New York Attorney General Eric Schneiderman made news on Tuesday when he ordered FanDuel and DraftKings to stop accepting wagers in the state.
Both of the daily fantasy sports sites allegedly run afoul of New York law, which prohibits bookmaking that profits from illegal gambling activity, according to Schneiderman.
The cease-and-desist order adds to the scrutiny faced recently by both leagues, which call their contests games of skill, citing as support a federal law passed in 2006 that excludes fantasy sports from the definition of the term “bet” or “wager.”
Schneiderman’s office thinks otherwise. In a letter to FanDuel (a nearly identical version went to DraftKings), Kathleen McGee, chief of the attorney general’s Internet bureau, wrote:
“Our review concludes that FanDuel’s operations constitute illegal gambling under New York law, according to which, ‘a person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence.’
FanDuel’s customers are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes. Further, each FanDuel wager represents a wager on a ‘contest of chance’ where winning or losing depends on numerous elements of chance to a ‘material degree.’”
The Empire State classifies as gambling games that involve a significant amount of chance. As David Apfel and Andrew Kim of the law firm Goodwin Proctor noted in a column last April, most fantasy contests involve some element of chance. The degree matters.
DraftKings tells me it is not leaving the New York market and plans to fight today's ruling by the attorney general.
— David Payne Purdum (@DavidPurdum) November 11, 2015
The federal law that excepts fantasy leagues from the definition of Internet gambling does nothing to upend state laws that prohibit, allow, or regulate gambling, leaving the leagues to navigate the variations in laws governing gambling in each state.
Currently DraftKings, FanDuel, and other fantasy sites operate in 45 states that allow games with some element of chance so long as skill predominates.
But elements of daily fantasy sports—significantly both the dailiness and fact that prizes vary with the number of participants—suggest that chance may outweigh skill in the outcome. According to Apfel and Kim:
“Many states distinguish between entry fees and bets, and have a clear law stating that paying to play in a game or contest for a prize is perfectly lawful, provided the prize has nothing to do with the number of entrants. Where a game’s prize is set in advance and does not turn on how many individuals enter the game, these states permit the game to proceed. But where prizes consist of a percentage of the entrance fees or are otherwise dependent in whole or in part on the number of participants, the laws in these states treat the otherwise benign entry fees as illegal bets or wagers.”
The frequency of the contests suggests that playing daily fantasy is less about drafting well—a skill that tests entrants’ ability to size up the skills of players they draft for their fantasy teams, an activity akin to what professional sports teams do as part of their business—than about luck.
Dustin Gouker, who covers the daily fantasy industry for Legal Sports Report, put it this way recently:
“There are thousands of contests that you can choose to enter on a variety of sites, with entry fees from 25 cents to thousands of dollars. Those buy-ins are how daily fantasy sites make money; they take a percentage of each entry fee. The biggest contests routinely pay out millions of dollars.
Does it sound like gambling, on its face? Gambling can be defined as wagering money on an uncertain outcome — like, say, a last-minute fumble that wins a player more than a million dollars. Sure sounds like daily fantasy fits the bill.”
A lot of money rides on the distinction. FanDuel and DraftKings each are valued at more than $1 billion and count among their investors the NBA, NBC Sports, Google, and Time Warner/Turner Sports (FanDuel), and Major League Baseball; Robert Kraft, who owns the New England Patriots; Jerry Jones, owner of the Dallas Cowboys, and Fox Sports (DraftKings).
Together the companies have 1.1 million active players in the Empire State, which houses 12.8% of the fantasy sports market, according to the Times. Being shut out of New York would cost the leagues a combined $35 million in revenue per year.
Then there’s the ad spending. FanDuel and DraftKings have spent more than $220 million since August, as anyone who has watched sports on TV or the Internet during that time knows. Fox Sports’ investment in DraftKings came with a promise by the fantasy site to spend $250 million on ads with the network over the next three years.
Judging by their investments, the investors thus far have concluded that benefits of backing the companies outweigh the risks. For the leagues, daily fantasy sports translate to viewers for games. Nearly two-thirds of daily fantasy players say they watch more live sports as a result of fantasy play, according to the Fantasy Sports Trade Association, an industry group.
Both DraftKings and FanDuel are pushing back against the charges by Schneiderman. DraftKings said in a statement it “will examine and vigorously pursue all legal options available” to continue operations in the Empire State, and accused the attorney general of failing to “understand our business or why daily fantasy sports are clearly a game of skill.”
“Fantasy sports is a game of skill and legal under New York State law,” echoed FanDuel.
Of course, a larger threat to the companies may come less from what happens in New York and more from what happens if other states follow Schneiderman’s lead. Last month, regulators in Nevada ordered daily fantasy sites to stop accepting wagers until they obtain a gambling license. The Department of Justice reportedly is investigating the sites, too.
Both DraftKings and FanDuel say they welcome government regulation. Officials in some states seem inclined to agree. Massachusetts Attorney General Maura Healey said on Wednesday that daily fantasy sites constitute “a form of gambling” but added that “it’s important to get beyond that.”
“Let’s focus on the issues, let’s focus on protecting consumers, and let’s set out some really robust standards for how this industry should operate, if it’s going to operate here in this state,” Healey told MassLive.
Healey’s suggestion may represent a lifeline. For those in the business of daily fantasy sports, a rule book soon may seem like the safest bet of all.