Is daily fantasy sports legal? An analysis of the debate in Nevada, New York and Illinois - Part 2
Published 22 February 2016 By: Andrew Visnovsky
This two part article explores the challenges to the legality of daily fantasy sports currently taking place in various states across the United States. While the legality of daily fantasy is being investigated and debated at a Federal level, the state challenges are arguably the more pressing given the speed at which they are progressing.
Part 1 of the article looked at the position in Nevada. Part 2, below, moves on to investigate New York and Illinois, before giving a brief recap of the position in other states and offering comment.
Attorney General Suit
The New York Attorney General (NYAG) filed suit against FanDuel and DraftKings on November 17, 2015.1 Earlier, the NYAG had sent cease and desist notices to the companies.2 In the notices, the NYAG outlined the major points of its case against the daily fantasy operators. The letter states that the AG’s analysis of the law:
“concludes that [Daily Fantasy’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.’”3
The NYAG letter stated that:
“[daily fantasy] customers are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes,” and that each [daily Fantasy] wager represents a wager on a ‘contest of chance’ where winning or losing depends on numerous elements of chance to a ‘material degree.’”4
The NYAG asserted that daily fantasy operators collect “wagers” in the form of entry fees, set prize payouts, and profit from people betting (through the above-mentioned rake).5 In NYAG’s submission to the Supreme Court of New York, it likened daily fantasy to “prop bets,” citing an un-named daily fantasy CEO who described daily fantasy as “prop betting parlay on steroids.”6 In its submission, the NYAG goes on to say that daily fantasy’s prime draft method, the “salary cap draft” daily fantasy companies set odds of players performances by deterring their “salary” for the draft, which likens them to sports books.7
The NYAG distinguishes daily fantasy operations from “traditional” fantasy sports, reasoning “traditional fantasy sports conduct a competitive draft, compete over the course of a long season, and repeatedly adjust their teams. They play for bragging rights or side wagers, and the Internet sites that host traditional fantasy sports receive most of their revenue from administrative fees and advertising, rather than profiting principally from gambling.”8 According to the NYAG:
“unlike traditional fantasy sports, the sites hosting [daily fantasy sports] are in active and full control of the wagering” and “unlike traditional fantasy sports, [daily fantasy sports] is designed for instant gratification, stressing easy game play and no long-term strategy."9
The NYAG’s suit centers on Article 1 Section 9 of the New York Constitution, and the advertising tactics of DraftKings and FanDuel.10 Under this section, “any lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling” is illegal.11 The NYAG’s complaint alleges multiple violations of provisions of New York Penal Law (NYPL) art. 225, which outlines criminal punishments for gambling offenses.12
The NYAG also argued that DraftKings and FanDuel’s advertising practices violated New York’s consumer protection and fraudlaws. Specifically, the NYAG alleges that DraftKings and FanDuel are misrepresenting and advertising “that [they] compl[y] with applicable laws”; “the likelihood of a casual player will win a jackpot”; “the degree of skill implicated in the games”; and “that Defendant’s games are not considered gambling.”13
In the suit, the NYAG moved for a preliminary injunction pending the outcome of the case against DraftKings and FanDuel.14 FanDuel responded by moving for injunctive relief against the NYAG from taking any enforcement action against them, and a declaratory judgment that daily fantasy is not gambling.15 DraftKings petitioned the Supreme Court to determine that the NYAG’s action was “arbitrary and capricious, [and] in excess of [the NYAG’s] jurisdiction."16 As well, DraftKings made the same motions as FanDuel regarding injunctive relief and declaratory judgment.
