Case History

Attempted End-Run Around the Legislature (July 20, 2010)

Despite Kentucky having a state constitution which separates the three branches of our government more emphatically than any other state, the Executive Branch grew frustrated by the Legislature’s refusal to pass a law making “historical horse racing” slot gaming legal.


So, in an attempted end-run around the Legislature, the Kentucky Horse Racing Commission adopted new regulations on July 20, 2010.


The Commission, charged with ensuring the integrity of horse racing and protecting the public, claimed to authorize the new form of slot gaming regardless of the fact that no other state had ever found “historical horse racing” slot gaming to be lawful absent a law change.


Kentucky’s Commission and Racetracks knew they were on shaky ground, opening them up to civil and criminal liability for violating Kentucky law. 


On the same day, they filed an “agreed case” to give their actions the appearance of legitimacy. It is also why they would seek an out-of-state consultant to tell them and the court what they wanted to hear.

 

Commission and Racetracks File an "Agreed Case" (July 20, 2010)

Unsure whether the “historical horse racing” slot gaming machines were legal, Kentucky’s eight racetracks and the Horse Racing Commission filed an “agreed case” on July 20, 2010. 

 

They asked the court to determine whether the games constitute pari-mutuel wagering on horse racing, thus making them legal under an exemption to Kentucky’s general prohibition against gambling.

Irregularities with the "Agreed Case"

 

#1 Flawed Affidavits
Four of the ten affidavits within that filing were flawed. Under penalty of perjury, four affidavit signers swore to events which had not yet occurred.


#2 No Alleged Facts
Despite KRS 418.020’s requirement that such an “agreed case” present the facts upon which their questions depend, Kentucky’s regulatory body and Racetracks asked the court to declare the slot gaming machines legal without any evidence or facts as to how they actually worked.


#3 No Opponent (2010)
The constitutionality of the declaratory judgment process, especially actions brought under KRS 418.020 as an agreed case, hinges upon the existence of a “real” controversy. That means there must be antagonistic parties to present both side of a controversy.


Regardless, the Commission and Racetracks failed to name any adversary. Then the Franklin Circuit Court wrongfully issued a sua sponte order (an action taken by a judge without the prompting or request of either party) claiming it still had authority to hear the case.


The Family Foundation Intervenes in the Case

 

The Family Foundation then intervened in the case, objecting to the only parties being advocates for the new slot gaming, no evidence being presented to the court, and the judge’s sua sponte order.

All Discovery of Evidence Barred

Once The Family Foundation intervened in the case, Kentucky's Horse Racing Commission and Racetracks worked hard to ensure that the court never saw any facts or evidence about how the machines worked.


Before a single question was even asked, the Racetracks and the regulatory body charged with ensuring integrity sought to block The Family Foundation from discovering any evidence or asking any questions.

The Franklin Circuit Court granted their request and barred The Familiy Foundation from discovering how the machines worked or any evidence on whether they may or may not be pari-mutuel. 

A Decision Without Evidence (December 29, 2010)

Despite having no evidence as to how the "historical horse racing" slot gaming worked, the Franklin Circuit Court issued an opinion declaring that the machines were pari-mutuel wagering.

The Famiily Foundation immediately appealed the Franklin Circuit Court's flawed ruling.

The Franklin Circuit Court would later admit that this 2010 Opinion and Order was drafted by the court’s law clerk... a law clerk who published articles concerning expanded gambling and who appears to have been a member of the Kentucky Equine Education Project (“KEEP”), a leading advocate for expanded gambling in Kentucky.


In fact, the president of Kentucky Downs, LLC, a party in the case, was the Chairman of KEEP. Counsel for Kentucky Downs, LLC, in this case, also appears to be counsel for KEEP. Kentucky Downs, LLC, was the first applicant for a license and the first track to install the historical horse racing gaming devices in 2011. KEEP presented on May 10, 2011, in support of the subject regulations at the Administrative Regulation Review Subcommittee of the Legislative Research Commission.

"Instant Racing" Begins Operation (September 2011)

"Instant Racing" was the first variation of "historical horse racing" slot gaming systems approved by the Kentucky Horse Racing Commission.

 

"Instant Racing" began operations in Kentucky during September 2011 and was in operation at Kentucky Downs, Ellis Park, and at Lexington Trots Breeders Association, LLC, d/b/a The Red Mile.

 

Even though the Commission and Racetracks alleged that they were seeking a determination of legality before operating the gaming systems, they began licensing and operating them long before any final determination has been made by the courts.


