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Gerow v. Washington State Gambling Comm'n

Court of Appeals of Washington, Division 2

May 13, 2014

Jay Gerow et al., Appellants,
The Washington State Gambling Commission, Respondent

Oral Argument February 27, 2014.

Appeal from Thurston Superior Court. Docket No: 08-2-00319-9. Date filed: 12/07/2012. Judge signing: Honorable H Christopher Wickham.

Joan K. Mell (of III Branches Law PLLC ), for appellants.

Robert W. Ferguson, Attorney General, and Callie Castillo, Assistant, for respondent.

AUTHOR: Linda CJ Lee, J. We concur: Lisa Worswick, C.J., Jill M Johanson, J.


Page 801

Lee, J.

[181 Wn.App. 231] ¶ 1 Jay Gerow and ZDI Gaming, Inc. (ZDI) appeal the superior court's dismissal of their petition to invalidate two Washington State Gambling Commission (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. WAC 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 WAC 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.


A. Background

¶ 3 ZDI is a commission-licensed gaming supply distributorship that manufactures electronic video pull-tab [181 Wn.App. 232] 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, [181 Wn.App. 233] 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. Wash. State Gambling Comm'n, 151 Wn.App. 788, 797, 214 P.3d 938 (2009), aff'd, 173 Wn.2d 608, 268 P.3d 929 (2012).

B. Procedural History

¶ 6 In 2005, ZDI submitted an application to the Commission seeking permission to distribute

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its 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 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 [181 Wn.App. 234] 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 (CMPT) (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; ...

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