Showboat Casino, Atlantic City, N.J.
Showboat Casino, Atlantic City, N.J. (Total Rewards)

A suit over a contract to provide online gambling services filed by the operator of the famed Churchill Downs racetrack against a New Jersey business that had unsuccessfully tried to buy an Atlantic City casino has been moved to New Jersey by a federal judge in Kentucky.

The Kentucky court lacked jurisdiction over a dispute stemming from an agreement by Churchill Downs Inc. to administer a planned online gaming program for the Showboat Atlantic City Hotel and Casino, said U.S. District Judge John Heyburn II, who sits in Louisville, Ky.

“After reviewing this matter quite carefully, the question of this court’s personal jurisdiction over defendants does not appear to be a close call,” Heyburn said Tuesday. “Because New Jersey is the district in which defendants reside, both venue and the exercise of personal jurisdiction over defendants are proper,” the judge added.

The prospective buyer—Nicholas Ribis, a longtime casino executive and lone principal of NLR Entertainment LLC—was planning to buy the boardwalk casino-resort from Caesars Entertainment Corp. when a representative reached out to Churchill Downs, according to the decision.

Churchill Downs operates the iconic Louisville horse racetrack of the same name and has an interactive gaming affiliate.

Last August—months after New Jersey legalized online gambling hosted by casinos, a law that would go into effect that November—the parties executed a binding term sheet, pursuant to which Churchill Downs made a $2.5 million good-faith payment.

The next month, they entered a licensing and operating agreement, which required the purchase to be finalized by January and gave Churchill Downs the right to be the exclusive online gaming vendor for at least seven years. If the deal fell through, Churchill Downs would be entitled to repayment of the $2.5 million. There was no forum selection clause, the opinion said.

Churchill Downs went to work on the project, hiring 30 new employees and licensing $10 million in software licensing in order to launch the program as of April, according to the opinion.

In the end, the deal fell through, and Churchill Downs filed suit in February, alleging breach of contract and fraud, and claiming NLR refused to pay back the $2.5 million. The suit was filed in Kentucky state court and removed to the Western District of Kentucky.

NLR moved to dismiss the suit or, failing that, to transfer venue to New Jersey.

Churchill Downs fought to keep the matter in Kentucky, relying on numerous factors, principally that NLR initiated contact, Churchill Downs’ general counsel led the contract negotiations, and the company took steps toward fulfilling its contractual requirements in Kentucky.

Heyburn obliged the latter request, finding he lacked personal jurisdiction over the matter.

He noted that the defendant’s conduct, not the plaintiff’s, is key in determining personal jurisdiction, and NLR’s activities “do not amount to ‘transacting business’ in Kentucky.”

The actions of Churchill Downs’ general counsel “do not speak to defendant’s actions,” Heyburn said, noting that it’s “undisputed that defendants have never set foot in Kentucky to negotiate or for any other reason.”

He called it “irrelevant” that Churchill Downs took steps to fulfill its end of the bargain.

The judge also noted that the only face-to-face meeting occurred in New Jersey and the contract included no waiver of personal jurisdiction.

Heyburn relied partly on Caesars Riverboat Casino LLC v. Beach, 336 S.W.3d 51 (Ky. 2011), where the Kentucky Supreme Court set limits on the effectiveness of the state’s long-arm statute. Even before that ruling, “a contract with a Kentucky company did not alone support the exercise of jurisdiction over a nonresident defendant” under that statute, the judge said.

Heyburn also noted that NLR did not market its prospective online gaming program in Kentucky.

Churchill Downs also argued, again unsuccessfully, that a second ground for personal jurisdiction was that NLR, with its out-of-state activities, caused a tortious injury in the state.

There’s no evidence that NLR regularly solicited business in Kentucky, “periodic communications” about a single contract don’t constitute persistent conduct, and Churchill Downs’ own actions are not a factor, Heyburn pointed out.

On transfer, the case was assigned to U.S. District Judge Kevin McNulty and Magistrate Judge Michael Hammer, who sit in Newark, according to electronic records on Pacer.

Richard Getty of the Getty Law Group in Lexington, Ky., counsel to NLR and Ribis, said, “We thought the case clearly belonged in New Jersey.”

“Everything happened in New Jersey,” he added. “I frankly was surprised [Churchill Downs] filed the case in Kentucky.”

Getty said he anticipates filing counterclaims, but declined to provide details.

The defendants are represented locally by William O’Connor Jr. of McElroy, Deutsch, Mulvaney & Carpenter in Morristown, Getty said.

K. Gregory Haynes, of Wyatt, Tarrant & Combs in Louisville, Churchill Downs’ counsel, declined comment.

Contact the reporter at dgialanella@alm.com.