Derby Wars To Pay $500,000 To Stronach Group, Comply With Interstate Horseracing Act, To Settle Lawsuit

The owners of Derby Wars will pay The Stronach Group $500,000 over the next year as part of a settlement agreement that ends litigation filed by the racetrack owner against the handicapping contest operator in December 2015.

Federal Judge James Otero of U.S. District Court for the Central District of California signed and filed the judgment on Tuesday.

Stronach Group racetracks, including Santa Anita, Gulfstream Park and Laurel, sued Horse Racing Labs, which operates Derby Wars, alleging four causes of action: violation of the Interstate Horseracing Act; violation of the Racketeering Influence and Corruption Act (RICO); violation of California's Unfair Competition Law; and Intentional Interference with Prospective Economic Advantage.

An earlier ruling by Otero dismissed the RICO and Interference with Prospective Economic Advantage elements of the suit.

Last month, Otero ruled that entry fees paid by Derby Wars contestants constituted a wager because the fees – minus a percentage held by Derby Wars – were paid out to the winners who compiled the most points based on pari-mutuel payouts of horse races. Otero compared the fees to the “pot” created by poker players.

As a result of the entry fees being considered a wager, Derby Wars is subject to the rules and regulations of the Interstate Horseracing Act of 1978, Otero ruled, thus requiring prior approval of the host track where the contest races are run.

The judgment negotiated between Stronach Group and Derby Wars eliminates the need for a trial, where potential damages would have been determined by a jury.

According to the terms of the judgment, The Stronach Group is entitled to $1 million. However, if the parent company of Derby Wars pays $250,000 within three business days and makes timely payments of $20,833 per month for 12 months ($249,996) – the monetary obligations will be considered satisfied in full at just under $500,000.

The agreement also requires Derby Wars to comply with the Interstate Horseracing Act and to not use content from Stronach Group tracks without prior written consent. The agreement is not an admission by Derby Wars of wrongdoing or being in violation of any statutory or regulatory laws and is not admissible in court in the event of potential future litigation brought by private parties or governmental agencies.

In practical terms, Derby Wars and other cash-entry contest operators would be required to get prior approval to use content from Stronach Group tracks. That almost certainly means they will pay a fee – similar to that paid for a simulcast signal by off-track betting or advance-deposit wagering companies – for the right to use the content. The fee would be divided between tracks and horsemen.

“We want to put a pricing model that works for both sides,” said Scott Daruty, president of Monarch Content Management, a division of The Stronach Group that handles simulcast matters for the company.

According to Otero's ruling, Derby Wars typically holds 10 percent of the entry fees as its takeout.

“I don't think it will be more than half and it won't be less than a 30 or 40 percent (of a contest operator's takeout),” Daruty said in reference to how much the Stronach Group may seek in future negotiations with handicapping contest operators. “In six months' time, people will see it wasn't our intention to shut down contests. It was just our intent to make sure we and horsemen are adequately compensated with contests.”

Derby Wars plans on moving forward, using the settlement as guidance for future contests.

“The Horse Racing Labs team is made up of lifelong, passionate racing fans whose goal is to grow horse racing through new ideas and products,” said Mark Midland, CEO of Derby Wars. “While we were disappointed in the ruling, the benefit is that the ruling has set a clear path for horse racing contest operators to proceed under the Interstate Horseracing Act.

“We are immediately signing new agreements with tracks, and we see a bright future for contests as we continue to commit our team and resources to driving innovation in horse racing to benefit all.”

It's not clear whether Derby Wars and other contest operators with California customers or using California races for content will need to be licensed as an ADW with the California Horse Racing Board. An email to a CHRB press officer was not immediately answered.

Final judgment