Churchill Downs v. Thoroughbred Horsemen's Group, Civil Action No. 3:08-CV-225-H.

CourtUnited States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
Writing for the CourtJohn G. Heyburn Ii
Citation605 F.Supp.2d 870
PartiesCHURCHILL DOWNS INC., et al., Plaintiffs v. THOROUGHBRED HORSEMEN'S GROUP, LLC, et al., Defendants.
Decision Date20 March 2009
Docket NumberCivil Action No. 3:08-CV-225-H.
605 F.Supp.2d 870
CHURCHILL DOWNS INC., et al., Plaintiffs
v.
THOROUGHBRED HORSEMEN'S GROUP, LLC, et al., Defendants.
Civil Action No. 3:08-CV-225-H.
United States District Court, W.D. Kentucky, at Louisville.
March 20, 2009.

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K. Gregory Haynes, Wyatt Tarrant & Combs, Louisville, KY, Kevin C. Pecoraro, David M. Schiffman, John W. Treece, Sidley & Austin, Chicago, IL, for Plaintiffs.

Alfred C. Pfeiffer, Latham & Watkins, San Francisco, CA, Margaret M. Zwisler, Marguerite M. Sullivan, Latham & Watkins, Washington, DC, Marvin L. Coan, Hummel Coan Miller & Sage, Louisville, KY, for Defendants Thoroughbred Horsemen's Group, Robert Reeves, Frank Petramalo, Wilson Shirley, Joseph Santanna.

Douglas L. McSwain, Sturgill, Turner, Barker & Moloney, PLLC, Lexington, KY, for Defendants Kentucky Horsemen's Protective and Benevolent Association, Inc., Rick Hiles and Martin A. Maline.

Steven B. Loy, Stoll, Keenon, Ogden, PLLC, Lexington, KY, William Jay Hunter, Stoll, Keenon, Ogden, PLLC, Louisville, KY, for Defendants Kentucky Thoroughbred Association and David Switzer.

MEMORANDUM OPINION

JOHN G. HEYBURN II, District Judge.


Churchill Downs Incorporated ("Churchill"), Calder Race Course, Inc. ("Calder"), and Churchill Downs Technology Initiatives Company ("TwinSpires") (collectively, "Plaintiffs") brought suit asserting antitrust violations and breach of contract claims against Thoroughbred Horsemen's Group, LLC ("THG"), Kentucky Horsemen's Protective and Benevolent Association, Inc. ("Ky HBPA"), Rick Hiles ("Hiles"), and Martin A. Maline ("Maline") (collectively, "Defendants").

Defendants have moved to dismiss the amended complaint on the grounds that the Plaintiffs lack antitrust standing, that the Interstate Horseracing Act immunizes the Defendants' actions from antitrust liability, that the Plaintiffs fail to allege sufficient facts under Bell Atlantic Corp. v. Twombly, and that Ky HBPA's actions did not breach the contract between those groups and Churchill. Defendants Hiles and Maline also move to dismiss on the grounds that they are protected by the Volunteer Protection Act.

This litigation occurs in the context of the on-going dispute between the horse owners and trainers (collectively "horsemen") and racetracks concerning the proceeds from all forms of off-track betting. To apply some financial leverage against the racetracks, the horsemen have withheld their permission for the racetracks to sell the ability for off-track betting operators to accept wagers on the track's races. This antitrust action amounts to the racetracks'

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return salvo in an escalating war between two groups whose economic destinies are intertwined.

To decide these issues the Court must apply the concepts of antitrust standing and pleading in the unusual context of a federal statute which creates the business of interstate parimutuel wagering. Further, these issues, and analysis thereof, are interrelated, without clear delineations. The Court will address standing, statutory immunity, pleading under Twombly, and breach of contract in turn.

I.

The description of the facts is critical because it helps determine whether an antitrust violation is occurring at all. Regardless of the conclusions Plaintiffs allege, the facts themselves must illustrate the violation. For those reasons, a detailed review of the factual basis of this suit follows.

Churchill is a large racetrack conglomerate that operates both the famous racetrack in Louisville, Kentucky, and the internet-based interstate wagering company TwinSpires. Calder operates a racetrack in Florida. Churchill, as well as other racetracks, earns its revenue largely from pari-mutuel wagering at the racetrack and at off-track betting sites ("OTBs").1 As an OTB, both Churchill and Calder accept wagers on races run at other tracks. Another form of off-track betting is advanced deposit wagering ("ADW"). An ADW operation is one in which account holders deposit money with an operator for the purpose of making wagers. Account holders make wagers from remote locations via telephone, the internet, or a mobile device. TwinSpires is an example of an ADW.

