The New York Daily Fantasy Sports Case - Part II

October 5 - A Special Day?

In the movie Back to the Future, a lot happens on November 12. Observing this, Doc opines that it may be a day of cosmic significance, or alternatively, an amazing coincidence.

If there was a DFS equivalent, it’d be October 5, hands down. 

October 5, 2021 is when the Court of Appeals will hear the oral arguments in White v. Cuomo. This is the third, and likely final step in the New York DFS saga.

While this case seems to have flown under the radar lately, in our opinion, its importance cannot be overstated. The first decision (PDF) in this case was rendered by the New York Supreme Court, which concluded DFS is gambling. In early 2020, the New York Appellate Division affirmed (PDF opinion). Now, on appeal, the New York Court of Appeals will decide what DFS’s fate will be. A reversal of the lower court decision would obviously be favorable for the DFS industry. On the other hand, if the Court of Appeals affirms, that would not only be a significant blow to DFS, but it would also lead to a pretty major court split (in the Illinois case Dew-Becker vs. Wu, which we covered in detail here, the Supreme Court of Illinois ruled that DFS is not gambling), which might ultimately pave the way for a Supreme Court showdown.

Funny coincidence - October 5 is when this lawsuit originally started. The plaintiffs, Jennifer White, Katherine West, Charlotte Wellins and Anne Remington filed this lawsuit on October 5, 2016. Here is Plaintiff’s complaint (PDF). 

Wait, it gets even funnier. Arguably, October 5 is also the day when this whole saga started. That’s right, just to go back in time six years, to October 5, 2015 and open up the New York Times. You will see the following headline:

That was the title of the New York Times article on October 5, 2015, exactly six years before the upcoming oral arguments, and exactly one year before Plaintiff’s complaint was filed. The story was about Ethan Haskell, a DraftKings employee. He engaged with DFS on a rival site, FanDuel, and won $350,000. The article alleged that he might have had an edge because of “insider information.” Since one’s success is measured relative to other DFS participants, the probability of winning may increase for rosters that utilize athletes seldomly used by other participants. 

To be clear, these types of contrarian strategies do not guarantee a win. If the majority is right, the participant employing the strategy would likely perform poorly. However, if the participant following this strategy happens to pick an athlete (or a set of athletes) that performs unexpectedly well, the DFS participants may earn a substantial amount of money.

Characterizing this incident as an “insider information” matter was likely a misnomer. Generally, “insider information” refers to material non-public information about a public company and trading on such information may give the trader an unfair edge. For example, in a recent, high-profile insider trading case, Mathew Martoma, a former hedge fund trader got into trouble for building a relationship with a doctor and allegedly having access to clinical trial results before they were announced to the public. Martoma worked at Steve Cohen’s hedge fund, S.A.C. Capital Advisors, which liquidated and shorted the relevant stocks (Wyeth and Elan) just in time to escape with a huge profit. The New Yorker recapped that story in detail here.

That type of insider information is possible in DFS too and more broadly in sports betting. Knowing who will play in an upcoming game, or how much, may give the DFS participant, or the sports bettor an edge provided that the information is not available to the public. In fact, it was a sports betting scandal, namely the 1946 sports betting scandal in the NFC championship game, which gave rise to the birth of the injury report. Following the scandal, Bert Bell, who served as the second NFL Commissioner from 1946 to 1959, forced each team to issue an injury report. 

While insider information is possible in DFS, what Haskell did can more accurately be characterized as front running. Front running can consist of several types, but perhaps the most common form is a broker with knowledge of an impending customer block order trading ahead of that order. Thus, this type of front running is not necessarily acting on material, non-public information, but acting on knowledge of a future trade, which may or may not be driven by having material non-public information. It was alleged that Haskell, by virtue of having access to non-public choices made by other DFS participants, was able to construct a roster that had a high probability of success.

DraftKings retained Greenberg Traurig, LLP, which conducted an independent investigation into the allegations that DraftKings employee Ethan Haskell used non-public information for his own advantage. On October 19, 2015, DraftKings issued a press release and a summary report, however the detailed findings were never made public. In any event, the damage was already done. Until the Haskell incident, the industry was rather successful in raising awareness around its product offerings, partially because of substantial advertising. From January 1, 2015 to October 5, 2015, the day the New York Times story on Ethan Haskell broke, DraftKings and FanDuel were reported to have spent $131.4 million and $74.5 million on TV ads alone. The Haskell incident was the trigger that further raised the profile of DFS and brought to the forefront genuine questions about its legality.

A series of legal developments followed. On October 16, 2015, DFS was deemed gambling in the state of Nevada by the Attorney General (.pdf memorandum). In a later memorandum dated December 23, 2015, the state of Illinois would conclude that DFS constitutes illegal gambling under Illinois law (.pdf opinion). Later, in January 2016, the Texas Attorney General would issue an opinion and reach the same conclusion; and note that a court would likely determine that participation in daily fantasy sports leagues is illegal gambling under section 47.02 of the Penal Code (.pdf opinion). When it’s all said and done, a total of 21 attorney generals would opine on daily fantasy sports, in the form of an opinion or otherwise, with 12 of them concluding that DFS is illegal gambling (in some of these states, DFS would subsequently be legalized via legislative action). In five states, the conclusion was mixed and only four states concluded that DFS is not gambling. (Note: Vela Wood keeps a tracker here. Legal Sports Report also has a tracker.)

However, the most important scrutiny came from the state of New York and its then-Attorney General, Eric Schneiderman …

Start at the beginning with Part I
Continue to Part III