New York Daily Fantasy Sports Court Case May Hinge On Meaning Of ‘Future Contingent Event’

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Daily fantasy sports case NY

New York has always represented tricky terrain for the daily fantasy sports industry.

Unlike many other states which define “gambling” by reference to the “predominant factor” test (that is, “chance” must predominate over “skill” before gambling will be said to exist), New York’s test sets a much lower bar for gambling.

What is gambling in New York?

Under New York Penal Law 225.00, “gambling” is defined as the staking or risking of something of value on the outcome of either (1) “a contest of chance,” or (2) “a future contingent event not under [that person’s] control or influence,” each with the agreement or understanding that the person will receive something of value in the event of a certain outcome. (At least eight other states employ the same test: Alabama, Alaska, Hawaii, Missouri, New Jersey, Oklahoma, Oregon and Washington.)

This definition sets forth two separate categories of gambling: (1) wagering on a “contest of chance,” and (2) wagering on the outcome of a “future contingent event” over which the bettor has no “control or influence.” The latter of these two categories is not dependent on a “skill vs. chance” assessment, but, rather, looks to whether an alleged bettor can “control” or “influence” the outcome of the “future contingent event.”

The statute, however, does not define these words. But the plain meaning of the words “control” and “influence” would seem to connote being able to have an “impact” or an “effect” on the event itself, which brings us back to the ultimate question: What is the “future contingent event” in a DFS contest? Is it the real-world sporting event or events on which scoring is based? Or is it the DFS contest itself?

Some guidance from NY commentary

While there is no case that is directly on point, one possible source of guidance in answering this threshold question may come from the McKinney Supplemental Practice Commentary accompanying New York Penal Law 225.00. The author of that commentary, William C. Donnino (a New York State court judge), employs a hypothetical involving the game of chess to illustrate the definition of “gambling” under New York law:

One illustration of the definition of “gambling,” drawn from the commentaries of Judges Denzer and McQuillan is the chess game between A and B, with A and B betting against each other and X and Y making a side bet. Despite chess being a game of skill, X and Y are “gambling” because the outcome depends upon a future contingent event that neither has any control or influence over. The same is not true of A and B, who are pitting their skills against each other and thereby have a material influence over the outcome; they, therefore, are not “gambling.” Thus the definition of “gambling” embraces not only a person who wagers or stakes something upon a game of chance but also one who wagers on ‘a future contingent event’ [whether involving chance or skill] not under his control or influence.” Denzer and McQuillan, Practice Commentary, McKinney’s Penal Law, § 225.00, pp. 23 (1967)

Deeper into the hypothetical

Now let’s expand that hypothetical even further, and, instead, of a single chess game, let’s assume there are eight tennis matches being played simultaneously, and, instead of wagering on the direct winner of the match between A and B, individuals X and Y each select five tennis players from among the eight tennis matches (involving a total of 16 players) and utilize a scoring system whereby two points are awarded for each “ace” and one point is subtracted for each “double-fault.” Can X and Y “control” or “influence” the outcome of this multi-player event any more than they can control or influence the outcome of a single tennis match? Probably not.

But the answer ultimately depends on how you define the “future contingent event”: is it the underlying real-world sporting event or events (as the New York AG would argue) or is it the fantasy contest itself (as DraftKings and FanDuel would argue)? The answer to this question could very well determine which side will obtain a preliminary injunction and ultimately prevail in the New York court case.

NY AG’s Argument

The task of identifying the “future contingent event” was at the crux of last week’s oral argument.

A ‘pure question of law’?

Kathleen McGee, the Assistant Attorney General who argued the case for the New York AG’s office, spent the majority of her 28-minute opening oral argument by focusing on this question, asserting that it represents a “pure question of law,” at least in contrast to the “chance vs. skill” assessment, which seems more heavily fact-dependent (a key consideration on a motion for a preliminary injunction, where one party is asking the court to essentially rule in its favor without a trial).

