Is 'RICO' a Reach in DerbyWars Suit?

When six racetracks owned by The Stronach Group sued the parent company of DerbyWars in a California federal court Dec. 2, the litigation came as no real surprise to anyone who has been following the recent and rapid rise of contest and tournament-style online gaming in the horse racing industry.

Much like the larger nationwide debate over the legality of fantasy team sports gaming, there are no clear answers to myriad gray-area questions about online horse racing contests. Are entities that collect entry fees and pay back prize money based on the aggregate use of individual race results usurping money from racing's traditional pari-mutuel profit model? Or are online contests bolstering interest and propping up betting handles by engaging customers who would otherwise not be wagering?

The Stronach-owned tracks (Santa Anita Park, Golden Gate Fields, Gulfstream Park, Laurel Park, Pimlico Race Course and Portland Meadows) have raised legitimate concerns about whether contest sites are profiting from the racing product without contributing revenue back to the industry. And although DerbyWars is hardly the only online tourney operator, the Stronach tracks are aiming to establish a precedent by going after Horse Racing Labs, LLC, because its DerbyWars game is well established as the highest-profile racing contest site in the country.

But here's the aspect of the lawsuit that did come across as a mild shock: The most serious–and potentially most financially damaging–complaint in four-count civil case in the United States Central District Court of California alleges that “bets” made through DerbyWars constitute “racketeering activity” that violates the Racketeer Influenced and Corrupt Organizations Act (RICO).

How is it that a sweeping and powerful 1970 federal statute designed to combat the Mafia has come into play in civil business between two racing-related companies? And how might that allegation factor into either a court trial or settlement negotiations?

Scott Daruty, the president of simulcast signal broker Monarch Content Management, LLC (which is owned by The Stronach Group) said in a phone interview that he was not at liberty to discuss specific litigation strategies. He did add, however, that the Stronach legal team felt “very strongly” that they have a solid complaint, and that “this is the exact type of case–illegal gambling–that RICO was set up for.”

Via email, DerbyWars founder Mark Midland declined a request to comment on the lawsuit.

TDN asked two independent attorneys who specialize in civil RICO claims to examine the lawsuit and to put the racketeering allegation in the proper legal context while offering their opinions on how the case might play out.

Jeffrey Grell is a Minneapolis-based attorney and author of the book Grell on RICO. He also operates the website www.ricoact.com and teaches a RICO course at the University of Minnesota Law School.

Paul Batista is a Manhattan-based trial attorney and author of the book Civil RICO Practice Manual. He often appears on CBS news as a legal affairs commentator.

In separate phone interviews, the first point that each lawyer emphasized is that the “organized criminal” stigma of being named as a defendant in a civil RICO lawsuit is no longer accurate. Despite the statute's original intent, RICO today is only rarely used to go after stereotypical “godfather” figures. In the 46 years since the law's inception, federal prosecutors now have more specific statutory tools to target Mafia-like racketeers. Instead, RICO has evolved as a key component in civil litigation, and is most often asserted by the purported victims of white-collar crimes, such as mail and wire fraud.

“I can understand why people in the Thoroughbred business would be surprised by the inclusion of a RICO claim,” Batista said. “But RICO has never applied just to organized crime families or what we consider the Mafia. It applies in any and all types of settings, including corporate board rooms, securities firms, banks, you name it, so long as there are allegations that the companies or the individuals running the companies committed what are known as 'predicate acts.'”

There are no restrictions on who can be named as a defendant, Batista said, ticking off the names of corporate and government institutions that have been accused of violating RICO, such as Bank of America, Merrill Lynch and the U.S. Department of Defense.

“Even the Catholic Church has been named as a RICO defendant,” Grell added.

The Stronach tracks' legal team presumably had many legal ways to state its case. Why go the RICO route?

“The main reason RICO is used is because it gets [the press] talking,” Grell said. “If they had just brought an 'interference with contractual relations' claim or a claim like they're also making under the Interstate Horse Racing Act or something else, nobody cares. But you bring RICO, then all of a sudden the media gets involved and people start taking notice. There's a lot more publicity, and it becomes a much bigger deal than it probably really is.”

Another daunting component of a RICO claim is that victims–once liability and the extent of harm are established–are entitled to mandatory triple damages.

“Unlike 99% of the other lawsuits in America, if these plaintiffs can prove that they were injured economically as a result of RICO action by the defendants, the judge has an obligation–it's not discretionary–to multiply [damages] by three,” said Batista. “So a lot of [plaintiffs] will try to include RICO claims in what might not otherwise sound like an appropriate RICO action.”