In the pari-mutuel wagering system, wagers from all sources are placed together in a pool. Thus, the bettors wager against each other not against the operator of the pool. The tracks, ADWs and OTBs return 80% of the pool in the form of "payouts" to the winning bettors. The remaining 20% is called the "Takeout," which is in essence the profit divided between the OTB or ADW, the host racetrack, horsemen's groups (by way of race purses), and various governmental agencies.

Since 1978 when Congress authorized interstate wagering, OTBs and ADWs must contract with the host racetrack for the right to accept wagers on horse racing at other tracks. These agreements allow the off-site operators to accept wagers on those races and also to receive a simulcast of the races, referred to as the "signal." The "price" for the product is the percentage of the Takeout that is paid to the host racetrack and the horsemen's groups. The current dispute concerns the allocation of the ADW Takeout with regards to the fee it pays for the right to accept wagers on host track races.

OTBs pay the host track a "host fee" for the signal. ADWs compensate the host track by paying two separate fees: the "host fee" and the "source market fee" (collectively the "Signal Fee"). The host fee is a percentage of the Takeout from wagers made at the OTB or ADW on the races at the host racetrack. The source market fee is a percentage of all wagers placed by ADW customers who are located near the host racetrack (e.g., within 25 miles). The source market fee is designed to compensate the host racetrack for wagering that the customers would otherwise have made at the host racetrack. These fees can vary depending on the popularity

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of the racetrack. In the past, the host track has always entered into a separate agreement with the horsemen's groups governing the percentage of the Signal Fee that is used directly to increase race purses.

In 1978, Congress enacted the Interstate Horseracing Act ("IHA"), primarily to protect the business of smaller racetracks and horsemen's groups from potential interstate off-track wagering abuses. 15 U.S.C. § 3001-07. Essentially, the IHA required that to engage in the business, industry participants must cooperate. Of particular interest here, the IHA requires five (5) consents to approve any off-track wagering agreement: (1) the authorized horsemen's group, (2) the host racing association,2 (3) the host state racing commission, (4) the off-track racing commission, and (5) all currently operating tracks within 60 miles of the off-track betting office, or, if there are none, then the closest such track in an adjoining state.3 15 U.S.C. § 3004. The horsemen's group is defined as "the group which represents the majority of owners and trainers racing there, for the races subject to the interstate off-track wager on any racing day." 15 U.S.C. § 3002(12). Thus, only the authorized horsemen's group at the host track can provide the required consent. A horsemen's group at another track has no ability to provide the statutory consent. Refusal to consent is commonly referred to as a "horsemen's veto."

Two horsemen's groups, Ky HBPA and Kentucky Thoroughbred Association, Inc. ("KTA"),4 represent the owners and trainers at Churchill Downs. Until recently, Churchill obtained Ky HBPA and KTA's consent to negotiate with OTBs and ADWs to sell Churchill's signals. Churchill then negotiated contracts with OTBs and ADWs. Churchill presented these contracts to Ky HBPA and KTA, which the horsemen's groups could veto on an individual basis. The horsemen's groups have consented to Churchill exporting the signal for the Kentucky Derby, the Kentucky Oaks, the Kentucky Derby Trial, the Woodford Reserve Turf Classic, and the Breeders' Cup Event Day races to any OTB or ADW and the horsemen's groups only reserve the right to veto four of those contracts. Churchill pays the horsemen's groups, by way of purses, 51% of the price Churchill receives for the signal.5 This is the "Purse Share." The contracts stipulate that Churchill cannot export the signal for any other races without the horsemen's groups' consent, which the IHA requires.

In November 2007, horsemen's groups from many tracks formed the Thoroughbred Horsemen's Group, LLC ("THG").6

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These horsemen's groups authorized THG to negotiate a separate but uniform Horsemen's Simulcast Licensing Agreement (the "Licensing Agreement") with each ADW. The Licensing Agreement sets a uniform fee by requiring ADWs pay THG a "License Fee" equivalent to at least one-third of the Takeout.7 It also provides that THG member horsemen's groups would consent to the sale of the host signal only if the ADW signed it. In this way, THG will contract directly with ADWs, excluding the host tracks entirely. Defendant THG notes that each THG member would choose whether to join in each separate Licensing Agreement. Once signed, the Licensing Agreement's terms would control the relationship between ADWs and all of THG's member horsemen's groups who also sign it. Until the ADWs execute the Licensing Agreement, several THG members have vetoed their host racetracks' attempts to export race signals to all the ADWs.

