Chance Management v. State of SD

_____________
No. 95-1665
_____________
Chance Management, Inc., a *
South Dakota corporation; *
William A. Sanders, a *
Wyoming resident, *
*
Plaintiffs - Appellants, * Appeal from the United States
* District Court for the
v. * District of South Dakota.
*
State of South Dakota; Mark W. *
Barnett, in his official *
capacity as Attorney General of *
South Dakota; South Dakota *
Lottery; Susan Walker, in her *
official capacity as Executive *
Director of the South Dakota *
Lottery; H. I. King, in his *
official capacity as member of *
the South Dakota Lottery *
Commission; Beverly McCracken, *
in her official capacity as *
member of the South Dakota *
Lottery Commission; Elaine *
Emery, in her official capacity *
as member of the South Dakota *
Lottery Commission; Don Bender, *
in his official capacity as *
member of the South Dakota *
Lottery Commission; Burdette *
Solum, in her official capacity *
as member of the South Dakota *
Lottery Commission; John E. *
Carmody, Sr., in his official *
capacity as member of the South *
Dakota Lottery Commission, *
*
Defendants - Appellees. *
_____________
Submitted: November 17, 1995
Filed: October 10, 1996
_____________
Before HANSEN, LAY, and MURPHY, Circuit Judges.
_____________
HANSEN, Circuit Judge.
A corporation may obtain a license as a video lottery machine
operator for the South Dakota Lottery only if residents of South Dakota
hold the majority ownership interest in the corporation. S.D. Codified
Laws Ann. § 42-7A-43 (Supp. 1995). Chance Management, Inc., and William
A. Sanders filed this suit, challenging the constitutionality of the
residency requirement under the Commerce Clause, the Equal Protection
Clause of the Fourteenth Amendment, and the Privileges and Immunities
Clause. The district court1 granted the defendants summary judgment. The
court concluded that Commerce Clause restrictions do not apply to the
statute because the state of South Dakota is acting as a market participant
in the video lottery business. The court further held that the statute
does not violate the Equal Protection Clause and that the plaintiffs have
no standing to assert the Privileges and Immunities Clause challenge. The
plaintiffs appeal. We affirm.
I.
In South Dakota, various forms of gambling are legal. See S.D.
Codified Laws Ann. §§ 42-7-47 to -106 (1991 & Supp. 1996) (horse and dog
racing); id. §§ 42-7A-1 to -55 (South Dakota Lottery); id. §§ 4242-7B-1 to
-62 (card games and slot machines). South Dakota owns and operates one of
the gaming enterprises in South Dakota, the South Dakota Lottery, which is
a video lottery business. Video lottery consists of games of chance played
on a computer-controlled video machine, simulating the games of poker,
blackjack, keno, and bingo. South Dakota operates its video
1
The Honorable John B. Jones, United States District Judge for
the District of South Dakota.
2
lottery business in accordance with Article III, Section 25 of the South
Dakota Constitution, which, as amended in 1994,2 reads as follows:
The Legislature shall not authorize any game of . . . lottery
. . . . However, it shall be lawful for the Legislature to
authorize by law, a state lottery or video games of chance, or
both, which are regulated by the state of South Dakota, either
separately by the state or jointly with one or more states, and
which are owned and operated by the state of South Dakota,
either separately by the state or jointly with one or more
states or persons, provided any such video games of chance
shall not directly dispense coins or tokens.
Chapter 42-7A of the South Dakota Codified Laws establishes the
state's video lottery under the direction of an independent state agency,
the South Dakota Lottery Commission (the Commission). S.D. Codified Laws
Ann. § 42-7A-2 (Supp. 1995). This chapter creates a detailed statutory
scheme governing South Dakota's video lottery business. See id. § 42-7A-1
to -55. An executive director administers the lottery pursuant to the
provisions of Chapter 42-7A, id. § 42-7A-2, and under the rules and
regulations promulgated by the Commission, id. § 42-7A-21.
South Dakota controls and operates its video lottery business in
large part through a central computer system, which is located in the main
office of the South Dakota Lottery in Pierre, South Dakota. Although the
state does not own the video machines on which the games of chance are
played or the modems attached to the
2
The South Dakota Lottery began operating in October 1989. In
1994, the Supreme Court of South Dakota declared that the state was
not actually running a lottery, but games of chance, in violation
of the South Dakota Constitution. Poppen v. Walker, 520 N.W.2d 238
(S.D. 1994). The South Dakota Legislature responded by passing a
joint resolution amending the South Dakota Constitution to allow
the South Dakota Lottery. The voters of South Dakota approved the
proposed constitutional amendment, and in November 1994, under the
amended Article III, Section 25 of the South Dakota Constitution,
video lottery operations again commenced.
3
machines, it owns the dominant software programs that operate the machines.
asable, Programmable, Read Only Memory (EPROM) chips
in the video machines, without which the machine
EPROM chips contain the data that protects and secures the system fro
invasion by outside influences. In
state spent two million dollars on the central computer system, personnel,
Video lottery machine operators (operators) own the individual video
and are responsible for their operation and maintenance. (J.A.
es or associated equipment
for thorized play in licensed video lottery establishments in South
a, including restaurants, bars, lounges, or lodging establishment
licensed to sell alcoholic beverages on the premises. S.D. Codified Laws
§§ 42-7A-1(6) (defining "licensed establishment"), -1(17) (defining
e operator"). The state bills the operators for its
portion by electronically sweeping the
operators' bank accounts. S.D. Admin. R. 48:02:
share t
dec this case; the South Dakota Legislature has since increased the
All video lottery machine manufacturers, distributors, and operators
obtain a license from the executive director of the South Dakot
Lottery in order to do business with the Lottery. S.D. Codified Laws Ann.
