S054681, Opinion — Wolf v. Oregon Lottery Commission

345
Argued and submitted November 5, 2007, decision of Court of Appeals reversed;
rule held valid March 27, 2008
Larry WOLF,
an Oregon elector
and president of the Oregon Education Association,
Varner Seaman, Maureen Crawford
and Nicholas Blosser,
Respondents on Review,
v.
OREGON LOTTERY COMMISSION
and Commissioners Kerry Tymchuk,
Bruce Andrews, Stan Robson,
and Richard Solomon,
in their official capacities,
Petitioners on Review.
(CA A125420; SC S05468 1)
l 82 P3d 180

346 Wolf v. Oregon Lottery Commission
C,JS, Lotteries § 13.
On review from the Court of Appeals.*
Denise G. Fjordbeck, Senior Assistant Attorney General,
Salem, argued the cause and filed the brief for petitioners on
review. With her on the brief were Hardy Myers, Attorney
General, and Mary H. Williams, Solicitor General.
Margaret S. Olney, of Smith, Diamond & Olney,
Portland, argued the cause and filed the brief for respondents
on review.
Before De Muniz, Chief Justice, and Gillette, Durham,
Balmer, Kistler, and Walters, Justices.**
GILLETTE, J.
The decision of the Court of Appeals is reversed. The rule
is held valid.
* Judicial Review of permanent rule adopted by the Oregon Lottery Commis
sion. 209 Or App 670, 149 P3d 303 (2006).
** Linder, J., did not participate in the consideration or decision of this case.

Cite as 344 Or 345
GILLETIE, J.
Under Oregon law, any person dissatisfied with an
administrative rule promulgated by an Oregon administra
tive agency may challenge the validity of that rule in an orig
inal proceeding filed in the Court of Appeals. ORS 183.400.1
This is such a case. The Oregon Lottery Commission (the
Lottery), after notice and a series of hearings, promulgated a
rule, former OAR 177-040-0026 (2004), dealing with the pay
ments that the Lottery would make to businesses (called
"retailers") that make video lottery games available to the
public.2 Among other things, the rule provided that " [t]he
compensation amount the Lottery shall pay to a retailer for
1 ORS 183.400 is set out in the text, 344 Or at 348-49.
2 The rule provided:
"( l} The compensation amount the Lottery shall pay a retailer for the sale
of video lottery game shares is calculated on a percentage of net receipts during
a business year. 'Net receipts' means the amount of money that is received at a
retailer's premises from the sale of video lottery game shares after the pay
ment of prizes. At the time a retailer signs a Retailer Contract, the retailer
must choose in writing to receive compensation in accordance with either sub
section (a) or subsection (b) of this section. If the retailer fails to choose as
required, the Lottery shall compensate the retailer pursuant to subsection (a)
of this section for the first business year the contract is in effect. For each sub
sequent business year the contract is in effect, no less than 60 days before the
beginning of the upcoming business year, the retailer may submit a written
notice to the Lottery that the retailer chooses to be compensated under the
alternative compensation method for the upcoming business year. If the
retailer does not submit or fails to timely submit a written notice, the Lottery
shall compensate the retailer using the retailer's current compensation
method for the next business year.
"(a) 3-Tier Option:
Net Receipts per Year-Compensation-Percent of Net Receipts
up to $175,000-32.5%
$ 175,000 to $475,000-26%
$475,000 and up-17%
For example, if a retailer's annual net receipts are $600,000, the
retailer would receive over the course of the business year: 32.5% of
the first $175,000 ($56,875), and 26% of the next $300,000 ($78,000),
and 17% of the remaining $125,000 ($21,250), for a total of$ 156,125.
"(b) 2-Tier Option:
l'!et Recei�)'"E,Jar-:-C()J!!Ptms11tio11 .f>ercent ()f Net; Receip�
up to $650,000-26%
$650,000 and up-19%
For example, if a retailer's annual net receipts are $1,000,000, the
retailer would receive over the course of the business year: 26% of the
first $650,000 ($1 69,000), and 19% of the remaining $350,000
($66,500), for a total of $235,500.

