The battle over daily fantasy sports (DFS) is now headed to the courtroom after New York's Attorney General sent cease and desist letters to two of the largest sites declaring them illegal and ordering them to halt operations in the state.
"DFS contests are neither harmless nor victimless," AG Eric Schneiderman wrote in his letters to DraftKings and Fan Duel. Both letters noted that "Daily Fantasy Sports are creating the same public health and economic concerns as other forms of gambling, including addiction," and that each company's advertisements "seriously mislead New York citizens about their prospects of winning."
Under New York state law, gambling occurs when a person "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, upon an agreement or understanding that he will receive something of value in the event of a certain outcome."
The wagers on DraftKings and FanDuel "easily meet" this definition, the AG wrote. "DraftKings bettors make bets (styled as 'fees') that necessarily depend on the real-world performance of athletes and on numerous elements of chance. The winning bettors receive large cash prizes—and the company takes a 'rake' or a cut from each wager." He noted that Washington State reached the same legal conclusion under a similar statutory definition.
Schneiderman was careful to distinguish traditional fantasy sports, where participants conduct a comprehensive 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."
In noting the differences between traditional fantasy sports and DFS, the letter to DraftKings focused on the company's role in the wagering process. It stated that "sites hosting DFS are in active and full control of the wagering: DraftKings and similar sites set the prizes, control relevant variables (such as athlete 'salaries'), and profit directly from the wagering." It further stated that "DraftKings has clear knowledge and ongoing active supervision of the DFS wagering it offers. Moreover, unlike traditional fantasy sports, DFS is designed for instant gratification, stressing easy game play and no long-term strategy."
DraftKings compounded the problem by promoting DFS like a lottery, Schneiderman wrote. It represented to New Yorkers that the game is "a path to easy riches that anyone can win," with ads such as: "It's the simplest way of winning life-changing piles of cash," and "The giant check is no myth … BECOME A MILLIONAIRE!" The AG's investigation found that just the top one percent of winners receive the vast majority of DraftKings' winnings.
The letters ordered the companies to "cease and desist from illegally accepting wagers in New York State as part of its DFS contests."
Wasting no time, DraftKings and FanDuel requested that a New York state court halt the enforcement of the cease and desist order and provide a declaration that their DFS operations are legal in the state. DraftKings' complaint characterized the AG's actions as a "shocking overreach" and a "misreading" of New York's gambling law.
New York's Attorney General "has unleashed an irresponsible, irrational and illegal campaign to destroy a legitimate industry," according to the complaint filed by DraftKings. "To ban an entire industry from the State, without even once informing these companies that such a thing was possible or affording them any opportunity to be heard, violates the most basic tenets of fairness and due process."
The companies' efforts were halted when New York Supreme Court Judge Manuel Mendez denied requests for a temporary restraining order and set a date for a subsequent hearing on the matter.
The New York AG's investigation began with news reports that employees of DraftKings and FanDuel regularly played on each other's sites and won significant amounts of money. Although the companies said their workers did nothing wrong, the allegations of insider trading prompted the companies to ban employees from participating in DFS.
The revelations triggered several investigations by state Attorneys General, the Federal Bureau of Investigation, and letters from lawmakers. Consumer class actions suits were also filed. The Nevada Gaming Control Board had earlier declared that DFS is a form of gambling under state law requiring a license. In the hopes of staving off some of the controversy, the industry agreed to establish a self-regulatory body tasked with creating a program of ethics and integrity.
To read the AG's cease and desist letter to DraftKings, click here.
To read the AG's cease and desist letter to FanDuel, click here.
To read the complaint in In the Matter of the Application of DraftKings v. Schneiderman, click here.
To read the complaint in FanDuel v. Schneiderman, click here.
Why it matters: The New York lawsuit is just the latest salvo in the ongoing battle over DFS and represents just one front for engagement. In the days following AG Schneiderman's cease and desist letter, his Massachusetts counterpart said she considered DFS to be a form of gambling and noted that the state's investigation into the industry is ongoing while a state lawmaker in California requested that AG Kamala Harris take a closer look at DFS.