Yesterday in the NSW Federal Court, Justice Perram ordered Racing NSW to file a defence within a week in the case brought against it by Betfair.

Attempting to explain to the Court why Racing NSW was well out of time in filing its defence, counsel for Racing NSW attempted unsuccessfully to argue that Betfair's statement of claim was deficient.

Perram was having nothing of that and decided that Racing NSW was just trying to delay proceedings.

Racing NSW's position regarding the Betfair proceedings sits very oddly with comments made by its CEO Peter V'Landys in early October when the Betfair writ was lodged.

In the Daily Telegraph on October 5th, V'Landys was quoted:

"The result of this legal challenge could have the most serious implications the racing industry has ever faced,'' V'landys said.

"Our revenue base is now under a very real threat. If we lose this case, then in simple terms it will mean reduced funding to the racing industry, less prizemoney and less returns to our participants.''

Well there's no better way to lose a case than to not file a defence.

Betfair has chosen to fight Racing NSW on the basis of its High Court win against the WA government. The High Court held that Section 92 of the Australian Constitution prohibited the states from using legislation to protect local enterprises against interstate competition.

Because Racing NSW has imposed a levy of 1.5% of turnover, Betfair argues that it is being penalised order to protect TAB NSW, which pays based on a percentage of gross profit.

The recently released Cameron Report on NSW Racing industry funding summarises Betfair's position.

"However, in terms of gross profits the race fields levy may impact each
type of wagering operator differently:

NSW TAB: A race fields levy of 1.5% on the TAB which has a takeout rate of 16% will mean that the TAB is required to pay a fee representing 9.375% of its gross revenue.
Bookmakers: Based on a win rate for bookmakers of 3% to 6%, a race fields levy of 1.5% represents 25% to 50% of their gross revenue.
Betfair (as the only betting exchange currently operating in Australia): Based on Betfair's gross revenues on thoroughbred racing in 2007/08, the race fields levy of 1.5% would have represented 60.73% of its gross revenue."

Not yet having filed a defence, Racing NSW has not had to provide discovery where all documents it holds relating to the imposition of the race fields levy will need to be disclosed.

Of particular interest to Betfair will be the documents relating to Racing NSW's discussions with TabCorp, the owner of TAB Limited. As Cameron pointed out in his report:

Stakeholder consultation has suggested that the margins associated with bookmakers are so low that the 1.5% product fee poses a significant shock to the bookmaker model. Indeed, Betfair queried why Tabcorp is supportive of the race fields arrangement given its move to become licensed in the Northern Territory as a bookmaker:

“In the absence of wider liberalisation of the NSW wagering market, the proposed race field fee of 1.5 per cent of wagering turnover will adversely affect the financial viability of wagering providers operating in NSW. For example, it has been estimated that NT-based bookmakers would see their margins reduced by approximately 30 per cent as a result of the race field fee (Wheen2008). Assuming TAB continues to fix its prices at the cap set by government, the 1.5 per cent product fee would erode approximately 75 per cent of its profit margin on NSW racing. The potential outcome makes it difficult to understand how the holding company [i.e. Tabcorp] could applaud the decision made by the racing industry to charge all local and interstate operators an additional 1.5 per cent product fee when there is no right to offset for payments made in the home jurisdiction.”

While there is no ‘right’ to offset, it appears that there is an understanding that TAB will be provided the opportunity to offset payments.

Precisely what that "understanding" is between Racing NSW and TabCorp will undoubtedly be of great interest to the Court. While that is being discovered more information about a few other agreements between Racing NSW and TabCorp may come to light.

For instance what agreements are in place giving TAB the exclusive right to on course signage and race sponsorship by a wagering operator? We now know that there has been agreement in place for metropolitan tracks since 2000 which runs to 2012, but what about the one more recently negotiated for all country venues?

Such agreements are important because of their commercial value to TabCorp in preventing access to competitors. By deducting that value from what TAB is paying Racing NSW a better understanding can be gained as to the make up of the fees.

