State Issues Could Affect Former US Facing Sites Reentering Market

July 15, 2013
State Issues Could Affect Former US Facing Sites Reentering Market

The $15 million settlement with the Commonwealth of Kentucky was interesting news for the up and coming U.S. regulated online gambling markets.  The company was the subject of a civil suit filed by Kentucky that attempted to recover losses by its residents.  Over 140 other companies are also defendants in similar cases.  Most of the defendants that are listed in the complaint as “unknown” are now defunct.  Some companies, including Bookmaker, Cake Poker and Red Star Poker, are still in business.  The most notable defendant still operating is PokerStars.

The case looks to recover losses from March 25, 2005 until September 25, 2009 from every website named in the lawsuit.  Kentucky allows players to sue to recoup illegal gambling losses for up to six months after the incident.  It allows an additional four and a half years for others to recover the loss.  This includes the State or the gambler’s family.  Treble damages are also allowed under Kentucky’s loss recovery law. 

The February 2010 lawsuit named Party Gaming, although it did not attempt to seize its domain because it left the U.S. market in 2006. Party Gaming, now known as, settled for $15 million.  The lawsuit only covered 13 months of the time Party Poker accepted Kentucky players.  The time involved in the lawsuit against PokerStars is about four times longer.  Party Poker was the largest online poker room in terms of cash games when it left the U.S. market.  PokerStars was already the largest U.S. tournament site and it quickly became the largest cash game site in 2006.

It is easy to make an estimate that PokerStars could have to settle or pay at least three times the amount paid to settle should it lose.  PokerStars already tried to get the lawsuit dismissed but was unsuccessful.  This suit could become a nuisance as the company tries to receive an interactive license in New Jersey and eventually other states.  Kentucky certainly knows the leverage its lawsuit holds over PokerStars.

Sites Leaving US Post-UIGEA Safe from Loss Recovery Lawsuits

Many states have similar gambling loss recovery statutes.  The longest statute of limitations for these types of civil matters is six years.  That means a site like 888 and Entraction (now owned by IGT) that were not already named in a pending lawsuit will not have to worry about having to defend itself against the type of lawsuit currently facing PokerStars in Kentucky.  An online gambling site that accepted players during a state’s statute of limitations might find itself in this situation though.

Does Not Exempt Tax Issues

While sites that left the market in 2006 may not be subjected to loss recovery lawsuits, they may be on the hook for state taxes.  These include gaming and income taxes.  Most or all of these sites failed to file state income and gaming tax returns.  Those that failed to do so may have even committed fraud by knowingly not filing a tax return.  There is typically no statute of limitations on tax fraud.  Any person or business that fails to file a tax return cannot claim exemption under statute of limitations. 

Some states may be forgiving of this action. Nevada did not appear to force 888 into paying past gaming taxes to receive an interactive license.  The state does not have a corporate income tax.  Delaware named 888 as a service provider, but has yet to license it.  It does not appear that Delaware has sought to recover past taxes from 888 either.  Other states may be less forgiving. 

Was Settlement with Kentucky a Good Strategy? 

The settlement with Kentucky could have been a good investment.  It sets a benchmark for what PokerStars may owe if it wishes to settle or if Kentucky prevails in its action. 

Other states with illegal gambling loss recovery statutes may see Kentucky’s settlement as free cash and decide to take their own action.  These types of statutes of limitations run as long as six years and include treble damages.  A company that left the U.S. market when the UIGEA passed would be immune from this type of lawsuit, but a company that left the market around Black Friday could be on the hook for years of player losses.

Is Kentucky’s Loss Recovery Lawsuit Ethical?

There is no doubt that Kentucky’s lawsuit was filed to protect its lottery and horse racing industry.  It was a controversial case.  The Kentucky Attorney General refused to take the action so it was contracted to outside counsel.  Many industry observers and attorneys questioned this action but it has grossed $21 million to date.  Other states would have to decide if it is in its best interest to pursue this type of legal action. 

It may be easier and more cost effective for states to wait until a company applies for a license there before it considers past taxes and resident losses.  It would certainly provide more leverage even if the statute of limitations has passed.  In the meantime, online poker rooms that operated in the U.S. in the past six years could be subjected to loss recovery lawsuits and actions pertaining to tax fraud during their attempt to reenter the U.S. market.


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