MEADOWLANDS MATTERS

Horse racing companies win in court over daily fantasy-style game

John Brennan
NorthJersey

A 14-page ruling by a California judge will be closely scrutinized by the overall daily fantasy sports industry to see if its impact might be widespread.

U.S. District Court Judge James Otero, of the Central District of California, ruled recently that the entry fees paid by horse race players of the game Derby Wars constitute wagers - making them subject to the Interstate Horseracing Act.

UPDATE: The defendants have agreed to pay Stronach $500,000.

Here's my deeper dive on this interesting ruling:

- The plaintiffs are six horse racing companies in California, Florida, Oregon, and Maryland.  The defendant is  Horse Racing Labs, which does business as Derby Wars (that distinction wound up being important).

The Maryland Jockey Club prevailed in a lawsuit against a horse racing fantasy sports game.

The case goes back to 2015, and last year the court dismissed allegations of violations of the Racketeering Influence and Corruption Act (RICO) as well as one claiming "Intentional Interference with Prospective Economic Advantage."

That left claims of violating the Interstate Horseracing Act and violating the Unfair Competition Law of California. Last May, a judge also threw out a plaintiff seeking of "disgorgement of damages."

[yes, the judge mirrors the act in calling it 'horseracing.']

The case is all about the definition of parimutuel wagering. From the ruling:

"Parimutuel wagering on horse races is defined by state and federal law and is generally considered an exception to states' general prohibition on gambling. The Interstate Horse Racing Act ("IHA") defines parimutuel wagering as "any system whereby wagers with respect to the outcome of a race are placed with, or in, a wagering pool conducted by a person licensed or otherwise permitted to do so under State law, and in which the participants are wagering with each other and not against the operator."

Another key passage: "The amount a person may wager under a parimutuel wagering system generally is not fixed in advance. Further, the payout on bets in a parimutuel wagering system generally is determined by the size of the wagering pool, which can fluctuate depending on the number and amount of wagers placed, and the wagering odds, which can change up to the time the race closes. The "host" track in a parimutuel wagering system generally retains a specified fixed percentage of the wagers (called the "take-out" or "vigorish") before it pays out money to the winners of the bets on a particular race."

What is Derby Wars, anyway?

"Players entering Derby Wars' pay-to-play contests pay a fixed entry fee in exchange for the opportunity to participate in contests. Derby Wars offers about 150 such contests per day on average. The fixed entry fee is set in advance and does not change, and every player pays the same entry fee in a given contest. As an example, for a $40 prize, two players each pay a $22 entry fee to compete with each other. 

"Derby Wars offers head-to-head contests with a prize up to $1,500, with $799 entry fees. The contests consist of a number of specified contest races (usually a minimum of six races in each contest) to be run at various horse racing tracks across the United States, including those operated by Plaintiffs. Players entering a contest select one horse for each designated race in the contest, along with a backup if that horse scratches. After the race, Derby Wars computes a point score for each player's pick. The points allocated to each player is based on the actual payoff amounts at racetracks for real races, subject to maximum caps set according to the contest's rules.

"After all races have been run, players with the highest point scores win the prize. Like the entry fees, the prizes awarded to the winner of each contest are set in advance and do not change. The prizes are awarded to the player who achieves the highest score in the game, and the prizes are the same regardless of the number of points scored.

"Derby Wars pays the prizes and Derby Wars' source of revenue is the entry fees into its contests. Derby Wars can and does lose money on some of its contests, particularly if a contest does not "fill," that is, the number of players in the contest is lower than the maximum number of players allowed to play."

U.S. House of Representatives member Frank Pallone, D-Monmouth, has taken a lead role in sports betting and daily fantasy sports issues.

What kind of contests do they have?

- Open. In Open contests, players can change their picks up until the race closes.

- Lockdown. In Lockdown contests, players must make all of their selections before the start of the first race.

- Survivor. Players must pick a horse that finishes first, second or third in each race in order to advance to the next race. Predetermined prizes in Survivor contests are awarded to the players who survive to the end of the contest.

 The Stronach Group, which is a party to the case, began talks with Horse Racing Labs about a possible business relationship back in 2011.Talks continued well into 2015.

The defense notes: "Prior to filing the lawsuit, Stronach Group executives never wrote to, spoke to, or met with Derby Wars objecting to the use of, or demanding that Derby Wars stop using Plaintiffs' tracks in Derby Wars' horse racing contests."

(more on that later)

"Defendant posits that the central question presented in this case is whether Derby Wars' contests constitute parimutuel wagers and are thus subject to the Interstate Hoseracing Act ("IHA"). Derby Wars asserts the question must be answered in the negative, taking the position that because Derby Wars' contests have a fixed entry fee that a participant must pay to play in the contest, a predetermined fixed prize, and a maximum number of participants, Derby Wars' contests are not parimutuel wagers.

"Furthermore, Derby Wars contends that in its contests, skill predominates chance."

The Stronach Group sued Derby Wars - a horse racing fantasy sports game - and won.

"Plaintiffs respond as follows: (1) Defendant's "contests" are indeed wagering on horseracing and are thus subject to the requirements of the IHA; (2) Defendant's "contests" are not saved by the Unlawful Internet Gambling Enforcement Act (the "UIGEA").; and (3) under the clear language of the IHA, Defendant is operating an "off-track betting system," and the IHA applies."

