Legal battle over DFS in New York not necessarily over

The New York State Senate passed a bill on Saturday declaring that fantasy sports do not constitute gambling. SI.com’s Michael McCann breaks down the ruling and how the legal battle may not be over yet.

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In a positive, though unsettled, development for DraftKings and FanDuel, the New York State Senate on Saturday passed a bill by a 45-17 vote that expressly permits daily fantasy sports in New York. The bill, which passed the New York State Assembly on Friday by a 91-22 vote declares that DFS is a game of skill, now goes to New York Governor Andrew Cuomo. Assuming Cuomo either signs the bill or takes no action after 10 days, the bill will become law. It is expected that Cuomo will sign the bill, a move that would restore the availability of DraftKings and FanDuel games to New Yorker consumers.

On March 21, the two companies agreed to suspend operations as part of a provisional settlement with New York Attorney General Eric Schneiderman. The settlement stayed their litigation over the legality of DFS under New York law on the condition that New York expressly legalizes DFS by June 30. It appears that this condition will be met, meaning that DraftKings, FanDuel and Schneiderman will likely not be back in court to debate the lawfulness of DFS. Schneiderman, however, has already issued a statement expressing that although DFS may soon become lawful in New York, he will continue to pursue ancillary claims “that DraftKings and FanDuel previously engaged in false advertising and consumer fraud.” In other words, although DFS may soon be legal in New York, Schneiderman still seeks to punish DraftKings and FanDuel for the manner in which they advertised and conducted business prior to the March 21 settlement.

A victory for DraftKings, FanDuel, Schneiderman and New Yorkers who like DFS

DraftKings and FanDuel are the most obvious winners from the pending legalization of DFS in New York. While legalization would not end these companies’ litigation with Schneiderman over past advertising practices, it would end Schneiderman’s most threatening claim against them: that DFS games offered by DraftKings and FanDuel are unlawful under New York law.

Legalization would also make it less likely that the two companies will face federal criminal charges in connection to New York law. As I explained on SI.com last October, the office of Preet Bharara, the U.S. Attorney for the Southern District of New York, has launched a probe into whether DFS violates federal law. One especially relevant federal law—the Illegal Gambling Business Act of 1970 (IGBA)—authorizes federal criminal charges upon a finding that a gaming operator has violated a state’s gambling law. New York legalizing DFS would mean that the interplay between IGBA and New York gambling law becomes less of an ongoing worry to DraftKings and FanDuel.

The pending DFS law would also benefit DraftKings and FanDuel from a market standpoint. Together they control approximately 95% of the national DFS market and New York is considered their largest market among the 50 states—even above California. New York is also home to FanDuel’s headquarters and to the league offices of the four major professional sports leagues, all of which are aligned either directly or indirectly with DFS gaming. The restoration of the New York market is thus vital to DraftKings and FanDuel, both of which, as I wrote on SI.com last week, are in talks to merge.

• ​A look at the potential merger of DraftKings-Fan Duel

The legalization of DFS in New York could also offer a trailblazer effect for DraftKings and FanDuel. Other states that are debating whether DFS ought to be considered lawful or unlawful would certainly take notice of New York legalizing DFS. Along those lines, New York legislators’ willingness to make DFS expressly lawful was likely impacted by how other states’ officials, including those in Virginia and Massachusetts, recently agreed to permit DFS gaming in regulated forms. While every state’s consideration of DFS varies based on the unique language of each state’s laws and on the differing political ideologies of state elected officials, how one state answers a legal question often influences how other states answer it.

Schneiderman also emerges as a winner. He aggressively took on DraftKings and FanDuel in court and ultimately persuaded them into accepting a settlement that suspended their operations. At the same time, Schneiderman placed the two companies in a position where they needed to fight a “do or die” legislative battle in order to remain in New York. Although DraftKings and FanDuel are now poised to resume business operations in the state, they would do so in a much more regulated landscape. Indeed, the version of the bill that passed the New York State Assembly and State Senate contemplates taxes and consumer protection restrictions on DFS companies that wish to operate in the state. Among those conditions:

• DFS operators must obtain a license from the New York State Gaming Commission. They must also submit annual reports to the Commission and provide numerous types of data, including number of new accounts, amount of entry fees and amount of prizes awarded.