42-7A-41. Before issuing a license to any of these parties, the state
a background investigation to ascertain whether the applicant
ies for a license. §§ 42-7A-43 (investigation), -13
ifications), -14 (ineligible persons); S.D. Admin. R.
02:02:01 (additional qualification requirements for licensure).
corporate applicant cannot obtain a license until each person who has the
4
majority of the corporation's board of directors has passed the
requirements set out for individual applicants. S.D. Admin. R.
48:02:02:02.
In addition to passing the background investigation, a person must
be a resident of South Dakota to obtain a video lottery machine operator's
license. S.D. Codified Laws Ann. § 42-7A-43. If the party seeking an
operator's license is a corporation, a majority of the ownership interest
in the corporation must be held by South Dakota residents in order to
qualify for a license. Id.
Plaintiff Chance Management, Inc., is a corporation organized under
the laws of the state of South Dakota and is owned by two persons.
Plaintiff William A. Sanders, a resident of Wyoming, owns the majority
(51%) of the stock in Chance Management, with the remaining shares (49%)
owned by a South Dakota resident. Chance Management applied for a video
lottery operator's license but was turned down because its majority
shareholder failed to meet the residency requirement under § 42-7A-43.
Chance Management and Sanders filed this suit against the state of
South Dakota, the executive director of the state lottery, and various
members of the state Lottery Commission. Plaintiffs challenged the
constitutionality of the residency requirement under the Commerce Clause,
the Equal Protection Clause of the Fourteenth Amendment, and the Privileges
and Immunities Clause. Both sides filed motions for summary judgment. The
district court granted the defendants' motion, holding that the statute
does not run afoul of either the Commerce Clause or the Equal Protection
Clause. The court further held that the plaintiffs lacked standing to
mount the Privileges and Immunities Clause challenge. See Chance
Management, Inc. v. South Dakota, 876 F. Supp. 209, 211-13 (D.S.D. 1995).
Chance Management and Sanders appeal.
5
II.
review the district court's grant of summary judgment de novo
Independent , 82 F.3d 791, 795 (8th Cir.
Summary judgment is appropriate when the evidence, viewed in the
most favorable to the nonmoving party, shows there is no genuine
of material fact and the moving party is entitled to judgment as a
of law. ; Cotto Waxo Co. v. Williams, 46 F.3d 790, 792 (8th Cir.
1995).
A. Commerce Clause Challenge
Under the Commerce Clause of the Constitution of the United States,
"Congress shall have Power . . . To regulate Commerce with foreign Nations,
and among the several States, and with the Indian Tribes . . . ." U.S.
Const. art. I, § 8, cl. 3. This clause acts not only as an affirmative
grant of regulatory power to Congress, but also "as a restriction on
permissible state regulation." Hughes v. Oklahoma, 441 U.S. 322, 326
(1979). "This `negative' or `dormant' aspect of the Commerce Clause
prohibits economic protectionism -- that is, regulatory measures designed
to benefit in-state economic interests by burdening out-of-state
competitors." Charities, 82 F.3d at 798 (citing New Energy Co. of Indiana
v. Limbach, 486 U.S. 269, 273 (1988)).
Because the power granted to Congress under the Commerce Clause is
the power to "regulate Commerce . . . among the several States," the
correlative restrictions on the states under the Commerce Clause are
invoked only when a state engages in regulation. Therefore, the Supreme
Court has drawn a distinction between state "regulation of" a market and
state "participation in" a market. SSC Corp. v. Town of Smithtown, 66 F.3d
502, 510 (2d Cir. 1995), cert. denied, 116 S. Ct. 911 (1996). See South-
Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 93-95 (1984) (plurality
opinion); White v. Massachusetts Council of Constr. Employers, 460
6
U.S. 204, 208 (1983); Reeves, Inc. v. Stake, 447 U.S. 429, 436-37 (1980);
Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 808-10 (1976). A state
acting as a market participant is free from the strictures of the Commerce
Clause because "there is no indication that the [Commerce] Clause was
intended to limit the ability of the [s]tates themselves to operate in the
free market." Charities, 82 F.3d at 799. States acting in a proprietary
capacity should be as free from federal constraints as are private market
participants. Id.
We agree with the district court's conclusion that South Dakota's
video lottery statute, including its residency requirement, falls within
the market participant exception to the Commerce Clause. To begin with,
the statute created a state business within the gaming market. South
Dakota invested substantial sums of money to get the South Dakota Lottery
off the ground. The state owns the dominant software programs that operate
the video lottery machines and owns the computer system that controls the
machine payouts. Moreover, the state presently reaps 50 percent of the
revenue generated by the South Dakota Lottery. Thus, South Dakota is
actively running a business in the gaming market. In furtherance of its
money-making enterprise, the state has created a business relationship with
its video lottery machine operators much akin to a partnership or joint
venture between private parties. Because South Dakota's choice of its
"business partners" is made in its role as a market participant, its
decision to deal only with corporations owned in major part by South Dakota
residents is beyond the purview of the Commerce Clause. "[T]he [s]tate,
like any private [gaming company], has a right to select the parties with
whom it will deal." Id. The lure of the huge profits to be made in the
gaming market proved too attractive for the legislature. Instead of just
taxing or regulating the other participants in the market, the legislature
opted instead to be the largest participant, to own and to operate a huge
piece of the
7
action. That it is the dominant actor in the market does not mean it is
not a participant.
