High Stakes – The Limits of Private Regulation

In his most recent editorial, Bloodhorse Editor-in-Chief Dan Liebman notes an interesting proposal from trainer Ken McPeek: let the American Graded Stakes Committee (“AGSC” or “the Committee”) effectively mandate uniform drug rules, or at least a steroid ban, by refusing to grant graded status to stakes races until a state or track complies. I’ve actually put a lot of thought into this issue, because, oddly enough, I’ve had the same idea myself.

To understand the proposal, one has to recognize the considerable influence that the Committee wields; Liebman outlines this fairly well in his piece. In short, racetracks want their stakes to be graded, because graded stakes tend to attract quality horses and larger crowds, and breeders want that black type in their horses’ pedigrees when they head to sale or stand at stud. As then-Committee member Rollin Baugh put it in a teleconference interview with NTRA in 2003, “as a performing horse or as a breeding animal, if you produce an animal that is graded one, two, or three and obviously grade one … being the most significant, you’re talking of hundreds of thousands of dollars in appreciated value of that animal or the pedigree that it’s associated with.” The Committee propagates the only grading system of American races, and those grades are recognized by all the major sales companies. The American Graded Stakes system isn’t mandated, but it is accepted industry-wide, which makes its influence inescapable.

There are two things I’ll point out before explaining the legal problem I see with McPeek’s idea. First is that it’s important to understand the family structure of the American Graded Stakes Committee. The Committee is actually a branch of the Thoroughbred Owners and Breeder’s Association, as is Bloodhorse. That’s just a side note.

Second, the AGSC procedure for grading stakes is not without its critics, due largely to its exclusive and mostly closed-door grading procedure. Ray Paulick detailed both the positive aspects of a uniform grading system, as well as the national and international criticism of Committee decisions, in a 2003 Bloodhorse editorial, which I will poach from a bit. The harshest criticism of the AGSC came from Tony Morris, a writer for the British publication ‘Racing Post,’ who asserted in 1988 that “[t]he scheme has been an administrated disaster, with annual review reduced to the level of farce by statistical equipment unsuited to the job and a team of workers with a false sense of priorities.” Since then, the Committee has improved their process in some respects by reducing the number of graded stakes and keeping the number of races in each grade to a specific percentage. But there are still problems with the procedure itself that could spell trouble if the AGSC/TOBA tried to manipulate tracks into compliance by threatening to take their graded stakes away.

Committee decisions are made behind closed doors, for the most part. The AGSC is composed of six TOBA members, “appointed by TOBA’s Chairman and confirmed by its Trustees,” and five Racing Official members, who are voted on by TOBA members. So TOBA completely controls the composition of the Committee. Guest observers are allowed to watch the grading sessions, but they are not allowed to speak, and are only invited at the discretion of the Chairman. The Committee has what I consider to be a reasonably objective statistical process for grading races, but, as TOBA states, “[i]n the end, the grades are a composite of expert opinion, rather than the result solely of statistical analysis.” That would be TOBA’s expert opinion, of course. TOBA states that “decisions on grading are not made with the thought either of promoting or suppressing sponsorship or promotional potential on behalf of any racetrack, sales company, breeders’ organization, or individual persons and horses,” and I have no real reason to doubt them. Racing Officials do not always vote to up-grade stakes at their own tracks, and AGSC refused to violate their own rules and grant the 3 new Breeder’s Cup races instant graded status in 2007, despite the fact that it would be beneficial to breeders and owners, and despite the fact that the races would obviously attract graded stakes-quality horses.

So, could the American Grades Stakes Committee really implement steroid bans through the grading process? It depends on how receptive the industry is to the changes the Committee wants to make, and also whether any parties get their feathers ruffled over TOBA exerting such tangential control over the industry, in a field theoretically controlled by state legislatures. Worst case scenario: the cabal-like nature of the AGSC, combined with the grading procedure itself, could result in a huge Sherman anti-trust suit, brought by tracks, horsemen, or state racing commissions.

