state legislation under the Commerce Clause, the United States Supreme Court has developed two general standards which differ according to the legislation at issue. Some statutes are facially neutral and have only incidental effects on interstate commerce. The Supreme Court has stated the general rule for such legislation as follows: "Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970). This balancing test is often referred to as the Pike analysis.

A statute that affirmatively discriminates against interstate commerce, on the other hand, is subject to a stricter standard. When "a statute directly regulates or discriminates against interstate commerce, or when its effect is to favor instate economic interests, the Supreme Court has generally struck down the statute without further inquiry." Brown-Forman Distillers v. New York State Liquor Auth., 476 U.S. 573, 579, 106 S.Ct. 2080, 2084, 90 L.Ed.2d 552 (1986). In many cases "where simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected." Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 2535, 57 L.Ed.2d 475 (1978). At the very least, when the regulation discriminates "either on its face or in practical effect" against interstate commerce, the State bears the burden of showing that the statute "serves a legitimate local purpose" and that the purpose could not be achieved adequately by nondiscriminatory alternatives. Hughes v. Oklahoma, 441 U.S. 322, 336, 99 S.Ct. 1727, 1736, 60 L.Ed.2d 250 (1979). This latter, stricter standard is referred to as the Hughes test.

B. Whether the Statute Implicates the Commerce Clause

To the extent that the South Dakota statute prohibits corporations owned in part by out-of-state citizens from owning gaming licenses, the statute interferes with the flow of investments across state lines. The State limits access to gaming licenses to those entities, created under South Dakota or other state law, having sufficient South Dakota ownership. This restricts the opportunities nonresidents of South Dakota have to invest their money in businesses owning South Dakota gaming licenses. By granting gaming licenses only to corporations, partnerships, and associations with majority South Dakota ownership, the State statute implicates interstate commerce.²

Amicus argues that the South Dakota statute does not affect interstate commerce to an extent sufficient to trigger the constitutional limitations of the Commerce Clause, specifically asserting interstate commerce is not affected by the majority ownership requirement.³ See Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 37, 100 S.Ct. 2009, 2016, 64 L.Ed.2d 702 (1980). In its brief, Amicus contrasts a hypothetical statute requiring gambling equipment be manufactured in South Dakota with the statute at issue requiring majority local ownership in business entities holding gaming licenses. The former, the argument goes, would interfere with interstate commerce while the latter would not. The Commerce Clause, according to this theory, applies only to tangible, not intangible forms...