[toc]Updated 2:50 PM PST, November 11, 2015
The cease-and-desist order from New York attorney general Eric Schneiderman to leading daily fantasy sports sites DraftKings and FanDuel marks a significant escalation of the broader tension between government and DFS operators.
Below are answers to common questions concerning the order and some initial thoughts regarding the potential impacts of the order.
What led up to this order?
- The first public expression of interest in DFS by the Office of the New York Attorney General (NYAG) came in the wake of controversy surrounding the accidental release of internal data by a DraftKings employee in late September.
- News of an initial probe by Schneiderman’s office broke October 6.
- On October 8, Schneiderman characterized daily fantasy sports sites as “totally unregulated gambling venues” during an interview with CBS.
- Following those comments, there was little public word from Schneiderman on the issue, even as a New York lawmaker introduced a bill to regulate fantasy sports in late October.
Are DraftKings and FanDuel staying in the New York market?
At this point, the answer appears to be yes.
A FanDuel spokesperson confirmed that the site was still operating in New York following the receipt of the attorney general’s order.
A DraftKings spokesperson provided the following statement to LSR:
There is a process by which hasty and uninformed opinions can be challenged in a court of law, which would allow DraftKings to not have to cease operations in the state of New York. We will pursue this fight to the fullest to ensure that New York fantasy sports fans do not need to stop playing the games they love.
Potential ramifications of the order
It’s difficult to chart the probable course of the legal process in New York at this stage.
But even as that process plays out, Schneiderman’s order may exert significant indirect force on the broader status quo for daily fantasy sports – especially if the situation appears to be trending away from a civil matter and toward a criminal one.
Ripple effect through similar states
A number of other states – including Hawaii, Iowa, Minnesota, Missouri, Oregon, and Washington – appear to employ a definition of gambling that echoes New York’s.
DFS operators are already blocking Iowa and Washington. That leaves Hawaii, Minnesota, Missouri, and Oregon as states that could look to Schneiderman’s decision for a path to dealing with the DFS question (although they are under absolutely no obligation to do so).
We can also look to the most conservative DFS operators for clues as to what states may be spurred by New York’s order to take a closer look at DFS:
- Star Fantasy Leagues blocks 25 states.
- StarsDraft blocks all states but Kansas, Maryland, Massacusetts, and New Jersey.
Pushback from payment processors
DraftKings and FanDuel have a significant incentive to remain in the New York market.
Payment processors may look at Schneiderman’s order from a different perspective.
While the order does not specifically mention the payment processing side of the industry, it’s clear that banks, credit card issuers, and payment gateways are playing for inherently different stakes than DFS sites.
Pullback from pro sports partners
DFS sites have a major footprint with pro sports franchises in New York, as either DraftKings or FanDuel has sponsorship deals with most of the professional franchises in the state.
- New York Giants (DraftKings)
- New York Jets (FanDuel)
- Buffalo Bills (FanDuel)
- Brooklyn Nets (FanDuel)
- New York Knicks (DraftKings)
- New York Rangers (DraftKings)
- New York Mets (DraftKings
- New York Yankees (DraftKings)
DraftKings also has a deal with Madison Square Garden, with a fantasy sports lounge inside; Draft Ops has a similar deal with Barclays Center in Brooklyn.
While DraftKings and FanDuel may have sufficient motivation to challenge the AG’s order, it’s unclear if their partners will utilize the same risk calculus.
It’s possible, but not known, that the order may give marketing partners the room necessary to cleanly exit a contract with a DFS site.
The decision by major teams and arenas in New York to reassess partnerships with DFS sites could spark a similar review by teams and arenas in other states, especially those with gambling law similar to (or stricter than) New York’s law.
Chilling effect on friendly legislation
At least two states have introduced legislation that is fairly industry friendly.
The first is Illinois, where an introduced bill creates a number of consumer protection measures and requires annual third-party audits of DFS operators in the state. There are currently no licensing fees or taxes in the bill.
A piece of draft legislation was floated today in Florida. It has much of the same language as the Illinois bill, although it does include six-figure licensing fees.
