New York’s attorney general has issued cease-and-desist orders to FanDuel and DraftKings, saying that they “constitute illegal gambling” under state law. And that has led a number of attorneys to weigh in on the issue, through their own stories or via the media.
New York AG Eric Scheiderman sent letters to both DFS operators this week; you can read the text of the letter to DraftKings here and the text of the letter to FanDuel here.
The “material degree” of chance vs. game of skill issue
SI.com writer and lawyer Michael McCann tackled the AG’s letters to DraftKings and FanDuel at length. He doesn’t offer a conclusion one way or another about the merits of skill vs. chance, but does outline what’s in play.
As to Section 225.00, which I detail in a previous SI.com article, gaming contests are unlawful under New York law when chance is a “material” element. The word “material” is key: Even if DFS games are mostly about skill, they could still be considered unlawful under Section 225.00 if they involve a substantial or meaningful amount of chance. A court would ultimately need to make a determination on whether a “material” chance exists in FanDuel and DraftKings’ games.
DraftKings and FanDuel are not without legal defenses. The companies have long insisted that their games are mainly about skill, and thus do not constitute unlawful gambling. Along those lines, the companies maintain that winners of DFS games tend to be those that conduct research and are skilled—rather than those who happen to be lucky.
Forbes contributor and lawyer Darren Heitner notes that the material element test is not an open-and-shut case either way, saying it’s a “softer standard” than employed in states where language is different. He also says sites need to prove the skill element:
Now is the time for the daily fantasy sports industry, and in particular DraftKings and FanDuel, to demonstrate that chance is not a material element to the winning of competitions and that skill is key.
Daniel Wallach, an attorney who closely follows the DFS industry, believes the “material degree” test can be met, that chance plays a role in the outcome of DFS contests, according to a story by Bloomberg:
“These are not chess pieces that you can control,” he said. “In fantasy sports, once the lineups are set, your role concludes.”
Dan Eaton, attorney and ethics professor at San Diego State University, wrote a piece for CNBC, in which he was bearish on the odds of the NY AG winning a legal battle with the daily fantasy sports industry. Almost the entire article deals with how much skill he perceives to be involved in DFS.
But fantasy football isn’t like placing a bet on a roulette wheel or buying a lottery ticket or even betting on one established team against another in a scheduled game. The “fantasy” element is in the customer carefully selecting players at key positions to comprise a fantasy,that is hypothetical, team subject to a salary cap that then goes on to compete against other “fantasy” teams selected with similar deliberation.
Jeff Ifrah, a lawyer who represents some DFS operators, offered what the legal argument might be for FanDuel and DraftKings:
“First, you argue that there is no foundation for the conclusions that are reached (by the attorney general). There is no scientific study, he did not engage any expert analysis … and then I would just be prepared to argue, as a secondary matter, that it’s a game of skill.”
Few winners, but still gambling?
Lawyers and non-lawyers alike have taken issue with Schneiderman calling DFS gambling, but also saying this (from a press release):
In addition, the investigation found that both companies consistently use deceptive advertising to lure consumers into an unregulated online gambling operation that, while marketed as a game that anyone can win, in fact distributes the vast majority of winnings to a small subset of experienced, highly sophisticated players. These winners constitute roughly 1% of all players on the two sites. The AG’s investigation also revealed that both companies deliberately target demographics susceptible to problem gambling.
Heitner sees hypocrisy and a hole in the AG’s argument that DFS operators are running gambling sites:
It appears that Schneiderman is mounting a defense against his own position. If a small minority of experienced, highly sophisticated players are winning guaranteed prize pools, then it should lead to the conclusion that skill heavily dominates over chance.
Eaton agreed with that assessment in his piece, without directly mentioning the AG’s assertion.
Intersection of NY law with federal law
No matter what you think about the legal arguments about DFS operators allegedly breaking the law in New York, per the AG’s assertions, this much is clear: If there is a violation of New York law, it could mean trouble at the federal level. Here is Wallach on that topic:
“The risk for the industry is that a violation of New York law, if it stands, could potentially give rise to federal prosecution,” said Daniel Wallach, sports and gaming attorney with Becker & Poliakoff law firm in Fort Lauderdale, Florida. “A state law violation really eases the path for federal prosecutors.”
McCann concurs, saying that a NY law violation would “increase the odds that federal indictments are brought.”
McCann goes into detail on what we could see in the coming days; FanDuel and DraftKings have five days to respond to his cease-and-desist notice. He said that the companies could file for an injunction against Schneiderman’s order. A lawsuit from the AG’s office against FanDuel and DraftKings also appears likely, per McCann.
Ifrah offered this:
On top of that “(Schneiderman) would have to go to court to enforce violations of the order. It is not self-enforcing.”
Heitner said a lawsuit from the AG’s office and a request for an injunction from the operators are possibilities.
Impact on other states?
McCann notes that several other states have similar gaming laws to New York, pointing out New Jersey and Nebraska and noting that AG’s in those states and others could piggyback on Schneiderman’s findings.