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Banilla Games, Inc. v. Iowa Department of Inspections and Appeals

Supreme Court of Iowa

October 12, 2018

BANILLA GAMES, INC., Appellant,
v.
IOWA DEPARTMENT OF INSPECTIONS AND APPEALS, Appellee.

          Appeal from the Iowa District Court for Polk County, Mary Pat Gunderson, Judge.

         A manufacturer and seller of electronic game devices appeals a judicial review decision of the district court upholding an adverse decision of the Iowa Department of Inspections and Appeals.

          Thomas M. Locher and Amy M. Locher of Locher Pavelka Dostal Braddy & Hammes, LLC, Council Bluffs, for appellant.

          Thomas J. Miller, Attorney General, and David M. Ranscht and John R. Lundquist, Assistant Attorneys General, for appellee.

          WIGGINS, Justice.

         A manufacturer and seller of electronic game devices filed a petition with the Iowa Department of Inspections and Appeals (the Department) seeking a declaration that its devices "Superior Skill 1" and "Superior Skill 2" are not subject to the registration provisions contained in Iowa Code section 99B.53 (2016). The Department denied the petition concluding the outcomes of the games are not primarily determined by the skill or knowledge of the operator, and therefore, the games are subject to registration. The manufacturer and seller filed a petition with the district court seeking judicial review. The district court affirmed the Department's decision. The manufacturer and seller appealed. In this appeal, we find the Department properly interpreted the relevant statutes. We also find the Department did not prejudice the substantial rights of the manufacturer and seller based upon an irrational, illogical, or wholly unjustifiable application of law to fact. Finally, we find the Department did not prejudice the substantial rights of the manufacturer and seller unreasonably, arbitrarily, capriciously, or through an abuse of discretion. Therefore, we affirm the judgment of the district court.

         I. Background Facts.

         Banilla Games, Inc. is a four-year-old North Carolina corporation. It manufactures and sells electronic gaming devices. Banilla seeks to distribute two of its games, Superior Skill 1 and Superior Skill 2, in the State of Iowa.

         Superior Skill 1 and Superior Skill 2 are machines that each offer different games and themes for players to select using a touch screen. Both games require players to insert money into the machine through a bill acceptor on the front of the device in order to play. Each game offers five different game themes and multiple play levels. There are two main categories of games on each device. One is a nudge game and the other is a hot swap game.

         Nudge-style games consist of three electronic reels featuring different icons that spin when a player pushes the play button and stop automatically after a short time. The reels may also stop spinning if a player pushes the stop button. However, if a player pushes the stop button, the same icons will appear as if the player let the machine stop automatically. Players then determine whether a potential winning combination of two or more icons is present and choose one of the wheels to move up or down (i.e., nudge) in order to complete the winning pattern.

         Hot swap-style games are similar in that after three spinning wheels stop, a player determines whether a potential winning combination of icons is present. However, unlike nudge games, there is one icon missing. Thus, a player must decide which icon to choose from a variety of icons in order to complete the winning pattern.

         Each game has a total number of game outcomes ranging from 75, 000 to 100, 000. The owner of the game can configure each device to allow the payout percentage for the machine, ranging from a 92% payout to a 98% payout. At a 92% payout, players will lose 8% of the amount of money cumulatively put into the machine even if the player exercises perfect skill and knowledge. At a 98% payout, players will lose 2% of the amount of money cumulatively put into the machine even if the player exercises perfect skill and knowledge. Even with the highest payout rate, positive prizes are available in less than one-third of all game outcomes.

         The game chooses the screens that appear to players and dictates whether they can win a prize from a pool of game outcomes. The game randomly selects the first game outcome from a table of predefined starting indices. The game chooses all game outcomes after the first screen from a finite pool, and the player plays all games thereafter without repetition until the game reaches the last game outcome. At that time, the game returns to the first game outcome and continues sequentially thereafter, repeating in the same manner.

         On all Superior Skill 1 and Superior Skill 2 games, a prize viewer allows players to view the possible prize for each theme-level combination available before players decide which theme and level to choose. The game awards prizes in the form of credits, with one credit equaling one cent. A player may put his or her credits toward another game play or cash out at any time. The machines do not dispense money. Prizes are in the form of either a redeemable voucher for a maximum of fifty dollars or tickets worth up to fifty dollars that are redeemable for merchandise on the premises where the machine is located.

