Burrus, Freddie v. IN State Lottery Com

In the

United States Court of Appeals

For the Seventh Circuit

No. 08-1142

F REDDIE B URRUS, et al.,

Plaintiffs-Appellees,

v.

S TATE L OTTERY C OMMISSION OF INDIANA, d/b/a

T HE H OOSIER L OTTERY,

Defendant-Appellant.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 05 C 1263—Sarah Evans Barker, Judge.

A RGUED JUNE 6, 2008—D ECIDED O CTOBER 6, 2008

Before B AUER, R IPPLE, and M ANION, Circuit Judges.

M ANION, Circuit Judge. Plaintiffs, seven former employ-

ees of the State Lottery Commission of Indiana, which

does business under the name Hoosier Lottery (herein-

after “Lottery”), sued their former employer under

42 U.S.C. § 1981 and Title VII of the Civil Rights Act of

1964. They claimed that they were fired because of their

race. The Lottery moved to dismiss the plaintiffs’ § 1981

claims on the basis that it was a state agency and therefore

2 No. 08-1142

entitled to sovereign immunity pursuant to the Eleventh

Amendment. The district court denied the Lottery’s

motion, and we affirm.

I.

The Indiana General Assembly created the Lottery in

1989 to operate lottery games “as a separate body politic

and corporate from state government.” Ind. Code § 4-30-1-

2(1). It intended the Lottery to function “as much as

possible as an entrepreneurial business enterprise,” and

mandated “[t]hat the lottery games be operated as a self-

supporting revenue raising operation.” Id. § 4-30-1-2(1), (3).

Over the years, the Lottery has more than proved its ability

to raise revenue: from its inception, the Lottery has made

over $3 billion in profits, including over $210 million in

fiscal year 2007 alone. Ind. State Budget Agency, Distribu-

tion of Build Indiana Fund and Lottery and Gaming

Revenues 3 (2007), http://www.in.gov/sba/files/LGS_

Distribution_Report_ 2007.pdf (last visited Sept. 23, 2008).

To enable the Lottery to commence operations, the

Indiana General Assembly authorized up to $18 million in

start-up appropriations. As it turned out, the Lottery did

not need that much money to get up and running. The

Lottery’s audit statement of cash flows for its first

fiscal year shows that the money actually appropriated

from the State during that period was just over $6 million,

and that sum was promptly repaid with interest during

the same fiscal year. The parties have stipulated that the

Lottery’s financial reports show no other appropriations

from the state other than that initial, promptly repaid sum.

No. 08-1142 3

The governor of Indiana appoints a five-member com-

mission to operate the Lottery as well as a director, who

is charged with “maximiz[ing] revenues in a manner

consistent with the dignity of the state and the welfare of

its citizens.” Ind. Code §§ 4-30-5-1, -3. The Lottery is “a

body politic and corporate separate from the state.” Id. § 4-

30-3-1. It has the authority to sue and be sued in its own

name. Id. When the Lottery is sued, the director of the

Lottery makes the final decision about whether the

Lottery will agree to a settlement and how much the

Lottery will pay. When the Lottery pays a monetary

settlement or any other legal obligation, the money comes

from the Lottery’s administrative trust fund as a general

operating expense. Should the Lottery default on any of

its monetary obligations, the Indiana Attorney General’s

official position is that the state would not be liable. 1991

Ind. OAG No. 10.

The Lottery deposits all of its revenue, which is “contin-

ually appropriated” to the Lottery, in an administrative

trust fund that is separate from the state’s general fund. See

Ind. Code §§ 4-30-15-1, 4-8.1-1-3. The money in the ad-

ministrative trust fund is used to pay the prizes and the

Lottery’s expenses, such as the cost of supplies and any

legal settlement or monetary judgment. Id. § 4-30-16-1.

