More On Ohio & Skill Games
What’s Proposed and Why I Believe It’s Important Outside the Buckeye State
by Tom Fricke
In the July 2014 issue of this column, I offered warning that regulation of skill games for prizes is coming and that the regulations would be problematic. In the November 2016 issue, I provided information about the draft regulations in Ohio now out for comment by industry stakeholders in the state, and how you can participate in (and maybe influence) the rulemaking process.
When a major state takes a sharp turn towards a new and troublesome form of regulation, I submit that it’s important to the industry as a whole –– not just to businesses located in the state –– to try to remove the lethality from the proposal. This is the case with the Ohio regulations that could become law four months from now in its present form, or in a form that is leavened by common sense.
Take a look at a summary of the statute that by these new regulations the Ohio Casino Control Commission is supposed to administer: *
• Prize limitations. Merchandise only, single-play value limit $10. For ticket redemption, accumulation of value within the machine is allowed, based on actual wins. Merchandise prizes must be delivered where and when the machine is played.
• Winner determination – requirements. Must be based solely on accomplishing the player’s task.
• Winner determination – prohibitions. (1) rigs and gaffs, (2) compensating algorithms, (3) excessive difficulty.
Industry stakeholders have submitted to the Commission, very few professionally-prepared comments. Here are four examples:
6/9/16, Playtronics Games, Inc., Youngstown, Ohio: “Overall the proposed rules would place a huge financial and administrative burden on Ohio small businesses.”
6/10/16, CEC Entertainment (Chuck E Cheese’s): “If enacted in their current structure, the draft rules issued by the Commission would render Ohio one of the most restrictive states in the United States for ticket redemption centers like those offered by CEC.”
6/13/16, Dave & Buster’s: “The proposed licensure structure seems a bit over- reaching, overly intrusive, unwieldy and expensive. … [W]e are concerned that Ohio intends to create the most onerous regulatory environment for our operations in the country.”
10/12/16, Shaffer Distributing, Inc.: “[I]f the rules are adopted as currently drafted, Shaffer will have to endure unnecessary and burdensome requirements and other potential restrictions that are unrelated to the purpose of the Commission’s statutory mandate.”
I wish there were more comments such as these by more stakeholders and to more Ohio agencies and officials than just the Casino Control Commission. It may help with your perspective on this to refer to a summary of the scope of the proposed regime that the Ohio Casino Control Commission is making. Here is a high-spot summary you can read in a few minutes:
3772-50-03 Licensing, generally –– No conduct of ticket redemption or operation of merchandisers is allowed by a vendor, operator, key employee or location without a license by the Commission, with a few exceptions. “Significant” change of licensee control requires a new application.
772-50-04 Vendor licenses –– Apply using form at state e-license web site. (Interpretation: the application form has not been released in draft, for comment.)
$15,000 application fee –– Non-refundable. $5,000 license fee if found “suitable.” (Interpretation: “Suitability” findings are at the heart of all license categories, so the following summary won’t be repeated for every category. The applicant must convince the Commission that the applicant and its controlling persons have (among other things) a good reputation, good experience in the business, “financial integrity,” no bankruptcy history, no association with persons of “disreputable character,” have never been indicted or convicted of violating any law anywhere and have never received a tax delinquency notice.) A vendor also licensed as an operator isn’t required to pay the vendor application fee.
3772-50-05 through 3772-50-08 Operators, locations and “key employees” have to be licensed, too –– To be licensed, the controlling persons have to be found “suitable.” The fees are significant, too:
• Operator $1,500 application, $1,500 license
• Location: $250 application, $250 license
• Key employee: $250 application, $250 license
3772-50-09 Transition period –– When the rules become effective, operators and vendors of merchandisers and ticket redemption may continue operating if they register with the Commission within 90 days of the rules’ effective date and apply for a license within 120 days of the effective date. To register the operator must list all locations, machines in inventory and who supplied them. Registration fees:
• $200/location (ticket redemption)
• $25/location (merchandiser)
3772-50-10 Waivers –– The Commission can waive any requirement except the requirement that you be licensed. Waiver applications have a $100 fee. Waiver request is a formal process that requires a detailed submission. There is no right to a hearing, but waivers are not to be granted or denied arbitrarily.
3772-50-11 Duty to update –– Licensees have to self-report to the Commission, any event relevant to a suitability determination, like a lawsuit, change of ownership, or an arrest.
3772-50-12 Information that operators have to send to the Commission –– Ticket redemption and merchandiser operators: locations, machine inventory and sources. To be filed with application and twice/year thereafter. Vendors: Ohio sales and customers, initially and twice per year.
3772-50-13 Licensees’ records –– Retention period is three years. For all licensees, this requires customer lists, machine inventory, acquisition and disposition records, and copies of independent testing laboratory certification records. This includes identification of records protected by attorney-client privilege. For operators, this requires detailed prize lists and award lists, revenue share journals, location contracts and complaint records. For locations, this requires revenue share journals, operator/vendor contracts and full prize award information: “A list of all prizes to be available to be awarded to a player, the dates the listed prizes were awarded to a player, the number of each prize awarded, and the date each prize was awarded to a player.”