The defense claimed that even if IHA does apply, this claim is barred by the statute of limitations - in this case, three years. But the judge found that Stronach negotiated with HRN, not Derby Wars. There were depositions by Stronach executives saying they didn't know what Derby Wars was.

The plaintiffs prevailed for the same reason against an "Equitable Estoppel" claim - as well as on an abstention claim that a ruling amid California's legislature mulling its daily fantasy sports bill would muddy the waters.

Now to the core of the ruling

To prevail on their IHA claim, Plaintiffs must prove that Derby Wars accepted an "interstate offtrack wager" in violation of the IHA's provisions. The IHA defines interstate offtrack wager as "a legal wager placed or accepted in one State with respect to the outcome of a horserace taking place in another State and includes pari-mutuel wagers, where lawful in each State involved, placed or transmitted by an individual in one State via telephone or other electronic media and accepted by an off-track betting system in the same or another State, as well as the combination of any pari-mutuel wagering pools."

"The IHA defines parimutuel as "any system whereby wagers with respect to the outcome of a horserace are placed with, or in, a wagering pool conducted by a person licensed or otherwise permitted to do so under State law, and in which the participants are wagering with each other and not against the operator.

"The parties dispute whether Derby Wars contests constitute parimutuel wagering under the IHA. Defendant contends that Derby Wars contests are not parimutuel wagering, but rather contests in which skill predominates over chance, and the IHA does not apply.

"Plaintiffs contend that whether something is a bet or wager is not dependent upon whether it takes skill to actually win that bet or wager. Defendant further argues that "Plaintiffs have admitted that the IHA only applies to parimutuel wagers" and that "Plaintiffs and DW are in agreement; there is no dispute that [Derby Wars'] contests are not parimutuel wagering, nor do Plaintiffs allege that they are." Plaintiffs reject Defendant's claims, arguing that "Defendant's contests are parimutuel as defined by both the IHA and California law." 

Then the judge explains that "Whether or not the Derby Wars contests are parimutuel wagering is a sufficient but not necessary condition for the applicability of the IHA (defining interstate off-track wager as "a legal wager placed or accepted in one State with respect to the outcome of a horserace taking place in another State and includes pari-mutuel wagers . . . .")........... Because a wager placed or accepted in one State with respect to the outcome of a horserace taking place in another State, placed or transmitted by an individual in one State via telephone or other electronic media and accepted by an off-track betting system in the same or another State, need not be a pari-mutuel wager, the Court finds that the proper focus of the inquiry rests on whether payment of the entry fee for Derby Wars contests is a wager."

The last half of that last sentence was the key

A 2007 case, Humphrey v Viacom, is cited for noting that the defendant's fantasy sports leagues were not "bets" or "wagers" because " (1) the entry fees were paid unconditionally; (2) the prizes offered to fantasy sports contestants were for amounts certain and were guaranteed to be awarded; and (3) defendants did not compete for the prizes."

Ok, that's good for Derby Wars, right? Well, "As Plaintiffs point out, the prizes at issue in Humphrey, were nominal and awarded at the end of an entire fantasy season."

Monmouth Park operator Dennis Drazin says he "didn't have a problem" with the Derby Wars fantasy sports horse racing contests.

Several other cases are cited, with the most important being Bell Gardens Bicycle Club v Department of Justice in 1995 (ironically, a year before the internet went mainstream). Both sides pitched this one to the judge:

It is "a case involving a jackpot poker game wherein the California Court of Appeals held that the component elements of the jackpot award demonstrated that the game was an illegal lottery under California Penal Code Section 319.

"In Bell Gardens, the prize designated as the jackpot was an independent sum of money separate from the common "poker" pot. Bell Gardens,The common poker "pot" was distributed at the end of each game to the winner of that game and was composed of the wagers or bets made with the game itself.

"Conversely, the prize was money set aside by the club for the jackpot award and was a sum beyond that contributed by the players at the table, which accumulated over time until it was won. There the court defined a bet or wager as "ordinarily an agreement between two or more that a sum of money or some valuable thing, in contributing which all agreeing to take part, shall become the property of one or some of them, on the happening in the future of an event at the present uncertain; and the stake is the money or thing thus put upon the chance."

"Plaintiffs respond that the definition of wager provided for in Bell Gardens perfectly describes a Derby Wars' contest: two players pay an entry fee, which becomes the property of the player whose picks return the most dollars in a series of races, the outcome of which is unknown at the time.

The judge picks a side

"Against this backdrop, the Court agrees with Plaintiffs that Derby Wars entry fees are more akin to the wagers which form the "pot" in poker. Although there may be instances where the number of players in the contest is lower than the maximum number of players allowed to play, where the race "fills" the contestants' payment of entry fees subsidizes the "pot" that Defendant calls its fixed prize.

"Having determined that Derby Wars entry fees constitute a wager, where such wagers are placed with Derby Wars in Kentucky, with respect to the outcome of a horserace, or series of up to six individual horseraces, as the case may be, taking place in California, Oregon, Maryland, and/or Florida, and where such wagers are received over the internet, the Court concludes that Defendants are operating an off-track betting system subject to the Interstate Horseracing Act."

Wallach added: "It could be problematic in those other cases, especially the New York lawsuit."