What Makes a Manufacturer?
09/09/2009

Article originally appeared in Casino Enterprise Management on 09/09/09

On May 18, 2009, Senate Bill No. 83 (“S.B. 83”), introduced on behalf of the State Gaming Control Board (the “Board”), was signed into law by Nevada Governor Jim Gibbons. S.B. 83 enacts various changes to the Nevada Revised Statutes (“NRS”), in particular, changing several of Nevada’s gaming laws that are expected to have a significant impact upon the manufacturing industry. The most important points of S.B. 83 are that it defines the term manufacture, amends the definition of the term gaming device, introduces and defines the term independent contractor and garners greater oversight of game intellectual property for the Board and the Nevada Gaming Commission (the “Commission”). These changes identify which activities will qualify persons and entities as manufacturers, which objects and components constitute gaming devices and which persons are subject to regulatory oversight for conducting activities related to control programs and game intellectual property. Simply, these particular changes serve to clarify and modernize the law with regard to the licensing of participants in the manufacturing industry.

Prior to S.B. 83, the NRS stated that persons and entities who design or assemble gaming devices as well as those who hold or maintain the copyright over such devices must be found suitable by the Commission. While the law appeared to be transparent with regard to who qualifies as a manufacturer and what constitutes a gaming device, the law, in application, was not so lucid. One reason for this is that unlicensed companies continually test the boundaries of the law with regard to what actions they can perform before having to obtain a license. For instance, the influx of other customarily, non-gaming companies from the technology sector and their accompanying innovations spurred a new wave of piecemeal manufacturing in the gaming industry. By parsing the manufacturing of gaming devices into many discrete processes, the regulatory line became blurred. In other words, the NRS no longer maintained a clear delineation between when a manufacturing license is required and when one is not.

S.B. 83, therefore, serves to clarify and modernize the law. The legislative amendments are worded to introduce greater flexibility into the NRS in an effort to have the law maintain pace with the rapid evolution of gaming technology and the industry in general.

ByS.B. 83 does this in four ways. First, a definition of the term “manufacture” is introduced into the NRS. Second, the term “gaming device” is revisited and revised. Third, a definition of the term “independent contractor” is introduced into the NRS. Finally, S.B. 83 authorizes the board and the commission to call forward a person to be found suitable or licensed if the person has invented, has developed or owns the intellectual property rights to a game for which approval by the commission is being sought or has been received.

Manufacture

Section 1 of S.B. 83 amends Chapter 463 of the NRS by introducing the definition of the term "manufacture.” Specifically, S.B. 83 states:

1. “Manufacture” means:

(a) To manufacture, produce, program, design, control the design of, maintain a copyright over or make modifications to a gaming device, cashless wagering system, mobile gaming system or interactive gaming system;

(b)To direct, control or assume responsibility for the methods and processes used to design, develop, program, assemble, produce, fabricate, compose and combine the components and other tangible objects of any gaming device, cashless wagering system, mobile gaming system or interactive gaming system; or

(c) To assemble or control the assembly of a gaming device, cashless wagering system, mobile gaming system or interactive gaming system.

2. As used in this section,“assume responsibility” means to acquire complete control over, or ownership of, the applicable gaming device, cashless wagering system, mobile gaming system or interactive gaming system.

Overall, the definition encompasses the entire spectrum of the manufacturing process and subsequent modification—from the design phase through fabrication, assembly, testing, and later modification of the gaming device, cashless wagering system, mobile gaming system or interactive gaming system—and as such brings added clarity to the activities that will qualify as manufacturing, whereas previously the NRS used the word “manufacture” but did not define what it exactly meant. Moreover, the use of the term “assume responsibility” recognizes the gaming industry’s need to use third parties to assist in the development of gaming devices.The board’s policy appears to be that if the entire process is controlled by the licensee, which assumes control of the source code, it is consistent with regulatory

Gaming Device

The definition of “gaming device ”was originally expanded in 1993 by the Nevada Legislature in an effort to regulate those persons who make a substantial portion of a gaming device but less than all of it. The recent amendments serve as a further update to the definition of “gaming device” in an attempt to capture the constantly evolving manufacturing industry within the term’s purview. Specifically, Section 3 of S.B. 83 revises the current definition of “gaming device,” as defined in NRS § 463.0155, to read: “Gaming device ”means any object used remotely or directly in connection with gaming or any game which affects the result of a wager by determining win or loss and which does not otherwise constitute associated equipment. The term includes, without limitation:

1. A slot machine.

2. A collection of two or more of the following components:

(a) An assembled electronic circuit which cannot be reasonably demonstrated to have any use other than in a slot machine;

(b) A cabinet with electrical wiring and provisions for mounting a coin, token or currency acceptor and provisions for mounting a dispenser of coins, tokens or anything of value;

(c) A storage medium containing a control program;

(d) An assembled mechanical or electromechanical display unit intended for use in gambling; or

(e) An assembled mechanical or electromechanical unit which cannot be demonstrated to have any use other than in a slot machine.

3. Any object which may be connected to or used with a slot machine to alter the normal criteria of random selection or affect the outcome of a game.

4. A system for the accounting or management of any game in which the result of the wager is determined electronically by using any combination of hardware or software for computers.

5. A control program.

6. Any combination of one of the components set forth in paragraphs

(a) to (e), inclusive, of subsection 2 and any other component which the Commission determines by regulation to be a machine used directly or remotely in connection with gaming or any game which affects the results of a wager by determining a win or loss.

