Bally Manufacturing Corp. v. New Jersey Casino Control Commission

426 A.2d 1000, 85 N.J. 325, 1981 N.J. LEXIS 1600

• Court: Supreme Court of New Jersey
• Decided: March 17, 1981
• Status: Published

Opinions

The opinion of the Court was delivered by

SULLIVAN, J.

This appeal by Bally Manufacturing Corporation (Bally) presents the question of the legality of a regulation adopted by the New Jersey Casino Control Commission (Commission) which, in substance, prohibits a licensed casino from acquiring more than 50% of its slot machines from any one manufacturer. N.J.A.C. 19:46-1.32.¹ Bally is directly affected by the regulation since it manufactures approximately 80% of the slot machines used in the United States.

Bally’s basic contentions on appeal are that the regulation is beyond the power and authority given the Commission under the Casino Control Act, N.J.S.A. 5:12-1 et seq., violates the Sherman Act, 15 U.S.C. § 1 et seq., and the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq., and is arbitrary and in violation of established principles of due process and equal protection. It is further contended that Bally was denied an evidentiary hearing in the matter in violation of the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq., and contrary to principles of administrative due process and fundamental fairness.

The following background is pertinent to consideration of the issues presented.

In 1976, Art. IV, § 7, par. 2 of the New Jersey Constitution was amended to make it lawful for the Legislature to authorize by law the establishment and operation, under regulation and control by the State, of gambling houses or casinos in Atlantic City. Pursuant thereto, the Legislature enacted the Casino Control Act under which the New Jersey Casino Control Commission was created with power to license, supervise and control casino gambling in Atlantic City. The act vests broad power over casino operations in the Commission which is authorized to adopt regulations, consistent with the policy and objectives of the act, as it deems necessary or desirable for the public interest in carrying out the provisions of the act. N.J.S.A. 5:12-69.

Declaring what the public policy of the State is with regard to casino operations, the act, inter alia, states:

An integral and essential element of the regulation and control of such casino facilities by the State rests in the public confidence and trust in the credibility and integrity of the regulatory process and of casino operations. To further such public confidence and trust, the regulatory provisions of this act are designed to extend strict State regulation to all persons, locations, practices and associations related to the operation of licensed casino enterprises and all related service industries as herein provided. In addition, licensure of a limited number of casino establishments, with the comprehensive law-enforcement supervision attendant thereto, is further designed to contribute to the public confidence and trust in the efficacy and integrity of the regulatory process. [N.J.S.A. 5:12-1(b)(6)]

Since the economic stability of casino operations is in the public interest and competition in the casino operations in Atlantic City is desirable and necessary to assure the residents of Atlantic City and of this State and other visitors to Atlantic City varied attractions and exceptional facilities, the regulatory and investigatory powers and duties conferred by this act shall include the power and duty to regulate, control and prevent economic concentration in the casino operations and the ancillary industries regulated by this act, and to encourage and preserve competition. [N.J.S.A. 5:12-l(bX12)]

In the main, it is the construction of the provisions of paragraph (12), principally those referring to the power and duty of the commission to “prevent economic concentration in the casino operations and the ancillary industries regulated by this act, and to encourage and preserve competition,” that is at issue in this appeal. N.J.S.A. 5:12-l(b)(12) (emphasis added). It is undisputed that Bally is a casino service industry subject to regulation under the act. N.J.S.A. 5:12-12.

In the course of carrying out itg statutory responsibilities, it came to the attention of the Commission that a substantial amount of casino revenues, estimated to be between 40 and 50%, are derived from slot machines. One report submitted to the Commission stated that slot machines “are the cornerstone” of casino operation. The Commission also learned that one manufacturer dominated the domestic slot machine market, accounting for at least 80% of all sales in the United States. This fact caused the Commission concern that market dominance in such a vital area of casino operations was the type of economic concentration that the Casino Control Act sought to prevent. Accordingly, on December 20, 1978, it proposed a regulation which, in substance, prohibited any casino from acquiring more than 50% of its slot machines from any one manufacturer.²

The proposed regulation was published in the New Jersey Register as required by the Administrative Procedure Act. 11 N.J.R. 108 (1979). Multiple letters, comments and memoranda were received by the Commission in response to this publication. Bally requested an evidentiary hearing, but was advised by letter that the Commission would consider the proposed regula-' tion under its rule, making authority and would be acting in its quasi-legislative capacity. The letter stated that presentation of factual testimony through witnesses would be inappropriate but that arguments of counsel would be permitted.

