The Supreme Court of Illinois on DFS

When a DFS participant lost to his opponent badly, he asked for a rematch in court, taking it all the way to the Supreme Court of Illinois. He lost again, but ... was it the right decision?

Colin Dew-Becker and Andrew Wu seemed to be just two of many people who were willing to risk money because they both believed they could form a better fantasy team. Wu took Dew-Becker to the cleaners, beating him 221 to 96. This was daily fantasy sports (“DFS”), a turbocharged version of traditional fantasy sports, which appealed to those seeking that instant gratification. No more waiting until the end of the season, no need to worry about whom to pick up from the waiver wire; all of that became old school. If you came up with the better fantasy team than your counterparty on Sunday morning, you could have made money, potentially big money, by Sunday night.

Generally, when this type of thing happens, one person is a bit poorer, the other one is a bit richer, and so they try again. What was different in this case was that Dew-Becker decided to take Wu to court. This DFS thing seemed like gambling to him and roughly 30 states, including Illinois, have some sort of loss recovery provisions that allow the loser to go after the winner and potentially recover the money. In roughly one-third of the states, including Illinois, third parties may also seek to recover a gambling loss if the actual loser does not do so.

Dew-Becker didn’t get much love in two lower courts, so he took the matter to the Illinois Supreme Court, the highest court in the state. For Dew-Becker, what was at stake was $100, give or take, and perhaps some bragging rights. For DFS, it was much more important. Illinois was one of the first states that came after them when Attorney General Lisa Madigan gave the DFS operators a Christmas present and declared that DFS is gambling (pdf opinion is here). FanDuel returned the favor and sued Lisa Madigan the next day. Nothing like a Christmas gift exchange!

Madigan caved and there never was litigation on the merits of the issues at hand. Thus, the merits were effectively being litigated by two guys that participated in a DFS offering. Outside the state of New York, it was arguably the most important case where the future of the industry hung in balance. Was DFS a game of skill like Wu argued? Or was it gambling?

When the Supreme Court of Illinois rendered its verdict on April 16, 2020, the DFS industry breathed a sigh of relief. The Court ruled, 5-1, that DFS was a game of skill and therefore not gambling. Attorney, Daniel Wallach, even went as far as arguing that the opinion could potentially pave the way for legalized poker. 

After the defeat in New York just two months earlier, when the New York Appellate Division, Third Department ruled that daily fantasy sports is gambling and the Interactive Fantasy Sports Law was a constitutional violation (our next post), it must have felt good for the DFS industry participants.

But … Was it the right decision?

Justice Karmeier retired from the Supreme Court of Illinois this last December, after practicing law for 56 years, 34 as a judge. This excerpt caught our attention in his farewell letter:

Justice Karmeier told me the key things he learned from his clerkship with Justice House early in his career was to be thorough, do his own research, and maintain a strong notion of fairness. One of the principals that has guided his judicial career, he said. was the desire “to do what is right.”

We do not know Justice Karmeier, but we know what the law is supposed to do: always seek the truth, always do the right thing and always be fair. We wish him all the best in his retirement. 

He was the lone dissent in the case. He had a strong start:

Due to its misconception of the predominate factor test, the ingenuity exerted in head-to-head DFS contests duped the majority into believing it is a game of skill when it truly is a game of chance. Therefore, I dissent.

Here, he was already signaling he was not buying the DFS narrative. An advantage of being thorough and doing your own research, after all, is to not assume that the narrative you are being told is the correct one. 

Later in his dissent, he continued with that theme:

The majority’s quantitative approach lacks the foresight to distinguish an activity tactfully camouflaged as a game of skill but whose outcome relies on a contingent event out of the participant’s control from an activity in which the participant can use his or her skill to overcome any impact chance may have on the outcome.

With this quote, Justice Karmeier provided one of the best descriptions of DFS. DFS was trying to advance a narrative around being a game of skill and Justice Karmeier saw right through the mirage. DFS is not a game of skill. 

Where we disagree with Justice Karmeier is what that means. If DFS is not a game of skill, but an activity where the outcome relies on a contingent event, what is it? For Justice Karmeier, that meant it was a game of chance. We disagree.

If the “outcome relies on a contingent event out of the participant’s control,” which is literally what Justice Karmeier said, then DFS is just that: an activity whose outcome relies on a contingent event.

Justice Karmeier was 100% correct in his diagnosis until this last step. His observation that the outcome relies on a contingent event did NOT imply that DFS was a game of chance. It implied that DFS was not a game in the first place.

We have, of course, said this for years. DFS is not a game. It is a claim on a future contingent event. ( This link will take you to Part 1 of our five-post blog series covering why the IRS is right and DFS is wrong. )

It is not just the majority that is tricked into believing that DFS is a game. It is pretty much the entire world. As far as we are aware, the only debate we have seen is whether DFS is a game of skill or a game of chance. Here is the problem: that is a false choice. The real debate is whether DFS is really a game or a claim; and given that choice, we are absolutely confident it is the latter. 

