Hawkeye Commodity Promotions, Inc. v. Vilsack

• Decision Date: 24 April 2007
• Docket Number: No. 06-2406.,06-2406.
• Citation: 486 F.3d 430
• Parties: HAWKEYE COMMODITY PROMOTIONS, INC., Plaintiff-Appellant, v. Thomas J. VILSACK, in his official capacity as Governor of the State of Iowa, Defendant, Thomas J. Miller, in his official capacity as the Attorney General of the State of Iowa; Kevin W. Techau, in his official capacity as the Commissioner of the Iowa Department of Public Safety, Defendants-Appellees, Iowa Lottery Authority; Edward Stanek, Dr., in his official capacity as the Chief Executive Officer of the Iowa Lottery Authority, Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

486 F.3d 430

HAWKEYE COMMODITY PROMOTIONS, INC., Plaintiff-Appellant, v. Thomas J. VILSACK, in his official capacity as Governor of the State of Iowa, Defendant Thomas J. Miller, in his official capacity as the Attorney General of the State of Iowa; Kevin W. Techau, in his official capacity as the Commissioner of the Iowa Department of Public Safety, Defendants-Appellees Iowa Lottery Authority; Edward Stanek, Dr., in his official capacity as the Chief Executive Officer of the Iowa Lottery Authority, Defendants.

No. 06-2406.

United States Court of Appeals, Eighth Circuit.

Submitted: December 11, 2006.

Filed: April 24, 2007.

Roger Marzulla, argued, Washington, DC, for appellant.

Julie F. Pottorff, Asst. Atty. Gen., argued, Des Moines, IA, for appellee.

Before BYE, COLLOTON, and BENTON, Circuit Judges.

BENTON, Circuit Judge.

In March 2006, Iowa enacted legislation ending the TouchPlay lottery game. Hawkeye Commodity Promotions, Inc., a licensed TouchPlay retailer, tried to enjoin the law before it took effect. Hawkeye argued that the law violates the Contracts, Takings, Equal Protection, and Due Process clauses of the federal constitution. The district court¹ rejects these claims. See Hawkeye Commodity Promotions, Inc. v. Miller, 432 F.Supp.2d 822 (N.D.Iowa 2006). Hawkeye appeals, reiterating those claims and asserting that the district court should have admitted the deposition testimony of the president of the Iowa Lottery Authority (the Lottery). This court affirms.

I.

Following revenue shortfalls in 2000 and 2001, the Iowa General Assembly authorized the Lottery to "establish a plan to implement the deployment of pull-tab vending machines with video monitors." The Lottery then added the TouchPlay game. A TouchPlay machine is "a vending machine that dispenses or prints and dispenses lottery tickets that have been determined to be winning or losing tickets by a predetermined pool drawing machine prior to the dispensing of the tickets." IOWA ADMIN. CODE R. 531-14.3. With flashing lights and captivating sounds, Touch-Play machines resemble slot machines. Unlike slot machines, which are random, TouchPlay is not random. Tickets are loaded into the machine electronically, and like pull-tab tickets, the outcome of each game is predetermined.

The Lottery never owned any Touch-Play machines. They were manufactured and distributed to retailers, who purchased or leased them. The Lottery contracted for the manufacture of TouchPlay machines; licensed the retailers to put them in businesses; set the number of winning tickets and the amount paid out on each machine; collected data from the machines; and split the revenue with manufacturers and retailers. TouchPlay began with 30 machines in May 2003, expanding rapidly: By April 2006, more than 6,400 machines operated at 3,800 businesses across Iowa.

Hawkeye was incorporated and capitalized solely as an Iowa TouchPlay retailer. On January 3, 2005, Hawkeye applied for an MVM (monitor vending machines) retailer license, which was issued on January 10. Accompanying the license were: a letter including a five-year revenue-sharing formula; door decals for Hawkeye's machines; and, a memo entitled "Licensing Terms and Conditions (January 2005)," summarizing the applicable laws and regulations. Hawkeye owns 724 TouchPlay machines, 581 of which operated at 187 Iowa businesses in April 2006. Hawkeye invested about $6.8 million in this venture — $4.7 million to buy the machines, and $2.1 million in start-up and operational costs.

Responding to concerns about the "proliferation of gambling," in January 2006 Governor Thomas J. Vilsack ordered a 60-day moratorium on new TouchPlay licenses while a task force studied it. In March the task force recommended restrictions to protect gambling addicts and minors. Governor Vilsack extended the moratorium "to give the Iowa Legislature time to act on the matter if it so chooses." The General Assembly passed legislation banning TouchPlay, which the Governor signed March 20 (to be codified at Iowa Code § 99G.30A(4)). The ban took effect May 4.

On April 5, Hawkeye sued for declaratory and injunctive relief, invoking the Contracts, Takings, Equal Protection, and Due Process clauses of the United States Constitution. An expedited trial occurred April 12, with testimony by affidavit. Hawkeye later moved to re-open the record to add the deposition of Dr. Edward J. Stanek, president of the Lottery. On April 26, the district court denied the motion and issued a decision. This court reviews the district court's factual findings for clear error, and its legal and constitutional conclusions de novo. Daggitt v. United Food & Commercial Workers Int'l Union, Local 304A, 245 F.3d 981, 986 (8th Cir.2001).

