Making Sense of the Debate in Kentucky

“Kentucky support grows for slot machines,” read the headline in the Feb. 3, 2010, edition of the Louisville Courier-Journal. “Fifty-nine percent of all Kentuckians now support video gambling at horse racetracks while an overwhelming 85 percent of voters want the opportunity to vote on the issue.”

For a state without casino or tribal gaming, Kentucky has had a busy year for gaming initiatives and laws. As of this writing, the Kentucky Legislature was in session, although it will be concluded by the time this article goes to press. The session was marked by the introduction of numerous gaming-related bills and the likely passage of none, despite the increasing support of voters across the commonwealth, according to recent polls.

In order to understand the barriers to expanded gaming legislation in Kentucky, we must look at Kentucky’s constitutional and legislative history.

Not unlike many other states, Kentucky’s Constitution, enacted in 1891, contained a general prohibition against lotteries and gift enterprises (now Kentucky Constitution Section 226(3)). In 1988, the Constitution was amended to provide for a state lottery (226(1)) and again in 1992 and 1994 to provide for charitable lotteries and gift enterprises and then charitable gaming (226(2)). Kentucky generally considers gambling transactions void (Kentucky Revised Statutes (KRS) 372.010), and KRS Chapter 528 criminalizes the promotion of gambling activities.

In 1931, the state attorney general brought suit against the Kentucky Jockey Club in Commonwealth v. Kentucky Jockey Club, 38 S.W.2d 987 (Ky. 1931), alleging that pari-mutuel wagering on horse racing violated the prohibition against lotteries found in section 226 of the Constitution. However, the Court of Appeals (then Kentucky’s highest court) held otherwise, defining a “lottery” as an activity that contains chance, prize and consideration.

As a result, pari-mutuel betting on horse racing was considered legal in Kentucky, with horse racing and breeding now known as the state’s “signature industry” and Kentucky as the “Horse Capital of the World.” Today, horse racing and the horse industry is Kentucky’s leading agribusiness, but that position is in jeopardy. Kentucky’s racetracks, such as Keeneland and Churchill Downs, are industry leaders in horse sales, world-class racing and pari-mutuel handle, but they have seen significant declines, particularly in the past two years.

KRS Chapter 230 governs all aspects of horse racing in the commonwealth. KRS Chapter 528 specifically exempts pari-mutuel wagering at racetracks if authorized by KRS Chapter 230. The Kentucky Horse Racing Commission (for a brief time called the Kentucky Horse Racing Authority) is the entity created by KRS 230 to oversee horse racing and pari-mutuel gaming. Kentucky was one of the first states to promulgate statutes and regulations to codify account wagering (telephone and Internet wagering) on horse racing (see KRS 230.379) expressly sanctioned by the 2000 amendment to the federal Interstate Horse Racing Act of 1978 (15 USC3001 et seq.).

The VLT Debate
The Kentucky Legislature meets each even-numbered year for 60 days and each odd-numbered year for 30 days in regular session. Over the past several years, a troubled economy, enormous state budget woes (including a $1.5 billion projected budget shortfall) and increasing pressure from the state’s signature industry have led to the introduction of multiple competing bills in both the House and Senate related to expanded gaming generally, and to the authorization of video lottery terminals (VLTs) specifically. Notwithstanding these efforts, progress has been minimal, due in no small part to the opposition of Kentucky Senate President David Williams (R).

Kentucky horse interests are active in this debate through traditional avenues such as state owners’ and breeders’ organizations, as well as through an innovative and effective grassroots group called KEEP (Kentucky Equine Education Project). Several years ago, KEEP began educating the public and legislators on the tremendous agribusiness and employment represented by the horse industry and the diversity of horses located in the commonwealth. The message is that while the subset of thoroughbreds and the even more narrow subset of the those horses owned by the rich and famous receive the majority of media attention, most horses in Kentucky are owned by regular people, and the resulting income from farm jobs, horse sales, veterinarians, farriers and other service people supports many Kentucky families. KEEP recently launched a new website aimed at putting faces on those involved in all aspects of the horse industry in Kentucky.

Expansion or Amendment?
Legislators are divided largely along party lines as to the need for a further constitutional amendment to permit VLTs at racetracks or otherwise. Kentucky Republicans generally disfavor expanded gaming and demand a constitutional amendment if expanded gaming is to be considered, whereas Democrats, including the Speaker of the House and former Attorney General Greg Stumbo (D), argue that only legislative authority is required. However, some prominent Republican fundraisers and horse owners recently came out strongly in favor of VLTs at racetracks and a legislative solution, despite the position of the Senate president.

In 2008, Gov. Beshear—newly elected and strongly supported by the horse industry—quickly introduced HB 537, which proposed as many as 12 casinos in the state, seven of which were to be located at existing racetracks and five that would be free standing, each under the auspices of a newly-established Kentucky Gaming Commission. The bill called for a constitutional amendment and never gained enough support to make it out of the House.