The plaintiffs argue that the state is not acting as a market
participant because it is not acting as a buyer, seller, or employer. The
plaintiffs base this argument on the roles the states played in the three
Supreme Court cases applying market participant exception. See White, 460
U.S. at 205-06 (employer); Reeves, 447 U.S. at 432 (seller); and Alexandria
Scrap, 426 U.S. at 799 (buyer). The reasoning of these cases, however,
does not support the plaintiffs' argument. The Court's inquiry in the
market participation cases asks not whether the state is acting as a buyer,
seller, or employer when it participates in a market, but whether the state
is actually participating in a narrowly defined market as a proprietor
rather than simply regulating the actions of other private market
participants. Wunnicke, 467 U.S. 94-95 (explaining White, Reeves, and
Alexandria Scrap), 97-98 (explaining that a state must actually be
participating in the specific market it is regulating for the market
participation exception to apply) (plurality opinion). We do not believe
that it can seriously be questioned that South Dakota has invested
substantial money and effort into participating in the narrowly defined
gaming market as a proprietor.
The plaintiffs argue that the residency requirement is the functional
equivalent of the statute the district court declared unconstitutional in
Gulch Gaming, Inc. v. South Dakota, 781 F. Supp. 621 (D.S.D. 1991). The
statute at issue in Gulch Gaming imposed a residency requirement on
operators or retailers engaged in gaming in Deadwood, South Dakota. S.D.
Codified Laws Ann. § 42-7B-25. Although the statute at issue in Gulch
Gaming appears to be analogous to the one presently before us, the state's
role in Gulch Gaming was entirely different from its role here. In Gulch
Gaming, the state had no ownership interest in the gaming activity and was
acting solely as a regulator of gambling conducted by private
8
businesses in Deadwood. Here, however, the residency requirement reflects
a decision by the state taken as an owner and operator of the gaming
business.
The plaintiffs also contend that the residency requirement falls
outside the market participation exception because the residency
requirement is unrelated to the state's participation in a private market.
Plaintiffs point to the fact that the state imposes a number of
requirements on video lottery machine manufacturers and restricts the
manufacturers' sales of the machines to licensed distributors and
operators. Plaintiffs argue that under Wunnicke, this restriction violates
the Commerce Clause.
Wunnicke involved a Commerce Clause based constitutional challenge
to a requirement that timber harvested from Alaska state-owned lands be
processed in Alaska prior to export. 467 U.S. 84-86. In its market
participant discussion, the Court first defined the relevant market,
concluding that Alaska was a market participant in the timber industry as
a seller of timber, but was not a market participant in the timber
processing industry. Id. at 98. A plurality of the Court concluded that
requiring private parties who purchased timber from the state of Alaska to
process their timber in Alaska was a downstream regulation outside of the
relevant market in which Alaska was participating and therefore not within
the bounds of the market participation exception. Id. at 99. The Court
explained:
The limit of the market-participant doctrine must be that it
allows a State to impose burdens on commerce within the market
in which it is a participant, but allows it to go no further.
The State may not impose conditions, whether by statute,
regulation, or contract, that have a substantial regulatory
effect outside of that particular market. Unless the "market"
is relatively narrowly defined, the doctrine has the potential
of swallowing up the rule that States may not impose
substantial burdens on interstate commerce even if they
9
act with the permissible state purpose of fostering local
industry.
Id. at 97-98.
This language indicates that the market participant exception is
limited to the actual market in which the state is participating, and to
that extent, the plaintiffs' assertion that the statute must be related to
the state's participation is correct. Once we determine that the state is
participating in the relevant market, however, we do not scrutinize, under
Commerce Clause analysis, whether the state's proprietary decisions best
meet the state's goals. We further note that unlike Alaska in Wunnicke,
South Dakota is actually participating in the market affected by the
legislation at issue in this case. Moreover, the residency requirement for
video lottery machine operators does not reach beyond those parties who are
actually and freely dealing with the state in its business enterprise.
The plaintiffs rely on GSW, Inc. v. Long County, 999 F.3d 1508 (11th
Cir. 1993), to support a broader interpretation of the import of Wunnicke.
In GSW, the Eleventh Circuit held that the county was not a market
participant where a county resolution geographically limited the sources
of the solid waste that a local private waste disposal facility could take.
The facts of GSW are fundamentally different from those before us today,
because the county had no investment in the market in which it asserted it
was participating and had even made sure it would not be subject to any
liability. By contrast, South Dakota has put substantial sums of money at
risk in entering the gaming market. Furthermore, our analysis is simply
not altered by the court's language that, under Wunnicke, "courts will
scrutinize `the relationship of the subject matter of the contract [or
legislation] and the condition imposed.'" GSW, 999 F.2d at 1516 (citation
omitted). Rather, that is precisely what we have done.
10
Our analysis is consistent with the Supreme Court's decision in
Wyoming v. Oklahoma, 502 U.S. 437, 461 (1992). In that case, Oklahoma
argued that it was acting as a market participant because it owned a
utility. Notwithstanding Oklahoma's participation in the market, the Court
held that Oklahoma could not require private utility companies to purchase
a certain percentage of coal from Oklahoma sources. The Court
distinguished between a state's imposition of limitations on its own
utility business and the regulation of private companies, noting that the
statute "would become a fundamentally different piece of legislation were
it construed to apply only to the [state-owned utility company]." Id. at
461. If the case before us today involved a residency requirement for
corporations doing business with private gaming companies in which the
state had no proprietary interest, this case would be like Wyoming v.
Colorado.3 However, we are considering "a fundamentally different piece
of legislation"; the statute at issue in this case "applies only to the
[state-owned gaming company]." Id. As such, the state's residency
requirement falls within the market participation exception to the Commerce
Clause.
The dissent correctly notes that the Supreme Court struck down the
entire statute in Wyoming v. Oklahoma, declining the state's invitation to
construe the legislation as applying only to the state-owned utility. We
do not believe, however, that the Court's decision not to construe the
statute as severable or as intended to apply only to the state-owned
utility affects our analysis. Indeed, as we have pointed out, the Court
expressly distinguished legislation such as that before us, and left to
"the Oklahoma Legislature to decide whether it wishe[d] to burden [its]
state-owned utility when private utilities will otherwise be free of . .