Grell concurred: “Generally speaking as a lawyer, the strategy is to throw everything that you can at your opponent, including the kitchen sink, and see what prevails.”

From a legal standpoint, RICO claims are also time-consuming, which can impose a financial burden on anyone forced to defend them.

“Just by pleading it, you're necessarily increasing the costs of litigation for your opponent,” Grell said. “If you feel as though you've got a bigger war chest than your opponent, that could be a good advantage to have.”

Grell explained that there are at least seven elements in any civil RICO claim. One of them is proving a pattern of racketeering activity under the 60 or so criminal activities that fall under the statute–and each one of those crimes has multiple elements and sub-elements that also must be proven. There's a distinction, he said, between doing something outside the law and intending to do so.

“You have to have a criminal intent to violate the law,” Grell said. “In the business context, lots of times RICO claims can be difficult to prove because there is at least an argument as to why the defendants' conduct is lawful.”

With specific regard to the Stronach tracks' lawsuit, both lawyers noted technical deficiencies in the RICO component of the complaint. Both attorneys zeroed in on the fact that in order to make a successful RICO claim, a plaintiff has to show that the defendant or defendants constituted an “enterprise” that controlled the allegedly criminal aspects of the business.

“This complaint doesn't identify an enterprise. It names a defendant. But that's not sufficient,” Batista said. “Without criticizing the plaintiff's lawyers, they left out a critical element of alleging an enterprise, which again, means more than just naming one defendant, which is all that they've done… They would have to say or make an effort to identify how those other people or corporations ran the DerbyWars business.”

Grell agreed: “That's just an absolute error…The statement expressly states 'The Defendant is the enterprise itself.' Based on this statement alone, almost all judges will hold that the RICO claim is not actionable.”

Grell also said the complaint does not cite the correct RICO statutory provisions.

“I think what they were intending to bring was a 1962(c) claim, which is when you're injured by the acts of racketeering activities themselves,” Grell said. “From my perspective, as a person who does this every day, the complaint wasn't written very well. And in my opinion, it's got some pretty fundamental problems.”

A section in a separate “compliance with RICO order” that the Stronach tracks filed on Dec. 28. that reads “Plaintiffs' claims are based on gambling, not on the predicate offense of wire fraud, mail fraud or fraud in the sale of securities,” stood out to Batista.

“It is beyond me why the plaintiffs did not add violations of the federal wire fraud and mail fraud criminal laws as RICO predicate acts,” Batista wrote in a follow-up email. “It is obvious, if one were to accept the plaintiffs' theories as true, that the fantasy game defendant would have utilized the wires to implement the fraud. Even though the federal criminal wire fraud statute is more than 100 years old, modern courts have concluded that it reaches email and text messages if they play even a marginal role in implementing a fraudulent scheme.”

Batista said that under federal law, a plaintiff has one chance to amend a complaint. But if the defendant answers the complaint by making a motion to dismiss it, the plaintiff no longer has the “automatic right” to amend the original complaint.

So far, the parent company of DerbyWars has yet to file an answer with the court. It was recently granted an extension to file until Jan. 22.

“And you know what's going to happen on Jan. 22, as sure as night follows day and the sun is going to come up in the morning?” Batista asked rhetorically. “There's going to be a motion to dismiss the racketeering claims.”

Batista said it's a “safe bet” that in federal district court, 90 to 95% of civil RICO cases will get thrown out.

“Given the way this is currently pled, if I were a judge, I would dismiss it,” Grell said. “And it's not that some of the pleading issues can't be fixed. Maybe they can state an actual claim. I just don't think that the complaint right now is actionable.”

Grell and Batista agreed that in general, if RICO claims do survive a motion to dismiss or a motion for summary judgment, most claims get settled out of court because there is too much at stake on both sides to let the case go to trial.

“There's too much potential for jury confusion, which creates risks for both sides,” Grell explained. “And obviously, the defendant faces the additional risk that if the jury is confused and believes the plaintiff, the defendant is not just going to get to hit with actual damages, but treble damages. Then again, the plaintiff doesn't want to be left with an empty bag.”

Beyond the RICO allegation, three other complaints in the suit allege violations of the Interstate Horse Racing Act, the California Business & Professions Code, and a statute called Intentional Interference With Prospective Economic Advantage.

“I remain skeptical, for the reasons we discussed, that [the plaintiffs'] horse will cross the RICO finish line,” Batista said. “I wish both sides well. But there's going to be one loser, and there's going to be one winner, just like a horse race.”