A shift in federal Class II gaming rules is expected to have significant impact on game design, customer play time and economic viability.

Will the proposed rules for Class II gaming devices usher in a new era of prosperity, as leadership of the rules-drafting National Indian Gaming Commission (NIGC) claims, or kill the goose that lays the golden eggs, as many in the tribal gambling industry suggest?

The jury is still out, and will likely be out for some time. Barring any further extension of the comment period by NIGC, the rules still have a long road to travel through the approval process before going into effect - perhaps not reaching implementation until August at the earliest.

The battle over the latest version of the proposed Class II rules, published by NIGC on Oct. 24, 2007, and described as substantially weaker than those the federal agency offered in spring 2006, raged unabated through last fall and winter.

According to NIGC chairman, Phil Hogen, the new rules are necessary, as they will establish “a bright line,” clarifying the distinction between Class II and Class III gaming devices. Native American casinos will benefit by being able to invest in gaming equipment without worry of legal challenges that could take these devices out of use prematurely.

The tribes argue that the rules’ effect will be to arbi-trarily slow down Class II games, thus making then less fun and exciting for players. Ernie Stevens Jr., chairman of the National Indian Gaming Association (NIGA), estimated that the changes proposed by NIGC would cost the tribal gaming industry more than $1 billion in revenues annually.

In an interview with the Bismarck Tribune, Elizabeth Homer, a former NIGC vice president, claimed the cost to tribal casinos would be even greater as the rules will make every one of their Class II machines illegal.

Defining the odds

By current definition, Class II games are those that pit players against each other in which there is a winner in every game. Such games include bingo and electronic machines that play games similar to bingo and other games that pit players against each other through a computer server.

Class III games are those that pit players against the house. These include table games like blackjack and Caribbean Stud, roulette, video poker and slot machines. With slots, players actually play against the machine.

This distinction is important, as Native American casinos can offer Class II games without state regulation. To legally offer Class III games, especially slot machines, tribal casinos must reach a compact with the state in which they operate that subjects the casino to state regulation in return for a portion of the profits, which states use to supplement tax revenues to pay for everything from roads to schools.

But in recent years, the distinction between Class II and Class III games has been blurred as Class II games manufacturers have adapted modern electronic and computer technologies to their player-against-player slots. As an example, the Jackpot Jubilee Class II game from Rocket Gaming Systems has reels depicting gems (rubies, diamonds, emeralds and the Jackpot Jubilee gem), each associated with its own progressive jackpot, the size of which is wordlessly displayed on the screen. Players win the jackpots by accumulating gems, but if they don’t, they get a consolation prize. Hit frequency increases along with player bets, making the game captivating for players.

This, some have argued, make some Class II games indistinguishable from Class III. Critics have said the Class II games should be considered Class III games, requiring tribal casinos to secure a revenue-sharing compact with the state.

Even the courts are having a hard time distinguishing Class II from Class III games. In June 2002, Judge Sam A. Joyner of the U.S. District Court of Northern Oklahoma ruled that the MegaNanza family of games were properly classified as Class II games. Based on this ruling, Austin, Texas-based Multimedia Games developed other games that met the same criteria, ultimately producing its best seller Reel Time Bingo.

However, in December 2007, Oklahoma District Court Judge Noma Gurich ruled in a lawsuit between Class II games makers Multimedia and Diamond Games that MegaNanza and Reel Time Bingo had been wrongly classified as Class II devices. That ruling, which Gurich said isn’t binding on tribal governments, is being appealed to the Oklahoma Supreme Court.

The current NIGC regulatory proposal would establish technical standards for Class II games played using electronic, computer or other technological aids. Where such machines have a similar look to Class III slot machines, tribal casinos would have to make it clear to customers that they are playing a bingo-derived game rather than a slot machine. Gaming devices would have to prominently display a label that the game is either a game of bingo or pull-tabs, with each letter measuring at least 2 inches in height. On bingo-derived games, the game must be played by the rules of bingo, and the bingo card display must fill at least half of the on-screen display area.

Restrictions and prohibitions

Tribal casinos and Class II electronic game developers remain highly critical of these proposed rules. Some of their complaints were addressed in the current NIGC regulatory proposal. For instance, the 2006 rules would have required Class II electronic game players to press three buttons to activate play. The 2007 rewrite only requires a two-button activation.

Other specifications seen as slowing down the pace at which games are played remain. To assure that a minimum number of players are involved in each game played on an electronic device, there is a delay in the start of each game. Whereas two players linked by a device might have been sufficient in the past, the new rules allow two-player games only when a maximum time delay period is reached.

