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Churchill Downs Subsidiary Sues Thoroughbred Owners Of California Over Simulcast Fee Dispute

A subsidiary of Churchill Downs, Inc. that operates advance deposit wagering companies TwinSpires and BetAmerica is suing Thoroughbred Owners of California for invoking state statute in an effort to bring a dispute over simulcast hub fees into binding arbitration.

Churchill Downs Technology Initiatives Company (CDTIC) filed the suit on Tuesday in United States District Court Central District of California's Western Division, seeking declaratory and injunctive relief while alleging that the arbitration provisions of California Business & Professions Code section 19604 are invalid and unenforceable because they violate the U.S. and California Constitutions' Due Process and Contracts Clauses.

The dispute centers around a hub agreement reached on Dec. 22, 2020, between Santa Anita Park and CDI's two online wagering companies, TwinSpires and BetAmerica. The agreement specified the percentage the ADW companies would receive on each dollar wagered by California residents using their platforms. By California statute, the maximum an ADW company may receive to facilitate a wager is 6.5%. The agreed-upon percentage in the agreement between the ADW companies and Santa Anita is redacted in the court filings. According to the lawsuit, TOC asked that the hub fee be reduced to 4.1%, which the complaint said “would cost Churchill Downs Technology millions of dollars and upset almost a decade of an established course of dealing between the contracting parties.”

TOC is not a party to the contract. By law, according to the complaint, an ADW provider can choose to enter into a hub agreement with a racetrack, a horsemen's organization, or both. However, under section 19604, the horsemen's organization (or racetrack) may file a written demand for arbitration within 10 days of receiving a copy of a hub contract. TOC did so on Dec. 31.

Two months earlier, on Oct. 28, the suit alleges, TOC president and CEO Greg Avioli asked Churchill Downs Inc. executive Mike Ziegler to “voluntarily return the equivalent of 1% of the total” wagered on the company's ADW platforms in 2020. “TOC threatened that if Churchill Downs Technology did not comply with its 'voluntary' request, it would demand arbitration pursuant to section 19604,” the complaint alleges, calling the effort a to retain additional revenue a “shakedown.”

In a statement issued by Avioli after the TOC learned of the lawsuit, he said: “ADW wagering in California increased by over 40% year over year statewide in 2020 while purse generation from live tracks and OTBs dropped substantially due to COVID-19 closures and restrictions. In 2020 CDTIC received over $7 million of hub fees from ADW wagers by California on Thoroughbred races. TOC's decision to exercise its arbitration rights under California law came after CDTIC declined to reach a voluntary settlement of the matter.”

The complaint suggests that California racing – not TwinSpires or BetAmerica – was the real beneficiary when wagering shifted from on-track to online during the pandemic.

“Online and telephonic wagering, known as advanced deposit wagering, has transformed horse racing in the state, and allowed the many stakeholders involved in horse racing to continue to prosper,” the complaint states. “This has been particularly true since the beginning of the COVID-19 pandemic, which led to limited races and limited spectators for months.

“ADW providers, such as TwinSpires and BetAmerica, make significant investments in technology, marketing and customer service to bring horse racing to as many fans possible, attract new fans, and make wagering on horses fun and easy,” the complaint continues. “During the COVID-19 pandemic, the ADW distribution not only kept fans engaged when they could not otherwise go to a racetrack, but also attracted and created many new fans of horseracing. Rather than appreciating this necessary and growing distribution outlet, the TOC has treated the ADW providers as competition, not as valued partners. This is bad for racing fans and horseracing as a whole.”

TOC's Avioli said the statute concerning arbitration is long established and clear.

“The specific provision in California law (Business and Professional Code 19604 et. seq.) authorizing the arbitration of hub fees is nothing new and, in fact, has been unchanged in California law for more than two decades,” Avioli said in a statement. “We intend to move forward with the hub fee arbitration in an expedited manner and believe the attempt to disrupt the arbitration by CDTIC with this last-minute federal lawsuit has no merit.”

According to section 19604, the arbitration must take place within 60 days of a formal request. The arbitrator has 15 days to render a decision on whether to maintain the contract as signed or to change the fee to the percentage requested by TOC.

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New Agreements With ADW Companies To Increase California Purses; TwinSpires Lone Holdout

The Thoroughbred Owners of California (“TOC”), Del Mar Thoroughbred Club, The Stronach Group's 1/ST Racing and FanDuel Group's TVG have announced a new purse enhancement program that will inject up to $15 million into California Thoroughbred purses in 2021 and 2022.

The parties to the agreement, all major stakeholders in California Thoroughbred racing, believed that working together on additional sponsorship and purse enhancements would help support the state's racing industry in light of the loss of purse revenue due to the cessation of live racing in California in 2020 and the restrictions on on-site attendance due to public health requirements. The parties also share a commitment to support and promote the significant equine health and safety advancements made by California racing interests over the last two years.

“California racing has always been very important to TVG, and we are committed to continuing our support of the racing industry here, especially given the challenging circumstances the industry faced in 2020,” said TVG CEO Kip Levin. “We feel the right strategy is to partner with the stakeholders to further strengthen what has always been a premier racing circuit in the United States.”

In anticipation of the program, Santa Anita Park recently announced a 10% across the board purse increase for its 2020-2021 Winter/Spring Meet. With a daily purse average of $533,000, Santa Anita Park's purses are now competitive with the top circuits in the U.S. despite not receiving any casino gaming revenues or government subsidies.

“This is a great development for California horse racing,” said Craig Fravel, The Stronach Group's CEO of Racing. “Along with our horsemen and regulators, we instituted historic safety reforms starting in 2019. We believe these reforms and the enhanced purses previously announced have created a great racing environment that has already attracted top stakes horses, trainers and riders from all over the country to our current Santa Anita Winter/Spring meet.”