348 Wolf v. Oregon Lottery Commission
the sale of video lottery game shares is calculated on a per
centage of net receipts during a business year." The rule
established two options for payment, with retailers empow
ered to select which option they wished to use. Petitioners
challenged the rule on the ground, among others, that the
Lottery did not have statutory authority to promulgate the
rule. A panel of the Court of Appeals agreed, and invalidated
the rule. Wolf v. Oregon Lottery Commission, 209 Or App 670,
149 P3d 303 (2006). We allowed the Lottery's petition for
review and now reverse the decision of the Court of Appeals.
The statute that controls the outcome of this case is
ORS 183.400, which sets out the procedure for mounting a
facial challenge to administrative rules and describes the
scope ofjudicial review. That statute provides:
"( 1) The validity of any rule may be determined upon a
petition by any person to the Court of Appeals in the man
ner provided for review of orders in contested cases. The
court shall have jurisdiction to review the validity of the
rule whether or not the petitioner has first requested the
agency to pass upon the validity of the rule in question, but
not when the petitioner is a party to an order or a contested
case in which the validity of the rule may be determined by
a court.
"(2) The validity of any applicable rule may also be
determined by a court, upon review of an order in any man
ner provided by law or pursuant to ORS 183.480 or upon
enforcement of such rule or order in the manner provided
by law.
"(3) Judicial review of a rule shall be limited to an
examination of:
"(a) The rule under review;
"(b) The statutory provisions authorizing the rule; and
"(2) The compensation rates for the sale of video lottery game shares set
forth in this rule are limited to compensation for the sale of shares for video
poker games as described in OAR 177-200-0070."
The foregoing rule has since been renumbered as OAR 177-040-0027, and its
scope now is limited to video poker retailers, rather than to the broader spectrum
of retailers who offered various Lottery games to the public at the time that the for
mer rule was adopted. However, with respect to video poker retailers, the issues
the Court of Appeals addressed in this case remain viable.

Cite as 344 Or 345 349
"(c) Copies of all documents necessary to demonstrate
compliance with applicable rulemaking procedures.
"( 4) The court shall declare the rule invalid only if it
finds that the rule:
"(a) Violates constitutional provisions;
"(b) Exceeds the statutory authority of the agency; or
"(c) Was adopted without compliance with applicable
rulemaking procedures.
"(5) In the case of disputed allegations of irregularities
in procedure which, if proved, would warrant reversal or
remand, the Court of Appeals may refer the allegations to a
master appointed by the court to take evidence and make
findings of fact. The court's review of the master's findings
of fact shall be de novo on the evidence.
"(6) The court shall not declare a rule invalid solely
because it was adopted without compliance with applicable
rulemaking procedures after a period of two years after the
date the rule was filed in the office of the Secretary of State,
if the agency attempted to comply with those procedures
and its failure to do so did not substantially prejudice the
interests of the parties."
The Court of Appeals began its analysis by observing
that, in this case, in challenging the Lottery's rule, petition
ers do not contend that the Lottery violated rulemaking pro
cedures; they confine themselves to arguing that the rule
exceeded the Lottery's statutory authority, and that it vio
lated the provision of Article XV, section 4(3), of the Oregon
Constitution that dictates how the Lottery must spend its
proceeds. Wolf, 209 Or App at 672. The court then briefly
examined the terms of the challenged rule, which included a
tiered compensation scheme that bases compensation on a
percentage of net revenues. Id. at 673-74.
Turning first to the subconstitutional question, see
Planned Parenthood Assn. v. Dept. of Human Res. , 297 Or
562, 564-65, 687 P2d 785 ( 1984) (describing proper sequence
for analyzing challenges to administrative rules), the Court
of Appeals focused its analysis on ORS 461 .445, the statute
that authorizes the Lottery to enact rules like the one in
question. That statute provides:

350 Wolf v. Oregon Lottery Commission
"In establishing its schedule of payments to contractors,
the Oregon State Lottery Commission shall u ndertake to
develop a system that maximizes the net revenue to the state
for the p ublic purpose consistent with providing a reason
able rate ofreturn for contractors."
(Emphasis added. ) The pivotal phrase, the court noted, was
the direction to "undertake to develop" the system contem
plated by the statute. Wolf, 209 Or App at 674. The Lottery
had argued that the word "undertake," which is central to
that phrase, means "attempt," so that the statutory directive
to the Lottery is to attempt to create a schedule of payments
to contractors that "maximizes the net revenue to the state,"
while providing a "reasonable rate of return" to contractors.
The Court of Appeals rejected the Lottery's view
because, it said, to accept that view would render the statute
"hortatory." Id. at 67 4. Noting that the word "undertake" has
a vast array of other meanings beyond "attempt" (such as
"guarantee," "promise," "contract," and "covenant"), the
Court of Appeals concluded that the word must have a sub
stantive connotation and that the dictionary did not provide
an answer. Instead, the court stated,
" [a] more meaningful method of interpreting the term is to
ask whether the legislature would enact operative legisla
tion (as opposed to a general, introductory policy statement
preceded by a 'whereas' clause or its functional equivalent)
containing explicit, substantive standards (such as 'maxi
mize [ ] the net revenue' and 'reasonable rate of return'),
couched in mandatory terms ('shall undertake'), if the leg
islature's intention was merely to give advice. We conclude
that, in context, the term 'undertake' imposes a genuine
mandate. The Lottery is charged with the duty to develop a
system, and to do so subject to an express constraint: to
maximize state revenue consistent with providing retailers
a reasonable rate of return."
Id. at 675 (emphasis in original) . For that reason, the Court
of Appeals rejected the Lottery's argument-that ORS
461.445 merely directs the Lottery to make an effort to devise
a system that would maximize net revenues, while providing
a reasonable rate of return to retailers.

