Entry Fee Or Wager: Why ‘Derby Wars’ Court Case Is Relevant To The Daily Fantasy Sports Wars

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A case involving a small horse racing fantasy sports site could have an impact on much larger ones like DraftKings and FanDuel.

Last week a court ruling came down in Los Angeles Turf Club v. Horse Racing Labs, LLC, Case No. CV 15-09332 SJO (C.D. Cal. May 15, 2017) — aka the “Derby Wars” case.

That ruling has sparked debate among fantasy sports legal analysts over whether this decision — which held that “entry fees” to enter a horse racing fantasy contest constituted a “wager” — could have ramifications for the mainstream daily fantasy sports industry in other contexts. That’s particularly true in lawsuits pending in Illinois, Massachusetts, New York and Texas, where similar issues are in play.

I believe that the Derby Wars decision is significant because it is the first US court decision to hold that DFS entry fees are “wagers” (and, by logical extension, gambling activity). But other analysts have downplayed the significance of this ruling by asserting that it applies to horse racing contests only.

These analysts point to the fact that the Derby Wars case arose under the Interstate Horseracing Act (IHA), the federal law that regulates all interstate wagers on horse races, and argue that any analysis of whether the entry fees constituted wagers in that case was “completely confined” to the horse racing industry.

Because this case arose under the IHA, they maintain that the non-horse racing DFS industry “does not need to be concerned” about the Derby Wars decision.

The court’s analysis was not confined to the IHA

A closer reading of the Derby Wars decision, however, reveals that the court’s analysis of whether the entry fees constituted a “wager” was not confined to the IHA, or even to horse racing.

In analyzing the IHA claim, the court acknowledged that The Stronach Group (the main plaintiff) had to prove that the operator of Derby Wars accepted an “interstate track wager,” which, in turn, is defined as “a legal wager placed or accepted in one state with respect to the outcome of a horserace taking place in another State, and includes pari-mutuel wagers …”

Based on this definition, the operator of Derby Wars argued that its contests did not involve “pari-mutuel wagering,” but, rather, were legal fantasy contests where skill predominates over chance.

However, the court explained that “[w]hether or not Derby Wars’ contests are “pari-mutuel wagering” is a sufficient but not necessary condition for the applicability of the IHA,” highlighting the fact that the IHA’s definition of “interstate off-track wager” includes, but is not limited to, “pari-mutuel wagers.”

Rather, the court looked more broadly to whether the Derby Wars contest entry fees met the general definition of “wager,” as that term is defined by non-IHA case law.  Indeed, as the court expressly made clear in its opinion, “the proper focus of the inquiry rests on whether payment of the entry fee for Derby Wars contests is a wager.”

When is an entry fee a wager?

In finding that the Derby Wars contest entry fees were “wagers,” the court adopted the analysis used in Bell Gardens Bicycle Club v. Department of Justice, 36 Cal. App. 717 (1995), a case involving a jackpot poker game.

In Bell Gardens, the California Court of Appeals defined a “bet or wager” as “ordinarily an agreement between two or more that a sum of money or some valuable thing, in contributing which all agreeing to take part, shall become the property of one or some of them, on the happening in the future event of an event at the present uncertain; and the stake is the money or thing thus put upon the chance.” Id. at 747. (Note the similarity between this definition and the New York statutory definition of “gambling” which was recently at issue in New York Attorney General Eric Schneiderman’s lawsuit against DraftKings and FanDuel).

Applying this definition, the California Court of Appeals held that the jackpot poker game was an illegal lottery under California law because the distribution of the prize “depend[ed] solely upon the fortuity or random event of one person having the second best hand and another person having the game’s best hand at the same point in time.” Id.

The Derby Wars court found that this jackpot poker case controlled the determination of whether the “entry fees” in horse racing fantasy contests were in fact “wagers.” Citing the Bell Gardens case, the California court characterized the Derby Wars contest entry fees as “more akin to the wagers which form the ‘pot’ in poker.”