McGee argued that one’s skill in making predictions is “irrelevant to the question of whether she is betting on a future contingent event not under her control or influence.” Thus, from the vantage point of the New York AG’s office, the “control or influence” test represents the path of least resistance on a motion for a preliminary injunction: it is a pure question of law that is not dependent on the degree of chance to skill (and all the fact-finding that might necessarily entail).

Almost immediately, McGee honed in on the critical (and potentially outcome-determinative) question: “So what is the ‘future contingent event’ out of the control or influence of the bettor?” She answered that, in the DFS context, the “future contingent event” is “the performance of athletes in real world games which no daily fantasy sports bettor can control.” She explained that “if the athletes do not perform or the games are not held, there can be no daily fantasy sports winner or loser,” adding that “the winner of each daily fantasy sports contest is dependent on what happens in the real games.” McGee used the following illustration to make her point:

Bettors win or lose points based on how many yards are rushed or runs batted in, whether there was a touchdown, or a fumble at the goal, how many sacks there were, which players were benched, whether the game was suspended, and so on and so on.

Who has the control?

McGee stressed that each of these events “is out of the control of the bettor. There is absolutely nothing they could do to influence how many yards a player runs or how many goals he scores, what plays are run, or even whether he slips on the turf because it is wet from the rain.” She said that once the “real games” start, the DFS player is reduced to a mere spectator: “in short, when I play DraftKings or FanDuel, I place my bet, I pick my team, and then I watch TV. The rest is up to the athletes, and all I can do is watch the event unfold before my eyes, perhaps, while yelling at the TV a bit.”

McGee next addressed the DFS sites’ contention that, through this formulation, the Attorney General “is criminalizing all types of activities: chess, investing, bingo, [and] spelling bees.” She characterized this argument as a “red herring,” pointing out “the only game at issue here is daily fantasy sports. No one is attacking bingo marathons, investing or spelling bees.”

The spelling bee example

Taking aim at the spelling bee example, McGee maintained that contestants could obviously “influence” the outcome of such a competition simply “[by] spelling the . . . word [correctly].” She then distinguished that example from the situation where “non-participants” are wagering on the outcome of a spelling bee.

McGee explained that “if someone ran a website taking millions of dollars and bets placed on the outcomes of spelling bees, that would be illegal gambling because the spelling bee is the ‘future contingent event.’ ” McGee added that non-participant bettors would not be able to “control” or “influence” the outcome of a spelling bee “even if [they] spent hours poring over the grammar school educations of the spelling bee contestants and running algorithms to determine which words were likely to be presented, and even if they could put together a fantasy team comprised of competitors in various different spelling bees.”

[My take – the stock investing example would not seem to be an apt comparison either since that activity is statutorily-authorized and subject to state and federal regulation. In other words, stock market investing can be seen as an exception to the definition of gambling]

FanDuel’s argument

Not surprisingly, FanDuel’s outside counsel, John Kiernan, had a different take on this issue.

DFS = ‘true contest’

He referred to DFS contests as a “true contest” in the same vein as a “spelling bee, fishing contest, hole-in-one contest, essay contest, beauty contest, marathon and other road races.” He called these types of contests “a valued and recognized part of the American social fabric” and “a well-recognized component of the American scene.” Kiernan described the characteristics of a “true contest” as follows:

The analysis is, is there an entry fee, is there a preannounced prize and is there what the State calls a “true contest,” that is a contest of skill. And those contests have been recognized [as legal] many, many times. . . . In fact, the way the courts resolve it is that they say, in those contests, the payment of an entry fee is not a wager, is not a bet, and, under New York formulations, is not staking or risking something of value, which is the same thing as a wager or bet.

Kiernan then proceeded to explain why FanDuel’s contests possess the characteristics of a “true contest,” i.e., one that is “skill-based.” He referred to the affidavit of one of his experts, a professor at MIT, who conducted a “multi-year longitudinal study” of the performance of FanDuel competitors and found that FanDuel competitors “consistently, overwhelmingly, consistently outperform, not only random selections of competitive rosters, fantasy rosters, but also rosters that have been adjusted to simulate some degree of skill.”

