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UNITED STATES DISTRICT COURT DISTRICT OF

THE OF ISLETA, ) a federally-recognized Indian tribe, ) THE PUEBLO OF SANDIA, a ) federally-recognized Indian tribe, and ) THE PUEBLO OF TESUQUE, ) a federally-recognized Indian tribe, ) ) Plaintiffs, ) ) PUEBLO OF SANTA ANA, a federally- ) recognized Indian tribe and PUEBLO OF ) SANTA CLARA, a federally-recognized ) Indian tribe; and ) ) PUEBLO OF SAN FELIPE, a federally- ) recognized Indian tribe, ) ) Plaintiffs-in-Intervention, ) ) v. ) No. 1:17-CV-00654-KG-KK ) Susana Martinez, in her official capacity as the ) Governor of the State of New Mexico, ) Jeffrey S. Landers, in his official capacity ) as Chair of the Gaming Control Board of the ) State of New Mexico, Raechelle Camacho, ) in her official capacity as Acting State Gaming ) Representative, and Salvatore Maniaci, in his ) official capacity as a member of the Gaming ) Control Board, of the State of New Mexico, ) ) Defendants. ) )

PLAINTIFFS ’S AND PUEBLO OF SANDIA’S MOTION FOR SUMMARY JUDGMENT AND SUPPORTING AUTHORITIES

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ...... iii

I. JURISDICTION AND SUMMARY JUDGMENT STANDARDS ...... 1

A. Jurisdiction...... 1

B. Summary Judgment Standards...... 2

II. SUMMARY OF ARGUMENT ...... 2

III. STATEMENT OF MATERIAL FACTS ON WHICH NO GENUINE ISSUE OF FACT EXISTS...... 4

IV. DEFENDANTS’ UNILATERAL DEMAND THAT FREE PLAY BE TREATED AS REVENUE UNDER THE 2007 COMPACT VIOLATES FEDERAL LAW BECAUSE IT IS NOT AUTHORIZED BY IGRA AND BECAUSE FREE PLAY IS NOT REVENUE UNDER GAAP...... 12

A. Whether Defendants’ Free Play Claim Violates Federal Law Must Be Decided Before The Defendants’ Motion On Arbitrability In Order To Protect The Federal Rights That Are The Subject Of This Action...... 12

B. Federal Law Secures To The The Right To Be Free From State Taxation And Regulation, Except As Negotiated And Expressly Agreed In A Compact That Comports With IGRA...... 14

C. The Secretary Has Determined That Defendants’ Unilateral Demand That Free Play Be Treated As Revenue And Revenue Sharing Be Paid On Its Use Violates IGRA...... 15

D. Treating Free Play As Revenue And Paying Revenue Sharing On Its Use Plainly Violates Federal Law Because It Is Not Authorized By IGRA And Is Contrary To GAAP...... 16

1. Defendants’ demand that free play be treated as revenue in calculating payments to the State under the 2007 Compact violates federal law because it is not authorized by IGRA...... 17

2. Treating free play as revenue violates federal law because doing so is contrary to GAAP...... 20

3. Defendants’ claim that the 2007 Compact does not require that each Pueblo’s Net Win be calculated in accordance with GAAP is baseless...... 22

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4. Because the Defendants’ free play claim is barred by federal law, it is invalid and cannot be pursued...... 27

V. CONCLUSION ...... 27

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TABLE OF AUTHORITIES

Cases

California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987) ...... 2, 14, 18, 19 Citizen Potawatomi Nation v. Oklahoma, 881 F.3d 1226 (10th Cir. 2018) ...... 2, 3, 12, 16 City of Detroit v. Murray Corp. of Am., 355 U.S. 489 (1958) ...... 19 Colorado River Indian Tribes v. NIGC, 466 F.3d 134 (D.C. Cir. 2006) ...... 20 Commc’n Workers of Am. v. Avaya, Inc., 693 F.3d 1295 (10th Cir. 2012) ...... 14 Crow v. Capitol Bankers Life Ins. Co., 1995-NMSC-018, 119 N.M. 452, 891 P.2d 1206 ...... 25 Deephaven Private Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168 (10th Cir. 2006) ...... 21 Dep’t of Revenue v. Kurth Ranch, 511 U.S. 767 (1994) ...... 20 Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536 (8th Cir. 1996) ...... 3 Hobbs v. McLean, 117 U.S. 567 (1886) ...... 26 Idaho v. Shoshone-Bannock Tribes, 465 F.3d 1095 (9th Cir. 2006) ...... 18 In re Imergent Sec. Litig., No. 2:05-CV-204, 2009 WL 3731965 (D. Utah Nov. 2, 2009) ...... 21 In re Indian Gaming Related Cases, 331 F.3d 1094 (9th Cir. 2003) ...... 18 Kennerly v. District Court, 400 U.S. 423 (1971) ...... 23 Madawick Contracting Co. v. Travelers Ins. Co., 120 N.E.2d 520 (N.Y. 1954) ...... 25 Martinez v. City of Rio Rancho, 197 F. Supp. 3d 1294 (D.N.M. 2016) ...... 2 Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) ...... 25 Michigan v. Bay Mills Indian Cmty., 134 S. Ct. 2024 (2014) ...... 14 Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012) ...... 19 New Jersey v. Sprint Corp., 314 F. Supp. 2d 1119 (D. Kan. 2004) ...... 21 New York v. , 505 U.S. 144 (1992) ...... 20 NLRB v. Noel Canning, 134 S. Ct. 2550 (2014) ...... 25 Pueblo of Santa Ana v. Kelly, 104 F.3d 1546 (10th Cir. 1997) ...... 23 Pueblo of Santa Ana v. Nash, 972 F. Supp. 2d 1254 (D.N.M. 2013) ...... 12-13, 15, 23 Rincon Band of Luiseno Mission Indians of Rincon Reservation v. Schwarzenegger, 602 F.3d 1019 (9th Cir. 2010) ...... 17, 19 Sault Ste. Marie Tribe of Chippewa Indians v. Granholm, 475 F.3d 805 (6th Cir. 2007) ...... 6, 20 SEC v. Goldstone, 952 F. Supp. 2d 1060 (D.N.M. 2013) ...... 20

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Seminole Tribe of Fla. v. Florida, 517 U.S. 44 (1996) ...... 15, 16 United States v. Constantine, 296 U.S. 287 (1935) ...... 19 Walsh v. Schlecht, 429 U.S. 401 (1977) ...... 26 Washington v. Confederated Tribes of Colville , 447 U.S. 134 (1980)...... 19 Wisconsin v. Ho-Chunk Nation, 512 F.3d 921 (7th Cir. 2008) ...... 17

Statutes and Regulations

Indian Gaming Regulatory Act (“IGRA”), 25 U.S.C. §§ 2701-2721 ...... passim 28 U.S.C. § 1331 ...... 1 28 U.S.C. § 1362 ...... 1 25 C.F.R. § 542.19 ...... 2, 5, 20, 22, 25 25 C.F.R. § 571.12 ...... 2, 5, 9, 20 Compact Negotiation Act, N.M. Stat. Ann. §§ 11-13A-1 to -5 ...... 6 State Audit Act, N.M. Stat. Ann. §§ 12-6-1 to -14 ...... 8 Fed. R. Civ. P. 56 ...... 1, 2 Regulatory Notices Compliance and Enforcement Procedures Under the Indian Gaming Regulatory Act, 58 Fed. Reg. 5833 (Jan. 22, 1993) ...... 5, 20 Minimum Internal Control Standards, 71 Fed. Reg. 27,385 (May 11, 2006) ...... 5, 20 Indian Gaming, 72 Fed. Reg. 36,717 (July 5, 2007) ...... 6 Notice of Approved Class III Tribal Gaming Ordinances, 78 Fed. Reg. 14,352 (Mar. 5, 2013) ...... 4 Indian Gaming, 80 Fed. Reg. 35,668 (June 22, 2015) ...... 3 Indian Gaming, 80 Fed. Reg. 44,992 (July 28, 2015) ...... 3 Indian Gaming, Tribal-State Class III Gaming Compact Taking Effect in the State of New Mexico, 81 Fed. Reg. 19,235 (Apr. 4, 2016) ...... 3 Indian Gaming, Tribal-State Class III Gaming Compact Taking Effect in the State of New Mexico, 82 Fed. Reg. 49,654 (Oct. 26, 2017) ...... 11