Cite as 344 Or
We do not agree with the Court of Appeals' analysis.
It is true, of course, that the legislature, in enacting ORS
461.445, intended to require that the Lottery "establish a
compensation system" by rule. But when one views the stat
ute in its entirety, it becomes clear that the word "under
take," as used in the statute, must mean "attempt."
Under ORS 461.445, the Lottery is to "undertake to
develop a system" that has two goals, viz. , "maximiz[ing] the
net revenue to the state" and "providing a reasonable rate of
return" to retailers. In that context, the outcome-a "sys
tem"-is to be the result of a process-"develop[ment]"-by
the Lottery that harmonizes two competing goals. Moreover,
interplay of those two goals will differ to some degree for each
of the hundreds of retailers with whom the Lottery deals.
(Each has different costs in rent, taxes, personnel, and phys
ical facilities, to name only the most obvious examples. More
over, each of those factors may vary to some degree for each
retailer from year to year.) Yet the Lottery's "system" is to be
imposed by a set of rules, which are quasi-legislative policy
choices of general applicability. See ORS 183.310(9) (defining
"rule"). Such rules will, of necessity, affect some retailers dif
ferently than others. No system is possible that precisely
strikes the statutory balance as to every retailer. Therefore,
the statute cannot mean that the Lottery "guarantees,"
"promises," "contracts," or "covenants" to produce such a sys
tem.3 The Lottery must seek to achieve the goals listed in
ORS 461 .445, but the validity of any "system" the Lottery cre
ates through rules is not contingent upon its meeting the two
competing goals vis-a-vis each and every retailer. It follows,
3 The Court of Appeals implicitly recognized that point when it rejected peti
tioners' argument that the statute did not permit the Lottery to balance the com
peting interests of retailers against revenues to the state but, rather, required it to
maximize revenue by selecting the lowest rate of return for retailers that would
keep them operating the games. The Court of Appeals ultimately solved the prob
lem this way:
"We * * conclude that ORS 461.445 requires the Lottery to establish a
retailer compensation system that balances two competing objectives: maxi
mizing state revenue and providing retailers with a reasonable rate of return.
In doing so, [however,] the Lottery is not obligated to establish a rate of return
that is the lowest one that the market will sustain[, i.e . , one in which the retail
ers receive only so much as will cause them to continue to participate in the
program]."
Wolf, 209 Or App at 676.

352 Wolf v. Oregon Lottery Commission
we believe, that the word "undertake," as used in ORS
461.445, can only mean "attempt," because the best that can
be hoped for in a rule (or a series of rules) is a rough approx
imation of the specified goals. That is, it is the attempt, not
the wholly accurate outcome, that the legislature has
directed the Lottery to make.
The Court of Appeals, however, appears to have read
that word as imposing a more demanding standard, and that,
in our view, led to the Court of Appeals' misunderstanding of
the scrutiny that it could apply to the system that the Lottery
created.
That misunderstanding is reflected in its treatment
of the concept of "rate of return"-a concept that had domi
nated petitioners' arguments. After consulting various texts
and other sources, the court concluded that
"the phrase 'rate of return' in the video lottery context
means the profits received by a retailer from the proceeds of
video lottery games-that is, the revenue minus the oper
ating cost of providing those games (for example, labor)
expressed as a percentage of the total capital investment
(for example, furniture or remodeling, or the opportunity
cost of using space for lottery games instead of other
revenue-generating uses). It follows that ORS 461.445
requires that the Lottery, in developing a compensation
system for retailers, obtain and consider data not only on
retailers' revenue, but also on their operating costs and cap
ital investments."
Wolf, 209 Or App at 678.
The court also relied on another provision of the
enactment that authorized the Lottery to permit video poker,
but which had been included in the Oregon Revised Statutes
as a note, rather than being codified: Oregon Laws 1991,
chapter 62, section 13. Section 13( 1 ) contemplated that the
Commission would contract for an "outside review" ofthe cost
of operating video lottery games and the manner in which
revenue from the operation of those games was shared
between retailers and the Lottery, with the review culminat
ing with a report to the Lottery. Or Laws 1991, ch 962,
§ 13( 1), compiled as a note after ORS 461.544 ( 1991) (so pro
viding). The Court of Appeals took special notice of section

