The New York Daily Fantasy Sports Case - Part X
Where the Confusion Lies
Throughout the New York Daily Fantasy Sports saga, two topics kept resurfacing. Arguably, they also happen to be the top two main sources of confusion. This matters a great deal because we believe this confusion may stand in the way of reaching the right outcome for the right reasons.
What are the two topics? The first is characterizing poker as skill-based gambling, which was the rare misstep in Andy Goodell’s wonderful masterpiece in front of the entire New York State Assembly.
The second one is not appreciating what a future contingent event truly means under the New York Penal Law as well as similar state laws.
In our opinion, there is nothing that illustrates these issues more clearly than the exchange below. This conversation was between Dustin Gouker, who used to write quite a bit for Legal Sports Report before moving to Catena Media when Catena added Legal Sports Report to its portfolio, and Daniel Roberts, who after spending five years each at Fortune and Yahoo Finance, is now Editor-in-Chief of Decrypt.
If you consider yourself a reader, please go ahead (note; any emphasis below is ours). If you’d like to listen to this dialogue instead, you can tune in here and forward to the 10:50 mark. The relevant part is just under two minutes.
GOUKER: [DraftKings and Fanduel] spent the better part of, like you said, the last few years getting almost a couple dozen laws on the books regarding daily fantasy sports, specifically saying it’s a game of skill.
And yeah they are going to say ok that’s this one product sports betting is gonna be over here it’s another product. I mean, whether you buy that, whether it’s a great thing to do, having two, like two things that are arguably skill-based gambling products, you know. No matter what the law calls DFS, I believe it is a game…, it’s a gambling product. It takes a lot of skill to be successful at it, but it’s when you are playing, you are gambling but yes that’s what they are going to sell. They are going to say hey this is over here DFS is over there it’s OK.
And the reality is it’s a product that, you know, the DFS product definitely correlates well with sports bettors. It’s people who are watching sports, who want to have a monetary interest on it. So it’s definitely something that makes sense for them to pivot to, for both Draftkings and Fanduel.
ROBERTS: Yeah I like that term that you are using: skill-based gambling. I always thought it was strange that there has to be a distinction of … it’s either. Oh it’s a game of skill, or it is gambling. I mean…Why can’t it be both?
GOUKER: It doesn’t have to be.
GOUKER: It's only because of the legality, and we have seen, the existing laws that the states say, say certain things are skill-based gaming, certain things are gambling. So that’s why we had this rhetoric over the last … There are legal reasons for it, but yes, I think most rational people could see that it is skill-based gaming, or gambling.
ROBERTS: It’s possible that it requires some skill of doing your homework and doing your research and getting good at it. But also, at the end of the day you are still choosing a line-up of human players and you can’t have any control of how they perform in the game. So it’s like how can you say there is no chance at all, you know?
GOUKER: People get injured, games get rained out all the time. There is a lot variables that you can’t account for just with, you know, being skillful at it, so …
Skill-based gambling. Is that an honest reflection of what DFS truly is? We would actually agree with Gouker’s statement. DFS is skill-based gambling.
There is only one problem. A game cannot be skill-based gambling. Remember the intersection of the three circles in Part VII? The area where games, skill, and gambling all intersect? There is nothing there in the context of New York Penal Law and practically every other state. (Arizona is one of the states that is, or used to be, rather strict on this, but even there the laws were generally not being enforced on chess, for example.)
Why is that? That is because three things are needed for a game to be gambling: prize, chance, and consideration. All three. Sweepstakes get around the gambling issue by letting people enter for free, so they basically eliminate the consideration from the promotion. Chess competitions, golf tournaments, etc. escape the gambling characterization by demonstrating there is sufficient skill involved.
States take different views on how much skill is enough. What is not debatable is this: sufficient skill means a game is not gambling. That is, after all, why the daily fantasy sports industry pushed so hard on the game-of-skill narrative.
