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Balmoral Racing Club, Inc. v. Churchill Downs, Inc.

United States District Court, N.D. Illinois

June 18, 2013

BALMORAL RACING CLUB, INC., MAYWOOD PARK TROTTING CLUB ASSOCIATION, INC., and THE ILLINOIS HARNESS HORSEMEN'S ASSOCIATION, INC., Plaintiffs,
v.
CHURCHILL DOWNS, INC., CHURCHILL DOWNS TECH. INITIATIVES CO. d/b/a TWINSPIRES.COM and YOUBET.COM, LLC, Defendants

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For Balmoral Racing Club, Inc., Maywood Park Trotting Association, Inc., Plaintiffs: Steven Douglas Groth, LEAD ATTORNEY, Paul D. Vink, PRO HAC VICE, Bose McKinney & Evans Llp, Indianapolis, IN; Andrew Allen Jacobson, Bryan D. King, Brown, Udell, Pomerantz & Delrahim, LTD., Chicago, IL.

For Illinois Harness Horsemen's Association, Inc., The, Plaintiff: Steven Douglas Groth, LEAD ATTORNEY, Bose McKinney & Evans Llp, Indianapolis, IN; Andrew Allen Jacobson, Bryan D. King, Brown, Udell, Pomerantz & Delrahim, LTD., Chicago, IL.

For Churchill Downs, Incorporated, Churchill Downs Technology Initiatives Company, doing business as Twinspires.com, Youbet.com, LLC, Defendants, Counter Claimants: Paul E. Veith, LEAD ATTORNEY, Alison V. Potter, Sidley Austin LLP, Chicago, IL.

For Balmoral Racing Club, Inc., Maywood Park Trotting Association, Inc., Counter Defendants: Steven Douglas Groth, LEAD ATTORNEY, Paul D. Vink, Bose McKinney & Evans Llp, Indianapolis, IN; Bryan D. King, Brown, Udell, Pomerantz & Delrahim, LTD., Chicago, IL.

For Illinois Harness Horsemen's Association, Inc., The, Counter Defendant: Steven Douglas Groth, LEAD ATTORNEY, Bose McKinney & Evans Llp, Indianapolis, IN; Bryan D. King, Brown, Udell, Pomerantz & Delrahim, LTD., Chicago, IL.

OPINION

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MEMORANDUM OPINION

John F. Grady, United States District Judge.

Before the court are: (1) the defendants' motion for summary judgment; (2) the plaintiffs' motion for summary judgment; and (3) the defendants' motion to strike certain exhibits and factual assertions. For the reasons explained below, we deny the parties' motions.

BACKGROUND

A. The Co-Branding Agreement (" CBA" )

Plaintiffs Balmoral Racing Club, Inc. (" Balmoral" ) and Maywood Park Trotting Association, Inc. (" Maywood" ) operate horse-racing tracks located near Chicago, Illinois. (Pls.' Stmt. of Material Facts in Supp. of Mot. for Summ. J. (hereinafter, " Pls.' Stmt." ) ¶ 1.) On December 13, 2007, Balmoral, Maywood, Fairmount Park, Inc. (" Fairmount" ), Hawthorne Racecourse, Inc.,

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and Suburban Downs, Inc. [1] entered into the CBA with Youbet.com, Inc. (" Youbet" ). (Id. at ¶ 6; see also CBA, attached as Tab 16 to Defs.' Appx. in Supp. of Rule 56 Stmts. (hereinafter, " Defs.' Appx." ).) At that time, Youbet operated an advanced deposit wagering (" ADW" ) service that permitted online wagering on horse races. (Pls.' Stmt. ¶ 8.) [2] Pursuant to the CBA, Youbet agreed to develop a " co-branded version" of its primary website, " www.youbet.com" (the " Co-Branded Pages" ). (CBA Recitals ¶ D; see also id. at § 1.) The agreement originally contemplated the development and promotion of a separate website, " www.youbetillinois.com," but the parties later agreed to use " www.youbet.com" as the Co-Branded Pages. (Pls.' Smt. ¶ 11.) [3] The parties mutually agreed to promote the Co-Branded pages " in order to maximize the number of visitors." (CBA § 2.1; see also id. at § 2.2.)

Under the CBA, the tracks (referred to in the agreement as " Associates" ) were entitled to a share of wagers placed through www.youbet.com by Illinois residents, including Illinois residents who were already Youbet customers when the parties executed the CBA. (See Pls.' Stmt. ¶ 8; Defs.' Stmt. ¶ ¶ 25, 28.) The Associates' fees were calculated and distributed as follows:

The Company [Youbet] shall retain one-third (1/3) of Net Commissions plus one-third (1/3) of breakage plus one-third (1/3) of Net Revenues (collectively, " Company Fees" ). After deducting the Company Fees, the remainder of Net Commissions, breakage and Net Revenues will be paid to Associates. The Company will pay such amounts to Associates in accordance with written instructions signed by all Associates.

