Alleging 'Shakedown' over ADW Fees, Churchill Takes TOC to Federal Court

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Greg Avioli | Getty Images

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In a spat over advance-deposit wagering (ADW) hub rate fees and which entity should benefit from the pandemic-related boom in at-home betting, a subsidiary of the gaming corporation Churchill Downs, Inc., filed a federal lawsuit against Thoroughbred Owners of California (TOC) Feb. 2 asking a judge to rule that TOC can't use a state law to force CDI into either accepting lower rates, abandoning its just-signed agreement with Santa Anita Park, or entering into arbitration to settle the dispute.

In a chain of events that plaintiff Churchill Downs Technology Initiatives Company (CDT), which operates the TwinSpires and BetAmerica wagering platforms, termed a “shakedown” in its 22-page complaint for declaratory and injunctive relief, the dispute arose Oct. 28, 2020, when TOC president and CEO Greg Avioli allegedly asked CDI's then-executive director of racing, Mike Ziegler, to “voluntarily return the equivalent of 1% of the total” amounts generated from California residents wagering on those platforms in 2020.”

In addition, according to the complaint, “Mr. Avioli proposed that all ADW providers agree to a 3% hub fee for the 2021-2022 term–a rate CDT has never agreed to in its history of operating in California. Indeed, at such a rate, CDT would be operating at a significant loss, and it would make little sense to do business in California or with California residents.”

The complaint does state the fees that are currently under contract between the CDT platforms and Santa Anita, but the United States District Court (Central District, California, Western Division) has allowed those rates to be redacted at the plaintiff's request. Santa Anita itself is not a defendant in the suit.

The complaint continues: “TOC threatened that if CDT did not comply with its 'voluntary' request, it would demand arbitration pursuant to [California Business & Professions Code] section 1960447. Contrary to Mr. Avioli's false characterization, the revenue ADW providers earned in 2020 was not a 'windfall,' but the result of increased demand for online wagering.”

Avioli responded to a request for comment on the lawsuit by emailing a statement, which read, in part, “On Dec. 31, 2020, TOC notified CDT that TOC would pursue the statutory remedy (available to both racetracks and horsemen in California) to seek arbitration of the amount of the hub fee retained by CDT from wagers from California residents for the calendar year 2021.
“ADW wagering in California increased by over 40% year over year statewide in 2020 while purse generation from live tracks and OTBs dropped substantially due to COVID-19 closures and restrictions.

“In 2020 CDT received over $7 million of hub fees from ADW wagers by California on Thoroughbred races. TOC's decision to exercise its arbitration rights under California law came after CDT declined to reach a voluntary settlement of the matter. 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 CDT with this last minute federal lawsuit has no merit.”

CDT, according to the suit, disagrees: “There is simply no basis for TOC to earn more money when California's horse-racing industry already retains a large majority of the revenue generated from online wagers. TOC has not contributed a single cent or ounce of effort in 2020 to the efforts and success of www.TwinSpires.com and www.BetAmerica.com, and has no right to a greater portion of their revenue.

“Although TOC wishes to confuse the issue to make it appear more sympathetic, California law already ensures that TOC is handsomely compensated any time a wager is placed on races occurring inside or outside of California,” the complaint continues. “Indeed, Section 19604 ensures the California horse racing industry, including TOC, receives the majority of the money available, after winning bets are paid out, earned from a race, and that the California horsemen and horsemen organizations do far better than their colleagues in every other state or nearly every other state.”

The complaint explains this is because “When an ADW accepts wagers from California residents on an out-of-state race, the track hosting that race, which is not in California, also collects a 'host fee' as compensation for conducting it. California law caps the host fee amount at just 3.5%, in addition to capping the hub fee rate. By capping the out-of-state track's host fee and the ADW provider's hub fee, Section 19604 ensures that California's horsemen groups and racing associations receive the vast bulk of revenue earned from wagers placed by California residents, regardless of where the race actually takes place.

The complaint states that CDT did not agree to the 1% return of money to TOC, nor the demand accept a “substantially lower” hub fee in 2021. Instead, in December, CDT and Santa Anita negotiated an ADW agreement for 2021 at a hub rate “far below the statutory maximum of 6.5%.”

The complaint states that same day that TOC received a copy of that hub agreement, “Mr. Avioli demanded that CDT voluntarily return approximately 0.9% of its 2020 handle, equal to $1.23 million, and reiterated TOC's intent to use Section 19604's arbitration provisions to set a hub fee rate of 4.1% or lower.”

Again, CDT refused. The complaint states that TOC then sent two letters dated Dec. 31 (one for each ADW platform; referenced above by Avioli) demanding that CDT “pick one of three options: (1) abandon its hub agreement with Santa Anita Park; (2) accept an alternate hub fee of 4.1%; or (3) proceed with a hub agreement arbitration.”

On Jan. 13, 2021, the complaint states that TOC did file an in-state demand to officially start the 60-day clock on a “rushed” arbitration process.

“CDT now faces nothing but untenable options,” the complaint states. “It could abandon the hub agreement, meaning all of its investment in building and promoting its websites in California will be lost. It could accept TOC's unreasonable and unsustainable hub fee, which would effectively cause the same result since it is highly questionable that CDT can profitably operate at 4.1%. Or it could go to a binding, unconscionable arbitration process, which would deprive CDT of its right to access the courts, force it into a rushed process without any standards guiding the arbitrator's decision, and allow a third-party to use California law to upend its contractual rights.

“Additionally, TOC has already threatened to attempt to use these arbitration provisions in future years. This sets the stage for a continuous, protracted, and inefficient legal dispute between TOC and CDT.”

The complaint sums up: “Lacking clarity, and recognizing that none of [the] 'options' provided by Section 19604 were actually fair or viable choices, CDT was forced to bring this lawsuit, seeking a declaration that TOC cannot force it to proceed to a fundamentally unfair and unconstitutional scheme and enjoining the organization from utilizing Section 19604 to force CDT to choose between abandoning its agreement, submitting to TOC's proposed rate, or arbitrating.”

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