While all eyes remain focused on the impending preliminary injunction ruling in the New York state daily fantasy sports suit, a new fantasy sports suit has been filed in California. The California suit targets DerbyWars, a fantasy site based on horseracing, for allegedly accepting wagers in violation of the Interstate Horseracing Act (“IHA”). DerbyWars awards cash prizes to players who accumulate the most points based on predicting the winners of horse races over the span of a given tournament.  Horse Racing Labs LLC (also known as Immerse, LLC), the company that operates DerbyWars, keeps a portion of each tournament pool.

Unlike traditional fantasy sports that focus on predicting the performance of professional sports players, Derby wars focuses on predicting the performance of horses in a series of horse races. Each contest has a fixed entry fee, a fixed prize pool and a maximum number of entries. Players select a horse to win in each race of the tournament, and each winning selection adds to their point total. At the end of the tournament, the player with the most points wins a cash prize.

According to the complaint, this activity does not come within the carve-out to Unlawful Internet Gambling Enforcement Act of 2006 ( “UIGEA”). The carve-out from what constitutes a “bet or wager” under UIGEA includes:

participation in a fantasy game or contest, so long as the player’s “team” is not based on an actual team, and (1) the prizes and awards are known in advance and the value is not based on the number of participants or the amount of the fees; (2) winning outcomes reflect the skill of the participants and are determined by statistical results of the performance of individuals in multiple games; and (3) the winning outcome is not based on the “score, point-spread, or any performance or performances of any single real-world team or any combination of such teams, or solely on any single performance of an individual athlete in any single real-world sporting or other event.”

The basis for that argument in the complaint is:

The only reasonable interpretation of the term “team” as used in the UIGEA as applied to horseracing is that a “team” is defined as a horse or a horse and its jockey. Thus, DerbyWars’ handicapping tournaments (which are essentially parlays) fall outside of the exceptions set forth in Section 5362 (ix), in that the winning outcome is based on the performances of a combination of teams (horses). In the same manner that the fantasy carve-out does not include selecting six winning teams from six football games, it cannot include selecting six winning horses from six races.

The Complaint seems to focus heavily on the argument that horseracing-based fantasy sports does not fall within the exception to UIGEA because there is no “team.” Arguably, the fantasy team is actually the collection of horses that a player predicts to win. Assuming, for the sake of argument, that there is no team, that will not likely end the inquiry. Even if the carve-out does not apply under these facts, a question remains as to whether this activity is nonetheless a bet or wager under UIGEA. One challenge for the plaintiffs here is that it appears, from the alleged facts, that players get a point for correctly predicting a winner. The winner is determined by who gets the most number of points and the prize is fixed. The complaint does not allege that winners get a payout commensurate with the odds of winning horses.

Under UIGEA, a “bet or wager,” is defined in part to mean: “the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome”

In at least one other fantasy sports case (in New Jersey), a court found as a matter of law that fantasy sports entry fees are not a bet or wager, where: (1) the entry fees are paid unconditionally; (2) the prizes offered to fantasy sports contestants are for amounts certain and are guaranteed to be awarded; and (3) defendants do not compete for the prizes. Those criteria appear to be met here based on the alleged facts.

It will be interesting to see how this case evolves. A number of other fantasy sports models arguably do not include teams (e.g. golf-base or race-car based fantasy sports models). Some noteworthy facts here are that horseracing is a heavily regulated industry and UIGEA  specifically addresses horse racing, stating that it is not the intent of UIGEA to legalize betting on horse racing that would otherwise be illegal under the IHA. Nevertheless, this case will still require a determination of whether this horseracing-based fantasy sports model constitutes a bet or wager.