United States: NY Daily Fantasy Sports In Jeopardy After Gambling Ruling

Last Updated: November 7 2018
Article by David O. Klein

Law360 (October 31, 2018, 5:16 PM EDT) — A New York state court's recent ruling that daily fantasy sports contests are gambling exposes operators like DraftKings Inc. and FanDuel Inc. to legal risks that were thought to be resolved and may force the companies to lobby for an amendment to the state constitution to save their businesses in the Empire State.

Daily fantasy sports, or DFS, operators have been offering their pay-to-play contests online and through mobile apps to New York residents for more than two years, since a 2016 law ended legal action by the New York Attorney General's Office alleging the contests were illegal gambling. The law defined DFS contests as games of skill and thereby outside the definition of illegal gambling under the state penal law.

But a judge ruled late Friday that lawmakers could not simply work around the state's constitutional limits on gambling, putting the continued legal viability of DFS contests in New York, a crucial market for the industry, in serious question once again.

"It is a major setback," said gambling law attorney David O. Klein, managing partner at Klein Moynihan Turco LLP. "It is a ruling that says absent a constitutional amendment, what the state has done to authorize fantasy sports within the jurisdiction of the state of New York is illegal, given the constitutional prohibition against gambling in the state."

In his ruling, acting Justice Gerald W. Connolly of the Albany County Supreme Court recognized that DFS contests — in which participants compete for cash prizes by assembling imaginary rosters of athletes from sports leagues in competitions that are scored based on the real-life performances of those athletes — require a significant amount of skill, suggesting that lawmakers could find they do not fall in line with the penal code definition of gambling.

But ultimately, he noted, the winner of the contests comes down to the performance of the real-life athletes outside the control of the participants. Even if skill is dominant, he said, the contests fall within the types of games prohibited by the constitution, namely "lotter[ies] or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling."

"The intentionally broad language and application of the constitutional prohibition, the common understanding at the time and now of the meaning of the prohibition and of the particular words 'bookmaking' and 'gambling,' and the undisputed fact that success in [DFS] is predicated upon the performance of athletes in future contests all lead to such a conclusion," the judge said.

The ruling comes in a lawsuit filed in October 2016 by a group of residents who say they are victims of gambling and oppose its proliferation. The lawsuit had lurked as a potential legal issue, but with the 2016 enabling law, DFS continued to operate, bringing in more than $3 million in tax revenue in 2017.

"I don't think for people who really follow this the outcome was really a surprise," said Karl J. Sleight, a New York-based gambling law attorney at Harris Beach PLLC. "The petitioners picked up the torch essentially left by the attorney general's office the first time around, which kind of went away as part in parcel of legislation where the legislature tried to carry the argument [that DFS] is not gambling."

Having fought the attorney general's office to gain legal status for DFS, DraftKings and FanDuel are now at its mercy, as the office is now tasked with defending the authorization law because the defendants in the lawsuit are all state authorities.

Gambling law attorney A. Jeff Ifrah of Ifrah Law PLLC said the decision is similar to the federal case DiCristina v. U.S. involving poker. In that case, a judge had found that the federal Illegal Gambling Business Act does not apply to poker, which is not specifically listed in the act, because poker is a game of skill, not chance, and is therefore outside the definition of gambling. But the Second Circuit reversed in 2013, saying the IGBA does not make a distinction between games of skill and games of chance as the New York penal code definition does.

Similarly, in Friday's DFS ruling, the judge on one hand recognized that the contests are games of skill, and therefore not gambling, but on the other found that they still fit within the types of games prohibited by the state constitution.

But here, Ifrah said, state lawmakers have made a distinction between what is and is not gambling under the penal law that the judge is essentially rendering meaningless based on a broad interpretation of the state constitution.

"What this judge is doing is basically erasing the entire game of skill exception, a long-recognized exception, when that game involves sports," Ifrah said, noting that ruling could have an impact beyond fantasy sports.

"While it is true that there are games specified in the constitution, those games originated decades ago. No one conceived of online skill games that would be based on questions around sports," Ifrah said. "To simply say that, where a constitution references betting pools or pool wagering, that therefore it covers every single form of games from here on in kind of ignores technology."

In the short term, there is likely to be an appeal. In the long term, experts say the state may have to either convince the state's highest court that the Legislature can legalize the contests without a constitutional amendment, or pass an actual amendment, a long process requiring legislative approval in two separate sessions and a statewide voter referendum.

The last thing the DFS industry likely wants to deal with is more legal questions over its contests, particularly as both DraftKings and FanDuel now run sportsbooks in some states following the U.S. Supreme Court's Murphy v. NCAA decision in May allowing it.

New York in 2013 amended its constitution to allow casinos in the state, a move that may open the door for sports betting in the state, althrough Friday's ruling on DFS may raise questions about that.

"Ultimately, if I were a betting man, the state would take this as an opportunity to take up a constitutional amendment for this and for sports gambling at the same time," Klein said. "This may fast-track things. Kick it into gear more than they have up until now and kill two birds with one stone, so to speak."

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