Per the New York CPLR, to award a preliminary injunction under New York law, a court must find;
- likelihood of success on the merits of the case;
- irreparable harm would occur absent the grant of an injunction, and
- balancing of the equities favors the moving parties interests.17
The New York Supreme Court ruled that an injunction against DraftKings and FanDuel was valid. Specifically, the trial court found that:
- the NYAG established a likelihood of success based on the Courts interpretation of New York gambling law, and their classification of Daily Fantasy as a game of chance;18
- because irreparable harm is implied for fraudulent and illegal conduct under New York Law, irreparable harm existed; and
- because DraftKings and FanDuel operate nationally, and the injunction itself only barred their operation in New York, the balance of the equities leaned in favor of the plaintiffs.19
The Supreme Court also found that FanDuel and DraftKings did not meet the above standards for the preliminary injunctions they requested.20
In response to the Supreme Court’s ruling, DraftKings and FanDuel filed for emergency injunctive relief from the Appellate Division of the New York Supreme Court.21 The Appellate Division granted the stay of appeal conditioned on the fact that an appeal be perfected for the May 2016 judicial term.22
Relevant Case Law
As mentioned above, the skill/chance divide generally takes center stage in the daily fantasy sports legality debate.
One federal ruling, U.S. v. DiCristina observed that the skill/chance issue was irrelevant in assessing a gambling determination under New York Law.23 The Second Circuit found that the fact that skill may be present in a game is immaterial to the question of whether it constitutes gambling under New York law.24
Ruling on whether operating a poker room violated the federal Illegal Gambling Business Act, the Court found that, while poker outcomes were predominantly determined by skill, it still constituted a “game of chance” under New York Law.25
To that end, the Second Circuit cited NYPL §225.00(1) which defines a game of chance as “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”26
Therefore, the question of whether something constitutes a “game of chance” under New York law resides on whether the outcome demands to a “material degree” on chance.27
DiCristina concluded that a poker game’s outcome “depends to a material degree upon the random distribution of cards” and thus constituted a game of chance.28 “The skill of the player may increase the odds in the player's favor, but cannot determine the outcome regardless of the degree of skill employed.”29
This mirrors the NGCB’s view on Daily fantasy. Ultimately, the athletes’ performance – which daily fantasy participants cannot control—governs the outcome, not the daily fantasy participant.
DiCristina is not binding precedent on other states’ treatment of daily fantasty, however. Federal Court decisions are not mandatory authority for state courts when interpreting state law. However, it does provide guidance for possible future rulings by New York State Courts.
UIGEA and New York Law
Like their Nevada contemporaries, the NYAG argued that the UIGEA did not set out to create or amend U.S. Gambling law.30 The Order in the initial preliminary injunction, found that “the UIGEA language exempting fantasy sports has no corresponding authority under New York State law as currently written."31
The fact that the New York Supreme Court and the NGCB came to similar conclusions points to possible results of challenges in New York and other states. Given the language from the initial ruling, and how similarly it follows the reasoning by the NGCB, Draft Kings and FanDuel may have a bit of an uphill battle.
However, some respite may be in sight. State legislators have introduced a bill to legalize daily fantasy.32 While this law may conflict with federal sports gambling legislation, should it pass before the case’s final determination in the courts, it could render the case moot.33
On December 23, 2015, the Illinois Attorney General (Illinois AG) issued an advisory opinion determining that daily fantasy constituted illegal gambling under Illinois law. Under Illinois law, illegal gambling is defined as “a game of skill or chance for money or other thing of value.”34 Illinois also makes it illegal for someone to knowingly establish, maintain or operate “an Internet site that permits a person to play a game of chance or skill for money or other thing of value by means of the Internet or to make a wager upon the result of any game, contest, political nomination, appointment, or election by means of the Internet.”35
Because Illinois law does not distinguish between games of chance or skill in its gaming law, the Illinois AG found that fantasy operators’ arguments that the game was “skill based” are immaterial to the question of whether the practice constitutes gambling in Illinois. The question on whether daily fantasy is gambling in Illinois turns on whether the game is played “for money.”
