TELLIS Expands Complaint in PokerTek Royalty/Infringement Suit

[Author's note: The events detailed in this post center on the burgeoning market of electronic poker tables. Some observers might opine that electronic tables represent a large-scale threat to traditional poker tables manned by dealers, although to date, electronic tables have made only relatively minor inroads in niche markets, such as aboard cruise ships, where a reliable, well-trained dealer population is unlikely to be present. However, the owners of the Kick Ass Poker site are also involved with one of the largest and most reputable online dealer-training programs, called, by some strange coincidence, Dealer Training. It's largely apples and oranges, because the two businesses serve different segments of the poker market, but it's important to acknowledge the thin likelihood that a conflict of interest -could- exist. It doesn't, of course; your author maintains editorial control over the content found in this news/opinion blog, and particularly in cases such as this, takes care to ensure that all information is taken from existing documents and verified outside sources. --- hh]

It's been a "may you live in interesting times" type of year, to date, for PokerTek. The North Carolina-based manufacturer of electronic "no-dealer" poker tables carrrying the PokerPro™ brand name has been beset with legal difficulties for the past several months. In the latest development, filed on Sunday, software developer TELLIS, Inc., of Texas, has expanded its complaint against PokerTek.

TELLIS filed its original complaint against PokerTek back on February 5th, alleging that PokerTek had failed to pay royalties and bonuses of approximately $730,000 due TELLIS based on sales of PokerTek tables. TELLIS alleges that it designed the software that runs the PokerPro dealerless tables, and that PokerTek attempted to make unilateral changes in the royalty agreement after the fact, reducing the fees paid to TELLIS for that firm's work. TELLIS refused to accept the reduced fees, and PokerTek is alleged to have made no payments to TELLIS whatsoever, excepting four payments totaling $20,000 early on, prompting the suit. The suit named PokerTek and company CEO Gehrig "Lou White" as defendants.

TELLIS included the terms of its initial agreement in its lawsuit against PokerTek, which included these four points, describing the payments that Tellis believes it is owed:

a) $10,000 upon delivery and acceptance of the prototype software;

b) $5,000/month for up to four months for the development of the production system to be evaluated by the Seminoles [Seminole-operated casinos were among the first to feature PokerTek tables];

c) $10,000 + 1% equity in PokerTek (or other entity formed to carry out the business of PokerTek) upon successful evaluation of the Evaluation Table(s) at the first Customer;

d) $10,000 + 1% equity in PokerTek (or other entity formed to carry out the business of PokerTek) at such time as the first money is received.

Other bonuses and payments were the inclusion of $1,200/table for the first 200 PokerPro tables sold, and $100,000 bonus to TELLIS payable upon the sale of table #200. Beginning with table #201, the per-table payment to TELLIS was to drop to $1,000 for each unit sold, with an additional $100,000 due to TELLIS upon the sale of table #500. Added up, the original agreement called for TELLIS to receive as much as $730,000 in cash bonuses and 2% of PokerTek equity. Four payments of $5,000 each were made to TELLIS during the summer of 2004, at which point the lawsuit alleges that PokerTek tried to change the agreement and intentionally and maliciously breached the deal on September 8, 2004.

TELLIS's attorneys in the matter, Austin-based Barry and Loewy, LLP, have been very outgoing in presenting their case to the media, while PokerTek has maintained the quite-common business approach of not commenting on matters of active litigation. This does tend to result in one-sided stories. However, there's no debate that Barry and Loewy have amended TELLIS's complaint, as of Sunday. The amended version adds PokerTek president James Crawford as a defendant and includes a motion for conversion, alleging that White and Crawford filed for a U.S. patent based on TELLIS's work. In the words of Adam Loewy, TELLIS's lead attorney on the case: "We
have obtained evidence that Mr. Crawford and Mr. White filed a US Patent for our guy's [TELLIS president Nick Trout's] concept.....and they did not name him as the inventor. They took credit for the invention themselves."

Only six days later, according to the amended complaint, PokerTek's White and Crawford filed for the U.S. patent. Here's the complete language from the amended complaint, worth reading in its entirety:

"24. Then, on September 14, 2005, less than six (6) days after unlawully and inexcusably breaching the Agreement with TELLIS, Lou White and James Crawford filed a U.S. Patent Application for the concept that TELLIS had developed. In U.S. Patent Application No. 20050090304, Lou White and James Crawford claimed to be the "inventors" of a "system and method of displaying or obscuring electronic playing cards." [Emphasis per original document --- hh] "These statements, made by Lou White and James Crawford to the United States Government, were knowingly and patently false. In reality, this was Nick Trout's invention, and Lou White and James Crawford had just knowingly lied about its authorship by claiming it was their invention. Lou White and James Crawford made fraudulent misrepresentations to the federal government (vis-à-vis the U.S. Patent & Trademark Office)."

The current TELLIS action against PokerTek alleges four counts: breach of contract; fraud; quantum meruit and unjust enrichment; and conversion, the latest entry to the list, which sums up the act of using TELLIS's patentable software for PokerTek's own purposes. The action asks for compensatory and "exemplary" (punitive, in layman's terms) damages against PokerTek.

It's an uncomfortable set of circumstances for PokerTek, to say the least. Not only are the rights to and profits from its PokerPro tables now under legal attack, but the firm itself also ran into difficulties in a different legal matter, that involving rival electronic-table developer Lightning Poker.

In that dispute, Lightning Poker forced PokerTek to disavow alleged statements made to third parties that Lightning Poker's own electronic-poker tables may infringe upon PokerTek's applied-for patents, doubly noteworthy since the veracity of one of those patent applications has itself now been called into question. Lightning Poker's out-of-court-settlement victory opened the door for Lightning to ink a development agreement with Shuffle Master, Inc., itself one of the biggest names in support equipment for casino games. The Lightning Poker/Shuffle Master marriage could conceivably blunt any early market lead held by PokerTek, due to Shuffle Master's huge market presence.

As mentioned, PokerTek president Crawford declined to comment on the matter, citing the active nature of the litigation. Electronic poker tables are indeed part of that "something new" on the poker scene, but at the moment, the exact shape of this future niche market is anyone's guess.