If you run a business involving fantasy games in New York, then good news: for the time being, you can stay in business. Last Friday was an important day for fantasy sports in the state with two different court decisions leading to one big result: until an appeals court has time to decide on the legality of this practice, fantasy services such as FanDuel Inc. and DraftKings Inc. may continue operating in the state.
Now the wait begins as we all sit back and wonder what will be the final results. There are millions of dollars at stake for the companies involved, and if they lose here, it is possible it could be the beginning of the end for a billion dollar industry.
The Backstory
Not everyone is a fan of fantasy sports leagues, and it’s not just all the friends and family members who have to deal with the taunts from loved ones when they lose. So, for those who haven’t heard about the war on fantasy sports, here is a little bit of background information:
Earlier this year (last month to be more exact), New York Attorney General Eric Schneiderman issued a cease-and-desist order to FanDuel and DraftKings that stated the two largest operators of a multibillion dollar industry must stop taking money for bets from New York residents – who make up a big portion of their clientele – because doing so constitutes illegal gambling.
As you might imagine, this decision was not one that the companies took happily. And not just because New York is such an important part of the industry’s business plan. The decision by New York is seen as one that could influence other states determining the same issue. If New York rules against fantasy sports, then other states might just follow.
On November 10, when Schneiderman issued this order, he stated his rationale as such: “It is clear that DraftKings and FanDuel are the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York, and not on my watch.”
At the time of the decision, a spokesperson for DraftKings said that there were more than 500,000 fantasy sports users in New York and that it would have been nice of the attorney general to sit down with the companies to find out business models before making this decision – though a representative for the attorney general did claim that these meetings in fact did take place. The company also sent out a notice of the decision to users, asking them to stand up for their rights to participate in these fantasy sports by writing to Schneiderman’s office.
Both companies stated that they would be taking advantage of all their legal options in the matter.
The World of Online Fantasy Sports
In order to really understand this debate, you should probably know a little bit about what exactly it is we are talking about. For example, what exactly do FanDuel and DraftKings do?
Fantasy sports center around creating teams in various professional leagues. All types of leagues are available for you to choice. For example,
- Major League Baseball
- National Football League
- NASCAR
- Professional Golf Association
- Soccer (including the English Premier League and Major League Soccer)
- National Hockey League
- National Basketball League
- United Fighters Confederation
All these, plus many college sports.
Once you have decided to enter a league (or leagues), you can join contests for as little as a quarter or as much as $10,000. Unlike some fantasy sports, these companies offer quick prizes with daily or weekly competitions so you do not have to wait an entire season to find out if you have won. Just like with gambling, how much you win is determined in large part on how much you put in.
Once you have put down your money, you will receive a $50,000 salary cap (at least that is DraftKing’s cap). Don’t get excited, this isn’t real money. With this fake cash, you will buy a team. Make it good. How your team does is how well you do.
Let’s say you are participating in a league for the MLB. You have a pitcher on your team who one day pitches a no hitter, then you’ll get points. A DH who hits a home run and gets a bunch of RBI’s? More points. At the end of the day, week, season, etc., depending on what game you are playing, the person in the league with the most points wins the prize.
Now, this is just a general overview of fantasy sports. Each company, league, etc., will be a little bit different. However, all of them will have pretty detailed rules for you to read in order to understand a little bit more about what you are doing before you start playing.
What Both Sides Are Claiming
The basic point of contention in this legal battle is simple: how much skill is required in order to win a fantasy league?
If it is as simple as picking a team of people and sitting back to let them play – and then winning money because of those picks, then the argument that this is illegal sports betting has some merit. However, the other side of the coin is that picking an entire team for yourself filled with individuals (instead of, say, simply placing a bet on a team that has already been created), making trades, knowing who is injured, and so on, takes time, skill, and knowledge. Plus, it takes enough time, skill, and knowledge to make this not gambling and more of a legal game.
As far as federal law goes, it is not gambling. The Unlawful Internet Gambling Enforcement Act of 2006 defines fantasy leagues as a game of skill and not one of luck. And this definition applies whether the game was a day long or an entire season. Because of this, it is allowed. However, that doesn’t mean that states cannot ban it on the state level.
The Court Decisions
All of this brings us to the present. While the attorney general issued a cease-and-desist order, a court still had to agree. On November 17, Schneiderman filed an enforcement action in court to seek a preliminary injunction against FanDuel and DraftKings. Basically, what he was asking the court to say was that the companies had to stop working in New York until a final court decision.
On Friday, a trial court decided to temporarily ban the businesses from practicing in the state, effectively cutting off their largest market, until a proper trial to determine the merits had been issued. However, that decision did not last long.
A few hours later, an emergency hearing was held in an appellate court after the companies claimed that closing in New York, even temporarily, would cause the businesses irreparable harm since New York business amounts to around $35 million in annual revenue for the companies and is around 13% of their market – California is the second biggest with about 10%.
After the emergency hearing, Judge Paul Feinman determined that, for now, the companies can keep on playing in the state – at least until a final court decision based off a full hearing of the case has been heard.
What Is Still Happening
Now, FanDuel and DraftKings, along with the attorney general, have to start preparing for court. Final papers for the first part of the appeals process are due on January 4. That means that neither side has that much time to get ready.
The test here is material factor. It doesn’t have to be all skill to be legal, and it doesn’t have to be all luck to be illegal gambling. Instead, if the court determines that chance is a material factor in winning, then it would be ruled to be gambling. If chance isn’t a material factor, then, well, you get the point.
In the meantime, several of the smaller businesses in this market, such as DailyMVP and MondoGoal have already shut down their New York operations. In addition, companies such as PayPal have already changed their business models to stop issuing transactions from fantasy sports vendors.
State Bans
Currently, there are six states that have straight out banned these organizations and more that decided to go with more moderate regulations of the businesses, such as classifying it as gambling and making it conform to gambling laws (Nevada). However, even more are considering bans and regulations. And as stated earlier, some of those are expected to be influenced by the New York decision.
This could end us spelling real trouble for the companies, as well as for the industry as a whole. This is especially true if California, which is considering the matter later this month, were to come up with stricter regulations as well.
In that case, not only would the companies be banned or more strictly regulated in their two biggest markets, but the likelihood of more states following would be increased even more. In other words, this upcoming ruling is a pretty big deal to anyone in the fantasy sports game.
The Takeaway
There are actually a few takeaways here. The first, and perhaps most important, is that everyone gets their day in court, even multibillion dollar businesses. The second is that if you run a for-pay fantasy sports league similar to FanDuel or DraftKings in New York, then for the time being, keep on trucking. However, the final lesson is that if you don’t run one now but want to start one, you might want to wait until a final court decision has been reached.