If a game of skill is not gambling, then that means what it says. A game can be gambling, like roulette. An activity that involves skill can be gambling, like sports betting. A game that involves enough skill, e.g. chess, is NOT gambling.
So you can have any two out of three (games, gambling, and skill), but you can’t have all three. It is kind of like time, energy and money. You can not have all three in life.
Here is where things get confusing:
What about poker?
Many people think poker is a game of skill. Many others think it’s gambling. So, is it skill-based gambling? One Legal Sports Report commentator took the position that daily fantasy sports is gambling and used poker as an example to rationalize it.
Uhm … poker is a game (it can be played during the pandemic or on Mars), so if it involves sufficient skill, it cannot be gambling. Poker arguably sits right in the middle of the skill vs. chance spectrum, so reasonable minds can agree to disagree as to how much skill is involved. If you think poker involves sufficient skill, and thus not gambling, that’s fine. If you think chance predominates skill in poker, and therefore, poker is gambling, that’s also fine. What you can’t do is take the position that poker, a game, is skill-based gambling. That literally nullifies the gaming law as we know it.
So what exactly is the confusion? A visual would work best here:
There are many people that believe poker involves skill. There are also many people that believe poker is a game of chance. If we follow the gaming laws, the first set of people would conclude that poker is not gambling and the second set of people would conclude that it is.
But, that doesn’t mean that poker, a game, involves sufficient skill and is gambling at the same time. That’s impossible.
So the confusion arises because one generally superimposes their own personal opinion when they say that poker involves sufficient skill, over somebody else’s conclusion (perhaps a court’s) that poker is gambling, and interprets that to mean that poker is skill-based gambling; an oxymoron when it comes to games.
Remember, skill and gambling can coexist. A skilled sports bettor might be able to win just enough, so even after paying the ‘vig’, they can still make a living out of it.
However, games of skill and gambling cannot coexist. The ability for a skilled enough person to win games more often than not, whether it is a chess tournament, golf tournament, etc. is precisely what allows a game to escape the gambling characterization.
What does a future contingent event mean?
If you comb through all the briefs and the relevant case law in White v. Cuomo, as well as the briefs in the original case when the State of New York sued FanDuel and DraftKings, you will see that virtually any type of unknown is characterized as a future contingent event. The confusion is in not appreciating the subtle nuances between three types of unknowns, which is absolutely critical.
Who starts a chess game? White does, and sometimes, a random event, such as a coin toss could determine who plays white. In football, there is a coin toss and the team that wins can choose to receive the ball or defer to the opposing team and take the opposite at the start of the second half. Then as games continue, there are all kinds of rules that determine what will happen next. In Texas Hold’em, the river card will follow the turn card. In backgammon, the dice will be rolled with each player taking turns. In roulette, the ball will be spun exactly once each round.
Are these events uncertain? Sure, there is uncertainty as to what the next card, dice roll, etc. will be. Does the game-winner change depending on how this uncertainty resolves? Yes, possibly. Does that make it a future contingent event as contemplated under the Penal Law? No, it doesn’t.
These are rules. They are artificially created instructions that all players should be aware of. There is uncertainty as to what will happen, but that uncertainty arises only because players decided to play a game and follow the game instructions. If somehow everybody stopped playing Texas Hold’em poker today, there would never be any uncertainty around what the river card will turn out to be. If everybody stopped playing backgammon, there would be no wondering about the roll of dice in a backgammon game. Thus, the key distinguishing factor between an uncertain event within a game, and a future contingent event is that the former does not arise if the game is not played in the first place. They are different from athlete performances, which happen independent of daily fantasy sports. Whether somebody “plays” DFS or not, athletes will go out and compete, completely unaware of the fact that somebody, somewhere, made a gambling decision based on expectations around how they will perform on the field.
