OAG 10-001 | KOGC

Request By:
Senator Damon Thayer, 17th Senate District

Opinion

Opinion By: JACK CONWAY, ATTORNEY GENERAL; Lisa K. Lang, Assistant Attorney General

Opinion of the Attorney General

You have inquired as to the permissibility of "Instant Racing" under Kentucky's current pari-mutuel wagering statutes. It is our opinion, based on our review of the relevant statutes, administrative regulations, and applicable attorney general opinions, Instant Racing is not permissible under current Kentucky law because Instant Racing does not constitute pari-mutuel wagering as defined by the administrative regulations promulgated by the Kentucky Horse Racing Authority. 1

BACKGROUND

In your letter, you have generally posed the question of whether Instant Racing is permissible in Kentucky. We assume for the purposes of this letter that you are inquiring about an Instant Racing system that is substantially similar to the Instant Racing system described in an Attorney General Opinion issued on March 17, 2009 by the Maryland Attorney General. 2 The Instant Racing Pari-Mutuel Wagering System described in that opinion ("Thoroughbred Mania") is owned by Race Tech, LLC and is described by Assistant Attorney General Bruce C. Spizler as set forth below: 3

In general, Thoroughbred Mania seeks to re-create for its users some features of the traditional wagering experience associated with live horse racing. To do this, "Thoroughbred Mania" relies on a number of innovations not found in traditional pari-mutuel wagering.

Broadly speaking, "traditional" pari-mutuel wagering is conducted through a central totalizator system which calculates odds for various outcomes in a particular race based upon the wagers received. For each wager, a certain percentage is first deducted as "takeout. " The remainder is then credited to a "betting pool" composed of all other wagers of the same type. For example, any bet for a horse "to win" Race One goes to the "win pool" for Race One. After the race results are ruled "official," each dollar wagered on the winning horse is entitled to an equal share of the total in the pool. The totalizator system calculates this share or ratio and indicates the payout.

According to Race Tech, Instant Racing also uses betting pools in calculating its payouts. Based on Race Tech's presentation and the materials provided to the Commission, we understand that the "Thoroughbred Mania" version of Instant Racing functions as follows: Players make their wagers through the use of self-service machines, just as patrons at race tracks may do in lieu of betting with a teller. Unlike traditional wagering on horse races, however, in Instant Racing, the patron bets on the outcome of a race that has already been run - i.e., "an actual horse race that was concluded by a licensed U.S. pari-mutuel facility, and concluded with official results." Each self-service machine is connected to a video server that contains data and recordings of past races, which are randomly sent to the individual machines in use. Before making a selection, the player has the opportunity to examine past performance data, originally published on the day the race was held, showing the records of each of the entries at that time. However, information identifying the race, the race track, the horses participating in the race, and the owners, trainers and jockeys of those horses is withheld until after a wager has been made.

To place a wager, an Instant Racing patron attempts to select the first three finishers of the race in exact order. After deducting the takeout amount, the central totalizator system automatically divides and allocates each wager into various types of pools, in pre-determined percentages, that correspond to each type of "win. " For example, in Thoroughbred Mania, there are betting pools corresponding to the following outcomes, which are considered "wins" :

In addition to the betting pools for each type of win, a portion of all wagers is periodically allocated to a kind of reserve pool, called the "seed pool, " until the seed pool has reached a pre-determined level.

After the bettor has made selections and placed a bet, the bettor's machine then displays a video of the race. The bettor may elect to view the entire race or only the last few seconds of the race. Upon completion of the video presentation, if the bettor has achieved a particular type of "win, " the Instant Racing machine displays the winning results "using entertaining video and/or mechanical displays. "

If a bettor has achieved a particular type of "win" the bettor receives the money from the corresponding pool. As noted above, the payout amounts vary for different types of "wins" depending upon the difficulty of winning in a particular manner and on the amount of money in the pool for that type of "win" at a particular time. If a bettor loses, the amounts in the various pools continue to accumulate until another bettor, wagering on a different race, wins the particular pool.

