Churchill Downs Inc. v. Trout

• Citation: 979 F.Supp.2d 746
• Decision Date: 23 September 2013
• Docket Number: Case No. 1:12–CV–00880–JRN.
• Parties: CHURCHILL DOWNS INCORPORATED; Churchill Downs Technology Initiatives Company, doing business as Twinspires.Com, Plaintiffs, v. Chuck TROUT, in his official capacity as Executive Director of the Texas Racing Commission; Gary P. Aber, Susan Combs, Ronald F. Ederer, Gloria Hicks, Michael F. Martin, Allan Polunsky, Robert Schmidt, John T. Steen III, Vicki Smith Weinberg, in their official capacity as members of the Texas Racing Commission, Defendants.
• Court: U.S. District Court — Western District of Texas

979 F.Supp.2d 746

CHURCHILL DOWNS INCORPORATED; Churchill Downs Technology Initiatives Company, doing business as Twinspires.Com, Plaintiffs,

v.Chuck TROUT, in his official capacity as Executive Director of the Texas Racing Commission; Gary P. Aber, Susan Combs, Ronald F. Ederer, Gloria Hicks, Michael F. Martin, Allan Polunsky, Robert Schmidt, John T. Steen III, Vicki Smith Weinberg, in their official capacity as members of the Texas Racing Commission, Defendants.

Case No. 1:12–CV–00880–JRN.

United States District Court,

W.D. Texas,

Austin Division.

Sept. 23, 2013.

James C. Ho, Prerak Shah, Gibson Dunn & Crutcher LLP, Dallas, TX, for Plaintiffs.

Lesli Gattis Ginn, Assistant Attorney General, Austin, TX, for Defendants.

ORDER

JAMES R. NOWLIN, District Judge.

Before the Court in the above-entitled and styled cause of action is Plaintiffs' Motion for Preliminary Injunction (Clerk's Dkt. No. 6); Defendants' Trial Brief (Clerk's Dkt. No. 28); Plaintiffs' Trial Brief (Clerk's Dkt. No. 30); Defendants' Reply Brief (Clerk's Dkt. No. 34); and Plaintiffs' Reply Brief (Clerk's Dkt. No. 35). On May 2, 2013, the Court heard oral argument on the constitutionality of the “in-person” requirement of the Texas Racing Act. The Parties agreed that this dispute was a question of law for the Court. Having considered the Parties' briefs, arguments of counsel, and applicable law, the Court enters the following Order.

I. FACTUAL BACKGROUND

Plaintiff Churchill Downs, Inc. (“Churchill Downs”) is a publicly-traded corporation with its principal place of businessin Kentucky. Churchill Downs, Inc. owns and operates racetracks throughout the country, the most notable being Churchill Downs Racetrack in Louisville, Kentucky. Churchill Downs does not, however, own or operate any tracks in Texas, nor does it possess any license issued by the Texas Racing Commission.

Plaintiff Churchill Downs Technology Initiatives Company, d/b/a Twinspires.com (“Twinspires.com”), is a Delaware corporation wholly owned by Churchill Downs, Inc. Twinspires.com is an online wagering platform that accepts wagers on races hosted by Churchill Downs, Inc. racetracks and other racetracks—a practice known within the industry as Advance Deposit Wagering (“ADW”).

Plaintiffs have simulcast contracts with Texas tracks, allowing them to transmit a telecast of a race from another race track to a Texas track, where the patrons of that track can then wager on the telecast race.

The Commission is a state agency charged with enforcing the statutory and regulatory provisions of the Texas Racing Act. Defendants Chuck Trout, Gary P. Aber, Susan Combs, Ronald F. Ederer, Gloria Hicks, Michael F. Martin, Allan Polunsky, Robert Schmidt, John T. Steen III, and Vicki Smith Weinberg are, respectively, the Executive Director and members of the Commission.

The Texas Racing Act (“Act”), enacted in 1986, regulates wagering on horse racing in Texas and requires all wagering on horse races by Texas residents to be placed in-person. SeeTex.Rev.Civ. Stat. art. 179e, §§ 11.01, 11.011, 11.04, 11.05. Under the Act, “[w]agering may be conducted only by an association within its enclosure.” Tex.Rev.Civ. Stat. Art. 179e, § 11.01 (Vernon 1986). “Only a person inside the enclosure where a race meeting is authorized may wager on the result of a race presented by the association by contributing money to the pari-mutuel pool operated by the association,” Id. § 11.04(a). The Act also proscribes betting on Texas horse races over the telephone. Id. 11.04(b).

During the 82nd legislative session, the Commission was re-authorized under the state's sunset provision. As part of the legislative process that lead to the Commission's re-authorization, the Legislature added specific language clarifying the legislature's position that the Act prohibits internet and telephonic gambling on horse racing in Texas.¹ Nevertheless, Twinspires.com continued to accept wagers from Texans through its website, and, as a result, the Commission issued a subpoena to Churchill Downs in June of 2012. Pl. App. 7. At a subsequent meeting between Churchill Downs and the Commission, representatives of the Commission informed Plaintiffs that the Commission would begin enforcing what all Parties concede is the State's longstanding policy. Pl. App. 7–8.

