State Court Bans Keno; Says It’s Not True Lottery

In a setback for the state lottery and Indian gambling, the California Supreme Court decided Monday that the lottery no longer can offer keno, a game that may take in nearly $400 million this fiscal year in sales, including $130 million for public education.

Justice Kathryn Mickle Werdegar, writing the unanimous decision, said that keno is illegal because it is not a true lottery, the only kind of gambling authorized by voters in the 1984 ballot measure that created the California Lottery.

Within hours after the decision, the state lottery officially halted all keno operations, promising to cash winning tickets for up to 180 days. Lottery officials announced they are trying to develop another game to replace keno, which generated about 17% of lottery revenues.

Reaction among keno players was mostly negative. “A lot of people are going to be upset,” said Kipp Harrison, a bartender at Brandy’s in the Crown Plaza Hotel Itsnear USC. “People like to come in. It’s very relaxing. I think this is absolutely stupid.”

State officials said they regretted the loss of revenues for the state lottery, but were pleased that it may help them close down slot machines at casinos operated on Indian lands.

Besides ending keno, the court’s ruling may limit the kind of games the lottery can offer and make vulnerable 12,100 slot machines on Indian reservations in California, lawyers in the case said.

Noting that the 1984 initiative limited the state to running lotteries, Werdegar wrote: “We may not now interpret the Lottery Act as authority for [the lottery] to conduct other forms of gambling.”

Under federal law, Indians legally can operate any form of gambling that is permitted by state law. In battles with the state, the tribes have defended their lucrative slots by pointing to the legality of keno, a defense that Monday’s ruling appears to jeopardize.

Gov. Pete Wilson called the loss of lottery revenue “regrettable” but insisted the ruling has removed any lingering legal questions about slot machines on reservations.

“The bottom line is the use of any ‘banked games’ and slot machines is illegal within the borders of California--including tribal lands,” he said. “It is now time that state and federal laws are fully enforced in California.”

Atty. Gen. Dan Lungren, whose office represented the lottery before the state high court, admitted at a news conference that the loss for the state lottery was overshadowed by the potential repercussions for restraining Indian casinos.

“It is a strange occasion,” he said. “Never have I had my office represent a client in which we have lost and in which I was more pleased by the ultimate decision of the court.”

Although the court’s ruling was limited to keno, it made clear that machines used on tribal lands are not lotteries, Lungren said. For five years the state has been fighting in court to get the slots off the reservations, he said.

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“It is our best hope and our expectation that some time in the not-too-distant future,” Lungren said, “we might see action by federal authorities to finally conclude what has been a very upsetting episode in California law--that is, a flagrant disregard of an act that is illegal under our penal code.”

But Daniel Tucker, chairman of the California Nevada Indian Gaming Assn., insisted the ruling “really doesn’t hurt us.” He said the tribes are awaiting a more critical decision in the U.S. 9th Circuit Court of Appeals over the legality of Indian casinos.

“We’re telling our people [at reservation casinos] to stay open because the decision didn’t come down on what happens on Indian land,” Tucker said.

The high court determined that a lottery, similar to a raffle, “can never fail financially as a result of the operator’s bad luck in the draw.” Keno, however, is a banking game like Las Vegas-style blackjack, the court said. In both keno and blackjack, the house plays against everyone else and theoretically risks losing money.

In all banking games, Werdegar wrote, “the total payout depends on the outcome of the game and thus may in theory exceed the total wagers.”

Assemblywoman Debra Bowen (D-Marina del Rey) a frequent critic of lottery management, said she wondered how thoroughly the lottery investigated the legal issues before it forged ahead with the introduction of a controversial game such as keno.

“This [court decision] was an atom bomb just waiting to go off,” she said. “It wasn’t even close. It was unanimous. I’m interested in going back to investigate how the lottery made the decision to do this.”

The state undoubtedly will be “on the financial hook” for millions of dollars in contractual obligations to companies that helped run keno, she said, besides the millions already spent for equipment that is no longer useful.

