From Fantasy to Reality: DraftKings and FanDuel versus the New York Attorney General

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

Final NYAG Fanduel Letter 11-10-2015

New Jersey Sports Betting Case Will Be Reheard

By Joan P. Sullivan

New Jersey won a victory yesterday (10/14/15) when the full Third Circuit Court said that it will revisit a 2-1 panel decision striking down a law that would legalize some sports betting in New Jersey.  The court vacated a decision rendered this past August which held the state violated the federal Professional and Amateur Sports Protection Act of 1992. The state urged the court to reconsider claiming the ruling is inconsistent with two prior decisions.  Stay tuned….

Karl Sleight’s Perspectives of American Pharoah at the Travers Stakes

By The Editorial Team

It seems as if the Travers Stakes at Saratoga Race Course is dominating the conversation as we draw closer to tomorrow’s race.  This morning on the The Capitol Press Room with Susan Arbetter, Karl J. Sleight, leader of the Harris Beach Racing and Gaming Industry Team, noted the activity this weekend at Saratoga is taking the worldwide destination for racing to a new level with the appearance of Triple Crown winner American Pharoah. Karl had watched with thousands of other fans American Pharoah galloping in preparation for Saturday’s race.  The thoroughbred looked strong.  But Saratoga has a long history of being a competitive course where some of the greatest horses of all time have not won.  Surely, the race will be an attention getter.  Karl will appear on Capital Tonight with Liz Benjamin tonight to talk about Travers and other topics on racing and gaming in New York.

Susan Arbetter to Interview Karl Sleight about American Pharoah

It’s the talk of the horse racing circuit and beyond: Triple Crown winner American Pharoah’s appearance tomorrow at the Travers Stakes at Saratoga Race Course.  Karl J. Sleight, leader of the Harris Beach Racing and Gaming Industry Team, will offer his insights and preview the race this morning at 11:00 a.m. on The Capitol Pressroom with Susan Arbetter.  Be sure to tune in.

New Jersey Loses its Fight to Legalize Sports Gambling

By Joan P. Sullivan @jsullivan_HB

A hot topic at this month’s Saratoga Institute on Equine, Racing and Gaming Law Conference was the question of legalized sports betting.  Yesterday, the U.S. Court of Appeals for the Third Circuit struck down a New Jersey betting law (See NCAA, et al v Governor of New Jersey, et al).  In a 2-1 decision the court found that the New Jersey law allowing betting at casinos and racetracks violates the federal Professional and Amateur Sports Protection Act of 1992 because it “authorizes by law sports gambling.”  PASPA was passed by Congress in 1992 and prohibits state-sanctioned sports betting.  This was a win for professional sports leagues and the NCAA.

The court acknowledged New Jersey’s salutary purpose in attempting to legalize sports gambling to revive its troubled casino and racetrack industries and further acknowledged that PASPA is not without flaws such as the spread of illegal sports gambling and a lack of transparency.

The court noted that those states wishing to legalize sports betting should seek Congressional action noting that “[u]nless or until that happens, [the court] is duty-bound to interpret the text of the law as Congress wrote it.”

Karl Sleight, Allen Molnar and Mitch Pawluk Presenting at Saratoga Institute on Racing and Gaming Conference

By The Editorial Team

On August 11 and 12, 2015, Karl Sleight, Allen Molnar and Mitch Pawluk will be presenting at the Saratoga Institute on Equine, Racing and Gaming Law Conference at the Saratoga Hilton in Saratoga Springs.

Mr. Sleight will moderate a panel on “Internet/Mobile/Social Gaming and Virtual Currencies.” Mr. Molnar will participate in a panel discussion on “Know Your Customer: Anti-Money Laundering and FinCEN Compliance.”  Mr. Pawluk  will participate in a panel discussion on “The National Picture: Horseracing’s Place in the Betting World.”

Harris Beach is a sponsor of the Institute. The Saratoga Institute on Equine, Racing and Gaming Law Conference, organized by the Government Law Center of Albany Law School, is an annual program dedicated to exploring the legal and public policy implications of racing and gaming in New York state and the nation.

NYRA Watch: State Lawmakers Call for End to Reorganization Board

By The Editorial Team

Here at the blog, we aim to continuously keep you apprised of what is coming next in both the racing and gaming industries.  With three casino applicants recommended and awaiting licensure, we will be turning a portion of our attention to the next big issue—the future of the New York Racing Association (NYRA) and racing in New York state.  We will continue to cover the latest news and provide commentary on all things NYRA as the Reorganization Board embarks on what is expected to be a new chapter. Want to follow along?  Subscribe to the blog by entering your email on the right hand side of our home page to receive notifications of new blog posts by email.  Alternatively, if following us on Twitter, search the hashtag #NYRAwatch for the latest news and commentary.