Plaintiffs filed this lawsuit for declaratory judgment seeking a declaration that the Texas Racing Act's in-person requirement violates the dormant Commerce Clause of the U.S. Constitution, both facially and as applied to Plaintiffs, and is therefore unenforceable. Plaintiffs have also asked this Court to issue a permanent injunction prohibiting the Texas Racing Commission (“Commission”) from enforcing its in-person requirement, as well as attorneys' fees and costs.

II. DISCUSSION

The Commerce Clause grants Congress the authority “[t]o regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” U.S. CONST. art. I, § 8, cl. 3. The Supreme Court interpreted a dormant Commerce Clause from this text, finding that since Congress has the power to regulate interstate commerce, states are precluded from doing so by enacting laws or regulations that excessively burden interstate commerce. E.g., Maine v. Taylor, 477 U.S. 131, 137, 106 S.Ct. 2440, 91 L.Ed.2d 110 (1986). Through the years, the Supreme Court has laid out a relatively simple framework for evaluating whether a law violates the dormant Commerce Clause. The first question the Court will address is whether the Act “clearly discriminates” against interstate commerce. If the Court determines that the answer to this question is yes, then the Court must strike down the law unless it finds that “the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.” Wyoming v. Oklahoma, 502 U.S. 437, 112 S.Ct. 789, 800, 117 L.Ed.2d 1 (1992) (quoting City of Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 57 L.Ed.2d 475 (1978)). Such a justification must be sufficient to justify the discrimination “both in terms of the local benefits flowing from the statute and the unavailability of nondiscriminatory alternatives adequate to preserve the local interests at stake.” Hunt v. Washington Apple Advertising Commission, 432 U.S. 333, 350, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977).

If, however, the Court determines that the Act regulates “evenhandedly” and only “indirectly” burdens interstate commerce, then this Court will uphold the Act unless it determines that the Act burdens interstate commerce in a manner that is “clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970).

A. Does the in-person requirement discriminate against interstate commerce?

Plaintiffs assert that the Act impermissibly discriminates against Churchill Downs by treating out-of-state gambling websites differently than in state brick-and-mortar gambling establishments. Their argument fails because it incorrectly treats brick-and-mortar gambling as identical to Internet gambling. In fact, they are two wholly different activities.

A state law violates the Commerce Clause if it mandates “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Granholm v. Heald, 544 U.S. 460, 472, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). But, for Granholm to apply as Plaintiffs suggest it does, the activities being treated differently must be “substantially similar.” Gen. Motors Corp. v. Tracy, 519 U.S. 278, 298, 117 S.Ct. 811, 824, 136 L.Ed.2d 761 (1997). Plaintiffs argue that the fact that Twinspires.com accepts wagers over the internet rather than at a brick-and-mortar outlet is irrelevant under the Commerce Clause since Twinspires.com “offers the same good as its Texas competitors: the opportunity to place ‘off-track’ wagers on races hosted elsewhere.” Pltfs' Reply Brief at 5. According to Plaintiffs, the bettor is “placing the same wager on the same horse, running the same race with the same odds—and is doing so in the hope of winning the same payout from the same wagering pool.” Id. at 5–6. This Court disagrees. As the Washington Supreme Court recently observed, “internet gambling and brick-and-mortar gambling are two different activities, presenting risks and concerns of a different nature, and creating different regulatory challenges.” Rousso v. State, 170 Wash.2d 70, 80, 239 P.3d 1084, 1089 (2010). Gambling in general poses extreme regulatory challenges, but the introduction of internet gambling has amplified all of those challenges considerably. Id. Anyone dubious of the meaningful differences between regulating gambling online vs. at brick-and-mortar facilities need only glance at the plethora of regulations the Act imposes upon brick-and-mortar operations that simply cannot be applied to internet operations.² To construe two activities that pose such different regulatory challenges as identical for purposes of Commerce Clause analysis would not only be unreasonable—it would dramatically constrain the legislature's ability to tailor legislation to specific problems. For all of these reasons, the Court rejects Plaintiffs' assertions that brick-and-mortar gambling and online gambling are the same activity for purposes of Commerce Clause analysis.

Having properly defined the activity in question, the Court now shifts to the task of evaluating whether the in-person requirement impermissibly treats websites that wish to take bets on horse races based in Texas differentially than the same types of websites based elsewhere in the United States. As previously stated, the dormant Commerce Clause prohibits differential treatment of similarly situated entities on the basis of geography. CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 87–88, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987); Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 471–72, 101 S.Ct. 715, 66 L.Ed.2d...