After the payment of prizes and expenses, the surplus

revenue from the administrative trust fund is disbursed as

follows: $7.5 million each quarter goes to the state treasurer

for deposit in the Indiana state teachers’ retirement fund;

$7.5 million each quarter goes to the state treasurer for

deposit in the pension relief fund; and any surplus re-

maining in the Lottery fund on the last day of January,

4 No. 08-1142

April, July, and October after the transfers to the pension

funds goes to the state treasurer for deposit in the “build

Indiana fund.” Id. § 4-30-16-3. The build Indiana fund is

used for state or local capital projects, though prior to

using the funds for that purpose the state treasurer is

required to transfer $19,684,370 each month from the

build Indiana fund to what is exhaustively titled the “state

general fund motor vehicle excise tax replacement ac-

count.” Id. § 4-30-17-3.5(a). In the event that the funds

in the build Indiana fund are insufficient to meet the

required transfer amount, the “auditor of state” is required

to make up the difference from the state general fund.

Id. § 4-30-17-3.5(b).

For the most part, the Lottery operates independently

from the state. It establishes its own annual budget and is

not required to submit its budget to the Indiana General

Assembly for approval. It determines the type of lottery

games it conducts and the manner in which it conducts

them. See id. § 4-30-3-7. It selects its own internal auditor.

It has the power to purchase its own insurance; own, sell,

and lease real and personal property; and own and

enforce copyrights, trademarks, and service marks. Id. §§ 4-

30-3-10 to -12. It has the power to enter into contracts

for the purchase or lease of goods and services. Id. §§ 4-30-

3-16 to -17. And it establishes and maintains its

own personnel program for its employees.

Though the Lottery has substantial operational inde-

pendence, it is still heavily regulated by the state. The

Lottery is required to maintain weekly records of lottery

transactions. Id. § 4-30-3-4. It is subject to an annual audit

by the state board of accounts and the state budget agency.

No. 08-1142 5

Id. §§ 4-30-19-1 to -2. It must submit revenue and expendi-

ture reports to the state budget agency and each legisla-

tive member of the budget committee upon request. Id. § 4-

30-19-4.2. It also has to submit monthly and annual reports

to the governor disclosing revenue, expenses, and prize

payouts. Id. § 4-30-3-3. In addition, the Lottery, like other

public entities, is subject to the Indiana Open Door Law,

see id. § 5-14-1.5-2(a)(3)(B), and the Indiana Public Records

Act, id. § 5-14-3-2(m)(8).

This action was brought after each of the plaintiffs’

employment at the Lottery was terminated between

January and May 2005. All but one of the plaintiffs

brought their employment discrimination claims against

the Lottery solely under § 1981. The Lottery moved to

dismiss the plaintiffs’ § 1981 claims on the basis of sover-

eign immunity. The district court denied the motion, and

the Lottery appeals.1

II.

This appeal presents only one issue: whether the Lottery

is entitled to assert state sovereign immunity under the

Eleventh Amendment to defeat the plaintiffs’ § 1981

1

We have jurisdiction over this appeal pursuant to the collat-

eral order doctrine. Puerto Rico Aqueduct & Sewer Auth. v. Metcalf

& Eddy, Inc., 506 U.S. 139, 147 (1993) (holding that “States and

state entities that claim to be ‘arms of the State’ may take

advantage of the collateral order doctrine to appeal a district

court order denying a claim of Eleventh Amendment immu-

nity”).

6 No. 08-1142

claims. Our review of that issue is de novo. Wisconsin v. Ho-

Chunk Nation, 512 F.3d 921, 929 (7th Cir. 2008) (noting that

a grant or denial of sovereign immunity is reviewed

de novo).

The Eleventh Amendment provides: “The Judicial power

of the United States shall not be construed to extend to any

suit in law or equity, commenced or prosecuted against

one of the United States by Citizens of another State, or by

Citizens or Subjects of any Foreign State.” U.S. Const.