Roulette involves chances, of course, but only certain chances, as defined by the rules and, in this case, by statistical laws. The kinds of things that can happen can be exhaustively determined. The ball may stop at an even or odd integer but never at a fractional or irrational number; the game allows for red and black but never blue; and one cannot bet on triple zero even if one stupidly wished to. (emphasis added)
Is it a contingency if it is controlled? Morson did not think so:
We do have one way to do away with unwanted contingency: games. Every significant play theorist has noticed this special feature of games. Although not all resemble chess in eliminating contingency, others at least control it, and controlled contingency may not really be contingency at all.
Chance Events Within Games
FanDuel and DraftKings wrote an amicus brief in White v. Cuomo. They said:
Every game of skill involves some elements of chance or contingent events that competitors cannot eliminate. See Dew-Becker, 2020 IL 124472, ¶ 22. Not even professional athletes can eliminate the risk of “injury,” “unexpected weather,” or “poor officiating.” White, 181 A.D.3d at 84. But no one would dispute that professional tennis players, ski racers, and marathon runners are engaged in skill contests. So too for professional chess players who cannot control who plays white, bridge players who cannot control the distribution of cards, Scrabble players who cannot control the letters they and their opponents draw, and competitors in a spelling bee who cannot control what words they and their opponents must spell. Nor can the owner of a horse control all variables that influence whether his horse runs the fastest and wins a race. See People ex rel. Lawrence v. Fallon, 152 N.Y. 12, 17 (1897). The potential for chance to sway the outcome of these contests does not mean they are gambling or involve a “material degree” of chance. They remain skill contests even if “occasionally an unskilled player may make a lucky shot.” People v. Cohen, 160 Misc. 10, 11 (N.Y. Magis. Ct., Queens Cty. 1936). (emphasis added).
There is not much to disagree with here except for what really matters. Lumping all of these events under the same umbrella with the conveniently vague label of “chance or contingent events” may be convenient for DFS, but is incorrect.
Also worth mentioning: if you go to the Dew-Becker v. Wu (PDF) opinion and read ¶ 22, you will see there is no mention of contingent events (that comes much later in the dissent). Rather, this is the opening sentence in ¶ 22:
Answering this question can present difficulties because the outcome of every contest depends, at least to some degree, on chance.
Do you see what happened here? FanDuel and DraftKings made it sound like the Dew-Becker opinion included the phrase ‘contingent events’. Now, they didn’t quote anything, so they can use their own words, but adding the phrase ‘contingent events’ to the mix is actually critical. With that sleight of hand, now everything is lumped into one class, it appears there is case law that supports that labeling, and another obstacle is removed toward characterizing DFS as a game of skill. This type of stuff happens more than you think (a couple of amicus briefs in Murphy v. NCAA did something similar; they would cite case law that supposedly supports the notion that states have jurisdiction over gambling, but when you would go to the opinion cited, you’d actually see the original opinion only mentioned casino gaming. We called them out on it in our SCOTUS amicus brief (PDF). Not surprisingly, the critical issue there was gaming v. gambling, which we maintained are different, and the threshold issue here is what a contingent event means. Practitioners and law students, take note: You absolutely have to go back to the original citations and read them. If you see something, say something.
As far as the distribution of cards, chess, Scrabble, etc. go, we described these events as controlled randomness events that only arise if a game is played in the first place. These are not future contingent events that the Penal Law contemplates.
But what to make of weather, etc.? Are those future contingent events? This is, in some ways, even trickier because the answer is that it depends. It depends on whether it impacts a game or the payoffs for a claim. Is it a side dish? Or is it the main course?