Some features of electronically-aided Class II games also would be prohibited, including the “auto-daub” feature on electronic bingo games, which NIGA claimed will make games run substantially longer. Mystery and random prize features would be severely limited. Such changes, NIGA argued, would make Class II gaming less marketable.

“The proposed rules are draconian in that they define Class II games narrowly as having to do X, Y and Z to qualify. They leave little room for the innovation that have made the most recent Class II games such a delight,” said Ron Harris, CEO of Rocket Gaming Systems in Grove, Okla.

“There is no basis in any federal or state court decisions to justify these proposed rules,” said Knute Knudson, vice president of Native American Development at Reno, Nev.-based International Game Technology. “Onerous elements such as these in the proposed rules will have an adverse effect on the economic viability of the Class II market.”

Aaron Rubin, director of marketing at Oklahoma City-based Video Gaming Technologies (VGT), agreed that additional changes need to be made in the proposed technical standards for Class II gaming devices to make them livable for all. He was also critical of a change in the enforcement rules, which he believed could result in game manufacturers being subjected to criminal charges under the Johnson Act for rare but correctable reliability problems in the computerized games.

Also problematic for game manufacturers is the proposed grandfather clause for pre-rule gaming devices, essentially for lack of specifics.

The NIGC proposed a grandfathering period, during which old games can remain in use until they reach the end of their useful life, defined as five years based on testimony from tribal casino management in comments on the 2006 rules proposal, which called for a two year phase-in of revised games. But Knudson noted that the October 2007 rules do not define when a gaming device has reached the end of its life.

“For instance, if a device has an LCD problem, but an exact replacement isn’t available, can you replace it with a similar monitor, or will the entire device be considered dead and no longer covered by the grandfather clause?” he noted. “Or what about a software glitch? Can you change the software, or must the entire device be replaced? We need answers.”

What's holding it all back

Once the new rules go into effect, tribal casinos can only add new games that are fully compliant with these rules, as verified by independent gaming laboratories to be licensed by NIGC.

Game manufacturers are split as to the ease of adapting existing gaming devices to meet the new rules if finally implemented.

“We have contingency plans,” VGT’s Rubin said. “Redesign work will require some heavy lifting in the development of new software to get current games within the scope of the new rules and still provide the same enjoyment.”

Knudson is confident the required changes can be made by implementation day.

“Our technology is flexible, so we can make changes in production and in the field as required. We can meet the new standard immediately.”

How immediate, though, is open to question. As of press time, the twice extended comment period on the proposed regulations was scheduled to end on March 9. The NIGC will then likely take at least 45 days to sift through the comments and make a decision on whether to call for implementation of the rules with slight amendments, or decide to engage in another major rewrite of the rules as it did in November 2006. If it decides to implement, the U.S. Congress has 60 days to review them and, if it doesn’t like them, pass a bill to reject. If not, the new rules will go into effect.

“It could be August at the earliest before the industry will have to contend with the revised Class II rules,” Knudson said.

Another wild card in the deck are hearings by the U.S. House Natural Resources Committee into the economic impact the rules may have on the Native American tribes for which Class II gaming is a major source of revenue and tribal employment. These hearings, called by Committee Chairman Rep. Dan Bowen, D-Okla., were set to begin Feb. 20 at Northeastern Oklahoma A&M College in Miami, Okla.

And VGT’s Rubin has heard that several tribes are contemplating legal action to stop or secure major alterations in these rules, rather than take the feared economic hit they believe the rules in their present form will inflict.

In a report commissioned by the NIGC, The Analysis Group’s Alan Meister, noted that the proposed Class II regulations would have a significant impact on tribes (Significant impact).

It looks like a long and bumpy ride is still to come.

Or maybe not. Rather than go with slower Class II games, more tribal casinos, after seeing how much their customers like games that play fast and unpredictable, will pursue compacts with states to install Las Vegas-style Class III games, a spokesman for a Class II game maker acknowledged. The latest to go Class III is Florida’s Seminole Tribe, long the model for how to set up and run profitable Class II gaming operations.

Within weeks after securing an agreement with Florida Gov. Charlie Crist, the Seminole Hard Rock Casino, Hollywood, Fla., installed its first Class III slot machines, most sourced from Las Vegas-based Bally Technologies. According to Seminole Chairman Mitchell Cypress, Class III slots are more lucrative than their Class II counterparts, and thus will greatly increase the revenues generated by the tribe’s six casinos throughout Florida. And under the agreement, Florida will receive up to $150 million in revenues annually by 2011.

The Seminole Tribe plans to eventually install 15,000 Class III slot machines in its casinos.

Significant impact