Amend. XI. “Although the Amendment speaks of suits

filed by citizens of another state, the Supreme Court ‘has

consistently held that an unconsenting State is immune

from suits brought in federal courts by her own citizens

as well as by citizens of another State.’ ” Peirick v. IUPUI

Athletics Dep’t, 510 F.3d 681, 694-95 (7th Cir. 2007) (quoting

Edelman v. Jordan, 415 U.S. 651, 662-63 (1974) (internal

citations omitted)). In addition, the Supreme Court has

held that state agencies, as arms of the state, are

immune from suit under the Eleventh Amendment. See

Edelman, 415 U.S. at 663; see also Joseph v. Bd. of Regents

of Univ. of Wis. Sys., 432 F.3d 746, 748 (7th Cir. 2005).

The Lottery claims that it is a state agency; the plaintiffs

assert that it is not. To determine if a particular entity is an

arm of the state, courts look primarily at two factors: (1) the

extent of the entity’s financial autonomy from the state;

and (2) the “general legal status” of the entity. Kashani v.

Purdue Univ., 813 F.2d 843, 845-47 (7th Cir. 1987). Of

the two, the entity’s financial autonomy is the “most

important factor.” Peirick, 510 F.3d at 695; see also

Edelman, 415 U.S. at 663. In evaluating that factor, we

No. 08-1142 7

consider the extent of state funding, the state’s oversight

and control of the entity’s fiscal affairs, the entity’s

ability to raise funds independently, whether the state

taxes the entity, and whether a judgment against the

entity would result in the state increasing its appropria-

tions to the entity. Kashani, 813 F.2d at 845; see also Hess v.

Port Auth. Trans-Hudson Corp., 513 U.S. 30, 48 (1994)

(recognizing “the vulnerability of the State’s purse as the

most salient factor in Eleventh Amendment determina-

tions”).

Taking into account these considerations, we find that

the first factor cuts heavily against finding that the Lottery

is an arm of the state of Indiana. The Lottery’s complete

lack of fiscal reliance upon the state is plain. The Lottery’s

funds are kept in an administrative trust fund separate and

apart from the state’s general fund. True to the state

legislature’s intent that the Lottery “be operated as a self-

supporting revenue raising operation,” Ind. Code § 4-30-1-

2(3), the Lottery funds all of its own operations with

the revenue generated from the games it operates. The

revenue the Lottery generates from the games is

enormous, totaling billions of dollars in profits alone.

Given that large stream of revenue, the Lottery has no

need for recourse to the state treasury. The Lottery has not

received any funds from the state treasury since the

$6 million given upon its inception, and that money was

quickly paid back with interest.

Most importantly, the Lottery pays any legal obligation

from its own administrative trust fund. The Indiana

Attorney General has expressly disclaimed liability for

any of the Lottery’s monetary obligations. See 1991 Ind.

8 No. 08-1142

OAG No. 10. Under that official opinion, the state treasury

is not exposed should there be a monetary judgment

against the Lottery in this case. Because the Lottery

raises revenue on its own account, controls and funds

its own operations, and does not expose state coffers

when monetary judgements are rendered against it, we

conclude that it is an entity financially independent from

the state. Cf. Miller-Davis Co. v. Ill. State Toll Highway Auth.,

567 F.2d 323, 327 (7th Cir. 1977) (holding that the

Eleventh Amendment did not bar suit against the

Illinois State Toll Highway Authority where the highway

authority raised its own revenue through bonds and tolls

and the state expressly disclaimed liability for the bonds).

The Lottery’s protests to the contrary are unavailing. The

Lottery argues that it maintains significant financial ties

to the state because its primary purpose is to raise

revenue for the state. According to the Lottery, should a

monetary judgment deprive it of the ability to meet its

revenue goals, the state would have less revenue, thereby

impacting the state treasury. It is undisputed that a great

portion of Lottery revenues—the money left over after

the Lottery’s operating costs are covered—is transferred

to the Indiana state teachers’ retirement fund, the Indiana

pension relief fund, and the build Indiana fund. And it is

also undisputed that, according to statute, if the build

Indiana fund has insufficient funds to meet its transfer

requirements to the state general fund motor vehicle

excise tax replacement account, the state has to tap the

general fund to make up the difference. See Ind. Code § 4-

30-17-3.5(b). (Although not mentioned in the record, we

will even assume that the same is true of the other two

funds.)