The proposed regulation was considered by the Commission on June 20, 1979 at a public hearing. Counsel for the respective interested parties, including Bally, were heard on the need for and the legality of the proposed regulation. One of the matters discussed was whether a factual basis had to be established for whatever percentage was fixed. After considering the material submitted and hearing argument in the matter, the Commission adopted the proposed regulation by unanimous vote. The regulation was then forwarded to and filed by the Secretary of State on June 28, 1979. It provides as follows:

(a) Unless otherwise approved by the Commission, no more than 50% of the slot machines used in any casino in this State to conduct gaming shall have been manufactured by any one manufacturer or by any enterprise under the direct or indirect control of said manufacturer.

(b) The Commission may modify the said limitation of subsection (a) of this section upon a finding that the casino licensee or applicant for a casino license has made a good faith effort to seek out and obtain slot machines from more than the single manufacturer and that a number of adequate slot machines sufficient to comply with the said limitation are not reasonably available for such use in the said casino.

(c) A casino licensee or an applicant for a casino license may seek modification of the limitation of subsection (a) of this section by filing a verified petition with the Commission alleging sufficient facts to satisfy the standards set forth in subsection (b) of this section.

(d) In response to such a verified petition, the Commission may decide the request summarily, elicit further information from the petitioner or other interested persons, set the matter down for a hearing or adopt such other procedure as may be appropriate under the circumstances. [N.J.A.C. 19:46-1.32]

Shortly thereafter Bally filed a Notice of Appeal and a motion for direct certification. This Court granted Bally’s motion on May 29, 1980. 84 N.J. 447 (1980).

Bally argues that the regulation is invalid because the Casino Control Act does not authorize the Commission to fix mathematical market shares. It points out that the act, which it describes as “one of the most comprehensive pieces of industry legislation in effect in New Jersey,” specifies percentages and fixed numbers in numerous areas where it intended that they be used. According to Bally, had the Legislature intended to impose an arithmetical quota upon the sale of slot machines, it would have supplied the desired percentage or, at the very least, indicated that a percentage limitation was desired. "Bally also contends that the statutory powers given the Commission to prevent economic concentration and encourage and preserve competition, relate only to the well established principle of “monopoly” in antitrust law. It argues that mere market leadership resulting from customer preference is not contemplated by the act and, consequently, may not be regulated by the Commission absent a showing of predatory practices.

We find Bally’s contentions lack merit. The act specifically provides that “casino operations are especially sensitive and in need of public control and supervision.” N.J.S.A. 5:12-l(b)(9). Such regulation necessarily requires the exercise of comprehensive power over not only casinos themselves but also over “all related [casino] service industries.” N.J.S.A. 5:12 — 1(b)(6). Accordingly, the act expressly requires the Commission to include, in its regulations, provisions “[governing the manufacture, distribution, sale, and servicing of gaming devices and equipment.” N.J.S.A. 5:12 — 70(i).

In prohibiting “economic concentration” in the casino industry, the Legislature was concerned with the fact of economic concentration in casino operations. Its intent was to prevent economic domination in any.area related to the industry. As noted, slot machines are vital to gambling operations. If one manufacturer were permitted to dominate this field, casinos would be largely dependent on one source of supply not only for the purchase of machines but also for replacement parts and servicing. Such economic power would have the clear potential for unfair advantage.³ In addition, chaos in casino operations could result if this one manufacturer ever ceased to be a supplier because of economic difficulties or loss of its manufacturer’s license. Therefore, our conclusion is that the regulation in question is within the framework of the broad powers conferred on the Commission by the act.

Bally next argues that the Commission’s action was knowingly and purposefully targeted against Bally as the one entity affected by the regulation. Since the Commission enactment allegedly singled out one entity for special restriction, Bally submits that it was entitled to the evidentiary hearing it had previously requested. In advancing this argument, Bally relies on the hearing provisions in the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq., as well as principles of administrative due process and fundamental fairness.

The Casino Control Act requires that Commission regulations “shall be adopted, amended, and repealed in accordance with the provisions of the ‘Administrative Procedure Act.’ ” N.J.S.A. 5:12-69(b). Prior to the adoption of an administrative rule by an agency, the Administrative Procedure Act requires 20 days public notice of the intended action with reasonable opportunity for all interested persons to submit data, views, or arguments, orally or in writing. N.J.S.A. 52:14B-4. It is undisputed that the Commission complied with this requirement. Bally, however, contends that the matter should be governed by the provisions for notice and hearing in contested cases, which include the opportunity to present evidence. N.J.S.A. 52:14B-9(c). The Administrative Procedure Act defines “contested case” as

a proceeding ... in which the legal rights, duties, obligations, privileges, benefits or other legal relations of specific parties are required by constitutional right or by statute to be determined by an agency by decisions, determinations, or orders, addressed to them or disposing of their interests, after opportunity for an agency hearing. [N.J.S.A. 52:14B-2(b)]

Bally maintains that since it was the target of the regulation and the only manufacturer whose rights were affected by the proposed Commission action, it was entitled to the evidentiary hearing on the basis not only of N.J.S.A. 52:14B-9(c) but also by principles of fair play and administrative due process.