         II. Prior Proceedings.

         On March 3, 2016, Banilla filed a petition for declaratory order with the Department, seeking an order from the Department declaring its Superior Skill games are electrical and mechanical amusement devices that comply with Iowa Code section 99B.10(1) (2015)[1] and are therefore not illegal gambling devices under section 725.9. It amended its petition on April 15.

         In its amended petition, Banilla claimed the registration requirements under section 99B.53 (2016)[2] did not apply to the machines because the outcome of the games is primarily determined by the skill or knowledge of the player. Thus, Banilla asked the Department to declare that the machines comply with Iowa Code section 99B.52 and are not illegal gambling devices under section 725.9. In support of its petition, Banilla submitted reports from Nick Farley & Associates, Inc., concluding that in each Superior Skill game the outcome is primarily determined by the skill or knowledge of the player.

         On May 23, after Banilla had provided written responses to the Department's questions, the Department issued a notice to all registered amusement device manufacturers, manufacturers' representatives, distributors, and owners, advising them of the amended petition for declaratory order and inviting comments about the issues presented therein. The Department received no comments.

         On July 8, the Department and Banilla met via video conference, during which Banilla demonstrated the games and the parties discussed the games. After the parties' meeting, the Department found the Superior Skill games are not illegal gambling devices; however, the Department found the outcomes of the games are not primarily determined by the skill or knowledge of the operator. In its ruling, the Department found "[c]hance plays an equal or greater role as the player's skill or knowledge in determining the outcome of the game." Therefore, to operate the games legally in Iowa, the Department found the owner of Superior Skill games must register the game pursuant to Iowa Code sections 99B.53 and 99B.56.

         On November 29, Banilla filed a petition for judicial review with the district court. In its petition, it claimed the Department's finding that the outcome of the games is not primarily determined by the skill or knowledge of the operator was erroneous. Banilla alleged the Department's decision was based on a flawed interpretation of the language in section 99B.53(1). It also argued the Department based its decision upon an irrational, illogical, and wholly unjustifiable application of law to fact. Banilla further claimed the decision was unreasonable, arbitrary, and an abuse of discretion.

         The district court upheld the Department's interpretation of the statute, finding no errors of law. Further, the district court held the Department did not prejudice the substantial rights of the manufacturer and seller based upon an irrational, illogical, or wholly unjustifiable application of law to fact. Finally, the district court found the Department did not prejudice the substantial rights of the manufacturer and seller unreasonably, arbitrarily, capriciously, or through an abuse of discretion. Banilla appeals.

         III. Standards of Review.

         An individual adversely affected by a final agency action is entitled to judicial review. Iowa Code § 17A.19(1). Iowa Code section 17A.19(10) of the Iowa Administrative Procedure Act (IAPA) governs judicial review of administrative agency decisions. NextEra Energy Res. LLC v. Iowa Utils. Bd., 815 N.W.2d 30, 36 (Iowa 2012). The petitioner challenging agency action has the burden of proving the invalidity or prejudice asserted. Iowa Code § 17A.19(8)(a).

         The Department is responsible for inspection and licensing of social and charitable gambling under chapter 99B. Iowa Code § 10A.104(10) (2018). The Department is also responsible for enforcement of chapter 99B. Id. § 10A.104(8) (2018). The Department is an "agency" as defined in the IAPA[3] and is thus subject to judicial review under the IAPA. See Iowa Code § 17A.19(10); see also Wyatt v. Iowa Dep't of Human Servs., 744 N.W.2d 89, 93 (Iowa 2008); Mosher v. Dep't of Inspections & Appeals, 671 N.W.2d 501, 508 (Iowa 2003).

         When an aggrieved party appeals the district court's decision in a judicial review action, our job is to determine whether our application of the standards of review set forth in section 17A.19(10) produces the same result reached by the district court in its application of the standards. Berger v. Dep't of Transp., 679 N.W.2d 636, 639 (Iowa 2004).

         The standard of review we apply depends upon the error asserted by Banilla. Burton v. Hilltop Care Ctr., 813 N.W.2d 250, 256 (Iowa 2012). We will discuss the ...


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