Federal Case Could Test Horsemen's Ability to Negotiate

After holding out from an agreement among California tracks, horsemen, and at least one advance-deposit wagering outlet that operates in the state, Churchill Downs Technology Initiatives Company has filed a federal lawsuit against the Thoroughbred Owners of California.

In litigation filed Feb. 2 in the United States District Court for the Central District of California, Western Division, CDTIC, a subsidiary of Churchill Downs Inc., seeks declaratory and injunctive relief, alleging it had reached an agreement in December 2020 on fees for the signal from Santa Anita Park but the TOC demanded a larger piece of the pie, forcing the company into binding arbitration.

Any action by the court will be closely watched, as horsemen's organizations typically have had the power to control their signals by approving and disapproving of such rates. From state to state, different remedies are provided should the sides fail to reach an agreement.

While the litigation does not include the current fee (a percentage of takeout from wagers it handles) that Churchill ADW companies TwinSpires.com and BetAmerica.com are receiving, it states the TOC wants the rate reduced to 4.1%. California law prohibits ADW companies from retaining more than 6.5%.

Such rates always have been a topic of tough negotiation, but they are of more importance than ever with COVID-19 restrictions shutting down or limiting attendance at tracks and simulcast outlets. Those changes have forced nearly all handle to come through ADW outlets. Those dollars are split between the tracks, horsemen (through purses), and the ADW platforms. With a third party in play, the percentage of money that goes to purses and the tracks typically is reduced. Such rates, or fees, are negotiated.

In a statement this week, the TOC said it is following the statutory remedy in resolving such issues when an agreement fails to be reached through negotiation.

"TOC's decision to exercise its arbitration rights under California law came after CDTIC declined to reach a voluntary settlement of the matter," the TOC said in a release. "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 CDTIC with this last-minute federal lawsuit has no merit."

In its suit, CDTIC said reducing its rate to 4.1% would result in the loss of millions of dollars for the company. It said arbitration cannot be invoked in this manner against the company.

"Moreover, Churchill Downs Technology never agreed to this arbitration scheme; it has been unilaterally imposed by statute which forces Churchill Downs Technology to choose between three fundamentally unfair options: accepting the lower rate proposed by TOC, abandoning its hub agreement with Santa Anita Park, or proceeding to arbitration," the suit reads. "In other words, Churchill Downs Technology has to abandon the millions of dollars it invested in its business in California and the rights it has under contract, or it has to proceed to a standard-less, but binding, arbitration. This violates due process clauses of the United States and California constitutions."

The Churchill company's lawsuit asks the court to declare the TOC's request as invalid and unenforceable.

Churchill Downs Inc. has faced a difficult year as many of its casino operations had to close or limit attendance but TwinSpires has helped alleviate some of those losses. With pari-mutuel wagering shifting to online and mobile platforms, TwinSpires enjoyed a record third quarter with $116 million in revenues, up 77% compared with the third quarter of 2019. (Moving the date of the Kentucky Derby Presented by Woodford Reserve [G1] to September also contributed to that record number.)

California purses receive no money from added gaming, meaning they completely depend on pari-mutuel wagering for funding. Last month the TOC, Del Mar, Santa Anita, Golden Gate Fields owner The Stronach Group, and ADW operator TVG announced an agreement that will "inject up to $15 million into California purses in 2021 and 2022." 

The agreement announced in January, which didn't include Churchill's ADWs, is projected to pump about $15 million in purse money for California Thoroughbred tracks in 2021 and 2022.

Churchill Downs Inc. officials declined to comment.