• DFS operators must pay both a tax on 15% of their gross revenue generated in New York and an annual tax of 0.5% (not to exceed $50,000).

• DFS customers must be at least 18 years old.

• DFS operators must provide honest advertising, including “accurate representations concerning the chances of winning, and the number of winners,” and advertising cannot target children.

• DFS operators must offer introductory procedures for all levels of players and allow them to identify a highly experienced player before playing him or her (and probably losing to him or her) in a DFS game.

• DFS operators must provide information to consumers on the risk of compulsive play (essentially risk of becoming an addict).

• DFS operators must safeguard the privacy and online security of players.

• No DFS games related to collegiate or high school sports may be offered.

If Schneiderman had not taken on DraftKings and FanDuel, the state and its citizens would probably not be in line to receive the tax revenue and consumer protections that are contemplated by the pending DFS law. Furthermore, Schneiderman, as noted above, has signaled he will continue to seek recovery from DraftKings and FanDuel for their operations leading up to the March settlement. Schneiderman can thus continue to extract concessions from the two leading DFS.

Last but not least, New York consumers who wish to play DFS are winners. Assuming Cuomo signs the bill into law, these consumers could resume playing games offered by DraftKings and FanDuel. They would also do so with greater protections in terms of advertising and privacy. Even New Yorkers without interest in DFS could be viewed as winners: their state is now poised to receive increased tax revenue from DFS companies that will be used for public purposes.

The legal battle over DFS in New York is not necessarily over

Cuomo signing the DFS bill into law would not necessarily resolve the state of DFS law in New York. A lingering concern for DraftKings and FanDuel would be if a consumer or business challenged the new DFS law in court on grounds that it violates other New York laws. Specifically, New York Penal Law 225.00 declares that gaming contests are unlawful when chance is a meaningful or substantial element. In addition, Article I, Section 9 of the New York Constitution provides that most types of gambling practices are illegal. Further, under that same constitution, a voter referendum would be technically required to legalize games that constitute gambling. No such referendum has occurred and procedurally it would likely take up to two years to execute—a length of time that would be far too long for DraftKings and FanDuel given their significant financial interest in operating in New York.

As gaming attorney Daniel Wallach tells SI.com, the pending New York law tries to work around the gambling issue by declaring that DFS is a “game of skill” and, therefore, not “gambling” under New York Law. Wallach, however, contends that any court that reviews these potentially conflicting laws would focus “not on labels selected by legislators” but rather on what the law actually does. Wallach believes that such a review could lead a judge to find the new DFS law contemplates gambling and thus violates the state constitution and other laws.

• Watch: New York Senate passes fantasy draft bill

“Look,” Wallach insists, “the new law provides for oversight and regulation by a state gambling commission—doesn’t that tell you something?” Wallach also highlights how the law “contains protections for ‘problem players’ that are reminiscent of compulsive gambling safeguards typically found in gambling laws.” Further, he stresses that a judge would need to factor in Schneiderman “consistently maintaining that DFS is illegal gambling under New York law.”

In addition to the New York state law question, the ongoing debate of whether DFS in general comports with federal law remains. I have analyzed this question in detail on SI.com. Two key federal laws are the Professional and Amateur Sports Prohibition Act (PASPA), which prohibits the ability of New York and 45 states to license, sponsor or authorize sports betting, and the Unlawful Internet Gambling Enforcement Act, which bans most types of Internet gambling but permits certain types of fantasy sports—though not necessarily DFS. Alan Milstein, an attorney representing DFS players who are suing DraftKings and FanDuel, maintains that the New York legal status of DFS is nowhere near certain under federal law. “What New York somehow does not understand,” Milstein warns, “is that, under PASPA, it cannot authorize sports betting, including DFS.”

Bottom line: don’t bet on the legality of DFS in New York being resolved with finality anytime soon.

Michael McCann is a legal analyst and writer for Sports Illustrated. He is also a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. McCann also created and teaches the Deflategate undergraduate course at UNH. He serves on the Board of Advisors to the Harvard Law School Systemic Justice Project and is the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law. He is also on the faculty of the Oregon Law Summer Sports Institute.