From the Computer to the Courtroom: Daily Fantasy Sports Websites To Take On New York Attorney General in High Stakes Legal Battle

Last week, New York Attorney General Eric Schneiderman drew the attention (and ire) of many when he sent letters to FanDuel and DraftKings alleging that daily fantasy sports games are illegal gambling and directing them to cease their operations in New York. Just a few days later, the companies fired back, filing complaints in New York state court to enjoin any action against them (here and here). And, on Tuesday, the New York Attorney General filed a complaint of his own against each website (found here and here) seeking a preliminary injunction. Time will tell how this high stakes dispute is resolved, but the websites should have good arguments why daily fantasy sports should be treated as lawful games of skill rather than illegal gambling.

By now, most sports fans have seen or heard advertisements for FanDuel and DraftKings on television or radio, respectively, encouraging viewers to "get off the couch and get some" by going to websites to play daily fantasy sports games (DFS). These games allow players to compete against one another in daily contests by choosing line-ups comprised of real-world athletes in professional sports such as football, basketball and baseball. Each athlete is assigned a fictional "salary," and a fictional "salary cap" limits the sum of the salaries in each player's line-up. The outcome in each DFS contest turns on the combined statistical performance of these athletes in real-world sporting events on a daily or weekly basis.

No one, including the New York Attorney General, appears to contend that DFS constitute illegal gambling under the applicable federal law. To the contrary, fantasy sports are expressly excluded from the Unlawful Internet Gambling Enforcement Act, the statute that Congress passed in 2006 in response to online poker websites. The New York Attorney General instead contends that FanDuel and DraftKings must stop offering DFS to New York customers because, he claims, DFS constitute illegal gambling under New York's Penal Code.

Whether New York's Attorney General can prove that claim appears uncertain. To the extent that New York courts have considered what the term "gambling" means, they have focused on whether the game is one of "luck or skill." If the games have turned predominately upon luck, courts have found that they constitute gambling. Thus, for example, New York courts have concluded that some poker games are gambling because the cards that a player draws are the product of chance. Similarly, one New Jersey court considering a similar statute has ruled that backgammon is gambling because it turns on the roll of a dice.

DFS, by contrast, do not appear to involve an element analogous to the "luck of the draw" or the "roll of the dice." Rather, every decision that a DFS player must make when choosing a line-up -- which in turn determines of the outcome of each contest -- turns upon the skill level of that DFS player and his knowledge of the available athletes. In every instance, DFS players will benefit if they have educated themselves about the available athletes, the opponents those athletes are playing, the weather conditions on any field of play, and so forth. Moreover, the salary cap and fictional "salaries" require DFS players to consider the expected value of each real-world athlete against other available athletes and the overall roster composition. Success in DFS thus appears at least as skill-based as running a successful sports franchise.

Indeed, even the New York Attorney General appears to recognize that DFS is largely a matter of skill, reporting that his own investigation found that "the top one percent of DraftKings' winners receive the vast majority of the winnings." The websites offer similar figures. DraftKings' complaint, for example, cites an article that found "91% of DFS player profits were won by just 1.3% of players" during "the first half of the 2015 [Major League Baseball] season" and a study concluding that skilled users outperformed a computer simulation in head-to-head contests more than 80% of the time. It is hard to view this disparity as anything other than evidence that skill is the primary factor in determining the outcomes in DFS contests.

The New York Attorney General also expressly concedes that "traditional," season-long fantasy sports are not gambling, which further supports the conclusion that DFS are not gambling. If anything, traditional fantasy games turn more on chance than DFS, since players draft athletes who will be on their roster for an entire season, increasing the role that injuries play in these contests. Moreover, any confusion in the New York Attorney General's beliefs about DFS and traditional fantasy sports only supports the view of FanDuel and DraftKings that he rushed to judgment when seeking to shut down DFS in New York.

The first week of this dispute does makes one thing very clear: Unlike prior disputes about the gambling provisions in New York's Penal Code provisions, which typically involved small-time operations and local prosecution, the stakes in this case are monumental and there is no shortage of resources on either side. Although the court declined to enter an immediate restraining order against the New York Attorney General on Monday, the websites' claims are scheduled to be heard again next Wednesday, and we will continue to keep an eye on the dispute going forward.

© Arnold & Porter Kaye Scholer LLP 2015 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.