Breaking down the legal, practical and political issues facing the daily fantasy sports sector in New York
By: Karl J. Sleight
The sudden entanglements facing daily fantasy sports (DFS) industry leaders DraftKings and FanDuel based on the New York Attorney General’s (NYAG) investigation and cease and desist letter is not a surprising development. That is not to say there is a clear cut right or wrong answer for the latest chapter of government versus free enterprise. The DFS world was built on an interpretation of federal law and had the challenging task of operating a national business platform against the backdrop of a patchwork of state-based gambling laws, regulations and regulatory bodies. The state law question has been smoldering below the industry’s surface for some time. Now the battle is joined as DraftKings and FanDuel have preemptively initiated a legal action against the NYAG. The immediate question is what will happen next?
To understand where the DFS sector is today, a brief primer on its meteoric rise to prominence is helpful.
In a typical DFS contest, the player selects a series of real life players from a major sports league, assembles a lineup and competes against others doing the same. Points per player are earned based on the real life on field performance of the athlete. The scores are tabulated and the outcomes (and payouts) are determined by the highest total score of the fantasy team and ranking or placement in the contest. In short, the better your chosen players do in real life, the better for your fantasy team.
DFS: Game of Skill or Chance?
The federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) was drafted to allow the playing of internet fantasy contests based on “relative knowledge and skill of the participants.” An analysis of the historical context and legislative intent behind this linchpin provision that the DFS sector relies on often leads to differing views and opinions among attorneys practicing in the area; however, in this exception was born the legitimizing concept of DFS as a game of skill rather than a game of chance. The federal government has not aggressively challenged the industry’s interpretation.
Mainstreaming the DFS model was a boon for many interested in the fundamentals of changing viewership of major sports league teams. In the past, fan allegiance was hard wired to a particular team. Fans described themselves, for example, as “a Giants fan” or “a Bills fan.” With the advent of DFS, now the individual performance of players in heretofore unwatched games became important and spurred viewership in these games. The model soon spread to other major sports. To date, the momentum behind the explosive growth of the DFS sector had muted concerns over the federal statute.
The pitfalls and recent difficulties facing the DFS industry are based less on the federal law and far more on the patchwork of state gambling laws, including the widely varied interpretations of gambling, lotteries and related conduct. Gambling has traditionally been a state regulated activity and the extent to which the definition of gambling includes the distinguishing element of chance versus skill varies from state to state. Over the last several weeks, the application of state law to the DFS business has triggered an uneven state-level response, including a reported grand jury investigation (Florida), licensing requirements (Nevada), increased regulation (Pennsylvania) and now bet the company litigation (New York).
NYAG’s Legal Action
The legal action pitting the New York Attorney General against Draft Kings and Fan Duel is no ordinary piece of litigation. A review of the Attorney General’s “cease and desist” letter of November 10, 2015 is insightful. The letter appears to be designed to fulfill the five day notice provisions of the state’s General Business Law. In New York, before the NYAG may sue a company, the company is required to be put on notice, in order to allow the company to offer any reasons why such a lawsuit should not occur.
However, in asking DraftKings and FanDuel to terminate their operations in New York, the AG heavily cites the New York State Constitution and the state Penal Law. Notably, in New York the AG has very little original jurisdiction over criminal acts, where the prosecution of crimes was ceded more than 100 years ago to the district attorneys in the state’s 62 counties. The AG’s criminal jurisdiction can be triggered by a letter from the head of a state agency (i.e., State Police, State Gaming Commission, etc.) asking for an investigation pursuant to Executive Law § 63(3). Without such authorization, unless the AG can find a violation of the Martin Act or other specific statute granting his office criminal jurisdiction, the AG is left to civil remedies.
The cease and desist letter appears to amalgam the legal position that DFS is illegal gaming to the notion that the company’s statement that it is engaged in a legal activity constitutes a “misrepresentation” and “persistent fraud” under the New York civil statutes.
A pure legal analysis might lead to a conclusion that DraftKings and FanDuel have a fighting chance, although other practical concerns exists, most importantly the published report that the AG is reaching out to the lifeblood of any business model – its payment processors (Pay Pal) and perhaps its financial partners. The heavily regulated financial sector has a traditionally low tolerance for unresolved issues potentially impacting its own compliance obligations. This tactic has become common place in NYAG cases and it will be interesting to see whether these extrajudicial activities draw the scrutiny of a court as the case progresses, and whether boundaries are set in a situation that might rise to the level of tortious interference in a dispute between non-governmental civil litigants.
Also according to published reports, the companies are presumably taking steps to segregate their users by jurisdiction by requiring state driver license information to be inputted as part of the log-in process (DraftKings), and shore up its legal flank by not accepting new deposits into accounts of its New York customers (FanDuel).
Future timelines and final determinations will be dictated by how the litigation is framed. For instance, whether styled as a traditional lawsuit or as a “special proceeding,” a truncated legal action that acts as a summary proceeding or declaratory judgment. Critical to the case will be the resolution of whether DFS is gambling under New York law, and that will drive not only the New York case but the conversation of the future of the DFS industry into the future.
Legislative Push to Change Gambling Law Underway
According to published reports a coordinated public relations and lobbying effort is underway to change the current state gambling laws. Recent trends in favor of gambling in NewYork, including a constitutional amendment to allow commercial casinos and the passage of regulations designed to allow for wider use of slot-like electronic video lottery terminals (VLTs) suggests a legislative fix may be in the wings. With estimates of 600,000 to a million DFS players in New York, some of whom presumably vote, the politics of the situation cannot be ignored.
The timing of the legislative effort and the court proceedings may be out of sync for the near term. The state legislature does not return to Albany until January, 2016, and if the current court proceedings lead to a temporary restraining order (TRO) prohibiting the DFS companies from operating in New York, DFS fans may be faced with a blackout period in New York that could last for some time.
Karl J. Sleight is the Leader of the Harris Beach Racing and Gaming Industry Team and a former New York State Assistant Deputy Attorney General