FRANKFORT — In a setback Friday for the state's horse racing industry, the Kentucky Court of Appeals turned down a lower court ruling that allows wagers on previously run horse races.

The appellate court, in a 2-1 decision, sent the case back to Franklin Circuit Judge Thomas Wingate "for further proceedings" on the issue known as instant racing. Voting in the majority were Senior Judge Joseph Lambert, a former chief justice of the Kentucky Supreme Court, and Judge Janet Stumbo. Judge Sara Combs strongly dissented.

Kentucky Downs in Franklin, the only track in the state with instant racing, plans to continue despite the ruling.

"It's business as usual," said Bill Flesher, spokesman for the track.

He said instant racing has generated nearly $2 million for purses and breeders' awards.

"As Kentucky Downs continues to operate instant racing, we take very seriously our role in improving the economy and creating jobs and look forward to our race meeting in September when we will offer record purses and breeders' awards," he said.

But opponents say instant racing is essentially the same as slot machines, which are illegal in Kentucky. Proponents say it is simply another form of pari-mutuel wagering because it is based on actual horse races.

The appeals court ruling orders Wingate in a new trial to allow the Family Foundation of Kentucky, which is challenging the legality of instant racing, to "engage in discovery" in the case.

That is the formal process of exchanging information between the parties about witnesses and evidence they'll present at trial.

Discovery enables the parties to know before the trial begins what evidence may be presented.

The request by the Family Foundation to Franklin Circuit Court to engage in discovery "was relevant and necessary to the court's determination, and that denial of discovery constituted an abuse of discretion," said the appellate court.

The Family Foundation argued that instant racing bets are illegal because they are not truly pari-mutuel and the races are not live.

Lexington attorney Stan Cave, who represents the Family Foundation, called the appellate court ruling "a victory for transparency."

"It will enable the public to know what is going on with instant racing," he said. "Anyone interested in public transparency should be very pleased. I am."

Martin Cothran, senior policy analyst for The Family Foundation, said in a statement, "Finally, we have a level playing field. Until now, we had been relegated to a back seat in the courtroom, unable to do discovery and ask any questions."

Cothran said "relevant questions were kept under a shroud of secrecy. With an issue as ripe for corruption as expanded gambling, the public has a right to question, know and understand the underlying facts relating to the gambling activity and the special interests involved."

Gov. Steve Beshear said in a statement that he is "confident that the authority of the Kentucky Horse Racing Commission" to authorize instant racing will be affirmed.

"In the meantime, I am pleased that the status quo has been maintained so our race tracks can continue to offer these exotic wagers until the case is decided."

Beshear said lawyers for the various parties are reviewing the appellate court ruling and evaluating what to do next in court.

The racing commission said in a statement that the appellate ruling "simply returned the case to the circuit court for further proceedings."

The decision will not affect its daily operations, the commission said.

The commission has allowed betting on instant racing since last September, when Kentucky Downs opened a gambling parlor at the track near the Tennessee border, about 35 miles north of Nashville.

Franklin Circuit Court ruled in December 2010 that the commission had the authority to allow the bets.

Kentucky Downs has taken in more than $100 million in wagering on its instant racing, which resemble video lottery terminals.

State Sen. Damon Thayer, R-Georgetown, who has worked on legislation to try to legalize instant racing, said instant racing has exceeded expectations at Kentucky Downs.

"The appellate court ruling will have a negative effect on purses and horse funds in the state," said Thayer.

He predicted that the issue eventually will be decided by the Kentucky Supreme Court, but said the appellate court ruling will slow down other tracks' interest in it until the issue is resolved.

Ellis Park in Henderson won approval in October to add the slot-like games but has not yet opened a parlor.

In her dissent to Friday's ruling, Judge Combs agreed with the circuit court that "all the issues before it were purely legal issues precluding the need for—or recourse to—discovery."

She also said the racing commission has legal authority to approve instant racing regulations.

Combs agreed with the Family Foundation that the state cannot tax instant racing.

Jack Brammer: (859) 231-1302. Twitter: @BGPolitics. Blog: bluegrasspolitics.bloginky.com