Give credit to the DFS industry for advancing the narrative that DFS is a game of skill and for creating a false choice. It is almost forgotten now, but at some point, the contingent event narrative seemed to be competing with the game of skill vs. game of chance narrative. Daniel Wallach discussed it at length (his tone was much more neutral when this argument started). Former New York AG Eric Schneiderman’s office argued forcefully that DFS is considered gambling under New York law because it depends on future contingent events. Of course, we have been advocating for this position since 2016

For reasons that are not entirely clear, Schneiderman’s view fizzled. Daniel Wallach changed his tune and the state of New York decided to settle with the operators. That leaves us, NSEI, as the guardians of the truth. The truth may be inconvenient for most, but the truth is the truth and it must be respected at all times. Otherwise, you blink your eye and there is a mob at Capitol Hill threatening the foundation of our country. Truth matters. Words make worlds

So, what happens if DFS is not a game? Let’s consider the implications. 

First and foremost, it means that Dew-Becker v. Wu is wrongly decided. The skill exemption would not have applied, as the majority had found that the exemption is only available for games. 

Was DFS gambling then? We are confident that this is the case. While the Illinois laws are not as explicit on future contingent event language as in some other states (e.g. New York), there are still multiple ways to get there, including, but not limited to a bookmaking provision. 

Also, of interest: Is DFS now considered gambling? The Sports Wagering Act was passed in 2019. The key question is whether or not it covers DFS. There are two options:

Option 1 - The Majority View

For the majority, this was just a footnote in passing (Footnote 1 on p. 6 of the opinion).

The Sports Wagering Act does not address or regulate DFS contests.

If so, and DFS is not a game of skill because it is not a game, arguably DFS would be operating illegally in the state of Illinois, as none of the exemptions would apply as far as we can see. 

Moreover, since the IRS charges an excise tax of 2% on unauthorized sports wagers, when the DFS industry asks, “May we have the check please?” the excise tax would be computed at 2% of the gross intake fees.  

Option 2 - The Minority View

Justice Karmeier departs from the majority on this issue as well. He stated:  

Therefore, contrary to the majority’s contention (supra ¶ 20 n.1), because daily fantasy sports requires a wager in an attempt to accumulate the most points based on the individual performance statistics of athletes in a combination of sport events over the Internet, the Act clearly governs daily fantasy sports. While the Act has no bearing on this case, the ability to recover losses from DFS contests, when played in accordance with the Act, has now come to an end. Pub. Act 101-31 (eff. June 28, 2019) (adding 720 ILCS 5/28-1(b)(15)).

If Justice Karmeier is correct in his view, then, this is where things get really interesting. It is likely true that the ability to recover may be gone in Illinois as the Sports Wagering exemption would kick in. If so, that already creates an absurd result; the majority concluded DFS is not gambling, but the subsequent sports wagering law governs DFS. It is very strange to be in a world where those two things are true at the same time. 

Furthermore, it begs the question: what about the DFS operator itself? Again, there is a bookmaking provision in the law. It goes like this:

A person engages in bookmaking when he or she knowingly receives or accepts more than five bets or wagers upon the result of any trials or contests of skill, speed or power of endurance or upon any lot, chance, casualty, unknown or contingent event whatsoever, which bets or wagers shall be of such size that the total of the amounts of money paid or promised to be paid to the bookmaker on account thereof shall exceed $2,000. Bookmaking is the receiving or accepting of bets or wagers regardless of the form or manner in which the bookmaker records them.

This provision actually does reference “contingent event,” thus, on its face, it seems to capture DFS. There are a few exceptions to this provision, but curiously, the Sports Wagering Act is not one of them. While there may not be a political will in the state to go after DFS, that’s a different matter. Why would this provision not apply to DFS, even if the Sports Wagering Act governs DFS? 

The excise tax issue is also interesting. If the Act does not mention DFS by name but covers it in substance, would we say that the Act is deemed to have authorized DFS? Or, would the IRS argue that since there is no express grant of approval, 2% should apply? 

Interesting, huh? The DFS industry, despite the apparent victory, seems to be stuck between a rock and a hard place. If they go with the majority view, all in, the check comes out to 2%. The minority view around the Sports Wagering Act governing DFS may potentially save them from a larger excise tax bill (i.e. if the IRS does not insist on requiring the express grant of approval, which they likely will), but that would make it awfully clear that the Supreme Court of Illinois got this one wrong. That not only means the bookmaking provision might potentially kick in, but it also makes things really problematic in some other states. 

Our take: Neither the majority nor the minority got it right, although Justice Karmeier came close to the truth: DFS is not a game. When participating in DFS, one is simply speculating that their pool of players, based on a set of contingent events, will have a better overall outcome than everyone else’s pool of players based on the same set of contingent events, e.g. the slate of football games on a given weekend. 

Do you want to dive deeper? As we do with these types of things, we annotated the Supreme Court’s opinion on Full Court Press Legends, our insights platform on Thinkific. Happy reading!