Why a Sherman antitrust action? The general public might be more familiar with Section 2 of the Sherman Act, which prohibits monopolies. But Section 1 is implicated here, because the use of Grades as an incentive / punishment could easily be seen as an illegal restraint of trade. As Paulick has pointed out, racetrack owners and operators fear that “the demotion [of a race] will lead to a lesser-quality field, fewer fans, and lower handle.” That could be a huge economic impact, enough of one to give a track standing under the Sherman Act, just as (the late) Hialeah race track had standing to bring an anti-trust action against Florida HBPA in 1975, when it alleged that it would suffer economic injury from the FL HBPA’s refusal to give consent to simulcasting. And even though TOBA is only one corporate entity, the Supreme Court has held that trade associations like TOBA, which wield substantial power over members and nonmembers, are subject to the limitations of the Sherman Act.

But while TOBA/AGSC is clearly subject to the Sherman Act, that doesn’t necessarily mean it would lose a lawsuit, although I think they’d be on shaky ground. When the American Quarter Horse Association was challenged under Section 1, the Fifth Circuit Court of Appeals held that self-regulation of an industry by a breed association was not a violation of anti-trust laws unless their regulations were unreasonable considering the goals of the association. TOBA’s goal is “to improve the economics, integrity, and pleasure of the sport on behalf of owners and breeders.” A commendable goal, and one that comports with eliminating steroid use in racing, which would significantly improve the integrity of the sport at this point in time. I think that the AGSC would pass this test.

The problem, however, is the grading procedure itself. Trade associations must provide adequate procedural safeguards to insure that restraints on trade are not arbitrary. For example, the Supreme Court has held that a trade association cannot deny privileges unless it gives the affected party fair procedures like notice and an opportunity to be heard. As far as notice goes, not only are the doors closed at the grading meetings, but AGSC also recently elminated its procedure for sending tracks notice that a race was being considered for downgrading. While, surely, every track would be on notice that they were being considered for downgrading if AGSC propagated its no-steroid rule prior to the next meeting, the question would be whether tracks had time to implement changes and enforcement procedures before the Committee made its grading decisions. Moreover, there is no procedure for challenging or appealing a decision of the AGSC, even within TOBA itself.

Were TOBA and the AGSC to follow McPeek’s advice, they would need to implement some serious structural and procedural changes. Say, open up the membership of the Committee to include representatives from all sectors of the industry, including RMTC, Jockey Club, RCI, etc., while creating legitimate notice and appeals procedures, and holding grading sessions at open meetings. Even then, would problems remain? Sure. I’m not even going to touch on how AGSC would attempt to enforce their rules; would they police various tracks to make sure that they were in compliance? And if they didn’t, what sort of hard evidence would keep their decisions from drifting toward the arbitrary? Additionally, there would certainly be an opportunity for a ‘race to the bottom’ – a track could easily offer lax standards and large purses to attract horsemen who didn’t want to play by the rules. Likely? No. Plausible? Yes. Charles Cella of Oaklawn Park has ignored the decisions of the AGSC, instead listing his stakes as “Grade A” and enhancing the purse structure of his races to attract quality horses. But Cella’s the exception to the rule. In general, McPeek, and Liebman, are right. Horsemen, tracks, breeders – they all want graded stakes.

Ultimately, McPeek did not have a bad idea, even if it does demonstrate the obstacles that a private association would face trying to self-regulate the racing industry. But what I like most about Ken’s idea is that it shows that industry insiders are thinking creatively about pro-active ways to make positive changes in this industry, in the face of a regulatory system that is not amenable to uniform changes. If the industry as a whole demonstrates the willingness of McPeek and Liebman, and if AGSC implemented adequate safeguards in their procedures and was careful not to step on any toes, this would, at the very least, be a great public relations move, and at most a substantial improvement in the welfare of horses and the integrity of the sport.