United States: KMT's David Klein Weighs In With Bloomberg On Future Of Daily Fantasy Sports In New York

Last Updated: December 3 2015
Article by David O. Klein

A one-hour Nov. 25 hearing in a New York courtroom may determine the future of the multi-billion dollar online fantasy sports industry (People v. FanDuel Inc., N.Y. Sup. Ct., No. 453056/2015, motion for preliminary injunction, 11/23/15 People v. DraftKings Inc., N.Y. Sup. Ct., No. 453054/2015, motion for preliminary injunction, 11/23/15 DraftKings Inc. v. Schneiderman, N.Y. Sup. Ct., No. 102014/2015, motion for preliminary injunction, 11/23/15 FanDuel v. Schneiderman, N.Y. Sup. Ct., 161691/2015, motion for preliminary injunction, 11/23/15).

Preliminary injunction motions in four interrelated lawsuits between the New York Attorney General's Office and the two leading online daily fantasy sports companies, FanDuel Inc. and DraftKings Inc., will be argued before Judge Manuel J. Mendez at the hearing. A courtroom victory for state attorney general Eric Schneiderman could shut down operations for the two companies in their largest market and put one out of business entirely.

Victory for the beleaguered fantasy sports companies means living to fight another day.

New York state comprises anywhere from 7 to 15 percent of the daily fantasy sports market.

According to David O. Klein, a partner with Klein Moynihan Turco in New York, there is more at stake in New York for FanDuel than its share of that business.

"I believe it's going to have a greater impact for FanDuel than DraftKings because FanDuel is headquartered here as well," Klein told Bloomberg BNA Nov. 24. Whether FanDuel's entire business could be shuttered "depends on the breadth of the order of the court, and associated interpretation," he said. "But to the extent that they're here and it's deemed to be illegal gambling or bookmaking, it may have broader implications."

For both companies, the suit could be a strong indicator of how the daily fantasy sports industry will be treated in the 43 other states in which it currently operates.

"A lot of state AGs from across the country generally take their cues from New York," Klein said. "The New York AG has historically grabbed headlines for taking big action against some of the biggest players in various industries, including the financial services industry, so this is a big one."

AG: Games Are 'Contests of Chance'

The court denied each company's temporary restraining order motions Nov. 16 but set an expedited Nov. 25 hearing date for their preliminary injunction requests. Schneiderman responded by filing enforcement actions Nov. 17 and seeking his own preliminary injunctions to bar both companies' operations during the suit (20 ECLR 1657, 11/25/15). Schneiderman's motions will also be heard.

New York's state constitution, Art. 1 § 9, prohibits gambling unless a specific exception applies. N.Y. Penal Law § 225.00(2) defines "gambling" as staking or risking something of value upon the outcome of a contest of chance or future contingent event not under the person's control or influence with the hope of receiving something of value if a certain outcome occurs.

In his brief for the state, Schneiderman argued that the definition encompasses daily fantasy contests, in which players pay entry fees to create lineups of athletes in actual games and compete with others based on the athletes' statistical performance.

Schneiderman contended that the entry fees and prizes are things of value that players stake and hope to receive. The outcomes of sporting events, he argues, are both contests of chance and future contingent events not under players' influence.

Schneiderman gave the example of a football game between Detroit and Seattle in which a Detroit ball carrier fumbled inches short of scoring a touchdown, although the play should have been disallowed due to a technical rules violation by Seattle. Those few inches and that uncalled penalty, he said, resulted in one DraftKings player winning a $1.2 million jackpot and another player losing it.

Companies: 'Games of Skill'

FanDuel, in its brief to the court, argued that daily fantasy contests are games of skill, not chance. Its briefing cited a Massachusetts Institute of Technology math professor's research indicating:

  • lineups of actual FanDuel users overwhelmingly defeat randomly selected lineups chosen within the constraints of the game;
  • after an initial learning period, skill levels largely persist over time, with good players tending to stay good and bad players tending to stay bad; and
  • experience and practice have a significant effect on results that wouldn't be expected in a game of chance.

FanDuel contrasted daily fantasy games with traditional season-long fantasy sports, which Schneiderman concedes are legal in New York. FanDuel argued that daily fantasy requires more skill than season-long games because all daily players choose from the entire universe of athletes rather than divvying up players in a draft. Less chance is involved, it argued, because factors such as weather reports, injuries and team motivation based on record are better known immediately before a day of real-life contests than they are for season-long players drafting months ahead of late-season games.

Players' fees for fantasy sports contests aren't wagers, FanDuel argued, but instead are entry fees for preannounced prizes. Citing Humphrey v. Viacom, 2007 BL 38423 (D.N.J. 2007) decided under a similar New Jersey statute, FanDuel compared its contests to spelling bees, beauty contests or livestock exhibitions that charge fees and award prizes. This common law understanding, it argued, has also been codified in the federal Unlawful Internet Gambling Enforcement Act of 2006, 31 U.S.C. § 5361-5365.

DraftKings's arguments closely track those made by FanDuel, but DraftKings additionally emphasized in briefing that daily fantasy companies have been operating in New York for years with no indication that the state thought they were operating illegally.

DraftKings also said that Schneiderman's discussions of daily fantasy companies using gambling slang and engaging in similar marketing to gambling enterprises were distractions.

Appeals Expected

DraftKings' attorney David Boies, a partner at Boies Schiller & Flexner LLP in New York, declined to predict in a Nov. 20 media briefing when Judge Mendez might rule on the parties' interconnected motions.

Klein agreed that the court could rule at the hearing or may take the decision under advisement for an unknown period of time. In any case, the only certainty, Klein said, is that litigation over the injunction — let alone the merits of the case — won't end with the hearing regardless of the result.

"Either way, I expect there's going to be an immediate appeal," Klein said.

Source: Bloomberg BNA Electronic Commerce & Law Report

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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