NY Decision Could Have Ripple Effect On Daily Fantasy Sports

The murky legality of daily fantasy sports (DFS) remains unclear after last week's special hearing in the courtroom of New York Supreme Court Justice Manuel Mendez.

The hearing was the result of a monthlong back-and-forth between the two biggest DFS operators — DraftKings and FanDuel — and New York State Attorney General Eric Schneiderman. On Nov. 10, Schneiderman sent cease-and-desist letters to both companies, ordering that they shut down their New York operations as they were in violation of the state's anti-gambling laws.

A denial of both operators' subsequent requests for a temporary restraining order, a motion by Schneiderman for the permanent injunction of DFS games in the state and the added stress of additional legal challenges — which brought professional sports leagues into the fold — in Florida, and both companies found themselves battling their adversaries in court on the eve of the American holiday that most promotes togetherness. After hearing oral arguments from all three parties, Mendez reserved his right to rule, stating that a ruling will come in the upcoming weeks.

At the heart of the matter is whether the intake of entry fees on both sites rise to the definition of gambling under New York Penal Law § 225.00 (et. seq):

"Gambling." A person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of certain outcome.

"Contest of chance" means any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon any element of chance, notwithstanding that skill of the contestants may also be a factor therein. [...]"

The attorney general's office is arguing that DFS games materially rely on chance and the wagering of money on the games of chance equates the practice to gambling. Gambling, in and of itself, is illegal in New York, without proper authorization. In an effort to curb widespread illegal gambling activity, rather than focusing on the gamblers themselves, New York has a law that imposes criminal liability on those operations involved in illegal gambling. It is this law for which the world of DFS has drawn Schneiderman's ire:

"Advance gambling activity." A person "advances gambling activity" when, acting other than as a player, he engages in conduct which materially aids any form of gambling activity... One advances gambling activity when, having substantial proprietary or other authoritative  control over premises being used with his knowledge for purposes of gambling activity, he permits such to occur or  continue  or makes no effort to prevent its occurrence or continuation.

Open and shut case? Well, not quite.

Justice Mendez reserved his right to rule, in part because there is an open question as to how much skill (or chance) is utilized by players in DFS. FanDuel and DraftKings have continued to argue that the games not only materially rely on skill, but that DFS players have significant influence and control over the outcomes. That argument was reiterated during the hearing, with a season-long fantasy football (SLFL) twist, according to this tweet from and gaming attorney Daniel Wallach, who was present at the hearing:

The question now before Justice Mendez is whether or not the attorney general's office has met the burden of proof necessary to grant the preliminary injunction. That injunction should only be granted if Mendez believes that the attorney general's office has demonstrated that the following criteria have been met:

  1. The plaintiff is likely to succeed on the merits of the case
  2. The plaintiff is likely to suffer irreparable harm in the absence of the injunction
  3. A balance of the equities tips in the favor of the plaintiff
  4. An injunction is in the public interest

Perhaps the most interesting of the criteria is the balancing of the equities. A preliminary injunction in New York could effectively cripple the entire DFS industry. While states like Massachusetts and Nevada are moving toward regulation or licensing options, there are a number of states — Missouri and Oregon among them — that have a gambling statute that is similar to New York's. Those states have the option of avoiding their own protracted DFS battles and following New York's lead. Does that potential dismantling of a multibillion-dollar industry properly balance itself against the public health and economic concerns (e.g., gambling) that arise from daily fantasy sports play? That is ultimately for Justice Mendez to decide. In the meantime, FanDuel is already feeling the effects of shutting down operations in New York. It saw its NFL entry fees decrease by more than $1.4 million in the first Sunday without New York entrants.

The future of daily fantasy sports may well be in the hands of Justice Mendez. The sports world, and particularly DraftKings and FanDuel, wait with bated breath.

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