Patent feud looms over intranet gaming

A secretive merger Tuesday between a shell corporation and a privately held Las Vegas company could lead to a rash of lawsuits that may delay plans for some casino operators to set up intranet betting operations.

The shell company, PCG Media Inc., is scheduled to issue 24 million shares of stock it values at $72 million to acquire Home Gambling Inc., whose sole asset is a "method patent" covering electronic wagering on live events.

The merger calls for HGN to operate under its own name as a wholly owned subsidiary of PCG Media, whose only asset is its publicly traded stock. PCG would also change its name to i2corp.com.

The shares of PCG, a former small airplane parts makers originally domiciled in California, are thinly traded. In recent days, the price has wavered between $5 and $5.50 a share.

The stock trading and the price fluctuations are interesting because the company has had no revenue for years, making it difficult for outsiders to judge the value of the stock.

A proxy statement says PCG has 6 million shares outstanding, 5.3 million of them held by companies in Ohio, Georgia, North Carolina, Missouri and the Bahamas and 50,000 held by two unsalaried directors.

The statement said PCG will issue 24 shares of its stock for each share of HGN, which has 1 million shares outstanding. It said it has valued the PCG stock at $3 a share.

The proxy statement said the merger terms were approved by directors of both companies "on the basis of a number of factors, including the financial condition and historical earnings of the two corporations and the comparative market prices and book values thereof."

Lawyers for and executives of PCG Media and HGN declined to answer most questions about the deal, their valuation of it, the reason behind the name change for PCG Media to i2corp.com or future plans.

But HGN principal deedee Molnick -- who will become president of PCG when the merger is consummated -- indicated the patent owned by HGN may be used as the basis of a lawsuit against companies such as Virtgame.com and Youbet.com.

"The patent covers all remote wagers on live events using electronic transactions," she said. "Whether you're doing live racing, bingo, casino games or sports events, if the player isn't present and there's an electronic transfer of money, we get a licensing fee. That's the whole basis of our business."

HGN doesn't accept wagers. It was formed to license other entities to operate under its patent, she said. Molnick said the method patent covers any technology used to let people wager away from a track or casino on live racing, sports events and casino games.

HGN has already sued several Internet gambling companies, asserting that by taking bets on live sporting events, they are violating the company's patent. HGN claimed its patent covers "all transmissions of live casino games and wagered events" and "provides the right to exclude others from practicing" such activities.

That includes intranet, as well as Internet, gambling, Molnick said.

"If Virtgame wants to do a deal with Coast Resorts," she said, "they'll have to get a license from us."

Los Angeles-based Virtgame recently announced an agreement to set up an on-line, closed-loop intranet sports-book system for Coast Resorts Inc., owner of the Orleans, Barbary Coast and Gold Coast hotel-casinos in Las Vegas.

The agreement would allow Coast Resort account holders living in Nevada to place wagers at any Coast casino over any computer. "For the first time," said Virtgame Chairman Leo George, "we are offering both state regulators and the gaming industry a viable solution for the on-line gaming boom, in a legal and controlled way."

State Gaming Control Board Chairman Steve DuCharme said Nevada gaming regulators won't approve an Internet gaming site, but left the door open for closed-loop intranet sites.

"If they've got a closed-system not dissimilar to what we've already approved, that can move through the approval process pretty fast," he said. "I haven't seen what they're proposing, but we have approved telephone-wagering accounts that are accessed via a modem.

"I believe they're suggesting they want a closed-loop system that doesn't utilize the Internet. If you've got a phone account now where you walk through the system using a touch pad, you could conceivably call up a telephone account through your computer. But it couldn't be done through the Internet."

Coast Resorts, not Virtgame, is expected to apply for approval of the system. And Virtgame executive Joseph Paravia said he doesn't believe HGN's patent applies to the proposed system.

"They may have a conflict with Youbet, but they don't with us," he said.

Youbet -- a Los Angeles-based Internet gaming company that named MGM Grand Inc. Chairman Terry Lanni a director last week -- has also announced plans to develop an in-home interactive race and sports wagering system for Nevada residents.

Neither Virtgame nor Youbet would book bets in the Nevada deals; that would be done by the participating casinos. But both deals would cover gambling on live horse racing and sporting events and could eventually lead to betting on casino games -- all of which HGN claimed fall under its patent.

Further complicating the outlook is the uncertain status of a Congressional bid to ban some forms of Internet gaming. While the Senate has approved one version of an Internet betting ban, the House Judiciary Committee is still considering a slightly different version.

The Senate bill raises serious questions about the legality of intranet systems such as those proposed for Coast and Station, allowing them only at computer terminals in public facilities such as shopping malls. The House bill would permit intranet systems that could be accessed from homes or offices.

Ultimately, the prospect of billions of untaxed dollars flowing into offshore cyberspace betting parlors or into the small, private casinos operated by computer-savvy entrepreneurs may force Congress -- and big Strip gaming companies -- to take another look at Internet gambling.

As Bears Stearns gaming analyst Jason Ader said in a recent report on cyber gambling: "We believe that future Internet gambling trends will occur on a much larger scale overall.

"Regardless of a potential U.S. ban on Internet gambling, other world markets will embrace it and capitalize on the immense potential of the combination of two very lucrative industries."

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