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Indian Entities Recognized and Eligible to Receive Services from the United States Bureau of Indian Affairs, 83 Fed. Reg. 4235 (Jan. 30, 2018) ...... 4 Other Authorities Black’s Law Dictionary (9th ed. 2009) ...... 19 Restatement (Second) of Contracts (1979) ...... 25 S. Rep. No. 100-446 (1988), reprinted in 1988 U.S.C.C.A.N. 3071 ...... 14 Frequently Asked Questions About the AICPA, AICPA, http://www.aicpa.org/About/FAQs/Pages/default.aspx#aicpa_answer12 (last visited Apr. 5, 2018) ...... 21

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Pursuant to Fed. R. Civ. P. 56, Plaintiff Pueblos of Isleta and Sandia respectfully move this

Court for summary judgment on the following claims presented in their Complaint for Injunctive and Declaratory Relief, ECF No. 1:

1. Plaintiffs seek a declaration that the Defendants’ effort to require each Pueblo to treat free play used on Gaming Machines as part of each Pueblo’s Net Win under the 2007 Tribal-State

Gaming Compact (“2007 Compact”), Ex. 1, and to require the Pueblos to pay the State an additional amount in revenue sharing by calculating Net Win on that basis, violates federal law, and therefore, the Defendants’ claim may not be pursued under the 2015 Tribal-State Gaming

Compact (“2015 Compact”), Ex. 2, or by any other means.

2. Plaintiffs seek injunctive relief against the Defendants and any of their agents, officers, employees, or representatives, from continuing their efforts to (a) impose a tax or other assessment on the Pueblos in violation of federal law in the guise of asserting a claim for additional revenue sharing payments under the 2015 and 2007 Compacts; (b) treat free play as revenue contrary to generally accepted accounting principles (“GAAP”); and (c) arbitrate the dispute over that effort under the 2007 and 2015 Compacts.

In support of this motion and pursuant to Local Rule 56.1(b), Plaintiff Pueblos respectfully refer the Court to the following supporting authorities and statement of material facts on which no genuine issue exist.

I. JURISDICTION AND SUMMARY JUDGMENT STANDARDS

A. Jurisdiction.

This Court has subject matter jurisdiction over this action and this motion under 28 U.S.C.

§§ 1331 and 1362 because it is brought by federally-recognized Indian tribes with governing bodies duly recognized by the Secretary of the Interior and states substantial questions arising under federal common law, the Indian Gaming Regulatory Act, (“IGRA”), 25 U.S.C. §§ 2701-

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2721, its regulations, 25 C.F.R. §§ 542.19, 571.12, and the 2007 and 2015 Compacts, see Citizen

Potawatomi Nation v. Oklahoma, 881 F.3d 1226, 1238-39 (10th Cir. 2018).

B. Summary Judgment Standards.

“Summary judgment is appropriate when the Court, viewing the record in the light most favorable to the non-moving party, determines that ‘there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law.’” Martinez v. City of Rio

Rancho, 197 F. Supp. 3d 1294, 1301 (D.N.M. 2016) (citing Fed. R. Civ. P. 56(a)).

II. SUMMARY OF ARGUMENT

Defendants’ claim that free play must be treated as revenue in calculating revenue sharing payments to the State under the 2007 Compact violates federal law for two reasons, each of which is independently sufficient to bar the claim. First, Defendants’ claim violates IGRA’s prohibition on state imposed assessments on Indian gaming, 25 U.S.C. § 2710(d)(4), and the federal law bar on state taxation of Indian tribes, California v. Cabazon Band of Mission Indians, 480 U.S. 202, 215 n.17 (1987), because it is based on a unilateral demand, advanced years after the 2007 Compact was negotiated and entered into, and because that demand is unsupported by and contrary to the

Compact’s terms, which expressly require that all gaming revenues be accounted for in compliance with GAAP. Second, federal law also requires each Pueblo to account for its gaming revenues in accordance with GAAP, 25 C.F.R. §§ 542.19(b), 571.12, and under GAAP, free play has no effect on Net Win and therefore cannot be included in calculating the portion of each Pueblo’s Net Win to be paid to the State as revenue sharing. Ex. 3, Am. Inst. of Certified Pub. Accountants, Audit &

Accounting Guide: Gaming § 6.13 (2014 ed.) (“AICPA Gaming Guide”); Ex. 4, Expert Report of

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Andrew M. Mintzer ¶¶6, 13 (“Mintzer Report”).1 Treating free play as revenue therefore violates federal law.

For these very reasons, the Secretary of the Interior (“Secretary”) rejected Defendants’ free play claim after reviewing the 2015 Compact under 25 U.S.C. § 2710(d)(8). The Secretary determined that it would be contrary to GAAP to include free play credits in the calculation of each Pueblo’s Net Win under the 2007 Compact, and therefore “the State’s unilateral determination to include such sums in revenue sharing calculations [under the 2007 Compact] would constitute an impermissible tax on tribal gaming revenues in violation of IGRA.”2 The

Secretary ultimately decided to take no action on the 2015 Compact, which is therefore

“considered to have been approved . . . only to the extent the compact is consistent with the provisions of [IGRA].” Id. § 2710(d)(8)(C).3 Because Defendants’ claim violates IGRA, the 2015

Compact neither preserves that claim nor provides an arbitration forum for its resolution. “IGRA prescribes the permissible scope of a Tribe-State compact,” Citizen Potawatomi, 881 F.3d at 1239

(quoting Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 546 (8th Cir. 1996)), and arbitration provisions of a Tribal-State compact that violate federal law are invalid and

1 All exhibits are attached to the concurrently-filed Declaration of David C. Mielke. 2 Ex. 5, Letter from Kevin K. Washburn, Ass’t Sec’y-Indian Affairs, U.S. Dep’t of Interior, to Susana Martinez, Governor, New Mexico, at 3 (June 9, 2015) (“Secretary’s Five Tribes Letter”) ( Nation, Apache Tribe, , Pueblo of Acoma, and Pueblo of Jemez Compacts). The Secretary took the same position in her determination on the 2015 Compact with the Plaintiff Pueblos. Ex. 6, Letter from Kevin K. Washburn, Ass’t Sec’y-Indian Affairs, U.S. Dep’t of Interior, to E. Paul Torres, Governor, Pueblo of Isleta, at 3 (July 21, 2015) (“Secretary’s Isleta Letter”); Ex. 7, Letter from Lawrence S. Roberts, Acting Ass’t Sec’y-Indian Affairs, U.S. Dep’t of Interior, to Francisco I. Lujan, Governor, Pueblo of Sandia, at 2 (Mar. 29, 2016) (“Secretary’s Sandia Letter”). 3 See 80 Fed. Reg. 35,668 (June 22, 2015) (Five Tribes); 80 Fed. Reg. 44,992 (July 28, 2015) (Isleta); 81 Fed. Reg. 19,235 (Apr. 4, 2016) (Sandia).

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unenforceable, id. at 1236-38. Defendants therefore may not pursue their free play claim through arbitration under the 2015 Compact or by any other means.

III. STATEMENT OF MATERIAL FACTS ON WHICH NO GENUINE ISSUE OF FACT EXISTS.

1. Plaintiffs Pueblo of Isleta and Pueblo of Sandia are federally-recognized Indian tribes. 83 Fed. Reg. 4235, 4238 (Jan. 30, 2018).

2. Defendants are Susana Martinez, in her official capacity as Governor of the State of New Mexico; Jeffrey S. Landers, in his official capacity as Chair of the State Gaming Control

Board (“Board”); Salvatore Maniaci, in his official capacity as a member of the Board; and

Raechelle Camacho, in her official capacity as Acting State Gaming Representative.

3. IGRA governs gaming on Indian lands, and divides it into three classes. As relevant here, Class III gaming includes all games other than social games played for prizes of minimal value, traditional forms of Indian gaming, and bingo and similar games. 25 U.S.C. § 2703(6)-(8).

