Jay Gerow, an Individual, & Zdi Gaming, Inc. v. Wash. State Gambling Comm'n

• Decision Date: 13 May 2014
• Docket Number: No. 44283–3–II.,44283–3–II.
• Citation: 324 P.3d 800,181 Wash.App. 229
• Court: Washington Court of Appeals
• Parties: Jay GEROW, an individual, and ZDI Gaming, Inc., a Washington corporation, Appellants, v. WASHINGTON STATE GAMBLING COMMISSION, Respondent.

181 Wash.App. 229

324 P.3d 800

Jay GEROW, an individual, and ZDI Gaming, Inc., a Washington corporation, Appellants,

v.WASHINGTON STATE GAMBLING COMMISSION, Respondent.

No. 44283–3–II.

Court of Appeals of Washington, Division 2.

May 13, 2014.

Joan Kristine Mell, III Branches Law PLLC, Fircrest, WA, for Appellant.

Callie Anne Castillo, WA State Attorney General Office, Olympia, WA, for Respondent.

LEE, J.

¶ 1 Jay Gerow and ZDI Gaming, Inc. (ZDI) appeal the superior court's dismissal of their petition to invalidate two Washington State Gambling Commission (the Commission) regulations under the Administrative Procedure Act (APA), RCW 34.05.570(2)(c). ZDI argues that WAC 230–14–047 (“Standards for electronic video pull-tab dispensers”) and WAC 230–06–003 (“Defining ‘cash’ ”) are invalid because, inter alia, the Commission adopted them without a three-vote majority as required by the “Gambling Act,” ch. 9.46 RCW. We agree.

¶ 2 Any rules adopted by the Commission relating to the regulation of licensing statutorily require at least three of five votes by Commission members. WACs 230–14–047 and 230–06–003 both relate to the regulation of licensing and the Commission promulgated these rules with only two votes. Because these rules were “adopted without compliance with statutory rule-making procedures,” we reverse the superior court's ruling that WACs 230–14–047 and 230–06–003 are valid and invalidate both rules. RCW 34.05.570(2)(c). Additionally, we award ZDI its attorney fees and costs on appeal and remand to the superior court to award attorney fees below.

FACTS

A. Background

¶ 3 ZDI is a Commission-licensed gaming supply distributorship that manufactures electronic video-pull tab dispensers. ¹ In 1994, the legislature specifically included “video pull-tabs,” along with video poker and slot machines, as types of “gambling device[s]” that are illegal in Washington. RCW 9.46.0241. Despite this limitation, two gambling device manufacturers (including ZDI) created “electronic video pull-tab dispensing devices” that the Commission approved in 1997 and 2002. Administration Record (AR) at 119.

¶ 4 ZDI's first electronic pull-tab dispensing machine incorporated a pull-tab dispenser and a pull-tab reader housed in a decorative cabinet designed to emulate a video slot machine. Although the machine did not contain drums or spinning reels, the video display contained rows of “spinning” pictures and simulated the play of a casino-style slot machine. AR at 202. In addition to mimicking a slot machine, these machines emitted “attractor” sounds, also commonly associated with casinos. AR at 202. The Commission approved this equipment in 2002.

¶ 5 ZDI's updated machine, the VIP, is nearly identical to the equipment the Commission approved in 2002; the primary difference is that the VIP machine incorporates cash card technology. As we explained in a previous opinion involving this technology:

The earlier versions of the machine required a player to purchase the pull tab with currency and required that players redeem all winning pull tabs with a cashier. The VIP machine disposes of these steps by allowing a player to purchase pull tabs with a prepaid “cash card” and automatically crediting pull tab winnings of $20 or less back onto the “cash card.” For winning pull tabs in excess of $20, the VIP machine directs the player to seek payment from an employee. If a player stops playing the game before depleting the “cash card,” the player can use the remaining credit to purchase food, drink, or merchandise , or the player can simply turn the credit back into cash. The “cash card” operates as a means by which a player can purchase pull tabs and receive winnings of less than $20; the odds of winning for any individual player do not change from use of the “cash card.”

ZDI Gaming, Inc. v. State ex rel. Wash. State Gambling Comm'n, 151 Wash.App. 788, 797, 214 P.3d 938 (2009), aff'd,173 Wash.2d 608, 268 P.3d 929 (2012).

