A challenge to New Jersey’s off-track-betting laws is fair game for the federal courts, the Third Circuit says in a precedential decision.

The appeals court, in ACRA Turf Club v. Zanzuccki, reversed a district judge who begged off the dispute under the 43-year-old Younger abstention doctrine.

But in December, the U.S. Supreme Court curtailed Younger, finding it applies only in “exceptional” circumstances involving quasi-criminal proceedings.

The ACRA Turf Club case did not meet that standard, the U.S. Court of Appeals for the Third Circuit held Monday.

In 2002, New Jersey enacted legislation providing for as many as 15 sites where patrons could place bets on horse races. The next year, the N.J. Racing Commission doled out the licensing rights to three entities that had permits to put on horse races.

The N.J. Sports & Exposition Authority, which then operated the Meadowlands and Monmouth Park racetracks, got rights to nine betting parlors, Freehold Raceway Off Track LLC got 4 and ACRA Turf Club got two.

As of 2011, however, only four sites were operational, leading the Legislature to step in and enact use-it-or-lose-it measures. The Forfeiture Amendment, enacted Feb. 23, 2011, provided permit holders would lose their rights as to any betting facility not open by Jan. 1, 2012, unless they showed they were making progress toward establishing it.

Two additional laws enacted Jan. 17, 2012, gave permit holders an alternative of depositing $1 million per site and created a pilot program that would allow exchanging one of the licenses for the right to install electronic wagering terminals in up to a dozen bars and restaurants.

The Racing Commission wrote to the license holders on Jan. 30, 2012, advising them they had until the end of the year to either show progress or deposit the money.

In March 2012, ACRA and Freehold filed petitions with the commission in an attempt to satisfy the “making progress” requirement.

Those petitions were pending in May 2012 when they jointly filed a suit challenging the constitutionality of the three laws under the U.S. Constitution’s Contracts, Takings, Due Process, and Equal Protection clauses.

The following month, the Racing Commission found they were making progress and did not have to make the $1 million deposits.

In light of that decision, U.S. District Judge Michael Shipp denied a preliminary injunction against the forfeiture and deposit laws, finding no immediate threat of irreparable harm.

Last May 30, he dismissed the suit under Younger v. Harris, 401 U.S. 37 (1971), which says federal courts should abstain, based on principles of comity and federalism, from cases that interfere with certain state court proceedings.

Younger involved a state criminal prosecution but later cases extended the doctrine to state administrative proceedings and civil enforcement actions in areas such as nuisance, welfare fraud, child abuse and attorney discipline.

Shipp applied the three-part inquiry from Middlesex County Ethics Committee v. Garden State Bar Association, 457 U.S. 423 (1982), which held abstention requires an ongoing state proceeding that implicates important state interests and an adequate opportunity in the state proceeding to raise the constitutional issues.

Last Dec. 10, while ACRA Turf Club‘s appeal was pending, the U.S. Supreme Court held in Sprint Communications v. Jacobs that lower courts were inappropriately using Middlesex County as a stand-alone test when Younger abstention should apply solely to state proceedings that are quasi-criminal in nature.

Otherwise, Younger would encompass “virtually all parallel state and federal proceedings, at least where a party could identify a plausibly important state interest,” wrote Justice Ruth Bader Ginsburg for a unanimous court.

Applying Sprint, the Third Circuit ruled that the decision to abstain in ACRA Turf Club was incorrect because “nothing here suggests the state proceeding is any more akin to a criminal prosecution than are most civil cases.”

The panel disagreed with the Racing Commission’s contention that the letter about the requirement to show progress or deposit money was the start of an enforcement proceeding.

“The letter was a purely informational document intended to inform Plaintiffs of the requirements imposed by the newly-enacted Amendments,” and did not demand any action nor reflect “an effort by the Commission to initiate adverse, quasi-criminal proceedings,” said Circuit Judges D. Brooks Smith, Patty Shwartz and Anthony Scirica.

Smith, writing for the panel, acknowledged that the Supreme Court has not directly held that Younger applies only when a state actor files a complaint or formal charges. “Nonetheless, its Younger progeny suggest that a state’s ‘initiation’ procedure must proceed with greater formality than merely sending a targeted advisory notice to a class of people that may be affected by new legislation,” he stated.

The panel also rejected the argument that the $1 million dollar deposit was a threatened sanction rather than a mere negative consequence. “Sanctions are retributive in nature and are typically imposed to punish the sanctioned party for some wrongful act,” and there was no suggestion that failure to set up an off track betting location was unlawful, much less wrongful, Smith noted.

John Pellecchia of Morristown’s Riker, Danzig, Scherer, Hyland & Perretti, the lawyer for ACRA and Freehold, says the appeals court decided correctly and points out that District Judge Joel Pisano, who had the case before Shipp, held that his client were likely to succeed on the contract clause and takings claims.

The Attorney General’s Office, which represents the Racing Commission, says only that it is reviewing the decision.

The New Jersey Thoroughbred Horsemen’s Association Inc., which currently operates the Monmouth Park track and horse racing at the Meadowlands, had sought to intervene in the case.

Its lawyer, Christina Vassiliou Harvey of Lomurro, Davidson, Eastman & Munoz in Freehold, argued it was a necessary party because it depends on off-track-betting revenue to help fund purses. And as a permit holder with a right to take part in the pilot program, its rights are implicated, she said.

Shipp denied the motion and the Third Circuit agreed Monday in a separate opinion that the attorney general adequately represents the association’s interest.

Harvey says the Third Circuit’s view that the Racing Commission took no punitive action against ACRA and Freehold undermines their unconstitutional-taking claim.

She says her client appealed the Racing Commission’s decision that ACRA and Freehold had made progress on opening more sites. Briefs have been filed but no argument has been scheduled.

Contact the reporter at mgallagher@alm.com.