The court explained that the aggregate entry fees in a Derby Wars fantasy contest “subsidizes the ‘pot’ that Defendant calls its fixed prize,” noting that “[t]his prize does not accumulate over time, and its distribution does not depend solely upon the fortuity of a random event, but rather is fixed and guaranteed to contest participants upon the submission of their wager (Derby Wars’ entry fee) and earning more points than the other contestants earned by virtue of their superior selection of horses.”

As the operator of Derby Wars observed in its court filings, these characteristics “closely parallel” the business model of mainstream DFS sites that focus on sports such as football, basketball, baseball, hockey and NASCAR.

Not just horse racing

Based on the broader definition of  “wager,” as elucidated in Bell Gardens and other California cases not arising under the IHA (or even involving  horse races, for that matter), the court concluded that Derby Wars’ entry fees “constitute a wager” and thus violated the IHA where such wagers were placed in one state with respect to the outcome of a horse race in another state and were received over the Internet.

While this case involved the application of the IHA to horse racing fantasy contests, the court’s analysis of whether a “bet” or “wager” was involved turned on legal principles completely outside of the IHA and horse racing framework.

It was only after the court determined that a “wager” was involved (based solely on non-IHA case law) that the IHA became triggered. In other words, even though the IHA came into play because the fantasy contests at issue involved interstate horse races, the court’s analysis of the “wager” issue was not confined to that specific context.

Playing the ‘DFS is like x’ game

It is quite ironic that an industry which consistently invokes a series of inapt analogies to describe their contest offerings — including my personal favorite: “DFS is like a spelling bee”— will suddenly draw the line when the comparisons are not to their liking.

Why can DFS be like chess, but not like horse racing? (Those who closely followed the New York Attorney General’s lawsuit against DraftKings and FanDuel may recall that FanDuel cited several horse racing cases — People ex rel. Lawrence v. Fallon, 152 N.Y. 12 (1897), Toomey v. Powell, 76 Mont. 166, 245 P. 943 (1926) — to support its argument that the payment of an entry fee is not a wager.)

Along those same lines, DraftKings and FanDuel frequently invoke two loss recovery cases — Humphrey v. Viacom, Inc., 2007 WL  1797648 (D.N.J. June 20, 2007) and Langone v. Keiser, 2013 WL 5567587 (N.D. Ill. Oct. 9, 2013) — in arguing that DFS entry fees are not “bets” or “wagers.”

These decisions are also inapposite because they interpreted a “qui tam” statute (where the focus is much narrower) and do not address the broader question of whether DFS contests constitute “gambling” under state law. But that inconvenient fact has not deterred DraftKings and FanDuel from relying heavily on these decisions in other court cases — to little success so far.

Indeed, even the operator in Derby Wars tried the Humphrey and Langone gambit (as well as a UIGEA argument), and it did not work there either.

DFS is not settled law in many jurisdictions

Very few decisions stand on “all fours” with another case, particularly in the DFS context where the only prior decision of note was New York Supreme Court Justice Manuel Mendez’s opinion preliminarily finding that the contests offered by DraftKings and FanDuel violated New York’s constitutional and statutory prohibition against gambling.

This is an evolving area of the law, with very few case precedents. The fact that Derby Wars arose in a different factual context and overall statutory framework does not negate its import in the traditional DFS context, particularly given the broader focus of the court’s analysis.

For this reason, I believe that the Derby Wars decision could—and will—become relevant in other pending cases involving traditional (meaning non-horseracing) DFS contests.

Derby Wars will soon surface in other DFS cases

As the first US court decision to hold that fantasy sports contest entry fees constitute a “wager,” Derby Wars will likely enjoy a longer shelf life beyond just a possible appeal.

