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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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Alleging ‘Shakedown’ over ADW Fees, Churchill Takes TOC to Federal Court

In a spat over advance-deposit wagering (ADW) hub rate fees and which entity should benefit from the pandemic-related boom in at-home betting, a subsidiary of the gaming corporation Churchill Downs, Inc., filed a federal lawsuit against Thoroughbred Owners of California (TOC) Feb. 2 asking a judge to rule that TOC can't use a state law to force CDI into either accepting lower rates, abandoning its just-signed agreement with Santa Anita Park, or entering into arbitration to settle the dispute.

In a chain of events that plaintiff Churchill Downs Technology Initiatives Company (CDT), which operates the TwinSpires and BetAmerica wagering platforms, termed a “shakedown” in its 22-page complaint for declaratory and injunctive relief, the dispute arose Oct. 28, 2020, when TOC president and CEO Greg Avioli allegedly asked CDI's then-executive director of racing, Mike Ziegler, to “voluntarily return the equivalent of 1% of the total” amounts generated from California residents wagering on those platforms in 2020.”

In addition, according to the complaint, “Mr. Avioli proposed that all ADW providers agree to a 3% hub fee for the 2021-2022 term–a rate CDT has never agreed to in its history of operating in California. Indeed, at such a rate, CDT would be operating at a significant loss, and it would make little sense to do business in California or with California residents.”

The complaint does state the fees that are currently under contract between the CDT platforms and Santa Anita, but the United States District Court (Central District, California, Western Division) has allowed those rates to be redacted at the plaintiff's request. Santa Anita itself is not a defendant in the suit.

The complaint continues: “TOC threatened that if CDT did not comply with its 'voluntary' request, it would demand arbitration pursuant to [California Business & Professions Code] section 1960447. Contrary to Mr. Avioli's false characterization, the revenue ADW providers earned in 2020 was not a 'windfall,' but the result of increased demand for online wagering.”

Avioli responded to a request for comment on the lawsuit by emailing a statement, which read, in part, “On Dec. 31, 2020, TOC notified CDT that TOC would pursue the statutory remedy (available to both racetracks and horsemen in California) to seek arbitration of the amount of the hub fee retained by CDT from wagers from California residents for the calendar year 2021.
“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 CDT 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 CDT declined to reach a voluntary settlement of the matter. The specific provision in California law… authorizing the arbitration of hub fees is nothing new and, in fact, has been unchanged in California law for more than two decades. We intend to move forward with the hub fee arbitration in an expedited manner and believe the attempt to disrupt the arbitration by CDT with this last minute federal lawsuit has no merit.”

CDT, according to the suit, disagrees: “There is simply no basis for TOC to earn more money when California's horse-racing industry already retains a large majority of the revenue generated from online wagers. TOC has not contributed a single cent or ounce of effort in 2020 to the efforts and success of www.TwinSpires.com and www.BetAmerica.com, and has no right to a greater portion of their revenue.

“Although TOC wishes to confuse the issue to make it appear more sympathetic, California law already ensures that TOC is handsomely compensated any time a wager is placed on races occurring inside or outside of California,” the complaint continues. “Indeed, Section 19604 ensures the California horse racing industry, including TOC, receives the majority of the money available, after winning bets are paid out, earned from a race, and that the California horsemen and horsemen organizations do far better than their colleagues in every other state or nearly every other state.”

The complaint explains this is because “When an ADW accepts wagers from California residents on an out-of-state race, the track hosting that race, which is not in California, also collects a 'host fee' as compensation for conducting it. California law caps the host fee amount at just 3.5%, in addition to capping the hub fee rate. By capping the out-of-state track's host fee and the ADW provider's hub fee, Section 19604 ensures that California's horsemen groups and racing associations receive the vast bulk of revenue earned from wagers placed by California residents, regardless of where the race actually takes place.

The complaint states that CDT did not agree to the 1% return of money to TOC, nor the demand accept a “substantially lower” hub fee in 2021. Instead, in December, CDT and Santa Anita negotiated an ADW agreement for 2021 at a hub rate “far below the statutory maximum of 6.5%.”

The complaint states that same day that TOC received a copy of that hub agreement, “Mr. Avioli demanded that CDT voluntarily return approximately 0.9% of its 2020 handle, equal to $1.23 million, and reiterated TOC's intent to use Section 19604's arbitration provisions to set a hub fee rate of 4.1% or lower.”

Again, CDT refused. The complaint states that TOC then sent two letters dated Dec. 31 (one for each ADW platform; referenced above by Avioli) demanding that CDT “pick one of three options: (1) abandon its hub agreement with Santa Anita Park; (2) accept an alternate hub fee of 4.1%; or (3) proceed with a hub agreement arbitration.”

