Legal Rollercoaster in New York for DraftKings and FanDuel
After a difficult November, daily fantasy sports (DFS) operators will need to buckle up for an even more challenging road ahead. Things looked grim for the DFS industry last month, after New York Attorney General Eric T. Schneiderman delivered cease-and-desist orders to FanDuel and DraftKings, ordering them to stop taking bets in New York. Though the DFS industry had faced obstacles before, this was the strongest blow against them, especially in the state where FanDuel is headquartered, and from which the largest number of DFS players hail. But both sites vowed to fight back, and have been embroiled in a tough legal battle ever since.
How Did We Get Here?
At the start of the NFL season, things were looking up for FanDuel and DraftKings. By spending millions of dollars flooding the airwaves with advertisements, both sites saw huge numbers of new players eager to win the giant jackpots touted in the ubiquitous commercials. But these advertisements did more than just pique the interest of excitable football fans, they also drew the gaze of skeptical regulators, who were ready to pounce after allegations of insider trading were cast upon a DraftKings employee who won $350,000 in one week on FanDuel. DFS operators tried to staunch their growing PR disaster by vowing to self-regulate, formulating the Fantasy Sports Control Agency to be led by former U.S. Secretary of Labor Seth Harris.
However, the regulatory beast had been awoken, and reports surfaced of investigations by the Federal Bureau of Investigations (FBI) and the Department of Justice (DOJ), grand jury hearings in Florida, and concern growing in states from New York to Nevada. Nevada’s Attorney General issued an opinion ruling that DFS constituted both sports pools and gambling games, rendering DFS operators outlawed in the state unless they applied for gambling licenses. Next came a wave of class action lawsuits from across the country, in which plaintiffs alleged consumer fraud, false advertising, and insider trading. It was while waiting for the various class action suits to be consolidated that DraftKings and FanDuel were hit with AG Schneiderman’s cease-and-desist orders, which forced them to start fighting on another battlefront: New York trial court.
AG Schneiderman vs. DraftKings and FanDuel
AG Schneiderman followed his cease-and-desist orders with inflammatory rhetoric about the DFS industry-giants, saying “DraftKings and FanDuel are the leaders of a massive multi-billion dollar scheme intended to evade the law and fleece sports fans across the country.” The two companies responded with fiery language of their own, in addition to filing for a temporary restraining order to prevent Schneiderman from shutting down the sites in New York, which was later denied by the judge. The subsequent emergency hearings began on November 25th, with both sides making strong arguments as to their desired fate for the future of DFS. As discussed previously, the arguments centered around the question of whether DFS should be considered a game whose material element is one of luck or one of skill.
In the midst of these hearings, the Attorney General of Massachusetts, Maura Healey, issued a set of proposed regulations that include raising the minimum age of participants from 18 to 21, leveling the playing field for “amateur” participants, altering the content and disclosures in DFS advertisements, and providing financial protections to prevent sustained losses. These proposed regulations, though rigorous, were met with positive responses from DraftKings and FanDuel, who both indicated a desire to work with Healey to come up with regulations that would benefit both participants and the operators.
Despite the introduction of this more reserved regulatory approach, anticipation was mounting over how Justice Mendez of the New York Supreme Court was going to rule. Though the decision would provide only temporary relief for either party, many viewed it as the true test case for the future of DFS. Surprising many, the court ruled in favor of the Attorney General, thereby enjoining and restraining FanDuel and DraftKings from doing business in the State of New York. But in keeping with the chaotic nature of the issue thus far, FanDuel and DraftKings immediately appealed and sought an emergency temporary stay, which was granted by a New York appellate judge later that same day. As it stands, the companies will be able to operate in New York until early next year, though FanDuel voluntarily chose to stop participation from New Yorkers following the cease-and-desist order.
FanDuel, DraftKings and the DFS industry live to see another day, but face an uphill battle as they fight to prove their legality in New York and across the country at large. For a game that has come to be loved by so many, it will be interesting to see how more modest regulatory approaches, like that of AG Healey, play out.
Arent Fox will be watching closely and working to protect our clients’ interests in the face of this complicated legal landscape.