Examining the impact of potential preliminary injunction on DFS lawsuit

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated

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.

If you’re betting on whether daily fantasy sports will remain legal in New York, the outcome of a court hearing next Wednesday will dramatically reshape the odds.

New York Justice Manuel Mendez will preside over a hearing in which attorneys representing DraftKings and FanDuel on one side and the office of New York Attorney General Eric Schneiderman on the other will offer dueling arguments over the legal status of DFS in New York. Both sides will ask Mendez to issue a preliminary injunction, which is a provisional—and not permanent—remedy. Here, a preliminary injunction would either empower the Big Two DFS operators to conduct business in New York or halt the companies from doing so. The injunction would be designed to remain in effect until a trial could be heard and an accompanying final judgment is rendered. Such a trial likely would not take place for many months, meaning a preliminary injunction could pose a dramatic and lasting effect on the DFS industry in New York well into 2016 or beyond.

Report: DraftKings CEO said it may not fully comply with anti-gambling law

As one legal wildcard, a preliminary injunction in favor of one side would be subject to an appeal. This means the “loser” of a preliminary injunction may be able to convince an appellate court to vacate the injunction long before a trial takes place. That same losing party would also petition Mendez to “stay”—meaning suspend—the enforcement of the injunction until an appeal could be heard. These possibilities highlight how the process for determining the legality of DFS in New York is complex and full of variables that make it difficult to predict the ultimate outcome.

Adding even more uncertainty, Mendez is neither obligated to make a decision on the spot next Wednesday—he could take days or even weeks to decide—nor must he ultimately grant either side’s petition. Indeed, he could decline both sides’ petitions for a preliminary injunction, leaving both sides in legal purgatory of sorts. He’ll only issue a preliminary injunction if one side convinces him that (1) it has a probability of success on the merits; (2) it would suffer “irreparable harm” without an injunction; and (3) the “balance of equities” favors it. 

Applying the factors for a preliminary injunction in New York

The first factor for a preliminary injunction would be demonstrated if Mendez reasons that one side’s arguments are more likely than not to succeed in a trial. Each side will present differing views about the relevant New York laws, including Article I, Section 9 of the New York Constitution and New York Penal Law Section 225.00 (for an SI.com legal analysis of these arguments, click here). On Nov. 16 Mendez declined to temporarily restrain Schneiderman in his pursuit of classifying DFS as unlawful gambling in New York, a move that might suggest that Schneiderman has the upper hand going into the upcoming hearing. Mendez’s decision on a temporary restraining order, however, was made at least in part because no action will be taken against DraftKings or FanDuel until at least after next Wednesday’s hearing (meaning a temporary restraining order would have been unnecessary). 

Mass. attorney general proposes daily fantasy sports regulations

The second factor for a preliminary injunction is more complicated and less predictable. Usually judges are unwilling to find “irreparable harm” when the harm could be cured by monetary damages. In other words, in deciding whether to issue an injunction against one side, the judge would consider whether that side would be fully remedied by monetary damages if it later wins a trial. It is thus incumbent on each side to convince Mendez that the prospect of winning money in a trial wouldn’t be enough and that the damages they suffer would be irreversible. For those reasons, the Big Two will likely contend that their reputations would be so severely and permanently tarnished by being banned from New York that no monetary damages could later cure the harm. For his part, Schneiderman would insist that a preliminary injunction is essential to protect New York consumers from damages that he would portray as social harms—such as, allegedly, the exacerbation of gambling addictions and the deception of consumers into paying to play games in which the odds are stacked against them—and that monetary damages could not cure these types of harms.

The third factor, which centers on the “balance of equities,” would consider the relative hardship placed on each side by an injunction being issued or denied. DraftKings and FanDuel would stress that a decision that favors Schneiderman would wreck havoc on not only their businesses but on New York consumers. Schneiderman, in contrast, would assert that a decision that favors the DFS companies would subvert New York law and the ability of his office to enforce the law. 

While the parties wait for Wednesday’s hearing, FanDuel has already suspended operations in New York. It seems poised to remain suspended at least pending Mendez’s decision. DraftKings, in contrast, continues to conduct business in the Empire State. DraftKings knows that Schneiderman’s cease and desist demand won’t become an order unless a court assents.

Key revelations from evidence surfacing about DraftKings and FanDuel

Schneiderman’s case against the two major DFS companies has included the filing of several exhibits and affidavits. These documents—which include internal presentations to investors, each company's advertising budget since 2012, and one of the first concrete looks at the sites' total American enrollees—filed by the Big Two shed new light on an industry that, for all of its recent publicity, is still decidedly non-public.

Both companies gained notoriety in the lead up to the 2015 NFL season for their incessant television ad campaigns featuring ads at a near-comic frequency. Now, we know how much those campaigns were worth. In the roughly six-week period between Aug. 1 and Week 1 of the NFL season, DraftKings spent an astounding $81 million on television advertisements that aired approximately 22,000 times across various networks. To contest DraftKings's presence and win market share of its own, FanDuel spent $47 million on commercials solely in the month of September. Those advertisements aired almost 9,500 times, according to Schneiderman's motion.