Cite as
13(2), which provided, "After considering the findings and
recommendations of this report, the lottery commission shall
modify its provisions for the payments to contractors." The
court announced that the text of section 13, read in context,
"required the Lottery to measure retailers' compensation for
providing video lottery games in terms of revenue, operating
costs, and capital expenditures ('space * * * for the operation'
of machines)." Wolf, 209 Or App at 678-79 (emphasis in orig
inal). Finally, after going beyond the words of the legislation
itself and reviewing the legislative history, the Court of
Appeals also stated that,
"in using the term 'rate of return,' the legislature intended
to assign to the Lottery the task of formulating a compen
sation system for retailers taking into account their reve
nues, operating costs, and total capital investment, in such
a way as to provide a 'reasonable rate of return.' Our
remaining inquiry is whether the Lottery did so. "
Id. at 681 (emphasis added).
That last, emphasized statement illustrates the
error in the Court ofAppeals' analysis: As we have explained,
the law required only that the Lottery try to achieve the stat
utory goals. By inquiring into whether the Lottery "did so,"
the Court of Appeals was asserting that the statute meant
not that the Lottery was to try, but that it had to succeed at
providing a reasonable rate of return. As we have explained,
review by that standard asked more of the Lottery than the
statute did. Having mistaken its role in scrutinizing the
Lottery's rule, the Court of Appeals then turned to consider
"the role that the rulemaking record can play in our inquiry."
Id. (emphasis added). As we shall explain, the resulting
inquiry also was erroneous.
The Court of Appeals acknowledged the limitations
on judicial review set out in the text of ORS 183.400, the part
of the Administrative Procedures Act that grants it the
authority to consider facial challenges to agency rules. Id. at
682. As noted earlier, that statute provides, in part:
"(3) Judicial review of a rule shall be limited to an
examination of
"(a) The rule under review;

354 Wolfv. Oregon Lottery Commission
"(b) The statutory provisions authorizing the rule; and
"(c) Copies of all documents necessary to demonstrate
compliance with applicable rulemaking procedures."
ORS 183.400(3) (emphasis added). The court also acknowl
edged this court's opinion in AFSCME Local 2623 v. Dept. of
Corrections, 315 Or 74, 79, 843 P2d 409 ( 1992), where this
court stated:
"Aside from questions that might arise concerning the facts
surrounding the process of adopting a rule-questions not
raised in this case-judicial review under ORS 183.400 is
limited to the face of the rule and the law pertinent to it.
Numerous individual fact situations can arise under any
rule, but judicial review of the rule as applied to each of
those situations is reserved to other forums."4
(Emphasis added. )
Nonetheless, the court rejected the Lottery's argu
ment that, under those standards, the rulemaking record
made before the Lottery commission in its deliberations over
the appropriate content of former OAR 177-040-0026 (2004)
was irrelevant to the court's judicial review function. The
court stated, "Neither the statutes nor the cases construing
them support the Lottery's position." Wolf, 209 Or App at
682. The court then undertook an extensive examination of
both the evidence presented to the Lottery during the rule
making process and the statements made by various Lottery
commissioners at that time to determine whether the Lottery
had created a system that met the statutory goals. And,
based on that examination, the court concluded that former
OAR 1 77-040-0026 (2004) bore "no discernable relationship"
that that court could identify to the rate of return described
in the governing statute. Therefore, the court held that the
rule was invalid. Wolf, 209 Or App at 691-92.
4 We note in passing that the phrase, "the face of the rule," means the wording
of the rule when read in the context of the other rules of which it is a part. We did
not mean to suggest by the use of that phrase inAFSCME Local 2623 that the rule
was to be read in isolation.

