Daily Fantasy Sports Gets Victory In New York Court Battle

On Friday morning, a New York judge effectively shut down daily fantasy sports in the state. By afternoon, a higher court returned the status quo.

The daily fantasy sports industry is facing its starkest challenge to date after New York Supreme Court Justice Manuel Mendez decided to grant state Attorney General Eric Schneiderman’s request for an injunction to effectively force DFS operators out of the Empire State. Later in the day, however, an appellate court granted a stay of the injunction, returning DFS to where it was just hours earlier.

After the stay had been issued, FanDuel indicated that it would be reentering the New York market, after leaving several weeks ago in the wake of the cease-and-desist letters issued by Schneiderman.

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The initial fallout from the NY DFS ruling

After the initial injunction was granted, DraftKings said it was “filing an appeal to preserve the status quo.” FanDuel already stopped serving New York customers in November. According to one legal DFS analyst, the injunctions were slated to start immediately, at least before the stay:

The preliminary injunction against DK/FD takes effect immediately; the 30 days refers to the filing of an answer in response to complaint
— Daniel Wallach (@WALLACHLEGAL) December 11, 2015

The Boston Globe reported that PayPal and Bank of America were moving to stop processing payments for DFS in New York, but PayPal reversed course after the stay was granted.

#BREAKING: PayPal is about to shut down #DFS transactions in New York. https://t.co/ZQOuDDvO8C #DraftKings #FanDuel pic.twitter.com/VIf3RQjTX7
— Dan Adams (@Dan_Adams86) December 11, 2015

The basics of the initial NY DFS injunction, and reaction

What some saw as a key determinant of the legality of DFS — that is a game of skill — didn’t even come into play in the decision, nor did the definition of “future contingent event” under state gambling law that was argued by both sides in the case.

DraftKings indicated it would appeal (it’s appeal filing can be seen here) in a statement from David Boies, counsel to DraftKings and Chairman of Boies, Schiller & Flexner LLP:

“We are disappointed with the Court’s decision, and will immediately file an emergency notice of appeal in order to preserve the status quo.

Daily Fantasy Sports contests have been played legally by New Yorkers for the past seven years and we believe this status quo should be maintained while the litigation plays out.”

FanDuel followed with its own statement and appeal:

We will be appealing — this is only the beginning of the legal process and, perhaps more importantly, the New York legislature is already moving forward on action to ensure our game remains legal and is regulated, which we strongly support. The court specifically noted that this was not a final determination of the issue and that discovery would be needed to fully resolve the legal question, which we think should be decided in our favor when all of the evidence is in.

New Yorkers have been able to legally play our games for more than six years, and today’s preliminary decision was wrong and we expect we will ultimately be successful. A number of issues became very clear in court: first, the outcome of fantasy sports contests are determined by skill, not chance. Second, the Attorney General’s argument for season-long fantasy sports being legal does not hold water — if season-long fantasy is legal, than daily fantasy is legal, and vice-versa.

The court was very concerned about this issue, but found the issue of whether the AG was failing to enforce against seasonal fantasy sports was not yet squarely before the court – but it will be. As the court itself noted, FanDuel is permitted in other states, making New York very much an outlier on the issue, as most states are moving towards sensible regulations — not bans, but the Attorney General decided he knows what is best by denying New Yorkers access to a game they have embraced and shared with friends and family for years. We remain committed to ensuring all fantasy sports are available to New Yorkers, and will work to bring our product back to sports fans around the State through our appeal and working with the legislature to enact sensible regulations for fantasy sports.”

And from the NY AG’s office:

“We are pleased with the decision, consistent with our view that DraftKings and FanDuel are operating illegal gambling operations in clear violation of New York law. I have said from the beginning that my job is to enforce the law, and that is what happened today.”

The decision came two weeks after a hearing in the New York Supreme Court where Justice Mendez declined to make an immediate ruling.

Read a breakdown of that hearing from gaming attorney Daniel Wallach and our coverage of the the broader context for DFS in New York.

What the Supreme Court judge said in the injunction

There were two separate cases — one against FanDuel and one against DraftKings — and preliminary injunctions were granted against both, while the temporary restraining orders asked for by both operators were subsequently denied as a result.

Here are some of the key points from Mendez’ ruling:

DFS constitutes illegal gambling in NY

The judge ignored case law from a New Jersey district court that FanDuel and DraftKings used in its filings, regarding “entry fees” not being the same as “wagers” or “bets,” saying it was not applicable here. From the ruling:

The payment of an “entry fee” as high as $10,600, on one or more contests daily could certainly be deemed risking “something of value.” The language of Penal Law 225.00 is broadly worded and as currently written sufficient for finding that DFS involves illegal gambling.

