The Interstate Horse Racing Act of 1978 is the only federal legislation with authority over pari-mutuel wagering in horse racing in the United States. Passed with broad industry support to regulate interstate wagering, the Act has not been significantly updated in the intervening 37 years to address the rapidly changing economics of the racing industry. What was intended to bring new revenue and create balance between competing interest groups, has evolved into a crippling burden that threatens to destroy the very things it was meant to protect. In a two-part story, equine attorney Joel B. Turner explains why major amendments to the Act are necessary to secure racing’s future.
Read Part II: How market forces have rendered the IHA’s intended protections obsolete
Imagine this: It is the first Saturday in May. A wedding reception is in full swing, and in one corner a group of well-dressed young people stands in a semicircle simultaneously staring at a video feed on a flat screen and tapping on cell phones placing wagers on the Kentucky Derby via their advance deposit wagering (ADW) accounts. The race starts, and the small crowd becomes more animated. The pitch of the voices, now solely focused on the video, heightens as the horses approach the finish. Then there is quiet. From the winners, a few clenched fists pumping, knuckles bumping, and high fives. Shaking heads, clenched jaws, and grumbling from the rest. It has been a moment of intense interest for all, and of great excitement and good fortune for some. The reception continues.
Easy to imagine today, that scene could not have been contemplated in 1978 when the Interstate Horseracing Act (IHA) was enacted by the U.S. Congress. What has become a common occurrence on major race days like the Kentucky Derby and Breeders’ Cup was illegal until the IHA became law. The unpredictably rapid development of new wireless technologies and proliferation of online commerce, video streaming, and smart phones with ADW apps has allowed remote wagering to flourish – but it has also come at great cost to racing.
Prior to 1978, all legal wagering – with a few possible exceptions – had to be made at the track where the race was run. No simulcasting. No telephone account wagering. (Some may remember that public telephones were not permitted at racetracks and the early cell phones carried by racetrack patrons were looked upon by track management with great disdain.) Attending the races, or sending a runner to make bets (legal in many jurisdictions), was the only option. Horse racing had the highest attendance of any sport, and people went to the races to play, watch, and socialize. Handle exclusively supported purses, and the tracks flourished – it was a vibrant time.
Today, with the notable exception of the “Big Days” and the boutique meets at Saratoga, Keeneland, and Del Mar, most tracks are virtually empty, lifeless, and hollow. Reported annual all sources North American pari-mutuel handle has decreased from a high of approximately $15 billion around the turn of the 21st century to roughly $9.5 billion today. Now, 85 to 90 percent of all wagering takes place off track, either at simulcast and off-track-betting (OTB) outlets, by telephone or on an ADW website. Racing dates and field sizes are in steep decline. Some attribute this downturn to horse racing’s inability to compete with the significant expansion of other forms of gaming. Do not be persuaded by this argument – it is only a small part of racing’s immediate challenge. A greater threat to horse racing’s survival is inaction on essential updates to the 1978 Interstate Horse Racing Act. Without such changes to IHA, and the concurrent ability to change the present horse racing business/economic paradigm, the future of the sport is bleak. However, with a few key revisions, racing may be able to weather the present storm of competition for the wagering/gaming dollar, right the ship, and sail into deeper and more plentiful seas.
History of the 1978 Interstate Horse Racing Act
In 1971, the New York Off-Track Betting Corp. offered wagering pools on the Kentucky Derby. It represented a historic occurrence – the first time wagering on the race had been offered outside the commonwealth of Kentucky – but there was a catch. Churchill Downs had refused to sell the rights to the race to New York OTB, yet they offered the pools anyway, generating handle of more than $1 million. It wasn’t the first time New York OTB had taken bets on out-of-state races without the host tracks’ permission, and their unilateral actions precipitated a dispute and ultimately the legislation that would become the IHA.
The Federal government’s longstanding policy had been to leave regulation of legalized intrastate gambling (i.e. gambling within a state, including simulcasting racing content from one track to another, or a track to OTBs) to the states. The racing industry, seeking to facilitate legal wagering among the states and ensure that one state could not interfere with the gambling policies of another, began to cautiously solicit limited federal involvement to regulate these concerns.