(See Second Am. to CBA § 6.1.) [4] The Associates agreed to split their potion of Net Commissions, breakage, and Net Revenues according to the " distribution by zip code" set forth in Profit and Loss Statements (" P& L's" ) prepared by Youbet: approximately 10% to Fairmount, with the balance divided between Hawthorne (52.5%) and Maywood/Balmoral (47.5%). (See Defs.' Rule 56.1(b)(3)(C) Stmt. ¶ 54; see also Hannon Dep. 2012, attached as Ex. N to Pls.' Supp. Designation of Evidence, at 182.)

B. Fairmount

After signing the CBA, the Associates agreed that Fairmount's share of CBA fees would be placed into an escrow account because Fairmount was concerned about the legality of ADW in Illinois. (Defs.' Rule 56.1(b)(3)(C) Stmt. ¶ 46.) Fairmount decided in early 2009 that it no longer planned to participate in the CBA.

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(Id. at ¶ 47; Pls.' Stmt. ¶ 19.) The plaintiffs sought to negotiate with Fairmount to obtain Fairmount's share of the CBA fees, (see Defs.' Rule 56.1(b)(3)(C) Stmt. ¶ 48), but the outcome of those negotiations is unclear. There is evidence in the record that Hawthorne and Balmoral/Maywood split the money (approximately $78,000) that was being held in the escrow account for Fairmount's benefit. (See Hannon Dep. 2012 at 230-31.) But the record does not disclose any specifics about this transaction. The parties agree, however, that Youbet stopped paying Fairmount's share of CBA fees in June 2009. (See Defs.' Rule 56.1(b)(3)(C) Stmt. ¶ 49.) In October 2009, Fairmount entered into an ADW agreement with a competing ADW provider, contrary to the CBA's exclusivity provision. (Id. at ¶ 50; see also CBA § 4.1.)

C. The Youbet Merger & ADW Platform Integration

On November 11, 2009, defendant Churchill Downs, Inc. (" Churchill" ) announced that it had reached an agreement to acquire Youbet. (Defs.' Stmt. ¶ 29.) The transaction, which the parties finalized on June 2, 2010, took the form of a merger between Youbet and a wholly-owned subsidiary of Churchill. (Id. at ¶ 30.) The surviving entity, Tomahawk Merger, LLC, was renamed Youbet.com, LLC. (Id.) [5] The merger triggered the plaintiffs' right to terminate the CBA. (See CBA § 10.2(c) (authorizing the Associates to terminate the CBA with 30 days notice if there is a change-of-control transaction affecting Youbet).) The plaintiffs chose not to exercise their termination right, although the parties dispute why. The plaintiffs contend that they did not terminate the CBA because of Churchill's assurances that Youbet would continue to honor the agreement's terms. (See Pls.' Stmt. ¶ 31; see also Defs.' Stmt. ¶ 34.) [6] The defendants contend that the plaintiffs were motivated instead by their desire to be bought out of the agreement. (See Defs.' Rule 56.1(b)(3)(B) Stmt. ¶ 31.)

At the time of the merger, another Churchill subsidiary -- defendant Churchill Downs Technical Initiatives Company, d/b/a TwinSpires.com (" TwinSpires" ) -- operated a competing ADW service. (Defs.' Stmt. ¶ 31; see also Pls.' Stmt. ¶ ¶ 3, 32.) The two companies operated separate ADW services for a period of time after the merger, but soon began preparing to integrate the two ADW platforms. (See Defs.' Stmt. 39.) The plaintiffs were aware that Churchill had publically expressed its intent to eventually integrate the two ADW platforms under one brand name. (See id. at ¶ 33.) But the defendants did not tell the plaintiffs about their specific plans until November 9, 2010. (Id. at ¶ 40.) On that date, Bradley Blackwell (an officer of Churchill, TwinSpires, and

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Youbet) and Lucky Kalanges (a legacy Youbet employee) convened a conference call with representatives of the Associates, including Hannon. (Id.) During the call Blackwell and Kalanges told the Associates that, on November 16, 2010, the defendants were going to integrate the Youbet and TwinSpires ADW platforms -- combining the best features of both -- under the TwinSpires brand name. (Id. at ¶ ¶ 40-41.) Current Youbet customers would have access to the integrated platform using their existing Youbet user names, passwords, and account balances. (Id. at ¶ 42.) The defendants would assign " cable codes" to those customers, permitting the parties to continue tracking their wagering activity in order to calculate the Associates' CBA fees. (Id. at ¶ 43.) The defendants would phase out www.youbet.com over time and establish a new URL, www.youbetillinois.com. (Id. at ¶ 44.) New customers who signed up through the new URL would be counted as customers under the CBA for purposes of calculating the plaintiffs' fees regardless of which URL -- www.twinspires.com, www.youbet.com, or www.youbetillinois.com -- they used to access the platform. (Id. at ¶ 47.) However, the plaintiffs would not be entitled to fees for wagers placed by new customers who signed up to use the service after integration through either www.youbet.com or www.twinspires.com. (Id. at ¶ ¶ 47, 58.)

