Setback for Historical Racing in Kentucky Supreme Court

A Kentucky Supreme Court opinion rendered Sept. 24 could jeopardize a major source of purse funding in the state as the court determined that at least one brand of historical horse racing that has operated in the state is not pari-mutuel. The court determined that the Encore Racing Based Games' system is not pari-mutuel because it "does not create a wagering pool among patrons such that they are wagering among themselves as required for pari-mutuel wagering." HHR terminals resemble slot machines but base winning combinations on previously run races. The games' supporters have said that their payouts are based on a pari-mutuel formula. But the Kentucky Supreme Court did not find the latter to be true for the Encore games. The Supreme Court remanded the larger case brought by the Family Trust Foundation of Kentucky against the Kentucky Horse Racing Commission and all of the Thoroughbred tracks in the state among others questioning the legality of the machines, back to the Franklin Circuit Court. It said a 2018 ruling by that court that the Encore system was a pari-mutuel form of wagering was misapplied and the circuit court must now consider the larger case consistent with the Supreme Court's ruling that the Encore system is not pari-mutuel. In 2016 Encore changed its name to Exacta Systems. After Thursday's Supreme Court decision, the company said it can address the issues of concern to make its games pari-mutuel. "Exacta appreciates the clarity surrounding HHR in Kentucky, and we are excited to present our system solution that complies with today's ruling to the KHRC in the coming days," said Exacta Systems Chief Development Officer Patrick Neely. There are other brands of historical racing that operate in Kentucky, and it wasn't immediately clear how this decision will affect them. While Churchill Downs Inc. does not use the Exacta Systems machines at its facilities, it said it would work to ensure that historical horse racing continues in Kentucky. "We will work within our legal rights and in coordination with Kentucky legislators to ensure the ongoing legal operation of our (historical racing) facilities in Kentucky so that we can continue to provide critical funding for the equine industry and support the citizens in the commonwealth of Kentucky," the company said in a release. "Although CDI does not use the Exacta system in question at any of our HRM facilities, we appreciate Kentucky Gov. Andy Beshear's support of the industry in his statement regarding Historical Horse Racing today." The company passed along Beshear's statement: "Historical Horse Racing is an important part of Kentucky's economy that supports jobs and contributes over $21 million to the state budget. We are working with various partners to find a path forward." The Family Foundation believes the ruling calls into question the legality of all historical horse racing machines operating in Kentucky. It issued a statement Thursday calling for them all to be shut down pending further clarification. "The Family Foundation is calling on all horse racing tracks who are engaged in so-called 'historical horse racing' to cease operations until it is determined that the gaming being conducted is in conformity with law," the statement read. "This declaration comes in the wake of today's decisive 7-0 decision by the Kentucky Supreme Court striking down a controversial system of gambling used at several facilities in the state." In its opinion released Thursday, the Supreme Court said two aspects of the Encore System fail to constitute pari-mutuel wagering, as defined in state law. It said pari-mutuel wagering needs to be on a "discrete event," such as a horse race, as opposed to multiple, disconnected, randomly selected historical horse races. It noted that the KHRC's regulations repeatedly refer to a singular historical horse race, and it did not find that standard to be met by the Encore games. The Supreme Court noted that patrons of Encore's historical horse racing games are all wagering on different, randomly selected historic races at any given time. It found that "without providing simultaneous access to one historical horse race to the same group of patrons, no pari-mutuel pool can be created among the patrons in which they are wagering among themselves, setting the odds and the payout. … To be clear, pari-mutuel wagering requires that patrons generate the pools based on wagering on the same discrete, finite events." Secondly, the Supreme Court found that "initial seed pools" used in the Encore games fell out of the bounds of the pari-mutuel definition because pari-mutuel pools are "required to be established only by the patrons." The KHRC could not be immediately reached for comment. Since Kentucky Downs was the state's first track to launch historical gaming in September 2011, purses awarded in the state have nearly doubled from $65.3 million in 2012 to $113.6 million in 2019. The Supreme Court noted that because it doesn't view the Encore games as pari-mutuel wagering, the KHRC overstepped its authority in 2010 when it approved the games—the initial brand being Instant Racing. The court said the Kentucky legislature has not updated the definition of pari-mutuel wagering to allow games that see patrons wagering on a different set of events. It said without an expanded definition from lawmakers, the KHRC had no authority to create a wagering pool where each patron is wagering on a different event or set of events—as that doesn't meet the definition of pari-mutuel wagering. It said lawmakers need to take action if the people of the state want an expanded form of pari-mutuel wagering. "We acknowledge the importance and significance of this industry to this commonwealth," the Supreme Court opinion read. "We appreciate the numerable economic pressures that impact it. … If a change, however, in the long-accepted definition of pari-mutuel wagering is to be made, that change must be made by the people of this commonwealth through their duly elected legislators, not by an appointed administrative body and not by the judiciary."