Replication of skill

According to Kiernan, the MIT professor’s study also showed “replication” among FanDuel players, in that “the most skilled players remain the most skilled players over time, the middle players remain generally middling, and the poor players remain poor players in a way that would be consistent with a skill-based kind of contest.”

Kiernan also pointed to a third characteristic highlighted by the MIT professor’s study: player improvement over time. That is, the study shows that “people who participate in these contests longer and longer get better at it.”

[My take — but isn’t that inconsistent with the finding of “replication,” i.e., that middling players remain middling over time, etc.?]

The judge gives his take

At this point, Justice Mendez interjected (his first substantive comment during the nearly two-hour oral argument) to remind Mr. Kiernan that the New York AG’s argument was centered primarily on the inability of the bettor to “control” or “influence” a future contingent event, rather than the amount of “skill” involved:

THE COURT: But I think what they are arguing is . . . the fact that you have the skill to pick the players, fine, you have that skill. But now you are relying on someone else’s skill to play the game, and that is your contingency there, how that other person performs. …

Justice Mendez then used the example of the “hole-in-one” golf case [Las Vegas Hacienda, Inc. v. Gibson, 359 P.2d 85 (Nev. 1961)], cited earlier by Mr. Kiernan, to make the point that the golfer who pays the entry fee to participate in a hole-in-one golf contest is relying entirely on his own skill and not someone else’s:

THE COURT: And I think that is what happened in the Gibson case you cited in your brief, where the golfer paid to enter, and then that golfer went and took the shot, whether he hits the hole-in-one [or not], but the golfer is doing it himself.

Well, the court says that’s skill. If you could put it in, fine; if not, you are betting on yourself basically, that’s your skill. You are not relying on someone else to do it.

Thinking quickly on his feet (since the Judge’s comment could be seen as agreeing with McGee’s argument), Kiernan responded that the judge had “gotten to exactly what is the central nub of our dispute,” which is “whether fantasy sports participants are mere observers of the contest being played or are actual participants in their very own contest that is separate and apart from the contest that is taking place on the field.” Kiernan maintained that there are “two characteristics” of DFS contests that “set it apart from all the analogies that the State offers about the person who is watching the spelling bee or betting on the chess game”:

The first is that there is a purposeful and elaborate detachment of fantasy sports from the actual outcomes of the games, and that happens in a couple of ways. First, the rules of fantasy sports say that when you are putting together your team, you are required to diversify your team, your roster across a bunch of different teams, so that your outcomes are “detached” from the outcomes of the individual games. But the roster that you select, obviously, those eight or ten people, whatever the number is in a particular contest, never step onto a field together. They never step onto a field against anybody else. They’re detached from those … contests.

And, of course, the outcomes of the underlying football game are really almost indifferent to the fantasy sports competitor, that is, the team could lose, but the selected roster person can perform fantastically, or the team can win and the selected person can perform terribly.

Now, the second element of fantasy sports that similarly sets it apart and makes it different from just somebody who is gambling on an event. . . . Participants in competitions for fantasy sports feel like competitors. The evidence indicates they regularly work very hard to select their teams. They believe that their efforts make a difference. . . . And that is the fundamental thing that sets it apart. . . . [It’s] about accumulating this fantasy roster and competing against somebody else and enjoying that so much that that competition has really been a kind of engrained . . . piece of American culture over recent years, and that is the essence of what makes fantasy sports so different, Your Honor.

Influencing the outcome

Kiernan argued that DFS players “are influencing the outcome because the outcome they are focused on is the outcome of their [DFS] contest, and that is pivotally affected by their skill at selecting their roster.” As Kiernan put it, the DFS contestants “are actually the movers, the marionettiers of that outcome, and the fact that they aren’t participating in the underlying sporting event doesn’t alter their role as very active participants in this separate contest.” He explained that “the event that the fantasy sports contestant is engaged in is the contest over who selects the best roster, [and] that is something … over … which the contestant has enormous influence, control or influence.” Calling this issue “the heart of the case,” Kiernan described DFS players as  “participants in their own competitions . . . whose actions influence the outcome of that contest within the meaning of the statute.”

