Operators of Dotty's, Stella's, Shelby's gambling cafes sue state over revenue rules

By Scott Holland & Jonathan Bilyk | Apr 5, 2017

The owners of two groups operating many of the video gambling establishments in strip malls and other locations across Illinois have sued the Illinois Gaming Board, arguing one board policy and two provisions of the state’s 2009 Video Gaming Act are unconstitutionally depriving them of the chance to negotiate better business deals for a larger share of the revenue they generate. 

Illinois Café & Services Company LLC, which runs the Dotty’s Café chain, filed a complaint April 4 in Cook County Circuit Court along with co-plaintiff, Laredo Hospitality Ventures LLC, which operates the Stella’s and Shelby’s branded establishments. They say they own hundreds of small gaming cafes, among more than 5,800 Illinois establishments licensed to host video wagering machines. 

The complaint says the state law forces establishments that want to offer video gaming to contract with “terminal operators” — companies that install the actual game machines — and mandates “they split the profits of video gaming without taking into account their relative investments, expenses and efforts; and then forbids them from freely negotiating the terms of their legislatively imposed joint venture.” 

According to the complaint, the state law has two flaws — a prohibition on locations with gaming licenses from serving as their own terminal operator and a stipulation that post-tax profits be split 50-50 between licensees and terminal operators. 

The board’s Feb. 1 advertising and promotions policy, the complaint contends, was “issued without following proper procedure and untethered to any actual legislative grant of authority (and) arbitrarily restricts the parties’ ability to share or negotiate business-essential costs.” They say the policy dictates how terminal operators and licensees can pay for “certain essential operating expenses” like free food and drinks for patrons, as well as advertising. 

Further, they say the policy favors terminal operators by eliminating many types of business deals under which the parties used to share costs. 

A press release the companies issued cited a revenue analysis indicating the law, which they argue violates due process and equal protections clauses of the state and federal constitutions, costs businesses as much as $150 million annually, about $25,000 a year for an average gaming bar or restaurant. 

Unlike establishment owners and gaming licensees, terminal operators, the complaint states, don’t have a role in monitoring or ensuring the integrity of video gaming. Further, the state law “imposes no special or heightened licensing review on them” and the operators aren’t authorized to do repair work or maintenance on a terminal’s interior components without a Gaming Board representative present. So if a machine breaks, the establishment owner can’t fix it, losing potential revenue. 

“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,” said attorney Dan K. Webb, of Winston & Strawn, whose firm filed the complaint, in the press release. “This law is not only unconstitutional, it provides a gravy train of unearned cash for big gaming businesses that make little investment in Illinois.” 

The companies want the court to declare the dual licensure and profit diversion facets of the state law to be declared unconstitutional and to enact preliminary or permanent injunction on their enforcement. They also want the court to invalidate the advertising and promotions policy, both on the ground the board didn’t comply with the Illinois Administrative Procedure Act in installing the policy, as well as on the ground it exceeds the scope of the Video Gaming Act because the board lacks the statutory authority to enact such a policy. 

Also at issue under that policy is allocation of revenue from automated teller machines that double as gaming winning redemption machines, a decision the businesses say was “arbitrary and capricious.”

The Dotty’s, Stella’s and Shelby’s branded gaming café-style establishments have sprung up rapidly throughout Illinois in recent years, beginning in Chicago’s suburbs about four years ago.

The business model, which sets video gambling terminals amid a café-like setting, allows patrons to wager on the terminal games while eating a light meal, or drinking coffee, soda, beer or wine.

According to published reports, the concept mirrors one established in other states, such as in Oregon, where the Dotty’s brand was cultivated by CEO Daniel Fischer under the corporate name of Oregon Restaurant Services Inc.

In Illinois, Fischer has run his Dotty’s-branded establishments under the corporate identity of Illinois Café & Service. According to state records, that company has enlisted the help of Michael Best Strategies, a lobbying firm associated with the Michael Best and Friedrich law firm, to lobby Illinois governmental officials.

According to Michael Best Strategies’ website, its Chicago office is led by Chip Englander, who served as campaign manager for Gov. Bruce Rauner. Others in the Michael Best Chicago office include David Ramirez, who also served in a leadership post on Rauner’s campaign, and Stephanie Vojas, who has worked for the Illinois Trial Lawyers Association and for Illinois Senate President John Cullerton.

As Dotty’s has expanded, so, too, have the Stella’s and Shelby’s brands under Des Plaines-based Laredo Hospitality Ventures.

That company is operated by CEO Gary Leff, who also founded and operates the Stir Crazy Fresh Asian Grill restaurant chain.

According to published reports, Leff received investments for the Laredo venture from at least two of his former college roommates, including Andrew Bluhm, son of billionaire Neil Bluhm, who operates Rivers Casino in Des Plaines along with other properties through his company, Rush Street Gaming, and Greg Carlin, Rush Street Gaming’s CEO.

When the investments were disclosed in 2015 by Unite Here, a labor union seeking to organize workers at Rush Street’s properties, Carlin told the Chicago Tribune the investments in Laredo represented a “personal and passive” transaction involving college roommates, even as they remained “totally committed to protecting Rivers Casino and… the industry and the Illinois Casino Gaming Association's work to curtail the expansion of casino cafes in Illinois."

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Chicago Tribune Illinois Gaming Board Michael Best and Friedrich LLP Rivers Casino Winston and Strawn LLP

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