The New York Daily Fantasy Sports Case - Part VIII
A Historical Perspective
311 years ago …
Queen Anne of England signed into law the Statute of Anne. In pertinent part, it read:
All notes, bills, bonds, judgments, mortgages, or other securities or conveyances whatsoever given, granted, drawn or entered into, or executed by any person or persons whatsoever, where the whole, or any part of the consideration of such conveyances or securities shall be for any money, or other valuable thing whatsoever, won by gaming, or playing at cards, dice, tables, tennis, bowls or other game or games whatsoever, or by betting on the sides or hands of such as do game at any of the games aforesaid, or for the reimbursing or repaying any money knowingly lent or advanced at the time and place of such play, to any person or persons so gaming or betting as aforesaid, or that shall, during such play, so play or bet, shall be utterly void, frustrate, and of none effect, to all intents and purposes whatsoever. (emphasis added)
The primary purpose of the statute was (non)-enforceability of gambling debts (Nelson Rose has a good primer here (PDF)). But what really matters in White v. Cuomo is how gambling is defined within the statute, which is the emphasized part above. Let’s break it down:
… playing at cards, dice, tables, tennis, bowls or other game or games whatsoever ...
Card games, dice, tables … these are what we effectively know as casino-style games today.
Tennis is tennis. The game bowls are essentially a precursor to curling, in fact, curling is sometimes called bowls on ice. We’re not exactly sure why these two games found their way into this statute; maybe the Queen didn’t like them?
In any event, while some of these games are games of chance and others are games of skill, what is undebatable is that all of these are games. Sounds a lot like the first part of the New York Penal Law, doesn’t it? Remember this is what § 225.00(2) says:
A person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.
But wait! Betting on players who play those games was also a thing back then. Here comes the critical part:
… by betting on the sides or hands of such as do game at any of the games aforesaid ...
Sounds a lot like ‘future contingent event,’ doesn’t it?
Practice commentaries are commentaries (secondary source of law) that are written by practitioners, judges and law professors. The following commentary relates to N.Y. Penal Law § 225.00 and highlights the critical distinction that the Statute of Anne made more than two centuries ago:
One illustration of the definition of ‘gambling,’ drawn from the commentaries of Judges Denzer and McQuillan is the chess game between A and B, with A and B betting against each other and X and Y making a side bet. Despite chess being a game of skill, X and Y are ‘gambling’ because the outcome depends upon a future contingent event that neither has any control or influence over. The same is not true of A and B, who are pitting their skills against each other and thereby have a material influence over the outcome; they, therefore, are not ‘gambling.’ Thus the definition of ‘gambling’ embraces not only a person who wagers or stakes something upon a game of chance but also one who wagers on ‘a future contingent event’ [whether involving chance or skill] not under his control or influence.
William C. Donnino, Practice Commentary, N.Y. Penal Law § 225.00, 39 McKinney’s Cons. Laws of N.Y. at 355 (2008).
X and Y are people that are betting on the sides or hands of such as do game …
Even if that is correct, you might ask, that’s just some old law, even older than the United States itself.
Ahh. Also correct, and that’s where understanding the history of gambling laws comes in. When it comes to historical perspective, Nelson Rose is always a good resource. Here is what he had to say about the Statute of Anne:
This 288 year-old English statute is of great importance to legal gaming in modern America because the Statute of Anne is part of the common law of every state.
Rose goes on and mentions Nevada, which explicitly adopted the common law of England in 1861:
The common law of England, so far as it is not repugnant to, or in conflict with the Constitution and laws of the United States, or the Constitution and laws of this state, shall be the rules of decision in all the courts of this state. N.R.S. 1.080. (emphasis original)
We mentioned two other states in our amicus brief:
An early version of the gambling statute in Illinois (1827) read almost identical to the Statute of Anne:
Any person who shall, at any time or sitting, by playing at cards, dice, or any other game or games, or by betting on the side or hands of such as do game … so playing or betting, any sum or sums of money, or other valuable thing ... (emphases added).
Similarly, the Tennessee Attorney General concluded that the state’s gambling laws descended from the Statute of Anne: (PDF opinion)
Clearly, some of the legal principles contained within the 1710 Statute of Anne designed to curtail excessive gambling losses have been included and even expanded, within Tennessee law.
These historical connections matter a great deal. The game vs. claim distinction is real and it is well-rooted in history. Looking at White v. Cuomo through that lens, there is only one possible conclusion: DFS is a claim on future contingent events, namely athlete performances; therefore, it is illegal gambling under the New York Penal Law.
What about the federal laws? How does the New York Penal Law interact with them?
Let’s start with a question. If you want to speculate that your favorite candidate will win the next election and risk $10,000, you cannot do it, at least not legally. The reason: the CFTC ruled back in 2012 that political event contracts are prohibited.
On the other hand, if you want to speculate that your favorite team will win the next game and risk $10,000, you can do it. Obviously, not everywhere and not necessarily the way you want it (you may need to be at a physical location for example), but you have options.
Why can you do one but not the other? What is the difference you might ask?
You might say that elections are a commodity, but football is not, so it’s not under CFTC jurisdiction. Putting aside the fact that this would be an artificial distinction, one CFTC commissioner actually took the position, publicly, that football is a commodity.
If football is a commodity, then why is sports gambling allowed? Why does the CFTC not take jurisdiction on sports betting?
We have always felt that they should. Here, you can find the comment letter we submitted to the CFTC earlier this year that details our position.