In this regard, Bally lists a number of alleged factual issues before the Commission with respect to which it contends that it should have been allowed to present eVidence. In essence though, Bally’s argument is that it was entitled to a hearing on the question whether its “market leadership” was achieved through the quality of its product and customer preference rather than as a result of predatory practices. Bally charges that it did not have the advantage of hearing the evidence concerning its market leadership, or of learning the precise factual findings upon which the agency based its decision to restrict slot machine sales.

Bally misconstrues the purpose of the regulation. It is not directed at Bally. The restriction applies to any manufacturer who, for whatever reason, occupies a dominant position in the slot machine market in New Jersey. At present, Bally is in that position but should another manufacturer develop an improved type of machine with strong market appeal,⁴ the regulation would apply equally to that producer.

The Commission’s action was founded on certain basic facts which were not in dispute: (1) the slot machine market was dominated by one manufacturer, (2) there was an absence of significant competition in the sale of slot machines, and (3) slot machines are an important source of casino revenues. In light of these facts, the Commission was obligated to take action to prevent “economic concentration” in the slot machine market and to “encourage and preserve competition.” The Commission was not interested in the reasons for the then existing situation in such a sensitive industry. It was the fact of market domination and the resultant “economic concentration” which concerned the Commission. Therefore, this was not a contested case requiring an evidentiary hearing and findings of fact. It was, as Bally was advised, an exercise of the Commission’s rule making authority. See Heir v. Degnan, 82 N.J. 109, 119 (1980). Since the regulation was not “directed” at Bally, as previously noted, but was rather a policy decision based on undisputed facts, principles of fair play and administrative due process did not require the evidentiary hearing mandated in Cunningham v. Dept. of Civil Service, 69 N.J. 13 (1975).

The fact that a proposed administrative rule or regulation will have a substantial impact on a particular entity does not, standing alone, require a trial type hearing as a matter of due process. Only where the proposed administrative action is based on disputed adjudicative facts is an evidentiary hearing mandated. Cunningham v. Dept. of Civil Service, supra. Professor Davis, in discussing the requirements for an evidentiary hearing in his treatise on administrative law states: “Due process never requires a trial on non factual issues. What is needed on such issues is argument, written ór oral, not evidence, and not trial procedure.” 2 Davis, Administrative Law Treatise, § 12.1 at 406 (2d ed. 1979). Addressing the question whether one who has vital interests involved in an administrative proceeding is for that reason entitled to the protection of trial procedure via an evidentiary hearing, Professor Davis adds:

The proposition stated in the title of this section is obvious but has to be stated because a good deal of law that bears on the proposition is confused. Some courts tend to assume that one who has vital interests at stake in a controversy is for that reason entitled to the protection of trial procedure, whether or not facts are in dispute.

The law clearly is, at a most elementary level, that because a trial is a process for taking evidence subject to cross-examination, and because taking evidence is not appropriate except on disputed facts, trial procedure is not required on issues of law, policy or discretion. [2 Davis, supra, § 12.2 at 409-410]

This is precisely the situation in the instant case. As we have noted, the Commission’s action was founded on basic undisputed facts. Applying these facts in light of its statutory obligation to prevent economic concentration is such a sensitive and important area of the gambling industry, the Commission, after complying fully with the requirements of the Administrative Procedure Act, adopted the policy expressed in N.J.A.C. 19:46.1-32.

Bally further contends that, at the very least, the Commission should have established some basis for the 50% limitation and afforded the manufacturer an opportunity to challenge that basis and present countervailing proofs. Absent such an opportunity, Bally claims the 50% limitation is arbitrary and a denial of due process.