Kentucky Court of Appeals Reverses (June 15, 2012)

First, the Kentucky’s Court of Appeals expressed grave concern about a case brought without an opponent, doubting the “wisdom of a process that provides for judicial approval of a matter based solely upon statements of parties having no adverse interests at stake."

 

Second, the Court of Appeals found the Franklin Circuit Court's denial of discovery to be an abuse of discretion. The court went on to declare that because of the "absence of any discovery, the record before us is without a meaningful evidentiary basis to support the judgment of the trial court."

The court explained that the "role of discovery in the litigation process can be hardly overstated":

Discovery is the process whereby parties learn the strengths and weaknesses of their cases, formulate issues and learn the facts. As lawyers and judges are well aware, most cases are decided on the facts discovered and admitted in evidence... We conclude that the request for discovery by Family Foundation was relevant and necessary to the court’s determination and that the court’s denial of discovery constituted an abuse of discretion.

 

Kentucky's Court of Appeals therefore vacated (cancelled or declared null and void) the Franklin Circuit Court's erroreoneous 2010 Opinion and Order, sending the case back and instructing the court to allow The Family Foundation to conduct discovery.

Kentucky Supreme Court Accepts Case for First (January 11, 2013)

Commission Member Believed It Was a Sham (April 9, 2013)

As the Kentucky Supreme Court was considering the case in 2013, the Commission and Racetracks concealed the fact that a Commission Member believed "Instant Racing", the first generation of "historical horse racing" slot gaming, to be a sham.

On April 9, 2013, Commission Chairman Robert Beck described the reliance on so-called “experts”: “So I think we have to rely heavily upon the expert to tell us if these games – and somebody, you know.”


Commissioner Edward Bonnie observed: “We are paying our expert to tell us and he knows what we want him to say. And he has said it. And the opposition says he is dead wrong. And I just want us to be careful because we are the ones that are going to approve or not approve. And it makes me very nervous. This was stretching the interpretation of the statutes to start with.  And this is further down that road moving away from historic races as far as I can see. There is not a reference to a historic race in Pigs in Mud and Bayou Bash. So I want to register my discomfort with expansion at this time. And, 2, whether or not it is consistent with statute. And I have not recently read our expert’s view with respect to it. But I wanted to register it on the record.”

Kentucky Supreme Court Echos Court of Appeals'  Concerns (February 20, 2014)

Kentucky’s Supreme Court echoed the Court of Appeals' concerns about the lack of an opponent in the case, proclaiming that the Court has consistently held that “a present actual controversy presented by adversary parties” is necessary. The Court went on to overrule a previous Court of Appeals decision which called this principle into doubt and declare that the Franklin Circuit Court was in error.


As the Court said, “By any definition, a controversy is a disagreement and a disagreement requires parties that disagree.”

 

The Court also took issue with the Franklin Circuit Court barring discovery:

 

...To answer the question posed by [the Commission and Racetracks]... one must examine the methodology of wagering they would undertake to determine if it is actually pari-mutuel in form.


We agree with the Court of Appeals that the Foundation... had the right to develop the evidence required to determine if the operation of historical horserace wagering... conforms to the requirements of... pari-mutuel wagering...

"Exacta Gaming" Approved (March 23, 2015)

"Exacta Gaming" was the second variation of "historical horse racing" slot gaming systems approved by the Kentucky Horse Racing Commission. Exacta Gaming was approved by the Commission on March 23, 2015.

 

The Exacta Gaming System, formerly known as the Encore Gaming System, is in operation at Ellis Park and Kentucky Downs. 

 

Even though the Commission and Racetracks alleged that they were seeking a determination of legality before operating the gaming systems, they began licensing and operating them long before any final determination has been made by the courts.

Demonstration of Slot Gaming Machines Denied (June 24, 2015)

Seeking the evidence the Court of Appeals and Supreme Court declared a right to, The Family Foundation requested a demonstration of the machines before the Franklin Circuit Court. But the Commission and Racetracks again objected to the court having that information.


The Franklin Circuit Court blocked the demonstration, making discovery of the necessary facts much more difficult and expensive. But The Family Foundation pressed on.

"PariMAX" Approved (November 2016)

The third gaming system is the PariMAX Gaming System (“PariMAX”) which was approved by the Commission in November 2016 and is in operation at the Red Mile.

Even though the Commission and Racetracks alleged that they were seeking a determination of legality before operating the gaming systems, they began licensing and operating them long before any final determination has been made by the courts.