Along those lines, we believe that DFS, too, falls under CFTC jurisdiction. We are not the only ones who took that position. John Holden and Ryan Rodenberg wrote a paper and they said:
[C]ertain fantasy contests may run counter to Commodity Futures Trading Commission regulations.
So, what does all of this have to do with White V. Cuomo? This case is certainly not about the CFTC. The New York Court of Appeals does not need to determine whether CFTC has jurisdiction over DFS. The New York Penal Code dates back to the 19th century, and the CFTC was not established until 1974.
The reason why it is relevant is that well before the CFTC was established, the question of whether a claim is gambling or not, came up over and over again. There were a lot of structural similarities between certain financial contracts that paid off if certain events happened (e.g. insurance) and sports bets, which made every contingent claim appear like gambling. We recapped that story in our brief to the Supreme Court in Murphy v. NCAA, so we’ll just offer the punchline here. The boundaries of gambling were drawn along the spectrum of purpose vs. entertainment. Bona fide contracts that served a valid economic purpose were respected and the gambling provisions did not reach them. Pure entertainment claims that did not serve any economic purpose were prohibited as gambling. That was the underlying principle in the 19th century and still holds today. Why wouldn’t it? The line needs to be drawn somewhere and economic purpose is as good as any.
The State of New York said the exact same thing in its own brief:
For instance, businesses offering insurance collect premiums from policyholders and make payments based on the outcome of contingent events not within the policyholder’s (or the insurer’s) control—namely, whether a person, home, or property will suffer damage. Nevertheless, the Legislature in 1889 specifically exempted from the statutory prohibition on gambling “any insurance made in good faith for the security or indemnity of the party insured.” (internal citations omitted)
In exempting insurance, the New York Legislature recognized that not all claims are created equal and the ones that serve a bona fide economic purpose serve the public interest. It is true that White v. Cuomo is not about the CFTC. But as the State itself admitted, the federal principles were being applied by the states long before the CFTC was established. The simple reconciliatory view is that both the Penal Law and federal laws serve the same purpose: prohibiting claims on future contingent events that do not satisfy the public interest.
Does DFS serve a bona fide purpose? No, it doesn’t. As FanDuel itself admitted, it’s an entertainment product. Of Course, the New York Penal Law doesn’t care about that. A claim on future contingent events is gambling and DFS cannot claim any kind of exemption, express or implied.
So, a holistic and honest reading of history does tell a story. The recognition that claims on future contingent events can be gambling is literally older than the United States itself. When the Union came together, the Statute of Anne influenced the state gambling laws heavily. Two types of gambling were prohibited: gambling games and gambling claims. To figure out when a game is gambling, states looked to the skill vs. chance spectrum. Sufficient skill meant a game was not gambling. To determine whether a claim was gambling, our society looked to another spectrum: purpose vs. entertainment. Critically, skill did not factor into that spectrum at all.
The CFTC was created by Congress through the Commodity Futures Trading Commission Act of 1974. Concurrently, the Economic Purpose Test became the official yardstick through which CFTC would determine whether claims are gambling or not. 26 years later, the Economic Purpose Test was formally gone when the Commodity Futures Modernization Act entered the books. Still, the CFTC continued to apply it in spirit and cited it in its order (PDF) prohibiting the listing and trading of political event contracts.
More recently, when ErisX, a designated contract market, tried to get certain contracts that mirrored sports betting contracts regulated, in what we viewed as a sneaky attempt to try and get sports betting federally regulated, the Economic Purpose Test was again at the forefront. ErisX would end up withdrawing the submission, but here is what Commissioner Berkowitz stated afterward:
The Commission has interpreted the “public interest” test in the CEA gaming provision as a restoration of the “economic purpose” test that was eliminated in the Commodity Futures Modernization Act of 2000 (CFMA). The referenced economic purpose test included a requirement that an application for the listing of a contract demonstrate that the contract “reasonably can be expected to be, or has been, used for hedging and/or price basing on more than an occasional basis. (internal citations omitted)
Ultimately, Commissioner Berkowitz’s position was that the Economic Purpose Test was alive and well, and it was still the relevant yardstick.
If ErisX or any other applicant can demonstrate that sports event contracts such as the NFL Contracts can be used for an economic purpose other than for gaming itself, meaning they reasonably can be expected to be used for hedging and/or price basing on more than an occasional basis, then in my view it would not be contrary to the public interest to permit their listing. To date, however, there has been no such demonstration.
The Economic Purpose Test has to continue to be the relevant yardstick. Because, what other framework do we really have?
Back to DFS. When the DFS industry faced the legality question, it successfully turned the debate into a false referendum between a game of skill and a game of chance. That resulted in them being measured with the wrong yardstick, i.e. skill vs. chance; when they should have been measured along the purpose vs. entertainment spectrum. At the same time, the CFTC refused to take action, at least so far, so DFS did not face the consequences on that front, either.
When we look at the entire DFS industry, we see a legality problem in New York and potential violation of state laws in states that have similar laws to New York (remember, ultimately, most gambling laws descended from the same place - the Brits - anyway). In addition, we see a commodity contract that is trading on unregulated venues. There is also the IRS excise tax issue that we wrote about back in Part I of our IRS v. Daily Fantasy Sports series. Then, there is the all-important Wire Act, which will be another one of our detailed write-ups in the near future.
Yet, the DFS industry continues to freely operate practically without consequence …