— by Wes Gerrie
Case: People v. FanDuel Inc., DraftKings Inc., et al., No. 453056/15, 2015 N.Y. Misc. Lexis 4521 (S.D.N.Y. Dec. 11, 2015).
Abstract
The popular, yet controversial, activity of Daily Fantasy Sports faced its first legal test for illegal gambling operations in New York. The Supreme Court of New York heard both sides and deferred its ultimate decision. However, in the meantime the companies were enjoined from conducting business in the state.
Narrative
Introduction
FanDuel and DraftKings are online Daily Fantasy Sports (“DFS”) companies that operate wagering websites. On these sites the customer selects a set number of professional athletes for their DFS team staying under a salary cap based on an athlete’s perceived value by the companies. The success of their wager is tallied by FanDuel and DraftKings who rely on individual real game performances of the athletes selected. DFS has two types of games: head-to-head (betting selected lineup will perform better than others), or guaranteed prize pools (contest where payout is based on standing).
In this case the People (plaintiff) allege this structure of is a contest of chance. On the contrary, FanDuel and DraftKings (defendants) argue the customer combinations, creation of user algorithms, and analysis of statistics make DFS a game of skill.
Procedural History
To begin, the complex history of this case began on October 6, 2015 when New York (“NY”) Attorney General (“A.G.”) Eric T. Schneiderman (“Schneiderman”) started an initial probe into DFS in NY, after complaints of insider information benefiting employees winning on the competing site. On November 10, as a result of the investigation Schniederman served a cease and desist letter to both parties, finding these sites are illegal gambling operations.
On November 13 both sites commenced an action for temporary restraining orders against Schniederman in the hopes of pre-emptively stopping action against them. In this action they cited full compliance with NY law as a game of skill, an arbitrary and capricious investigation, violation of Due Process, and tortious interference with their business; this action was denied. On November 17 Schniederman filed for an injunction to prevent FanDuel and DraftKings from operating in NY due to fraudulent conduct and illegal gambling practices.
Court Analysis and Rationale
Judge Manuel Mendez ordered an injunction restraining FanDuel and DraftKings from doing business in the State of New York and from accepting entry fees, wagers, or bets from New York consumers for any contest on their websites. The court held for A.G. Schneiderman on the basis of three key rationale.
First, Executive Law §63 permits the NY A.G. to bring action for injunctive relief to remedy a repeated fraud or illegality upon the finding of a prima facie case where the act complained of has the tendency to deceive or creates an atmosphere conducive to fraud. Under General Business Law §349 a prima facie case is established by the showing of injury resulting from defendant engaging in an act or practice materially misleading or deceptive. Additionally, General Business Law §350 permits a prima facie case when the defendant engages in false advertising with a showing of reliance on said advertisement. Here, the court found A.G. Schniederman established a likelihood of success warranting an injunction under the authority of §63 due to violations of both §349 and §350.
Second, New York State Constitution Article 1 §9 states “no lottery or sale of lottery tickets, pool-selling, book making or any other kind of gambling…shall hereafter be authorized or allowed within [New York]”. In NY, Penal Law §225 defines gambling as when a person stakes or risks anything of value upon the outcome of a contest of chance not under their control. Here, Judge Mendez specifically mentioned A.G. Schniederman has a greater likelihood of success on the merits of this illegal gambling and contest of chance allegation. In finding this Judge Mendez interpreted §225 broadly and determined DFS involves illegal gambling in some capacity. The court differentiated the case at hand from Humphrey v. Viacom by stating DFS is not a one-time fee, not seasonal, and has a percentage of every fee being paid directly to these companies who control almost every aspect of the wager. Judge Mendez wrote this reflects NY State’s policy against commercial gambling.
Lastly, the final rationale involved refuting FanDuel and DraftKing’s claims made in their November 16th action. Judge Mendez pointed out Due Process only requires notice and an opportunity to be heard which was properly complied with during A.G. Schniederman’s month long investigation. Additionally, the court found no showing of an arbitrary and capricious enforcement of illegal gambling laws because both FanDuel and DraftKings were named defendants and no “similarly situated” DFS websites were exempted from A.G. Schneiderman’s probe.
Conclusion
However, later in the day, after this decision was handed down, the Appellate Court of NY granted a temporary stay of the injunction.[1] Part of this stay led to the announcement a New York State Appellate Division five-judge panel will hear the case in full on January 4th, 2016. The appeals and memorandum[2] for this hearing have been filed in this landmark case, so place your bets!
[1] Chris Grove, Daily Fantasy Sites Get Reprieve After Initial Loss in New York Court Battle; FanDuel Reenters NY, Legal Sports Report, December 11, 2015, http://www.legalsportsreport.com/6690/dfs-sites-ny-court-battle/.
[2] Recently, A.G. Schneiderman wrote an addendum to the case seeking a return of all profits earned by the sites to it’s fans.