4. Class III gaming requires a tribal ordinance that satisfies id. § 2710(b), (d)(1)(A)(ii), and that the Chairman of the National Indian Gaming Commission (“NIGC”) has approved. Id. §

2710(b)(1)(B). The ordinance must provide, inter alia, that “the Indian tribe will have the sole proprietary interest and responsibility for the conduct of any [Tribal] gaming activity.” Id. §

2710(b)(2)(A). Each Pueblo has enacted such an ordinance.4 IGRA also requires a Tribal-State compact for Class III gaming, id. § 2710(d)(1)(C), and controls the permissible subjects of

4 See 78 Fed. Reg. 14,352, 14,354 (Mar. 5, 2013); Ex. 8, Pueblo of Isleta, Ordinance 94-02 (Dec. 20, 1994) (authorizing Class III gaming; requiring annual audit, id. § 4(A)), Ex. 9, Letter from Harold A. Monteau, Chairman, NIGC to Alvino Lucero, Governor, Pueblo of Isleta (Apr. 11, 1995) (approval letter); Ex. 10, Pueblo of Sandia, Ordinance 94-37 (Nov. 23, 1994) (authorizing Class III gaming; requiring annual audit, id. § 4(A)), Ex. 11, Letter from Harold A. Monteau, Chairman, NIGC to Joe M. Lujan, Governor, Pueblo of Sandia (Feb. 15, 1995) (approval letter).

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compact negotiations, id. § 2710(d)(3)(C). IGRA provides that except for assessments agreed upon to defray State regulatory costs,

nothing in [§ 2710] shall be interpreted as conferring upon a State or any of its political subdivisions authority to impose any tax, fee, charge, or other assessment upon an Indian tribe or upon any other person or entity authorized by an Indian tribe to engage in a class III activity.

Id. § 2710(d)(4).

5. Compacts must be submitted to the Secretary for approval, id. § 2710(d)(3)(B), and may be approved or disapproved within 45 days of submission, id. § 2710(d)(8)(A)-(C). If the

Secretary does neither, the compact is “considered to have been approved . . . but only to the extent the compact is consistent with the provisions of [IGRA].” Id. § 2710(d)(8)(C).

6. IGRA also imposes auditing and accounting requirements applicable to all tribal gaming revenues. An “annual outside audit[] of the gaming . . . [must] be provided by the Indian tribe to the [NIGC].” Id. § 2710(b)(2)(C). And Indian tribes must account for their gaming revenues in accordance with GAAP. See 25 C.F.R. § 571.12(b) (2015) (current regulations); 58

Fed. Reg. 5833, 5843 (Jan. 22, 1993) (promulgating regulations requiring GAAP in 1993); 71 Fed.

Reg. 27,385, 27,392 (May 11, 2006) (establishing minimum internal control accounting standards

(“MICS”) for Class III Gaming that require compliance with GAAP) (codified at 25 C.F.R. §

542.19(b)). Each Pueblo’s gaming regulations meet these requirements.5

5 Ex. 12, Pueblo of Isleta Gaming Regulatory Agency, Regulations (2007), Reg. 6.21 (requiring that all gaming enterprise books and records be maintained in accordance with GAAP); id. 13.2 (requiring the Gaming Enterprise to “establish tribal internal controls that are at least as restrictive as the [MICS] adopted by the NIGC”), Ex. 13, Isleta Resort & Casino Accounting Policies and Procedures, Accounting Minimum Internal Control Standards for Gaming Activities § 1.1 (2011) (requiring that accounting records be kept in accordance with GAAP); Ex. 14, Pueblo of Sandia Tribal Gaming Comm’n, Regulations (2013), Reg. 13.1(a) (adopting “the [MICS] adopted by the NIGC”); id. 14.2(b) (requiring that gaming operation’s accounting records be kept in accordance with GAAP).

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7. The AICPA Gaming Guide is the judicially-recognized source of GAAP for Indian gaming. See Sault Ste. Marie Tribe of Chippewa Indians v. Granholm, 475 F.3d 805, 813 (6th Cir.

2007); see also Mintzer Report ¶¶13, 22. It provides that the use of free play by patrons “has no effect on the reporting of net win or loss from gaming activities.” AICPA Gaming Guide § 6.13; see also Mintzer Report ¶¶6, 35.

8. Each of the Pueblos and the State entered the 2007 Compact, Ex. 1, 2007 Tribal-

State Class III Gaming Compact, which was approved by the Secretary on July 5, 2007, see 72

Fed. Reg. 36,717 (July 5, 2007).6 Before the 2007 Compact was approved by the Secretary, the

Department of the Interior informed each Pueblo and the State that

the Department has sharply limited the circumstances under which Indian tribes can make direct payments to a State for purposes other than defraying the costs of regulating Class III gaming activities. To date, we have only approved payments to the State where the tribe obtains substantial economic benefits in return for the payments.

Ex. 15, Letter from Paula L. Hart, Deputy Dir., Office of Indian Gaming, U.S. Dep’t of Interior, to J. Robert Benavides, Governor, Pueblo of Isleta (June 6, 2007); Ex. 16, Letter from Paula L.

Hart, Deputy Dir., Office of Indian Gaming, U.S. Dep’t of Interior, to Victor Montoya, Governor,

Pueblo of Sandia (June 6, 2007) (collectively “P. Hart Letter”).

9. The 2007 Compact authorizes each Pueblo to conduct “any or all forms of Class III

Gaming,” id. § 3(A), and to establish the “betting and pot limits, applicable to such gaming,” id. §

3(B). Authorized forms of Class III gaming include Gaming Machines, id. § 2(F), which may be played “upon insertion of a coin, token or similar object, or upon payment of any consideration in

6 The 2007 and 2015 Compacts were executed by the State under the Compact Negotiation Act, N.M. Stat. Ann. §§ 11-13A-1 to -5, which provides that the State’s Governor “shall approve and sign” a compact which is “identical to a compact . . . previously approved by the legislature except for the name of the compacting tribe,” id. § 11-13A-4(J). Thus, the Pueblos’ 2007 and 2015 Compacts are identical, except for each Pueblo’s name.

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any manner . . . .” Id. Each Pueblo authorizes patrons to play Gaming Machines using free play credits provided by the Pueblo.7 Under the 2007 Compact, any player who wins a prize by playing a Gaming Machine is paid “automatically from the Gaming Machine or in any other manner . . .

.” Id.

10. Under the 2007 Compact, each Pueblo “shall require all books and records relating to Class III Gaming to be maintained in accordance with [GAAP].” Id. § 4(C). In addition, each year “an audit and a certified financial statement covering all financial activities of the Gaming

Enterprise, including written verification of the accuracy of the quarterly Net Win calculation,

[must be prepared] by an independent certified public accountant licensed by the State.” Id. The financial statement “shall be prepared in accordance with [GAAP] and shall specify the total amount wagered in Class III Gaming on all Gaming Machines at the Tribe’s Gaming Facility for purposes of calculating ‘Net Win’ under Section 11 of this Compact using the format specified therein.” Id.

11. The 2007 Compact also provides for each Pueblo to “pay to the State a portion of its Class III gaming revenues” in exchange for “the exclusive right within the State to conduct all types of Class III Gaming described in this Compact,” with the “sole exception” of the limited use of Gaming Machines at racetracks and for veterans’ and fraternal organizations. Id. § 11(A). The

State’s right to these payments terminates if it “passes, amends, or repeals any law, or takes any other action, that would directly or indirectly attempt to restrict, or has the effect of restricting, the scope or extent of Indian gaming . . . .” Id. § 11(D)(1)(a).

7 Ex. 17, Letter from J. Robert Benavides, Governor, Pueblo of Isleta, to Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., at 4-5 (May 19, 2017); Ex. 18, Letter from Malcolm Montoya, Governor, Pueblo of Sandia, to Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., at 4 (May 19, 2017).

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12. The portion of each Pueblo’s Net Win paid to the State as revenue sharing is calculated as follows. The first step is to determine the “total amount wagered on . . . all Gaming

Machines . . . .” Id. § 11(C)(1). The financial statement prepared in accordance with GAAP under

§ 4(C) “specif[ies] the total amount wagered in Class III Gaming on all Gaming Machines at the

Tribe’s Gaming Facility for purposes of calculating ‘Net Win’ under Section 11 of this Compact using the format specified therein.” Id. Net Win is then calculated by deducting from the total amount wagered: the amount paid out in prizes won on Gaming Machines; the State’s regulatory costs; and the Pueblo’s regulatory costs. Id. § 11(C)(1)(a)-(c). The percentage of each Pueblo’s

Net Win to be paid to the State is shown on a chart set forth in § 11(C)(2) and is paid on a quarterly basis, with any over or under payments corrected in the fourth quarter, id. § 11(C)(3).

