N.Y. AG's Ban On DraftKings, FanDuel Won't Be Death Knell For Daily Fantasy Sports

The New York State attorney general Eric T. Schneiderman has demanded that DraftKings and FanDuel immediately cease providing daily fantasy sports services to New York residents. Schneiderman's demand was made roughly one month after it was revealed that he was conducting an inquiry into the two websites for what appeared at the time to be use of "insider information" by a DraftKings employee in a FanDuel competition. A separate investigation has since determined that the employee could not have used such information to win $350,000 in the tournament hosted by FanDuel.

Schneiderman claims that DraftKings and FanDuel are "leaders of a massive, multibillion-dollar scheme intended to evade law and fleece sports fans across the country."  His statement underscores the fact that he not only believes the websites' services violate New York laws against gambling, but that consumers need protection from DraftKings' and FanDuel's current practices.

At least one politician does not agree with Schneiderman's stance.

"[Y]our decision on daily fantasy sports is another blatant grab for headlines @ the expense of New Yorker's personal freedoms," states a Tweet from Representative Chris Collins of New York's 27th Congressional District.

DraftKings and FanDuel have also expressed their strong disagreement with Schneiderman's cease and desist letter. What is their likelihood of success in a battle against Schneiderman and why should the daily fantasy sports industry as a whole not be scared into submission?

New York may be on a small island.

The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) created a federal carve out for certain types of fantasy sports operations, officially establishing that the participation in same is not to be considered betting or wagering. One required element for fantasy sports operators to be deemed in compliance with the carve out is that their "winning outcomes reflect the relative knowledge and skill of the participants."

While the UIGEA clearly exempts certain fantasy sports games from the definition of gambling, it leaves the ultimate test to the states in determining whether such games should be permitted within their borders. States have adopted a variety of tests, with the "predominant purpose test" applied by a majority of states.

Under the predominant purpose test, an activity is deemed to be one of chance (and therefore considered gambling) if greater than 50% of the outcome is derived from a person's mere luck.

New York uses the "material element test," which establishes that an activity is one of chance as long as chance plays a "material role" in, and is not merely an incidental effect of, the outcome of a competition. This is a much softer standard and lends to a greater ability for a state attorney general (such as Schneiderman) to defend a position that daily fantasy sports operations constitute illegal gambling.

Now is the time for the daily fantasy sports industry, and in particular DraftKings and FanDuel, to demonstrate that chance is not a material element to the winning of competitions and that skill is key. Studies should be commissioned to prove that point, which may benefit operators from a legal standpoint, but concurrently dissuade more casual sports fans from spending money on the daily fantasy sports sites.

The New York Attorney General's position may not be sustained.

DraftKings has announced that it strongly disagrees with Schneiderman's reasoning in his opinion "and will examine and vigorously pursue all legal options available." It notes that over 500,000 customers reside in New York. DraftKings and FanDuel plan on continuing to operate in New York, as does Draftpot, but that may be made difficult with at least one payment processor insisting that daily fantasy sports sites cease providing their services within the state.

Schneiderman may file a lawsuit against DraftKings and FanDuel if they continue to ignore his demand. Additionally, DraftKings and FanDuel could seek an injunction against Schneiderman's cease and desist order.

While Schneiderman has stated his concern about misleading New York consumers, alleging that daily fantasy sports "is neither victimless nor harmless," his focus will be shifted to proving that DraftKings and FanDuel are promoting illegal gambling operations. His own words may be used against him on that point.

In Schneiderman's press release, he says that DraftKings and FanDuel are "marketed as a game that anyone can win," but "in fact distributes the vast majority of winnings to a small subset of experienced, highly sophisticated players. These winners constitute roughly 1% of all players on the two sites."

It appears that Schneiderman is mounting a defense against his own position. If a small minority of experienced, highly sophisticated players are winning guaranteed prize pools, then it should lead to the conclusion that skill heavily dominates over chance.

Meanwhile, other states are considering taking a pro-daily fantasy sports stance.

There are only a small number of states that have taken a position, one way or the other, on the legality of daily fantasy sports operations. Practically every operator stays out of Arizona, Iowa, Louisiana, Montana, Washington and Nevada. Some oprerators are much more restrictive, such as StarsDraft, which currently only allows for individuals located in Kansas, Maryland, Massachusetts and New Jersey to participate in paid daily fantasy sports competition. These are states that have thus far taken a pro-daily fantasy sports position.

A variety of other states are now in the process of taking a look at the daily fantasy sports landscape in an effort to determine whether they will deem the operations to be legal or an illegal form of gambling. The State of Florida has introduced legislation that would allow for, but place restrictions on, daily fantasy sports websites. Similarly, Illinois is looking at legislation that may help protect consumers who play daily fantasy sports, but permit operations to persist within the state's borders.

Thus, while New York, through its attorney general, has taken a position that DraftKings and FanDuel are illegal gambling operations, that should not scare the entire industry into believing that it is on the brink of collapse. The attorney general's stance may not be upheld, and even if it is, that does not mean that other states will fall in line.

Darren Heitner is a lawyer and the Founder of South Florida-based HEITNER LEGAL, P.L.L.C., which has a focus on Sports Law and Entertainment Law.

Follow @DarrenHeitner