Thus, the betting pool for each type of "win" grows as wagers are made and part of each wager is allocated to that pool. When a bettor achieves the type of "win" associated with a particular pool, the bettor is credited with the contents of that pool. A prescribed sum is then transferred from the seed pool to the newly depleted pool to ensure that the latter pool contains a pre-determined minimum amount of money. The seed pool thus ensures that the next winner of that betting pool will receive at least that minimum amount. (citations omitted)

ANALYSIS

Gambling Under Kentucky Law

The advancement of gambling activities is generally prohibited under KRS 528 of Kentucky's Penal Code. KRS 436.480, however, specifically provides that KRS 528 shall not apply to pari-mutuel wagering at race tracks as authorized under KRS 230. Accordingly, Instant Racing will only be permissible if it meets the requirements of pari-mutuel wagering as set forth under KRS 230.

Pari-Mutuel Wagering in General The pari-mutuel wagering system was first developed in France during the 1840s. 4 Loosely translated, pari-mutuel means "to wager between ourselves." 5 Under a pari-mutuel wagering system, "participants bet among themselves, and the winners divide the money wagered in proportion to their individual bets. " 6 Pari-mutuel wagering was first introduced in Kentucky and eventually spread to other states. 7

Because "horseracing uses the pari-mutuel system in which bettors wager against one another instead of against the 'house'," it is unlike other forms of gambling. 8 Generally, "[o]f the total amount wagered on a particular race, approximately 80% is returned to winning bettor. The other 20%, called the "takeout, " is shared between the state government, the racetrack and the horsemen who race at the track." 9

Under a pari-mutuel wagering system, participants are given "access to information about the race, including the odds of a horse winning. " 10 The odds are posted prior to betting and provide a "forecast of how it is believed the betting will go in a particular race." 11 As bettors begin to place their wagers against each other, the odds begin to fluctuate. 12 These fluctuations "are displayed on the tote board, and convey information about how others are betting on the race and how those bets will affect payout on a winning ticket." 13 Bettors also have access to racing programs which "provide fans with extensive information about a given horse's past performance, any medication the horse will take before the race, the weight of the jockey, and the pedigree of the horse. " 14

Pari-Mutuel Wagering Under Kentucky Law

Under Kentucky law, the legislature has vested the power to regulate horse racing and wagering on the Kentucky Horse Racing Authority (the "Authority"):

It is hereby declared the purpose and intent of this chapter in the interest of the public health, safety, and welfare, to vest in the authority forceful control of horse racing in the Commonwealth with plenary power to promulgate administrative regulations prescribing conditions under which all legitimate horse racing and wagering thereon is conducted in the Commonwealth so as to encourage the improvement of the breeds of horses in the Commonwealth, to regulate and maintain horse racing at horse race meetings in the Commonwealth of the highest quality and free of any corrupt, incompetent, dishonest, or unprincipled horse racing practices, and to regulate and maintain horse racing at race meetings in the Commonwealth so as to dissipate any cloud of association with the undesirable and maintain the appearance as well as the fact of complete honesty and integrity of horse racing in the Commonwealth. 15

The Commonwealth of Kentucky has further stipulated that 1) horse race wagering in Kentucky shall be based on a pari-mutuel system; and 2) that the Kentucky Horse Racing Authority shall be responsible for promulgating administrative regulations regarding same.

(1) The authority shall promulgate administrative regulations governing and regulating mutual wagering on horse races under what is known as the pari-mutuel system of wagering. The wagering shall be conducted only by a person licensed under this chapter to conduct a race meeting and only upon licensed premises. The pari-mutuel system of wagering shall be operated only by a totalizator or other mechanical equipment approved by the authority. The authority shall not require any particular make of equipment. 16

Pursuant to KRS 230.361, the Kentucky Horse Racing Authority has promulgated several administrative regulations that serve to regulate the pari-mutuel system of wagering in Kentucky. These regulations include 811 KAR 1:125 (Pari-Mutuel Rules), and 810 KAR 1:011 (Pari-Mutuel Wagering) .

811 KAR 1:125, Section 3. Payments

(1) requires that payment due on all wagers "shall be made in conformity with the well established practice of the pari-mutuel system."