13. In 2014, the New Mexico State Auditor, acting under the State Audit Act, N.M.

Stat. Ann. §§ 12-6-1 to -14, reviewed the Board’s position on the “accounting treatment of ‘Free

Play’ in calculating and reporting revenue sharing payments from tribal gaming establishments under the 2001 and 2007 Tribal-State Class III Gaming Compacts” and reported the results of that review to the Board. Ex. 19, Letter from Hector H. Balderas, N.M. State Auditor, Office of State

Auditor (“OSA”), to Jeffrey S. Landers, Chair, N.M. Gaming Control Board, at 1 (Dec. 29, 2014)

(“OSA Letter”). The State Auditor noted that the Board “contends that Free Play gaming should either be accounted as virtual revenue to the casinos, or else any jackpots won on Free Play should not be counted as a gaming payout,” while “the Tribes . . . contend that GAAP require calculating

Net Win without adding virtual Free Play revenue” and that “their Net Win revenue share to the

State should be calculated by subtracting all gaming payouts disbursed to customers from all gaming revenues received from customers.” Id. at 4. Reviewing the parties’ positions, the State

Auditor acknowledged that “[t]he Compacts do not state that Free Play credits should be treated

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as virtual revenue, nor do they state that jackpots won with Free Play credits cannot be deducted to arrive at the Net Win figure.” Id. In addition, the State Auditor recognized that the Compacts

“require Tribes to keep all their books, records, and financial reporting ‘in accordance with

[GAAP],’” id. (citing 2001 and 2007 Compacts § 4(C)), and that “[b]y law, Tribes are also required to prepare financial statements and receive audits in accordance with GAAP.” Id. (citing 25 C.F.R.

§ 571.12). Finding that the AICPA “has issued guidance regarding GAAP in the gaming context” which “states that Free Play is not imputed revenue, nor should Free Play prizes be segregated,” id. at 5, he stated that: “It is the opinion of the OSA that the Tribes [sic] proposed method for calculating ‘Net Win’ revenue for financial reporting purposes is consistent with GAAP,” and that the Board’s “proposed methods of accounting for Free Play do not implement the AICPA guidance.” Id. Finally, the State Auditor observed that the Board could not effectuate its own position, stating:

the [Board’s] electronic gaming reporting system does not provide data to show which wagers were made with Free Play credits or which jackpots were won on Free Plays. The [Board] has failed to develop the data collection systems that would be required to account for Free Play in the way that [the Board] claims it is required to do so. As a result of this lack of data, the inputs cannot be precisely calculated and the [Board] has been forced to create ad hoc alternate methods, consisting either of treating Free Play credits as imputed revenue, or else statistically estimating Free Play prizes. These methods are not described or defined in the Compacts.

Id. at 5-6.

14. Each of the Pueblos and the State subsequently entered the 2015 Compact, which

“supplant[ed] and replac[ed]” the 2007 Compact, 2015 Compact § 9(A), with one exception: “the terms of any Predecessor Agreement . . . shall survive to permit the resolution of payment disputes” which “shall be resolved through the procedures set forth in Section 7 of th[e 2015]

Compact.” Id. § 9(B). The 2015 Compact expressly provides that “Free Play and Point Play do not

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increase Net Win, and amounts paid as a result of Free Play or Point Play reduce Net Win for purposes of the revenue sharing calculation in Section 11(C).” Id. App. § III(C).

15. Section 7 of the 2015 Compact has two subsections: § 7(A) provides that “if the

State believes that, prior to the Effective Date of this Compact, the Tribe has failed to comply with or has otherwise breached any provision of a Predecessor Agreement affecting payment, the State may invoke” the arbitration procedures described in § 7(A) “within two (2) years of the Effective

Date of this Compact, as permitted in Section 9(B)”;8 and § 7(B) provides that “[n]othing in

Subsection 7(A) shall be construed to waive, limit or restrict any remedy that is otherwise available to either party to enforce or resolve disputes concerning the provisions of this Compact.” The

Pueblos rely on § 7(B) in bringing this action to assert their right to bar Defendants’ claims under applicable federal law.

16. In reviewing the 2015 Compact under 25 U.S.C. § 2710(d)(8), the Secretary determined that the State’s position on the treatment of free play under the 2007 Compact violates

IGRA because including free play credits in the calculation of Net Win and revenue sharing payments is contrary to GAAP and that “the State’s unilateral determination to include such sums in revenue sharing calculations would constitute an impermissible tax on tribal gaming revenues in violation of IGRA.” Secretary’s Five Tribes Letter at 3. The Secretary took the same position on the 2015 Compact with the Pueblos of Isleta and Sandia, and most recently, with the Pueblo of

Pojoaque. Secretary’s Isleta Letter at 3; Secretary’s Sandia Letter at 2; Ex. 20, Letter from Gavin

Clarkson, Dep. Ass’t Sec’y, Policy & Econ. Dev.–Indian Affairs, to Joseph Talachy, Governor,

Pueblo of Pojoaque, at 2 (Oct. 23, 2017) (“Secretary’s Pojoaque Letter”). The Secretary ultimately

8 The 2007 Compact is a “Predecessor Agreement” under the terms of the 2015 Compact, because it is the “the last tribal-state Class III Gaming compact . . . entered into between the Tribe and the State preceding the execution of this Compact.” 2015 Compact § 2(S).

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decided to take no action on any of the Pueblos’ 2015 Compacts. Accordingly, each is “considered to have been approved by the Secretary, but only to the extent the compact is consistent with the provisions of [IGRA].” 25 U.S.C. § 2710(d)(8)(C); see supra at 3 & n.3; 82 Fed. Reg. 49,654 (Oct.

26, 2017) (Pojoaque).

17. On April 13, 2017, the Acting State Gaming Representative, acting on behalf of the

Defendants, sent letters to the Executive Director of each Pueblo’s Gaming Commission9 asserting that each Pueblo had “failed to comply with the requirements of Section 11 of the 2007 Compact related to the computation of ‘Net Win’ and the payment of revenue sharing,” and that “prizes awarded as a result of the use of ‘free play’ are not deductible unless the face value of the ‘free play’ is included in the calculation of the total amount wagered.” Board’s Letters at 1.10

18. On May 19, each Pueblo sent a letter to the Acting State Gaming Representative stating that the interpretation of the 2015 and 2007 Compacts set forth in the Board’s Letters violates IGRA and its regulations, had been rejected by the Secretary, was not subject to arbitration under the 2015 Compact, and was based on a misreading of the 2007 Compact. See Ex. 17 and 18.

19. On May 31, the Acting State Gaming Representative, acting on behalf of the

Defendants, sent letters to the Executive Director of each Pueblo’s Gaming Commission that purported to be “notices to cease conduct” under Section 7 of the 2015 Compact, and that

9 Ex. 21, Letter from Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., to Georgene Louis, Exec. Dir., Pueblo of Isleta Gaming Regulatory Agency (Apr. 13, 2017) (“Board’s Isleta Letter”); Ex. 22, Letter from Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., to Frank Paisano, Interim Exec. Dir., Sandia Tribal Gaming Comm’n (Apr. 13, 2017) (“Board’s Sandia Letter”) (collectively, Board’s Letters”). 10 Those letters also demanded additional revenue sharing payments from each Pueblo. For the reasons set forth herein, no additional payments in any amount are due to the State.

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demanded the Pueblos either pay the amount demanded by the State, or “invoke arbitration within

10 days of this notice,”11 which deadline the State subsequently extended to June 19, 2017.

20. On June 19, the Pueblos filed this action. ECF No. 1.

IV. DEFENDANTS’ UNILATERAL DEMAND THAT FREE PLAY BE TREATED AS REVENUE UNDER THE 2007 COMPACT VIOLATES FEDERAL LAW BECAUSE IT IS NOT AUTHORIZED BY IGRA AND BECAUSE FREE PLAY IS NOT REVENUE UNDER GAAP.

A. Whether Defendants’ Free Play Claim Violates Federal Law Must Be Decided Before The Defendants’ Motion On Arbitrability In Order To Protect The Federal Rights That Are The Subject Of This Action.

The instant motion should be decided before the Defendants’ Arb. Mot. for four reasons.

