SARATOGA SPRINGS, N.Y. – A ruling by a federal district judge in Michigan that has upended the legal framework underlying account-wagering on horse racing and drawn the attention of the entire electronic gambling industry was harshly criticized during a panel on Wednesday morning, closing day of the Racing and Gaming Conference in Saratoga Springs.
The ruling, which was issued in response to a lawsuit from Churchill Downs Inc., was called a “galactic misstep” by one of the panelists and came under intense fire for both its content and potential impact by three of the four panelists.
In the ruling, Judge Hala Y. Jarbou of the U.S. District Court for the Western District of Michigan said that Churchill Downs was likely to succeed on the merits of its claim that Michigan had no right to regulate Churchill’s ADW activity in the state because it would violate the Interstate Horseracing Act.
The ruling maintained that the proper regulator of the Michigan bets was in Oregon, because that was where the bets Churchill took from Michigan residents was processed.
Jack Jeziorski, president of the New York Racing Association’s simulcasting and account-wagering subsidiary, repeatedly said that aspects of the ruling required “legal gymnastics” that consistently elicited an incredulous response.
“Congress could not possibly have intended to have one state regulate a particular form of gambling in another state to the exclusion of the other state,” Jeziorski said, in reference to the Interstate Horseracing Act. “You cannot be serious. There was no way there was any intent ever to do that. The idea that anyone intended Oregon to regulate Michigan’s gambling, come on. You can’t be serious.”
The ruling is now being closely watched by the entire gambling industry because of its potential to open up states for electronic gambling even if they have explicit prohibitions on certain types of gambling. Under the ruling, for example, some gambling companies have said that they could take bets from Texas residents – where gambling is strictly regulated – over gambling apps as long as gambling is legal in the state where the app’s wagers are processed.
Melanie LaCour, the legal director of ZwillGen PLLC, which advises gambling companies, said that the impact of the ruling would lead to an absurdity that strips states of all ability to determine what happens within their borders.
“Either a state would have to completely outlaw pari-mutuel wagering . . . or it then just cedes all regulation, including licensing and consumer protection issues, over the residents of the state for wagering activity occurring within its borders,” LaCour said.
Brad Fischer, a senior advisor for the Sport Betting Alliance at the Orrick Law Firm, said that he was confused by Churchill’s end game in initiating the lawsuit, considering that an ultimate ruling in its favor would lead to massive upheaval in state regulatory markets where Churchill is active.
“It’s going to spin off a lot of chaos,” Fischer said. “You don’t know what’s next. If you are a company, you want continuity, you want predictability. And they have put themselves in a position where there is a lot of unpredictability. . . . They are walking a pretty specific tightrope here, that if it goes wrong, there’s a lot of downside risk for them.”
The panel included one supporter of the ruling and its impact on racing. Todd Bowker, a longtime executive at ADW companies who is now a consultant, said that he was rooting for Churchill to succeed because it would simplify operations at ADWs and lower their costs.
“If you only have one set of rules or statutes you have to follow, it really makes operating your business a lot easier,” Bowker said, under the interpretation that Oregon, where most ADWs have hubs, would be the ultimate regulator of all ADW activity across the U.S. if the judge’s decision prevailed.
Jeziorski warned that the benefits to ADW companies would mean vast amounts of harm to tracks operating on thin margins.
“The practical effect is, someone like NYRA will probably be okay,” Jeziorski said. “But if [source-market revenue] goes away, Emerald Downs closes and there’s no horse racing in Washington. And if the ADWs are allowed to keep the lion’s share of that revenue, there’s a lot of small tracks in trouble. And you can kiss California goodbye too.”
Ominously, Bennett Liebman, the panel’s moderator and one of the foremost authorities on pari-mutuel and gambling law, closed the panel by pointing out that the ruling would likely allow Native American tribes, which have broad authority over gambling on their reservations, to take wagers throughout the U.S. without authorization from pari-mutuel interests.
