DerbyWars: Judge Rules That Fantasy Horse Racing Fees Are In Violation Of Federal Law

For the first time in history, a U.S. court has ruled that the paid-entry fees charged for fantasy horse racing contests are the same as real-money wagers. This controversial ruling could have implications on the future of the fantasy sports industry.

Derby Wars, whose parent company is the Kentucky-based Horse Racing Labs, is a fantasy horse racing site that offers tournament-style handicapping contests on races in the US. The Stronach Group, owner of several major racetracks across the nation including Pimlico and Santa Anita Park, decided to file suit against the fantasy sports operator back in December of 2015. The federal lawsuit filed in the U.S. District Court for the Central District of California alleged that Horse Racing Labs was in violation of the Interstate Horseracing Act (IHA) of 1978.

The IHA is a federal law that regulates interstate pari-mutuel wagering on horse races and provides definitions of interstate off-track wagers and the off-track betting system. The Act was updated in 2000 to include language regarding the transmission of horse race bets between states via the internet or other electronic devices.

§ 3002(3) “interstate off-track wager ” means a legal wager placed or accepted in one State with respect to the outcome of a horse race taking place in another State and includes pari-mutuel wagers, where lawful in each State involved, placed or transmitted by an individual in one State via telephone or other electronic media and accepted by an off-track betting system in the same or another State.

Judge S. James Otero determined that the entry fees collected by Derby Wars are equivalent to wagers, therefore making DerbyWars an off-track betting site rather than a traditional fantasy sports operator

"Having determined that DerbyWars entry fees constitute a wager, where such wagers are placed with DerbyWars in Kentucky, with respect to the outcome of a horserace, or series of up to six individual horse races, as the case may be, taking place in California, Oregon, Maryland, and/or Florida, and where such wagers are received over the Internet, the court concludes that defendants are operating an off-track betting system subject to the Interstate Horseracing Act," wrote Judge Otero in his summary

By ruling that the operator falls under the scope of the IHA, their acceptance of “wagers” would put them in violation of the federal law. This judgment gives the Stronach Group a stronger case in their separate claim for monetary damages against Horse Racing Labs. The DerbyWars contests were - and still continue to be - held at racetracks operated by the group, yet Stronach has not received any form of compensation. A trial is already set for June where the Stronach Group will also be requesting an order against DerbyWars to stop these bets from taking place.

This was a shocking judgment to the entire Horse Racing Labs brand as they maintained that their paid-entry fees do not constitute wagers. The fees that are charged by DerbyWars go into a large pool that is disbursed between winners and, of course, a percentage is left for the operators. DerbyWars argued that their organizational structure was permitted under the confines of the fantasy clause included in the federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Lawyers also attested that the fees were not wagers in any capacity, and should be treated as contests per the California Business and Professions Code. DerbyWars had the following to say in a statement released to the press:

"We are disappointed with the court's ruling but intend to press forward with our defense and are evaluating our options to appeal the court's order, with which we disagree. We believe DerbyWars has created a product that is innovative and advances horse racing in a sport that needs more innovation. We look forward to continue building new products and helping to grow the sport we love."

There are other fantasy sports cases currently underway across the nation that could be effected by the California ruling. In New York, a group of citizens are claiming that the state’s fantasy sports law violates the constitutional gambling ban. Judge Otero compared the pool model used by DerbyWars to “the ‘pot’ in poker” which is a part of the gambling industry that is struggling to be revived. If fantasy sports sites were to shut down even temporarily, there is a possibility that it would struggle to regain traction.

In Massachusetts, a class-action suit is underway against FanDuel and DraftKings, the two biggest names in the fantasy sports industry. Some of the arguments in the case include illegal gambling and shady business practices. If another judge rules that these contests are in fact wagers, it could serve as the pathway for an onslaught of legal battles.

Even with Judge Otero ruling in favor of the plaintiff’s, LegalHorseBettingSites.com does not see fantasy sports becoming a defunct industry now or ever. Scott Daruty, President of The Stronach Group’s simulcast marketing department, even stated that fantasy sports is a worthwhile product that horse enthusiasts enjoy, however, there needs to be a delivery system to ensure that the overall economics of the racing industry are addressed.

Also, while the UIGEA does have a provision for traditional fantasy sports, horse racing is an industry that is largely regulated on a state level rather than federal. For that reason, this ruling could have implications on fantasy horse contests, but not the entire fantasy sports industry.