. restrictions." Id. See also SSC Corp. v. Town of Smithtown, 66 F.3d
502, 512 (2d Cir. 1995) (holding that, although the county was
3
Indeed, such a statute was struck down by the district court
in Gulch Gaming.
11
a market participant in the waste disposal business, the county could not
compel private parties to buy services from the local incinerator), cert.
denied, 116 S. Ct. 911 (1996); Atlantic Coast Demolition & Recycling, Inc.
v. Board of Chosen Freeholders, 48 F.3d 701, 717 (3d Cir. 1995) (holding
that the state was not a market participant when it was using its
regulatory power to go beyond its own participation and to control the
market activities of private market participants); Swin Resources Sys.,
Inc. v. Lycoming County, 883 F.2d 245, 250 (3d Cir. 1989) (upholding
allegedly discriminatory rules concerning the county's landfill because
they did "not apply to private landfills and d[id] not apply beyond the
immediate market in which [the county] transact[ed] business."). The issue
before us does not involve the state using "its regulatory power to control
other[] participants in the [gaming] market." Atlantic Coast Demolition
& Recycling, Inc. 48 F.3d at 717. Rather, it involves a decision integral
to the state's choice, as a business, as to whom it will deal with as
operators.
The state's use of a licensing scheme rather than a contractual
agreement does not take this case outside of the market participation
doctrine, as the plaintiffs contend. See, e.g., Alexandria Scrap, 426 U.S.
at 808-10 (holding that a state was acting as a market participant in its
statutory scheme of giving in-state scrap processors preferential
treatment); Charities, 82 F.3d at 799-800 (holding that a statute
determining the eligibility for participation in a state employees'
charitable fund raising drive falls within the market participation
doctrine). The state, like any private gaming company, is free to choose
those with whom it will deal, be it through licensure or contract.
The plaintiffs and the dissent argue that South Dakota's involvement
in virtually every aspect of the South Dakota Lottery, as expressed in
South Dakota's amended constitution and state legislation, reveals that the
state is actually regulating the
12
market. We agree that the state's involvement is pervasive, but cannot
agree that this involvement is regulation of "the market." To the
contrary, we believe the state is administering its own business. The
state, like the private gaming companies, is entitled to manage its
business.
Finally, the plaintiffs argue that the market participation exception
does not apply to this case because, by state constitutional mandate, the
state of South Dakota has a monopoly in the video lottery business in South
Dakota. Thus, the plaintiffs argue, the state is acting in its sovereign
capacity. The Ninth Circuit Court of Appeals used this reasoning in
Western Oil & Gas Ass'n v. Cory, 726 F.2d 1340 (9th Cir. 1984), aff'd
without opinion by an equally divided Court, 471 U.S. 81 (1985). In that
case, the state of California passed a statute and promulgated regulations,
charging oil refining companies by volume for transporting petroleum in
pipelines over and across state-owned tidelands and submerged lands. When
the companies filed a Commerce Clause challenge to the statute and
regulations, the state argued that it was a market participant in the
petroleum transport business. The Ninth Circuit disagreed, focusing on the
permanency of the plaintiffs' refining facilities, which did not allow the
plaintiffs any option but to lease from the state the submerged and
tidewater lands upon which their pipelines rested. The court held that,
under those facts, where the state had a monopoly and the companies had no
choice but to renew their leases, the state was acting in its sovereign
capacity as a regulator rather than as a market participant. Id. at 1343.
We are not entirely persuaded by the reasoning in Western Oil and
4
Gas; however, even if we were to agree, this case is
4
Regardless of our doubt about the reasoning in Western Oil &
Gas, we agree with the result because the state was not actively
engaged in the narrowly defined market of oil transportation and
was for that reason not a market participant in that industry.
13
different. This case does not concern an established business relationship
between the state and a private party where the private party is raising
a constitutional challenge to the state's unilateral change to the terms
of the "contract." Nor does this case involve parties who are forced to
continue to deal with the state because of the permanency of their
facilities. Rather, it involves parties who are asserting they have a
right to do business initially with the state, and the state determining
that it does not want to do business with the parties. As such, we believe
the plaintiffs' and the dissent's reliance on Western Oil & Gas is
misplaced.5 We further note that South Dakota's residency requirement for
its own business does not preclude Chance Management from dealing with the
various private gaming businesses in South Dakota.
Having considered the arguments presented on this issue, we hold that
the state of South Dakota is acting as a market participant in the gaming
market by operating the South Dakota Lottery. Further, we hold that the
state's business decision to require that a majority interest of any
corporate video lottery machine operator be held by South Dakota residents
is not subject to Commerce Clause restrictions.
B. Equal Protection Clause
Sanders and Chance Management also contend that the residency
requirement violates their equal protection rights under the
5
The dissent finds the state's recent increase of its share of
the State Lottery revenue to be relevant to this case. We
respectfully disagree. Our "activity-by-activity analysis," see
post at 20, is confined to whether the state's decision on the
residency requirement falls within the market participation
exception. Because neither Chance Management nor Sanders has
challenged the state's decision to reap 50% of the revenue from its
business (nor would they have standing to do so), we express no
opinion on that issue.
14
Fourteenth Amendment. The plaintiffs concede that rational basis review
governs their equal protection challenge. Under the rational basis
standard, we presume legislation is valid and will sustain it if the
classification drawn by the statute is rationally related to a legitimate
state interest. City of Cleburne v. Cleburne Living Ctr., Inc., 473 U.S.
432, 440 (1985). The statutory classification "need not be drawn so as to
fit with precision the legitimate purposes animating it." Alexandria
Scrap, 426 U.S. at 813. Instead, the plaintiffs have the burden of proving
that the classification is so attenuated to its asserted purpose that the
distinction it draws is wholly arbitrary and irrational. City of Cleburne,
473 U.S. at 446. Moreover, a party challenging the legislation must negate
"every conceivable basis which might support it." FCC v. Beach
Communications, Inc., 508 U.S. 307, 315 (1993) (internal quotations
omitted). The plaintiffs contend that the state has not submitted a
legitimate purpose for the residency requirement, and further, that the
residency requirement is not related to any legitimate purpose.