B. Procedural History

¶ 6 In 2005, ZDI submitted an application to the Commission seeking permission to distributeits VIP machine with cash card technology. The Commission denied the permit. request relying heavily on former WAC 230–30–070(1) (2001), which stated that “[a]ll prizes from the operation of punch boards and pull-tabs shall be awarded in cash or in merchandise.” AR at 346–47. The Commission also determined that the VIP machine was an illegal “gambling device.” Clerk's Papers (CP) at 330. ZDI filed a petition for declaratory relief, and in August 2007, the superior court ruled that the Commission acted arbitrarily and capriciously in denying ZDI's permit to distribute its VIP machine.²

¶ 7 In September 2007, concerned about the potential impact of the superior court's ruling, the Commission began discussing:

whether these electronic video pull-tab dispensing devices: 1) Are consistent with the Commission's legislative authorization to define a pull-tab game; 2) Are consistent with the original authorizing rules [allowing pull-tab gaming under the Gambling Act]; and 3) [whether the VIP machine authorized] by the [superior] court increase[s] the possibility of an unintentional expansion of electronic machine gambling in Washington.

AR at 10; see also Commission Meeting Transcription (CMT) (Sept. 14, 2007) at 5–6. This discussion led to three rule proposals related to electronic pull-tab dispensers.

¶ 8 Commission staff presented the first proposed rule, which would have amended WAC 230–14–045 (“Authorized pull-tab dispensers”) to specifically ban all electronic pull—tab dispensers—effectively eliminating technology the Commission had approved in 1997. AR at 15; CMT (Sept. 14.2007) at 6–7. One member of the Commission described this proposal as:

draconian because it was designed to get everybody involved in this process to recognize the need that if we can't get rules that are clear to everybody, then we're just not going to have these machines at all. But we will, because I know that people would be able to get together and make a set of rules that are clear and understandable so we won't be litigating for the rest of our lives.

Commission Public Meeting Transcription (CPMT) (Oct. 12, 2007) at 32.

¶ 9 Commission staff also presented the second proposed rule, designated as “ALTERNATIVE # 1,” which stated:

Electronic video pull-tab dispensers must be approved by us prior to use, meet the requirements below, and may incorporate only the features below and not perform additional functions.

(1) Electronic video pull-tab dispensers must dispense a paper pull-tab as defined in WAC 230–14–010 and follow the rules for:

(a) Pull-tabs; and

(b) Flares; and

(c) Authorized pull-tab dispensers.

(2) Electronic video pull-tab dispensers that use a reading and displaying function must:

(a) Use a video monitor for entertainment purposes only; and

(b) Open all, or a portion of, the pull-tab in order to read encoded data that indicates the win or loss of the pull-tab if the dispenser is equipped to automatically open pull-tabs; and

(c) Dispense the pull-tab to the player and not retain any portion of the pull-tab; and

(d) Read the correct cash award from the pull-tab either when it is dispensed or when the pull-tab is reinserted into the dispenser; and

(e) Display the cash award from the pull-tab, one pull-tab at a time; and

(f) Provide:

(i) An electronic accounting of the number of pull-tabs dispensed; and

(ii) A way to identify the software version and name; and

(iii) A way to access and verify approved components; and

(iv) Security on the dispenser to prevent unauthorized access to graphic and prize amount displays.

(3) Gift certificates or gift cards used in electronic video pull-tab dispensers must:

(a); Be purchased with cash, check or electronic point-of-sale bank transfer before use in the dispenser; and

(b) Be convertible to cash at any time during business hours; and

(c) Subtract the cash value for the purchase of the pull-tab one pull-tab at a time.

AR at 8. Alternative # 1 also included a proposed rule defining “cash” for all of Title 230 of the Washington Administrative Code:

“Cash,” when used as a noun in this title, means currency in the form of coins or bills issued by the government of the United States or Canada only and does not include electronic, digital or other representations of money or other methods of payment.”

AR at 9.

¶ 10 The pull-tab industry presented the third proposed rule, designated as “ALTERNATIVE # 2.” This proposed rule was substantially similar to Alternative # 1, except that it would allow pull-tab dispensers to “add prizes twenty dollars or less to a cash card upon insertion of the winning pull-tab.” AR at 18–19.

¶ 11 After gathering extensive information from pull-tab industry stakeholders and holding a number of public meetings addressing the three proposed rules, the Commission voted in January 2008 to adopt Alternative # 1, which included the proposed rule defining “cash.” CMPT (Jan. 11, 2008) at 16–19. Hence, Alternative # 1 became WAC 230–14–047, and the rule defining “cash” became WAC 230–06–003. Although a quorum of three of five commissioners was present for purposes of holding a meeting, RCW 9.46.050(2), only two of the three commissioners present voted in favor of adopting the new rules.

¶ 12 In February 2008, ZDI commenced this action against the Commission in Thurston County Superior Court, challenging WACs 230–14–047 and 230–06–003 under the APA. In April 2009, the superior court stayed the proceeding pending the outcome of the Commission's appeal of the August 2007 superior court order ruling that the Commission had acted arbitrarily and capriciously in refusing to permit ZDI's VIP machine. After our Supreme Court upheld the August 2007 superior court order, the stay was lifted in June 2012.

¶ 13 ZDI then moved to supplement the agency rulemaking file with depositions of Commission members and staff, purportedly to show that Commission members adopted the new WACs out of...