Zdi v. State ex rel. State Gambling Com'n, 36751-3-II.

CourtCourt of Appeals of Washington
Citation214 P.3d 938,151 Wn. App. 788
Docket NumberNo. 36751-3-II.,36751-3-II.
PartiesZDI GAMING, INC., Respondent/Cross-Appellant, v. The STATE of Washington, by and through the WASHINGTON STATE GAMBLING COMMISSION, Appellant/Cross-Respondent.
Decision Date25 August 2009
214 P.3d 938
151 Wn. App. 788
ZDI GAMING, INC., Respondent/Cross-Appellant,
The STATE of Washington, by and through the WASHINGTON STATE GAMBLING COMMISSION, Appellant/Cross-Respondent.
No. 36751-3-II.
Court of Appeals of Washington, Division 2.
August 25, 2009.

[214 P.3d 941]

H. Bruce Marvin, WA State Attorney General's Office, Olympia, WA, for Appellant/Cross-Respondent.

Joan Kristine Mell, III Branches Law PLLC, Fircrest, WA, for Respondent/Cross-Appellant.


¶ 1 The Washington State Gambling Commission denied ZDI Gaming, Inc. permission

214 P.3d 942

to distribute its VIP electronic pull tab machine. In this case, we address the following issues. First, we must decide whether ZDI timely perfected its appeal to the Thurston County Superior Court. If it did not, the Commission's decision stands. Second, if ZDI timely appealed the Commission's decision, we must apply the law applicable to administrative appeals, ch. 34.05 RCW, and address (1) whether the Commission properly determined that the cash card technology used in the VIP machine did not meet the regulatory definition of "cash," (2) whether the cash card meets the regulatory definition of "merchandise," and (3) whether the Commission properly denied ZDI permission to distribute the VIP machines. In addition, if ZDI timely perfected its appeal, we must address whether the superior court erred when it awarded ZDI less than the $25,000 statutory maximum for attorney fees and costs.

¶ 2 We hold that, as an appeal under the Administrative Procedures Act (APA), ch. 34.05 RCW, Pierce County had subject matter jurisdiction over ZDI's appeal and, therefore, the appeal was timely, and we hold that the transfer of venue to Thurston County did not deprive that court of jurisdiction. We also hold that, applying the APA standards of review to the record of the Commission's decision denying ZDI's request to distribute its VIP machines, substantial evidence does not support the Commission's determination that ZDI's cash cards were not cash equivalents satisfying the regulatory definition of cash. As to ZDI's cross-appeal from the superior court's attorney fees award, we hold that the trial court should reconsider its decision to reduce ZDI's attorney fees based on its response to the Commission's motion to dismiss for lack of jurisdiction, and we remand to the Thurston County Superior Court to reconsider the award of attorney fees and costs.


Factual Background and Regulatory Framework

A. Pull Tabs

¶ 3 ZDI is a gaming supply distributorship licensed by the Commission. ZDI supplies pull tabs, bingo supplies, casino supplies, and other items related to the gambling industry in the State of Washington. ZDI has been involved with pull tabs and their associated equipment since approximately 1989.

¶ 4 Pull tabs predate the 1973 legalization of gambling in the State of Washington. Although there are several variations, a standard pull tab is a paper ticket that contains a series of windows that in turn conceal a series of numbers or symbols. See former WAC 230-02-260 (1973). Certain combinations of these numbers or symbols entitle the player to collect a prize. Former WAC 230-02-260. Each pull tab series has a predetermined number of winning tickets. Former WAC 230-02-260. A sheet of paper posted next to the pull tab game, called a "flare," designates all prizes in excess of $20 in value; when a player wins a prize with a value over $20, the game operator must cross the prize off the flare, thereby informing players what prizes they can still win in any particular pull tab series. Former WAC 230-30-070(6) (2000); former WAC 230-30-106(4) (1997). Facilities such as bowling alleys, bars, and charities use pull tabs as an economic stimulant to increase the sale of food, drink, or other services.

