Antitrust Law Daily Wrap Up, RICO—W.D. Ky.: Finality rule precludes RICO injury for bettors from Kentucky Derby disqualification, (Dec 17, 2024)

By Seth Abrams, J.D., M.A.

Bettors were able to establish Article III standing even though merits of claim failed.

The federal district court in Louisville has dismissed a complaint brought by a group of bettor plaintiffs against defendants Robert A. Baffert and Bob Baffert Racing Stables, Inc. Plaintiffs all had wagered on Mandaloun to win the 2021 Kentucky Derby. Mandaloun, who crossed the finish line second in the race, was subsequently declared the winner after the disqualification of Baffert-trained Medina Spirit. However, that ruling, several months after the race had been declared official for pari-mutuel wagering purposes, had no effect on the wagers. The court first denied the motion to dismiss for lack of Article III standing but granted the motion because the bettors’ allegations are foreclosed under Kentucky law and are nonetheless too speculative (Beychok v. Baffert, No. 3:24-cv-00100-CHB (W.D. Ky. Dec. 13, 2024)).

Background. Medina Spirit, trained by Baffert and Baffert Racing, crossed the finish line first in the 2021 Kentucky Derby, but had a short-lived reign as champion. Several months after the race, the Kentucky Horse Racing Commission (“KHRC”) disqualified Medina Spirit due to a failed post-race drug test. The stewards issued a new order of finish with Mandaloun—the original second-place finisher—declared the winner. The prize money—which had not yet been distributed—was ordered given to Mandaloun’s owner and the other qualifying finishers. However, payouts to bettors—which were made immediately after the race when it was declared official for wagering purposes—were not altered due to Kentucky’s regulations on horse race betting. These regulations provide that the “decision of the stewards as to the official order of finish for pari-mutuel wagering purposes shall be final, and no subsequent action shall set aside or alter the official order of finish for the purposes of pari-mutuel wagering.” The KHRC ruling explicitly provided that pari-mutuel wagering was not affected by its ruling.

The bettors brought six causes of action: (1) violations of the federal Racketeering Influenced and Corrupt Organizations Act (“RICO”) (2) conspiracy to violate the RICO Act; (3) violations of 23 state RICO laws; (4) conspiracy to violate state RICO laws; (5) common law fraud; and (6) equitable fraud. The bettors requested damages in the amount that they would have won, but for the “illegal doping of Medina Spirit.”

Article III Standing. The parties disputed whether the injury-in-fact requirements for constitutional standing were met. Defendants asserted that the bettors have no recourse under Kentucky law and, as a result, lack standing. However, the court noted that this conflates the merits of the claim with standing. Even though the bettors claims may fail due to the KHRC rules, it did not affect their standing to bring the claim. Monetary harms are concrete injuries for the purposes of Article III standing. The court found that the injury-in-fact requirement had been satisfied as the lost bets constituted an injury. It also found that the other elements of Article III standing—traceability and redressability—which were not contested by defendants, were satisfied.

Finality rule. Defendants had argued that the bettors failed to assert an injury for RICO purposes. Their first argument was based on the finality rule, which is part of administrative regulations by which the KHRC governs issues related to pari-mutuel wagering. It states, in relevant part, that “[t]he decision of the stewards as to the official order of finish for pari-mutuel wagering purposes shall be final, and no subsequent action shall set aside or alter the official order of finish for the purposes of pari-mutuel wagering.”

The rules further reiterate this by stating that “a subsequent change in the order of finish or award of purse money that could result from a subsequent ruling by the stewards, judges, or corporation shall not affect the pari-mutuel payout.” In Mattera, an earlier case involving a group of bettors who also bet on Mandaloun and sued Baffert, Baffert Racing, and Churchill Downs for negligence, breach of contract, and other state law claims, the Sixth Circuit found that the finality rule precluded recovery for the bettors. See Mattera v. Baffert, 100 F.4th 734, 738 (6th Cir. 2024).The court in Mattera “declined to replace the official order of finish for pari-mutuel wagering purposes with another order of finish” because “the finality rule barred that challenge.”

The court here followed Mattera and found the finality rule precluded recovery based on wagers that did not match the official order of finish for pari-mutuel purposes. The court was also unpersuaded by the argument that the bettors only sought damages based on the pari-mutuel wagers, not a redistribution of the payout.

Injury too speculative. The bettors contended that if Medina Spirit had been properly prohibited from competing then they would have won their respective bets on Mandaloun. The court noted that courts are “ill-equipped” to speculate and determine the outcome of a horse race. It pointed out that “[n]owhere does the Stewards Ruling find that Mandaloun would have won but for Medina Spirit racing... [n]o one can know that.”

The court found arguments that Mandaloun would have won the 2021 Kentucky Derby too speculative to establish an injury for RICO purposes. As a result of the speculative nature of the injury and that recovery is barred under the finality rule, the court dismissed the federal RICO claims for lack of injury.

Other claims. The 23 state RICO law claims failed for one of two reasons. First, 11 states do not provide for a civil cause of action for racketeering violations. Second, the remaining 12 states (and also the other 11 states) all require the bettors to state an injury. These fail for the same reasons that the federal RICO claim failed. The bettors’ fraud claim failed because Kentucky law does not recognize the bettors’ injury as one warranting recovery.

The Case is No. 3:24-cv-00100-CHB.

Judge: Boom, C.

Attorneys: Alex C. Davis (Alex Davis Law Office) for Michael E. Beychok. Gavin J. Rooney (Lowenstein Sandler LLP) for Robert A. Baffert.

Cases: RICO KentuckyNews