Updated on 05/17/2017 4:30PM

Judge clears way for Stronach Group's claim against Derby Wars

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A federal judge has given the go-ahead to The Stronach Group to pursue a claim against a leading racing tournament site, Derby Wars, ruling that the site is an offtrack betting outlet that should be subject to the provisions of a federal law governing interstate wagering.

Judge James Otero of the U.S. District Court for the Central District of California issued the ruling on Monday, granting The Stronach Group’s request for partial summary judgment and sweeping aside Derby Wars’s motion to dismiss. The ruling states that The Stronach Group, which filed a lawsuit against Derby Wars late in 2015, can use the federal Interstate Horseracing Act of 1978, which gives racetracks, horsemen, and racing commissions the right to authorize wagering on simulcast signals, as the legal basis for its claim against Derby Wars by defining entry fees paid by customers of the site as “interstate wagers.”

“This is not the end of our lawsuit, but this is a big step forward,” said Scott Daruty, the president of The Stronach Group’s simulcast marketing arm, on Wednesday. “The issue of whether this is a wager and whether this is covered by the IHA is now settled.”

Daruty said The Stronach Group will continue to seek damages and an injunction against Derby Wars. A trial is scheduled for June.

The case has been closely watched in the racing industry for its potential to create a legal standard on the use of horse races as the basis for cash tournaments. The Stronach Group, which owns racetracks in California, Florida, and Maryland, along with a number of other racing assets, filed the lawsuit at a time when attorneys general in multiple states were cracking down on fantasy sports contest sites such as FanDuel and DraftKings, which at that time were soaring in popularity. Since then, many states have passed laws regulating the fantasy sports sites.

In a statement released Wednesday afternoon, Mark Midland, a co-founder and chief executive of Derby Wars, said the company “disagreed” with the ruling.

“We are disappointed with the court’s ruling but intend to press forward with our defense and are evaluating our options to appeal the court’s order,” Midland said. “We believe Derby Wars has created a product that is innovative and advances horse racing in a sport that needs more innovation.”

The Stronach Group had alleged in its initial lawsuit that Derby Wars had violated provisions of the Interstate Horseracing Act because it had not reached agreements with Stronach Group tracks to offer the company’s races in tournaments. The suit also contended that the entry fees paid by customers of Derby Wars should be considered wagers in a legal sense.

Otero agreed with that assessment, writing that the “Derby Wars entry fees are more akin to the wagers which form the ‘pot’ in poker.” Furthermore, Otero wrote, because Derby Wars operates on the Internet, taking entry fees from people in multiple states, and because the races included in the tournaments are often outside of the company’s location in Kentucky, the entry fees are therefore “interstate wagers” subject to the IHA.

Daruty pushed The Stronach Group to file the lawsuit in order to establish a legal precedent that would require tournament operators to compensate tracks and horsemen for the use of their content. His argument has generally been supported by other racetracks, some of whom feared that tournament sites would grow in popularity along the same lines as FanDuel and DraftKings. (The rates of growth at both sites has slowed considerably in the past year.)

On Wednesday, Daruty said the company had issued cease-and-desist orders to other sites that he said “were taking parimutuel wagers and calling themselves contest operators.” He said Monday’s ruling would discourage other site operators from doing the same.

“We think this is an important precedent not just for The Stronach Group but for the entire racing industry,” Daruty said.

Last year, after the suit was filed, Derby Wars reached an agreement with Hawthorne Racecourse near Chicago giving the track a portion of its entry fees on tournaments using Hawthorne’s races. At the time, Midland said the agreement was part of a larger strategy to work with the racing industry.

“We see working with racetracks as important to growing contests,” Midland said. “Partnering with the tracks is a natural way to do that.”

The ruling also could affect racing organizations that run handicapping tournaments using live races, including the National Thoroughbred Racing Association, which runs the National Handicapping Championship. Keith Chamblin, a vice president of the NTRA, said on Wednesday that the association will review the ruling with legal counsel over the next several days, and he declined to comment until the review is complete.

Daily Racing Form also operates a tournament website and recently announced a tournament with a $1 million cash prize funded by 200 buy-ins for $5,000 each.