No. 08-1142 9

Nevertheless, that is not the type of effect on the state

fisc that our prior cases have considered the mark of a

state agency. We have been concerned with the effect of

monetary judgments on the state treasury only when the

entity against which the judgment is rendered is depend-

ent on state appropriations. See, e.g., Kashani, 813 F.2d at

846 (“If a judgment were awarded against Purdue, the

state treasury would not write out a check to Kashani.

But in view of the fact that Purdue is by design dependent

on state appropriations, which are evidently carefully

geared through close oversight to meet the changing

financial needs of the university, it is apparent that the

payment would directly affect the state treasury.”). In

contrast, the Lottery is not dependent on state funds for

its operations. There are therefore no fungible funds from

the state treasury that would have to be replaced in the

event of a judgment award. The state may be deprived of

some of its anticipated (and hoped-for) revenue, but “the

Supreme Court has rejected the state-benefit theory of

sovereign immunity.” Takle v. Univ. of Wis. Hosp. & Clinics

Auth., 402 F.3d 768, 770 (7th Cir. 2005). According to the

Supreme Court,

The proper focus is not on the use of profits or surplus,

but rather is on losses and debts. If the expenditures

of the enterprise exceed receipts, is the State in fact

obligated to bear and pay the resulting indebtedness

of the enterprise? When the answer is “No”—both

legally and practically—then the Eleventh Amend-

ment’s core concern is not implicated. . . . It would

indeed heighten a “myster[y] of legal evolution” were

we to spread an Eleventh Amendment cover over an

10 No. 08-1142

agency that consumes no state revenues but contrib-

utes to the State’s wealth.

Hess, 513 U.S. at 51 and n.21. The Lottery is a pure profit

producer for the state, with no potential for the state to

incur debt. The fact that a judgment against the Lottery

may “affect” the state treasury in the sense that the state

treasury will not be quite as flush absent the money

paid the plaintiffs by the Lottery is not pertinent to the

Eleventh Amendment analysis.

In arguing that it is financially dependent on the state,

the Lottery also points to a statute that states that the

money in the Lottery’s administrative trust fund is

“continually appropriated to the commission for the

purposes specified in this article.” Ind. Code § 4-30-15-1.

The money in the Lottery’s administrative trust fund is

completely generated by the Lottery. The Lottery is a

source for state revenue, not a siphon. The type of “appro-

priation” referred to in § 4-30-15-1 of the Indiana Code

is therefore not an appropriation from the state treasury.

Thus, it is of a different kind than the appropriations

we have found to be the mark of a state agency, namely,

those appropriations that come “directly from the state.”

Kashani, 813 F.2d at 845.

Moving on to the second factor—the general legal status

of the entity—it too supports a conclusion that the Lottery

is not an arm of the state. The Lottery generally controls

its own operations. Like a private enterprise, the Lottery

maintains control over its own operating budget and has

the power to enter into contracts; own and enforce trade-

marks and service marks; sell, own, and lease property;

and sue and be sued in its own name. Furthermore, the

No. 08-1142 11

statute creating the Lottery states that the Lottery is “a

body politic and corporate separate from the state,” Ind.

Code § 4-30-3-1 (emphasis added), and should “function

as much as possible as an entrepreneurial business enter-

prise.” Id. § 4-30-1-2(1). The Indiana Attorney General,

interpreting that statutory language, determined that the

state will not be liable for any financial obligations of the

Lottery. 1991 Ind. OAG No. 10. And the Indiana Supreme

Court, in applying that statutory language, has held

that employees of the Lottery are not employees of the

state of Indiana. Nobles v. Cartwright, 659 N.E.2d 1064, 1072

(Ind. Ct. App. 1995). In short, the state acts like the Lottery

is a separate entity. While the question of sovereign

immunity is a matter of federal law, the state of Indiana’s

own view of the entity it created is significant. See Peirick,

510 F.3d at 696. And the manner in which Indiana law

treats the Lottery cuts heavily against finding that the

Lottery is an arm of the state.