II.

No state shall pass any law "impairing the Obligation of Contracts." U.S. CONST. art. I, § 10, cl. 1. Hawkeye's main argument is that SF 2330 (the bill number of the TouchPlay law) "completely destroyed" Hawkeye's contracts with the Lottery, and with over 200 Iowa businesses.

Much of Hawkeye's discussion addresses its license. Hawkeye emphasizes at length that its license could not be terminated without good cause, 60 days' notice, and a hearing. IOWA ADMIN. CODE r. 531-14.1 to -14.20. But Hawkeye's license has not been terminated; Hawkeye still has its license. The Licensing Terms and Conditions, which Hawkeye agreed to in its application, state: "If a provision in this document conflicts with an applicable statutory or regulatory provision, the statutory or regulatory provision preempts the conflicting provision in this document." The abolition of TouchPlay did not trigger the administrative rules governing Hawkeye's license.

A.

A three-part test determines whether a statute violates the Contracts Clause. "The first question is whether the state law has, in fact, operated as a substantial impairment on pre-existing contractual relationships." Equip. Mfrs. Inst. v. Janklow, 300 F.3d 842, 850 (8th Cir. 2002). This question "has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial." Gen. Motors Corp. v. Romein, 503 U.S. 181, 186, 112 S.Ct. 1105, 117 L.Ed.2d 328 (1992).

i.

The parties appear to assume that the existence of a contract is governed by state law. Indeed, the district court looks only to Iowa law, finding an implied-in-fact unilateral contract of indefinite duration, which either party could cancel at any time. See Hawkeye, 432 F.Supp.2d at 843-46. But "whether a contract was made is a federal question for purposes of Contract Clause analysis." Romein, 503 U.S. at 187, 112 S.Ct. 1105 (citing Irving Trust Co. v. Day, 314 U.S. 556, 561, 62 S.Ct. 398, 86 L.Ed. 452 (1942)).

In Stone v. Mississippi, 101 U.S. 814, 25 L.Ed. 1079 (1879), the Supreme Court rejected a private company's Contracts Clause challenge to the state's cancellation of its lottery charter.

Any one, therefore, who accepts a lottery charter does so with the implied understanding that the people, in their sovereign capacity, and through their properly constituted agencies, may resume it at any time when the public good shall require, whether it be paid for or not. All that one can get by such a charter is a suspension of certain governmental rights in his favor, subject to withdrawal at will. He has in legal effect nothing more than a license to enjoy the privilege on the terms named for the specified time, unless it be sooner abrogated by the sovereign power of the State. It is a permit, good as against existing laws, but subject to further legislative and constitutional control or withdrawal.

Id. at 821, 11 Otto 814. In Douglas v. Kentucky, 168 U.S. 488, 502, 18 S.Ct. 199, 42 L.Ed. 553 (1897), the Supreme Court said flatly, "a lottery grant is not, in any sense, a contract within the meaning of the Constitution of the United States, but is simply a gratuity and license, which the State, under its police powers, and for the protection of the public morals, may at any time revoke, and forbid the further conduct of the lottery."

This court is "bound to decide for ourselves whether a contract was made, what are its terms and conditions, and whether the state has, by later legislation, impaired its obligation. This involves an appraisal of the statutes of the states and the decisions of its highest courts." Ind. ex rel. Anderson v. Brand, 303 U.S. 95, 100, 58 S.Ct. 443, 82 L.Ed. 685 (1938). In Romein, 503 U.S. at 187, 112 S.Ct. 1105, the Supreme Court adopted the state supreme court's holding that workers' compensation benefits were not an implied term of a contract. Looking to Indiana law, the Court in Brand, 303 U.S. at 104, 58 S.Ct. 443, concluded, "the petitioner had a valid contract with the respondent."

Stone and Douglas are clear: A lottery "grant" or "charter" is not protected by the Contracts Clause. Hawkeye responds that Stone and Douglas, while "certainly good law," involve "an entirely different circumstance." On the contrary, Stone and Douglas are not distinguishable: in both cases, the legislature allowed a private party to operate a lottery, which was later nullified (in Stone, by the state's Reconstruction constitution; in Douglas, by act of the legislature and then by amendment to the state constitution). That fairly describes the history of Touch-Play in Iowa. Whatever agreement existed between Hawkeye and the Lottery is not protected by the Contracts Clause of the federal constitution.

ii.

As to the location contracts, it is undisputed on appeal — and this court decides — that they are contracts within the Contracts Clause, and are impaired by SF 2330. This court therefore asks whether the impairment of Hawkeye's contracts — with its locations and with the Lottery (assuming the district court is correct that they are protected by the Contracts Clause) — is substantial.

iii.

Substantial impairment depends on "the extent to which the...