As first reported by the Albany Times Union, a number of New York State Senators and Assemblymembers signed a letter this week (below) calling for Governor Andrew Cuomo to “move as quickly as possible to transition [the NYRA Reorganization Board] back to a nonprofit racing association.”  As readers of this blog will recall, in 2012 the previously private, not-for-profit NYRA was replaced by a publicly-controlled NYRA Reorganization Board consisting of appointees of the governor and legislative leaders (prior coverage: “Governor Cuomo Signs Legislation to Establish NYRA Reorganization Board”).  The legislation creating the Reorganization Board only called for its term to last three years. This past spring, as part of state budget negotiations the term was extended to four years (prior coverage: “NYRA’s Privatization Addressed in New York State Budget”).

This week’s letter calling on the governor to transition NYRA back to a private, not-for-profit racing organization cites concerns that the temporary reorganization board does not have the ability to make necessary long-term decisions essential for continued success in the racing industry. In particular, the letter raises concerns over the potential negative impact on the Saratoga Race Course, which opened its 40-day meet last Friday (July 24, 2015).  Notably, the letter was signed by both chairs of the legislative committees overseeing racing in New York state—Senator John Bonacic and Assemblymember Gary Pretlow.  What lies ahead for NYRA and racing in New York state is unknown.  The only thing you can bet on is that we will be here following the latest advancements and keeping you apprised of the issues of the day.

NYRA Letter to Gov. Cuomo

What’s Next for American Pharoah?

By Karl J. Sleight (@ksleight_hb)

American Pharoah’s performance in the Belmont Stakes cemented his place in the pantheon of American racing history alongside immortals like War Admiral, Citation, Secretariat, Seattle Slew and Affirmed. The feat was 37 years in the waiting and no one knows whether it will be another 37 years before we see his likes again. Or, are we about to enter another golden age of racing, like the 1970s when there were three Triple Crown winners. Time will tell, but the immediate question for many is: What’s next for American Pharoah?

First things first. It will take a few days to see how American Pharaoh came out of the race. Things like energy level and regaining his normal eating habits are telltale signs of what this race meant to American Pharoah physically. Assuming there are no issues there, published reports indicate that before the Belmont Stakes AP’s owners, the Zayat family, struck a deal with Coolmore Ashford Stud the Ireland-based breeding operation that operates an arm in Kentucky. The reports indicate that the Zayat family has retained control over American Pharoah’s racing career through 2015, and thereafter he will become a stallion at Coolmore. Cutting the deal before the Belmont was another big bet by both Coolmore and the Zayat family. AP’s value if he had not won the Triple Crown would certainly be less, but now as the only living Triple Crown winner in several generations of equine history to spread his genes and imprint the breed takes it to another level.

Although the details of the breeding rights deal were not released, the business pressures that now exist will be significant because of the natural concerns and risk that exist with horse racing. To give a sense of these elements, if American Pharoah continues on the logical path, the soonest we might see him race is in August possibly at Saratoga (Jim Dandy/Travers), Monmouth (Haskell) or Del Mar (Pacific Classic). Thereafter, there could be a race against older horses, and then the logical final race of American Pharoah’s career would be the Breeders’ Cup Classic on October 31 at Keeneland in Lexington, Kentucky. If American Pharoah won all of these races, he would add approximately $3-4 million to his earnings.

By contrast, once American Pharoah enters stud he is far more profitable. Each opportunity to breed to American Pharaoh will conservatively be priced at $150,000. The rules of thoroughbred racing do not allow artificial insemination, so these are live “covers” thus limiting the annual breeding opportunities, conservatively to 150. This does not take into consideration shipping AP to the Southern Hemisphere where the breeding calendar (opposite of the Northern Hemisphere calendar) allows for even more opportunities. The conservative math comes out to $22.5 million per year in gross revenue. Assuming he has a breeding career that (again conservatively) lasts 15 years, that’s $337.5 million in gross revenue. Variables including the success of his offspring on the track will affect this, but since the best mares in the world will be coming for a “date” with American Pharoah, the chances of his progeny having success on the race track are very good. With that, his value will increase and a stud fee matching that of legendary stallion Storm Cat ($500,000 per cover) is clearly within reach, as is the opportunity to generate career gross revenue of over a billion dollars.

Back to the business pressures. American Pharoah is the messiah that the racing world has wanted for 37 years. The hope is that a horse capturing the Triple Crown would reignite interest in horse racing, broaden the fan base, and encourage people of means to become owners and participate in the “Sport of Kings.” To see the 90,000 fans at Belmont cheering on Saturday, there may be some degree of logic to that. The statements by Mr. Zayat immediately after the race that he fully intends to race AP for the remainder of 2015, and not immediately retire him to stallion duty has to make everyone in horse racing truly grateful. With the kind of money that is waiting for Coolmore beginning with the 2016 breeding season, lots of folks will be holding their breath and even the most minor hiccup in American Pharoah’s training regime could upset the stated intent to race for the remainder of the year.

