January 11, 2016

Battle Against DraftKings, FanDuel Spreads to Illinois; Private Lawsuits And Demands For Regulation Grow Around the Country

Seller Beware: Consumer Protection Insights for Industry

In November 2015, we reported on the legal battle between New York Attorney General Eric Schneiderman and daily fantasy sports (DFS) companies DraftKings and FanDuel, with Schneiderman alleging that DFS games constitute illegal gambling under New York's Penal Law. DFS players choose sports lineups of real professional athletes, and their success is based on the statistical performance of those athletes in actual sporting events.

In late December 2015, Illinois Attorney General Lisa Madigan joined the conversation, issuing an opinion saying that the DFS games also constitute illegal gambling under Illinois law. The opinion was in response to an inquiry from Democratic State Representatives Elgie Sims and Scott Drury, and concluded that DFS sites do not fit into an exception to Illinois' ban on the playing of "games of chance or skill for money." In response, DraftKings promptly filed a lawsuit against the State Attorney General in Cook County Illinois Circuit Court, seeking injunctive relief to stop her office from enforcing her interpretation of the law. FanDuel and Head2Head Sports filed a similar lawsuit in Sangamon County, where Illinois state lawmakers are considering legislation regulating DFS sites.

Since November 2015, the New York case has also seen significant activity. In mid-December, a New York state judge granted New York Attorney General Schneiderman's request for a preliminary injunction on the grounds that DraftKings and FanDuel are likely providing forms of gambling. But later that same day, the New York Supreme Court Appellate Division issued an interim stay of that same preliminary injunction, allowing the companies to continue doing business in New York pending further review of the preliminary injunction order in early January this year. In a memorandum to the New York appeals court, Schneiderman compared DFS contests to "parlay bets," or a single bet linking together individual wagers, where winning the bet is dependent on all of the wagers winning. And on New Year’s Eve, Schneiderman amended his lawsuits against both FanDuel and DraftKings, demanding that these companies refund all of the money that they obtained from consumers in New York State and seeking civil penalties of up to $5,000 per allegedly illegal wager.

The direct legal battles in New York and Illinois stand in contrast to measures adopted by other specific states. In November 2015, for example, the Massachusetts Attorney General introduced consumer protection regulations imposing new standard for the operation of DFS operators within the state. Such regulations insist that the games be closed to those under the age of 21, ban daily fantasy college sports contests, and require DFS companies to make greater disclosures to players regarding their likelihood of winning.

The Massachusetts regulations also call on the DFS companies to offer games for "beginner" players as well as clearly to identify the "highly experienced players" using a symbol on their profile. These changes directly respond to government concerns that the DFS games are dominated by advanced players—such as 26-year-old Saahil Sud, who has reportedly made more than $3.5 million playing online fantasy sports—with access to sophisticated analytics and statistics software and ample cash. Massachusetts Attorney General Maura Healy points out that less than two percent of all players win 90 percent of the prizes.

The DFS industry's marketing and advertising tactics—and the domination of the games by sophisticated players—are also under attack in nearly two dozen private lawsuits around the country. In one such action, pending in the Southern District of Florida, the plaintiff recently amended the complaint to include as defendants professional sports leagues (including the National Basketball Association and Major League Soccer), sports media companies, and investors, alleging that by "financing, promoting and endorsing" DFS's activities, those parties have "provided credibility and legitimacy to the enterprise." The Judicial Panel on Multidistrict Litigation will consider on January 24 of this year whether to consolidate the proposed class actions, as well as what court should hear any such consolidated case.

With so much attention focused on the DFS companies and the possibility of additional action by state regulators, we may see interested parties begin attempts to establish relationships with state attorney generals. For example, the fantasy sports industry has already begun lobbying the Texas Attorney General for a ruling that the DFS games are legitimate in advance of his decision about whether such sites can legally operate in Texas. DFS companies may also attempt to satisfy applicable state regulations governing their industry.

© Arnold & Porter Kaye Scholer LLP 2016 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.

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