The daily fantasy sports industry is facing its starkest challenge to date after New York Supreme Court Justice Manuel Mendez decided to grant state Attorney General Eric Schneiderman’s request for an injunction to effectively force DFS operators out of the Empire State. Later in the day, however, an appellate court granted a stay of the injunction, returning DFS to where it was just hours earlier.
After the stay had been issued, FanDuel indicated that it would be reentering the New York market, after leaving several weeks ago in the wake of the cease-and-desist letters issued by Schneiderman.
BREAKING: FanDuel will now lift the restriction on users in New York. FanDuel users in NY will be able to enter paid contests tonight.
— Daniel Roberts (@readDanwrite) December 11, 2015
More on the stay:
DraftKings & FanDuel granted a temporary emergency stay which will last thru calendar year. Will then next go to panel of appellate judges.
— Darren Rovell (@darrenrovell) December 11, 2015
Reports indicate that a New York state appeals court five-judge panel will consider the preliminary injunction in January and whether to continue the stay, although no date has been set yet. Then, the AG’s office and DraftKings and FanDuel will again argue their cases.
Stay just a placeholder until appeals court can weigh fully -briefed motion; signed by just 1 judge; likely not indicative of appeal merits
— Daniel Wallach (@WALLACHLEGAL) December 11, 2015
A statement from DraftKings attorney David Boies confirmed the stay had been granted:
“We are disappointed with the Court’s decision, and have filed a notice of appeal and an expedited motion to stay the Court’s decision, pending our appeal, in order to preserve the status quo. This immediate stay was granted, so we will remain fully operational in New York.
We look forward to a full and fair hearing and are confident we will demonstrate clearly to the Court why we should be able to continue to offer our DFS games in New York permanently.
We are encouraged by our dialogue this week with New York state legislators. We look forward to continuing that conversation.”
The order to grant the initial preliminary injunction can be seen here.
After the initial injunction was granted, DraftKings said it was “filing an appeal to preserve the status quo.” FanDuel already stopped serving New York customers in November. According to one legal DFS analyst, the injunctions were slated to start immediately, at least before the stay:
The preliminary injunction against DK/FD takes effect immediately; the 30 days refers to the filing of an answer in response to complaint
— Daniel Wallach (@WALLACHLEGAL) December 11, 2015
The Boston Globe reported that PayPal and Bank of America were moving to stop processing payments for DFS in New York, but PayPal reversed course after the stay was granted.
— Dan Adams (@Dan_Adams86) December 11, 2015
What some saw as a key determinant of the legality of DFS — that is a game of skill — didn’t even come into play in the decision, nor did the definition of “future contingent event” under state gambling law that was argued by both sides in the case.
DraftKings indicated it would appeal (it’s appeal filing can be seen here) in a statement from David Boies, counsel to DraftKings and Chairman of Boies, Schiller & Flexner LLP:
“We are disappointed with the Court’s decision, and will immediately file an emergency notice of appeal in order to preserve the status quo.
Daily Fantasy Sports contests have been played legally by New Yorkers for the past seven years and we believe this status quo should be maintained while the litigation plays out.”
FanDuel followed with its own statement and appeal:
We will be appealing — this is only the beginning of the legal process and, perhaps more importantly, the New York legislature is already moving forward on action to ensure our game remains legal and is regulated, which we strongly support. The court specifically noted that this was not a final determination of the issue and that discovery would be needed to fully resolve the legal question, which we think should be decided in our favor when all of the evidence is in.
New Yorkers have been able to legally play our games for more than six years, and today’s preliminary decision was wrong and we expect we will ultimately be successful. A number of issues became very clear in court: first, the outcome of fantasy sports contests are determined by skill, not chance. Second, the Attorney General’s argument for season-long fantasy sports being legal does not hold water — if season-long fantasy is legal, than daily fantasy is legal, and vice-versa.
