Stay granted to DFS sites as fight to operate within New York intensifies

A New York judge just dealt a huge blow to more than 620,000 daily fantasy sports players in the Empire State.

A New York appellate court judge on Friday granted DraftKings and FanDuel an emergency stay of New York Justice Manuel Mendez’s decision earlier in the day to bar the two largest daily fantasy sports companies from operating in New York, allowing the 620,000 registered DFS players in the state to continue to be able to play.

FanDuel, which left the New York market last month amidst legal scrutiny, will allow players to play on its website starting Friday nigh, while DraftKings said it will continue to remain fully operational in New York. 

The stay, which in law refers to the postponement of a judicial order, is expected to remain in effect until at least Jan. 4. The appellate court has the authority to extend the stay or lift it, and will likely consider written briefs and oral arguments in assessing the relevant legal issues.​

Friday's actions marked a stunning reversal of fortune for the DFS industry, which had experienced a significant but fleeting defeat earlier Friday, when Mendez granted a preliminary injunction in favor of New York Attorney General Eric Schneiderman and against DraftKings and FanDuel. Mendez’s decision followed a Nov. 25 hearing in New York State Supreme Court that was centered around discussions of whether DFS constituted games of skill or games of chance, and therefore, whether or not DFS constituted gambling in the state of New York.

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Mendez’s Friday morning ruling declared that DFS did in fact constitute illegal gambling in New York, but he did not reach that conclusion as a result of siding on one side of the semantic disagreements that dominated the case’s oral arguments. Mendez instead looked past the operators’ common conceit that DFS is a game of skill and found that “the balancing of the equities are in favor of [Schneiderman] and the State of New York due to their interest in protecting the public, particularly those with gambling addictions.” While Mendez noted the decision is not necessarily a final determination on the rights of the parties involved, in the eyes of the court this obligation to protect the public outweighed any potential loss of business for either of the operators.

Just hours before the stay was granted, payment companies that process transactions for the DFS operators began to fall in to line with Mendez’s ruling. According to the Boston Globe​, PayPal announced that it would no longer process daily fantasy sports transactions in New York (although players can still withdraw money from the sites back into their accounts), and Bank of America also said it would stop its New York customers from depositing money into daily fantasy sites. 

The ruling was the latest in a series of divergent state-based decisions by lawmakers, the courts and other officials to regulate the emergent industry. While Mendez’s ruling and the resulting emergency stay both pertain to New York, Friday’s events will likely encourage political leaders and law enforcement officers in other states to undertake a closer assessment of DFS under their respective states’ gaming laws. Several other states, including Missouri, Oklahoma, Oregon, New Jersey, and Washington, use a definition of gambling strikingly similar to New York’s, according to attorney Daniel Wallach, who covers the daily fantasy sports industry. 

The high-stakes back-and-forth could also prompt officials in Washington, D.C., to address the absence of a federal solution to both DFS and sports wagering. Congress has the power to regulate both of the multi-billion-dollar, largely unregulated industries, which have received little attention from Congress in the past year as their popularity has skyrocketed.

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One area of federal legislation Mendez’s ruling addressed is the Unlawful Internet Gaming Enforcement Act, a 2006 federal law that prohibits payment processors from processing illegal, gambling-related transactions, but exempts from those transactions those pertaining to games of skill. DFS proponents, including DraftKings CEO Jason Robins, have long cited UIGEA as a reason for the legality of fantasy sports. Mendez ruled Friday, however, that UIGEA’s exemption and the law itself have no authority in New York.

Why Mendez concluded DraftKings and FanDuel are operating in violation of New York law

A preliminary injunction such as the one awarded to the attorney general on Friday is normally difficult to obtain. A judge must be convinced that the side seeking the injunction has a probability of success on the merits and would suffer “irreparable harm” without an injunction, and that the “balance of equities” favors the injunction be granted.

Here, Mendez reasoned that Schneiderman correctly interpreted Article I, Section 9 of the New York Constitution and New York Penal Law Section 225.00, specifically that its prohibition against “lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling, except lotteries offered by the state…” extends to DFS games. Mendez placed significance in the fact that Article I, Section 9 reflects—in Mendez’s words—“the public policy of the State of New York against commercialized gambling.”

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​Schneiderman additionally persuaded Mendez with the argument that DraftKings and FanDuel’s activities fall under New York’s definition of gambling. The state defines gambling in part as when a person “risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence…” Mendez reasoned that the payment of entry fees associated with DFS games—ranging from as little as 25 cents to more than $10,000 per daily contest—falls within conduct prohibited by Section 225.00. The definition of a “future contingent event,” meanwhile, which counsel from both DraftKings and the attorney general’s office spent the majority of the Nov. 25 arguments debating, did not come into play in Mendez’s ruling.

DraftKings and FanDuel likely believed they had the upper hand on the issue of “irreparable harm,” which generally refers to harm that can’t later be fully cured by monetary damages. The companies had insisted that being shut down in New York for any period of time would cause permanent damage to their reputations and cause incalculable damage. But Mendez did not validate this argument, instead finding more persuasive Schneiderman’s contention that a continuation of DraftKings and FanDuel games in New York would undermine New York policies against gambling, exacerbate gambling addictions and deceive consumers. 

DraftKings and FanDuel had come under fire during the early weeks of the 2015 NFL season for “deceiving consumers” by running ads showing everyday people winning enormous sums of cash by entering modest sums in daily contests. DFS operators have recently stated their intention to shift the content of their substantial television ad buys away from showing players winning huge sums and toward players experiencing the fun of the game.

Significance of DraftKings and FanDuel’s being awarded a stay

A higher court judge granted the stay late Friday, which will last until Jan. 4, the day after the final regular-season weekend of the NFL, the industry’s most lucrative sport. While the stay will likely result in some form of expedited appeal, it is not yet clear when oral arguments will take place. 

It also prevents immediate harm to the two operators’ business, as being denied access to the New York market for a substantial amount of time could have been devastating to both. This is particularly true given the various other legal controversies DraftKings and FanDuel face, including class actions against them along with the sports leagues and media companies that do business with them.

Keep in mind, if DraftKings and FanDuel fail to persuade the appellate court that Mendez incorrectly interpreted New York law, the preliminary injunction would be reinstated and remain in effect until a full trial—which might not occur until 2017 or even later depending on how long pretrial discovery and accompanying proceedings take. 

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While it’s unclear exactly how much revenue DraftKings and FanDuel would lose, an Eilers Research report estimated 12.8% of active DFS players reside in New York, the most by far of any state in the country. Recent court documents filed by DraftKings have said 7% of its customers, or more than 370,000 participants, are based in New York. FanDuel’s court documents maintain it has at least 250,000 registered users in the state. In the week of its Dec. 6 NFL contests alone, FanDuel reported more than $21 million in cash game and tournament revenues nationwide. It reported $22 million in NBA cash game and tournament revenues for games between Dec. 2 and Dec. 8, according to the SuperLobby. Neither FanDuel nor DraftKings report state-by-state revenues.

DraftKings was the first to file paperwork to formally appeal the ruling and said in a statement, “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.”

“This is only the beginning of the legal process,” FanDuel assured the public in a statement of its own on Friday afternoon before the stay was granted. “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.

If nothing else is certain, a long legal fight lies ahead.

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.