United States: DraftKings, FanDuel Settle With New York Attorney General Pending Legislative Result

Last Updated: March 30 2016
Article by David O. Klein

DraftKings Inc. and FanDuel Inc. will stop allowing New York-based consumers to participate in their online daily fantasy sports contests under two virtually identical settlements with New York state, Attorney General Eric T. Schneiderman announced March 21.

Schneiderman brought enforcement actions against each company in November 2015, saying the companies were violating the state's anti-gambling laws. The settlement places all litigation on hold through June 30 to give the state legislature time to pass a comprehensive regulatory scheme. If no legislation passes, the litigation will resume in September.

The settlement is a ''big win'' for DraftKings and FanDuel, David O. Klein, managing partner at gaming and Internet law firm Klein Moynihan Turco in New York, told Bloomberg BNA March 21. It paves the way for the companies to return to the New York market in the long term, likely with application and registration fees that would provide a barrier to entry for smaller companies.

''We may end up with a duopoly, and then this all works for them if the industry is profitable going forward,'' Klein said.

But Schneiderman also got ''complete capitulation'' from the companies, Daniel Wallach, a shareholder with Becker & Poliakoff in Ft. Lauderdale, Fla. who specializes in sports and gaming law, told Bloomberg BNA March 21. ''The New York attorney general got everything
he asked for in the cease and desist letters,'' Wallach said.

For Schneiderman, regulation would likely provide sought-after consumer protections in areas such as segregating player funds, excluding minors and insiders from participation and allowing problem gamblers to self-restrict their own participation.

False advertising and consumer fraud claims against the companies are unaffected by the settlement.

''We will continue to work with state lawmakers to enact fantasy sports legislation so that New Yorkers can play the fantasy games they love,'' DraftKings said in a statement.

''We are proud to be one of New York's largest startup companies, and while it is disheartening for us to restrict access to paid contests in our home state, we believe this is in the best interest of our company, the fantasy industry and our players while we continue to pursue legal clarity in New York,'' a FanDuel spokesperson said in a statement.

Legislation Pending.

Five bills that would legalize and regulate daily fantasy sports are currently pending in
the New York legislature. The settlement is an indication that the companies have a strong sense that one of those bills will pass, Wallach said.

''DraftKings and FanDuel certainly must believe that legislation is very likely,'' Wallach said. ''Otherwise they wouldn't have agreed to this deal.''

A number of prominent New York lawmakers support legalizing daily fantasy sports, Wallach said, including state Sen. John Bonacic (R), who chairs the senate's Racing, Gaming and Wagering Committee. Bonacic has sponsored a bill, S. 6793, that would require companies to pay a one-time $500,000 registration fee and would provide basic consumer protections.

Schneiderman Investigates, Sues.

After announcing an investigation in October, Schneiderman sent both companies cease and desist letters in November, ordering them to stop accepting contest entries from New York-based customers. The websites each responded with lawsuits seeking a declaration that their contests aren't gambling under New York law (20 ECLR 1627, 11/18/15). Schneiderman brought enforcement actions against each company in response (20 ECLR 1657, 11/25/15).

At a consolidated Dec. 11 hearing, Judge Manuel J. Mendez issued a preliminary injunction against both companies from operating in the state, but an appellate court put the order on hold later that day (20 ECLR 1732, 12/16/15). Both sides have briefed the appellate court on whether it should maintain or overturn the injunction. The settlement stipulates putting the appellate proceedings on hold until September unless legislation passes in the meantime.

At a March 21 press conference, Schneiderman said he expects other daily fantasy sports operators to take heed of the settlement and act accordingly. ''We're hopeful that the other daily fantasy sites will stop doing business in New York as well,'' Schneiderman said.

Yahoo Inc. is the most prominent other company in the daily fantasy sports market.

Schneiderman also said he doesn't expect New York consumers to have difficulty withdrawing any funds they currently have in DraftKings or FanDuel accounts.

''Anyone who's already made a bet, they're not going to lose their money,'' Schneiderman said.

Other Claims Remain.

The settlement only addresses claims that daily fantasy sports contests are illegal in New York. Additional claims involving false advertising or consumer fraud theories will go forward in the courts unaffected.

But those claims carry much less potential risk for the websites, Wallach said. Although Schneiderman could still win a damages award, Schneiderman can't seek disgorgement and restitution of every dollar risked in an online contest, as he sought under the illegal gambling
theory. Disgorgement of that magnitude could have been an ''existential threat'' to the companies, Wallach said.

Consumers are separately pursuing damages claims against the companies in at least 80 class actions recently consolidated in federal court in Massachusetts (21 ECLR 163, 2/10/16).

Reproduced with permission from Electronic Commerce & Law Report, 21 ECLR 403 (Mar. 23, 2016). Copyright 2016 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

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David O. Klein
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