First, deciding this motion before Defendants’ motion is necessary to protect the federal rights that are the subject of this action. The Pueblos contend that Defendants’ free play claim is barred by federal law, and that the provisions of the 2015 Compact that Defendants assert preserve that claim and provide an arbitration remedy for its resolution are invalid and unenforceable. If that is correct, then the Defendants are pursuing a claim that violates federal law, under invalid and unenforceable provisions of the 2015 Compact. Citizen Potawatomi, 881 F.3d at 1236-38 (provisions of a Tribal-

State compact allowing arbitration of disputes and de novo review of arbitration awards in federal court are illegal under federal law and are therefore invalid and unenforceable).12 Second, because the Pueblos’ federal law claims are based on IGRA, and IGRA controls the scope and effectiveness of compact terms, id. at 1226; Pueblo of Santa Ana v. Nash, 972 F. Supp. 2d 1254, 1265-66

11 Ex. 23, Letter from Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., to Georgene Louis, Exec. Dir., Pueblo of Isleta Gaming Regulatory Comm’n [sic], at 3 (May 31, 2017); Ex. 24, Letter from Paulette Becker, Acting State Gaming Rep., N.M. Gaming Control Bd., to Tommy Simmons, Exec. Dir., Sandia Tribal Gaming Comm’n, at 3 (May 31, 2017). 12 Furthermore, the invalidity and ineffectiveness under federal law of the 2015 Compact provisions under which Defendants assert their free play claim could not be determined in arbitration because the 2015 Compact excludes from the arbitrators’ authority “any question as to the validity or effectiveness of this Compact or of any provision hereof.” Id. § 7(A)(3).

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(D.N.M. 2013), a ruling on those claims in favor of the Pueblos would make it unnecessary to consider Defendants’ contrary interpretation of the 2007 and 2015 Compacts. Third, Defendants’ arbitrability motion poses no hurdle to deciding the instant motion first because Defendants’ position is that “whether arbitration is the exclusive or one of many permissible avenues available for the parties to resolve their dispute is immaterial.” Defs.’ Reply in Supp. of Mot. for Summ. J. on the Issue of Arbitrability at 2 (“Arb. Reply.”), ECF No. 62. Fourth, Defendants’ have also conceded that this action was filed before they invoked arbitration, id. at 5 (conceding all of the

Pueblos’ Supp’l Statement of Undisputed Material Facts (“SSUF”), see Pls.’ & Pls.-in-

Intervention’s Resp. in Opp. to Defs.’ Mot. for Summ. J. on the Issue of Arbitrability at 5 (“Arb.

Resp.”), ECF No. 58, including ¶¶7 and 8, which so state), and that the Secretary concluded after reviewing the 2015 Compact that it would be contrary to GAAP to include free play credits in the calculation of Net Win under the 2007 Compact, and that the State’s unilateral demand to do so would constitute an illegal tax on tribal gaming revenues in violation of IGRA, id. (conceding the

Pueblos’ SSUF ¶10, which so states).13 The latter concession merges the merits of this case with the arbitrability issue because if the Secretary’s determination is correct as a matter of law, then

Defendants’ pursuit of their free play claim through arbitration violates federal law. And the Tenth

13 The Pueblos’ SSUF ¶10 states as follows: When the 2015 Compact was before the Secretary for the required statutory review, the Secretary concluded that the treatment of free play as revenue under the 2007 Compact would violate IGRA because it would be contrary to [GAAP] to include free play credits in the calculation of Net Win, and that “the State’s unilateral determination to include such sums in revenue sharing calculations would constitute an impermissible tax on tribal gaming revenues in violation of IGRA.” See [Secretary’s Five Tribes Letter at 3]. The Secretary took the same position in her determination on the 2015 Compact with the Pueblos who brought this action. See, e.g., [Secretary’s Isleta Letter at 3; Secretary’s Sandia Letter at 2; Secretary’s San Felipe Letter at 2]. Arb. Resp. at 5.

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Circuit has made clear that when “the merits of the claim are bound up with the question of arbitrability” “the court’s duty to determine whether the party intended the dispute to be arbitrable trumps its duty to avoid reaching the merits.” Commc’n Workers of Am. v. Avaya, Inc., 693 F.3d

1295, 1300 (10th Cir. 2012).

B. Federal Law Secures To The Pueblos The Right To Be Free From State Taxation And Regulation, Except As Negotiated And Expressly Agreed In A Compact That Comports With IGRA.

The Pueblos’ rights to conduct gaming free from State taxation and regulation are held under settled federal law. In Cabazon, the Supreme Court held that “States lacked any regulatory authority over gaming on Indian lands,” Michigan v. Bay Mills Indian Cmty., 134 S. Ct. 2024,

2034 (2014) (citing Cabazon, 480 U.S. at 221-22), and reaffirmed that under the “per se rule,”

State taxation of Indian tribes is permitted only when “Congress has made its intention to

[authorize such taxation] unmistakably clear.” Cabazon, 480 U.S. at 215 n.17 (quotation omitted).

And in enacting IGRA, Congress expressly made these principles applicable to gaming conducted under a Tribal-State compact.14 IGRA provides that, except for assessments agreed upon to defray

State regulatory costs under 25 U.S.C. § 2710(d)(3)(C)(iii), nothing in IGRA gives States authority

14 The Senate Committee Report on IGRA explains how and why Congress did so as follows: Consistent with [the principles of federal Indian law], the Committee has developed a framework for the regulation of gaming activities on Indian lands which provides that in the exercise of its sovereign rights, unless a tribe affirmatively elects to have State laws and State jurisdiction extend to tribal lands, the Congress will not unilaterally impose or allow State jurisdiction on Indian lands for the regulation of Indian gaming activities. The mechanism for facilitating the unusual relationship in which a tribe might affirmatively seek the extension of State jurisdiction and the application of state laws to activities conducted on Indian land is a tribal-State compact. In no instance, does [the draft IGRA] contemplate the extension of State jurisdiction or the application of State laws for any other purpose. S. Rep. No. 100-446, at 5-6 (1988), reprinted in 1988 U.S.C.C.A.N. 3071, 3075-76.

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to “impose any tax, fee, charge, or other assessment upon an Indian tribe . . . .” Id. § 2710(d)(4).

IGRA further provides that State laws and State jurisdiction have no application to gaming conducted under a compact unless the Tribe affirmatively agrees to the application of State laws

“directly related to, and necessary for, the licensing and regulation of such activity,” and to the application of State jurisdiction that is “necessary for the enforcement of such laws and regulations

. . . .” Id. § 2710(d)(3)(C)(i)-(ii).

Accordingly, each Pueblo has a federal right to be free from State taxation and regulation of its gaming activities except to the extent it has negotiated and agreed to compact terms that otherwise provide and that also comport with IGRA. Compact provisions that are contrary to

IGRA’s requirements are invalid. “A gaming compact is a creation of the IGRA, which determines the compact’s effectiveness and permissible scope,” Nash, 972 F. Supp. 2d at 1265 (citing

Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 49 (1996)), and therefore “the negotiated terms of the Compact cannot exceed what is authorized by IGRA,” id. at 1266.

C. The Secretary Has Determined That Defendants’ Unilateral Demand That Free Play Be Treated As Revenue And Revenue Sharing Be Paid On Its Use Violates IGRA.

The Secretary of the Interior has already determined that Defendants’ claim under the 2007

Compact, “that the Tribes’ net win – and, thus, their revenue sharing payments – should include wins and losses arising from free play or point play” violates IGRA. Secretary’s Five Tribes Letter at 3. Reviewing the 2015 Compact under 25 U.S.C. § 2710(d)(8), the Secretary determined that it would be contrary to GAAP and inconsistent with IGRA to include free play credits in the calculation of Net Win and the payment of revenue sharing, and concluded that “the State’s unilateral determination to include such sums in revenue sharing calculations would constitute an impermissible tax on tribal gaming revenues in violation of IGRA.” Id. The Secretary took the same position under the 2015 Compact with the Pueblos of Isleta and Sandia, Secretary’s Isleta

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Letter at 3; Secretary’s Sandia Letter at 2, and, most recently, Pojoaque, Secretary’s Pojoaque

Letter at 2 & n.6.