We find that the residency requirement is rationally related to
legitimate interests averred by the state. It is axiomatic that the
state's first submitted interest, preventing illegal activities and
infiltration by outside criminal elements into the South Dakota Lottery,
is a legitimate purpose. Furthermore, we agree with the district court
that "[g]ambling is generally understood to have a greater tendency to
attract criminal infiltration than most other types of business
enterprises." Chance Management, 876 F. Supp. at 212. We note that in
furtherance of its interest in protecting against the infiltration of
criminal elements, South Dakota closely monitors the video lottery machine
operators. The state undertakes an extensive background investigation on
each applicant. Those investigations include contacts with foreign law
enforcement bodies and sometimes require personal contact to conduct
interviews and verify information. (J.A. at 50-51.) In addition, the
state conducts periodic inspections of the operators' premises. (J.A. at
15
51.) While the state's use of a residency requirement to prevent criminal
infiltration in its video lottery business may not be the perfect solution,
a legislature could rationally conclude that the South Dakota Lottery can
better protect the state's legitimate interests if the corporate operators
of the machines -- who maintain the video machines and who collect and
temporarily hold large sums of money from them -- are owned in major part
by residents of South Dakota.
We also agree with the district court that the state has a legitimate
interest in insuring that the state's substantial investment in its video
lottery business ultimately benefits the South Dakota taxpayers. The
legislature could have rationally concluded that a residency requirement
would further this interest. Cf. Smith Setzer & Sons, Inc. v. S. C.
Procurement Review Panel, 20 F.3d 1311 (4th Cir. 1994) (holding statute was
rationally related to state's legitimate interest in directing benefits
generated by state purchases to the citizens of the state).
Accordingly, we hold that § 42-7A-43 of the South Dakota Codified
Laws does not violate the Equal Protection Clause of the Fourteenth
Amendment.
C. Privileges and Immunities Clause
In their final claim, appellants argue that South Dakota's residency
requirement violates the Privileges and Immunities Clause of Article IV,
Section 2 of the United States Constitution, which states that "citizens
of each State shall be entitled to all Privileges and Immunities of
Citizens in the several States." The state responds that neither Chance
Management nor Sanders has standing. The state further argues that if we
hold that Sanders has standing, he should lose on the merits, because the
South Dakota residency requirement does not burden a fundamental privilege
or immunity covered by the Privileges and Immunities
16
and because the state's interest in the profitability and the
We d
Immunities Clause rea
has e
Management ,
Chanc Management cannot raise the Privileges and Immunities claim.
ization, 451 U.S. 648, 656
Sanders, who has not applied individually for a license as an
and whose only "injury" is that flowing from his status as a
of Chance Management, also lacks standing. Smith Setzer
Sons, 20 F.2d at 1311.
rs attempts to distinguish the cases holding that a
individual's status as a shareholder is
noting that § 42-7A-43 prohibits nonresident individuals, as well a
corporations r
licenses. individual applicants is not at
issue n
operator's license.
Sanders a e
applicant in this cas
the statutory requirements imposed by South Dakota Codified Laws § 42-7A-
which provides for a background investigation and requires operators
meet certain qualifications to obtain a license. This argument i
unpersuasive because it does not address the material question -- whether
has a cognizable injury under the Privileges and Immunities Clause
Regardless of the extra hurdles Sanders,
for Chance Management to obtain an operator's license, the
17
potential injury that denying the license to Chance Management may cause
to Sanders flows directly and solely from the alleged injury to Chance
Management, which is "not constitutionally cognizable under the Privileges
and Immunities Clause." Smith Setzer & Sons, 20 F.3d at 1317. We
therefore hold that neither Chance Management nor Sanders has standing to
bring the Privileges and Immunities Clause claim.
III.
For the foregoing reasons, we affirm the judgment of the district
court.
LAY, Circuit Judge, dissenting.
With all due respect, the fundamental flaw in the majority's
reasoning is the manner in which it frames the issue. The majority asks
whether the state of South Dakota, in exclusively favoring its residents
in the operation of a video lottery business, is acting as a "market
participant" or a "market regulator." Upon finding that the state is a
market participant in the video lottery business (indeed, it operates a
monopoly) on account of its substantial investment in a central computer,
software, and related expenses, the court declares it immune from Commerce
Clause restrictions.6
The difficulty with the majority's stated approach is that it fails
to ask whether, while acting as a market participant, the state has also
illegally attempted to regulate the market. As the
6
The Commerce Clause restricts the states in discriminating
against interstate commerce. Thus, the Supreme Court has generally
recognized that the "'negative' aspect of the Commerce Clause
prohibits economic protectionism--that is, regulatory measures
designed to benefit in-state economic interests by burdening out-
of-state competitors." New Energy Co. v. Limbach, 486 U.S. 269,
273-74 (1988).
18
Circuit has explained, "[c]ourts must evaluate separately eac
challenged s
participation or regu USA Recycling, Inc. v. Town of Babylon, 66
1272, 1282 (2d Cir. 1995), cert. denied and cert.
denied 116 S. Ct. 1452 (1996). Dissenting in , Justice Powell
this truism when he observed that "[s]tate action burdening
trade is no less state action because it is accomplished by a
agency authorized to participate in the private market."