After hearing the defendants' integration plans, Hannon asked the defendants to continue counting as CBA " Customers" new customers who signed up to use the integrated platform through www.youbet.com. (Id. at ¶ 50.) Blackwell told Hannon that he would look into his request. (Id.) Hannon emailed Blackwell the following day and pressed the point more forcefully, demanding that the Associates get the benefit of new customer sign-ups through www.youbet.com " for a period of time." (Id. at ¶ 51.) On November 11, 2010, Blackwell agreed to credit the Associates for wagers placed by new customers who signed up via www.youbet.com through the end of 2010. (Id. at ¶ 53.) Hannon responded that he was satisfied with the change. (Id. at ¶ 53; see also id. at ¶ ¶ 59-61 (Hannon emailed certain interested parties about the changes and testified at his deposition that the emails were consistent with his " agreement" with Blackwell concerning " how customers and wagers would be tracked under the [CBA] after the migration." ).) The defendants emphasize that the plaintiffs did not assert at that time that the integration breached the CBA. (See id. at ¶ ¶ 54-55.) The plaintiffs contend that Hannon voiced his dissatisfaction during other conversations with Blackwell, (see Pls.' Rule 56.1(b)(3)(B) Stmt. ¶ ¶ 54-55), but Hannon's testimony on this subject is vague. (See Hannon Dep. 2012, attached as Tab 12 to Defs.' Appx., at 34-37 (testifying vaguely about subsequent communications with Blackwell about his unhappiness with the integration).) It is undisputed that the plaintiffs did not send a written notice of breach at that time. (Defs.' Stmt. ¶ 56; see also CBA § 10.2(d) (authorizing the parties to terminate the CBA for a material breach that is not cured within 30 days after providing written notice thereof).) On November 16, 2010, the defendants integrated the Youbet and TwinSpires ADW platforms consistent with their representations the prior week. (Defs.' Stmt. ¶ ¶ 62-64.)

D. Youbet's License Renewal Application and the CBA's Termination

The Illinois Horse Racing Act requires ADW providers to obtain a license from the Illinois Racing Board (" IRB" ). See 230 ILCS 5/3.28 (" An advance deposit wagering

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licensee shall be an organization licensee or a person or third party who contracts with an organization licensee in order to conduct advance deposit wagering." ); [7] 5/3.29 (" Any person who accepts an advance deposit wager who is not licensed by the Board as an advance deposit wagering licensee shall be considered in violation of this Act and the Criminal Code of 2012." ). In June 2010, Youbet.com, LLC (the new entity) applied for and received a license to operate its ADW platform in Illinois through December 31, 2010. (See Defs.' Rule 56.1(a)(3)(C) Stmt. ¶ ¶ 24, 26.) On October 29, 2010, Youbet submitted an application to renew its ADW license for 2011. (Defs.' Stmt. ¶ 67.) On November 10, 2010 -- the day after the conference call regarding the YouBet/TwinSpires integration -- Hannon spoke with Marc Laino, the IRB's Executive Director. [8] (Id. at ¶ 70.) In an email summarizing his conversation with Laino, Hannon stated that he told Laino about the integration and about a " possible illegal business practice." (Id.) He went on to indicate that he regarded Youbet's license renewal application as a possible bargaining chip in his negotiations for a buy out. (See id. (" On Tuesday, November 30th an item on the Board agenda will be the renewal of Twinspires, Youbet, TVG and Xpressbet Illinois ADW licensees [sic] for 2011 -- this is good timing for us in our negotiations with CDI for the buy out prior to this Board meeting." ).) On November 26, 2010, Hannon sent an email to a representative of Day at the Track, another ADW operator, stating: " things are progressing slowly with [Churchill] -- (getting out of my Youbet contract) however, they are still moving forward -- we are asking for conditions to be put on them when they go up for licensing next week therefore, we hope they will now want out of the contract." (Id. at ¶ 71.) Before the November 30, 2010 IRB meeting, Hannon sent a memo to IRB members entitled " Youbet Concerns" that listed a range of grievances including alleged " credit card abuse" and CBA violations. (Id. at ¶ 72.) In the memo, Hannon urged the IRB to " postpone the licensing of Youbet LLC until the December Board meeting in order to give the parties to the Agreement more time to resolve these issues." (Id.) Laino opened the November 30 IRB meeting by recommending that the Board deny Youbet's application because Youbet was no longer eligible for an ADW license after the integration. (See Trans. of IRB Meetings, dated Nov. 30, 2010, attached as Tab 27 to Defs.' Appx., at 6; Laino Aff. ¶ 13.) [9] During the course of the meeting, Hannon (1) accused Youbet of " anticompetitive practices" that he said should be brought to the " Justice Department's attention; " (2) asked the Board to " investigate [Youbet's] license based on these anticompetitive practices and rule violations . . . ; " and (3) asked that the Board place " conditions" on Youbet before granting its license application. (Defs.' Stmt. ¶ 75.) The IRB ultimately chose to defer further consideration of Youbet's renewal application until the Board's December 21, 2010 meeting. (Id. at ¶ 77.)

On December 1, 2010, Youbet notified the plaintiffs that it was terminating the CBA (as to plaintiffs) based upon their failure to use their " best efforts" to assist Youbet in renewing its ADW license. (Id. at ΒΆ 79; see also CBA ...


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