If upheld on appeal, this decision could adversely impact DFS operators outside of the horse racing context. The issue of whether DFS contests constitute betting, wagering or gambling is in play in at least four pending lawsuits involving non-horseracing fantasy sports contests:

New York already a concern

The Derby Wars decision could tip the scales against the DFS operators in those other cases, with the most serious threat being in New York, where a group of New York residents are seeking to invalidate New York’s fantasy sports law by arguing that it violates the state constitutional prohibition against gambling. (I have written previously about that case: see here).

If that legal challenge succeeds, it could put a temporary end to legal fantasy sports in New York and force the issue to a voter referendum.

The Derby Wars decision has already caught the attention of the plaintiffs’ lawyer in the New York case. In a letter filed with the court today, attorney Cornelius Murray, who is representing the New York plaintiffs enclosed a copy of the Derby Was decision and asserted that it is “relevant” to the New York case because:

“the manner in which Derby Wars operates is virtually identical to the types of contests run by the likes of FanDuel and DraftKings and other ventures that would be regulated under Chapter 237 of the Laws of the State of New York, which is challenged by Plaintiffs in this case on the grounds that Daily Fantasy Sports constitutes betting prohibited by Article I, § 9 of the Constitution.”

DFS class action

Likewise, the Derby Wars decision could bolster the case brought by a nationwide class of DFS players against DraftKings and FanDuel, which is now pending in a Massachusetts federal district court.

A finding by the Massachusetts court that DFS constitutes betting, gambling or wagering could have dual repercussions.

In the short term, it could have the effect of invalidating the mandatory arbitration clauses relied upon by DraftKings and FanDuel in seeking the dismissal of that lawsuit. (One of the arguments raised by the plaintiffs is that the mandatory arbitration clauses appearing in the terms of service are void as against public policy because they constitute an illegal gambling contract).

Looking further ahead, the Derby Wars decision could be cited as persuasive authority to support one of plaintiffs’ main claims — e.g., that the DFS contests offered by DraftKings and FanDuel violate the gambling prohibitions of one or more states, including California.

The plaintiffs seek, among other remedies, restitution (meaning the return) of all monies paid to DraftKings and FanDuel as entry fees. A monetary judgment based on that theory alone could easily approach nine-figures.

Given the high stakes involved, the lawyers for the class action plaintiffs will undoubtedly be citing Derby Wars, in addition to other legal authorities, to support both contentions.

The possible Wire Act implications of Derby Wars

The determination by the Derby Wars court that DFS entry fees constitute a “wager” could even have ramifications under the Wire Act, which prohibits anyone “engaged in the business of betting or wagering” from using a “wire communication facility” for transmitting in interstate commerce “wagers on sporting events or information assisting in the placing of such wagers.”  (28 U.S.C. 1084(a)).

Equating a DFS entry fee with a “wager” could be problematic from a Wire Act perspective — given the language employed in the statute — especially since sporting events are involved and courts have held that the statutory term “wire communication facility” encompasses transactions over the Internet. (United States v. Lyons, 740 F.3d 702, 716 (1st Cir. 2014) (noting “[t]he Wire Act’s evident applicability to the internet.”); United States v. Cohen, 260 F.3d 68, 76 (2d Cir. 2001) (concluding that “transmitting bets and betting information” over the Internet “violate[s] the statute”)).

Until the Derby Wars decision, no court had ever held that a DFS entry fee constituted a “wager,” which is the specific term used in the Wire Act. While I am not suggesting that any DFS company faces an imminent (or even a long-range) threat of a Wire Act prosecution, the equating of a DFS entry fee with a “wager” arguably raises that possibility above zero.

While there is legitimate disagreement over the applicability of Derby Wars outside of the horse racing context, the potential exists for this decision to have a significant impact in the future. That’s especially true if it is affirmed on appeal (a Ninth Circuit decision would carry much greater weight than a lower federal court decision) and adopted or extended by other courts in future cases involving mainstream DFS contests.

Image credit: Cheryl Ann Quigley / Shutterstock.com