The court was very concerned about this issue, but found the issue of whether the AG was failing to enforce against seasonal fantasy sports was not yet squarely before the court – but it will be. As the court itself noted, FanDuel is permitted in other states, making New York very much an outlier on the issue, as most states are moving towards sensible regulations — not bans, but the Attorney General decided he knows what is best by denying New Yorkers access to a game they have embraced and shared with friends and family for years. We remain committed to ensuring all fantasy sports are available to New Yorkers, and will work to bring our product back to sports fans around the State through our appeal and working with the legislature to enact sensible regulations for fantasy sports.”
And from the NY AG’s office:
“We are pleased with the decision, consistent with our view that DraftKings and FanDuel are operating illegal gambling operations in clear violation of New York law. I have said from the beginning that my job is to enforce the law, and that is what happened today.”
The decision came two weeks after a hearing in the New York Supreme Court where Justice Mendez declined to make an immediate ruling.
There were two separate cases — one against FanDuel and one against DraftKings — and preliminary injunctions were granted against both, while the temporary restraining orders asked for by both operators were subsequently denied as a result.
Here are some of the key points from Mendez’ ruling:
The judge ignored case law from a New Jersey district court that FanDuel and DraftKings used in its filings, regarding “entry fees” not being the same as “wagers” or “bets,” saying it was not applicable here. From the ruling:
The payment of an “entry fee” as high as $10,600, on one or more contests daily could certainly be deemed risking “something of value.” The language of Penal Law 225.00 is broadly worded and as currently written sufficient for finding that DFS involves illegal gambling.
FanDuel and DraftKings pointed to the Unlawful Internet Gambling Enforcement Act federal carveout for fantasy sports, but Mendez dismissed that argument:
The UIGEA language exempting fantasy sports has no corresponding authority under New York State law as currently written. … The exception found in UIGEA does not apply under the current New York statutory language.
One of the arguments brought by DraftKings and FanDuel was that they had both operated in New York for years, with no reason to believe that they were running illegal contests until November. The judge did not buy that argument:
…The possibility of estoppel against a governmental agency is to be denied, in all but the, “rarest of cases”… The DFS corporations, have not stated a basis to find the “rarest of cases” exception applies to the NYAG’s claims, and the potential for public fraud.
The NY AG has said that seasonlong fantasy was legal in NY, while DraftKings and FanDuel argued that seasonlong actually involved less skill than DFS. The judge found the fact that DFS was targeted and seasonlong was not to be immaterial:
Defendant’s contention that plaintiff failed to seek restraint as to Seasonal Fantasy Sports, is not relevant to the pending motion because that relief is not before this Court.
For a preliminary injunction to be granted, a likelihood of success warranting the injunction must be found. Mendez agreed that the AG was likely to prevail in the case:
The balancing of the equities are in favor of the NYAG and the State of New York due to their interest in protecting the public, particularly those with gambling addictions. FanDuel and DraftKings are only enjoined and restrained in the State of New York, DFS is permitted in other states, and the protection of the general public outweighs any potential loss of business.
The next steps will come into focus as we get some distance from the decision. But in the immediate aftermath, we can speculate with confidence on a few points.
Today represents a mile marker, not an finish line. Justice Manuel Mendez’s decision was appealed, and the issue of the preliminary injunction is still in play.
Meanwhile, the larger question of the legality of daily fantasy sports appears likely to be debated at trial, a process that could stretch over months.
At least 8 other states use the same test as NY for "gambling": Alabama, Alaska, Hawaii, Missouri, NJ, Oklahoma, Oregon and Washington
— Daniel Wallach (@WALLACHLEGAL) December 11, 2015
How did we get to this point in the New York DFS case?
The decision comes as New York has four active bills in the legislature dealing with daily fantasy sports, and shortly after a committee hearing was held this week. Assemblymember Dean Murray, who has emerged as the champion of DFS in the state, offered this via Twitter on the initial injunction:
While I respect the judge's decision, I do disagree with it & will move forward with legislation legalizing & regulating #DFS in NY
— Dean Murray (@DeanMurrayNYAD3) December 11, 2015
While the broad strokes of a legislative solution to the broader situation are conceivable (i.e., lawmakers carve out DFS from the state gambling code, rendering the question of legality moot), the finer points contain a number of unanswered questions:
In any case, we’re looking to January at the earliest before a clear path begins to emerge on the legislative front.
Dustin Gouker contributed to this report.