97 F.3d 1107 (8th Cir. 1996), 95-1665, Chance Management, Inc. v. State of S.D.

Docket Nº:95-1665.
Citation:97 F.3d 1107
Party Name:CHANCE MANAGEMENT, INC., a South Dakota corporation; William A. Sanders, a Wyoming resident, Plaintiffs-Appellants, v. STATE OF SOUTH DAKOTA; Mark W. Barnett, in his official capacity as Attorney General of South Dakota; South Dakota Lottery; Susan Walker, in her official capacity as Executive Director of the South Dakota Lottery; H.I. King, in his
Case Date:October 10, 1996
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
FREE EXCERPT

Page 1107

97 F.3d 1107 (8th Cir. 1996)

CHANCE MANAGEMENT, INC., a South Dakota corporation;

William A. Sanders, a Wyoming resident,

Plaintiffs-Appellants,

v.

STATE OF SOUTH DAKOTA; Mark W. Barnett, in his official

capacity as Attorney General of South Dakota; South Dakota

Lottery; Susan Walker, in her official capacity as

Executive Director of the South Dakota Lottery; H.I. King,

in his official capacity as member of the South Dakota

Lottery Commission; Beverly McCracken, in her official

capacity as member of the South Dakota Lottery Commission;

Elaine Emery, in her official capacity as member of the

South Dakota Lottery Commission; Don Bender, in his

official capacity as member of the South Dakota Lottery

Commission; Burdette Solum, in her official capacity as

member of the South Dakota Lottery Commission; John E.

Carmody, Sr., in his official capacity as member of the

South Dakota Lottery Commission, Defendants-Appellees.

No. 95-1665.

United States Court of Appeals, Eighth Circuit

October 10, 1996

Submitted Nov. 17, 1995.

Page 1108

Steven W. Sanford, argued, Sioux Falls, SD, for plaintiffs-appellants.

Jeffrey P. Hallem, argued, Pierre, SD (Lee M. McCahren, on the brief), for defendants-appellees.

Before HANSEN, LAY, and MURPHY, Circuit Judges.

HANSEN, Circuit Judge.

A corporation may obtain a license as a video lottery machine operator for the South Dakota Lottery only if residents of South Dakota hold the majority ownership interest in the corporation. S.D. Codified Laws Ann. § 42-7A-43 (Supp.1995). Chance Management, Inc., and William A. Sanders filed this suit, challenging the constitutionality of the residency requirement under the Commerce Clause, the Equal Protection Clause of the Fourteenth Amendment, and the Privileges and Immunities Clause. The district court 1 granted the defendants summary judgment. The court concluded that Commerce Clause restrictions do not apply to the statute because the state of South Dakota is acting as a market participant in the video lottery business. The court further held that the statute does not violate the Equal Protection Clause and that the plaintiffs have no standing to

Page 1109

assert the Privileges and Immunities Clause challenge. The plaintiffs appeal. We affirm.

I.

In South Dakota, various forms of gambling are legal. See S.D. Codified Laws Ann. §§ 42-7-47 to -106 (1991 & Supp.1996) (horse and dog racing); id. §§ 42-7A-1 to -55 (South Dakota Lottery); id. §§ 42-7B-1 to -62 (card games and slot machines). South Dakota owns and operates one of the gaming enterprises in South Dakota, the South Dakota Lottery, which is a video lottery business. Video lottery consists of games of chance played on a computer-controlled video machine, simulating the games of poker, blackjack, keno, and bingo. South Dakota operates its video lottery business in accordance with Article III, Section 25 of the South Dakota Constitution, which, as amended in 1994, 2 reads as follows:

The Legislature shall not authorize any game of ... lottery.... However, it shall be lawful for the Legislature to authorize by law, a state lottery or video games of chance, or both, which are regulated by the state of South Dakota, either separately by the state or jointly with one or more states, and which are owned and operated by the state of South Dakota, either separately by the state or jointly with one or more states or persons, provided any such video games of chance shall not directly dispense coins or tokens.

Chapter 42-7A of the South Dakota Codified Laws establishes the state's video lottery under the direction of an independent state agency, the South Dakota Lottery Commission (the Commission). S.D. Codified Laws Ann. § 42-7A-2 (Supp.1995). This chapter creates a detailed statutory scheme governing South Dakota's video lottery business. See id. § 42-7A-1 to -55. An executive director administers the lottery pursuant to the provisions of Chapter 42-7A, id. § 42-7A-2, and under the rules and regulations promulgated by the Commission, id. § 42-7A-21.

