FanDuel and DraftKings take different routes on state law challenges

Both Fan Duel and DraftKings agreed to withdraw their services from Hawaii and Nevada, but they have taken different routes on the other states.

As most people in the industry suspected, the DraftKings data leak and insider betting scandal has led several states to examine their laws and determine whether daily fantasy sports (DFS) is legal or not. And when they deem the activity is illegal they have asked the sites to stop catering to their residents. Both FanDuel and DraftKings barred people located in Arizona, Iowa, Louisiana, Montana and Washington from playing at their sites from the outset as they deemed that the laws in those states precluded DFS, but in recent months Hawaii, Nevada, Illinois, Texas and New York and Georgia claimed that their laws also make DFS illegal. On the other side Virginia and Indiana have begun the process to enact a law that would deem DFS legal and will likely tax the product and Massachusetts seems determined to pass legislation to regulate and tax the product as well. Florida legislators also tried to pass a law to confirm that DFS is legal, but it failed in the legislature.

Draftkings fantasy sports legalWhile both Fan Duel and DraftKings agreed to withdraw their services from Hawaii and Nevada, they have taken different routes on the other states. In Texas FanDuel announced it would leave in exchange for the state agreeing not to prosecute them going forward for past actions, but DraftKings plans on fighting the ruling. DraftKings asked a county court in Texas to clarify the situation but they also indicated they would continue to operate in Texas since "DFS is perfectly legal under Texas law." Both sites also temporarily suspended play from Illinois until the legality is sorted out there, although again there is indication that FanDuel is willing to withdraw permanently, while DraftKings is prepared to challenge the state Attorney General in court. And of course with New York, both sites are operating after a superior court ruled that they had the right to operate until the judge decides on the matter. However, when New York AG Eric Schneiderman originally announced that DFS was illegal in the state, Fan Duel was ready to leave, and again DraftKings was prepared to fight. To date no decision has been made in New York. As for Georgia's announcement neither DFS site has made any decision although it's likely that FanDuel will withdraw while DraftKings won't, if they are forced to make a decision.

The difference in actions between the sites is somewhat surprising. Hawaii and Nevada were no brainers for both sites since the number of players from those states was minimal and it just wasn't worth fighting about, but Texas represents almost 20% of revenue for each site. And the loss of Illinois and New York would really hit the bottom lines for both companies. The question is why are they acting so differently?

It appears that FanDuel wants everything to be on the up and up and are concerned about making any waves, while DraftKings is willing to take their chances. I tried to get in touch with each site but, not surprisingly, received no response. A lawyer who is well versed in gambling law, however, indicated to me that both sites are looking forward and trying to act in a way they deem will benefit them in the future:

"FanDuel feels that the majority of states will regulate DFS and they want to ensure that if those states ever enact a 'bad actor' clause that they can indicate they operated in good faith by withdrawing from questionable states when those AGs asked them to. And with the Texas announcement they obviously fear fines going forward. DraftKings, on the other hand, is looking at revenue streams and likely feels there is no benefit to withdrawing since a bad actor clause is unlikely. Both sites are well known and in the views of most lawyers have been operating legally per UIGEA regulations, so they are just listening to the advice from their counsel. But if a state is going to regulate DFS are they actually going to rule that FanDuel can operate because they left Texas while DraftKings can't because they didn't? FanDuel clearly believes so, but I highly doubt it. The stakeholders (shareholders and sports partners) also undoubtedly had a say in their actions to date. Some leagues are more vigilant than others."

But even in the products they offer, the sites have acted differently. The relevant section of the UIGEA regulations states the following:

(III) No winning outcome is based—
(aa) on the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or
(bb) solely on any single performance of an individual athlete in any single real-world sporting or other event.

daily fantasy sports As a result of the wording FanDuel only offers betting on team sports, since they interpret the law to mean that only multiple bets on team sports are legal. DraftKings, on the other hand, has chosen to offer DFS play on NASCAR, golf and MMA, which are single player games but which they deem is legal since golf tournaments take place over several days, NASCAR races take place over several laps and MMA takes place over several rounds. DraftKings has also ventured into soccer, while FanDuel has chosen to stick to just the major North American sports. Most lawyers I spoke to seem to believe that the individual sports probably aren't included in the carve out but the regulations are so vague and so badly written that an argument can be made for allowing it. More importantly, the PGA Tour, NASCAR and MMA have endorsed DraftKings, so there's really nobody who is going to challenge DraftKings since the states could probably care less what they offer if they are going to legalize and regulate the product and the leagues monetarily benefit from DraftKings. In their own regulations states can also outline banned sports if they like.

The obvious question is which site is acting the smartest.

That's a tough question to answer, but looking at the sites that left the U.S. market after the passing of the UIGEA or subsequent threats from the U.S. government I would suggest it's DraftKings. Most of the sites that left the U.S. market (excluding UK firms), that were hoping to be able to operate in the future in a regulated U.S. market because they gave in to pressure from the government have really seen no benefit from that decision. As a prime example one just needs to look at PokerStars. When the Rational Group were told that they would be given a clean bill of health and allowed to operate stateside if they purchased the assets of Full Tilt and gave the federal government a huge settlement, the company did so. And for their $714 million they ended up with a piece of paper worth squat. New Jersey decided to block the company from operating because of past wrongs and the federal government's response when the Rational Group wanted their intervention was "not our problem." And in the end the promise was so useless the Rational Group determined the only option was to sell the product to Amaya. And most of the companies that stayed in the U.S. market have continued to do quite well. They still have payment options available to them and for the most part have been left alone by U.S. authorities. But more than that the decision on how to handle DFS will be a state by state decision and if states are going to regulate and tax DFS they will want to maximize revenues which means they'll allow both sites to operate. Really if Pennsylvania, for example, decides to regulate and tax DFS do you think they'll really determine whether DraftKings can operate their by whether they adhered to Texas' proclamation that DFS is illegal? It's highly unlikely.

The DFS industry is now at the fork in the road. Several states want to ban the product and several states want to regulate and tax it. It's obvious that DraftKings and their lawyer believe that their product is perfectly legal in almost all U.S. states because DFS is a game of skill and allowed per the UIGEA regulations and they are willing to put up a fight to be able to retain their revenues and FanDuel, clearly afraid of state repercussions has chosen not to fight states likely believing that they'll avoid big fines in the future and will be welcomed by states who want them. And in their view some revenues from a smaller pot is better than none. In that way one can equate FanDuel to Roberto Duran in his second fight against Sugar Ray Leonard when he threw up his hands after getting pummelled by Leonard and yelled "no mas." Is that the right decision? Only time will tell.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!

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