Kiernan insisted that the fact that DFS players cannot control “all future events” (referring to the real-world games), was not fatal to his argument since no participant in any contest has that power. As he put it, “[a]ll the fisherman can do is throw his line out in the place that his skill has taught him is the place to throw the line out. There is still a role for the fish.”

DraftKings’ argument

Next up was litigator extraordinaire David Boies on behalf of DraftKings.

The distinction between season-long and daily fantasy

Mr. Boies seized on the AG’s statement that once the real games start, a DFS player can’t control what happens, observing that “if that’s true, [then] that’s [just] as true for seasonal sports as it is for daily fantasy sports.” Boies asserted that the AG’s concession that season-long fantasy contests are legal is “fatal” to the AG’s claim that DFS contests are illegal, saying “[t]hey cannot have it both ways. They cannot have that seasonal sports are lawful, not gambling, but that daily fantasy sports somehow are.”

Boies then favorably compared daily fantasy sports to season-long contests, asserting that DFS “actually requires more skill, not less skill” than the longer-duration contests and that players have even “more control” in a DFS contest since there is no draft. As Boies explained:

[I]n daily fantasy sports, every player gets to pick whatever players they want for their roster, they have complete control over them. Which, of course, is a sharp distinction between any card game, poker or otherwise. Because in poker, you play the hand that you’re dealt. It’s true, as they say, you can fold, raise, check, go all in. Those are all different bets. What you can’t do is change your cards. Those cards are random, that’s the chance element. In fantasy sports, you don’t get dealt a hand. You get to pick your own team. And that’s something you have complete control over.

Controlling the contest

Boies next addressed head-on the AG’s contention that DFS contestants “can’t control the real world events that are going on” by asserting that this is “true in any contest that you have.”

Citing horse racing as one example, Boies pointed to the Belmont Stakes (sponsored by DraftKings!) and said that “once the bell rings, once the gate opens, the owner’s got no control over what happens in that race. The owner has picked a horse, picked a jockey, but once the gate opens, he’s got no control. Just like, once you picked your roster, . . . you don’t have any more control. You’re not out there actually throwing the pitch, shooting the basket. [And] that’s true for seasonal [fantasy] sports as well as daily [fantasy] sports.”

[My take – the horse racing comparison is not an apt one because thoroughbred racing is expressly permitted by the New York State Constitution and empowered by state legislation, and, moreover, is regulated by the New York State Gaming Commission]

Boies also disagreed with the AG’s contention that the real-world sporting events are the “future contingent event” for purposes of NYPL 225.00. “The problem” with the AG’s argument, Boies explained, “is that [the real-world sporting event] isn’t the ‘contest’ for which the prize is awarded. When you’re betting on sports, you’re getting a prize for what happens in that real-world sports contest. When you’re betting [he actually said ‘betting’] on fantasy sports, you’re getting a prize for what happens in your fantasy contest. And that fantasy contest is something that the players control.”

Thus, the “contest,” Boies concluded, is not the [real-world] sporting event. There’s no prize for any of those sporting events. The contest for which you’re getting a prize is the daily fantasy sports competition.”

[Note—the pertinent statutory language in NYPL 225.00 is “future contingent event,” not “contest.” Under Boies’ rationale, a fantasy contest centered around multiple spelling bee competitions scheduled on a single day would lead to the conclusion that the fantasy contest, not the underlying spelling bee competitions, is the “future contingent event.” Or, as Steve Ruddock tweeted a few weeks ago, “It would seem that by that logic my placing a sports bet is the event and not the game I’m betting on.”]

NY AG’s rebuttal

During her rebuttal, Assistant AG McGee took aim at FanDuel’s counsel’s argument that the results of a daily fantasy contest are “detached” from the actual outcomes of the real-world sporting events, and, therefore, are not comparable to betting on a spelling bee or chess match. She stressed that the “purposeful detachment” test posited by FanDuel’s counsel is not recognized in the law and is certainly not part of the New York statutory framework. As she explained to Justice Mendez:

You’ve heard a lot of new tests being bandied about by the defense today. Frankly, I never heard of, nor has it been revealed in any of our case law, we have heard the true contest. . . . We have heard the purposeful detachment test, the fully realized test—which I personally hope to attain some day—the more fun tests, none of these are in the law. They’re certainly not within the four corners of Penal Law Section 225.

