Daily Fantasy Sports Dodges Nightmare Scenario On Legality; DraftOps Files For Bankruptcy

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DFS nightmare scenario

It appears a federal court will not rule on the legality of daily fantasy sports in a case involving the NHL’s Minnesota Wild and defunct DFS operator DraftOps.

What happened in the DFS case

A judge in the US District Court in the District of Minnesota did not grant Draft Ops a motion to dismiss in the ongoing case. You can read the court order on the MTD and other matters related to the case here.

DraftOps had been trying to get out of a sponsorship deal it signed with the NHL franchise. DraftOps’ main legal argument in trying to get out of the agreement was that DFS is illegal in the state.

After the motion to dismiss was denied, DraftOps almost immediately told the court it had filed for bankruptcy protection. (Filing here; bankruptcy docs here.)

The court basically passed on the legality of DFS in the state as it related to the case. From the court order filed Dec. 28:

This Court need not presently decide whether DFS is unlawful in Minnesota. A legal argument is subject to sanctions only if a “reasonable and competent” attorney would not “believe in the merit of [the] argument.” …

Defendants’ arguments addressing the legal status of DFS in Minnesota are colorable arguments about an unsettled legal question. Regardless of their ultimate success, Defendants’ arguments are not frivolous or “so baseless as to warrant Rule 11 sanctions.”

The question of DFS and legality

The case itself between a DFS operator and a sports franchise isn’t that interesting from a “who owes money” standpoint. However, the legality question — from a site that claims it could have been operating illegally — was certainly a novel one.

Law not settled on DFS

It was also an argument that the remaining companies in the DFS space likely were not excited about. It’s possible — or even likely — that the court could have examined Minnesota law and come to the conclusion that DFS is legal there.

But it’s not necessarily a black-and-white question, despite the fact that nearly all DFS operators take real-money entries in the state. The court said as much in its ruling:

Defendants rely on Minnesota’s general prohibitions against gambling. … Under Minnesota law, anyone who “makes a bet” is guilty of a misdemeanor …and anyone who “receives, records, or forwards bets or offers to bet or, with intent to receive, record, or forward bets or offers to bet, possesses facilities to do so” is guilty of a gross misdemeanor. …

It is a felony in Minnesota to engage in “sports bookmaking,” which is defined as “the activity of intentionally receiving, recording or forwarding within any 30- day period more than five bets, or offers to bet, that total more than $2,500 on any one or more sporting events.”

And then:

In support of its motion for sanctions, Minnesota Wild argues that Minnesota courts have never applied these gambling provisions to DFS. But the absence of legal precedent alone does not render a contention implausible, let alone sanctionable. A court could determine that these statutory gambling prohibitions encompass DFS. The language of the above-quoted provisions does not categorically exclude DFS.

Minnesota Wild minimizes the relevance of other states’ determinations that DFS is illegal in their respective states. Although the decisions of other states have no direct bearing on whether DFS is lawful in Minnesota, those decisions are relevant to determining whether a colorable legal controversy exists as to the legal status of DFS in Minnesota.

The motion to dismiss being granted under the legality argument would have been a worst-case scenario for much of the industry.

A ruling in Minnesota could have reverberated elsewhere

While gaining legal clarity via a court ruling certainly would have been a good outcome for the industry, the obverse could have been disastrous. No court has yet ruled on the legality of DFS in a state that has not explicitly legalized it.

Minnesota had often been assumed to be a state where DFS was legal. Its legality not being confirmed in a state like this would have an impact in states where the laws are far less friendly. There are ongoing cases about DFS legality in both Illinois and Texas.

The tack DFS operators DraftKings and FanDuel has been to pull out of states where their legality has been questioned, or to tie the matter up in court. It seems highly unlikely, at this point, that the sites would argue a case over their legality to a final court ruling, if it were at all avoidable. See, for instance, what happened in New York.

Also of note on the legality front in Minnesota

Wither DraftOps

The side note to the court case is that DraftOps is certainly done in the DFS space. This isn’t really a surprise, as it had ceased real-money operations some time ago.

A little over a year ago, the company had indicated its intention to spend heavily to compete with DraftKings and FanDuel. It had also signed a number of high-profile deals with sports franchises and arenas.

But the events of the past year drastically changed things for the DFS industry, both on the legal and regulatory fronts. Those developments have created a challenging environment for any sites not named DraftKings and FanDuel, which plan to merge sometime this year.

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