Franklin Circuit Court Trial (January 8-11, 2018)

"Instant Racing" Discontinued After Admission (April 12, 2018)

On April 25, 2018, Kentucky's Horse Racing Commission and Racetracks filed a notice representing that as of April 12, 2018, Instant Racing was no longer in operation in Kentucky.

Discontinuing the use of "Instant Racing" came after notices of correction filed with the court on September 17, 2015 and September 23, 2015, notifying the court that they had wrongly represented that "Instant Racing" did not use random number generators or elements of chance.

 

The notices coincided with the Wyoming Attorney General's Opinion declaring that the machines were not pari-mutuel wagering on horse racing because they utilized random multipliers, random wild symbols, random bonus rounds, and even random race outcomes running in the background and unknown to the player.


Interestingly, Gaming Laboratories International, LLC’s (the same consultant that told Kentucky the machines were pari-mutuel) were the ones that assisted the Wyoming Attorney General in determining that they were not par-mutuel, due to elements of chance being used.

"Ainsworth" Approved (July 17, 2018)

The fourth gaming system is the Ainsworth Gaming System (“PariMAX”) which was approved by the Commission on July 17, 2018 and is in operation at a subsidiary of Churchill Downs, Inc.

 

Even though the Commission and Racetracks alleged that they were seeking a determination of legality before operating the gaming systems, they began licensing and operating them long before any final determination has been made by the courts.

Franklin Circuit Court Errs Again (October 24, 2018)

The Franklin Circuit Court once again wrongly declared the "historical horse racing" slot gaming machines to be pari-mutuel wagering on horse racing.

 

This time, it did so by erroneously deferring to the Kentucky Horse Racing Commission's consultant. This New Jersey gaming consultant was not a lawyer and had no legal education, yet the Franklin Circuit Court defered to his "legal opinions"

 

Richard LaBrocca, whose employer was paid $860,849.67 by some of the Racetracks in this case, testified that the machines met the Commission's definition of pari-mutuel.

 

Tellingly, LaBrocca actually testified at trial that the Regulatory Definition has whatever meaning the Commission chooses to give it:


“The wagering that has been approved by the Commission defines what the wager is -- these are pari-mutuel because the definition of wager is fluid to the types of wagers the Commission can approve.”


Despite LaBrocca's lack of qualifications to give legal opinions, the court deferred to his determination that:


Pari-mutuel wagering does not require patrons to wager on the same horseraces, nor does it require reciprocity among patrons, or for a pool to remain open for a specified period of time.


This new definition of pari-mutuel wagering was then found to be satisfied because:

 
[Richard] LaBrocca explained ‘[w]hen patrons are wagering amongst themselves into the same pool they are affecting the other wagers who come after them by either increasing the funding of the pool, as every wager is going to do, and at some cases when there is a win, decreasing the number . . . thereby affecting other future players.’


This was squarely contrary to the 2010 Kentucky Attorney General's Opinion examining "Instant Racing", the first generation of "historical horse racing" slot gaming:


"To the extent the success or failure of other bettors may influence the size of payouts of Instant Racing, it cannot occur in the same way in the context of traditional pari-mutuel betting.”


Nonetheless, based on the Franklin Circuit Court’s new redefinition of pari-mutuel wagering, the Commission and Racetracks offered no proof that Exacta Gaming complied with the Regulatory Definition’s requirements that players be wagering among themselves on an uncertain event or that amounts wagered be placed in one or more designated wagering pools and that such resulting net pools be paid out to winning patrons.


Exacta Gaming did not meet the requirements to be pari-mutuel wagering, the Franklin Circuit Court changed the requirements and then adjudged the changed requirements met.


Interpreting and applying the words “patrons are wagering among themselves” to be satisfied by a fiction of where the operator deposits a singular, unique wager on a singular, unique event is creating an exception broader than the prohibition itself. Such an absurd interpretation and application of the words is not scrutiny.  It is deference.


As four U.S. Supreme Court justices recently stated in a concurring opinion:


When we defer to an agency interpretation that differs from what we believe to be the best interpretation of the law, we compromise our judicial independence and deny the people who come before us the impartial judgment that the Constitution guarantees them. And we mislead those whom we serve by placing a judicial imprimatur on what is, in fact, no more than an exercise of raw political executive power.
Kisor v. Wilkie (2019) (Gorsuch, J. concurring, joined by Thomas, J., Alito, J., Kavanaugh, J.)

Appeal Currently Before the Kentucky Supreme Court
(Motion to Transfer Accepted on June 13, 2019)

© 2019 by The Family Trust Foundation of Kentucky