The Illinois AG found that since participants pay an entry fee and/or buy-in to compete for prize money, it constitutes illegal gambling under Illinois law.36As well, since daily fantasy operators use the Internet to facilitate those wagers, their operation in in Illinois is illegal.37
DraftKings and Fan Duel have responded to the Illinois AG’s advisory opinion, filing lawsuits in separate courts in Illinois to have the opinion thrown out.38
In addition to Nevada, New York, and Illinois, a number of other states have scrutinized daily fantasy’s legal and gambling status. The Massachusetts Attorney General determined that daily fantasy is both legal in Massachusetts and constitutes gambling.39 The State is pushing forward new regulations, which aim to “protect Massachusetts consumers who play daily fantasy Sports contests for prizes from unfair and deceptive acts and practices that may arise in the gaming process. The regulations are also intended to protect the families of persons who play Daily Fantasy Sports to the extent that they may be affected by unfair and deceptive practices that lead to unaffordable losses.”40
Indiana’s general assembly has also introduced daily fantasy legislation. Senate Bill 339 and its identical contemporary legislation in the Indiana house of representatives:
“[p]rovides that paid fantasy sports games conducted in accordance with the paid fantasy sports game statute do not constitute gambling.”41 [It also] “[p]rovides that paid fantasy sports games may be conducted through an Internet web site maintained and operated by a game operator or on the premises of certain licensed facilities under a contract between a game operator and the owner of the licensed facility.”42
The bill appropriates the definitional language from the UIGEA and creates “Paid Fantasy Sports Division” within the already established Indiana Horse Racing Commission to monitor, investigate, and regulate compliance with the new law.43
In addition to the above, California, Florida, Michigan, Minnesota, Missouri, Nebraska, New Jersey, Pennsylvania, Rhode Island, Vermont and Virginia have bills floating through their respective legislatures attempting to legalize and regulate daily fantasy.44
Continued determinations and classifications of daily fantasy as gambling by states could lead to federal civil challenges under the Professional and Amateur Sports Protection Act (PASPA), or criminal charges against daily fantasy operators under the Illegal Gambling Business Act (IGBA).45
PASPA generally makes it unlawful for “a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity . . . gambling, or wagering scheme based, directly or indirectly . . . on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.”46
Under the IGBA, “whoever conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business shall be fined under this title or imprisoned not more than five years, or both.”47
Daily fantasy operators will need to be careful. Not only do they face state-based challenges, but also the potential of federal suits against them for operating in states where it has been deemed illegal. It’s understandable why daily fantasy companies are fighting so hard against gambling classifications.
Additionally, the threat to the loss of popularity due to the shrinking pool of winners, and the insider trading scandal threatens the viability of the business. The insider trading scandal itself, has the potential to threaten the existence of the dominant companies in the market.
The Fantasy Sports Trade Association has, to its credit, welcomed consumer protection and transparency regulation.48 A well regulated, legal sports wagering industry (whether it be daily fantasy, or traditional gambling) benefits the integrity of sport.49 Banning daily fantasy does not support this outcome. If a blanket ban persists, people who want to wager on sports will simply move to the multi-billion dollar illegal U.S. gambling market.50
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- Tags: Daily Fantasy Sports | Gambling | Governance | New York Attorney General (NYAG) | New York Penal Law | Professional and Amateur Sport Protection Act 1993 | Regulation | The Nevada Gaming Control Board (NGCB) | United States of America (USA) | Unlawful Internet Gambling Enforcement Act of 2006 (UIEGA)
- Is daily fantasy sports legal? An analysis of the debate in Nevada, New York and Illinois - Part 1
- The growth of daily fantasy sports betting and the legal issues it faces: an interview with Shergul Arshad
- What are the top sports law issues to watch in 2016?
- The legality of daily fantasy sports betting in the US
Andrew is an associate at Landman Corsi, Ballaine & Ford P.C., where he works on a wide range of complex civil matters including employment disputes, commercial litigation, and professional liability claims. Andrew previously served as a Law Clerk to the Honorable F. Patrick McManimon, J.S.C., and a mediator in the Superior Court of New Jersey for the 2014/15 judicial term.