Different stakeholders in racing had different opinions about the form such legislation should take. Horsemen (at that time defined to include both owners and trainers) feared that the distribution of takeout for interstate wagers would be detrimental to purses and believed they needed the ability to intercede if the sharing of content led to declining revenue streams flowing to purses. Racetrack operators sought assurances that any legislation would expressly permit interstate transmission of gambling information – guaranteeing them protection from federal criminal prosecution under the Interstate Wire Act of 1961. The Wire Act appeared to apply only to sports betting, but aggressive enforcement in the late ‘50s and ‘60s caused widespread paranoia and a desire for clear rules. As simulcasting began to take off in earnest in the mid-‘70s, OTBs – including the widening networks in New York and Connecticut (the latter had no live racing at the time) needed access to the tracks’ content in order to expand their business, and state racing commissions would be forced to cede power to regulate simulcasting for the benefit of national interests.
The key phrase was “national interests” – and it was the collective belief among the various stakeholders that federal legislation would lay the foundation for cooperation, putting the national interests of horse racing ahead of those belonging to the various states, allowing the sport to expand and prosper.
Ultimately, with the able guidance of the American Horse Council (which was insistent on presenting a bill approved by all interested stakeholders,) and the tireless consensus-building efforts of Churchill Downs’ President Lynn Stone, a grand compromise was accomplished allowing the legislation to proceed to the sponsors on Capitol Hill. The bill considered by the legislature had the support of all horse racing industry factions, but only after:
a) The tracks agreed not to restrict the availability of content;
b) The horsemen were given the opportunity to approve/consent to the sending of racing content to other wagering outlets;
c) Tracks were given geographic protection from the invasion of other gambling facilities (primarily OTBs at that time);
d) Racing commissions were given the right to approve the simulcasting agreements between the horsemen and the tracks in advance.
The bill was quickly passed out of committee, and later received a favorable vote on the floor of both houses of Congress. The Act was signed into law later in 1978.
To understand how the horse racing industry finds itself in its present economic dilemma, one must understand the IHA and its history. After much dissent among the various competing interests in horse racing, a compromise was reached to support the passage of what was then widely considered to be industry favorable legislation. The IHA expressly allowed the use of the wires to legally conduct pari-mutuel wagering across state lines. The legislation was intended to help the tracks, the state racing regulators, and horsemen end infighting over valuable racing content by increasing the legal opportunities available to wager on horse races at locations across North America. Presumably, the increased handle enabled by the Act would benefit all participants in the business.
Unfortunately, the mandate imposed by the IHA that the tracks, regulators, and horsemen act for the common good of all competing interests in the horse racing business has now been circumvented, and the intended economic balance upset. Opportunity has knocked at the door of one segment of the industry to the detriment of another, and advantage has been taken. The 1978 foundation upon which the good intentions of the Act were built has been neither maintained nor upgraded, and shifting economic and technological terrain has revealed previously obscured structural faults.
Today, racing suffers from the unintended consequences of the Act. Instead of protecting the interests of all, it has hobbled the industry’s once genuine effort to maintain, for the greater good, a delicate balance in the bargaining power of its primary stakeholders. In fact, the Act has caused a shift away from the uniform approach to interstate wagering envisioned by the framers of the legislation. The industry-supported federal legislation – intended to address economic concerns about how to grow wagering – has resulted three decades later in a deeply divided industry with competing interest groups fighting for shares of shrinking markets and increased state regulation.
Joel B. Turner is chair of the equine law group at the Kentucky-based law firm Frost Brown Todd LLC and is involved in a full range of equine legal services; syndicate, co-ownership, partnership and limited liability company agreements, equine lending documentation, purchase and sale agreements, private and public placements, administrative hearings and appeals, gaming regulatory matters, tax and estate planning, and litigation. He is knowledgeable in racing legislation in the United States and is actively working with horsemen throughout the country to attend to the needs of breeders, owners, and trainers.