3772-50-14 Inspections/Audits –– Commission agents can inspect licensee machines and records, can seize without warrant and can audit books and records and can subpoena. You consent to this or you don’t get your license.
3772-50-15 Advertising –– Advertising in Ohio of game machines not approved for use in Ohio is prohibited. (Who would be subject to this prohibition?)
3772-50-16 Other prohibitions –– Vendors (i.e. manufacturers) can’t sell merchandisers or ticket redemption “to be used in Ohio” to anyone not licensed as an Ohio vendor. (Permissible for a licensed Ohio vendor to buy amusement machines from a vendor who is not licensed in Ohio.) Revenue share with anyone not licensed is prohibited. Vendors are not allowed to revenue share at all. Licensees can’t extend credit to players or modify amusement machines once certified.
3772-50-17 What vendors have to do –– Vendors have to provide to Ohio customers, only Ohio-compliant, certified or waived machines. This includes either waivers or compliance with technical standards and ITL certification.
3772-50-18 What merchandiser operators have to do –– They will have to keep records, safeguard the keys (away from the location), keep a log of entry into machines at the location.
3772-50-19 What ticket redemption operators have to do –– (In addition to the requirements of rule 18) ticket redemption operators have to keep owners from playing, display all prizes offered in one place where the machine is played, with redemption “prices” posted, award prizes when won, not later, and keep an inventory of prizes at the location.
3772-50-20 What ticket redemption locations have to do –– (In addition to what ticket redemption operators have to do): revenue-sharing agreements have to be in writing and available for inspection at the location and employ at least one licensed key employee at each location.
3772-50-21 How to qualify as an independent testing laboratory (“ITL”) –– Apply, submit to backgrounding and provide descriptions of methods capability, and quality control. Application fee is $2,000.
3772-50-22 Some Requirements for ITLs –– Professional liability insurance, accreditation by the International Organization for Standardization, maintain records and maintain records, controls and security.
3772-50-23 Dos and Don’ts for ITLs –– To determine if machines comply with the statutory standards for skill-based machines and the Commission rules and technical standards, but it is the Commission that decides if a tested game machine may be used in Ohio. Ohio-certified ITLs aren’t allowed to testify against the Commission or any other Ohio agency.
3772-50-24 Technical standards for skill-based game machines –– For game machines for which technical standards are inapplicable, the Commission reviews on a case-by-case basis. Some of the technical standards are: (1) display of the software version, (2) enable plug-in to read the signature of the machine’s software (to match it with the signature set out in the ITL compliance certification), (3) changes in difficulty parameters must be disclosed to players if they change the rules, but changes in difficulty parameters must not be based on prior outcomes (4) reaction times required to achieve any player’s task must not be shorter than 1/5 of a second, and paid bonus games are allowed.
3772-50-25 Game approvals –– An Ohio-licensed vendor or operator is not allowed to buy or sell (or place) a game machine in Ohio or to be used in Ohio unless the machine has been approved by the Commission and the approval documents are available to all parties to the machine transaction. Ohio-licensed vendors have to apply for Commission approval of every game machine in their Ohio inventory within 90 days after they first apply for an Ohio vendor license.
3772-50-26 Tournaments –– For a tournament, the wholesale merchandise value limit of $10 doesn’t apply. (There are rules that supplement the statute regarding the kind of merchandise that can’t be awarded.) To conduct a competitive common game, the licensed operator has to notify the Commission (on its forms) at least 30 days before the tournament begins. For a tournament to last more than a week and for separate tournaments in one location to be conducted more than ten days per month, Commission approval is required. When a tournament is over with, the operator has to submit to the Commission reports of revenue and player participation.
3772-50-28 Penalties that the Commission can impose administratively –– Fines, civil penalties and forfeitures for “any conduct which undermines the integrity of skill- based amusement machine gaming or the public’s confidence …”
* To see the full text of these stakeholders’ comments together with all other comments formally submitted as of 12/22, go to www.casinocontrol.ohio.gov. When there, search, “skill based amusement”. On the dropdown that will appear, hit the link for the 12/22 submission to the Common Sense Initiative (CSI). On the CSI landing page, hit the link for “Business Impact Analysis.” That will take you to the Commission’s CSI submission; from there you can scroll down through all of the comments submitted through 12/22. Here is a TinyURL link to the page: tinyurl.com/hkzd2wh.
Attorney Tom Fricke specializes in the law of redemption. He has served the amusement game trade for more than three decades in various roles including in-house counsel for a national FEC chain, trial and transactional attorney for many businesses and as an expert witness on the law of redemption. Tom has also penned hundreds of articles on the subject of redemption regulation, legislation and compliance.
Redemption and the Law is commentary. It is not legal advice. It is intended only to provide useful information on the subject matter covered with the understanding that neither the publisher nor the author is engaged in rendering legal services. If legal advice or other professional or expert assistance is required, the services of a competent professional should be sought. The views expressed in Redemption and the Law are solely those of the author and not the publisher. Author Tom Fricke claims an exclusive trademark in the phrase Redemption and the Law. He can be reached by email at t[email protected]; phone 314/322-9526. © Copyright, Thomas F. Fricke 2016, St. Louis, Missouri, USA. All rights reserved worldwide.