A spokeswoman for the lottery said it still was trying to assess how its contractual obligations will be affected by the ruling.

The case before the court was brought by lottery competitors--Western Telcon Inc., which operates an arcade-type of business, and a race horsing association. They filed the lawsuit against the lottery in 1992 for offering keno, which the state introduced that year in hopes of revitalizing slumping sales and renewing player interest in games of chance.

But keno, which had been highly successful in Oregon, failed to be so popular in California. Law enforcement, led by Los Angeles Sheriff Sherman Block, tried without success to persuade Wilson to eliminate the game. Block and others complained that Indians would use keno as a legal excuse for their slot machines.

“The real impact of this is on the Indians,” said Los Angeles lawyer Jerry M. Hill, who represented Telcon against the lottery.

But Robert Forgnone, a lawyer for the California Horsemen’s Benevolent & Protective Assn., an association of owners and trainers of thoroughbred race horses, said the ruling probably will constrain both the state lottery and Indian tribes.

“I think it does send a message that the voters in 1984, when they approved the state lottery initiative, intended to have a state lottery and nothing more,” he said. Prior to the lawsuit against keno, the lottery “was engaged in a plan to have fast-pace Las Vegas-style games.”

Sen. Ken Maddy (R-Fresno), who is normally active in the Legislature on gambling issues to protect the horse-racing industry, said the decision will put more pressure on federal law enforcement officials to get slot machines off reservations.

But the “Indians won’t give up easily,” Maddy said, and may win new protections in Congress. “There seems to be sympathy for the Indian cause in Congress.”

Carol Levitzky, a spokeswoman for the U.S. attorney’s office in Los Angeles, said federal prosecutors will not comment until they review and discuss the ruling.

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But the ruling did not surprise Los Angeles lawyer I. Nelson Rose, considered one of the nation’s leading experts on gambling. He had filed an affidavit in the case insisting that keno was an illegal banking game--the argument ultimately embraced by the court.

“It’s clear . . . that they [found] that the voters in 1984, when they voted in a state lottery, meant to put in a state lottery,” Rose said. “They did not mean to put in casinos.”

Even with the court’s ruling, Indians could ensure the continuation of their slot machines if the tribes could negotiate a special pact with Wilson. The state currently has such an agreement with Indians for bingo.

But Wilson won’t negotiate with the Indians because “they jumped the gun” and imported slot machines, at times in the dead of the night, making the activity illegal from the start, said Special Assistant Atty. Gen. Thomas F. Gede, the state’s lead prosecutor on tribal gaming.

Sen. Tim Leslie (R-Carnelian Bay) said Monday’s decision shows the lottery should never have been allowed to make decisions such as the introduction of keno without legislative approval.

At the time keno was introduced, Leslie said, he was so angered by the decision that he sponsored and passed legislation that would prevent the lottery from introducing similar games in the future without legislative approval.

“Keno has been done literally in the back room without full exposure to the public and certainly no approval of the Legislature or any elected officials,” he said. “It just boggled my mind that this could have happened. How could there have been this massive expansion without any public comment or public approval?”

Dolan reported from San Francisco and Vanzi from Sacramento. Times staff writers Virginia Ellis in Sacramento and Paul Lieberman in Los Angeles contributed to the story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Counted Out by Court

In a decision affecting the state lottery, the California Supreme Court ruled Monday that keno, the lottery’s third most popular game, is illegal.

LOTTERY SALES

Super Lotto: 48%

Scratchers: 26%

Keno: 17%

Fantasy 5: 5%

Daily 3: 3%

Decco: 1%

KENO SALES

Keno, introduced in 1992, is a game in which players pick up to 10 numbers on a card in hopes of matching numbers drawn at random by a computer. Top prize is $250,000.

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Date Total sales For schools 1992-93* $235 million $80 million 1993-94 $392 million $133 million 1994-95: $421 million $143 million 1995-96**: $383 million $130 million

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* For three quarters only

** Projected

- PLAYERS DENOUNCE BAN

Its fans insist that keno is a legitimate game. B1