Season-long vs. DFS misstep?

But McGee missed a golden opportunity to properly explain the rationale for the State’s distinction between season-long fantasy leagues (which it contends are legal) and daily fantasy sports contests (which it contends are illegal).

She offered only that traditional season-long fantasy leagues are “typically games among friends or coworkers and are about bragging rights” and that “the [main] difference is that there is no wager being controlled and operated and fronted by the management of that daily or traditionally fantasy sports enterprise.”

[My take—what about CBS Sports and Yahoo?]

She continued that “[t]here is no wager that is happening within the four square corners of the event that is happening, whether it is through papers, whether it is through a website, no wager is happening through the website.”

Justice Mendez appeared taken aback by McGee’s suggestion that there is no “entry fee” in season-long fantasy leagues (as would many of my co-workers who have been playing for years). He asked her whether there was an “entry fee” for season-long contests, to which McGee responded that [t]here might be an administrative fee . . . [but] that in traditional fantasy leagues[,] operators don’t take a cut of the wagers.”

She then characterized season-long fantasy contests as “a different animal,” and offered that if DraftKings and FanDuel “were to offer season-long bets, take a cut of the bets and offer cash prizes for winners, we, the State, would consider whether it was a gambling operation worthy of an enforcement action. [I’m] not saying we wouldn’t, that’s not an issue here today. What is at issue today is what the daily fantasy sports operators are doing, and that falls clearly and really simply within the four corners of [New York Penal Law Section] 225.00.”

This eventually led to Justice Mendez’s next question: “I still don’t understand . . . why it is that traditional sports would be allowed whereas Daily Fantasy Sports wouldn’t? What is the difference? What is the core difference?” McGee responded in a similar vein by explaining (not entirely accurately) that while there is an entry fee in daily fantasy sports, “there is not always an entry fee in traditional Fantasy Sport [and, further], there is not always a prize in traditional Fantasy Sport.”

As an illustration, McGee pointed to her husband’s participation in a season-long fantasy league involving soccer. She noted that in her husband’s league, “there is no prize but for bragging rights with his friends. There is no entry fee. That is a traditional Fantasy Sports game.” She reiterated that season-long fantasy sports contests are “a horse of a totally different color” because there are “no wagers, often no prizes, and certainly nothing that conforms to [New York Penal Law Section] 225.00.”

Given that Justice Mendez asked only two (maybe three) questions during a two-hour hearing, Ms. McGee’s misapprehension of season-long fantasy sports contests (which often involve both entry fees and prizes, as Mr. Boies was quick to point out later) may have very well snatched defeat from the jaws of victory.

Differentiation not made

In my opinion, there was a more effective way for the AG to differentiate between daily fantasy sports contests and season-long leagues: in the latter, players are able to “control” or “influence” the outcome of their contests through “in-season” trades, waiver claims and roster adjustments, a feature wholly lacking in daily fantasy sports (where the rosters are fixed before the game starts).

From the vantage of “control” and “influence,” daily contests and season-long contests are not close comparators: the contestant in a season-long contest arguably has greater control and influence by being able to select “new cards” (e.g., new players) midstream (e.g., between games), whereas the DFS contestant can only exercise control or influence through the application of skill in selecting his initial roster before the actual games start (after which he becomes a mere spectator).

That is the real difference between DFS and season-long contests, at least with respect to the cornerstone issue of whether contestants can “control” or “influence” the outcome.  Whether this missed opportunity comes back to haunt the AG’s office remains to be seen.

The ‘balancing of the equities’ may forestall a preliminary injunction

Although the two-hour oral argument also addressed other issues, such as whether DFS is a “contest of chance” under New York Penal Law 225.00, I decided to focus exclusively on the “control or influence” language of NYPL 225.00 because that is the basis on which a preliminary injunction is likely to be granted (for either side).

