Grape Consequences

Jess Jackson, the California vintner who is making headlines for his increasing involvement as a Thoroughbred owner and breeder, undoubtedly was more than a mildly interested spectator when the Supreme Court returned to work in Washington, D.C., the week of Feb. 21. So are many others in the racing industry.

One of the major issues the court faces involves the legality of state laws prohibiting the direct sale of wine to consumers from out-of-state wineries such as Jackson's privately owned Kendall-Jackson in Sonoma County, Calif. According to the New York Times, 24 states ban direct shipment from out-of-state wineries to consumers.

The states (New York and Michigan are being challenged in the case before the Supreme Court) say the 21st Amendment to the U.S. Constitution that ended prohibition gives them the right to regulate importation of alcohol. The plaintiffs argue the Constitution's Commerce Clause, which empowers Congress to regulate interstate commerce, prohibits one state from discriminating against another in a way that directly benefits businesses in that state. If, for example, Kentucky legislators were to pass a law saying that only Kentucky-breds can be sold at horse auctions inside Kentucky, that law would not stand up under the scrutiny of the Commerce Clause.

On the surface, the Supreme Court case is only about wine. Why then should racing be interested in the ruling?

If restrictive wine sales are found unconstitutional, restrictive pari-mutuel or account-wagering laws and regulations in several states--including New Jersey, Virginia, and Washington, which place limits on who can conduct account wagering within their borders--may be challenged.

If the court finds in favor of the plaintiffs--and many observers believe that will be the case, based on arguments before the court last December--states will have the right to regulate out-of-state wineries; they just won't be able to prohibit them from doing business.

The alcohol and pari-mutuel industries are heavily regulated by states. In the wine case, an attorney for the plaintiff cited a law in New Hampshire requiring out-of-state wineries to maintain and supply detailed sales records, comply with reasonable regulations, and pay state taxes.

Most horse racing states do not have regulations on out-of-state account-wagering businesses. Companies like TVG that operate through a betting hub in Oregon are regulated by the Oregon Racing Commission, and not by states where most of their customers reside or where the races are run.

This becomes even more problematic with offshore wagering companies. Those businesses are regulated in places like Curacao or St. Kitts. It is believed some of those offshore companies are taking bets from residents of states--including Texas, Illinois, and Florida--where law enforcement officials say account wagering is not legal. Pari-mutuel regulators in those states have no way of knowing who is wagering, whether the accounts are secure, taxes are being paid, or underage gambling is permitted.

These issues became much more relevant with the recent federal gambling indictment in New York. As a result of the indictment, the New York Racing Association and other track operators have ceased doing business with some of the offshore betting companies until they have conducted audits and have answered questions satisfactorily. Most recently, the Thoroughbred Owners of California, the National Thoroughbred Racing Association, and Magna Entertainment tracks have requested background checks on 11 betting shops both within the United States and off shore.

A Supreme Court ruling on the wine industry eventually could turn today's "requests" into tomorrow's regulatory action.