Churchill Downs Suit Seeks to Loosen Interstate Gambling Prohibitions

Published On October 25, 2012 | By Ken Dreifach | General, Litigation
TwitterLinkedInFacebookRedditCopy LinkEmailPrint

It has been generally accepted for more than a decade that internet gambling is not legal unless it is permitted in both the place in which the bettor is located and the place in which the gambling service is located.  Decisions in United States v. Cohen, 60 F.3d 68, 76 (2nd Cir. 2001), and People of the State of New York v. World Interactive Gaming. Corp., 714 N.Y.S.2d 844 (Sup. Ct. 1999) (1999) established that principle. However, this principle has most commonly been applied to gambling that is authorized by a foreign state, rather than another U.S. State. By contrast, gambling services that are legal in one (or more) U.S. States, but not licensed (and thus not legal) in others where they wish to offer games, have often existed in a state of legal and practical limbo – sandwiched between the conflicting principles of Cohen and WIGC on the one hand and principles of comity, the Commerce Clause and full faith and credit on the other.

This conflict is especially vexing for account wagering services operated by racetracks, and increasingly for state lotteries, which are moving into the online gaming space. The conflict also, of course, stands in the way of these services reaching significant new audiences. (The Interstate Horseracing Act amendments of 2000 permitted account wagering across state lines, e.g., by OTBs, but only if the wagering is permissible in both states.)

Churchill Downs seeks to resolve this conflict in a suit against the Texas Racing Commission (TRC). Through, Churchill Downs accepts wagers on its races – including on the Kentucky Derby. It has done this since the 1990s, initially only by phone, and then online. Last month, for the first time, the TRC made clear its intention to enforce a long-standing Texas law requiring that all Texas wagers on horse-racing be made in person. Churchill responded by bringing suit, alleging that the “in person” requirement violates the dormant Commerce Clause prohibition against discriminating against interstate commerce. In other words, Churchill alleges that out-of-state tracks are subjected to far greater expenses (e.g., establishment of an in-state distribution outlet) and thus unfairly – and unconstitutionally – discriminated against by the Texas law. Churchill Downs is relying on recent Supreme Court precedent striking down on Commerce Clause grounds a Michigan law that permitted in-state but not out-of-state providers from directly shipping wine to Michigan residents. Granholm v. Heald, 544 U.S. 460 (2005).  Granholm also held (in a companion case) that a New York restriction subjecting out-of-state wine sellers to additional restrictions, by requiring them to establish an in-state distributorship operation, was likewise unconstitutional.

The Churchill Downs suit thus potentially drives a wedge through Cohen and the latitude that states have had to prohibit gambling operators – including operators sanctioned by other states – from accepting bets from outside those states’ jurisdictions. If Churchill Downs succeeds, States whose statutes or constitutions broadly prohibit any gambling not specifically authorized by that State may face new challenges on both constitutional and statutory interpretation grounds (as statutes must be interpreted to avoid constitutional conflict). Some of these same states, however, stand to benefit commercially: a resolution favorable (even partly) to Churchill Downs could open those State Lotteries and account wagering platforms to new markets — and lead to a much wider array of options available to lottery players and horse-bettors. If this happens, it will also bring with it a wider and even more complex set of statutory, compliance and geo-licensing issues for future resolution.

Churchill Downs’ lawsuit is available here.

About The Author

Ken counsels clients on complex issues involving information privacy and data law, online liability, consumer regulatory and gaming law, including regulatory response, and adherence to self-regulatory guidelines for online advertising. Ken has had more than twenty years of experience in high-profile regulatory, in-house and private practice roles, including as Chief of the New York Attorney General’s Internet Bureau. He is one of the nation’s leading authorities on the relationship between emerging advertising technologies and online privacy.