As heretofore noted, an evidentiary hearing is not called for by the rule making process. Nor are findings of fact, sufficient to justify the regulations, a required part of the same process. Heir v. Degnan, supra, at 119. Admittedly, the selection of any percentage restriction is arbitrary in a sense. A rational basis, however, for the 50% limitation clearly exists. The Commission had a mandate to prevent economic concentration in any and all areas of casino operation. Recognizing that the slot machine industry was dominated by one manufacturer which controlled at least 80% of all slot machine sales, the Commission concluded that this constituted undue economic concentration in an important area of casino operation. To prevent this concentration of economic power, the Commission imposed a 50% limitation on the number of slot machines which a casino could acquire from any one manufacturer. While the Commission did not articulate the basis for this percentage, it is clear that the Commission concluded that for any one manufacturer to control more than one-half of the slot machine market in Atlantic City constituted economic concentration within the meaning of the act. The percentage fixed, therefore, has a rational basis. Moreover, the regulation remains subject to modification and change in the light of the Commission’s experience with it. Should it prove to be unworkable, unfair or unnecessary, it will be the obligation of the Commission to take appropriate corrective action.

Bally’s final argument is that the regulation violates' state and federal antitrust laws. The contention that the regulation offends the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq., is misplaced as that statute by its own terms does “not apply to any activity directed, authorized or permitted by any law of this State.” N.J.S.A. 56:9-5(c). Since we have concluded that the regulation in question is authorized and permitted by the Casino Control Act, the exemption provision of the New jersey Antitrust Act, therefore, comes into play. New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 564 (1978).

Whether the regulation runs afoul of the Sherman Act, 15 U.S.C.A. § 1 et seq., presents a different question. Restraints on trade and competition are illegal under the Sherman Act. The United States Supreme Court, however, has established a “state action” exception to the applicability of the Sherman Act. In the seminal decision of Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943), it was held that state regulatory programs were immune from the provisions of the Sherman Act as the Court did no.t find in that act any legislative purpose to nullify state powers since the act was directed against “individual and not state action.” 317 U.S. at 352, 63 S.Ct. at 314, 87 L.Ed. at 326.

Subsequent decisions, upholding the ruling in Parker v. Brown, have refined the standards for finding antitrust immunity for state action. „ See, e. g., Goldfarb v. Virginia State Bar, 421 U.S. 773, 95 S.Ct. 2004, 44 L.Ed.2d 572 (1975); Cantor v. Detroit Edison Co., 428 U.S. 579, 96 S.Ct. 3110, 49 L.Ed.2d 1141 (1976); Bates v. State Bar of Arizona, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977); New Motor Vehicle Bd. of Calif. v. Orrin W. Fox Co., 439 U.S. 96, 99 S.Ct. 403, 58 L.Ed.2d 361 (1978). The United States Supreme Court most recently reviewed the Parker v. Brown doctrine in California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980). Considering the development of that doctrine in the subsequent decisions regarding antitrust immunity for state action, the Court in Midcal stated:

These decisions establish two standards for antitrust immunity under Parker v. Brown. First, the challenged restraint must be “one clearly articulated and affirmatively expressed as state policy"; second, the policy must be “actively supervised” by the State itself. [445 U.S. at 105, 100 S.Ct. at 943, 63 L.Ed.2d at 243 (citation omitted)] a proceeding ... in which the legal rights, duties, obligations, privileges, benefits or other legal relations of specific parties are required by constitutional right or by statute to be determined by an agency by decisions, determinations, or orders, addressed to them or disposing of their interests, after opportunity for an agency hearing. [N.J.S.A. 52:14B-2(b)]

Reviewing the facts of the instant case, we conclude that these standards have been fully satisfied so that the regulation falls within the antitrust immunity established by Parker v. Brown and its progeny. First, as we have already held, the regulation is clearly authorized, indeed required, by the expression of State policy contained in the Casino Control Act. N.J. S.A. 5:12-l(b)(6) & (12).. Second, there is no question but that this policy is actively supervised by the State itself. The Casino Control Commission has been established as a state agency to regulate not only casinos, but also casino service industries of which Bally is one. In short, the two-prong test set forth in Midcal clearly has been met.⁵

Finding no merit in any of the issues raised by Bally on appeal, we conclude that N.J.A.C. 19:46-1.32 constitutes a proper exercise, by the Casino Control Commission, of its rule making authority. The validity of that regulation is therefore affirmed.

1 A casino’s compliance with this limitation is conditioned on the availability of a sufficient number of suitable slot machines.

2 On December 15, 1978, Bally, aware of the Commission’s contemplated action, had submitted its own proposed regulation to the Commission which did not contain any percentage limitation on slot machine purchases by any one casino.

3 The situation would be aggravated in this particular case because Bally is also a casino licensee. Were its position sustained, it would control the source of supply, maintenance and repair of slot machines used by its casino competitors.

4 At the June 20, 1979 hearing before the Commission, the attorney for another slot machine manufacturer referred to “a new and quite refined machine” which this manufacturer proposed to introduce into New Jersey.

5 Argument could well be made that the effect of the regulation is actually to promote competition rather than restrain it.