Procurement Opportunities in the Gaming Sector: A Good Bet for Those Who Play By the Rules

by Andrew F. Upton and Jonathan M. Silverstein

Practice Tips

Introduction

Establishment of casino gaming in Massachusetts was the subject of a passionate debate. But the Legislature has acted and casinos are in Massachusetts to stay. The Massachusetts Gaming Commission has issued three licenses—full casino licenses to Wynn Resorts in Everett and MGM in Springfield, and a “slots-only” license to Penn National Gaming in Plainville—and is considering applications for the fourth license in the southeastern region of the state.

In addition, the Commission has promulgated regulations covering the gaming industry in Massachusetts.  The opportunities for vendors to provide goods and services under these regulations are extensive and will remain so for years to come.

The licensed casinos are expected to purchase an enormous variety of locally-supplied goods and services totaling between $150 and $200 million annually, from tomatoes to toilet paper, and from limousines to linen supply.

Although the opportunities for Massachusetts vendors to supply goods and services to casinos is substantial, so too is the regulatory burden imposed on such vendors. This article will provide an overview of the process and the issues to which attorneys should pay particular attention.

Statutory Overview

In November 2011, Governor Patrick signed into law the Expanded Gaming Act (“Act”), which included a new Chapter 23K of the General Laws.  Among the stated goals of the Act are providing “new employment opportunities” and “promoting local small businesses and the tourism industry.” G.L. c.23K, §1(5)-(6).

However, the Act also emphasizes integrity in the licensing process.  This emphasis extends from vendors to casinos.   Under the Act, “[n]o person shall conduct business with a gaming licensee unless such person has been licensed or registered with the commission.”  G.L. c.23K, §31(a).  The Act creates two broad classes of vendors – gaming vendors and non-gaming vendors.  Gaming vendors, those who make and service gaming and simulcasting equipment, must be licensed by the Commission, whereas non-gaming vendors are subject only to registration with the Commission.  Because manufacturers and servicers of gaming equipment are well-established in the marketplace, this overview will focus on non-gaming vendors – a key area of opportunity for Massachusetts businesses.

Vendors

A “non-gaming vendor” provides goods or services “not directly related to games” such as food purveyors or suppliers of the many non-gaming items that a large, destination resort needs to operate.  Non-gaming vendors are required to register with the Commission.

A “secondary gaming vendor” also provides goods and services unrelated to gaming, but in amounts exceeding $250,000 in a twelve month period or $100,000 in a three-month period.  Secondary Gaming Vendors must be licensed by the Commission.  If the Commission determines that a non-gaming vendor “has met or is reasonably likely to meet the thresholds” for sales volume, it will notify the non- gaming vendor of the need to apply for licensure as a secondary gaming vendor.

The secondary gaming vendor designation only applies to non-gaming vendors, who “regularly” conduct business triggering these monetary thresholds.  Single or infrequent transactions will not necessarily result in this designation.  For example, a vendor who makes a single sale of $500,000 of lighting fixtures is unlikely to be designated.

Importantly, the monetary thresholds apply to the amount of business a vendor conducts with a single gaming licensee, and not to the aggregate of all business the vendor conducts with all Massachusetts casinos.  Thus, a vendor who regularly conducts business with two casinos will not be designated as a secondary gaming vendor, even if the aggregate of the business conducted with the two gaming licensees exceeds $250,000 per year, or $100,000 in a three-month period.

Registration/Licensing

The Gaming Commission’s Investigations and Enforcement Bureau (“IEB”) oversees the registration and licensing of vendors.  The Commission’s regulations identify a number of classes of business that do not have to register — including insurance and media companies, professional services (legal, accounting, and financial services), medical services, and entertainers.

If none of these exemptions apply, the vendor must register, regardless of the monetary value of the transaction(s) conducted.  The Non-gaming Vendor Registration Form requires disclosure of general business information (trade name, address and contact information, nature of services or goods provided, FEIN), as well as personal identifying information (name, residential address, social security number, and birth date) of: (a) the sales representative(s) soliciting business from the gaming licensee; (b) any person authorized to sign any agreement with the casino; and (c) any person or entity owning more than five percent of the vendor.  In addition, the vendor must agree to be fingerprinted by IEB, and a registrant may have to submit a Subcontractor Information Form, which requires certain disclosures about “known or anticipated” subcontractors.

Once a non-gaming vendor has registered with the Commission, it may conduct business with a casino.  IEB monitors and tracks all payments made by casinos to vendors.  If IEB determines that a non-gaming vendor should be designated as a secondary gaming vendor, it will notify the vendor, who must take one of three actions within 45 days: (a) file a secondary gaming vendor application; (b) discontinue providing goods or services to the casino; or (c) file a written request for reconsideration on the ground that the goods or services are not provided on a regular or continuing basis.

Continuing Obligations

Vendors have an ongoing obligation to comply with the regulations and to notify IEB of certain changes in their status.  Vendors have a duty to cooperate in any Gaming Commission inquiry or investigation.  Failure to comply with Commission regulations or the Act, or the arrest or conviction of a vendor’s principal, could result in the suspension, modification or revocation of a license.  Since the Commission is charged with an ongoing monitoring role, licensed vendors are advised to self-regulate as closely as possible to prevent threats to their licensure.  Given the intense media scrutiny the industry and regulators face, vendors are well advised to adopt strong internal controls and compliance policies when doing business with casinos.  Equally important, vendors should be forthright and transparent in their dealings with IEB.  A minor incident in a vendor’s past may not preclude licensure, but lying about it may. This is one circumstance in which it is not better to ask for forgiveness than permission.

The Commission continues to supplement and revise its regulations.  Unlike many longer-standing regulatory processes, the regulatory scheme for gaming and gaming vendors is relatively new.  Commission staff, who are veterans of both Massachusetts state agencies and the national gaming industry, have shown a refreshing willingness to engage attorneys and applicants with pre-filing reviews and discussions offering procedural guidance, and it is worth the practitioner’s time to take advantage of this resource.

Conclusion

The establishment of four casinos in Massachusetts offers considerable opportunity for many types of vendors to access a potentially lucrative market.  But this market is regulated more stringently than most.  There are significant and continuing regulatory obligations for those who participate, and public scrutiny in this highly regulated industry is certain to be constant.  Detailed record keeping and communication with Commission regulators is essential and may add overhead costs for some businesses.  But those who qualify and are able supply casinos in a consistently compliant manner should find themselves with a winning hand.

Andrew Upton is a partner at DiNicola, Seligson & Upton, LLP. He specializes in all phases of Administrative Law with an emphasis on licensing and permitting.
Jonathan Silverstein is a member of Kopelman and Paige, PC, focusing his practice on land development permitting, contracting and litigation. He chairs the firm’s Expanded Gaming practice and has represented clients in connection with every gaming facility proposal in the state, appearing regularly before the Massachusetts Gaming Commission.