In his victorious 2003 recall campaign against Gov. Gray Davis, Arnold Schwarzenegger promised to exact financial concessions from wealthy casino tribes.

He proceeded to negotiate lucrative tribal compacts that gave California a cut of the action from a major expansion of tribal gambling.

But now many tribes – and the courts – are pushing back. And the governor is on a losing streak.

The latest blow came Tuesday. A three-judge panel of the 9th U.S. Circuit Court of Appeals ruled that the Schwarzenegger administration wrongfully strong-armed a San Diego County tribe during unsuccessful negotiations over a casino expansion.

In a 2-1 opinion, the panel said the governor negotiated in bad faith by demanding that the tribe pay a share of casino profits into California's general fund in exchange for adding slot machines.

The court ruled that the demand constituted an improper attempt by the state "to impose a tax" in violation of the Indian Gaming Regulatory Act.

The opinion, and other recent legal rulings, have significantly chipped away at California's negotiating power with its casino tribes.

"This is the first time that a finding of 'bad faith' has ever been made by the court," said Nikki Symington, a spokeswoman for the Rincon Band of Luiseño Mission Indians from San Diego County. "That means the state is not playing fair and the tribes have no recourse. And this is the first time the fees charged by the state have been called an illegal tax."

Schwarzenegger spokesman Jeff Macedo said the Governor's Office intends to appeal the matter to the full 9th Circuit court.

"We believe that we negotiated in good faith," Macedo said. "We believe this is the federal courts telling the states again what they can and can't do by reducing our ability to negotiate."

George Forman, a leading California tribal attorney, said the ruling won't necessarily upset existing tribal gambling agreements. But he said it could lead to new legal challenges and put state officials in a vulnerable negotiating position if they seek payments for casino expansions.

"It is a big deal," Forman said. "What this case does, if it isn't reversed by the U.S. Supreme Court, is take the state's insistence of a fee or a tax paid into the general fund off of the table."

Earlier this month in San Diego, U.S. District Judge Larry Burns suspended millions of dollars in payments that a different San Diego tribe must pay the state under a 2004 gambling agreement that it had negotiated with Schwarzenegger.

The Pauma Band of Mission Indians originally paid California $315,000 a year under a 1999 agreement signed with Davis. It agreed to pay $7.75 million a year in the compact with Schwarzenegger in exchange for permission to expand from 1,050 slots to 2,000.

But a planned $300 million casino expansion collapsed, and the tribe was stuck with the state payments – until Burns suspended them, pending a ruling in the case.

The 1999 deals that 61 tribes signed with Davis entitled each to install a maximum of 2,000 slots.

Schwarzenegger was able to negotiate significant financial concessions from tribes – both at and below the 2,000-slot limit – by insisting that a state cap permitted only 32,151 slot machine licenses.

Wealthy gambling tribes such as the Pechanga Band of Luiseño Indians in Riverside County and the United Auburn Band near Sacramento negotiated tiered revenue-sharing agreements allowing up to 7,500 slots or unlimited machines over time.

Other tribes resisted. The San Pasqual Band of Mission Indians sent the state a $550 million demand for lost revenues because it was denied an expansion up to 2,000 slots. The Colusa Indian Community sued because it couldn't add 300 slot machines to its 846-slot casino.

In August, U.S. District Judge Frank C. Damrell Jr. ruled the state must make more than 10,000 new slot machine licenses available without additional tribal concessions. He said the state slot machine cap improperly estimated the number of slots that could have been anticipated under the 1999 casino deals.

In a special draw in October, tribes sought less than one-third of licenses offered.

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