Let’s hope for smooth sailing and a few more races to see one of the greatest athletes in American racing history do what he clearly was born to do. As for his next race, if the Zayat family is looking for challenges left to conquer, the historic Saratoga Race Course would seem to offer the most. Both Man O’ War and Secretariat lost at Saratoga. Will we ever find out how American Pharoah would fair at Saratoga? It’s now up to the Zayat family. Stay tuned.

Harris Beach Racing Blog Predicted Triple Crown – In January!

By The Editorial Team

One of our favorite blog posts is our “The Year in Preview” edition, which we post at the beginning of each calendar year. The annual post identifies the big issues for the coming year in racing and gaming and gives our readers a sense of how we think they will play out. The issues we take a hard look at are a mix of legal, policy and political, with a little fun sprinkled in. In our inaugural edition in 2013, we waded into the creation of the new Gaming Commission, budget issues impacting racing and gaming, as well as the constitutional amendment to allow commercial casinos. In 2014, we forecasted the year long time line of events in the casino selection process.

Armed with a sense of fearlessness from our previous experience, frankly, we outdid ourselves for 2015. We are still waiting to see if many of our other predictions for this year come true, but we know for better or worse one of them we be settled late in the afternoon this Saturday. Here’s is the conclusion of our blog entitled “2015: The Year in Preview.”]

Our boldest prediction for 2015 is that on June 6 at the Belmont Stakes, for the first time since Affirmed in 1978, the world will celebrate a Triple Crown winner. This equine athlete will take the nation by storm and the name of the Triple Crown winner is ______________. Hey, c’mon, we’re bold, but we’re not that bold.

Cheers for a great 2015. Enjoy.

– 2015: The Year in Preview, January 5, 2015

Like millions of people around the world, we’ll be rooting for American Pharoah to make our prediction come true. After overcoming a far outside post in the Kentucky Derby, the rail post in the Preakness, and most importantly the deepest group of 3 year olds in the last 15 years, if he is successful in “The Test of the Champion” he will be a true champion and deserving of joining the likes of War Admiral, Citation, Secretariat, Seattle Slew and Affirmed as an American racing legend.

Good luck to his connection, and Go Pharoah !


FinCEN’s Casino Crackdown Hits Vegas’ Poker Tables

By Allen E. Molnar and Christopher W. Hinckley (@Chinckley_HB)

Money talks in Las Vegas, but cash always seems to speak a little louder. Whether it’s giving  a nice tip to your server even though your drink was free, one to your blackjack dealer for “giving” you a winning hand even if the cards were entirely random, or a maitre d’ for helping you find a better table, regular visitors to Vegas find that showing a little gratitude can go a long way.

Cash commonly has been used at poker tables to keep games “in play” when chips run out. Though permissible casino floor games are officially played with chips, veteran players have learned that it’s never hard to add additional currency to a pot, especially if you’re doing particularly well and don’t want to take a break to change your chips. Dealers, pit bosses and security officials all seem agreeable with this tradition – regularly declaring “cash plays” whenever a player pulled out a bill.

Starting this spring, however, most major Strip casinos have silenced this voice in poker rooms, and now require that all poker games be played entirely with chips.

In March, MGM Resorts announced that, starting April 1, cash will no longer be playable at its nine poker rooms. It joined Aria and Bellagio in making this switch, and within a month, all of the Station Casinos, Wynn, Venetian and Caesars Palace followed suit. None of them made official proclamations about the switch – guests simply encountered the change, and it was also reported on by local gaming media.

However, the move wasn’t entirely unexpected due to increasing scrutiny being given the gaming industry by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and extra attention to anti-money laundering (AML) initiatives. FinCEN has been increasingly aggressive in encouraging casinos to account for every transaction, and for sizeable winners to complete paperwork before being presented with their winnings.  (Most recently, FinCEN issued uncommon “Geographical Targeting Orders” affecting businesses in certain zip code zones of Los Angeles and Miami it deemed particularly vulnerable to money laundering activity through the regular use of cash by customers for “large-ticket” purchases.  Businesses operating in the designated geographical locations now must report cash transactions to the government in greater detail, and at lower threshold amounts, than AML regulations ordinarily require.)

While casino owners may quietly grumble about the increased regulation and gradual shift from the city’s traditional “anything goes” reputation, they also seem willing to be seen as complying with still-evolving gaming laws.

Poker in poker rooms especially has stood out as a table game with slightly more lax views on playing with cash vs. chips. Players adding $100 bills to their bets were not uncommon. It certainly sweetened the pot and was a simple work-around for tables with a maximum amount of chips per bet.

But it also created security concerns – besides the potential risk of players not reporting any cash winnings, it also increased the potential for theft or accidents – it’s easy to identify which player may have dropped the blue chip, but harder to reclaim a missing $100 bill.

Players will likely adjust to the new chips-only rule adequately. They may remember to change extra money before a big tournament, or casinos may hire extra runners to change money when needed. What’s less known is how this change will impact the World Series of Poker, traditionally held at Caesars Palace. The role of currency for supplemental bets seemed like part of that event’s format.