Because the Secretary ultimately did not act on any of the 2015 Compacts, each is

“considered to have been approved . . . only to the extent the compact is consistent with the provisions of [IGRA].” Id. § 2710(d)(8)(C). See supra at 3 & n.3, 11. And because the Defendants’ assertion that free play must be treated as revenue under the 2007 Compact is “inconsistent with the provisions of [IGRA],” the provisions of the 2015 Compact that Defendants rely on to preserve that claim and provide an arbitration remedy for its resolution are invalid and ineffective. IGRA

“determines a gaming compact’s effectiveness and permissible scope,” Citizen Potawatomi, 881

F.3d at 1226 (citing Seminole Tribe, 517 U.S. at 49), and the arbitration provisions of a compact that are contrary to federal law are invalid and unenforceable, id. at 1236-38.

D. Treating Free Play As Revenue And Paying Revenue Sharing On Its Use Plainly Violates Federal Law Because It Is Not Authorized By IGRA And Is Contrary To GAAP.

The Secretary’s determination that federal law bars the Defendants’ free play claim is manifestly correct. And federal law compels the same result even without it. First, Defendants’ free play claim violates IGRA’s prohibition on the imposition of State assessments on Indian gaming, 25 U.S.C. § 2710(d)(4), and the federal law rule barring state taxation of Indian tribes, because that claim is based on a unilateral demand, made by Defendants years after the parties negotiated and agreed to the 2007 Compact, that is unsupported by the Compact’s text and is contrary to the Compact’s express terms, which require compliance with GAAP in accounting for all gaming revenues. Such a claim cannot satisfy the strict limits IGRA imposes on payments to a

State under a compact. Second, federal law requires each Pueblo to account for its gaming revenues in accordance with GAAP. Treating free play as revenue violates GAAP and therefore violates the

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federal law that mandates its use.15 Accordingly, the provisions of the 2015 Compact that the State relies on to assert its free play claim are invalid and ineffective.

1. Defendants’ demand that free play be treated as revenue in calculating payments to the State under the 2007 Compact violates federal law because it is not authorized by IGRA.

Payments to a State under a compact are valid only if such payments were negotiated and agreed to by the Tribe and fall within the limits IGRA imposes on compact negotiations.

“[N]othing in IGRA can reasonably be construed as conferring on states the power to impose anything; all the states are empowered to do is negotiate.” Rincon Band of Luiseno Mission Indians of Rincon Reservation v. Schwarzenegger, 602 F.3d 1019, 1030-31 (9th Cir. 2010). IGRA permits only two types of payments to be negotiated and agreed upon in a compact: payments assessed by the State “in such amounts as are necessary to defray the costs of regulating” gaming activity, 25

U.S.C. § 2710(d)(3)(C)(iii), and, in certain circumstances, payments required by provisions dealing with “other subjects that are directly related to the operation of gaming activities,” id. §

2710(d)(3)(C)(vii).16 The theory on which revenue sharing payments to States are in some circumstances allowed “[i]s that the parties negotiated a bargain permitting such payments in

15 In addition to the specific GAAP rule mandating the disregard or free play for purposes of gaming revenue determination discussed infra at V.D.2., free play cannot be characterized as revenue under a GAAP conceptual framework because it does not represent “actual or expected cash in-flows.” Mintzer Report ¶¶28-29. And if free play cannot be reasonably classified as “revenue,” each Pueblo’s obligation to pay “a portion of its Class III gaming revenues” to the State in consideration of limited exclusivity under Section 11.A of the 2007 Compact cannot include free play either. 16 See Rincon Band, 602 F.3d at 1033 (a state may seek to negotiate revenue sharing in a compact for uses that are “directly related to the operation of gaming activities”; consistent with the purposes of IGRA; and exchanged for a meaningful concession rather than imposed); Wisconsin v. Ho-Chunk Nation, 512 F.3d 921, 932 (7th Cir. 2008) (IGRA authorizes negotiation of State regulatory assessments under § 2710(d)(3)(C)(iii), and contains a “general catchall,” § 2710(d)(3)(C)(vii); states and tribes have avoided the “prohibitory language in § 2710(d)(4) by having . . . payments to the state serve as consideration for the tribe’s exclusive operation of its gaming, rather than the ability to engage in class III gaming itself.”). The Pueblos are not challenging the validity of the revenue sharing provisions of the 2015 Compact in this action.

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return for meaningful concessions from the state (such as a conferred monopoly or other benefits).”

Idaho v. Shoshone-Bannock Tribes, 465 F.3d 1095, 1101 (9th Cir. 2006) (citing In re Indian

Gaming Related Cases, 331 F.3d 1094, 1111-14 (9th Cir. 2003)).

All payment provisions in a compact are subject to approval by the Secretary under IGRA,

25 U.S.C. § 2710(d)(3)(B), (d)(8), and the Secretary

has sharply limited the circumstances under which Indian tribes can make direct payments to a State for purposes other than defraying the costs of regulating Class III gaming activities. To date, we have only approved payments to the State where the tribe obtains substantial economic benefits in return for the payments.”

P. Hart Letter. Accordingly, to be valid, any payment made to a State under a compact must fall within the narrow limits set by IGRA and the Secretary. Any other state assessment is barred by

25 U.S.C. § 2710(d)(4) (denying States authority to “impose any tax, fee, charge, or other assessment upon an Indian tribe”), and the per se rule. Cabazon, 480 U.S. at 215 n.17.

Defendants’ free play claim fails because it is based on a unilateral demand, made years after the 2007 Compact was negotiated and agreed upon by the parties. A State is required to negotiate a compact in good faith, 25 U.S.C. § 2710(d)(3)(A), and for a payment to a State to be valid under

IGRA, its terms must be within the permissible scope of a compact, see id. § 2710(d)(3)(C), must have been negotiated by the parties, id. § 2710(d)(3)(A), and agreed to in the compact, id. §

2710(d)(3)(B). These requirements can be satisfied only by a clear statement in the compact. A payment claim cannot be imposed retroactively, based on a new interpretation of the compact. The

2007 Compact does not even mention free play, see OSA Letter at 4 (“[t]he [2001 and 2007]

Compacts do not state that Free Play credits should be treated as virtual revenue”), much less show that treating free play as revenue comports with IGRA. Defendants’ assertion that if free play is not treated as revenue, prizes won on free play cannot be deducted in determining Net Win, fails for the same reasons. If the use of free play were to trigger that penalty, the compact would have to say so,

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in terms that comport with IGRA. It does not. See id. at 4 (the 2001 and 2007 Compacts do not state that “jackpots won with Free Play credits cannot be deducted to arrive at the Net Win figure”).

Indeed, “the [Board’s] electronic gaming reporting system does not provide data to show which wagers were made with Free Play credits or which jackpots were won on Free Plays.” Id. at 5. And while the Board has “create[d] ad hoc alternate methods, consisting either of treating Free Play credits as imputed revenue, or else statistically estimating Free Play prizes,” “[t]hese methods are not described or defined in the Compacts.” Id. at 6.

By contrast, the terms of the 2007 Compact that were negotiated and agreed upon by the parties require each Pueblo to account for its gaming revenues in accordance with GAAP, id. §

4(C); OSA Letter at 4, under which free play may not be treated as revenue, AICPA Gaming Guide

§ 6.13; Mintzer Report ¶¶35-36; OSA Letter at 5. Because Defendants’ free play claim is based on an interpretation of the 2007 Compact advanced years after it was negotiated and agreed upon, and is both unsupported by and contrary to the 2007 Compact’s express terms, it constitutes an illegal attempt to impose a tax or other assessment on an Indian tribe that violates 25 U.S.C. §

2710(d)(4) and the federal law bar on state taxation of Indian tribes. Cabazon, 480 U.S. at 215 n.17.17

17 Defendants cannot avoid the federal law bar on state taxation of Indian tribes simply by calling their claim a revenue sharing payment. First, Defendants’ free play claim is not authorized by IGRA. See supra at 14-19. Second, whether a state exaction is a “tax” for purposes of tribal immunity from state taxation is to be determined under federal law in light of its “substance and application,” see Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 565 (2012) (quoting United States v. Constantine, 296 U.S. 287, 294 (1935)); accord City of Detroit v. Murray Corp. of Am., 355 U.S. 489, 492-93 (1958), and practical operation, not how the State describes the demand, Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 188 (1980) (Rehnquist, J., concurring in part & dissenting in part). “A tax is ‘a charge, usu[ally] monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue.’” Rincon Band, 602 F.3d at 1029 (quoting Black’s Law Dictionary 1594 (9th ed. 2009)). Defendants’ free play assessment is a tax because its purpose is to obtain a fixed percentage of the nominal value of the Pueblos’ free play as general State revenue, which is the quintessential form

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2. Treating free play as revenue violates federal law because doing so is contrary to GAAP.