With the support of these purse enhancements, the Del Mar Thoroughbred Club is projected to increase average daily purse levels at its summer meeting to more than $600,000 in 2021, Del Mar officials indicated. Josh Rubinstein, Del Mar's president, stated, “Coming off our extraordinarily successful summer and fall meets in 2020, these increased purses, coupled with the growing excitement for the 2021 Breeders' Cup World Championships, sets us up for a fantastic 2021.”

The purse enhancements come as a result of new hub agreements involving TOC and the advance deposit wagering companies TVG and 1/ST Bet, also known as Xpressbet. With the coronavirus pandemic eliminating virtually all on-track wagering, the ADW companies enjoyed a financial windfall for most of 2020 and into 2021, as betting shifted online. In recognition of that, TVG and 1/ST Bet agreed to accept a lower fee – 4.1% instead of 5% – on all wagers from California residents through their platforms. Other, smaller wagering platforms have also agreed to the new terms, according to TOC.

Churchill Downs Inc.'s ADW company, TwinSpires, did not agree to the fee reduction and the matter will go to arbitration in accordance with California Business and Professions Code 19604.

“This unprecedented level of partnership among California's horsemen and women, FanDuel/TVG, The Stronach Group and Del Mar is just the beginning,” said TOC President Greg Avioli. “With sports wagering on the horizon and its potential to both add millions more to purse accounts and to create new horse players, combined with the successful safety and welfare measures instituted over the last two years by our race tracks, we are well on the way to returning California to its historic place as the country's premier racing circuit.”

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Washington: Revenue Decreased By COVID-19, Commission Seeking Increase In ADW Percentage

In the state of Washington, racing is hanging on.

A rule change notice, posted by the Washington Horse Racing Commission (WHRC) at the end of July, cites the negative impact of the pandemic on their ability to continue regulating the sport due to diminished funding sources:

“With the COVID-19 pandemic and the closure of OTB's and Emerald Downs for live in-State wagering from March to June, WHRC revenue has decreased substantially, while expenses remain consistent. On-line wagering thorough the Advance Deposit Wagering firms has increased greatly but the WHRC does not receive any revenue from out of State residents who wager on Emerald Downs. In order to maintain a fund balance required by [the state], the WHRC must increase in revenue to protect its ability to remain in operation therefore allowing live racing and simulcasting to continue.”

The WHRC is seeking to adjust the source market fee it receives on Washington residents' ADW bets. Previously, it received a net 7.5 percent of the total source market fees withheld but if the new regulation is adopted in September, it will increase to a total of 10 percent, what equates to an overall increase of one-third.

In its previous fiscal year, more than 60 percent of WHRC revenues came from taxes assessed on betting at racetracks and OTBs, while just roughly 25 percent came from its share of the fee on ADW betting. With the on-track business unlikely to return any time soon, the WHRC settled on this plan.

Much to their credit, and through negotiations with both Emerald Downs and the Washington Horse Owners and Breeders' Association, the actual fees are not increasing, just being shifted to the WHRC to keep racing going.

In reality, the WHRC receives 10 percent normally, and deposits 25 percent of that, 2.5 percent overall, to a bonus fund and breeders' award account. Under the proposed rule, Emerald Downs will do that, giving up 2.5 percent to fund the owners' and breeders' awards while enabling the full 10 percent to remain with the WHRC. A vote to adopt the change is expected in September.

Working together, making adjustments, Washington racing will carry on.

Most ADW outlets do not have streams of online wagering other than horse racing.

While ADW operators are likely happy to rake in profits as handle is directed mostly through their channels, the reality of what “racing” needs to continue operating is different. As the impact of the pandemic evolves, more remedies are likely needed to situations like that which emerged from this unusual situation in Washington.

The Washington shortfall also helps exhibit that, to some degree, a renegotiation is possible to keep racing and wagering active.

Racing may have been the only sport still going strong during the pandemic, but it did not translate into a boon for all.

While handle declines for the year are just shy of seven percent, purses distributed nationwide are down 36 percent through July in figures reported by Equibase this week. Yes, race days and total races are down similarly as purses. Profits from online wagering at Churchill Downs Incorporated, operator of TwinSpires, were reported up 39 percent in the second quarter of 2020 over the same period a year ago which included the 2019 Kentucky Derby.

Without question, shifting variables across racing make “like-for-like” financial comparisons endlessly tricky, the pandemic-imposed shift to nearly all handle coming via ADWs makes this particularly difficult. But the difficulty that comes with interpreting the data does not suggest there is value in just ignoring the financial realities facing the present, and seeking an improved future.

Survival is key.

North of Washington, in Vancouver, British Columbia, the measures taken by dedicated horsemen are particularly extreme. Stakes purses at Hastings Racecourse are being funded “nearly 100%” by contributions from incredibly generous owners according to Glen Todd, a perennial leading owner at Hastings. Workouts are being clocked just four times weekly, instead of the standard of six days. While this presents some integrity challenges, it is a symptom of the current state of affairs.

Todd reports that income from sources which feed purses is down substantially. C$7.87 million was paid over 51 live days in 2019 (C$154,313 per day), with just C$2.78 million available in 2020 across 25 days (C$111,200 per day). While it is a per-day decline of 28 percent, the total available to be distributed to horsemen is down 65 percent.

Horsemen have responded at the entry box, with field sizes “the highest in years.”

Hastings recently shifted its race dates to Thursday and Sunday mid-afternoons, beginning August 2, away from jammed schedules on Mondays and Tuesdays while seeking greater televised coverage.

Horsemen finding a way to “make due” is understandable in the present. Fixing the broken business model of racing is a necessity for the future.

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