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Texas Defends Betting Law as Derby Day Nears

AUSTIN (CN) - The Texas Racing Commission has fired back at Churchill Downs, insisting that the state ban on online wagering does not violate the commerce clause.

Though Texans had wagered on out-of-state races online or over the telephone since the 1990s, the state Racing Commission allegedly opted in 2011 to renew a 25-year-old in person betting requirement.

Kentucky-based Churchill Downs and Churchill Downs Technology Initiatives Company dba Twinspires.com had claimed that the commission did so to increase revenue since the rules impose a heavy tax on out-of-state tracks.

Churchill said the rule would forced it to funnel wagers through a Texas competitor, establish its own in-state track or force customers to travel out of the state to place their wagers. As such, the law would allegedly keep most Texans from betting on the Kentucky Derby.

The September 2012 federal complaint called the law "unconstitutionally discriminatory" since it would favor in-state tracks over out-of-state tracks.

"A state cannot impose an 'in person' transaction requirement on the purchase of shoes or books, for no reason than to favor local businesses at the expense of out-of-state entities like Zappos.com or Amazon.com," Churchill said. "Such a law would surely violate the Commerce Clause. The same principle applies here. Indeed, this case is even more extreme."

Texas disagreed in a reply brief last week, arguing that the ban applies equally to entities both outside and inside of Texas.

"At its base, Churchill Downs' suit is an attempt to overturn the Texas Legislature's policy decision to permit brick-and-mortar horseracing and greyhound racing and wagering and prohibit other types of wagering, such as internet wagering," the reply states. "The commerce clause does not provide Churchill Downs with its desired result. The equal application of the internet wagering ban to all entities, regardless of geographic location, and the public protections embedded in the regulatory scheme are inescapably fatal to Churchill Downs' commerce clause arguments."

The state also disputed that it has refused to enforce the ban in the past.

"Setting aside Churchill Downs' casual admission that it has been knowingly violating Texas law, this statement is not accurate," the reply states. "TRC has sought out a significant number of suspected violators of the internet wagering prohibition and forced them to cease operating in Texas."

Churchill further missed the mark in analogizing the law with a rule that forces "Pepsi to to sell its soda only through Coke machines," according to the brief.

Out-of-state entities are on equal footing with in-state entities because both are banned from accepting internet wagers, Texas said.

Churchill Downs is mistaken in arguing that law limits gamblers making off-track wagers to in-state tracks, Texas argued.

"In fact, in-state tracks may only accept wagers that are placed within the confines of that track, assuming the track is properly licensed by the TRC," the reply states. "A Texas bettor may not lawfully place an off-track bet from his home computer with a Texas track any more than he can lawfully place a bet with Churchill Downs, regardless of where the actual race is located."

Churchill cannot support commerce clause claims despite heavy reliance on legislative comments from the 2011 session and other industry acknowledgements of the negative effects of the ban for out-of-state entities, according to the brief.

"The Texas in-person requirement does not discriminate based on residency and therefore has nothing in common with any of the statutes cited by Churchill Downs," the reply states. "In Texas there are a number of out-of-state entities that hold ownership interests in licensed Texas tracks. Therefore, under the existing state law that allows brick-and-mortar gambling but not internet gambling, there is still interstate commerce being conducted - not only through the ownership of the Texas tracks but also the active simulcast market."

It adds: "The [dormant commerce clause] protects the interstate market, not particular out-of-state companies, from prohibitive or burdensome regulations. Therefore, the existence of a burden that falls on an out-of-state company by virtue of a state regulation does not establish a claim of discrimination against interstate commerce."

Texas says there is no discrimination when legislative comments show a desire to treat different "business forms" differently. It says comments from the 2011 session do not reveal a desire to treat companies differently based on where they are from.

"Instead, the desire is to continue to enforce the prohibition on internet wagering - a fundamentally different business form than brick-and-mortar wagering," the reply states.

The plaintiffs are represented by James Ho and Prerak Shah with Gibson Dunn in Dallas. The state is represented by Lesli Ginn with the Texas Attorney General's Office in Austin.

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