Earlier this month New York Attorney General Eric Schneiderman issued a cease and desist order against both FanDuel and DraftKings arguing that daily fantasy sports (DFS) is a clear form of gambling and against the statutes of New York. He gave FanDuel and DraftKings five days to cut off New York residents or give a good reason why he shouldn't file suit to enforce the cease and desist order. FanDuel complied by blocking New York residents from playing at that site, but DraftKings chose to ignore the ruling and has allowed New Yorkers to continue to play DFS at their site. As a result, Schneiderman filed a suit with the New York district court on November 17 asking for a ruling on whether DFS indeed violates New York law and thus could he enforce the cease and desist order. Court Justice Manuel Mendez heard the arguments last week and said that he would decide "very soon".
The arguments for both sides were clear. Schneiderman's arguments are that daily fantasy sports is no different than any other form of online gambling since it relies predominantly on luck and, in fact, it was just a new model for online gambling and sports betting. New York law prohibits any activity that relies to a material degree on chance, regardless of the fact that the skill of the contestants may also be a factor and DFS clearly falls into that category. Schneiderman also stated concerns that employees could bet on fantasy sports at other sites and he threw back in FanDuel's face a previous comment by their company that DFS was "parlay betting on steroids." The arguments by lawyers for FanDuel and DraftKings are that the contests are indeed skill based, that it is not gambling and that both sites have adhered to all the rules laid out under the exemption in the UIGEA which they believe is the ultimate ruling on the legality of DFS.
Mendez gave no indication either way, but he did suggest that the skill was actually on the part of the players involved in playing the sporting contests and not the skill of the fantasy sports players, thus suggesting that picking a group of players from a makeshift salary cap doesn't make the DFS players skillful themselves, possibly just lucky. At the same time, to fend off concerns that Schneiderman may be afoul of the UIGEA, Schneiderman himself suggested that season long DFS contests, i.e. rotisserie leagues, do involve skill and that was what the federal statute was trying to exempt. Some suggested this was a tactical error while others believe it was necessary to show the differentiation between contests that take place over a whole season, where players are shifting their lineups weekly, compared to DFS which is decided in the course of a day.
I asked Lawrence Walters, an online gaming and constitutional lawyer, some questions about the case. First of all I was curious when he believed the court would rule and also I was curious how he believed the courts would rule:
"I expect the judge to rule fairly quickly. A temporary injunction is in the nature of a legal emergency, and such rulings are typically rendered in short order. I don't have any unique insights into the judge's schedule or docket, but I believe that industry will see a ruling in a matter of days, not weeks or months.
As to the substance of the ruling, that gets into the legal analysis of daily fantasy sports. We charge substantial fees to render such opinions, so I am unable to provide that in the context of an article. However, I believe a compelling argument can be made on either side of this issue. Ultimately, the decision will come down to the specifics of New York, and whether wagering on a short-term contests like DFS violates state gaming prohibition. Some states, like Florida prohibit wagering on both games of chance and games of skill. Other states have specifically prohibited fantasy sports. The legal precedent interpreting New York gaming statutes will control the outcome."
I talked with a couple of other industry analysts who, like Walters, didn't want to render an opinion on how they believed the judge would rule. However, one analyst who asked that his name not be used at this time suggested that the ruling would have a huge impact on not only the legality of DFS but potentially other aspects of gambling as well:
"It's abundantly clear that this ruling will not only create a precedent for daily fantasy sports but sports betting in general. Up until recently sports betting was the hot topic. New Jersey tried to legalize it after its citizens voted in favor in a state referendum, but the courts ruled they couldn't implement the state law because other federal statutes, including PASPA and the Wire Act, prohibited the activity. With that rule, which New Jersey is still trying to appeal, the courts effectively stated that federal law supersedes state law in the area of gambling. The UIGEA is also a federal law and every analyst including myself is convinced that the rules as they are written allows for daily fantasy sports. There's nothing in the rules that stipulates a time limit on when the games have to be played for fantasy sports to be legal and the fantasy sports sites acted on that loophole. If the judge rules for the New York AG then he is opening up a Pandora's Box which will provide states like New Jersey, Delaware and others that want to legalize sports betting a reason for an appeal, namely that if the legality of daily fantasy sports is determined at the state level despite a federal law to the contrary then the other gambling related laws should be decided at the states level also. I have no doubt the courts realize this which is why they won't rush to a decision."
Walters, has a completely different opinion on the matter than the aforementioned analyst and doesn't believe that the UIGEA will have any bearing on the court's decision:
"While the UIGEA provides an exemption for fantasy sports, that does not automatically render the activity legal under each state's law. The exemption only means that the activity, as contemplated by the statute, does not violate the UIGEA. Gambling has historically been regulated at the state level, so the states have the ability to prohibit fantasy sports despite the fact that the UIGEA exempts such activity from its purview. PASPA is a completely different statute, which is structured in a unique way. The ruling in the New York case on DFS will not have any significant impact on how the PASPA is interpreted, in my view. The federal prohibition on actual sports betting is a complicated mess, but typically the states can still prohibit gaming activity that has been exempted from federal regulation, unless the dormant commerce clause prohibits state level regulation."
Some analysts have suggested that the fantasy sports operators have already admitted that the decision on whether to offer DFS is up to the states and not the feds, since they have cut off residents of Arizona, Montana, Iowa, Louisiana and Washington from playing at either FanDuel or DraftKings because of rules in those states. Similarly, both sites agreed to cut off residents of Nevada when that state declared DFS gambling and the Nevada Gaming Control Board ordered them to stop operating in Nevada immediately. So why DraftKings has set the line at New York is uncertain, although DraftKings likely realizes that if they give in to every state that gets a bee in their bonnet they'll likely have no clients left except for the odd state like Massachusetts, that prefers to regulate the activity rather than ban it. And other analysts believe the leagues and particularly the New York teams may have asked DraftKings to challenge Schneiderman for fear that they will lose their sponsorship deals and huge revenue streams if too many states unilaterally rule that they don't want DFS. And unlike Iowa, Montana etc. New York is a major market and loss of that market will have a significant impact on revenues and more importantly could be an impetus for other major markets to follow. It's still uncertain why the 2 sites chose different routes with regards to offering their product to New Yorkers until a decision is reached although that was likely a decision made by the sites and their lawyers for strategic reasons.
So all eyes are now focused on the New York district court and judge Mendez. His decision will set a precedent and could determine how other states will react and also how the DFS sites will operate in the future. No one is sure how Mendez will rule, but a ruling to deal with the legality of Daily Fantasy Sports is necessary and timely.
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