Internet gaming site settles patent lawsuit

By Liz Benston (contact)

Tuesday, Jan. 21, 2003 | 10:51 a.m.

In one of few intellectual property disputes of its kind related to Internet gambling, a startup Internet enterprise has settled a patent infringement lawsuit against the operator of an Antigua-based Web casino.

The case pitted i2corp.com -- a small, financially strapped company formerly based in Las Vegas -- against DrHo.com, considered one of the largest operators of a live gambling site on the Internet.

DrHo.com, operated by Caribbean Online Ltd, pays a licensing fee to use the name of Macau casino mogul Stanley Ho. Ho, who has a virtual monopoly on the casino market in the Chinese gambling outpost, doesn't own the site himself but has an indirect interest in its operations. Ho's son-in-law, Peter Kjaer, is the site's chief executive officer.

Home Gambling Network, a subsidiary of i2corp.com, owns a "method patent" that governs the process by which gamblers worldwide can use electronic financial transactions to wager on live games and events. The patent doesn't apply to the vast majority of gambling sites, which aren't live and merely offer a virtual version of casino games.

In 2001 Home Gambling Network sued Ho, Kjaer, Caribbean Online Ltd., two separate companies controlled by Ho and other parties in federal court in Las Vegas, alleging patent infringement.

Both parties claimed victory Monday.

The decision not only gives the company clout in future negotiations with Internet operators but shows that the patent can hold up in court, Home Gambling Network President Mel Molnick said.

"As Dr. Ho and Caribbean Online Ltd. have found out, it would have been more economical to license our patent in the first place than to get prosecuted in the courts and have to pay all the associated costs, attorneys' fees and damages," he said.

The company aims to negotiate with companies rather than sue, Molnik added.

"Nobody has yet had the courtesy to sit down and discuss it, they just thought they could step on us -- and they made a big mistake," he said.

"We were put in this position. We have to protect what's ours ... or (the patent) is worthless."

Caribbean Online Ltd. will pay Home Gambling Network an up-front fee and royalties on future revenue related to licensing the patent -- funds that will help the company pursue other products related to online gambling, he added.

Terms of the settlement agreement were confidential.

But Home Gambling Network's legal maneuvers failed in a number of respects, said David Enzminger, the Los Angeles-based lead defense attorney who represented Ho, Kjaer and their related companies in the case.

Last year U.S. District Court Judge Larry Hicks denied a move by Home Gambling Network to shut down the site with a preliminary injunction. Hicks also dismissed Ho and two of his Asian companies, along with two Canadian companies and three Canadian executives, as defendants on the basis that the companies and their executives had no operations in the United States.

A motion asking for sanctions against the defendants for failing to provide documents during the discovery period also was denied.

The suit and the resulting settlement will have no material effect on the site, Enzminger said.

"We think that the litigation settled on terms that were win-win for both sides."

The site has since been renamed DrHo888.com to capitalize on numbers that are considered lucky for Asian gamblers, the site's primary market -- a change that has nothing to do with the suit, Enzminger said.

The settlement is the fourth of its kind for Home Gambling Network but marks the company's largest-ever defendant, Molnick said.

The company's patent was granted in the United States and therefore governs the processing of electronic transactions on live games for U.S. gamblers or for sites that are based in this country, Molnick said.

Over the past few years, the company has shut down three live gambling site operators as a result of patent infringement suits. Live gambling allows players anywhere in the world to bet online with real dealers. Apart from DrHo888.com, company officials say they're not aware of any other such significant sites on the Web.

Last year, i2corp.com relocated from Las Vegas to Solvang, Calif., in part to seek better medical coverage for its staff and to capitalize on emerging Internet gambling opportunities with Indian tribes in the Golden State.

Company officials say they have been among the first Internet gambling companies to capitalize on a coveted intellectual property patent.

"The patent is the product. And it's definitely a viable product," i2corp.com President Chris Almida said. "We've seen that other companies want to patent this as a business model."

The company is struggling financially, records show.

The company posted a loss of $184,627 for the six months ended Sept. 30, 2002, compared with a loss of $282,666 for the same period in 2001, according to the company's most recent quarterly financial statement.

The decreased loss was due primarily to cutting overhead and other expenses, the company said.

"Our current cash on hand is not sufficient to meet our ongoing operating expenses," the filing stated, noting that the company is still in the "initial stages" of generating licensing revenue and reported only $12,000 in such revenue for the six months ended Sept. 30, 2002.

The company, which is solvent, is required by securities laws to warn investors of risk, Almida said. It also wasn't relying on the settlement to stay in business, he added.

Method patents, which govern processes rather than products, are a relatively recent invention.

A U.S. Court of Appeals decision involving a lawsuit by Boston-based investment bank State Street Bank & Trust Co. in 1998 paved the way for method patents to be applied to the way companies do business.

Still, a court has yet to clarify just how broad a method patent can be applied, Enzminger said.

And because Home Gambling Network's past three suits were either settled out of court or were the result of a judgment rendered before actual litigation, a judge has yet to define how the company's method patent applies to the Internet gambling process, he added.

Home Gambling Network defendants have taken the position that the patent should be applied to a much narrower part of the company's business.

"In our view (the patent applies to) a tiny aspect of live Internet gambling," Enzminger said.

As an outcome of the patent suits, i2corp.com has been approached by entities representing state governments that are interested in partnering with the company to pay licensing fees in exchange for issuing the patents to Internet gambling operators, Molnick said.

States want to receive revenue from licensing such operations while having the authority to prosecute non-licensed sites in federal court for patent infringement -- a more effective method of regulating Web casinos than existing federal rules that are murky at best, he said.