State appeals court overturns large award against tribe, citing federal law

A state appellate court has ruled that a decade-old case against a California gaming tribe is preempted by federal law and should never have gone to trial, overturning a $30 million-plus verdict.

In a decision issued on Friday, a three-judge panel with the 3rd District Court of Appeal said unanimously that El Dorado County Superior Court erred when it agreed to hear a lawsuit by Sharp Image Gaming Inc.

The appeals court found that plaintiff failed to puncture the tribe’s sovereign immunity because the two contracts in question were never approved by the federal National Indian Gaming Commission. Such approval is required by the Indian Gaming Regulatory Act. Sharp Image Gaming, Inc. v. Shingle Springs Band of Miwok Indians, 2017 DJDAR 9165.

The ruling, written by Justice William J. Murray, overturns the judgment, and entitles the Shingle Springs Band of Miwok Indians to seek costs on appeal. Justices George Nicholson and Elena J. Duarte also sat on the panel.

“It is unusual for a case to take 10 years to be dismissed on an issue that was raised at the outset,” said Mary Kay Lacey, formerly with Denton’s, who served as counsel of record for the tribe. “The nub of the decision is that the state court is obligated to do what common sense and the law would dictate: defer to the federal agencies in charge of regulating Indian gaming.”

The origins of the case date back to 1996, when Sharp signed a contract to invest in a casino on the tribe’s land and serve as the exclusive provider of slot machines. That facility operated briefly but was shut down due to multiple issues, including the lack of a tribal compact with California regulators.

The tribe later rejected a new partnership offer from Sharp Image. Instead it worked with a different developer to open the 2,200 slot machines at Red Hawk Casino in Placerville, near Sacramento.

Sharp Image sued in 2007. The tribe raised federal preemption during multiple motions to dismiss. Judges in the case rejected these arguments and barred related evidence from trial. A jury sided with Sharp Image in 2011.

The tribe would have been on the hook for more than $50 million once interest was added to the original verdict, said James M. Wagstaffe, a partner with Kerr & Wagstaffe LLP in San Francisco. Wagstaffe was part of Shingle Springs’ legal team, focusing on preemption issues.

Dentons US also represented the tribe.

Indian gaming is heavily regulated by the federal government, he said, in order to ensure that gaming tribes aren’t taken advantage of in management contracts.

“They [the plaintiffs] made the decision to stay away from federal court and hope that a state court judge would see this as a regular contract,” Wagstaffe said. “This [El Dorado County] judge probably had this issue once in his career. Federal courts deal with this all the time.”

El Dorado County Superior Court Judge Nelson Keith Brooks claimed federal review wasn’t necessary, since the tribe had repudiated the contract. He also ruled that when federal officials did reject the contract in 2009, it didn’t constitute a legally binding “final agency action.”

One important point in the long-running case came in 2013, when attorneys from the U.S. Justice Department filed an amicus brief siding with the tribe. It dismissed the Brooks’ reasoning as “a non sequitur.”

Attorney Sanford I. Millar, who was not involved in the lawsuit, said the case may also be an example of something he has seen in his career: a company assuming a tribe is “unsophisticated.” Millar is a tax attorney with MillarLaw APC in Los Angeles and has worked extensively on tribal issues.

“One thing I’ve learned in dealing with tribes is they are exceptionally cautious and they understand the rules under which they operate better than anybody,” he said.

An attorney representing Sharp Image with DLA Piper LLP could not be reached for comment.