In this country, football is as much a part of Thanksgiving as turkey and pumpkin pie.
Increasingly, the tradition of lounging around watching football games while gorging on food all day is also filled with fantasy sports strategizing. No matter which teams are playing, somebody in the room has someone on their fantasy team that will lead to cheers over seemingly meaningless six-yard catches.
Thanks to daily fantasy sports (“DFS”), those innocuous plays could spell the difference between winning or losing hundreds, thousands, or even millions of dollars on sites such as FanDuel and DraftKings.
It is that ability to pay money to enter DFS contests for the chance at winning significant sums of money that has lawmakers questioning whether these games constitute unlawful forms of gambling. In New York, a judge will hear oral arguments on the eve of Thanksgiving as to whether or not DFS sites in one of the nation’s largest markets must shut down due to a recent attack by the Empire State’s Attorney General, Eric Schneiderman.
On November 10, 2015, Attorney General Schneiderman sent cease and desist letters to DFS leaders, FanDuel and DraftKings, ordering them to stop accepting wagers in New York claiming that doing so violates anti-gambling laws.
Specifically, the Attorney General accused FanDuel and DraftKings of violating N.Y. Penal Law § 225.00(2) which provides, “A person engages in gambling when he stakes or risks something of value upon the outcomes 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.” Interestingly, the law imposes no criminal liability on individual bettors but instead penalizes the bookmakers or those running the gambling operations.
Of course, FanDuel and DraftKings do not believe their games are gambling and have vowed to fight the New York AG every step of the way. Frankly, DFS operators might not withstand the loss of the New York market. In 2014, DraftKings generated $25.6 million in entry fees from New York — second only to California. That same year, FanDuel took in $31 million in entry fees from New York residents.
In response to the AG’s cease and desist letters, both sites filed temporary restraining orders on November 16 seeking to put an interim halt to Schneiderman’s crusade. However, New York Supreme Court Justice Manuel Mendez denied the sites’ temporary restraining orders. Instead, Judge Mendez scheduled an emergency hearing to determine the legality of DFS for November 25, 2015.
After losing its request for a TRO, FanDuel stopped accepting entries from New York on November 17. DraftKings, however, has remained fully functioning. In the meantime, the AG — as promised — filed for a permanent injunction of DFS games, which will be the focus of Judge Mendez’ hearing on Nov. 25.
Of course, FanDuel and DraftKings do not believe their games are gambling and have vowed to fight the New York AG every step of the way.
At its core, gambling consists of three elements — consideration, chance, and a prize. In terms of fantasy sports, the federal Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”) exempted some fantasy games from federal gambling violations. However, the UIGEA did not legalize fantasy sports. Rather, it left the ultimate decision to the states. So far, seven states have banned DFS in some form, or at least classified it as gambling and required DFS sites to obtain gambling licenses, such as Nevada.
Most states have adopted a framework known as the “predominant purpose test” to determine if an activity is gambling. Under this test, if chance, aka luck, plays more than a 50 percent role in determining the outcome, then the activity is gambling. This uniquely American test has drawn a lot of scrutiny when it comes to poker as the game is seemingly predominantly skill-based with some luck mixed in. Advocates of DFS, like poker supporters, argue that the games are predominantly skill-based.
However, in New York, Penal Law § 225.00 defines an unlawful “contest of chance” as one in which the outcome depends “in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor.”
The word “material” is the whole ballgame in New York.
FanDuel and DraftKings must prove that chance is not a material element to DFS. Certainly both skill and luck factor into DFS outcomes. However, if chance is a “material” element, then the Attorney General will prevail.
Even in the face of dozens of potential class action lawsuits, how Judge Mendez rules this week could lead to a domino effect with other states moving to shut down DFS. Although Massachusetts, where DraftKings is headquartered, is headed down a legalization and regulation route, many other states might want to avoid the so-called ills of DFS “gambling” like New York.
So, while the mashed potatoes and stuffing feast is taking place, be thankful that America’s inconsistent and incoherent gaming laws make wagering money on individual athletes’ performances a perfectly legal Thanksgiving entertainment option. For now.