Even if Defendants’ free play claim were otherwise plausible, it is barred by the federal law that requires each Pueblo to account for its gaming revenues in conformance with GAAP. Federal law has required Indian tribes to maintain their gaming records and account for their gaming revenues in accordance with GAAP since 1993. See 25 C.F.R. 571.12(b) (2015) (audit standards requiring that “[f]inancial statements prepared by the [tribe’s] certified public accountant shall conform to [GAAP] and the annual audit shall conform to generally accepted auditing standards”);

58 Fed. Reg. at 5843 (promulgating regulations requiring GAAP in 1993); OSA Letter at 4; see also

25 C.F.R. § 542.19(b) (imposing MICS for accounting, and requiring that “[e]ach gaming operation shall prepare general accounting records according to [GAAP]”); 71 Fed. Reg. at 27,392

(establishing MICS for accounting for Class III Gaming). And in compliance with federal law, each

Pueblo’s regulations require compliance with GAAP, Isleta Reg. 6.21; Sandia Reg. 14.2, and incorporate the NIGC’s MICS, Isleta Reg. 13.2; Sandia Reg. 12.1.18

The reporting procedures required by GAAP are defined in the AICPA Gaming Guide, which is the judicially-recognized source of GAAP for Indian gaming, see Sault Ste. Marie Tribe,

475 F.3d at 813, and on which the NIGC relies to establish its own standards.19 See NIGC, Bull.

and purpose of taxation. Dep’t of Revenue v. Kurth Ranch, 511 U.S. 767, 779-80 (1994) (taxes are “usually motivated by revenue-raising . . . purposes”); see New York v. United States, 505 U.S. 144, 171 (1992) (federal levy on waste transmission, calculated as percentage of state surcharge, is “no more than a federal tax on interstate commerce”). 18 Because 25 C.F.R. § 542.19 was not promulgated until 2006, see 71 Fed. Reg. at 27,385, the District of Columbia Circuit’s ruling in Colorado River Indian Tribes v. NIGC, 466 F.3d 134 (D.C. Cir. 2006), did not address its validity. Colorado River held that the NIGC had exceeded its authority in promulgating MICS in 1999 governing the operation of Class III gaming. Section 542.19 was not before the court and was thus not addressed in the decision. And even if § 542.19 were not applicable of its own force, the Pueblos’ regulations adopting the NIGC’s MICS make it binding on the Pueblos’ accounting practices. 19 This Court can take judicial notice of standards published by accounting industry organizations like the AICPA. See SEC v. Goldstone, 952 F. Supp. 2d 1060, 1221 (D.N.M. 2013) (taking notice of

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No. 2003-4, Audit Requirements for Gaming Operations/Gross Gaming Revenue Computation

(2003) (relying on the AICPA Industry Audit and Accounting Guide-Audits of Casinos definition of “gross gaming revenue” to find that the NIGC definition of “gross gaming revenue,” see 25

C.F.R. § 542.2, “is consistent with the professional pronouncement”); see also 25 C.F.R. §

542.3(f)(1)(iii)(A) (relying on “AICPA’s ‘Audit of Casinos’ Audit and Accounting Guide” to require that casino cage and count room observations not be announced in advance). The fact that the AICPA Gaming Guide provides the authoritative source of GAAP for Indian gaming and free play in particular is confirmed by the Mintzer Report ¶¶13, 22, and was earlier recognized by the

State Auditor, OSA Letter at 5.

Under GAAP, free play credits are not revenue and are not included in the calculation of

Net Win, i.e., gross gaming revenue. Mintzer Report ¶¶29-32; OSA Letter at 5. The AICPA

Gaming Guide expressly provides that the use of free play20 by patrons

will not trigger accounting recognition because revenue is measured based on an aggregate daily (or shift) basis, rather than on a per bet or per customer basis. Because revenue is the net win from gaming activities, the use of the benefit [i.e. free play] has no effect on the reporting of net win or loss from gaming activities.

Id. § 6.13 (emphasis added).21 This means that

documents produced by Financial Accounting Standards Board, which develops accounting standards “in conjunction” with the AICPA, Frequently Asked Questions About the AICPA, AICPA, http://www.aicpa.org/About/FAQs/Pages/default.aspx#aicpa_answer12 (last visited Apr. 5, 2018)). And AICPA documents are typically relied upon by federal courts in the Tenth Circuit to determine GAAP and accounting standards. See Deephaven Private Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168, 1174 (10th Cir. 2006); In re Imergent Sec. Litig., No. 2:05-CV-204, 2009 WL 3731965, at *7-8 (D. Utah Nov. 2, 2009); see also New Jersey v. Sprint Corp., 314 F. Supp. 2d 1119, 1146 n.24 (D. Kan. 2004). 20 AICPA Gaming Guide defines free play as “[f]ree wagering offered by a gaming entity to provide cashable benefits that increase the customer’s odds of winning, changing the basic odds of the game.” Id., glossary. 21 The prior edition of the AICPA Gaming Guide took the same position, in the same language. Mintzer Report ¶23, 35.

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if a customer bets $5 of his or her own cash and wins $1, the gaming entity reports revenue of $4. If a customer bets $5 of his or her own cash, uses $5 of credits from his or her club card, and wins $1, the gaming entity reports revenue of $4.

Id. Because free play does not trigger accounting recognition, it also makes no difference whether a prize is won using free play or cash. All prizes are deducted in determining each Pueblo’s “win,” which is “the difference between gambling wins and losses before deducting costs and expenses.”

Id., glossary (defining “win”).22 These definitions all acknowledge the same simple truth: revenue that has been paid out to patrons who win a prize on a Gaming Machine cannot be treated as if that payout remains in the till. See Mintzer Report ¶38. Thus, Defendants’ alternative claim - that if free play is not treated as revenue, prizes won on free play may not be deducted in determining each Pueblo’s Net Win – also fails.

In sum, Defendants’ free play claim is barred by the provisions of federal and tribal law that require each Pueblo to account for its gaming revenues in conformance with GAAP.

3. Defendants’ claim that the 2007 Compact does not require that each Pueblo’s Net Win be calculated in accordance with GAAP is baseless.

Defendants seek to avoid the controlling effect of GAAP on the treatment of free play by contending that “the 2007 Compact contains no provision that states or infers that the parties are to utilize GAAP for the calculation of ‘Net Win’.” Board’s Letters at 2. In the Defendants’ view, the calculation of Net Win for the purposes of making quarterly payments to the State is governed by § 11(C)(1), and “[t]here is no language in Section 11.C.1 that permits a deduction for ‘free play’” or any provision that “compels the parties to utilize some ‘industry standard’ for calculating

‘Net Win’ that is not provided for in the 2007 Compact.” Id. at 4. These contentions are rejected

22 This comports with the NIGC definition of gross revenue for gaming machines which “equals drop, less fills, jackpot payouts and personal property awarded to patrons as gambling winnings.” 25 C.F.R. § 542.19(d)(2); see also Mintzer Report ¶¶6, 38.

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by federal law and Compact provisions that clearly dictate otherwise, as the State Auditor recognized in 2014. OSA Letter at 4-5.

In the first place, even if Defendants’ were correct, it would make no difference because

IGRA and tribal law require the Pueblos to comply with GAAP in accounting for all gaming revenues, and compact terms that are contrary to IGRA are invalid. Nash, 972 F. Supp. 2d at 1266

(“the negotiated terms of the Compact cannot exceed what is authorized by the IGRA”); see

Kennerly v. Dist. Ct., 400 U.S. 423, 428-29 (1971) (per curiam) (tribal consent to concurrent state court jurisdiction invalid for failure to comply with federal regulatory scheme for authorizing extension of state court jurisdiction over Indians in Indian country); Pueblo of Santa Ana v. Kelly,

104 F.3d 1546, 1550, 1553-55 (10th Cir. 1997) (Tribal-State gaming compact invalid for failure to comply with IGRA even though it had been approved by the Secretary under IGRA).