It is absolutely correct that uncertain future events such as weather could certainly impact game outcomes, e.g. extreme snow could derail a field goal attempt. But teams don’t get points for predicting the weather. They get points for scoring touchdowns and field goals. Any team may occasionally get unlucky but they can demonstrate skill and still win. Justice Karmeier, the lone dissenter in Dew-Becker v. Wu (which we analyzed in detail here), made the same observation in the opinion (PDF):
It is true that every game, to some extent, involves chance or an unknown. Nevertheless, no court would doubt that a person participating in a simple human footrace is a game of skill. The critical distinction between a game of chance and a game of skill is the participant’s ability to overcome chance with superior skill. Runners can train for severe weather, divert their routes to avoid competitors, or increase their speed to make up for lost time. But a person who places a wager on the race lacks any ability to control the outcome of the race. It is this type of chance inherent in a game, which a person cannot influence, that contributes to the undeniable evils at which antigambling statutes are aimed. Thus, the exemption under section 28-1(b)(2) may apply only to contests in which the participant’s own skill has the opportunity to overcome chance. (internal citations omitted)
Notice how he brilliantly describes it: chance or an unknown, as opposed to how the DFS operators described it: chance or contingent events. That’s really the bottom line. These subtle nuances are not convenient for DFS, but they are critical for the Penal Law and other similar laws, to operate properly.
When does weather become a future contingent event? Simple. When one buys weather derivatives. These are contingent claims that pay off based on future contingent events, e.g. if snowfall in Chicago exceeds 10 inches in December.
Developed with the onjective to serve as a risk management tool, weather derivatives are regulated by the CFTC. Weather in this case is not a chance event that potentially sways the outcome of a game, it’s a future contingent event that directly determines the value of the claim, similar to athlete performances in DFS.
Ultimately, these nuances are critical and Gary Saul Morson captured some of these distinctions brilliantly. Regarding chance events in sports, he distinguished them from controlled randomness:
Other games do not allow odds to be calculated. Something closer to genuine contingency exists. No one can predict a baseball’s “bad hop.” The fielder must possess the presence of mind to respond to a weird bounce or sudden wind. Suspense in sports derives in part from the possibility of such unforeseeables. The game tests the player’s skill, surprising perhaps even to himself, at meeting situations that may never have happened that way before.
When he said “something closer to genuine contingency,” Morson was tactfully distinguishing between controlled randomness within a game and chance events that may impact the game, but at the same time not exactly concluding it is a contingency. That’s the whole point, a chance event that may impact the game is not the future contingent event contemplated under the Penal Law. These nuances are subtle and quite critical.
Morson’s commentary in the last sentence around the game testing the player’s skill is precisely the same as what Justice Karmeier said in his dissent when he mentioned “the participant’s ability to overcome chance with superior skill …” Great minds think alike.
Another articulate contrast by Morson:
In baseball, unlike roulette, something new can always happen.
Yet, Morson understood that the side dish doesn’t become the main course. The weather may impact the outcome of a sports game, but it is not a contingent event unless your claim payoff is directly tied to it. Same with baseball:
Novel situations arise in baseball, but baseball is not about such situations. (emphasis original)
Finally, Morson clearly didn’t think that random chance events turn baseball into a game of chance:
Baseball is a game of skill and presentness, but allows for unpredictable chances.
In today’s post and the one before we heavily cited work from some of the greats in other fields such as historians, sociologists and literary theorists. It would be easy to write off that work as irrelevant, which is what DraftKings tried to do. However, law, at its best, is truly interdisciplinary. It pulls from a wide range of disciplines. History matters because history always provides great lessons, which allows us to compare and contrast the present with the past. Sociology matters, because law, ultimately, is about humans. Literary theory matters, because words and definitions matter a great deal. Last, but not least, economics matters because it teaches us the incentive structures and cost-benefit analyses among other things. This holistic approach is not only how we prefer to look at things, but we also think it is absolutely necessary to reach the right outcomes for the right reasons.
Despite everything we said, you may still feel a bit uneasy about fantasy sports not being a game. We understand assumptions are hard to shake. Thus, it is important to understand the why. Why have we assumed that fantasy sports is a game? That’s what we will detail in our next release in the series, Part XI.
White v. Cuomo - New York State Court of Appeals - APL-2020-00027
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