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The Federal Trade Commission announced on Monday that it is taking legal action to try to stop the merger based on anti-trust concerns.
The proposed merger was announced in November of last year.
In a press release, the FTC is “alleging that the combined firm would control more than 90 percent of the U.S. market for paid daily fantasy sports contests.” The action was joined by the offices of the attorneys general in the California and the District of Columbia.
The FTC and those AGs will file a complaint in federal district court seeking a preliminary injunction to stop the deal, according to the release.
That means a merger that the two DFS behemoths may not happen before the NFL season, or at all, if the FTC gets its way.
More from the FTC:
According to the FTC’s complaint, DraftKings and FanDuel are each other’s most significant competitor. At present, the two companies battle head-to-head to offer the best prices and product quality, including the largest prize pools and greatest variety of contests. The proposed merger would create a single provider with by far the largest share of the market for paid daily fantasy sports contests in the United States.
“This merger would deprive customers of the substantial benefits of direct competition between DraftKings and FanDuel,” said Tad Lipsky, Acting Director of the FTC’s Bureau of Competition. “The FTC is committed to the preservation of competitive markets, which offer consumers the best opportunity to obtain innovative products and services at the most favorable prices and terms consistent with the provision of competitive returns to efficient producers.”
The FTC commissioners voted 2-0 to proceed with legal action to stop the merger. (Usually there are five commissioners, but there are currently just two sitting on the FTC to vote on such a matter.)
DraftKings CEO Jason Robins and FanDuel CEO Nigel Eccles issued a joint statement after the FTC revelation:
“Today, the Federal Trade Commission (FTC) announced it will attempt to block the proposed merger between DraftKings and FanDuel.
We are disappointed by this decision and continue to believe that a merger is in the best interests of our players, our companies, our employees and the fantasy sports industry. We are considering all our options at this time.
As we work together to determine our next steps, we would like to thank DraftKings and FanDuel players, partners and employees for their patience, support, and continued loyalty.
Previously, Robins had intimated that the review process was “going well.”
A DraftKings email sent to all employees today obtained by Legal Sports Report painted a picture of what’s going on inside at least one of the DFS companies. The email said that DraftKings “will ask a federal court to issue an injunction against” the FTC action.
More from the email:
We…are working with our legal team and FanDuel to chart the best court of action, which could include going to court to make our case about the benefits of the proposed merger. …
Please don’t let this regulatory setback distract you. DraftKings is poised for growth, whether or not we merge with FanDuel. … In the days ahead, it will be business as usual as we prepare for the start of the NFL season.
The FTC believes that the proposed merger of DraftKings and FanDuel violates anti-trust law. It appears it will be up to the courts to decide whether it’s correct.
Here’s what the FTC says about why it acts to stop mergers:
The Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. These filings do not constitute a finding that any violation of law has occurred.
On DraftKings and FanDuel, specifically, the FTC cited some of the research it did on the industry:
According to the FTC’s complaint, consumers of paid daily fantasy sports are unlikely to view season-long fantasy sports contests as a meaningful substitute for paid daily fantasy sports, due to the length of season-long contests, the limitations on number of entrants and several other issues.
The complaint also alleges that entry or expansion by other providers is not likely to provide timely or sufficient competition to offset the anticompetitive effects of the merger. The complaint also asserts that purported efficiencies would not offset the likely competitive harm.
This is based on what FTC investigators were asking as it reviewed the merger.
There is a pretty good case against the FTC blocking the merger.
The central sticking point in the case is the definition of the market, for anti-trust purposes. If the market is narrowly defined as DFS, then yes, a DraftKings and FanDuel merger would constitute a near monopoly. That’s apparently what the FTC believes.
However, there’s a very good argument that DraftKings and FanDuel are a smaller part of much larger industries:
The FTC will seek a temporary restraining order and a preliminary injunction in court to stop the merger:
Two-step process for #FTC re: DraftKings, FanDuel:
1. FTC will seek a TRO/PI in federal court
2. Administrative trial to begin 11/21/17
— Daniel Wallach (@WALLACHLEGAL) June 19, 2017
If the FTC gets its way, the merger will be held up pending the result of the trial that is set to start in November. A scenario in which DraftKings and FanDuel merge before the NFL season does not appear at all likely at this point.
The news of the brakes being pumped on the merger sets up a scenario that is both old and new: The idea that one of the two companies will come out on top gains traction.
DraftKings and FanDuel will now apparently remain competitors at least through the NFL season. If they are not allowed to merge in the short term — or at all — it would appear increasingly likely that only one of them survives.
No merger could mean winner-take-all for one DFS company, if the other were to fail.
That’s an interesting question to which we don’t know the answer.
While the AG’s involvement is at least visibly unrelated to the legality of the DFS, California is a place where it has been in question.
A bill to grant legal clarity to the DFS industry passed the state Assembly almost unanimously in 2016, but all action halted after that. That appears to be at least in part due to concerns from tribal gaming interests. There has also been chatter about a possible negative attorney general opinion on the legality of DFS dating back more than a year.
A spokesperson for California AG Xaiver Becerra offered this statement:
Attorney General Becerra is concerned that a virtual monopoly could negatively affect consumers and competition. Permitting this merger could make it difficult for start-up companies to compete and could set a potentially harmful precedent for start-ups of all sorts.
And from the AG’s office in DC:
“Daily fantasy sports contests are a pastime that many District residents enjoy — but it’s no fun for consumers when near-monopolies limit competition and innovation,” Attorney General Karl Racine said. “Because we believe that this proposed merger would harm consumers in the District, we have joined the FTC and California in opposing it.”