On Jan. 13, 2021, the complaint states that TOC did file an in-state demand to officially start the 60-day clock on a “rushed” arbitration process.

“CDT now faces nothing but untenable options,” the complaint states. “It could abandon the hub agreement, meaning all of its investment in building and promoting its websites in California will be lost. It could accept TOC's unreasonable and unsustainable hub fee, which would effectively cause the same result since it is highly questionable that CDT can profitably operate at 4.1%. Or it could go to a binding, unconscionable arbitration process, which would deprive CDT of its right to access the courts, force it into a rushed process without any standards guiding the arbitrator's decision, and allow a third-party to use California law to upend its contractual rights.

“Additionally, TOC has already threatened to attempt to use these arbitration provisions in future years. This sets the stage for a continuous, protracted, and inefficient legal dispute between TOC and CDT.”

The complaint sums up: “Lacking clarity, and recognizing that none of [the] 'options' provided by Section 19604 were actually fair or viable choices, CDT was forced to bring this lawsuit, seeking a declaration that TOC cannot force it to proceed to a fundamentally unfair and unconstitutional scheme and enjoining the organization from utilizing Section 19604 to force CDT to choose between abandoning its agreement, submitting to TOC's proposed rate, or arbitrating.”

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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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Stabling in California Stabilized in “Stopgap” Funding Measures

Facing a reported $2-million budget deficit, the Southern California Stabling & Vanning Racing Committee has performed a fiscal juggling act to maintain the stabling status-quo in the southern portion of the state during 2021, with year-round auxiliary stabling assured for the year at Los Alamitos and San Luis Rey Downs, while off-site training will continue at Santa Anita during the Los Alamitos Thoroughbred and Del Mar Fall meets.

Last year, the program–funded in equal parts by the Thoroughbred Owners of California (TOC) purse account and the Southern California racetracks–cost approximately $9.4 million, the committee explained in a letter addressed to the trainers Thursday.

Historically, monies have come from a percentage of bricks and mortar simulcast wagering at tracks and satellites. But due to the economic impacts of COVID-19, that revenue stream was largely decimated last year.

What’s more, with state-wide purses off more than $20 million since 2018 due largely to a massive betting shift towards ADW platforms, “the horsemen’s purse account is not in a position to continue to subsidize millions of dollars per year” towards the program, the letter states. This at a time when “inefficient training” is not “filling fields,” the letter adds.

According to the letter, the following three main actions were taken to keep the program afloat:

-The auxiliary stabling facilities agreed to cut their stabling rates by more than $1 million and to carry the $2 million of debt from 2020.

-Both the TOC and the SoCal racetracks have each agreed to fund an additional $2 million–above the statutory funding–to help cover the projected deficit this year. These funds will come from the TOC purse account and racetrack commissions respectively.

Had these measures not been taken, either Los Alamitos or San Luis Rey Downs could have faced closure this year, and possibly both, the letter warns.

According to the letter, another possible ramification could have been the imposition at Los Alamitos or San Luis Rey Downs of a new per-day “stall rent” charge, potentially “rebate-able” based on a minimum number of per-trainer starts per stall–an idea that TOC president and CEO Greg Avioli mooted in October.

The letter also addresses several barometers of the overall fiscal performance of the state’s industry:

-Due to a shrinking horse inventory, for much of 2020 both Los Alamitos and San Luis Rey Downs operated at less than 50% of horse capacity–850 at the former and 450 at the latter.

-The racing participation of horses stabled at both Los Alamitos and San Luis Rey Downs was “remarkably low”–0.6 starts per horse during this past year’s Santa Anita winter-spring meet.

-As a consequence, between December 2019 and June 2020 the 749 horses that the stabling and vanning program spent some $4 million to stable and train at Los Alamitos and San Luis Rey generated 486 starts during Santa Anita’s six-month winter-spring meet. This translates into more than $8,000 per starter.

-Workers compensation costs have increased dramatically. Since the beginning of 2019, owners’ per-start contributions have risen more than 60% from $100 per start to $162 per start. At the same time, trainers’ per-stall fees have risen from $3.05 to $5.10.

-More than 90% of workers compensation claims result from morning training.

The letter also makes clear that this financial arrangement is a temporary one.

“The purpose of this letter is to inform the CTT and ALL California trainers of the state of the stabling and vanning fund. The negotiated deal outlined above to keep the SoCal auxiliary training program essentially the same in 2021 as it was in 2020 is only a stopgap measure,” the letter states. “The current economics of SoCal Stabling & Vanning are not sustainable long term.”

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