South Dakota controls and operates its video lottery business in large part through a central computer system, which is located in the main office of the South Dakota Lottery in Pierre, South Dakota. Although the state does not own the video machines on which the games of chance are played or the modems attached to the machines, it owns the dominant software programs that operate the machines. The state owns the Erasable, Programmable, Read Only Memory (EPROM) chips in the video machines, without which the machines could not function. The EPROM chips contain the data that protects and secures the system from invasion by outside influences. In the first year of its operation, the state spent two million dollars on the central computer system, personnel, and related expenses.

Video lottery machine operators (operators) own the individual video machines and are responsible for their operation and maintenance. (J.A. at 49.) An operator places video lottery machines or associated equipment for authorized play in licensed video lottery establishments in South Dakota, including restaurants, bars, lounges, or lodging establishments licensed to sell alcoholic beverages on the premises. S.D. Codified Laws Ann. §§ 42-7A-1(6) (defining "licensed establishment"), -1(17) (defining "video lottery machine operator"). The state bills the operators for its portion of the revenue, receiving payment by electronically sweeping the operators' bank accounts. S.D. Admin. R. 48:02:06:03 (1992). The state's share of the net income was 37 per cent at the time the district court decided this case; the South Dakota Legislature has since increased the state's portion to 50 per cent.

All video lottery machine manufacturers, distributors, and operators must obtain a license from the executive director of the

Page 1110

South Dakota Lottery in order to do business with the Lottery. S.D. Codified Laws Ann. § 42-7A-41. Before issuing a license to any of these parties, the state undertakes a background investigation to ascertain whether the applicant qualifies for a license. Id. §§ 42-7A-43 (investigation), -13 (qualifications), -14 (ineligible persons); see also S.D. Admin. R. 48:02:02:01 (additional qualification requirements for licensure). A corporate applicant cannot obtain a license until each person who has the ability to control the corporation's activities or to elect a majority of the corporation's board of directors has passed the requirements set out for individual applicants. S.D. Admin. R. 48:02:02:02.

In addition to passing the background investigation, a person must be a resident of South Dakota to obtain a video lottery machine operator's license. S.D. Codified Laws Ann. § 42-7A-43. If the party seeking an operator's license is a corporation, a majority of the ownership interest in the corporation must be held by South Dakota residents in order to qualify for a license. Id.

Plaintiff Chance Management, Inc., is a corporation organized under the laws of the state of South Dakota and is owned by two persons. Plaintiff William A. Sanders, a resident of Wyoming, owns the majority (51%) of the stock in Chance Management, with the remaining shares (49%) owned by a South Dakota resident. Chance Management applied for a video lottery operator's license but was turned down because its majority shareholder failed to meet the residency requirement under § 42-7A-43.

Chance Management and Sanders filed this suit against the state of South Dakota, the executive director of the state lottery, and various members of the state Lottery Commission. Plaintiffs challenged the constitutionality of the residency requirement under the Commerce Clause, the Equal Protection Clause of the Fourteenth Amendment, and the Privileges and Immunities Clause. Both sides filed motions for summary judgment. The district court granted the defendants' motion, holding that the statute does not run afoul of either the Commerce Clause or the Equal Protection Clause. The court further held that the plaintiffs lacked standing to mount the Privileges and Immunities Clause challenge. See Chance Management, Inc. v. South Dakota, 876 F.Supp. 209, 211-13 (D.S.D.1995). Chance Management and Sanders appeal.

II.

We review the district court's grant of summary judgment de novo. Independent Charities of Am., Inc. v. Minnesota, 82 F.3d 791, 795 (8th Cir.1996). Summary judgment is appropriate when the evidence, viewed in the light most favorable to the nonmoving party, shows there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id.; Cotto Waxo Co. v. Williams, 46 F.3d 790, 792 (8th Cir.1995).

  1. Commerce Clause Challenge

    Under the Commerce Clause of the Constitution of the United States, "Congress shall have Power ... To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes...." U.S. Const. art. I, § 8, cl. 3. This clause acts not only as an affirmative grant of regulatory power to Congress, but also "as a restriction on permissible state regulation." Hughes v. Oklahoma, 441 U.S. 322, 326, 99 S.Ct. 1727, 1731, 60 L.Ed.2d 250 (1979). "This 'negative' or 'dormant' aspect of the Commerce Clause prohibits economic protectionism--that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." Charities, 82 F.3d at 798 (citing New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 273, 108 S.Ct. 1803, 1807, 100 L.Ed.2d 302 (1988)).

    Because the power granted to Congress under the Commerce Clause is the power to "regulate Commerce ... among the several States," the correlative restrictions on the states under the...

To continue reading

FREE SIGN UP