Inc. v. Stake 451 (1980) (Powell, J., dissenting). Thus,
the fact that a state may participate in the mar
does not m e
majorit reduces the distinction between market regulation and market
The majority principally relies on H ,
426 U.S. 794, 810 (1976), and Reeves e
cases, however, did t
in a policy of discrimination. Reeves, Inc. v. Kelley
737 (8th Cir. 1979) (noting the complete absence of an "allegation tha
South Dakota regulated or restricted out-of-state sale of privatel
manufactured cement or exercised its police power to suppress competition
7
), aff'd More
Indeed, the Supreme court in expressly distinguished
such cases in observing that:
South Dakota has not sought to limit access to the
limestone or other materials used to make cement
Nor ha r
sister .
Moreover, petitioner has not s
possesses o
produce cement.
Likewise, the Court in Hughes upheld Maryland's subsidization
of in-state automobile scrap metal processing market on the
cal effect" of the challenged scheme
"wa that the movement of hulks in interstate commerce was
426 U.S.
19
importantly, Wyoming v. Oklahoma, 502 U.S. 437 (1992), directly refuted the
majority's analysis. There the Court struck down an Oklahoma statute which
required all public and private utilities within the state to supply ten
percent of their fuel needs from Oklahoma-mined coal. While acknowledging
that Oklahoma, as a participant in the coal market, could purchase coal
from whomever it chose, id. at 461, the Court invalidated Oklahoma's
regulatory conduct in imposing purchase requirements upon private
8
utilities. Id. at 454-59.
In discussing Wyoming v. Oklahoma, the majority takes comfort in the
Supreme Court’s observation that were the Oklahoma law construed to apply
only to the state-owned public utility (Grand River Dam Authority) (GRDA)
the statute “would become a fundamentally different piece of legislation.”
Ante at 11 (citing Wyoming v. Oklahoma, 502 U.S. at 461). If the law
struck down in Wyoming v. Oklahoma were applied only to the GRDA, and the
market participant exception were applied, private utilities would be free
to make their own decisions from whom they might buy coal unimpeded by
government regulation. In contrast, because of the way South Dakota has
structured and regulated the video lottery market, private companies are
not free to do business unimpeded by government regulation, without facing
criminal penalties. Beyond
at 803 & n.13. The Court distinguished prior cases involving
"interfere[nce] with the natural functioning of the interstate
market either through prohibition or through burdensome
regulation," concluding that "Maryland has not sought to prohibit
the flow of hulks, or to regulate the conditions under which it may
occur. Instead, it has entered into the market itself to bid up
their price." Id. at 806.
8
Because the Court found it impracticable to sever that
portion of the statute governing state-owned utilities, it declared
the Act as a whole unconstitutional. Id. at 459-61.
20
choosing its own “business partners,” South Dakota has regulated all actors
in the video lottery market by prohibiting transactions between private
parties. Although South Dakota is participating in the market, its
statutory commands reach beyond merely dictating terms to its “business
partners,” and therefore its regulation of the video lottery market is
similar to the law struck down in Wyoming v. Oklahoma.
In contrast to the analysis urged by the majority, the decisions of
several other circuits support an activity-by-activity analysis where the
state both regulates and participates in the relevant market. In Atlantic
Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders, for
example, the Third Circuit observed:
When a public entity participates in a market, it may sell and
buy what it chooses, to or from whom it chooses, on terms of
its choice; its market participation does not, however, confer
upon it the right to use its regulatory power to control the
actions of others in that market.
48 F.3d 701, 717 (3d Cir. 1995); accord SSC Corp. v. Town of Smithtown, 66
F.3d 502, 513 (2d Cir. 1995), cert. denied, 116 S. Ct. 911 (1996). The
Second Circuit has likewise stated:
[The Town of] Babylon has exercised its governmental powers by
denying licenses to all garbage haulers but the one hired by
the Town, and by establishing civil and criminal penalties for
haulers who collect garbage without a license. Because no
private actor could engage in such activity, the Town is acting
as a market regulator rather than a market participant. The
Town does 'participate' in the garbage collection market in a
different respect: it buys garbage hauling services from
BSSCI. But states and local governments do not enjoy carte
blanche to regulate a market simply because they also
participate in that market. Particular state actions that do
not constitute 'market participation' are subject to the
limitations imposed by the Commerce Clause. A state engaging
in mercantile activity does not
21
obtain blanket immunity to regulate the market in which it
participates, free from the strictures of the dormant Commerce
Clause.
USA Recycling, 66 F.3d at 1282 (citations omitted).
Similarly, in Western Oil & Gas Ass'n v. Cory, 726 F.2d 1340 (9th
Cir. 1984), aff'd without opinion by an equally divided court, 471 U.S. 81
(1985), the Ninth Circuit recognized that a state's ownership interest in
a market does not exempt its regulation of the market from Commerce Clause
scrutiny. Western Oil & Gas involved a California scheme to collect a
volume-based "rent" from off-coast refineries for the leasing of state-
owned tidelands over which they transported oil. The state contended that
its leasehold activities fell outside the scope of the Commerce Clause on
the basis that, as owner of the tidelands, it acted in a proprietary
capacity in renting them. Id. at 1342. The court rejected that argument:
The State owns and controls tidelands and submerged lands in
its sovereign capacity. Although some of the lands are in the
possession of local State entities or private interests, this
does not mean that California becomes one of many competitors.
The permanency of plaintiffs' facilities does not permit them
to "shop around". There is no other competitor to which they
can go for the rental of the required strip of California
coastline. The Commission has a complete monopoly over the
sites used by the oil companies. The companies have no choice
but to renew their leases despite the volumetric rate, as the
oil, gas and petroleum-derived products cannot be transported
to plaintiffs' facilities without traversing the state-owned
lands. This control over the channels of interstate commerce
permits the State to erect substantial impediments to the free
flow of commerce. We therefore reject the State's contention
that its leasing activities are not subject to Commerce Clause
scrutiny.
Id. at 1343 (emphasis added and citations omitted).
