Facing threat from N.Y. attorney general, FanDuel suspends entries in state
FanDuel on Tuesday temporarily suspended entry to daily fantasy sports contests for people in New York after state attorney general Eric Schneiderman filed lawsuits along with motions seeking preliminary injunctions to keep the company and competitor DraftKings from operating there.
The widely expected lawsuits come after the two daily fantasy sports (DFS) companies sought relief in the New York Supreme Court from Schneiderman's order last week that they stop accepting illegal “wagers” in New York.
The attorney general’s filings on Tuesday assert that DraftKings and FanDuel have been operating “an illegal sports gambling business in New York, in defiance of the state constitution, the penal law, and other statutes.”
FanDuel announced that it would temporarily suspend entry to contests for people in New York, starting at 2:30 p.m. Eastern on Tuesday.
In a Q&A on its website, FanDuel, which is based in New York, said it would check locations of users to make sure they submitted entries from states where it is permitted. Those who attempt to circumvent that with proxy servers of virtual private networks could see their accounts terminated and FanDuel refuse to pay out winnings.
“We believe that this restriction is temporary and we hope to be able to offer our paid contests to New Yorkers again very soon,” FanDuel told its users.
DraftKings, which is based in Boston, sent an e-mail to its New York customers on Tuesday assuring them that they could continue submitting entries.
“To be clear: Your right to play DFS in New York will remain unchanged unless a New York court decides otherwise,” the DraftKings e-mail stated.
Emergency hearing set for FanDuel, DraftKings
The complaints filed Tuesday by the attorney general argue that the state meets the three-prong standard needed for a preliminary injunction: a likelihood of success on the merits, irreparable injury and the balance of equities in the state’s favor.
The state argues it is likely to succeed because FanDuel and DraftKings have operated illegally and caused injury to New York residents.
“The fact that the laws being violated here were specifically designed to protect the public tips the equities decidedly in the State’s favor,” the motions for the injunction state. “By contrast, there are no private equities in the defendants’ favor. Defendants have no right to operate an illegal gambling operation."
On Monday, Justice Manuel Mendez denied the companies’ request for a temporary restraining order against Schneidermann's order from last week, and he set a hearing for Nov. 25.
That hearing will focus on the question of daily fantasy sports' legality. The companies have argued that they are games of skill and, thus, legal under federal law. But Schneiderman has argued that they are illegal under New York law because while they can include skill, they depend on a contest of chance to a material degree – a standard of determining what is gambling in the state.
Schneiderman argued the DFS companies satisfy the other standard in determining gambling in that a person risks something on a future contingent event not under his control or influence. That is likely the better argument, said Daniel Wallach, a sports and gaming law expert at Becker & Poliakoff in Florida.
“The New York AG has made a quite compelling case,” said Wallach. “He brought his best arguments and led with his best argument, which wasn’t the degree of chance to skill but the lack of influence or control over the outcome. That prong of the gambling definition will be the more problematic of the two for DraftKings and FanDuel to confront. That is a much lower threshold, in my opinion, than getting into a battle of the experts as to how much skill versus chance is involved. The AG made the point, and this is a really important point, that it isn’t how much skill is involved but whether chance plays a material role in the outcome. You could have a whole ton of skill, but still have a chance play a determinative role.
“Flipped on its head or stated another way, DraftKings and FanDuel will have a hard time maintaining that chance is immaterial because that really is the inverse of materiality, immaterial. For chance to be immaterial ignores the total lack of impact, control or influence on the real-world game itself or on the real-world performance of athletes.”
Schneiderman’s office had previously asked the companies’ payment processors to stop processing their payments. FanDuel and DraftKings responded last week by filing a lawsuit against Schneiderman.
“We look forward to being afforded a full and fair opportunity to demonstrate why daily fantasy sports are legal under New York State law,” a spokesperson for DraftKings said in a statement. “We believe the Attorney General’s view of this issue is based on an incomplete understanding of the facts about how our business operates and a fundamental misinterpretation and misapplication of the law.
“We remain committed to ensuring that New Yorkers retain the right to continue to play the daily fantasy sports games they love.”
A FanDuel spokesperson said, “FanDuel has always complied with state and federal law and we are going to continue to fight to ensure millions of New Yorkers have the right to play the fantasy sports games they love. We look forward to the court vindicating our position next week.”
Daily fantasy sports companies believe they are legal under a 2006 federal law that cracked down on online gambling but exempted paid daily fantasy sports under certain conditions, including that they reflect the skill of the participants as opposed to pure luck or chance.
That law, however, was enacted before these companies existed and doesn’t give them immunity from state gambling laws. FanDuel was founded in 2009, and DraftKings started offering daily fantasy games in 2012.
In exchange for an entry free, the companies offer customers the chance to win cash prizes based on the statistical performances of players in real-life sporting events. Though both companies have been operating for years, it wasn’t until recently that they were targeted by regulators, prosecutors, plaintiffs and lawmakers.
That attention is due in part to an advertising blitz since August that emphasized how easy it was to win big cash jackpots by playing their games. The state’s filing highlighted that, using data from DraftKings to show it increased its broadcast and cable advertising on NBC Universal/Comcast from $1 million in 2014 to $21 million in the first 10 months of this year. Similarly, FanDuel spent $2.2 million last year and $12 million so far this year.
It was the companies’ own information that provided Schneiderman with his best evidence, Wallach said. In internal memos, online discussions and even the search engine optimization of its websites, the companies used gambling terms or compared their businesses to poker, sports betting and casino gambling.
While that doesn’t settle the argument of law, Wallach said, the optics are not good for the DFS sites. As for the legal question, Wallach sees a challenge ahead for FanDuel and DraftKings.
“The attorney general has presented the stronger case, but it is not a fait accompli,” said Wallach, who believes the industry should be legal and regulated.
“The attorney general will likely prevail in this proceeding based upon the low threshold for gambling under present New York law. That can’t be avoided. This court is interpreting the law as it’s written currently, not as it should be written or how it may be written next year or the year after. This is just too low of a bar for the fantasy sports industry to feel confident in their chances.”
Contributing: Brent Schrotenboer