$500K Settlement in Stronach Vs. DerbyWars Suit

The Stronach Group (TSG) will get a minimum $500,000 settlement from the parent company of the online fantasy contest site DerbyWars after the two companies negotiated a deal approved by a federal judge June 13 that keeps a civil lawsuit from going to trial later this month.

The 18-month long United States Central District Court of California battle has been widely viewed as a test case to determine the legality of fantasy- and tournament-styled online gaming based on horse race results. Its key point centered on whether or not DerbyWars allegedly took illegal bets on TSG races without contributing anything back to the horsemen and tracks that put on the show.

“I think it's an important ruling, not just for TSG, but for the entire industry,” said Scott Daruty, the executive vice president of content & media for TSG. “Running live racing is expensive for the racetracks, and it's also expensive for the owners and trainers of the horses. We just wanted to make sure that the tracks and horsemen are getting compensated when people use our product for wagering purposes, be that traditional, co-mingled, pari-mutuel wagering, or whether it's handicapping contests that are being conducted by DerbyWars and others.”

Mark Midland, the founder of Horse Racing Labs, LLC, which owns DerbyWars, said his company in no form would appeal the case, and that he instead preferred to focus forward on growing his business and the sport's contest sector in general.

“While we were disappointed in the ruling, the benefit is that the ruling has set a clear path for horse racing contest operators to proceed under the Interstate Horse Racing Act (IHA),” Midland said. “We are immediately signing new agreements with tracks, and we see a bright future for contests as we continue to commit our team and resources to driving innovation in horse racing to benefit all.”

The ruling, signed by federal judge S. James Otero, actually calls for DerbyWars to pay TSG a $1-million negotiated settlement. But the deal is structured in such a way that if DerbyWars makes a $250,000 initial payment to TSG within three business days of the filing of the court order, then follows up with 12 installments of $20,833 monthly, the financial obligation will be considered satisfied in full at four dollars shy of $500,000.

Otero's ruling also reads, in part, “Nothing in this Judgment, nor any act performed by Defendant nor any document executed pursuant to this Judgment, shall be construed as an admission by Defendant of any fact, liability, issue of law, conclusion of law or violation of any statutory or regulatory laws.”

Otero added that the order defining the terms of the settlement shall not be admissible in court in the event that DerbyWars is involved in future litigation with another party.

Although TSG used the word “precedent” in a press release to describe the negotiated agreement, and Midland used the phrase “clear path” to establish parameters for contest contracts moving forward, it is not precisely established based on the ruling whether the court-approved settlement constitutes an actual legal precedent. TDN asked Daruty, an attorney since 1991, for his interpretation on what the agreement actually means regarding future contest/content usage.

“From a technical legal standpoint, this judgment is not binding on any parties other than DerbyWars and TSG,” Daruty explained. “It cannot be used either as a shield or a sword by parties other than DerbyWars or TSG. But I do think it's very helpful in that it provides insight into what a federal court judge has determined, and that it does give an indication as to how other federal court judges in the future would determine this exact same issue. So while the judgment itself is not binding on other parties, it does give other parties guidance as to what the law is in this area, and I hope it means racetracks and horsemen, even [those] other than [at] TSG tracks, get compensated when their content gets used.”

Although the ruling restrains DerbyWars from “directly or indirectly using or including any horseraces run at any of the horserace tracks operated by any of the Plaintiffs in any of Defendant's Contests,” it does leave the door open for TSG and DerbyWars to negotiate a contract if both sides wish to do so.

When asked if DerbyWars might soon begin offering contests involving TSG tracks, Midland replied that “We're looking to work with all tracks, including the Stronach tracks…. DerbyWars has had several track partners in place previously. We're open to compensating track partners and want to work with as many tracks as possible.”

Asked the same question, Daruty put it this way: “I think it's going to take time for the wounds to heal. We've just come off of 18-plus months of pretty bitter litigation, and we at TSG have every intention of working with some handicapping contest operators to make sure our product is out in the marketplace in the context of handicapping contexts. I think it's unlikely that DerbyWars will get our content immediately, but I'm not saying they'll never get it. I just think we have to wait and let time pass and then we'll see how things turn out with respect to DerbyWars.”

Daruty was also asked if TSG was considering operating its own form of online contest play in the future.

“Absolutely. We acknowledge that customers are interested in [contests]. Not every customer, but many customers are,” Daruty said. “So we feel like it's our job to get this product to our customers, but we have to do it in a way that returns compensation to the tracks and horsemen. So I believe that we will be providing our content to contest operators in the very near future–maybe not all of them, maybe not DerbyWars, but some. And we would also certainly be looking at potential opportunities to get into this business ourselves. But those two things aren't necessarily hand in hand. In other words, even if we don't get into the business ourselves, we'll still be providing the content to other operators.”

Over the past year and a half, the nature of the case shifted and changed while Horse Racing Labs fought to have some of the initial TSG complaints dropped and the two sides entered into behind-the-scenes negotiations to settle it. At all levels of law, it is not uncommon for suits to be simultaneously contested back and forth in court while plaintiffs and defendants try to come to terms on a working agreement, with some form of settlement reached as the trial date looms.

On Dec. 2, 2015, six TSG-owned tracks–Santa Anita Park, Golden Gate Fields, Gulfstream Park, Laurel Park, Pimlico Race Course, and Portland Meadows–demanded a jury trial to seek unspecified monetary, punitive and exemplary damages, plus injunctive relief, from DerbyWars.

The initial complaint alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), which, if proven, carried the ominous penalty of mandatory triple damages. But DerbyWars successfully argued in court that such a “thermonuclear device” of civil litigation was not applicable in this case, and five months later, the RICO allegations were one of three causes of action dismissed by Judge Otero.

On May 16, 2016, TSG filed an amended lawsuit, streamlining the initial four-count complaint into what the TSG tracks believed were the two strongest allegations: Alleged violations of both the IHA and the California Business & Professions Code, which regulates “unfair or fraudulent” business acts.

That meant the retooled case, if it were to move forward to a trial, hinged on the proving or disproving of one key point: Were the contest selections made by pay-to-play fantasy horse racing game participants actually “bets” subject to the IHA? It took Judge Otero a year to figure out exactly what that issue meant in the context of the lawsuit.

“The parties dispute whether Derby Wars contests constitute parimutuel wagering under the IHA,” Otero wrote in a ruling dated May 15, 2017. “Defendant contends that Derby Wars contests are not parimutuel wagering, but rather contests in which skill predominates over chance, and the IHA does not apply. Plaintiffs contend that whether something is a bet or wager is not dependent upon whether it takes skill to actually win that bet or wager.”

Otero continued: “Whether or not the Derby Wars contests are parimutuel wagering is a sufficient but not necessary condition for the applicability of the IHA…. Because a wager placed or accepted in one State with respect to the outcome of a horserace taking place in another State…need not be a pari-mutuel wager, the Court finds that the proper focus of the inquiry rests on whether payment of the entry fee for Derby Wars contests is a wager.”

Then, while granting (in part) the plaintiffs' motion for summary judgment, Otero concluded: “The Court finds: the entry fees paid in contests offered by Defendant on its Derby Wars website are wagers under the Interstate Horseracing Act of 1978; Defendant is operating an offtrack betting system as defined in Section 3002(7) of the IHA; and the IHA can serve as a predicate for a California Business and Professions Code Section…claim.”

In sum, because Otero ruled last month that entry fees in the DerbyWars contests do constitute wagers, the case was scheduled to proceed to trial on June 27 for the purpose of determining damages. But the terms of the settlement take precedence now that Otero has signed off on the negotiated agreement, and the trail will be avoided.