Interpretation of the law

The determination of whether DFS is a “contest of chance” (which is defined as “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance”) is much more fact-intensive (as evidenced by the numerous affidavits submitted by both sides) than is identifying the “contest” and “future contingent event” at issue, which is purely a matter of statutory interpretation (and, thus, a question of law more suitable for early resolution).

In other words, if Justice Mendez were inclined to grant either side a preliminary injunction, he would likely do so based on an assessment of whether paying an entry fee to enter a DFS contest is tantamount to risking or staking money on the outcome of a “future contingent event” which cannot be controlled or influenced by the contestant.

This formulation, in my opinion, represents the more obvious and cleaner basis for preliminary injunctive relief, as underscored by the disproportionate amount of time devoted to this issue by counsel at oral argument.

What will the verdict be?

So how will Justice Mendez rule? Given his reticence at oral argument (he asked only two or three questions at most), it is difficult to get a read on this judge. But the few questions he did ask present obvious problems for both sides.

For DraftKings and FanDuel, I would be concerned about Justice Mendez’s apparent acknowledgement that DFS contestants rely, at least in part, on the skill of the real-world athletes whose performance cannot be controlled or influenced.

To counteract this early impression, DraftKings and FanDuel would have to persuade Justice Mendez that the “future contingent event” (and not just the “contest” in a purely colloquial sense) is the daily fantasy sports contest itself rather than the underlying professional sporting events to which the DFS point scoring is inextricably intertwined. This, in my view, is a tall order, especially at this early stage of the proceedings.

From the vantage point of the New York AG, the biggest concern lies in his office’s failure to adequately explain the basis for treating season-long fantasy contests differently than daily contests.

The AG’s office had better hope that one of the judge’s law clerks has a firmer understanding of what distinguishes season-long leagues from daily fantasy contests on the core issue of “control or influence.”

As stated earlier, the ability to make “in-season” roster adjustments differentiates season-long contests from daily contests, and that may have been the best way to explain the disparate treatment by the AG’s office. But the AG’s office did not make that point at oral argument, and its inability to cogently explain why one is legal and the other is not may have compromised its ability to obtain a preliminary injunction.

The best guess: No preliminary injunction

If I had to venture a guess (and with a “cold bench,” that’s all any of us really have), I suspect that Justice Mendez will deny the New York AG’s motion for a preliminary injunction based on a “balancing of the equities” (the third requirement for preliminary injunctive relief, with the first two being “a likelihood of success on the merits” and a showing of “irreparable harm”).

Under a “balancing of the equities,” the moving party is required to demonstrate that the harm it would suffer without a preliminary injunction is greater than the harm that would be suffered by its opponent if an injunction were entered. An injunction is typically denied where the harm to the non-moving party from being preliminarily enjoined “substantially outweighs” the harm to the moving party if an injunction were not entered.

This element would seem to heavily favor DraftKings and FanDuel, which would face the loss of their largest market (and the prospect of payment processors seeking to exit their contracts) should Justice Mendez grant the AG’s request for a preliminary injunction.

By contrast, the AG may be hard-pressed to successfully articulate a greater level of harm since DFS contests have operated openly and conspicuously in New York for several years. While the AG may not be estopped or barred from pursuing an enforcement action as a matter of law, his delay in bringing suit nonetheless raises the issue of whether a “waiver” of irreparable harm has occurred.

While delay alone may not adversely impact the AG’s entitlement to a permanent injunction upon prevailing on the merits of the case following a trial, it could undermine his ability to obtain a preliminary injunction, which requires a showing of irreparable harm.

In commercial cases, even a delay as little as two months in filing suit could preclude the entry of a preliminary injunction based on a “waiver” of irreparable harm.

Whether that doctrine applies to government enforcement actions is not clear, but the fact that these contests have existed openly for several years would appear to undercut the AG’s contention that the harm to the people of New York through “no injunction” would be greater than the harm that would be suffered by DraftKings and FanDuel if they were forced to immediately exit their largest market.

Thus, with the actual merits of the case appearing to be a close call following last week’s oral argument, look for the “balancing of the equities” to emerge as a key component of the judge’s decision.