22
There as no doubt in Western Oil & Gas e
tidelands their oil. Yet the fact
that it wielded monopolitistic power, and as such was a market participant,
not deter the court from holding that its regulatory function wa
subject to dormant Commerce Clause scrutiny.
The Western Oil & Gas on the ground that the
present case "does not involve parties who are forced to deal with the
State in a monopoly situation that falls outside the reach of free market
forces," but rather "parties who are asserting they have a right to do
business initially with the State, and the state determining that it does
not want to do business with the parties." Ante at 14. This
characterization slights the fact that in deciding that it "does not want
to do business" with Chance, the state has also foreclosed the opportunity
for Chance "to do business" with anyone else, much as the refineries in
Western Oil & Gas were foreclosed from dealing with other landowners. If
the rationale behind market participation doctrine is genuinely
evenhandedness, see Reeves, 447 U.S. at 439 (where "state proprietary
activities" are "burdened with the same restrictions imposed on private
market participants," then "[e]venhandedness" supports invocation of market
participant doctrine), then it would seem that South Dakota must take the
bitter with the sweet: it may not enter the market as a purchaser of video
lottery operation services while precluding, through the use of its
regulatory power, all potential competitors from entering the market.9 If
anything, the instant case presents facts more compelling than Western Oil
& Gas for not applying the market participant exception, for the state has
a monopoly over video lottery as a direct result of its
At oral argument South Dakota conceded that, if the market
participation exception does not apply, its interests in regulating
23
erely by "happenstance."10 Reeves
at see C & A Carbone, Inc. v. Town of Clarkstown .
1677, (1994) ("With respect to this stream of commerce, the flow
ordinance discriminates, for it allows only the favored operator
process waste that is within the limits of the town."); at 1683
the flow control ordinance favors a single local proprietor . .
There should be little question in the present case that South Dakota
not simply exercising a private choice as to the parties with whom it
Indeed, by its own constitutional and legislative enactments
10
oretically the refineries involved in Western Oil & Ga
cou have dealt with other landowners; only the cost prohibited
from so doing. Here, by contrast, entry into the market i
not cost prohibitive, but constitutionally and statutoril
forbidden.
1
n
question e
monopoly a
state business within the gaming market,” at 7, and adds that
oes not
preclu Chance Management from dealing with the various private
Ante at 14. These statements
soften the fact that South Dakota made itself the only
artner” with whom plaintiffs may enter the video lotter
business. To suggest that the plaintiffs can merely go elsewhere
into other private gaming is a tacit admission that the state has
the video lottery market, and seems to ignore the
ority’s own command that the court’s inquiry is limited t
analyzing a narrowly defined market.
24
the state concedes that it is regulating the market.12 Pursuant to the
constitutional grant of authority within
12
Article III, § 25 of the South Dakota Constitution, for
example, provides in relevant part:
The Legislature shall not authorize any game of chance
lottery, or gift enterprise, under any pretense, or for
any purpose whatever . . . . However, it shall be lawful
for the Legislature to authorize by law a state lottery
or video games of chance, or both, which are regulated by
the state of South Dakota, either separately by the state or
jointly with one or more states, and which are owned and operated
by the state of South Dakota, either separately by the state or
jointly with one or more states or persons, provided any such video
games of chance shall not directly dispense coins or tokens.
However, the Legislature shall not expand the statutory authority
existing as of June 1, 1994, regarding any private ownership of
state lottery games or video games of chance, or both. The
Legislature shall establish the portion of proceeds due the state
from such lottery or video games of chance, or both, and the
purposes for which those proceeds are to be used. SDCL 42-7A, and
its amendments, regulations, and related laws, and all acts and
contracts relying for authority upon such laws and regulations,
beginning July 1, 1987, to the effective date of this amendment,
are ratified and approved.
25
Section 25, the South Dakota legislature has del
Lottery n
of y] games." S.D. Codified Laws Ann. § 42-7A-2 (Michie Supp.
Likewise, § 42-7A-21 authorizes the Commission to promulgate
ules and regulations" concerning seventeen aspects of the lottery
including e
amount of application fees to be paid," id. g
proce id. § 42-7A-21(16). As South Dakota admits in its brief:
"The State's involvement in video lottery is pervasive. Virtually every
aspect of video lottery operations is owned, operated, specified,
controlled or monitored by the State." Brief for Appellees at 12.
Although the majority asserts that South Dakota "is free to choose
those with whom it will deal, be it through licensure or contract," ante
at 13, the granting and denial of licenses is far more akin to market
regulation than to market participation. Public licensure is not generally
contractual in nature: a license neither grants the licensee a property
right nor creates a mutual
26
obligation.13 If anything, public licensing constitutes a "primeval
governmental activity" such as the taxation scheme favoring in-state
residents found to fall outside of the market participant exception in
Limbach, 486 U.S. at 277.
The state concedes that licensing normally entails authorizing
private "individuals to pursue private occupations that demand a minimum
13
One authority defines "license" (in part):
A permit, granted by an appropriate governmental
body, generally for a consideration, to a person, firm,
or corporation . . . to carry on some business subject to
regulation under the police power. A license is not a
contract between the state and the licensee, but is a
mere personal permit. Neither is it property or a
property right.
Black's Law Dictionary 829 (5th ed. 1979) (citations omitted). The
final phrase in the quoted passage is helpful in light of the
public policy declaration found in S.D. Codified Laws Ann. § 42-7A-
56(3) (Michie Supp. 1995):
No applicant for a license or other affirmative
commission action has any right to a license or to the
granting of the approval sought. Any license issued or
other commission approval granted pursuant to the
provisions of this chapter is a revocable privilege, and
no holder acquires any vested interest or property right
therein or thereunder.