The order from the NYAG may complicate the political climate for those sorts of bills, which seek to define DFS as a non-gambling product. This phenomenon becomes more likely if other state AGs follow New York’s lead.
Exposure for DFS affiliates
Given that the NYAG’s assertion that DFS contests “constitute illegal gambling under New York law,” sites promoting daily fantasy sports to traffic from New York — especially those promoting under a revenue share agreement — may be opening themselves to legal exposure.
Intersection with federal investigation
The order from the NYAG is not directly connected to the probe being conducted by the US Attorney’s Office in the Southern District of New York (SDNY).
But if the action by the NYAG moves in the direction of a criminal action, that could open the door to a federal charge under the Illegal Gambling Business Act – a scenario similar to what’s reportedly playing out in Florida.
Does this order affect other DFS operators?
The only letters seen so far from Schneiderman were sent to DraftKings and FanDuel.
However, most DFS operators offer contests in much the same way that DraftKings and FanDuel do. It therefore seems safe to assume that other operators are impacted, albeit not quite as directly as FanDuel and DraftKings.
A handful of operators – including Star Fantasy Leagues and StarsDraft – had already exited New York prior to Scheniderman’s order.
Reaction from other operators
- DraftOps has exited New York, although it’s unclear if that decision predated the NYAG order.
- DraftPot – who are based in New York – announced via Twitter they’ll be staying in the market.
Is this order connected to the investigation being conducted by Preet Bharara / SNDY?
Not directly, as the offices are separate, but there’s certainly the potential for the two to eventually intersect.
The NY AG’s action comes as Preet Bharara, the U.S. Attorney for the Southern District of New York (SDNY), is probing the DFS industry.
Bharara was the force behind the Black Friday indictments that permanently altered the landscape of the global online gambling industry.
In October, his investigation was characterized as being “at an early stage.”
What the SDNY is specifically investigating is unknown, but state gambling law violations — such as those Schneiderman references in the order — could potentially trigger a variety of federal charges, including the Illegal Gambling Business Act.
It’s important to again stress that Schneiderman’s order is a civil, not a criminal, matter at this stage.
What does the order from the New York AG say?
Here’s the critical bit:
Our review concludes that DraftKings’ operations constitute illegal gambling under New York law, according to which, “a person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence.” DraftKings’ customers are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes. Further, each DraftKings wager represents a wager on a “contest of chance” where winning or losing depends on numerous elements of chance to a “material degree.”
(The same text appears in the letter addressed to FanDuel, with references to FanDuel instead of DraftKings.)
Below are links to the sections of New York law invoked in the order:
- Definitions of “contests of chance” and gambling in NY state penal code
- Article I, Section 9 of the New York State Constitution
- Promoting gambling in the second degree.
- Promoting gambling in the first degree
- Possession of gambling records in the second degree.
- Possession of gambling records in the first degree.
- Executive Law § 63 (12)
- GBL §§ 349
- GBL §§ 350
- BCL § 1303
Should players in New York be concerned about their funds?
That’s a decision unique to each individual player.
But following the exit of DFS sites from Nevada — once policymakers there concluded that DFS constitutes gambling — players had absolutely no issues that I’m aware of accessing their accounts and cashing out funds.
There is no obvious reason to believe that a decision to exit New York – should the situation come to that point – would be handled in any other fashion.
Why did FanDuel and DraftKings leave Nevada but not New York?
There’s no way of knowing for sure at this point.
And the decision by DraftKings and FanDuel may be only a temporary play designed to buy a bit of time or to achieve some other objective, such as justifying their continued presence in the state following news of the NYAG probe.
The situations in Nevada and New York are distinct on a few levels:
- The Nevada decision was accompanied by a formal legal opinion from the State AG. It’s not clear that Schneiderman’s order rises to that level.
- The NYAG decision was preceded by a publicly-made, wide-reaching request for information from DraftKings and FanDuel. There was no such prologue in Nevada.
- Nevada’s legal opinion relied on aspects of Nevada gambling law unique to the state, while New York’s legal definition of gambling is echoed in several other states.
- The population of Nevada is 2.8m; New York, 19.7m.
Image credit: a katz / Shutterstock.com