Illinois’ nearly 6,000 video gambling parlors could reinvest more in their businesses, including making their operations more consumer-friendly, if they weren’t required to evenly split their profits with the companies that operate the terminals, according to a lawsuit filed Tuesday against the Illinois Gaming Board.
Video gambling has continued to grow since its 2012 debut in Illinois, but the state’s Video Gaming Act “places a disincentive on local establishments to improve their consumers’ video gaming experience,” says the lawsuit, filed in Cook County Circuit Court by the two companies that own the Dotty’s Cafe, Stella’s Place and Shelby’s gambling parlor chains.
The gambling parlors and the terminal operators should be free to negotiate their own profit-sharing deals, and the retail establishments, which include bars and restaurants, should also be allowed to buy, install and maintain their own machines, according to the lawsuit, which seeks to invalidate those two provisions of the law. It says those parts of the act are “unconstitutional under the due process and equal protection clauses” of the Illinois and U.S. constitutions.
“The amount in profits the Video Gaming Act divvies out to each party is not rationally related to the contributions or investments each party may make toward the business or the amount each party has at risk,” the lawsuit argues.
Combined, Laredo Hospitality Ventures and Illinois Cafe & Services Co. own and operate more than 100 Illinois video gambling parlors in 21 counties, employing almost 500 workers. Each location requires an initial investment of about $200,000. They’re not allowed to buy and maintain their own machines, so when a $1 bill is jammed in a machine, for example, they must ask the terminal operator to call a technician from off-site, potentially leaving a machine out of service for days and resulting in lost customers and revenue.
The way the law is set up also costs the state much-needed tax revenues, two lawyers representing Laredo Ventures and Illinois Cafe & Services said. Video gambling revenues, after payouts to winners, are taxed at a flat 30 percent rate, with 25 percent going to the state and the other 5 percent going to the local municipality. The remaining 70 percent of revenue is divided evenly between the establishments and the terminal operators.
If the parlors didn’t have to share such a big percentage of their profits with the terminal operators, the establishments could upgrade current operations, hire staff, expand or promote their businesses, all of which would help to generate additional revenues and more taxes to the state, said Winston & Strawn lawyers David Dahlquist and Dan Webb, a former U.S. attorney.
They estimate that the law costs the average video gambling establishment about $25,000 a year in lost profits.
“I can think of no other industry where, by law, a business is forced to give up 50 percent of their profits and is strictly prohibited from even trying to negotiate better terms,” Webb said.
The Illinois Gaming Board declined to comment on the lawsuit.
The expenses of a terminal operator are generally limited to the video gambling terminals and their maintenance, which an independent contractor is also capable of performing, according to the lawsuit.
Most terminal repairs require the presence of a Gaming Board representative, the lawsuit says.
“Terminal operators are not entrusted to perform system upgrades without oversight, nor can they independently make any repairs to a terminal’s internal mechanisms,” the lawsuit says, adding that terminal operators have no role in monitoring or ensuring the integrity of video gambling.
Having to hand over half of the profits to the terminal operators “represents an unconstitutional and irrational transfer of wealth” that violates the gambling establishments’ rights because it “favors terminal operators and serves no legitimate state interest,” the suit says.
Riverboat casino owners are allowed to operate video gambling machines at their casinos, and they own some Illinois terminal operators. Terminal operators or investors also include Delaware North and private equity firm Clairvest Group.
The lawsuit notes that three-fourths of the companies’ workers are women and between 25 percent and 40 percent are minorities, with many receiving health and benefits packages. The state has more than 5,800 video gambling parlors, according to the lawsuit.
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