Analyst doesn’t believe $315 million judgement will haunt Scientific Games By Howard Stutz, Executive Editor, CDC Gaming Reports August 14, 2018 at 8:00 pm Investor concerns over Scientific Games Corp.’s potential need to make good on a $315 million judgement in a federal lawsuit may have played a role in the company’s recent stock price decline. If upheld, the judgement could do serious harm to the gaming equipment manufacturer.“Currently, the $315 million damage award equates to greater than 10 percent of Scientific Games’ market cap, which is why we felt this issue required further attention,” Union Gaming Group analyst John DeCree wrote in an Aug. 9 research note. The Las Vegas-based company’s stock price is down almost 10 percent since the verdict and more than 35 percent since the beginning of the year. DeCree consulted with a law professor who is an expert on patents for advice with his report. The case’s central legal issue concerned alleged fraudulent automatic card shuffler patents the company used to keep rival developers from bringing a shuffler into casinos. DeCree said the plaintiffs – four small gaming manufacturers – won’t see any of the money for a while, if ever. For now, DeCree expects little financial impact on Scientific Games, other than additional legal fees. He said the company – which will appeal the judgement – did take a $25 million legal charge in the second quarter. DeCree told investors the appeals process could take 18 months or longer. By then Scientific Games’ balance sheet – which carries more than $8.95 billion of debt – “should be in much better shape” if the company is forced to pay the damages. Multiple deck card shuffler from SHFL EntertainmentObviously, Scientific Games hopes to “have the jury verdict thrown out completely. But if that doesn’t happen, the company could seek to have the damage award reduced.” The most likely scenario is the case heading to the Seventh Circuit Court of Appeals. A federal jury in Chicago said on Aug. 7 that Scientific Games used fraudulent patents to pursue “sham” litigation and keep a rival automatic card shuffling device out of the marketplace. The litigation was initially pursued in 2012 by SHFL Entertainment (which Scientific Games acquired through its $5.1 billion purchase of Bally Technologies in 2015) to try to keep Chicago-based Shuffle Tech from developing a single deck card shuffler. Illegally monopolizing the market could be construed as an antitrust violation. Shuffle Deck sold its casino card shuffler intellectual property to another gaming equipment manufacturer; the company now makes card shufflers for consumer use. The jury awarded $105 million to the plaintiffs, which was automatically tripled by the judge to $315 million under U.S. antitrust law. In a Securities and Exchange Commission filing on the same day, Scientific Games said, “the jury reached the wrong result” and that the company would “seek review of both the finding of liability and the damages award, both before the trial court and, if necessary, on appeal.” After discussing the case with the law professor – DeCree did not disclose his source – he told investors that Scientific Games faced an “uphill battle in a jury trial.” The company’s defense had many moving parts and complexities. “The good news for Scientific Games is that the concern of appealing a complex case to a jury is significantly eased in an appeal, which would be presented before a panel of three judges presumably far more sophisticated and well versed in patent law and litigation than a jury,” DeCree wrote. The federal judgement overshadowed some of the good news coming out of the company. Caesars Entertainment signed a deal to use Scientific Games’ OpenBet sportsbook platform in New Jersey and Mississippi, and Pennsylvania’s state lottery recorded record sales of $4.2 billion in fiscal year 2018. Scientific Games’ lottery division is Pennsylvania’s primary equipment and management supplier However, Scientific Games is still trying to shake off any hangover from the Bally buyout, which saddled the company with Bally’s debt load. A new CEO, Barry Cottle, took over in June. Cottle replaced Kevin Sheehan, who himself replaced Gavin Issacs as CEO in August 2016. All three men are on the company’s board of directors. Scientific Games inherited the lawsuit from SHFL Entertainment. The company said in its SEC filing that the court dismissed all plaintiff’s claims in 2015, except for the antitrust law allegations covering the shuffler patents. In hindsight, going forward with the trial was likely an error in judgement. DeCree doesn’t believe the lawsuit, however, will be an overhang on the business. “In short, we are redirecting our attention and focusing back to fundamentals and the business outlook,” he said. Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at email@example.com. Follow @howardstutz on Twitter.