Gurley, man: Rams' rookie embodies best traits of running back legends

The companies each had specific policies governing employee participation in DFS contests. An internal FanDuel memorandum sourced by the attorney general's office illustrated the company's encouragement of employees playing DFS on other platforms, but also revealed awareness of the risk this posed to the company's image. Employees were asked to sign a document whose stated goals included reassuring concerned site users that FanDuel employees weren't “exploiting inside info” when playing non employees. Employees were told that playing on other sites would help them do their jobs better, but that they should “do no harm” through playing on other sites so that other users are “less likely to be suspicious or angry.”

Of particular concern, the document noted, was employees accessing and copying the lineup entries of FanDuel's most successful players, and then using those exact lineup constructions on another DFS site. In October, the company banned its employees from playing DFS for money on any platform, shortly after a DraftKings employee inadvertently released insider information following his entry as a participant in a contest on FanDuel.

There were more revelations regarding DraftKings, a company whose CEO Jason Robins has vehemently maintained does not offer a gambling product, but instead a game of skill. Gambling could not have been strategically far from mind, however. An internal DraftKings presentation that appeared to be targeted to investors noted that a sports wagering vertical was a “large and addressable market,” and quantified the global market for online betting to be currently estimated at $27 billion, with projections of growth to $36 billion by 2018. 

The documents also help quantify the amount of customers participating in, and revenues generated by, DFS games in states where those games are either outlawed or under significant scrutiny. Drawing on data from DraftKings’s motion for a restraining order, as well as a separate lawsuit DraftKings is currently engaged in with its payment processors, it's revealed that its number of total registered customers approximates 5.3 million. Roughly seven percent, or greater than 370,000 of those customers, are New York-based. A breakdown of state revenues from 2014 showed that New York players on DraftKings were responsible for $25.7 million in entry fees last year, the most of any U.S. state excepting California. 

A potentially damning side allegation from the filings was Schneiderman's contention that in 2014 DraftKings accepted more than $484,000 in entry fees from players registered in the five states (Washington, Arizona, Louisiana, Montana and Iowa) where DFS is expressly prohibited. More than $420,000 of those entry fees came from registrants in Washington state, whose definition of gambling is almost identical to that of New York. How DraftKings accepted these payments is unclear, and Schneiderman has written that finding fault with the company along these lines is not his most pressing concern. But the revelations expose the company to potential action from either the gaming commissions or even the attorneys general of the other five states. A public information officer for the Washington State Gambling Commission said in August that it was investigating daily fantasy sports in the state.

Echoing the Nevada Gaming Control Board's findings from October, Schneiderman noted the DraftKings website's use of betting-specific metadata to attract customers searching for gambling opportunities online. Search tags such as “weekly fantasy football betting,” “daily fantasy basketball betting” and “fantasy golf betting” were installed in the website's programming code, ostensibly helping to draw customers looking for wagering action on those sports to DraftKings.com.

Beyond the uniform: Other ways NFL players can support important causes

Golf contests were among the types of DFS games that Robins allegedly told members of the Fantasy Sports Trade Association did not comply with federal law. According to FSTA meeting minutes first reported on by ESPN's David Purdum and obtained by SI.com, Robins told association members on a conference call in May that his company's golf and racing contests did not comply with the Unlawful Internet Gambling Enforcement Act, a 2006 federal law aimed at inhibiting financial transactions related to illegal sports gambling. Those present at the meeting also acknowledged that by offering contents that were not UIGEA-compliant, DraftKings was also in violation of the FSTA paid operational charter, an association-governing document that all member DFS operators abide by. According to the minutes, Robins stated his belief that operators should not need to operate consistently with UIGEA if they can operate lawfully under state law, noting that state laws pertaining to wagering superseded federal ones.

According to ESPN, following its report on Thursday, Robins personally questioned the accuracy of the meeting minutes and was adamant that he had never said his company violated federal guidelines. DraftKings has since said it “operates with careful attention” to UIGEA, and a spokesman for the company told ESPN that the meeting minutes cited were “not a verbatim transcript, but rather the interpretation of a lengthy meeting by one non-lawyer reflecting what another non-lawyer said about a complex law.”

Michael McCann is a writer and legal analyst at 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. This fall he is teaching an undergraduate course at UNH titled “Deflategate.” McCann is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law and he teaches “Intellectual Property Law in Sports” in the Oregon Law Sports Law Institute. As a disclosure, one of McCann’s family members is represented in a personal matter by an attorney who represents a plaintiff in John Weaver v. FanDuel and DraftKings.

Will Green is a contributing writer and video producer at Sports Illustrated. He covers college basketball, college football, daily fantasy sports and wagering.