NY Attorney General Says Fantasy Sports is Illegal, FanDuel & DraftKings Ordered to Shut Down

The fantasy sports industry is back in the news in New York State. On November 10, Attorney General Eric Schneiderman ordered FanDuel and Draftkings to stop doing business in New York. The two companies, part of a multi-billion dollar business community, were the subjects of an earlier report on LBN. Schneiderman says that the fantasy sports operations violate New York law. The legality of fantasy sports operations has been looked at by other states.

FanDuel CEO Nigel Eccles disagrees with the Schneiderman. He said that his company will continue to allow New Yorkers to play despite the state attorney general's order to be shut down. DraftKings has stated that it is evaluating it options in order to permit New Yorkers to continue playing fantasy sports. Business law Professor Joseph Kelly, a gaming law expert, discusses the New York situation in this report.

Professor Joseph Kelly

Professor Joseph Kelly

Prof. Kelly says that the Unlawful Internet Gambling Enforcement Act of 2006 is probably not a shield for the fantasy sports companies in their dispute with New York. Kelly points out that the law does not say that fantasy sports are legal, but rather that “seasonal fantasy sports are not illegal.” That leaves the door open for states to ban fantasy sports. When the law was drafted, no one was thinking about the sort of daily fantasy sports operations that presently exist. Kelly opines that the fantasy sports companies have “pushed the envelope” from seasonal to daily operations. This is past what the drafters of the law envisioned.

Prof. Kelly also notes that the fantasy sports companies contend that their businesses do not involve gambling. He points out that gambling involves three things: prizes, consideration, and skill. Most states, in determining whether something is gambling or not, examine it to see whether chance prevails over skill. “If chance is predominant, then it’s gambling.” Kelly says that New York has a tougher standard, “material factor.” If chance is a material factor in success, “then it’s gambling.” The material factor test makes it easier for a prosecutor to prove that an operation is gambling. To illustrate his point, Prof. Kelly says that proponents of online poker in New York State sought to change the standard from material factor to predominance, as in most other states.

Prof. Kelly opines that N.Y. Attorney General Schneiderman’s action may be of interest to other states who are looking into fantasy sports because Schneiderman’s position is not only that the games involve gambling, but also that they violate New York’s consumer protection law. If New York is successful, other states might be encouraged to take on fantasy sports. As of the moment, the fantasy sports exclude six states from their operations: Arizona, Iowa, Washington, Louisiana, Montana, and Nevada. But, Kelly says, both state and federal officials in Florida are considering taking action. If the federal government takes action, Kelly says, it would probably be under the Illegal Gambling Business Act. This could trigger a money laundering investigation.

Another concern is that employees at the fantasy sports companies are privy to internal data and information about sports teams. This raises concern about insider trading. That, says Prof. Kelly, is what stimulated all the unfavorable publicity. An employee of one of the two big companies was using his information to wager at the other company. Problems like this are why state regulation, not prohibition, makes a lot of sense in Kelly’s opinion. Proper regulation could insure that employees were all suitable people and that there would be no use of insider information. Even though the companies now say that they have eliminated the problem, having governmental assurance of this “would be a win-win situation for all players.” State regulation would also help to prevent money laundering.

Another benefit of state regulation is that the public could be assured that the companies were taking steps to minimize compulsive gambling. Prof. Kelly says that experts on compulsive gambling say that seasonal gambling for small stakes is not so much of a problem as daily fantasy sports, “which can become very addictive.”

Prof. Kelly does not believe that federal regulation would be a good idea, given the ineptitude federal regulators have often displayed. He notes that there is a bill pending in Congress, the Restoration of America’s Wire Act. As presently written, the bill would ban most forms of online gambling. Kelly says that the bill could include a carve out for fantasy sports.

Joseph M. Kelly, Ph.D., J.D., is a professor of business law at SUNY College at Buffalo and an associate of the Catania Consulting Group. He is licensed to practice law in Illinois, Nevada, and Wisconsin. He is also co-editor of Gaming Law Review. He has been a speaker on gaming topics throughout the world. His law review publications have been cited as authority by federal district and appellate courts, as well as state appellate and supreme courts. The Legal Broadcast Network is a featured network of Sequence Media Group.