Decoupling a heated issue
An earlier panel on Wednesday focused on “decoupling,” the term given to the legal separation of casino and racing licenses, which has most prominently emerged as an issue of pressing concern to horsemen and the breeding industry in Florida.
This year, Gulfstream Park, the Florida racetrack owned by 1/ST Racing and Gaming, threw its weight behind a bill that would have allowed the track to operate its casino without any statutory requirements for live racing. Though the bill was dropped in the face of opposition from the rest of the state’s racing and breeding industry and Florida’s governor, Gulfstream last week filed a lawsuit seeking a judicial separation, and the fight continues.
Panelists said that the Florida fight has sparked fears across the U.S. about similar efforts emerging in other states where tracks rely heavily on subsidies from casinos – which is just about every major racing state other than California.
Some states are considered safe, at least for now: Kentucky’s economy is heavily reliant on the equine industry; New York’s major racing operator, the New York Racing Association, will need its casino subsidies far into the future to pay off a 25-year state loan. Similarly, Maryland’s racing industry is now controlled by the state; and other states, such as Arkansas, Indiana, and Virginia, seem to have a strong relationship between horsemen, tracks, and the legislature.
Though panelists declined to name the next dominoes, the candidates are pretty obvious: 90 percent of Pennsylvania’s purses are generated by casino gambling, and track operators in Ohio, West Virginia, and Louisiana seem less and less interested in maintaining expensive live-racing operations.
Eric Hamelback, the chief executive officer of the National Horsemen’s Benevolent and Protective Association, said on the panel that the fight against decoupling will likely never end. As a result, horsemen’s associations need to be constantly communicating with their state representatives about racing’s sprawling economic impact and job multipliers, something that is not necessarily shared by a slot machine.
“What do politicians care about? Economy and jobs,” Hamelback said. “They don’t care specifically about horse racing. But they care about economic impact and jobs, especially agricultural ones. And at the end of the day, [casinos] don’t produce the jobs that our industry does.”
Joe Faraldo, the chief executive of the Standardbred Owner’s Association of New York, said that the harness racing industry in New York is under enormous stress because the state’s racetrack/casinos, by and large, aren’t interested in running racetracks anymore, preferring instead to operate only their casinos. He said that the signs of that effort are everywhere, in the little cuts the companies are constantly making to their racetrack operations, a trend that just makes it harder for the racing side of the business to succeed.
As in Florida, New York’s legalization of gambling at racetracks was tied to the casinos providing financial help to the racing and breeding industries. Now, Faraldo said, the companies that benefited from the arrangement by becoming the sole legal licensees for casinos want to sever themselves from that relationship.
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“You have a partner who’s looking to kill you,” Faraldo said. “They are trying to make the argument, ‘I’ve done this, I’ve done that, nothing works.’ They are looking to say, ‘We can’t make racing better, we need to be able to decouple.’”
Lonny Powell, the chief executive of the Florida Thoroughbred Owners and Breeders Association, said from the audience that his greatest challenge is to convince the state legislature to protect the statutory relationship between racing and gambling now that Gulfstream is isolated from the rest of the state’s industry.
“Yes, it’s about jobs and economic impact, number one,” Powell said. “But your biggest challenge is when your racetrack doesn’t want to race.”
Laura D’Angelo, a partner at the Lexington law firm Jones Walker, told the conference attendees that any effort to stop decoupling needs to have long-term goals aside from blocking the legislation.
In Florida, Gulfstream eventually agreed to provisions in the failed bills that would have kept the live-racing protections in place for seven years, under the promise that it would work with horsemen and breeders to come up with a long-term plan for the state’s industry. But horseman and breeders rejected those provisions outright.
“Florida’s a cautionary tale,” D’Angelo said. “It shows that this could take place in any state. But you can’t just think of fighting these things for fighting’s sake. You have to have a long-term vision.”
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