Photographer: Zia Morales/Bloomberg

N.Y. Daily Fantasy Players Put on Hold by Judge Considering Ban

  • FanDuel, DraftKings seek to operate during court fight
  • Judge is first to weigh game-of-luck or skill debate

Daily fantasy sports players in New York are going to have to wait to find out whether they can legally play while Attorney General Eric Schneiderman seeks to permanently ban the games in the state.

A New York judge declined to rule immediately on FanDuel Inc. and DraftKings Inc. requests to let people in the state keep playing while they fight the attorney general in court. Schneiderman’s demand on Nov. 10 that the sites stop taking bets upended an industry already in turmoil, following claims that some employees were making money by using insider information.

Judge Manuel Mendez in Manhattan said he would rule on the issue “very soon.”

At least a dozen states are reviewing the legality of daily fantasy sports or waiting to see how the New York dispute is resolved. A key issue is whether the competitions are a game of chance or a contest of skill, said Linda A. Goldstein, an attorney in New York with Manatt Phelps & Phillips LLP who has counseled daily fantasy companies on U.S. gaming laws. 

"To decide this case, the court is going to need to address that issue head on,” said Goldstein. "This is obviously a pivotal case because it’s really the first time a court will be squarely addressing the merits” of the legal issue.

FanDuel and DraftKings, although in operation for almost a decade, gained prominence in the past few years as their popularity surged and advertising swamped television screens, radio and billboards. But as Uber Technologies Inc. and Airbnb Inc. found out, exponential growth invites the scrutiny of regulators even as it attracts investors.

Dueling Arguments

Lawyers for FanDuel and DraftKings are urging the judge to let them keep operating in the state. FanDuel has already suspended play for people located in New York. DraftKings has allowed them to play as it waits for a decision from the judge.

John Kiernan, an attorney for FanDuel, said at the Wednesday hearing that daily fantasy sports games are "true contests" like marathons and fishing competitions where contestants pay a fee to enter in the hopes of winning a prize.

Fluke events, such as a blown call by a referee, a change in the weather or a word in the dictionary that a spelling bee participant didn’t study are part of such contests and don’t mean they aren’t games of skill, he told the judge.

"There’s no need to do any kind of fine calibration to determine how much is chance and how much is skill," Kiernan said.

Assistant Attorney General Kathleen McGee, head of Schneiderman’s Internet bureau, said the companies entry-fee analogy is misleading.

"The only game being attacked here is daily fantasy sports contests," McGee said. "If someone set up a website that allowed people to make millions of bets on the outcome of spelling bees, that would be gambling."

Attorneys for Schneiderman are pressing for a ruling that would prevent the companies from letting New Yorkers play while he seeks a permanent shutdown.

Mendez probably won’t make a final decision until next year. The ruling after Wednesday’s hearing likely will indicate which way the judge is leaning and would stay in place until a trial, unless overturned on appeal.

In daily fantasy sports contests, players choose a roster of athletes who earn points based on their performance in real games. The entries usually cost from less than $1 to thousands of dollars, with payouts sometimes exceeding $1 million to the winner.

New York would become the seventh state to ban daily fantasy sports if Schneiderman wins his suit. Other states, such as Massachusetts, have moved to regulate the industry, a move that DraftKings lawyer David Boies called a better approach.

At least a dozen states are considering legislation that would regulate the industry, reviewing the legality of the contests or watching Schneiderman’s case, including Ohio, Pennsylvania and Texas.

Colorado Attorney General Cynthia Coffman has been talking to law enforcement and other states including New York about the "next best steps," spokesman Roger Hudson said.

"This is something we’ve been looking at for a good period of time," Hudson said in a telephone interview.

Other Challenges

There have been other challenges to fantasy sports that have been dismissed on procedural grounds that entry fees didn’t constitute bets or wagers, said Goldstein, who helped draft a "carve out" in a 2006 federal gaming law that banned Internet poker but legalized fantasy sports games.

While a win by Schneiderman may encourage other regulators to pursue similar paths, Goldstein said she doesn’t see a “volcano” since gambling laws differ on whether chance has to be a “material factor” or the “dominant factor” in a game’s outcome.

"I don’t think it’s going to have a snowball effect should the attorney general win," said Joseph Kelly, a business law professor at the State University of New York College at Buffalo. "But it depends on what’s in the decision. If it’s just a ruling under New York law that chance is a material factor, most states don’t follow that test."

The cases are FanDuel Inc. v. Schneiderman, 161691/2015, New York State Supreme Court (Manhattan); and DraftKings Inc. v. Schneiderman, 102104/2015, New York State Supreme Court (Manhattan).

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