The Licensing Agreement does not directly affect the existing relationship between the tracks and the ADWs, or between the tracks and the horsemen's groups. The ADWs would continue to pay the Signal Fee and the tracks would still pay the Purse Share. For that reason, the Licensing Agreement provides that the License Fee be reduced by the Purse Share. In this way, the benefit the horsemen's group and the host track receive are intertwined.

By requiring execution of the Licensing Agreement, the horsemen's goal is to ensure a minimum...

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11 practice notes
  • Cloverleaf Enterprises, Inc. v. Md. Thoroughbred, Horsemen's Ass'n, Inc., Civil Action No. RDB 10-407
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • August 6, 2010
    ...is similar to boycotts that have been held to be per se violations. In Churchill Downs Inc. v. Thoroughbred Horsemen's Group, LLC, 605 F.Supp.2d 870, 891 (W.D.Ky.2009), for example, horse track operators asserted antitrust claims against horsemen's groups, alleging that the groups collectiv......
  • Racetech, LLC v. Ky. Downs, LLC, CIVIL ACTION NO. 1:15-CV-00082-GNS
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
    • March 11, 2016
    ...interstate commerce (3) that imposes an unreasonable restraint on trade.” Churchill Downs Inc. v. Thoroughbred Horsemen's Grp., LLC , 605 F.Supp.2d 870, 887 (W.D.Ky.2009) (citations omitted). While the Section 1 does not provide a private cause of action, 15 U.S.C. § 15 creates such an acti......
  • Shamrock Mktg. Inc. v. Bridgestone Bandag Llc., Civil Action No. 3:10–CV–74–H.
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
    • March 11, 2011
    ...Act allegations must support a plausible finding of the alleged violation. Churchill Downs Inc. v. Thoroughbred Horsemen's Group, LLC, 605 F.Supp.2d 870, 887 (W.D.Ky.2009). “ Twombly established that antitrust complaints are held to a ‘plausibility standard,’ which requires Plaintiffs to pl......
  • New Eng. Horsemen's Benevolent & Protective Ass'n, Inc. v. Mass. Thoroughbred Horsemen's Ass'n, Inc., Civil Action No. 16-11079-FDS
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • September 28, 2016
    ...horsemen are compensated for their role in enabling off-track betting, Churchill Downs, Inc. v. Thoroughbred Horsemen's Group, LLC , 605 F.Supp.2d 870, 882 (W.D. Ky. 2009). To this end, the IHA prohibits off-track betting systems1 from accepting interstate off-track wagers absent the consen......
  • Request a trial to view additional results
11 cases
  • Cloverleaf Enterprises, Inc. v. Md. Thoroughbred, Horsemen's Ass'n, Inc., Civil Action No. RDB 10-407
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • August 6, 2010
    ...is similar to boycotts that have been held to be per se violations. In Churchill Downs Inc. v. Thoroughbred Horsemen's Group, LLC, 605 F.Supp.2d 870, 891 (W.D.Ky.2009), for example, horse track operators asserted antitrust claims against horsemen's groups, alleging that the groups collectiv......
  • Racetech, LLC v. Ky. Downs, LLC, CIVIL ACTION NO. 1:15-CV-00082-GNS
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
    • March 11, 2016
    ...interstate commerce (3) that imposes an unreasonable restraint on trade.” Churchill Downs Inc. v. Thoroughbred Horsemen's Grp., LLC , 605 F.Supp.2d 870, 887 (W.D.Ky.2009) (citations omitted). While the Section 1 does not provide a private cause of action, 15 U.S.C. § 15 creates such an acti......
  • Shamrock Mktg. Inc. v. Bridgestone Bandag Llc., Civil Action No. 3:10–CV–74–H.
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Western District of Kentucky
    • March 11, 2011
    ...Act allegations must support a plausible finding of the alleged violation. Churchill Downs Inc. v. Thoroughbred Horsemen's Group, LLC, 605 F.Supp.2d 870, 887 (W.D.Ky.2009). “ Twombly established that antitrust complaints are held to a ‘plausibility standard,’ which requires Plaintiffs to pl......
  • New Eng. Horsemen's Benevolent & Protective Ass'n, Inc. v. Mass. Thoroughbred Horsemen's Ass'n, Inc., Civil Action No. 16-11079-FDS
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • September 28, 2016
    ...horsemen are compensated for their role in enabling off-track betting, Churchill Downs, Inc. v. Thoroughbred Horsemen's Group, LLC , 605 F.Supp.2d 870, 882 (W.D. Ky. 2009). To this end, the IHA prohibits off-track betting systems1 from accepting interstate off-track wagers absent the consen......
  • Request a trial to view additional results

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