The New York Daily Fantasy Sports Case - Part III

The State of New York Attacks

November 11, 2015.

Just over a month had passed since the New York Times ran the Haskell article and the state of New York was already on the move. Just the day before, Eric Schneiderman, the state Attorney General at the time, had sent Cease-And-Desist Letters to FanDuel and DraftKings. Subsequently, a press release on the letters had come out of his office and Schneiderman didn’t pull any punches:

Daily fantasy sports is neither victimless nor harmless, and it is clear that 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.  Today we have sent a clear message: not in New York, and not on my watch.

Clearly, Schneiderman was ready to fight. This was a problem for DFS since New York was one of their largest markets (roughly 10% of revenues according to this data). It was our opinion that the DFS industry was playing fast and loose with the truth and it appeared, for a moment, that it had finally caught up to them. They had no choice but to find a way and make something happen.

Friday, the 13th.

This is what Eric Schneiderman woke up to.

Of the approximately 300 people that had gathered, many admitted to being employees of FanDuel or DraftKings. In any event, they were wrong. Daily fantasy sports was not a game of skill, because it was not a game in the first place. That said, these erroneous chants were one of the many things that helped FanDuel and DraftKings advance the game-of-skill narrative and turn this whole debate into a false referendum between the game-of-skill and game-of-chance arguments.

November 20, 2015. 

The DFS industry was lawyering up. David Boies, generally considered one of the top lawyers in the country, had recently been retained by DraftKings. Now he was speaking on Bloomberg TV.

He also had a conference call with the media the same day, which was covered by Legal Sports Report. One argument he made:

FanDuel has been openly operating these contests in New York for almost 8 years. DraftKings itself has been openly offering these contests in New York for almost four years. Never, until about 10 days ago, had anyone — not the attorney general, not anybody in the attorney general’s office, not any other public official — hinted, asserted that there was anything illegal about what FanDuel and DraftKings were doing.

(Note: There is a slight inconsistency between what Boies pointed out in the Bloomberg video, namely that smaller operators were operating in New York for 8 years and FanDuel for 6.5, and what Legal Sports Report attributed to him, namely FanDuel operating in New York for 8 years.)

We would hear a very similar argument years later from Ripple. Here is what they said in their response to the SEC complaint dated March 4, 2021:

The SEC filed this Complaint 8 years after XRP was created, 5 years after the DOJ and FinCEN characterized XRP as a virtual currency, and after more than 2 ½ years of investigation during which the SEC allowed Defendants to continue to distribute XRP, allowed the XRP open market to grow, and allowed millions of market participants to rely on the free and efficient functioning of that market.

Do you see a pattern here? We do. In both cases, it took the government eight years to act. In both cases, the party who is facing a legal issue leaned hard on the fact that it took the government a long time to act, and used that as part of the defense. 

There is one problem, however. That’s not how laws are supposed to work. To see how absurd this line of reasoning is, just consider that you go 100 miles an hour on a freeway where the speed limit is 60 miles an hour. Nothing happens for 30 mins and you enjoy the ride. It’s thrilling. Then, a cop pulls you over and you say, “Officer, I have been doing this for 30 minutes and nobody stopped me, you can’t do it now. It’s too late.” 

Would that work? Of course not. It is a fact of life that the government doesn’t really pay attention to something until the economics becomes material. Further, by the time something does become material, some extra time is generally needed to formulate a robust legal position. We think that it is ludicrous for the start-ups that are playing fast and loose to try to turn that into an advantage. 

November 23, 2015.

We were following this case closely, and while we didn’t agree with everything the state of New York said (more on this below), we agreed with them on their main conclusion:  DFS constituted illegal gambling under the Penal Law.

We felt we should put a brief write-up together and get it published somewhere. Legal Sports Report was getting some traction, so we thought they might be willing to run a guest post. We finished up the write-up and this was the punchline: 

The daily fantasy industry is trying to turn the debate into a referendum between skill vs. gambling. Since fantasy requires skill, the argument goes, it is not gambling. It remains to be seen what the New York court will say on the relative importance of skill, but in the end it will not matter because of three powerful words in the New York law: future contingent event. (emphasis original)

What we didn’t agree with the state of New York on was their views on traditional fantasy sports. Perhaps sensing that not having taken any action in the past on the traditional season-long fantasy sports may be a problem for them, Schneiderman was trying a little too hard to distinguish DFS from traditional fantasy sports. The November 11 press release, for example, included this statement:

Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling, and misleading New York consumers. (emphasis added)

That was a slippery slope and we made our position clear in our write-up.

If a traditional fantasy sports operator accepts money from individual participants, pools it, and returns cash back to the participants, after perhaps some administrative fees, everything in the statutory definition of gambling is met as far as the state of New York is concerned. 

In our opinion, traditional fantasy sports, provided the conditions described above were met, is also gambling. Perhaps a less harmful, lower-stakes and a more social version relative to DFS but still gambling, nonetheless. We felt this point was important because the DFS industry was trying to use every opportunity to hide behind traditional fantasy sports when the circumstances warranted. 

 We shared our write-up with Legal Sports Report and started waiting. Their response came ninety minutes later.  

Good piece, well written, and I tend to agree with the analysis. With that said, we're going to pass because it's tough for us to run external opinions on legal matters from non-lawyers.

Sounds somewhat reasonable? Except, Legal Sports Report already ran what was effectively a legal opinion on DFS by somebody else. In any event, while the conclusion in that op-ed, that DFS is gambling, is correct, our view is that the argumentation was poor.

We felt that the real reason was that our arguments were inconvenient for the DFS industry. We felt we were being suppressed because we were a threat. We ended up publishing our piece on our own website because we knew that another opportunity would present itself soon …

Start at the beginning with Part I
Continue to Part IV