Judge: 'Tough Issues' in CDI Lawsuit

Judge presides over hearing in CDI antitrust case.

A federal judge presiding over the antitrust lawsuit filed by Churchill Downs Inc. against horsemen’s groups basically said Feb. 19 he has his work cut out for him in trying to resolve the complex issues involved in the case.

United States District Judge John G. Heyburn II said he feels many of the dynamics being argued in CDI’s case against the Thoroughbred Horsemen’s Group and the Kentucky Horsemen’s Benevolent and Protective Association are without clear-cut legal precedent.

“It’s a very tough issue,” Heyburn said near the close of a four-hour hearing held in a courtroom located in Louisville at the U.S. District Court Western District of Kentucky. “There is no (precedent) case out there that exactly says what to do. This is not a classic antitrust case, because of the intrusion of the (Interstate Horseracing Act).

“It throws a monkey-wrench into all of it,” he said of the IHA, a unique federal law which regulates interstate pari-mutuel wagering. “There is an argument for both sides, and I guess I need to figure out what the reality is.”

Respective attorneys during the hearing argued their clients’ “realities” about the lawsuit, which sprang from the high-profile dispute in 2008 over revenue shares from bets made through advance deposit wagering outlets.

The Kentucky HBPA and a since-dismissed defendant, the Kentucky Thoroughbred Association, last April withheld their IHA-authorized consent to allow the signal for Churchill Downs racetrack to go out to certain ADWs unless those wagering outlets signed a new licensing agreement advocated by the THG. Other signals were separately shut off by horsemen at such tracks as Calder Race Course, Lone Star Park, and Presque Isle Downs, among others, and the resulting standoff hit both sides of the warring parties with lower handle and purses.

CDI and affiliated entities filed the antitrust lawsuit in May 2008, claiming, in part, that the collective hand-off to THG as a negotiating agent was in violation of the federal Sherman Act. Accusations of price-fixing and collusion, which are prohibited by the Sherman Act, were leveled against the horsemen, and repeated at the hearing.

“The federal penitentiaries are filled with ‘agents’ who have represented groups in violation of the antitrust laws,” said David M. Schiffman, a Chicago attorney representing the CDI plaintiffs. “The THG is the ringleader of the conspiracy.”

Schiffman argued that the collective development of the revenue-sharing model advocated by the THG, which basically asks for a one-third share of the takeout from ADW wagers, was in clear violation of antitrust laws, as was the "boycotts" that followed.

“If they can get a higher price acting collectively than individually, then that is classic price-fixing,” he said.

On the other side, attorneys for the THG and Kentucky HBPA argued, among many things, that horsemen’s groups have operated within rights granted to them by the IHA, including immunity protection from the antitrust allegations leveled by the plaintiffs.

The defendants noted that of the 17 member groups affiliated with the THG when the lawsuit was launched (there are 20 now), only a handful actually withheld consent. Others, such as the Louisiana HBPA, cut their own deals.

“They haven’t agreed to act collectively,” argued Margaret M. Zwisler, an attorney from Washington, D.C., who represents the THG. “They’ve agreed to develop a standard contract. The THG is just an agent, and the horsemen are free to take it or leave it.”

Another THG-affiliated lawyer argued that the horsemen can’t cut different deals on signals like racetracks can, but can only market the one commodity they have under IHA authority – signal consent.

“It’s the only right we have, is to consent,” said attorney Alfred C. Pfeiffer, who is based in San Francisco. “We can’t go out and say, here is a different price than what Churchill Downs is asking.”

Earlier this month Heyburn issued a preliminary opinion on arguments made in dismissal motions, and indicated that in these early stages of the litigation, he was leaning towards supporting the antitrust charges leveled by the CDI plaintiffs. During the hearing, the judge again voiced concerns about the “collective” efforts of the horsemen.

“I guess anyone in a conspiracy has the unilateral right to drop out at anytime,” he said, responding at one point to the “take it or leave it” statements of Zwisler. “Usually it’s a little bit more difficult (to detect a conspiracy), because they don’t form a group; instead, they have secret meetings. They’ve made it a little easy for me here.”

But Heyburn said both early and late in the hearing that he hadn’t made up his mind on the antitrust issues. “THG is attempting to change the entire dynamics of the business,” he said in his opening remarks. “I am not saying it is right or wrong. I am not convinced they are violating antitrust laws."

Towards the end of the hearing the judge said he didn’t know if the hearing resolved anything. "(The CDI plaintiffs) are saying the actions of the horsemen are causing the tracks to make less money,” he said. “If all they are doing is getting more for themselves, I don’t know where the antitrust violation is. It wouldn’t necessarily raise the prices being paid.”

If the judge denies the dismissal motion filed by the horsemen, it could pave the way for the discovery portion of the litigation to begin. There, both sides would be allowed to seek and present evidence under court direction to further make their arguments.

At the close of the hearing Heyburn wondered aloud about the dismissal of other defendants, such as the KTA and the Florida HBPA.

Douglas L. McSwain, a Lexington attorney representing the Kentucky HBPA, claimed the only reason his clients were still in the mix was because they have a pending breach of contract counterclaim seeking at least $5 million in purse money it alleges Churchill Downs has not paid.

“There are ADW deals in place in both Florida and Kentucky,” McSwain said of subsequent agreements to the filing of the antitrust lawsuit that reportedly helped lead to dismissals of certain defendants. “The only reason we are still in it is because of the counterclaim.”

McSwain told Heyburn the ADW agreement for Churchill Downs, which was announced at the close of 2008, only covers the spring meet.

“After that, I guess we’re back to square-one,” he said.