States Win Again

In the 1950s and '60s, the term "states' rights" became a code phrase for segregation. While the federal government was attempting to integrate schools, some state governors were blocking the doorways.

Television also gave state governments a bad name, or at least made them seem insignificant. A half-hour news program only has time to cover what the President did that day. Governors, let alone state legislatures, only get attention when they do something unusual; and state regulators are almost always ignored, unless they do something stupid.

But state and local governments, which have the primary responsibility for everything from transportation and education to health and crime control, probably have the most impact on the average person's daily life. For some industries, and legal gambling is the prime example, the major impact of federal laws and regulations is merely to create more paperwork.

In most parts of the world, legal gambling is uniquely a creature of state laws. Federal governments, like the European Union and the governments of Canada and Australia, usually leave it up to the individual member states to decide what forms of gambling should be made legal and how the games should be controlled.

Nowhere is this more true than in the United States, where Utah, a state with a complete prohibition on gambling, can share a common border with Nevada and still be part of the same country.

Legal gambling has played a surprisingly important role in the historical shifting of power between the states and the federal government.

At first the states were all-important. The United States was created by 13 separate, independent colonies, having much of the power of nations, deciding to create a federation of governments. The principal goals were practical: banding together for a common defense, establishing a single currency.

We can get a good idea of what this was like by looking at Europe, where the euro has replaced the lire and franc, but not the independence of Italy and France.

The new American federal government was seen as so limited that the drafters of the Constitution could not agree whether there should be any federal trial courts at all.

All of this changed in the 19th century. The industrial revolution made it possible for anyone, including gambling operators, to communicate across the country in minutes instead of months.

In 1903, the United States Supreme Court ruled on The Lottery Case, issuing one of its most important decisions, not just for legal gambling, but for the country. States were being swamped by Louisiana Lottery tickets, and they asked the federal government for help. Congress responded by passing a statute, still on the books, making it a federal crime to send lottery tickets across state lines. For the first time, the High Court held that the federal government had power over a legal product, simply because it was involved in interstate commerce. This created the modern, massively powerful federal government, since virtually everything involves interstate commerce.

The tide has turned over the last 20 years, led by Chief Justice William H. Rehnquist and a slim majority of the U.S. Supreme Court.

Legal gambling is once again playing a leading role.

In 1996, in one of the most important rulings of the last few decades, the Court knocked out part of the Indian Gaming Regulatory Act, and with it much of the power of the federal government over states. This case, Seminole Tribe v. Florida, led to other cases, so that today, state governments, including state regulators, can often do what they want, without having to worry about acts of Congress or lawsuits from angry individuals.

This is obviously good news for state lotteries and gaming regulators, since these are parts of governments. But anyone who wants, or has, a license, such as racetracks and casinos, and their patrons, have lost a way to fight back.

In its most recent gambling case, the Supreme Court has given states even more protection. The dispute involved casino ships and docking rights. But the result is that individuals may not now even be able to take their complaints about state regulators to other regulators.

The case began when South Carolina Maritime Services, Inc., asked for permission to berth its casino cruise ship, the M/V Tropic Sea, at the South Carolina State Ports Authority's facilities in Charleston. The Tropic Sea was going to sometimes cruise down to the Bahamas and sometimes take daytrips to nowhere. The Port Authority, part of the state government of South Carolina, refused, contending that it had an established policy of denying berths in Charleston to vessels whose primary purpose was gambling. Maritime Services filed a complaint with the Federal Maritime Commission, noting that the Port Authority allowed Carnival Cruise Lines' ships with casinos to dock.

The Port Authority naturally said that it did nothing wrong. But it also asked the federal regulator to dismiss the complaint, based on its sovereign immunity.

Every government has the right to refuse to be sued without its consent. The 11th Amendment to the U.S. Constitution explicitly says that a state that does not agree cannot be sued in federal court.

The Port Authority wanted to take that immunity one step further. It asserted it could not be forced to defend itself not in a federal court, but in a hearing before a federal agency.

The U.S. Supreme Court, by a five-to-four majority, agreed. The Court said that the administrative "proceeding walks, talks, and squawks like a lawsuit." The Supreme Court did not want to use the phrase, but we all know this as "the duck test."

So the law now is that if an administrative hearing would look like a trial, it will be treated as if it were a lawsuit filed in a court. The Court made it clear that this means a state and all of its agencies, which would include state lotteries and regulators, cannot be forced to defend claims in federal or state courts, or in federal or state adversarial administrative hearings. This applies to all individuals, companies, and even tribes who might feel they have been wronged.

States can still consent to adversary hearings. State agencies often hire people, called administrative law judges, to conduct hearings. Regulators have no trouble arguing their cases in front of their own employees.

But I expect that we will see more state agencies passing regulations and asking their legislatures for statutes protecting them from having to defend their actions before outside trial court and administrative law judges.

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