In 2009, Stumbo proposed HB 157 (later amended). The bill provided for VLTs at seven of Kentucky’s eight licensed racetracks. The two Lexington-based tracks, the Red Mile (standardbreds/quarter horses) and Keeneland (thoroughbreds), would share one license by agreement of the two tracks. Consistent with his previously rendered opinion as attorney general, Stumbo argued that no constitutional amendment would be required and provided for oversight of the VLTs by the existing Kentucky Lottery Commission. The bill passed out of the House but failed to be called to a vote in the committee chaired by David Williams. Gov. Beshear then called a special session in June 2009 on this issue alone but was unable to move the legislation forward.

In 2010, VLT legislation was again proposed but failed to gain any footing with the legislature; it was considered to be legislation without a chance almost immediately. Despite this development, Gov. Beshear, still advocating for VLTs at racetracks, proposed a budget that included $780 million in spending contingent on revenue predicated on the passage of expanded gaming. Without expanded gaming, that spending cannot occur.

Kentucky has a surprisingly long history of considering VLTs and other forms of expanded gaming and an equally long history of seemingly divided and divergent attorney generals’ opinions on this issue of legislative expansion or constitutional amendment.

However, in 2009, recently elected Attorney General Jack Conway (D), issued a lengthy and well-reasoned opinion attempting to reconcile the prior five seemingly inconsistent attorney general opinions on the issue of expanded gaming. He evaluated the legislation that was drafted and put forth by the governor for the 2009 Special Session. In 09 OAG 4, Conway explained that three of the attorney general opinions (1980, 1992, 1999 and 2005) were consistent with one another (with the 1993 opinion being the outlier), each adopting the Jockey Club definition of lottery. Explaining the concepts pure chance (English Rule) and predominately by chance (American Rule) and finding that Kentucky is a hybrid rule state, he ultimately reconciled the attorney general opinions and the case law and opined that a constitutional amendment is not required to authorize VLTs.

The Instant Racing Opinion
In 2010, Conway was asked to opine on the legality of “instant racing” and did so in 10-OAG-001. He determined that instant racing was not pari-mutuel in nature, based on Kentucky’s existing regulations with respect to pari-mutuel wagering. He relied heavily on a 2009 Maryland attorney general opinion, both supporting the opinion and distinguishing it. He based his review on the “Thoroughbred Mania” model produced by Race Tech LLC. His opinion indicated that if the Kentucky Racing Commission would promulgate regulations that cleaned up some definitions and addressed how instant racing would be conducted, then instant racing could be authorized.

Subsequent to this opinion on instant racing, an amendment was proposed to an existing 2010 bill to legislatively authorize instant racing by statute. However, the bill quickly died when the Senate president opposed it after initially supporting it. It does not seem that this step of statutory approval was necessary at all, given Conway’s opinion. However, in deciding not to support the proposed bill, legislators evidently relied heavily on the 2006 Wyoming Supreme Court decision in Wyoming Downs Rodeo et. al .v the State of Wyoming (2006 WY 55), which examined the language of the patent of VLTs and held them to be prohibited “gambling devices” under Wyoming law.

Subsequently, it appears that expanded gaming will not occur in any form in 2010 but is likely to be considered again in 2011.

Kentucky vs. Domain Names
Despite the rallying cries for expanded gaming to raise revenues both for the commonwealth and its horse racing industry, a recent Kentucky anti-gaming development has received much international press. In 2008, the commonwealth of Kentucky filed suit, utilizing a contingency-fee plaintiff’s firm, in an unusual civil in-rem (property) seizure and forfeiture action against 141 domain names, but citing a violation of a criminal statute. The state attorney general did not participate in the action. Gov. Beshear was quoted in the press as stating that it was a move designed to protect horse racing.

The suit was filed to effectuate the seizure by and forfeiture to the commonwealth of 141 domain names (such as “pokerstars” and “bigtimebingo”) for alleged illegal Internet wagering due to their acceptance of bets from Kentucky residents. In the lawsuit heard around the world, the trial judge, in an ex-parte hearing, issued an order for the seizure of the domain names and sent the order to the registrars of the various names, ordering them to comply. Representatives of the domain names, including IGC and IMEGA, appealed to the Kentucky Court of Appeals on issues of due process, jurisdiction, intellectual property and the more narrow argument that a domain name is not a “gambling device” under the relied-upon Kentucky statute. The Court of Appeals overturned the trial court on the narrow issue that domain names are not “gambling devices” and are therefore not subject to seizure in such an action. As a result, the court did not need to reach the other difficult issues. The decision was appealed by the commonwealth to the Kentucky Supreme Court, which on March 18, 2010, reversed, refusing to recognize “associational standing” for this purpose and requiring that a party in interest put forth the arguments. The court indicated that if such a party came forward, it would be inclined to rule on the merits. On March 26, specific members of IMEGA and IGC renewed their writ and requested transfer from the Court of Appeals for immediate consideration by the Supreme Court. The Court of Appeals issued an order recommending the transfer the same day. The outcome of this case and its impact on Internet wagering around the world will be closely watched by the gaming community.