Accordingly, this section too suggests the state's licensing scheme
is regulatory, not proprietary, in nature, for a contract creates
bargained for rights and obligations. Compare, e.g., Rushmore
State Bank v. Kurylas, Inc., 424 N.W.2d 649, 653 (S.D. 1988)
(noting that "there are property rights in the [liquor] license as
between the licensee and third parties such as creditors," but
"there clearly is no general property right in the license in South
Dakota as between the state and the licensee") with Black's Law
Dictionary at 291-92 (5th ed. 1979) (defining "contract" (in part)
as "[a]n agreement between two or more persons which creates an
obligation to do or not to do a particular thing. Its essentials
are competent parties, subject matter, a legal consideration,
mutuality of agreement, and mutuality of obligation.").
27
level of proficiency, skill and competency," but contends that its lottery
licensing regime merely "provides the individual
28
or business with the ability to participate in the State's video lottery
business enterprise." Brief for Appellees at 16. This assertion (which
is unsupported by any authority) is dubious, given the substantial
eligibility requirements delineated in S.D. Codified Laws Ann. §§ 42-7A-13
and 42-7A-14 (Michie Supp. 1995). The granting and denial of public
licenses clearly constitutes market regulation. See Reeves, 447 U.S. at
440; cf. Richard A. Epstein, The Permit Power Meets the Constitution, 81
Iowa L. Rev. 407, 414 (1995) (["N]o matter how generous a view one takes
of the permit power, one still must distinguish between the state as
regulator and the state as owner. Quite bluntly, the power to issue a
permit does not--or at least should not--make the state a part owner of the
property.").
The state's unilateral decision to increase its share of video
lottery revenues from 35 to 50 percent also detracts from its argument that
it is not regulating the video lottery market. See S.D. Codified Laws Ann.
§ 42-7A-63 (Michie Supp. 1995). In a competitive market, such an increase
in a licensor's share of revenues would normally be the product of
bilateral negotiations in which the possibility of losing the licensee to
a competitor would serve to limit the licensor's bargaining power. Here,
however, the state has no competitors, for it has erected a legal barrier
to their entry into the video lottery market. Private entities enjoy no
such comparable power. See SSC Corp., 66 F.3d at 512 ("A state's actions
constitute 'market participation' only if a private party could have
engaged in the same actions."). Characterizing the state's activity as a
"refusal to deal" with nonresident corporations is therefore misleading.
Compare United States v. Colgate & Co., 250 U.S. 300, 307 (1919) ("In the
absence of any purpose to create or maintain a monopoly, the [Sherman] act
does not restrict the long recognized right of trader or manufacturer
engaged in an entirely private business, freely to exercise his own
independent discretion as to parties with whom he will deal.") with Eastman
Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359,
29
375 (1927) (finding refusal to deal "in pursuance of a purpose to
monopolize" illegal under the Sherman Act). Cf. Epstein, supra at 416 ("In
ordinary markets, if you don't like the terms that people offer, you can
go elsewhere. But there is no effective exit right when the state asserts
its permit power. The state, which has a stranglehold on individual
behavior, must be told to relax its grip." (footnote omitted)).
To be sure, South Dakota "participates" at some level in the video
lottery market each time it "contracts" with a state-licensed video lottery
operator, and the majority is quite correct to reject Chance's argument
that the market participant doctrine is limited to circumstances in which
a state formally acts as a buyer, seller, or employer.14 Under South
Dakota's licensing scheme, however, only corporations owned in their
majority by residents are permitted to enter the video lottery market;
nonresident-owned corporations are "removed from the market altogether,"
Reeves, 447 U.S. at 444 n.17, for one may not operate a video lottery
machine without a license, and doing so is in fact punishable as a felony.
See S.D. Codified Laws Ann. § 42-7A-39 (1991). Imposing criminal penalties
may not fairly be considered an act of a market participant. See SSC
Corp., 66 F.3d at 512. Pursuant to its state
14
See South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82,
97 (1984) (plurality opinion) ("privity of contract is not always
the outer boundary of permissible state activity"); White v.
Massachusetts Council of Constr. Employers, Inc., 460 U.S. 204, 211
n.7 (1983) ("[T]he Commerce Clause does not require the city to
stop at the boundary of formal privity of contract."); Reeves, 447
U.S. at 438 n.10 (noting that "States may fairly claim some measure
of a sovereign interest in retaining freedom to decide how, with
whom, and for whose benefit to deal"); Reeves, 603 F.2d at 737 n.1
(a state possesses "'unrestricted power to produce its own
supplies, to determine those with whom it will deal, and to fix the
terms and conditions upon which it will make needed purchases'"
(quoting Perkins v. Lukens Steel Co., 310 U.S. 113, 127 (1940)),
aff'd, 447 U.S. 429 (1980); Independent Charities of Am., Inc. v.
Minnesota, 82 F.3d 791, 799 (8th Cir. 1996) (finding "no well-
founded reason to constrict the proprietary activities covered by
the market participant exception to acts of buying or selling").
30
constitution, South Dakota is the "purchaser" of video lottery
in which Chance might sell
its services, nor is there any residual purchase See
S.D. Const. Art. III,
of . . . lottery . . . .").15
of the hallmarks of p
to characterize its video lottery arrangement
See nnicke, 467 U.S. at 97 (plurality opinion) (market participan
doctrine e
imposes it upon someone with whom it is in contractual privity").
scheme set out by the South Dakota legislature, it should
be obvious that the state is using its police po
lottery in a manner that precludes
entrepreneur. ]
impeding free private trade in the national marketplace." Reeves .
at nfortunately, Chance has no opportunity to compete on equal
I must, therefore, respectfully dissent.
15
e
titors,
but mpletely foreclosed market. See Reeves, 447 U.S. at 44
n.17 ("The 'bottom line' of the scheme closely parallels the result
Alexandria Scrap t
remove from the market altogether; to compete successfully with
competitors, however, they must achieve additional
to n
market behavior to in-state concrete suppliers.").
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
32