Daily Fantasy Sports Companies Take a Hit

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New York Attorney General issues a letter ordering two major fantasy sports websites to cease all online bets with New York residents.

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Fantasy sports companies will be looking to set their roster of legal counsel after a recent development in New York orders the daily fantasy sports websites to end online betting.

New York Attorney General Eric T. Schneiderman recently issued a formal cease-and-desist letter, ordering two major fantasy sports companies, DraftKings and FanDuel, to stop accepting sports bets from New York residents. According to the order, the games constitute illegal gambling under New York law. In a press release, Schneiderman called the two fantasy sports companies “leaders of a massive scheme” intending to “evade the law and fleece sports fans across the country.”

Fantasy sports sites operate by allowing users to assemble a virtual game of real players from professional sports teams and wager over the course of a season. The virtual team statistics are based on the actual performance of those players in real games, and team “owners” are able to draft, trade, and drop players, similar to the process in real sports. In fact, several major sports leagues, the NBA and MLB in particular, have invested stakes in the daily fantasy sports sites, but league representatives argue that the activity should still be regulated to “protect integrity.”

In a recent paper, Marc Edelman, an associate professor of law at the Zicklin School of Business at the City University of New York, argues that the legality of daily fantasy sports depends primarily on each individual contest’s game rules and methods of operation. In short, there is no one-size-fits-all solution, he says.

In 2006, during the fantasy sports Internet boom, Congress passed the Unlawful Internet Gambling Enforcement Act, which gave the federal government the power to stop payment processors from funding illegal forms of gambling. However, the Act carves out a narrow liability exception for payment processors funding fantasy sports that are based on teams of real athletes from real teams. The exemption also requires that the prizes be established before the event starts and rely on the participant’s skill to determine the outcome of the wagers.

According to Edelman, the determining factor in deciding if daily sports contests are forms of illegal gambling under most state laws is whether the games are “games of chance” or “games of skill.” Unlike in games of chance, where the outcome of the game is predicated on a randomizing device, the outcome in games of skill is determined mainly by the player’s mental (or physical) skill, with a minor degree of chance.

Schneiderman’s cease-and-desist-letter found that the prospects of winning or losing on the fantasy sports sites “depend on numerous elements of chance to a material degree,” thereby constituting illegal gambling. Specifically, the Attorney General’s letter noted that the participants in fantasy sports games administered in New York were wagering on events outside of their control – the “real game performance of professional athletes” – and therefore fantasy sports betting was a game of chance banned in the state.

Additionally, the Attorney General found there to be a “critical distinction” between the daily fantasy sports run by websites like FanDuel and “traditional fantasy sports.”

According to the order, traditional fantasy sports conduct competitive drafts and play for “bragging rights or side waivers,” and the hosting websites receive most of their revenue from pay-to-play fees and advertising, rather than profits from the wagers. On the contrary, the letter continues, in daily fantasy sports the websites are in “full and active control of the wagering” through randomized prizes and controlled relevant variables. The participants, the letter asserts, are less in control of their wagers and the hosting websites are able to profit at the expense of most of the players.

DraftKings and FanDuel representatives have disagreed, accusing the Attorney General of not taking the time to “understand [the] business and why daily fantasy sports are clearly a game of skill.” FanDuel, however, has stopped taking game deposits from New Yorkers on Tuesday afternoon.

The future of daily fantasy sports and its ability to withstand legal scrutiny, Edelman argues, will turn on the individual game format and style and the limits of specific state laws. Edelman notes, however, that even a relatively lax approach to the legality of daily fantasy sports could change as the marketplace grows in size and presence.

Attorney General Schneiderman gave the two fantasy sports companies five days to respond to his cease-and-desist letter. A New York state judge already denied FanDuel and DraftKing’s request for a temporary restraining order against the effort to stop the gaming operation. New York Supreme Court Judge Manuel Mendez has arguments regarding the government requested shutdown scheduled on November 25, 2015.