Federal Judge Rules Against Contest Operator Derby Wars In Stronach Group Lawsuit

A federal judge has ruled that horse racing tournament website Derby Wars has been operating as an off-track betting business and is subject to the federal Interstate Horseracing Act, which requires consent of racetracks and racing commissions prior to accepting any wagers.

The order, entered on Monday by Judge James Otero of U.S. District Court for the Central District of California, came in a lawsuit filed against Louisville, Ky.-based Horse Racing Labs, parent company of Derby Wars, by Stronach Group racetrack associations operating at Santa Anita Park, Golden Gate Fields, Laurel Park, Pimlico and Portland Meadows.

The original suit, filed in Dec. 2, 2015, alleged 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 Inteference with Prospective Economic Advantage.

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

Monday's order granted Stronach Group's motion for partial summary judgment and denied Derby Wars' motion for summary judgment to dismiss the suit.

The key issue in the case centered on whether entry fees paid by participants in Derby Wars contests that are returned to the winners as cash prizes constitute a wager. The contest results are based on the outcome of races and their associated pari-mutuel payoffs, which are compiled as points. Winners are the participants with the highest number of points from their tournament race selections. Prizes are based on entry fees from the actual or projected number of players, with Derby Wars retaining a percentage of the entry fee, which the judge equated as the takeout or “vigorish.”

Attorneys for Derby Wars argued the contests are not wagers, but contests as defined by California Business and Professions Code Section 17539.3 as “Any game, contest … or plan that holds out or offers to prospective participants the opportunity to receive or compete for gifts, prizes, or gratuities as determined by skill or any combination of chance and skill and that is, or in whole or in part may be, conditioned upon the payment of consideration.”

In his ruling, Otero wrote that Stronach Group attorneys argued that “because Derby Wars contestants pay entry fees into a wagering pool, and play against each other for the right to claim the cash prize, the contests are most similar to exchange wagering. California Professions Code Section 19604.5(a)(7) defines exchange wagering as 'a form of pari-mutuel wagering in which two or more persons place identically opposing wagers in a given market.'”

However, Otero added in his ruling that “whether or not the Derby Wars contests are pari-mutuel wagering is a sufficient but not necessary condition for the applicability of the IHA.”

Citing a case involving whether a jackpot poker game constituted an illegal lottery (Bell Gardens Bicycle Club v. Department of Justice), Otero wrote “the court agrees with (Stronach Group) that Derby Wars entry fees are more akin to the wagers which form the 'pot' in poker.”

Otero concluded: “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 (Derby Wars) are operating an off-track betting system subject to the Interstate Horseracing Act.”

Otero wrote the Interstate Horseracing Act can be used as the Stronach Group's “predicate for a California Business and Professions Code claim.”

Stronach Group is seeking injunctive relief, along with monetary damages and restitution for money the suit claims was “wrongfully” obtained. A June 27 trial date has been set.