Daily fantasy sports sites DraftKings and FanDuel are reportedly nearing a second settlement with New York Attorney General Eric Schneiderman, this one to end false advertising claims from the AG’s office.
Both the New York Times and ESPN are reporting that a settlement could be on the way in the coming days; it could cost the sites in excess of $10 million.
Such a settlement could have wider repercussions for the industry, however.
The backstory on DraftKings, FanDuel and the AG
When the original settlement between Schneiderman and the sites was made — allowing New York to move ahead with legislation that would eventually become law this summer — Schneiderman reserved the right to act on advertising claims. Advertising from the companies overstated how easy it was for DFS players to win, Schneiderman alleged at the time.
Regardless, our key claims against the companies for false advertising and consumer fraud are not affected by the agreement and will continue.”
Even after the law took effect, Schneiderman stayed true to his word, saying this in a statement:
Our false advertising and consumer fraud claims for past misconduct by Draft Kings and Fan Duel will continue to move forward.”
When and how that movement would manifest itself wasn’t clear until the recent reports.
Settling one legal problem vs. another for DFS
Settling — or not fighting — cases on the basic legality of DFS is a strategy with downside, but it takes away the risk of a nightmare scenario for DraftKings and FanDuel.
Namely, if a court would come to a final determination of legality on DFS vis a vis state gambling laws (i.e. that DFS is gambling), that could be potentially devastating to the industry. While a victory on legality would be great, it’s not worth the possibility of an extremely bad precedent on the books.
Despite what comes out of DFS companies publicly, they and their lawyers have to be at least somewhat concerned every time another state AG issues a negative opinion about the industry’s underlying legal footing. But settlements (FanDuel settled in Texas, for instance) — or pulling out of states with a negative legal climate — allow for bills to be advanced by lawmakers while reducing current legal risk.
But the settling of the NY false advertising claims and not fighting them could stir up a hornet’s nest as well.
Possible repercussions of a settlement
We don’t know much about the settlement that is being crafted; certainly DraftKings and FanDuel are unlikely to admit any wrongdoing in a scenario where the case is handled out of court.
Other states follow suit?
But here’s the danger, no matter what the settlement says: Will other state AGs or prosecutors be tempted to pursue the same course of action against the sites?
No AG has been as aggressive as Schneiderman on the DFS front, even those that have said DFS operators are violating state gambling code. And none have tried to take them to court for false advertising claims.
But seeing what New York does on the fraud/false advertising front has to be on the radar of other AGs or prosecutors who have been generally aware of or closely following the industry.
After all, after Nevada and New York issued their opinions on DFS, other AGs started citing them. Is it far-fetched to think other states could do the same on this issue, and try to cash in with settlements of their own? If the terms of the settlement are made public, it could possibly draw a road map for others, but it’s also possible such details would be private.
The NY laws on false advertising
Here is what the NY AG set forth on the false advertising claims when it filed an injunction against DraftKings and FanDuel last November.
‘Fraudulent conduct’
Executive Law § 63(12) authorizes the Attorney General to bring an action to enjoin repeated or persistent fraudulent conduct.
As set forth above, defendant has engaged in repeated and persistent fraudulent acts by conduct, including but not limited to:
a. Misrepresenting that defendant complies with applicable laws
b. Misrepresenting the likelihood of a casual player will win a jackpot;
c. Misrepresenting the degree of skill implicated in the games;
d. Misrepresenting that defendant’s games are not considered gambling.
Violation of “Business Corporate Law”
Defendant has also engaged in repeated and persistent fraudulent acts by conduct, including but not limited to:
a. Misrepresenting that defendant complies with applicable laws
b. Misrepresenting the likelihood of a casual player will win a jackpot;
c. Misrepresenting the degree of skill implicated in the games; and
d. Misrepresenting that defendant’s games are not considered gambling.
As such, defendant has abused its powers contrary to the public policy of the state, warranting annulment of its authority to do business in this state and an injunction against its continued operation of an illegal gambling business.
Violations of “General Business Law”
As set forth above, defendant has engaged in deceptive acts and practices in violation of GBL § 349 by conduct, including, but not limited to:
a. Misrepresenting that defendant complies with applicable laws;
b. Misrepresenting that casual player is likely to win a jackpot;
c. Misrepresenting that DFS is a “skill game”; and
d. Misrepresenting that defendant’s games are not considered gambling.
The filing also asserts violation of GBL §§ 350
NY law vs. other states
Much like gambling laws, the laws in each state regarding fraud and truth in advertising are not the same in every state.
New York’s laws give the AG a lot of leverage and flexibility in bringing a case on false advertising, so it’s certainly not a one-to-one correlation for “x” state to mimic NY. But many states do have such laws on the books.
Is New York a one-off for DraftKings and FanDuel if a settlement is struck? Or could there be more to come?
There’s also the consideration that false advertising is often a component of class action lawsuits against the sites.
What we can be sure of: The legal uncertainty for DFS is far from resolved.
