October 2016 | Lawsuit Amplifies Racing Reform Problems, But a Fix May Be Coming
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Lawsuit Amplifies Racing Reform Problems, But a Fix May Be Coming

Suzanne Bush - October 2016

Controversy is swirling around HB941 like flies in a horse barn in July. The bill, now known as Act 7, began with such promise. A slew of reforms to Pennsylvania’s horseracing industry, aimed at protecting the industry by changing the way it is governed in the state, were signed into law by Governor Tom Wolf in February, 2016. 

Celebrated by stakeholders at first, the bill quickly became an object of scorn when fatally flawed wording in the bill’s final version undermined its intent. Instead of setting up a breeder award program for horses foaled in Pennsylvania, the bill’s language specified that only foals “sired in the Commonwealth” would be eligible for awards.

The result has been catastrophic for Thoroughbred horse breeders and farms across the state. Because of the wording, which essentially controverted the bill’s intent, breeders’ awards in Pennsylvania have not been paid since February. Vet bills, feed bills, training bills, hay bills—have been unpaid or paid partially while breeders wait for the Legislature to correct what was, essentially, an epic typo. Several million dollars in awards are sitting in an account, beyond the reach of the people who earned them and who desperately need them.

What more could happen to undermine a bill that seemed to have checked off all the boxes, from bipartisan support, to stakeholder support, to bringing an important industry into the 21st Century? How about a lawsuit claiming the law is unconstitutional? That’s exactly what happened when Churchill Downs, on behalf of its subsidiary TwinSpires, filed a lawsuit charging Pennsylvania with violating the US Constitution, and also Pennsylvania’s own Constitution.

Does Act 7 Violate the Constitution?
Act 7 defines several “primary market areas” within the state and sets up regulations that TwinSpires contends effectively prohibit organizations like theirs from doing business within those areas. According to the suit, the state created six of these market areas, whose boundaries correspond to 35-mile radius circles around each of the state’s racetracks. Only the racetrack “at which the licensed racing entity is conducting a horse race” may engage in online or simulcast wagering. Since TwinSpires provides online wagering, advance-deposit wagering and electronic wagering for racetrack patrons, the lawsuit maintains that Act 7 restrains them from engaging in lawful, legitimate business enterprises. They cite the US Constitution’s dormant Commerce Clause—which nominally forbids any state from setting up regulations that discriminate against certain businesses—as a rationale for their lawsuit.

Attorneys for TwinSpires, which has been providing online wagering in Pennsylvania since 2007, contend that Act 7 discriminates against any business that does not fall within the 35-mile radius of the racetracks; and that it creates monopolies for the companies that operate the racetracks.

But Act 7 doesn’t prohibit operations like TwinSpires from participating. Instead, it places an annual fee on such companies. The first year the fee would be $500,000; every year after the fee would be $100,000. In this way, the State contends, TwinSpires will be a “licensed racing entity.”

Further, the TwinSpires lawsuit charges that Act 7 violates the Pennsylvania Constitution’s so-called “single subject rule.”  While the Constitution states that “no bill shall be passed containing more than one subject,” Act 7 regulates gaming, but also distilleries, fantasy gaming and other activities.

A History of Complaints
Michael Rader, who is Executive Director of the Senate’s Agriculture and Rural Affairs Committee, has been working on this racing reform legislation for five years. He’s frustrated but not cowed by the TwinSpires lawsuit. Several issues are mixed into this latest squabble. When Pennsylvania brought casinos into the mix with horseracing, then amplified breeders’ awards with receipts from slot machines, it changed the landscape of racehorse breeding in the United States. The traditional powerhouse states like Kentucky, home of Churchill Downs which is practically synonymous with horseracing, suddenly faced a new rival.

“There’s a history to TwinSpires and Churchill Downs’ judicial presence in Pennsylvania,” Rader says. “In 2012 we enacted a tax on those types of wagers. That was an issue. They have an issue of challenging Pennsylvania’s attempts to level the playing field. It (the lawsuit) was not unexpected.”

Rader says that the lawsuit incorrectly claims that Act 7 violates the dormant Commerce Clause. “To claim that these secondary pari-mutuel organizations are subject to fees that instate entities are not subject to, there’s nothing further from the truth.” He says there was no statutory authority for them to accept wagers in Pennsylvania.

“They make a few different cases,” he says. “One is discriminating against out-of-state businesses. It comes down to a market area complaint that they’re precluded from accepting wagers from in-state licensees.” He says no discrimination occurs because the law applies to everybody. “The market area protections have existed for decades,” he says. “It’s nothing new.”

Referring to the annual $100,000 fee to which TwinSpires objects, Rader says that it’s something that applies to everybody. “Only difference is for the in-state licensees, their fees are paid through their Category 1 casino licensing fee. They paid that to get a casino license. The number one requirement (to operate a casino) is you must have a racetrack.” He says that in their complaint, TwinSpires says they’ve been operating in Pennsylvania for eight years. “But they had no statutory right to do so.”

The TwinSpires lawsuit also insists that Act 7 violates Pennsylvania’s Constitution, which includes a “single subject rule.” Basically this is a rule that appears in the constitutions of most states, to preclude the creation of bills that include regulations for many unrelated issues.

Act 7 is certainly not the only piece of legislation that has more than one subject. In fact, as Rader points out, Act 7 is actually a rewrite of a nine-year-old law. “When we got the racehorse reform act in 1984, it was a consolidation of two separate laws that were passed in 1930. It was a monster undertaking,” he says, “but we think Act 7 is a very good product. There are always some clean-up issues that will come to light. There are clean-up issues you can find in a two-page law.” At any rate, he says the courts will decide whether Act 7 violates the single subject rule.

Horse Breeders Still Waiting
While the TwinSpires lawsuit has edged the state’s horse breeders out of the spotlight, they continue facing enormous problems because of the way Act 7 describes breeders’ awards. This problem has been waiting for a solution for months, and the state’s legislators say that fixing it is a priority.

“The problem is you have this pot of money that’s accruing,” Rader says. “We have all the people who have made investments according to that pot of money. We’re talking about real jobs, real people who have made an honest investment in the distribution of this money. It’s a purely technical error that has untechnical ramifications.” Indeed.

But a Fix Appears Imminent
Representative Martin Causer (R., Cameron, McKean, Potter Counties) has introduced HB 2303, which was scheduled for a vote on September 27. Causer chairs the House Agriculture and Rural Affairs Committee, which approved the bill on September 20.

The bill includes a technical amendment which would move the reform law out of the Administrative Code of Pennsylvania and into the Agriculture Code. The state’s Administrative Code prohibits any law from addressing more than one subject. The Agriculture Code has no such prohibition, and HB2303 would thus eliminate one of the complaints filed against Pennsylvania by TwinSpires.

Once the bill passes the House, where support is said to be bipartisan and overwhelming, it will go back to the Senate. While there are some lingering disagreements, sources in the House expressed optimism that the Senate will move quickly to pass the bill. Legislators are hoping that this chapter in Pennsylvania’s horseracing reform will finally close once Governor Wolf signs the bill into law. The state’s horse breeders, who have borne the biggest burden for nearly eight months, will surely be more relieved than anyone.