DraftKings, FanDuel file lawsuits v. New York AG; FanDuel cut off New York players

new-york-lawsuits-draftkings-fanduel-daily-fantasy-sportsDaily fantasy sports operators have asked New York courts to get the state Attorney General off their backs, while the AG vowed to seek criminal charges against the operators.

On Friday, DFS operators DraftKings and FanDuel filed separate lawsuits in New York, asking the state Supreme Court to block efforts by Attorney General Eric Schneiderman to declare their operations illegal gambling activity under state law.

On Tuesday, Schneiderman issued cease & desist orders to both operators, warning that criminal charges could follow if they didn’t quit doing business with New York residents within five business days.

Each of Friday’s lawsuits asks the Court to provide emergency injunctive relief to prevent Schneiderman from making good on his threat. The suits also ask the Court to declare that (a) DFS is a game of skill and thus the activity falls outside the scope of New York’s gambling laws, and (b) the companies haven’t engaged in misleading advertising claims regarding the likelihood of winning a prize.

Schneiderman’s office responded to the suits with a statement reiterating his position that DraftKings and FanDuel were “operating illegal sports betting websites under New York law, causing the same kinds of harms as other forms of illegal gambling.” Since both companies “have refused to follow the law in our state, we will take action to enforce state law.”

No dates have been set for courts to hear either the DFS operators’ complaints or Schneiderman’s pursuit of a court order to enforce his C&D. In each case, judges could issue immediate rulings or conduct full-scale hearings, the outcomes of which would likely be appealed by the losing parties.

The suits came on the same day as a planned rally outside Schneiderman’s office, although it doesn’t appear to have been the PR coup the DFS operators hoped for. A couple hundred demonstrators showed up, although many of the reporters covering the event claimed that the majority of those present were DFS employees, some of whom initially tried to deny their connection to the operators.

A couple hours after the suits were filed, FanDuel announced that it was “with great disappointment” that it had begun “the process of limiting access to users located in New York while we pursue the opportunity to be heard in Court.”

The five business day window stipulated in Schneiderman’s C&D doesn’t close until Tuesday, thus FanDuel says New York players will still have access to a full slate of contests this weekend. However, FanDuel has immediately stopped accepting new deposits from New York residents. FanDuel emphasized that all player deposits were safe and the ability to withdraw wasn’t affected.

DraftKings has yet to issue a similar statement, but expectations are that one will be imminent. New York accounts for 5% of FanDuel’s customer base, 7% of DraftKings.

But can DraftKings actually do anything to stop New York residents from playing? On Friday, the New York Times reported that it was easily able to access DraftKings’ site from Iowa – a state where DFS is explicitly illegal – via the use of a proxy server. The Times says it successfully employed the same tactic in the five other US states that ban DFS play, while similar attempts to access FanDuel were rebuffed.

Ever since Nevada ordered DFS operators to either acquire a gaming license of exit the state, DraftKings has been accused of lacking the means to geolocate its players, unlike the real-money online gambling sites in the three regulated US markets. DraftKings issued a statement accusing the Times of using “a deliberate technique to circumvent” the site’s tracking methods and warned users that such behavior “would be violating our terms of use.”

FanDuel has generally taken a more proactive approach than DraftKings to getting on regulators’ good sides and the company recently updated its help section to alert users of a new policy requiring more detailed ‘know your customer’ protocols. Players requesting a withdrawal will now have to provide birthdays and Social Security numbers, in keeping with practices at the real-money sites in the three regulated states.

DraftKings’ complaint is the more aggressive of the two lawsuits, accusing Schneiderman of “using strong-arm tactics and defying the rule of law” in issuing his C&D. Schneiderman “took to the airwaves to publicly slander” the operators by saying they were evading the law and fleecing sports fans, “a malicious falsehood unwarranted by the facts and unbecoming of a public official.”

As expected, the suits pounce on Schneiderman’s seemingly contradictory statements that (a) DFS depends to a material degree on the element of chance, and (b) DFS marketing misrepresents the average player’s ability to overcome the efforts of more skilled players.

Also as expected, DK’s suit mentions the 2007 Humphrey v. Viacom case, in which a New Jersey federal judge ruled season-long fantasy games didn’t violate the state’s gaming laws because of the contest’s reliance on skill.

DK bolsters its skill game argument by mentioning the widely cited stats that showed 1.3% of DFS players earned 91% of player profits over the first half of the 2015 Major League Baseball season. On Wednesday, FanDuel CEO Nigel Eccles told reporters that these numbers were “not accurate.”

DK says it engaged Gaming Laboratories International (GLI) to conduct its own research on the performance of skilled DFS players in head-to-head contests. DK says GLI’s data showed that skilled users outperformed randomly generated DFS team lineups 83% of the time in MLB, with similarly large numbers for contests involving the NBA (96%), NHL (82%) and NFL (84%).

DK also claims that DFS is “fundamentally different” than that other alleged skill game to which it is most often compared, i.e. poker. Poker players “start each hand on a non-level playing field based on the cards they are randomly dealt,” whereas DFS users all start from the same position before selecting their lineups.

DK’s lawyers believe Schneiderman is barking up the wrong tree with his position that DFS is illegal because it depends to a ‘material degree’ on chance. DK believes state precedent has established that the true test is whether skill or chance is the “dominating element” that determines the result.

DK claims that Schneiderman’s C&D order violated the company’s state and federal constitutional rights to due process and equal protection, while Schneiderman engaged in tortious interference by “threatening to take action” against payment processors unless they stopped handling transactions with New York players. At least one processor, Vantiv, has told the operators it wants out, while other firms are reportedly leaning in that direction.

The suit says Schneiderman’s efforts are having a “chilling effect” on DK’s ability to continue its relationships with its current investors and partners, as evidenced by Thursday’s report that DK had asked its NBA partners to defer 10% of the money DK owes NBA teams under the terms of its marketing deals.

DK’s suit says the AG’s actions have also negatively impacted its ability to attract new investors and partners. On Thursday, the New York Post reported that DK’s latest funding round was scuttled following Schneiderman’s C&D order.

FanDuel’s complaint covers much of the same territory, albeit using less inflammatory rhetoric. The suit emphasizes the need for emergency relief by claiming that Schneiderman’s actions “were intended to immediately disrupt FanDuel’s New York business adversely, and they have done so.”

Echoing Eccles’ statement re winning percentages, FanDuel disputed the AG’s claim re “the top one percent” of DFS players winning “the vast majority” of prizes. Fanduel says such claims are “factually incorrect,” while acknowledging that “as a general matter it is true” that highly skilled players win a higher percentage of prizes.

Meanwhile, the US Department of Justice has commented on Thursday’s New York Post report, which claimed that the DOJ was poised to declare DFS an illegal gambling activity and promising some kind of action by year’s end.

On Friday, DOJ spokesman Peter Carr told ESPN that the DOJ “remains concerned about internet gambling” because of the usual fears of underage gambling, fraud, money laundering and organized crime. However, Carr said the DOJ would “decline to speculate on the legality of specific online sites.”

Carr emphasized that DFS end users had little fear from any potential DOJ action, as federal law “applies to gambling businesses and payment processors.’ However, Carr noted that the issue of whether these players might face prosecution by state-level authorities was “a separate question.”