The Lottery, unsurprisingly, takes a different view of

its status vis à vis the state. The Lottery points to the

fact that the governor appoints the members of the com-

mission that operates the Lottery in an attempt to show

that it is a mere appendage of the state. But “the power

to appoint is not the power to control.” Takle, 402 F.3d at

770; see also Auer v. Robbins, 519 U.S. 452, 456 n.1 (1997)

(noting that although the governor appointed four of the

five-member board of police commissioners, the “board

[was] not subject to the State’s direction or control in any

other respect”). As we have explained above, despite the

governor’s appointment of its commissioners, the Lottery

sets its own budget, controls its day-to-day operations,

sues in its own name, and brings in its own revenue.

12 No. 08-1142

Indeed, with respect to litigation, the director of the

Lottery, and not a state officer like the attorney general,

makes the final decision about whether the Lottery will

agree to a settlement and how much the Lottery will pay.

Moreover, the governor’s power to appoint the Lottery

commissioners is overshadowed by the Lottery’s finan-

cial independence from the state. “[W]here the evidence is

that the state did not structure the entity to put the state

treasury at risk of paying the judgment, then the fact that

the state appoints the majority of the governing board of

the agency does not itself lead to the conclusion that the

entity is an arm of the state.” Fresenius Med. Care Cardiovas-

cular Res., Inc. v. P.R. & Caribbean Cardiovascular Ctr. Corp.,

322 F.3d 56, 68 (1st Cir. 2003). “Moreover, rendering [the

control that comes through the exercise of a governor’s

appointment power] dispositive does not home in on the

impetus for the Eleventh Amendment: the prevention of

federal-court judgments that must be paid out of a State’s

treasury.” Hess, 513 U.S. at 48.

Here, there is no question that the state of Indiana

intended to protect its state purse from a judgment

against the Lottery. The several provisions from the

Indiana Code cited above clearly establish the Lottery as

an entity separate from the state. And the official opinion

of the Indiana Attorney General verifies that the Lottery

is not an agency of the state. Accordingly, that the Lottery

operates independently from Indiana’s state treasury is

the determinative factor in the Eleventh Amendment

analysis. That factor greatly outweighs the fact that Indi-

ana’s governor appoints the Lottery commissioners. See

id. at 47-48; Takle, 402 F.2d at 770-71.

No. 08-1142 13

We are similarly unpersuaded by the Lottery’s reference

to the state regulations to which it is subjected. The

regulations demonstrate that the public takes a healthy

interest in its operation, like the public does with a

utility or any other quasi-public entity. Beyond that,

however, the regulations for Eleventh Amendment pur-

poses are not significant. Similar regulations did not

change our conclusion in Takle that the University of

Wisconsin Hospital and Clinics Authority was not an

arm of the state of Wisconsin. See Takle, 402 F.3d at 771

(referring to the fact that the University of Wisconsin

Hospital and Clinics Authority was subjected to Wiscon-

sin’s open-meeting laws as “minor strings”); see also

Durning v. Citibank, N.A., 950 F.2d 1419, 1427 (9th Cir.

1991) (“Admittedly, the Authority is more closely tied to

the state than an ordinary corporation. The governor and

state treasurer serve on its board, and it is subject to the

state’s open meetings law. Nonetheless, its separate

corporate status is clearly established.”). Likewise, the

existence of such regulations does not alter our conclu-

sion here. The Lottery is not entitled to invoke the

Eleventh Amendment.

III.

The Lottery is not entitled to sovereign immunity

because it is not an arm of the state. We therefore A FFIRM

the decision of the district court denying the Lottery

immunity from the plaintiffs’ 42 U.S.C. § 1981 claims.

10-6-08