New York Attorney General Moves to Ban Daily Fantasy

Like many of you, I play fantasy football in a season-long league (no biggie but I’m in first place), and I also dabble in daily fantasy. As of tomorrow, however, and may be prohibited from doing business in New York, and are being threatened with both civil and criminal penalties. For participants, this comes as a bummer, because daily fantasy is fun. For the companies, their partners, and their investors, the prospect of losing the New York market carries massive financial consequences. The companies will likely fight the New York State Attorney General (NYAG) in court, where the looming question will be whether or not daily fantasy constitutes "gambling."

According to the New York Times (click link for the story), the two sites have a combined 1.1 million users in New York, which equates to 12.8% of the entire daily fantasy market. According to that same article, being shut out of New York would have a combined financial impact of $35 million dollars for the companies.

Whether daily fantasy (or season-long fantasy, for that matter) constitutes "gambling" seems less important than the fact that New York likes to maintain its Constitutional monopoly on all things gambling. This appears to be more of a targeted attack on two successful businesses because New York can't get its cut of the action. Daily fantasy money is obviously more visible than season-long bets, so the NYAG appears to be grabbing the low-hanging fruit. Hopefully the Legislature can respond quickly to create a framework that will allow these businesses to work in New York, whether through a licensing fee or some other financial arrangement. 

Is Daily Fantasy Illegal in New York?

This depends on whether daily fantasy constitutes “gambling.” Obviously, the Attorney General believes that it does, and since gambling is illegal in New York (unless the state is the bookie, then it's totally fine), the NYAG's position is that daily fantasy is illegal. As referenced in his letters to DraftKings and FanDuel, the NYAG cited the following constitutional provision concerning illegal gambling:

“[E]xcept as hereinafter provided, no lottery or the sale of lottery tickets, poolselling, book-making, or any other kind of gambling, except lotteries operated by the state . . . except pari-mutuel betting on horse races . . . and except casino gambling at no more than seven facilities…shall hereafter be authorized or allowed within this state; and the legislature shall pass appropriate laws to prevent offenses against any of the provisions of this section.” N.Y. Const. Art. I, § 9.

The NYAG also referenced both civil and criminal authority for the investigation and the cease and desist letter. First, on the civil side, the NYAG is authorized under Executive Law 63(12) to investigate and seek Court authorization to enjoin illegal business activities. Similarly, authority exists under New York State General Business Law § 349, which prohibits businesses from “deceptive acts and practices,” and § 350, which prohibits false advertising.

As far as penalties go, the NYAG has threatened criminal charges, as well as the civil consequences. Illegal gambling laws are found in the Penal Law.

As for a definition of “gambling”: “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.” N.Y. Penal Law § 225.00 (McKinney).

In his letters the NYAG also threatened specific criminal charges against the daily fantasy sites including: “Promoting Gambling in the First Degree” (a class “E” felony); “Promoting Gambling in the Second Degree” (a class “A” misdemeanor); and Possession of Gambling Records in the First Degree (a class “E” felony).

Is Regular Season-Long Fantasy Illegal? 

According to the NYAG, normal season-long fantasy is not illegal. The letters (linked above) specify the difference between daily fantasy and season-long leagues as:

“We believe there is a critical distinction between DFS and traditional fantasy sports, which, since their rise to popularity in the 1980s, have been enjoyed and legally played by millions of New York residents. Typically, participants in traditional fantasy sports conduct a competitive draft, compete over the course of a long season, and repeatedly adjust their teams. They play for bragging rights or side wagers, and the Internet sites that host traditional fantasy sports receive most of their revenue from administrative fees and advertising, rather than profiting principally from gambling. For those reasons among others, the legality of traditional fantasy sports has never been seriously questioned in New York.”

“Unlike traditional fantasy sports, the sites hosting DFS are in active and full control of the wagering: FanDuel [DraftKings] and similar sites set the prizes, control relevant variables (such as athlete “salaries”), and profit directly from the wagering. FanDuel [DraftKings] has clear knowledge and ongoing active supervision of the DFS wagering it offers. Moreover, unlike traditional fantasy sports, DFS is designed for instant gratification, stressing easy game play and no long-term strategy. For these and other reasons, DFS functions in significantly different ways from sites that host traditional fantasy sports.”

So, as it stands now, your Yahoo!, ESPN or whatever other league should be safe. That said, it seems like the NYAG's characterization of season-long fantasy as not gambling because of "a competitive draft....a long season...and repeated[] adjust[ments]..." ignores the fact that it still ultimately "a contest of chance or a future contingent event not under [the participants'] control or influence. Just like daily fantasy, I have no control over whether Tom Brady is going to throw 4 TDs to Gronk on any given Sunday, but according to the NYAG, I guess I'm not "gambling" by starting them both week after week in the hope that it happens. 

What Have Other States Done?

Interestingly, several states have already given DraftKings, FanDuel, and others the boot based on the same idea – that their services constitute illegal gambling. In Nevada, for example, the sites ceased accepting bets after that state’s AG came after them. Similarly, the daily fantasy sites are already blocking Iowa and Washington, which have similar definitions of “gambling” as New York. Several other states, in which daily fantasy is presently allowed, have substantially the same definition, so whatever happens in New York might have an effect there.

I Play Daily Fantasy, How Can I Keep Playing If I Live in New York?

Right now, only the two “big” companies, DraftKings and FanDuel, have been issued cease and desist letters. That means that if you participate through another service, you should be okay for now. If the prohibition takes hold and the biggies are shut out of the state, it’s reasonable to expect that the smaller companies will follow.

If you are motivated, call your state senators and representatives. The fact that the NYAG is targeting the daily fantasy sites for supposedly illegal gambling is contrary to the direction the State, and Gov. Cuomo, have been moving. In 2012, Gov. Cuomo urged the legalization of “Vegas-Style” casinos, and three have since been approved. On one hand, the New York State aggressively promotes new casino gambling (which should generate $300+ million in tax revenue), while on the other hand is now effectively criminalizing internet-based daily fantasy.

Proposed Legislation

In the wake of recent news concerning the use of “insider information” between the big daily fantasy sites, New York State Assemblyman Felix Ortiz introduced a bill that would subject daily fantasy to regulation by the New York State Gaming Commission. This would likely mean that the Commission would promulgate regulations to carve out exceptions for fantasy sports from the current law, and get additional money for New York. Because New York tightly controls gambling, and because it’s a HUGE moneymaker for the State, it only makes sense that the State wants a piece of the action.

Other states have already passed or are considering laws that allow daily fantasy, but either charge big franchise fees for the right to do business in the state, or otherwise ensure that the state gets a piece of the pie through taxation, etc.