810 KAR 1:011, Section 4. Calculation and Distribution of Pools

The only pari-mutuel wagering pools permitted in this state shall be for win, place, show, daily double, exacta, and quinella, and other exotic wagering approved by the authority as provided by Section 9 of this administrative regulation; each shall have separate and independent calculation and distribution. From each pool there shall be deducted by each association the commission as provided by KRS 230.3615, with the remainder being the net pool for distribution as payoffs to ticket holders.

Instant Racing as a form of Pari-Mutuel Wagering

The Maryland Attorney General has concluded that Instant Racing is not permissible under Maryland's Horse Racing Act because Instant Racing does not constitute "pari-mutuel betting. " While we find the Maryland Attorney General opinion well-founded, we do not find that pari-mutuel wagering is prohibited by Kentucky's Horse Racing and Showing Act (KRS 230). However, we do find that Instant Racing is not permissible in Kentucky because it does not constitute pari-mutuel wagering under Kentucky's administrative regulations. The authority to "prescrib[e] conditions under which all legitimate horse racing and wagering thereon is conducted in the Commonwealth" 17 has been vested in the Kentucky Horse Racing Authority by the Kentucky Legislature. The Kentucky Horse Racing Authority has promulgated administrative regulations defining "pari-mutuel wagering. " To the extent Instant Racing is not permissible in Kentucky, it is because Instant Racing does not constitute pari-mutuel wagering under the current administrative regulations.

Whether Instant Racing Constitutes Pari-Mutuel Wagering Under Kentucky's Administrative Regulations

Instant Racing is not pari-mutuel wagering as contemplated by the administrative regulations promulgated by the Kentucky Horse Racing Authority.

1. Betting on Completed Races

The Instant Racing Pari-Mutuel Wagering System is a system that involves wagering on races that have long since concluded. While there is nothing in Kentucky's Act that clearly prohibits wagering under these conditions, Instant Racing is clearly not the type of pari-mutuel wagering contemplated by the administrative regulations. The administrative regulations 810 KAR 1:011 and 811 KAR 1:125 clearly contemplate live races only.

2. Betting Pools

The Instant Racing Pari-Mutuel Wagering System is also not permissible because it does not appear to be in conformance with Kentucky's well established pari-mutuel betting system. In Kentucky, the well established practice of pari-mutuel betting requires those who have successfully bet on the same winning outcome share the betting pool. This cannot occur with Instant Racing. With Instant Racing, each individual player places a bet on a different race with different horses with different outcomes from that of all other players placing bets at other Instant Racing machines. Thus, a person who successfully chooses a winning horse never shares a mutuel pool with other bettors simply because there is no one else betting on the same race. While Instant Racing may involve a type of pooled betting, it is not the pari-mutuel betting contemplated by Kentucky's administrative regulations.

Furthermore, bettors in a traditional pari-mutuel system participate directly in setting the odds for any given race. Bettors engaging in Instant Racing, however, clearly cannot do so since there will never be more than one person betting on the same race. To the extent the success or failure of other bettors may influence the size of pay outs in Instant Racing, it cannot occur in the same way it does in the context of traditional pari-mutuel betting.

3. Seed Pools

Instant Racing deviates from a traditional pari-mutuel wagering system because of its reliance on a seed pool. Seed pools in Instant Racing are used to replenish the various win pools with a minimum balance after a payout has been made from the pool. Seed pools do not exist in the traditional pari-mutuel wagering system. In fact, seed pools are at odds with the "minus pool" as defined in Kentucky's administrative regulations. In pari-mutuel wagering, it is possible for the pool to lack sufficient funds to pay a prescribed minimum wager. In those situations, the race track owner is required to pay each successful bettor. Through its use of a seed pool, Instant Racing eliminates the need for a minus pool.

CONCLUSION

In our opinion, because Instant Racing does not constitute pari-mutuel wagering under Kentucky's administrative regulations, it is not permissible in Kentucky.

Footnotes

Footnotes

1 If regulatory or statutory changes are considered to permit this sort of wagering, the proponents should also be cognizant of the requirements of KRS Chapter 528 with regard to "gambling devices" and consider whether amendments to that chapter are also in order.