The lawsuit that is so important for anyone who cares about racing's future

It has flown a little under the radar so far, but there’s no doubt the legal battle between the Stronach Group of U.S. racetracks and the parent company of Derby Wars, the horse racing fantasy contest provider, could have a significant impact on the future finances of Thoroughbred racing in America.

Just to recap, the Stronach Group (its tracks are Santa Anita, Golden Gate Fields, Gulfstream Park, Pimlico, Laurel and Portland Meadows) filed a lawsuit against Horse Racing Labs, LLC, on December 2 in the Central District of California.

The fantasy contests run by Derby Wars are based on the results of live horse races at tracks across the country. In essence, the suit claims that Derby Wars is getting all that for free - that none of the money it makes from these contests is returned to the tracks, even though it is dependent on races the tracks stage and finance.

Now I’m all for fantasy contests, involving both horse racing and sports generally. There are certainly potential benefits for racing.

But I believe the Stronach Group has a point.

The complaint (which you can read here, courtesy of the Paulick Report) was filed on Wednesday, December 2, in the Central District of California. It makes four charges:

  • Violation of the Interstate Horseracing act of 1978 (IHA);

  • Violation of the Racketeering Influence and Corruption Act;

  • Violation of the California Business and Professional Code;

  • Intentional interference with prospective economic advantage.

The complaint says: “The format used by Derby Wars is simple: players select a horse to win in each race of the tournament and each winning selection adds to their point total. Players can go head to head or play against large numbers of bettors. At the end of the tournament, the player with the most points wins a cash prize.

“Derby Wars keeps a percentage of the tournament “pool” for itself, and none of the money goes to the race meets where the races used in the contests were run.”

No financial contribution

These contests base the “points” awarded to the players on the actual price payouts at the various tracks. Derby Wars contests do not actually participate in the host track pools on which their contests are conducted.

Under Section 3004 of the IHA, all interstate wagering on horses requires a contract with and payments to the host track with approval from the recognized horsemen’s group for that track and approval from the track’s state regulatory body.

In sum, Derby Wars does not have host fee and purse agreements with any of these Stronach tracks or the relevant horsemen’s groups. In effect, Derby Wars receives the benefits of the races that are conducted at great expense to the tracks and the horsemen with no financial contribution to either and no regulatory approval from the state racing commissions.

Now I’m not a lawyer and I cannot make any predictions as to what will happen with the suit or, longer term, what impact it may or may not have on the future of the sport, but I certainly hope that any outcome guarantees appropriate payment to tracks for any wagering on fantasy events.

Here is the Derby Wars response to the suit. The statement includes this: “As the industry has acknowledged time and time again, the sport is in dire need of new ideas and innovation to ensure growth for the future.”

I certainly agree with that.

And it refers to other potential benefits for racing associated with fantasy horse racing contests.

Racing can learn a lesson on takeout

However, first and foremost, it is unacceptable for those who take part in fantasy racing competitions and those who run them to benefit from the investment by tracks, trainers and owners without making any direct financial payments for their events.

There is one thing, though, that the racing industry can learn from fantasy sports betting - the business position on “effective takeout” on their contests. While I do not have access to the Derby Wars financials, fantasy sports contests generally have an effective takeout rate of 10 percent, as compared to over 20 percent rate on Thoroughbred racing.

This outrageously high takeout for the racing industry is one of the major factors in the decline of the sport. There is no question this level of takeout is not competitive with other gaming opportunities and a contributing factor to the ongoing decline in racing handle. That, however, is a topic for another day.

In discussing fantasy horse racing, I think it is important to note its significant difference from Daily Fantasy Sports (DFS) contests.

Because of federal and state gambling laws, with the exception of Las Vegas and a handful of states, it is illegal to bet on the outcome of a sporting event in the United States. The business model of DFS sites such as Draft Kings and Fan Duel gives fans taking part the opportunity to watch and root for their individual fantasy players and their “fantasy team” without betting on the actual outcome of a basketball or football game.  

If companies want to conduct fantasy horse racing contests, I think they should be allowed to - as long as they are contributing an agreed rate to the tracks and are regulated to protect the customer. With the current takeout rate on fantasy contests, it is certainly possible that wagering on fantasy contests could grow while the national handle on horse racing continues to decline.

Consequences could be dire

Without a contribution from this business sector, the long-term consequences for racing could be dire.

Innovation in business practices and investment in new technologies can be game changers in any industry. Yet such changes, if not implemented and regulated properly, can be disastrous for that industry.

There is no better example of a changed business and regulatory model in racing than the current battle in the U.K. between the bookmakers and, collectively, the owners, trainers and racecourses.

Certainly Britain has one of the best racing jurisdictions in the world, yet it has the lowest contribution to purses from wagering among major jurisdictions.

Currently, the bookmakers are required to pay 10.75 percent of their gross margin from wagering to the Government Levy Board, which passes these funds through to the racing industry for purses and other services. In 2014, funding from the bookmakers to the racing industry was £75 million for the gross margin levy fee, £173 million for media rights to show the races in the 9,000 betting shops and another £12 million in sponsorship deals.

The big problem now is that, with the advent of internet and phone account wagering, U.K. bookmakers have moved these operations to offshore locations, such as the Isle of Man and Gibraltar, where they cannot be taxed by the British Government for bets made by U.K. residents on U.K. races.

Bookmakers who pay nothing on bets they take offshore

The migration of these account wagering businesses has occurred over the last decade and, for the past five years, the racing industry and the Government have been discussing the need for a “racing right”, which would confer statutory status on a scheme to tax all wagering (including bets taken offshore) by U.K. citizens on all U.K. races.

Nothing concrete on this topic will occur for at least the next two years. In the meantime, what possible justification do the bookmakers have for paying nothing to the racing industry on all of their offshore account wagering?

Nick Rust, CEO of the British Horseracing Authority, estimates that about 40 percent of all betting on U.K. horse racing is now done outside Levy Board jurisdiction. The result is that the total Levy yield for 2008-2009 was £116.5 million and total Levy yield for 2017-2018 is currently projected to be about £53 million - a decline of over 50 percent.  

The good news is that the British racing industry has drawn together, and the tracks, the horsemen (trainers and owners) and Nick Rust of the BHA are understood to be making progress with the bookies.

Of course, offshore wagering and fantasy racing are different models, but it is essential in the same way in both cases that racing is not sold short.

Thoroughbred racing must be diligent at all times in its efforts to secure funding and business arrangements that support all constituents of the racing and breeding industry.

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