09/24/2012 5:01PM

Churchill Downs Inc. files suit in Texas over phone, Internet wagering

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Churchill Downs Inc. filed a federal lawsuit on Friday seeking to block the Texas Racing Commission from enforcing a prohibition on telephone and Internet betting by state residents on horse races, according to court filings.

The suit, filed in U.S. District Court for the Western District of Texas, is the first to be filed by a racing company seeking to overturn state prohibitions on Internet or telephone wagering. Churchill owns and operates Twinspires.com, the largest account-wagering operation in the United States, an operation that accepts bets from players in states in nearly every jurisdiction in which racing is legal and account-wagering is not explicitly illegal.

The action is also highly unusual because Churchill acknowledged in the suit that Texas laws have long banned Internet and telephone betting. Churchill, however, contends in the suit that the state racing commission did not begin to enforce the ban on account wagering until 2011 as part of an effort to direct business to in-state tracks. As a result, Churchill has said that the enforcement is a violation of the federal commerce clause, which prohibits states from placing restrictions on out-of-state businesses that do not exist for in-state businesses.

On Monday, officials for the Texas Racing Commission disputed Churchill's contention that the state had not enforced prohibitions on account wagering until 2011. Bill Childs, the commission's public information officer, said that the state's attorney general sent a letter to account-wagering companies in 2000 warning the companies that telephone and Internet betting was illegal. Also, in 2005, the attorney general sent a letter to Youbet.com, a leading account-wagering company, warning the company that account wagering was not authorized in the state. Youbet, which was one of the most aggressive account-wagering companies in the United States, disputed the letter.

Churchill launched Twinspires.com in 2007. It later purchased several other leading account-wagering companies, including Youbet.com, and has since grown to become the dominant account-wagering company in the country.

Officials from Churchill did not immediately respond to questions posed to a spokesperson on Monday afternoon.

The suit stems from a cease-and-desist letter the Texas Racing Commission sent account-wagering companies, including Twinspires.com, late in 2011. The letter reiterated that Texas law requires bettors to be "in person" at a racetrack or simulcasting enclosure in order to place a bet, citing a law that was passed earlier that year explicitly stating that Internet and telephone betting on horse racing violated the "in-person" provision.

The law was passed as part of a suite of bills reauthorizing the Texas Racing Commission, including legislation providing for the commission's funding.

In its lawsuit, Churchill quotes from the legislative record as evidence that the law was clarified to include Internet and telephone betting in order to "generate more revenue for the commission," which is funded in part by revenue at racetracks. In addition, Churchill said that the effect of the enforcement would lead to more revenue at in-state tracks and simulcast centers, which will result in more revenue for the state as a whole through taxes and fees.

"The limited legislative history also reveals the sole motivation behind reaffirming the in-person requirement: to encourage the commission to cover anticipated budget shortfalls by enforcing laws that discriminate against out-of-state businesses in favor of in-state businesses, and thereby raise additional revenue for the commission," the suit states.

Childs said that the quotes from the legislative record were taken out of the full context of the discussion of the new legislation.

Although the federal commerce clause clearly prohibits acts that favor one state's businesses over another, states have generally also been given wide latitude in enforcing gambling laws that are more restrictive or liberal than neighboring states. The federal Internet Gambling Prohibition Act includes an exemption for horse race betting among a blanket prohibition on gambling over the Internet, but the act also gives states the right to decide whether to allow Internet gambling on horse racing within their borders.

Account-wagering companies have long complained about states that allow for horse racing but do not allow for telephone or Internet betting. In most cases in the past, however, the companies have backed down if confronted by a state attorney general about the practice.

Childs said that eight of the nine companies that were sent the cease-and-desist letter in late 2011 stopped taking bets from Texas residents without disputing the content of the letter. The exception was Churchill Downs.

Under the in-person requirement, residents of Texas are allowed to bet only at seven locations in the state, the largest in the continental United States Because of that restriction, account-wagering companies are eager to provide residents with additional outlets for wagering.