Second, Defendants’ assertion that the 2007 Compact does not require each Pueblo to conform with GAAP in calculating Net Win for purposes of determining the amount to be paid to the State as revenue sharing is flatly wrong. The starting point in determining each Pueblo’s Net

Win is to determine the “total amount wagered” on Gaming Machines. Id. § 11(C)(1). That determination is made under § 4(C) of the 2007 Compact, which requires that a “financial statement shall be prepared in accordance with [GAAP] and shall specify the total amount wagered in Class III Gaming on all Gaming Machines at the Tribe’s Gaming Facility for purposes of calculating ‘Net Win’ under Section 11 of this Compact using the format specified therein.” Id.

(emphasis added). The accuracy of the Net Win calculation is also confirmed on a quarterly basis by “an audit and a certified financial statement covering all financial activities of the Gaming

Enterprise, including written verification of the accuracy of the quarterly Net Win calculation,

[prepared annually] by an independent certified public accountant licensed by the State.” Id.

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(emphasis added). This language explicitly requires compliance with GAAP in calculating Net

Win under § 11 of the 2007 Compact and in confirming the accuracy of that calculation on a quarterly basis, and GAAP directs that free play may not be treated as revenue. Consequently, it is not necessary for the 2007 Compact to specifically require that free play be deducted from Net

Win, or that it compel application of an industry standard for that purpose. Board’s Letters at 2.

Because free play is not included in Net Win in the first place, it is not necessary to exclude it.

To determine each Pueblo’s Net Win, the following deductions are made from the total amount wagered: the amount paid out in prizes to winning patrons, id. § 11(C)(1)(a); the State’s regulatory costs, id. § 11(C)(1)(b); and the Pueblo’s regulatory costs, id. § 11(C)(1)(c). Defendants assert that under § 11(C)(1)(a), prizes won by a patron using a free play credit are not deductible if free play is not treated as revenue. But the 2007 Compact contains no such condition. Instead, the first sentence of § 11(C)(1)(a) requires that “the amount paid out in prizes to winning patrons, including the cost to the Tribe of noncash prizes, won on Gaming Machines” be deducted in calculating Net Win. Id. That deduction necessarily includes all payouts to patrons who win a prize on a Gaming Machine – whether play is initiated with cash or a free play credit – because winners are paid off either “automatically from the Gaming Machine or in any other manner.” Id. § 2(F).

Net Win under GAAP and under any reasonable construction of the Compact’s text is a measure of the value retained in the machine as the result of gaming activity. Mintzer Report ¶¶32, 38.

Monies that are paid out to winners cannot be treated as part of each Pueblo’s Net Win.

Defendants next contend that the second sentence of § 11(C)(1)(a) only permits the deduction of prizes won on cash wagers. But in context with two sentences immediately following, the second sentence simply confirms that gambling winnings paid out to patrons are deductible, while the next two sentences show that other prizes are not. The second sentence provides that

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“[t]he phrase ‘won on Gaming Machines’ means the patron has made a monetary wager, and as a result of that wager, has won a prize of any value.” Id. As a free play credit is accepted as a cash equivalent by Gaming Machines, prizes won using a free play credit are deductible. In contradistinction, the third and fourth sentences provide that neither “rewards, awards or prizes, in any form, received by or awarded to a patron under any form of a players’ club program (however denominated) or as a result of patron-related activities,” nor “[t]he value of any complimentaries given to patrons, in any form,” are deductible in determining Net Win. See generally NLRB v. Noel

Canning, 134 S. Ct. 2550, 2596 (2014) (“sensible interpretation” of Constitution “should start by recognizing” when terms are used “in contradistinction” to each other.) In short, all prizes won by a patron playing a Gaming Machine are deductible, while rewards, awards, or prizes given to patrons selected in a manner not involving Gaming Machine play are not. As the 2007 Compact elsewhere makes clear that cash or a free play credit may be used to initiate play on a Gaming

Machine, id. § 2(F), that interpretation also adheres to the principles that a “writing is interpreted as a whole,” Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59 (1995) (quoting

Restatement (Second) of Contracts § 202(2) (1979)), and that “no part of the contract can be isolated and interpreted distinctly from the rest of the contract,” Crow v. Capitol Bankers Life Ins.

Co., 1995-NMSC-018, ¶31, 119 N.M. 452, 891 P.2d 1206 (citing Madawick Contracting Co. v.

Travelers Ins. Co., 120 N.E.2d 520, 523 (N.Y. 1954)).

In any event, the term “monetary wager” cannot be read to deny the deductibility of jackpots won on a free play credit because that would be contrary to GAAP and therefore in violation of federal law. See supra at 20-22. It would also be contrary to the GAAP-based NIGC definition of “gross revenue” for gaming machines, which “equals drop, less fills, jackpot payouts and personal property awarded as gambling winnings.” 25 C.F.R. § 542.19(d)(2) (emphasis

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added); see also Mintzer Report ¶¶32-34. “[W]here a contract is fairly open to two constructions, by one of which it would be lawful and the other unlawful, the former must be adopted.” Hobbs v.

McLean, 117 U.S. 567, 576 (1886). See Walsh v. Schlecht, 429 U.S. 401, 408 (1977) (interpreting clause in collective bargaining agreement not to violate federal law, “[s]ince a general rule of construction presumes the legality and enforceability of contracts, [and] ambiguously worded contracts should not be interpreted to render them illegal and unenforceable where the wording lend itself to a logically acceptable construction that renders them legal and enforceable”) (citation omitted).

Finally, the State’s share of each Pueblo’s Net Win is then determined by reference to the chart set forth in § 11(C)(2), and is paid to the State on a quarterly basis. 2007 Compact § 11(C)(3).

Each payment “shall be based upon the Net Win during the preceding quarter” as well as the prior year’s Net Win and applicable revenue sharing percentage, and the Pueblo’s best estimate of the

Net Win for the current year. Id. In each fourth quarterly payment, each Pueblo corrects any over or under payments by either paying any additional amount due for the first three quarters or showing a credit in the amount of overpayment. Id. And as earlier recited, the final determination of the accuracy of the quarterly Net Win calculation is controlled by § 4(C), which requires that

“an audit and a certified financial statement covering all financial activities of the Gaming

Enterprise, including written verification of the accuracy of the quarterly Net Win calculation,

[must be prepared each year] by an independent certified public accountant licensed by the State.”

(emphasis added). Because GAAP controls that determination, free play cannot be treated as revenue. See supra at 20-22; OSA Letter at 5.

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4. Because the Defendants’ free play claim is barred by federal law, it is invalid and cannot be pursued.

Because treating free play as revenue under the 2007 Compact and paying revenue sharing on its use violates federal law, the provisions of §§ 7(A) and 9(B) of the 2015 Compact that provide the State a period of two (2) years to assert payment claims under the 2007 Compact are invalid and ineffective to preserve that claim or to provide an arbitration forum for its resolution. See supra at 15-16.23

V. CONCLUSION

For the foregoing reasons, the Pueblos respectfully request that the Court grant summary judgment in favor of the Pueblos and enjoin the Defendants, and any of their agents, officers, employees, or representatives, from continuing their efforts to: (a) impose a tax or other assessment on the Pueblos in violation of federal law in the guise of asserting a claim for additional revenue sharing payments under the 2015 and 2007 Compacts; (b) treat free play as revenue, which is contrary to GAAP and therefore contrary to federal law; and (c) arbitrate the dispute over that effort under the 2015 Compact or under any provision of the 2007 Compact.

Dated: April 10, 2018 By: /s/ David C. Mielke David C. Mielke, Esq. Sonosky, Chambers, Sachse, Mielke & Brownell, LLP 500 Marquette Avenue NW, Suite 660 Albuquerque, NM 87102 (505) 247-0147 [email protected]

Douglas B. L. Endreson, Esq. Frank S. Holleman, Esq. Sonosky, Chambers, Sachse, Endreson & Perry, LLP

23 The Defendants’ contention that if they cannot arbitrate their claim, they will have no remedy, see Arb. Reply at 5 n.1, fails because there is no remedy for a claim that violates federal law, or is contrary to the compact’s plain terms.

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1425 K St NW, Suite 600 Washington, DC 20005 (202) 682-0240 [email protected] [email protected]

Attorneys for Pueblo of Isleta and Pueblo of Sandia

CERTIFICATE OF SERVICE

I hereby certify that on April 10, 2018, I caused the foregoing document and all attachments to be filed using CM/ECF, which caused all parties or counsel to this case to be served by electronic means, as more fully reflected on the Notice of Electronic Filing.

/s/ David C. Mielke

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