355
It was error for the court to consider the record in the
way that it did, and further error to utilize that record as a
justification for striking down the Lottery's rule. The govern
ing statute, ORS 183.400(3), could not be phrased more
plainly. The record on review (aside from information con
cerning whether the statutory procedures for rulemaking
were followed, an issue not presented by this case) consists of
two things only: the wording of the rule itself (read in con
text) and the statutory provisions authorizing the rule. ORS
183.400 (3)(a), (b). See Planned Parenthood Assn. , 297 Or at
572-74 (illustrating process). See also ORS 183.400(4)(a), (b)
(court may declare rule invalid "only if' the rule violates a
constitutional provision or "exceeds the statutory authority
of the agency") (emphasis added).
This court's statement in AFSCME Local 2623, that
judicial review is limited under ORS 183.400 to the face of the
rule and the law pertinent to it, is precisely on point. Nothing
in that decision invites a reviewing court to consider, in addi
tion to the relevant statutes and the wording of the rule (read
in context), particular evidence that was offered in the course
of the rulemaking proceeding or the comments of individual
rulemakers concerning that evidence and their thoughts
about their rulemaking task. Indeed, an inquiry into the
thinking processes of administrators and agency heads who
were performing their quasi-legislative function as rule
makers is impermissible, given the limited scope of the issues
under ORS 183.400(3).
It follows from the foregoing that the Court of
Appeals should have limited its inquiry to the wording of the
rule, read in context, and the applicable statute, ORS
461 .445 . When that is done, it becomes apparent that the
rule passes the statutory test: The legislature directed the
Lottery to attempt to establish a payment scheme that would
maximize state revenues while providing contractors with a
reasonable rate of return. Former OAR 177-040-0026 (2004)
fulfilled the legislative directive. It is true that the rule did
not speak either in terms of "maximizing revenue" or of
"reasonable rate of return," but the absence of those phrases
does not show that the Lottery was not following the statute.
By regulating a contractor's net receipts from lottery games

356 Wolfv. Oregon Lottery Commission
shares, the rule necessarily established what revenues the
Lottery would receive and, derivatively, what each retailer's
particular rate of return would be. The rule was not facially
invalid on the statutory ground urged by petitioners. The
Court of Appeals' contrary conclusion was error.
The question arises concerning what disposition to
make of this case. As noted, petitioners challenged the rule in
question on both statutory and constitutional grounds.
Because of its view of the case, the Court of Appeals did not
need to address petitioners' constitutional challenge to the
rule. Ordinarily, we now would remand the case to the Court
of Appeals to address petitioners' constitutional arguments.
However, both parties ask us to dispose of the remaining
issue in this opinion. We believe that it is desirable to do so in
this case.
We have considered petitioners' constitutional argu
ments. Petitioners assert that former OAR 177-040-0026
(2004) is invalid, because the rates set by the
Lottery in that rule exceed permissible "costs of administra
tion" of the Lottery, contrary to that requirement in Article
XV, section 4(3), of the Oregon Constitution.5 Petitioner's
argument in this respect is doubly mistaken. First, the argu
ment shares a flaw with petitioners' statutory arguments,
i.e. , it assumes that the reviewing court can look behind the
wording of the rule, read in context. That is not correct, as we
already have explained. Second, the "costs of administration"
mentioned in section 4(3), and on which petitioners rely, are
the Lottery's administrative costs. See Ecumenical Ministries
u. Oregon State Lottery Comm. , 318 Or 551, 567, 871 P2d 106
( 1994) (so explaining). Therefore, they are not the costs of
retailers that the Lottery's rule makes allowance for. Peti
tioners' constitutional arguments are not well taken in the
context of a proceeding under ORS 183.400.
5 Article XV, section 4(3), of the Oregon Constitution provides:
"There is hereby created the State Lottery Commission which shall estab
lish and operate a State Lottery. All proceeds from the State Lottery, including
interest, but excluding costs of administration and payment of prizes, shall be
used for any of the following purposes: creating jobs, furthering economic
development, financing public education in Oregon or restoring and protecting
Oregon's parks, beaches, watersheds and critical fish and wildlife habitats."

Cite as 344 Or 345
The decision of the Court of Appeals is reversed. The
rule is held valid. 6
6 Our holding in this case arises out of the limited scope of review allowed
under ORS 183.400. We do not by our holding suggest that petitioners could not in
the future seek relief under another procedure, such as a contested case, or through
a declaratory judgment. See, e.g. , ORS 183.410 (declaratory judgment proceeding
before agency).