Alleged Boycott of Racetracks for Bigger Share of Wagers Could Be Illegal

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Various horsemen’s groups—organizations comprised of horse owners and trainers—could have illegally boycotted Kentucky racetrack operators in an effort to raise the amounts they received from advanced deposit wagering (ADW), the federal district court in Louisville, Kentucky, has ruled.

The complaining racetracks had standing to assert the claims and pled sufficient facts to support a finding of unlawful price fixing. Rejected was a contention by the defending horsemen’s groups that the Interstate Horseracing Act (IHA) created an implied legislative immunity from antitrust liability. The defendants’ motion to dismiss the complaint on all three grounds was denied.

According to the racetracks, the horsemen’s groups controlled the price of the “signal”—the broadcast of off-site races—by refusing to allow its sale unless each ADW operator agreed to pay them a specified percentage of the “takeout” (the profit from race betting shared by tracks, horsemen’s groups, ADW operators, offtrack betting parlors, and various governmental agencies).

The alleged group boycott produced a detrimental effect when the horsemen’s groups prevented signals from being sold, resulting in fewer wagering opportunities for the ultimate individual consumer, it was asserted. The setting of a minimum cost of the signal that was higher than any the ADW operators had been paying amounted to an inflation of prices.

Standing

The racetracks satisfied each requirement for antitrust standing, the court decided. Their allegations sufficiently described harm to competition. They further asserted that the defendants’ alleged antitrust activities were the direct cause of several specific injuries: (1) the inability to sell their signal, (2) the consequential decrease in wagering opportunities, and (3) a higher price to an ADW operator to purchase the signal.

Although each horsemen’s group could individually veto signal sales, thereby causing similar injuries to tracks and ADW operators, that behavior was not independent and separate from the alleged collusion. Since no independent cause of the injuries could be identified, the racetracks met that element of antitrust standing as well.

Implied Immunity

The IHA did not so heavily regulate the horseracing industry that it authorized the defending groups’ individual actions, the court determined. While the IHA’s provisions created the rules under which racetracks could legally market and facilitate interstate horse race wagering, including requiring consents from various parties before any track could sell its signal or before any wagering can occur, it neither created nor envisioned any other supervision or regulatory scheme. It left regulation of the horse wagering industry to the respective state racing commissions. Its limited provisions did not conflict either directly or indirectly with antitrust principles, let alone possess a clear repugnancy to the antitrust laws.

An argument that implied immunity could apply, despite the absence of active supervision, was rejected by the court. The IHA’s purpose—to ensure that horsemen were compensated for their contributions to the successful operation of an offtrack
betting system—was neither at odds with nor inhibited by antitrust laws. The IHA provided no standards or oversights to regulate the horsemen’s power to veto signal sales, the court said.

Extended Immunity

Also rejected was an argument that the IHA’s proper application required immunity from the antitrust laws under a theory of “extended immunity”—that if certain concerted action by individuals affiliated in a group was immune from antitrust laws, so too were acts by a group consisted of those groups of individuals. In essence, the defendants contended that because individual horsemen could not comply with both the IHA and antitrust laws, the IHA created implied antitrust immunity for groups of horsemen, and by extension, groups of those horsemen’s groups.

However, to conclude that individual horsemen must be immune from antitrust liability under the IHA misconstrued the circumstances of the case and the statutory scheme. Individual horsemen did not need immunity because no individual could exercise a horsemen’s veto or take any action under the IHA, the court observed.

Sufficiency of Allegations

Finally, the racetracks’ complaint satisfied the pleading requirements enunciated in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709), the court held. The alleged presence of a tangible, and agreed upon, licensing agreement dictating minimum prices for ADW operators purchasing signals made the existence of a combination or conspiracy amongst the horsemen plausible.

The description of the relevant market as the “sale and licensing of the right to receive simulcast signals and to accept wagers on horse racing at locations other than the host racetrack” in the United States was a plausible relevant market. The assertion of an agreement that set a floor for the price of a signal was plausibly construed as price fixing, and their factual allegations further illustrated a plausible finding of a group boycott to raise prices.

The March 20 decision is Churchill Downs Inc. v. Thoroughbred Horsemen’s Group, LLC, 2009-1 Trade Cases ¶76,555.