Clearly there is no sponsorship or advertising component in what Racing NSW is trying to charge Betfair, so the Court should be asked to compare its payments to those made by TabCorp net of promotional benefits.

Another factor which has recently come to light is the agreement that Racing NSW has with TabCorp that it will not lower its takeout rate below the maximum permitted by law.

At the recent Asian Racing Conference, Racing NSW CEO Peter V'Landys stated that if TabCorp did lower its takeout rate they would be sued.

"If they do something like reducing takeout rates that reduces our financial benefit we can sue them", V'Landys said in his presentation.

V'Landys has been quoted saying that wagering operators who object to paying the turnover based levy will have to change their business model in order to increase their operating margins.

Clearly this means setting their prices so that punters lose more. By doing so they become less competitive, particularly with TabCorp.

By engaging in behaviour which entrenches TabCorp's dominant position in the wagering market, Racing NSW is skating perilously close to retail price maintenance, which is in breach of the Trade Practices Act.

In the celebrated TVN Case where Racing NSW sued the AJC and STC over granting broadcast rights to TVN, Justice Bergin was scathing in her criticism of Racing NSW's conduct.

In attempting to do TabCorp's bidding in order to prevent competition to Sky Channel, it was pointed out that Racing NSW was in danger of breaching the TPA.

The TVN action eventually turned on what rights Racing NSW had under its own enabling Act of Parliament, of which it was shown to be appallingly ignorant.

Betfair is bringing its current action alleging a breach of the Constitution, but it could well be that Trade Practices issues also emerge.

The underlying theme of all the machinations undertaken by Racing NSW on the race fields levy is to maximise its take from wagering from all wagering operators.

The flip side of this is that it wants punters to lose more, as that is the only way to increase revenue. The only way to do this is for there to be more punters, so the total pool of available punter loss is bigger, or for existing punters to lose more.

By engaging in processes which stamp out low margin competitors to Tabcorp, Racing NSW may temporarily increase punter loss from those who can't help themselves.

Most likely however a fair number of those punters will migrate to lower margin alternatives, which almost certainly will not include NSW racing in their product mix. Any gain will be shortlived and illusory.

V'Landys is correct when he states that the legal challenge has serious implications for the racing industry.

However if the Federal Court upholds Betfair's claim, because it is based on a High Court decision, the Racing NSW approach will be found illegal, not only for NSW but every other state which tries to go the same route.

Racing NSW should be happy that there is an exit clause in all of this. Betfair is on the public record and has willingly signed up to a gross profit related levy system in Tasmania and Victoria. It would do the same in New South Wales.

Because Betfair believes that wagering operators should make a contribution to the sports they bet on, it is in favour of a system which compels payment.

The current race fields levy system is acceptable if it is imposed fairly on all operators.

If it really wanted to, Betfair could challenge the validity of any race fields payment enforced by state legislation. Constitutionally only the Commonwealth government has the right to impose laws relating to intellectual property.

The proper law to enforce payments relating to what is a copyright issue is the Copyright Act, which as a Federal law overrides all state laws.

The problem is that under copyright law, the value of publishing a race field is likely to be very small. The principal purpose for the racing industry compiling race fields is for the orderly conduct of racing. They are only incidentally used for the purpose of wagering.

The industry can mount any claim it likes for the value of the copyright it wants to be paid by wagering operators. However to be awarded that payment by a Court it has to justify the claim.

Once it has deducted the expense necessary to run its own affairs, coupled with the fact that all Australia's racing bodies give racing information away for free, I suspect that the real value of a race field is next to nothing.

Perhaps that explains why we have these state laws with criminal penalties as opposed to going the copyright route.

Racing NSW has made the odd threat about launching a copyright action if it fails in respect of the current Betfair action on race fields.

The question is, will the new Racing NSW Board be inclined to fight yet another losing case?