More On Woolley Progeny

I didn’t expect to revisit (or even provide any further thoughts on) the Woolley line of cases this quickly (see my earlier Deal Tracks entitled “Woolley and Its Progeny”), but I read an interesting (OK, I found it interesting) summary of a Department of Justice “Memorandum Opinion” recently published on the topic of states leasing their lotteries to a private operator.

As discussed in an excellent newsletter, Indiana Gaming Insight, the DoJ recently opined that leasing a State Lottery would run afoul of Federal law against private lotteries (there is an exception for lotteries conducted by States). The relevance of this Memorandum Opinion, which has almost the force of law, is its discussion of the difference between the provision of management and contract services and an actual, more-than-de minimis investment by the operator. (Several states have explored the lease of their lotteries to private operators, which would pay “rent” in a lump sum upfront, possibly acquire the lottery assets and obtain a term of years – 99, with rights to extend – to operate the lottery at an anticipated profit.)

Two sentences in the Memorandum Opinion jumped out at me. First, the DoJ said, “That a State contracts with a private company to assist in certain functions associated with the lottery, even where the contactor is compensated for its services by a relatively small fixed percentage of the revenues of the lottery, does not mean that the State itself is no longer conducting the lottery.”  Second, the DoJ “does not foreclose the possibility that the State may, consistent with the limits of the exemption, permit the private management contractor to own and provide most of the assets needed for the lottery… without elevating the role of the company providing the assets to that of a partner or joint venturer in the lottery.

These sentences are reminiscent of the thread of the arguments made by Marriott in the Manchester/Pacific Landmark and Hyatt in the Hyatt/GGF case. In fact, in the Hyatt/GGF case, Hyatt argued that its Management Agreement without cash investment actually elevated it to a “joint enterprise” with the owner. There, the court acknowledged that an “agency coupled with an interest” might well derive from such a “joint enterprise;” it simply found that Hyatt did not have one.

Further discussion in the Memorandum Opinion made me feel as if I were reading yet another (and likely successful) claim of “agency coupled with an interest.” Indeed, a hotel manager might want to review the DoJ Memorandum Opinion and attempt to structure a deal close to the deal on which the Memorandum Opinion turns. From an owner’s perspective, the good news is that the operator likely will not want to put up so much money upfront.

This is particularly relevant in the Woolley line because the lottery opinion may contain an analysis analogous to that which would be used in determining whether a hotel operator has an agency coupled with an interest, which would render a Management Agreement by a hotel operator non-terminable.

All operators not currently incorporated in Maryland and using Maryland law to govern their management agreements likely want to know how to create an agency coupled with an interest.  This discussion is best left to a much longer article, but suffice to say that, in this time where operators probably will be asked to make investments in hotels to help owners to avoid mortgage default (particularly in connection with upcoming maturities), those operators certainly will look to this language as instructive in formulating an investment to enable their management to become an “agency coupled with an interest."

And, here I had thought that virtually nothing the Bush Justice Department could do might actually challenge me to think.