UIGEA not important vis a vis state law

FanDuel and DraftKings pointed to the Unlawful Internet Gambling Enforcement Act federal carveout for fantasy sports, but Mendez dismissed that argument:

The UIGEA language exempting fantasy sports has no corresponding authority under New York State law as currently written. … The exception found in UIGEA does not apply under the current New York statutory language.

Delay in action by AG was irrelevant

One of the arguments brought by DraftKings and FanDuel was that they had both operated in New York for years, with no reason to believe that they were running illegal contests until November. The judge did not buy that argument:

…The possibility of estoppel against a governmental agency is to be denied, in all but the, “rarest of cases”… The DFS corporations, have not stated a basis to find the “rarest of cases” exception applies to the NYAG’s claims, and the potential for public fraud.

Seasonlong vs. DFS, also irrelevant

The NY AG has said that seasonlong fantasy was legal in NY, while DraftKings and FanDuel argued that seasonlong actually involved less skill than DFS. The judge found the fact that DFS was targeted and seasonlong was not to be immaterial:

Defendant’s contention that plaintiff failed to seek restraint as to Seasonal Fantasy Sports, is not relevant to the pending motion because that relief is not before this Court.

‘Likelihood of success’ for AG

For a preliminary injunction to be granted, a likelihood of success warranting the injunction must be found. Mendez agreed that the AG was likely to prevail in the case:

The balancing of the equities are in favor of the NYAG and the State of New York due to their interest in protecting the public, particularly those with gambling addictions. FanDuel and DraftKings are only enjoined and restrained in the State of New York, DFS is permitted in other states, and the protection of the general public outweighs any potential loss of business.

What happens next?

The next steps will come into focus as we get some distance from the decision. But in the immediate aftermath, we can speculate with confidence on a few points.

Start of a lengthy court battle

Today represents a mile marker, not an finish line. Justice Manuel Mendez’s decision was appealed, and the issue of the preliminary injunction is still in play.

Meanwhile, the larger question of the legality of daily fantasy sports appears likely to be debated at trial, a process that could stretch over months.

Industry impacts

Status of DFS in New York: It appears that operators that were already in New York, before the stay, will remain operational in the state. After PayPal said it would continue to process payments for DraftKings, at least part of the processor side of the issue was cleared up. FanDuel, as noted above, reentered New York.
Status of DFS in other states: The decision has no direct impact on the legal status of DFS in other states. And it is far from final, meaning that it will have limited influence outside of New York. With that said, it is likely that other states currently considering the DFS question — especially states with gambling law similar to New York’s — will include the decision as weight on the scale in their process.

At least 8 other states use the same test as NY for “gambling”: Alabama, Alaska, Hawaii, Missouri, NJ, Oklahoma, Oregon and Washington
— Daniel Wallach (@WALLACHLEGAL) December 11, 2015

PR impact: The decision is another point on a line stretching back to early October that is crowded with negative developments. The bad news in the morning was followed by good news in the afternoon, so the PR impact appears to be mitigated while the preliminary injunction is sorted out.

Background of the dispute

How did we get to this point in the New York DFS case?

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.
On Nov. 10, Schneiderman issued cease and desist letters to both DraftKings and FanDuel. Neither site immediately left the NY market in the wake of those letters.
On Nov. 13, FanDuel announced it would stop taking deposits from New York players, which led to them no longer accepting entry fees from any New York user a few days later.
On the same day, both FanDuel and DraftKings sought to preemptively stop any action by the AG.
Temporary restraining orders were asked for by both the DFS operators on Nov. 16. The TROs were denied and a court date was set.
On Nov. 17 Schneiderman filed for an injunction to force DraftKings and FanDuel from operating in New York
On Nov. 25, Judge Manuel Mendez heard both sides and deferred his decision until a later date.

The intersection of the courts and legislation

The decision comes as New York has four active bills in the legislature dealing with daily fantasy sports, and shortly after a committee hearing was held this week. Assemblymember Dean Murray, who has emerged as the champion of DFS in the state, offered this via Twitter on the initial injunction:

While I respect the judge’s decision, I do disagree with it & will move forward with legislation legalizing & regulating #DFS in NY
— Dean Murray (@DeanMurray4NY) December 11, 2015

While the broad strokes of a legislative solution to the broader situation are conceivable (i.e., lawmakers carve out DFS from the state gambling code, rendering the question of legality moot), the finer points contain a number of unanswered questions:

Is there sufficient political will to rapidly advance a DFS bill?
Can New York address daily fantasy sports legislatively without running afoul of PASPA?
What parts of the code or state constitution would need to be altered to provide sufficient safe harbor?
Will the AG’s office expect some sort of accounting for pre-legislative activity in New York by DFS operators?

In any case, we’re looking to January at the earliest before a clear path begins to emerge on the legislative front.

Dustin Gouker contributed to this report.

Daily Fantasy Sites Get Reprieve After Initial Loss In New York Court Battle; FanDuel Reenters NY