Daily Fantasy Sports Face Cease and Desist Lawsuit in New York State

The upcoming legal battle between New York’s Attorney General and daily fantasy sports companies will depend on whether or not the rapidly growing industry of day-to-day fantasy competitions are primarily games of skill or luck.  New York law prohibits businesses from providing access to games based on luck, but does not ban games which rely on skill to succeed, and a legal determination where daily fantasy falls on the skill vs luck spectrum will guide the future of the enterprise in the state.

New York Attorney General Challenges Daily Fantasy Competition

Last week New York State Attorney General Eric Schneiderman filed lawsuits against the preeminent fantasy sports companies, FanDuel and DraftKings, requesting they be legally required to cease operations in the state under the New York constitution’s prohibition against gambling.  Both Fanduel and DraftKings have been fully integrated into sports entertainment during an extended period of unregulated operations with both companies heavily invested in major sports broadcasting with spots on ESPN, Fox, and NBC Sports during prime time games.  The business of daily fantasy sports came under intense scrutiny earlier this year when it became clear that only a small percentage of high dollar players won money and employees of both companies were taking advantage of inside information in order to earn payouts by selecting advantageous player lineups.

In the midst of the attention paid to FanDuel and DraftKings operations, Schneiderman took action by asking a New York court to declare both companies promoted illegal games of chance.  According to the legal document filed by Schneiderman the daily fantasy product “is nothing more than a rebranding of sports betting” which is “plainly illegal.”  Schneiderman points to advertising strategies by both companies which heavily focus on the opportunity to quickly make money when in reality the likelihood of cashing out in daily fantasy is small because a handful of regular players take home a large majority of winnings.  Arguing the small chance at payout is indicative of a game of chance, Schneiderman is looking to halt operations of both FanDuel and DraftKings in the state of New York, which would take a significant chunk of players from both companies.

Daily Fantasy and Gambling Under New York Law

Gambling is illegal under New York penal law, with the practice defined as, “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.”  Chance means, “The outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”  According to Schneiderman, daily fantasy clearly meets the definition of gambling because the outcome of fantasy sports is outside the “control or influence” of players who cannot use any measure of skill to alter performance of athletes.

Attorneys for FanDuel and DraftKings have responded to the Schneiderman complaint by arguing daily fantasy payouts are dependent on players crafting optimal athlete lineups, and success is defined primarily on the skill of elite fantasy participants who build the optimal team.  Although the companies concede there is an element of unpredictability in daily fantasy because athlete performance can be difficult to forecast, both FanDuel and DraftKings argue that success is determined by being able to skillfully put fantasy teams together based on knowledge of sports and athlete performance.

Ultimately both luck and skill are involved in success in fantasy sports, leaving the New York court scheduled to hear the case this week with a difficult decision about which element dominates the game landscape.  The ruling is expected to be appealed by whichever side loses, so a final resolution on the matter is likely months or even years away.

New York Legal Challenge Headlines Changes to Daily Fantasy Sport Policy

The explosion of daily fantasy sports sites such as FanDuel and Draftkings has come largely because neither company has been forced to suffer any government regulation during their meteoric rise to profitability.  Although New York’s pending lawsuit is headlining current action by states to pay closer attention to the industry, the increased scrutiny has already resulted in an outright ban of operations in Nevada and regulatory proposals in other states including Massachusetts, Maryland, and Florida.  The outcome of New York’s upcoming legal challenge will not dictate how other states handle the growth of daily fantasy sports, but it could provide insight into how the legal system will approach the issue.

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