7. Any object that has been determined to be a gaming device pursuant to regulations adopted by the Commission.

• As used in this section,“control program”means any software, source language or executable code which affects the result of a wager by determining win or loss and is necessary to operate a gambling game as determined pursuant to regulations adopted by the Commission. The removal of “assembled video display

unit” from the list of components considered to constitute a gaming device when assembled with another of the listed components means that unlicensed manufacturers can now add “assembled video display units” to the multitude of items they can manufacturer without being subject to licensure. Overall,however, the 2009 revisions are clearly intended to broaden the definition of a gaming device, in particular, broadening the statutory scope to now include:

• Any object affecting gaming win or loss that is not otherwise classified as associated equipment;

• Control programs and storage mediums containing control programs ,with a control program being defined as any software, source language or executable code which affects the result of a wager by determining win or loss as determined pursuant to regulations adopted by the Commission;

• Any object which may be connected to or used with a slot machine to alter the normal criteria of random selection or affect the outcome of a game; and

• Any object the Commission determines to be a gaming device pursuant to the regulations. As important as it is to include the language “any object” in the expanded definition of gaming device, the amendment goes further by authorizing the commission to adopt specific regulations for determining what constitutes a gaming device. Specifically, subsection 7 of the amendment gives the commission broad discretion to adopt regulations regarding gaming devices, and in doing so, firmly establishes the regulatory reach into the gaming manufacturing industry. This section became effective on May 18, 2009, for the purpose of adopting regulations and becomes effective on Oct. 1, 2009, for all other purposes.

Independent Contractor

Of particular importance is Section 18.5 of S.B. 83, which provides for the regulation of “independent contractors.”An independent contractor is defined as a person who (i) is not an employee of a manufacturer and (ii) pursuant to an agreement with the manufacturer, designs, develops, programs, produces or composes a control program, as defined above under revised NRS § 463.0155, used in the manufacture of a gaming device. The purpose of this definition is twofold. First, the definition ensures that employees of the manufacturers are not considered independent contractors, thereby avoiding a huge regulatory burden. Second, the definition ensures that those actually producing control programs that determine win or loss constitute independent contractors.While the term“independent contractor”does not appear to include producers or writers of programs that have no relationship to game win or loss, such as those involving only sound or graphics,3 the board intends to clarify this in forthcoming regulations. Section 18.5 enables the commission to provide by regulation for the filing by a manufacturer of reports and information regarding any independent contractor and the business arrangements between the manufacturer and an independent contractor.The commission is afforded the power to require the registration of independent contractors without having to resort to mandatory licensing.The amendment also enables the commission to provide by regulation procedures pursuant to which an independent contactor may berequired to file an application for a finding of suitability, as well as any other oversight of independent contractors as the commission determines is necessary and appropriate.By way of an illustration, one should consider Sony and its video game console,PlayStation®. Primarily, Sony focuses on the development of the hardware platform and relies on third-party game developers to deliver games for the PlayStation. Accordingly, a vast number of the games used on this platform are produced by independent game developers such as Electronic Arts. The gaming industry is now very similar. Indeed, a gaming company that has access to a broader and more diverse base of developers, ingenuity and technology, and enables that company to develop more gaming products for a greater market,would be more likely to increase its market share than a company that tries to provide the entire value chain of gaming products with its limited inhouse resources. Consequently, as technology has progressed, traditional non-gaming companies, such as game developers, are having a greater impact upon the market. In passing S.B. 83, the Nevada Legislature recognized that the gaming industry needs to have the same dynamics as other technology industries in order to facilitate the current growth and expansion that the sector is undergoing. Indeed, if developers like Electronic Arts are met with the requirement of a full-blown regulatory investigation, as if they were a gaming manufacturer, they would most often choose to develop something for Sony rather than for the Nevada-based manufacturers to avoid the intrusive and costly expenses associated with such an investigation. The commission is therefore granted a great deal of discretion under S.B. 83 with regard to its examination of independent contractors.This flexibility ensures that the gaming industry will not have to employ everyone who might come up with an application or content for a gaming manufacturer. Instead, a manufacturer will be able to contract with an independent contractor to develop a concept that it ultimately purchases, vets and incorporates into its gaming device.This amendment became effective July 1, 2009.

Intellectual Property

In addition to the above changes, Section 9 of S.B. 83 amends NRS § 463.162 to allow the board and the commission to call forward an individual for a finding of suitability or licensure if that person “[h]as ninvented, has developed or owns the intellectual property rights to a game for which approval by the Commission is being sought or has been received in accordance with regulations adopted by the Commission.” Previously, their statutory authority did not expressly extend this far into the manufacturing or gaming device value chain, but this expansion is in accord with the intention to expressly allow the board and the commission to keep pace with industry developments and effectively regulate the industry.This section became effective July 1, 2009.

Final Thoughts

Throughout this decade, the gaming industry has seen a tremendous influx of technology and innovation from other industries.Gaming manufacturers no longer develop and assemble everything in-house, but rely on an extended enterprise to source gaming device and system components from specialized manufacturers and software developers for design, assembly, coding, manufacturing or distribution. The evolution of technology, the manufacturing process, and the gaming industry as a whole will continue to press the boundaries of gaming law. As such, the additions and revisions to the Nevada Revised Statutes as provided by S.B. 83 will afford needed clarity of the extent to which regulatory oversight reaches into the gaming industry’s manufacture of gaming devices and systems.These refinements should resolve, at least for the time being, any question of Nevada’s gaming authorities’ statutory right to regulate any portion of the gaming manufacturing industry value chain.

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Authors

Karl F. Rutledge
Karl F. Rutledge
Partner, Chair - Commercial Gaming Group
krutledge@​lrrc.com
702.949.8317

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