¶ 5 In addition to purchasing pull tabs directly from an employee of an establishment, the Commission has authorized pull tab dispensing equipment. In an effort to attract more pull tab players and increase gambling revenues, gambling equipment manufacturers have developed pull tab dispensing machines with entertainment features; not only do these machines dispense and read pull tabs, they also simulate the sounds and displays of electronic slot machines. Before a manufacturer can place a pull tab dispenser into play in the State of Washington, state law requires that the Commission review and approve the machine to ensure that it complies with all applicable gambling laws and regulations. Former WAC 230-12-316 (2003); former WAC 230-30-090 (1974).

¶ 6 The Commission's regulations strictly limit the types of prizes that a player can win

214 P.3d 943

in a pull tab game and narrowly circumscribe the consideration that a player can use to purchase pull tabs. Specifically, a player must purchase pull tabs with "cash, check, or electronic point-of-sale bank transfer." Former WAC 230-12-050(2) (2004). The operator must pay players pull tab prizes "in cash or in merchandise." Former WAC 230-30-070(1) (2001).

B. The VIP Machine

¶ 7 The first version of ZDI's electronic pull tab dispensing machine incorporated a pull tab dispenser and a pull tab reader. This version is an electronically powered, stand-alone device that also features a video monitor display screen and a currency/bill acceptor. All of these features are housed in a decorative cabinet. ZDI intentionally designed the video monitor display to emulate a video slot machine; although the machine does not contain drums or spinning reels, the video display contains rows of "spinning" pictures and simulates the play of a slot machine that a player would typically encounter in a casino. The "reels" contain pictures and various characters that align in winning or losing combinations determined by the bar code on the inside of the paper pull tab that the player inserted into the machine. In addition to mimicking a slot machine, these machines emit "attractor" sounds, also commonly associated with casinos.

¶ 8 ZDI's updated version, the VIP machine, is a pull tab dispenser and reader with integrated cash card technology; with the exception of the integrated cash card technology, the VIP machine is largely identical to the earlier ZDI pull tab dispensing and reading machine already authorized for use by the Commission. The cash card technology is the critical difference between the two machines.

¶ 9 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.

Procedural History

A. The Application and Administrative Hearing

¶ 10 On March 29, 2005, ZDI submitted an application to the Commission staff seeking permission to distribute the VIP machine within the State of Washington. On August 15, 2005, the Commission staff issued a letter denying ZDI's application based on, in part, its determination that the VIP machine's cash card technology did not comply with the term "cash" as required to purchase pull tabs or with the terms "cash" or "merchandise" as required to redeem winning tickets. The Commission staff also determined that the VIP machine was an illegal "gambling device." On September 21, 2005, ZDI filed a petition for declaratory relief with the Commission.

¶ 11 In its petition for declaratory relief, ZDI challenged the Commission staff's interpretation of the Commission's regulatory language, arguing that the VIP machine's cash card technology was a "cash equivalent" that satisfied the regulatory definition of "cash." ZDI did not raise any other issues in the petition, nor did it raise additional issues during the administrative hearing proceedings.

¶ 12 To support its argument that the cash cards qualified as "cash equivalents," ZDI presented evidence about the ease and functionality of the cards and how functionally similar the cash cards were to cash. In addition, ZDI pointed to evidence that the Commission permitted Indian tribes to use similar technology at electronic scratch ticket terminals at tribal venues.

214 P.3d 944

¶ 13 On May 1, 2006, the administrative law judge (ALJ) issued an initial declaratory order in which he held that the term "cash," as used in the Commission's regulations, meant currency or a universally accepted currency substitute. Because the VIP machine's cash card technology was not universally accepted, as its use was limited to a single establishment, the ALJ determined that it did not meet the regulatory definition of "cash" or a "cash equivalent." As a result, the ALJ upheld the Commission staff's decision.

¶ 14 Both parties filed petitions for review with the full Commission. ZDI challenged the ALJ's ruling, arguing that its cash cards qualified as "a cash equivalent."1 On August 10, 2006, the full Commission issued a final declaratory order in which it upheld the ALJ's conclusions as to the definition of "cash," as well as the ALJ's determination that ZDI's cash cards did not meet the requirements of this definition.

B. Petition for Judicial Review

¶ 15 On August 31, 2006, the Commission served ZDI with its final order. On September 11, 2006, ZDI filed a petition for judicial review with the Pierce County Superior Court. On September 21,...

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