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Here are the ways DraftKings, FanDuel could still get sued in New York

Daniel Roberts
Senior Writer

Last week, the New York State legislature passed a bill to legalize and regulate daily fantasy sports. The bill imposes new fees and limitations on fast-growing private tech companies like DraftKings and FanDuel, but overall protects their contests by labeling them games of skill.

The 11th-hour legislation was hailed as a big win for the operators, the players, and the state (which will see a cut of the revenue). DraftKings CEO Jason Robins told Yahoo Finance the news reached him at 2:14 a.m. and he “passed out immediately” in relief.

But DraftKings and FanDuel aren’t in the clear just yet.

First, New York Gov. Andrew Cuomo needs to sign the bill, veto it, or do nothing. If he signs or does nothing, it becomes law. He’ll have 10 days to take action once it’s delivered to him, but it’s unclear when it will be delivered.

The problem for daily fantasy sports (DFS) operators is that the passing of the bill into law in no way guarantees the end of legal challenges in the state.

1. New York Penal Law

Any New Yorker could still bring a civil lawsuit against the companies for violating Article 225 of New York Penal Law, which deems contests illegal if they involve a meaningful element of chance. While DraftKings and FanDuel have long argued that their contests are “predominantly skill,” it’s a stretch to argue that setting a lineup of athletes you believe will perform well is something without significant chance involved. After all, you, the user, have no control over how a roster of real-life athletes will perform. Fantasy operators have countered that when you create a lineup, your lineup is competing against other users’ lineups, so you control the outcome with your skill at selecting the right players. But the debate over skill vs. chance in this business is far from settled, and anyone could still challenge them.

2. New York State Constitution

Section 9 of the New York State Constitution prohibits any form of gambling (save for horse racing). The language restricts “lottery or the sale of lottery tickets, pool-selling, bookmaking, or any other kind of gambling, except lotteries operated by the state and the sale of lottery tickets.” Someone in New York could sue to declare the new law invalid based on the language in the state's constitution.

Of course, it may be unlikely that someone would actually bring a new challenge on this constitutional basis, but if someone were to do so, it could have legs. Why?The new bill labels daily fantasy sports as games of skill, but that label is not controlling, meaning it does not prevent future claims. A constitutional challenge (if successful) would override the new law and leave DFS back where it was in the state before the bill passed. In fact, to permanently label these contests as not gambling in New York would require a referendum to amend the New York State Constitution.

As Florida gaming attorney Dan Wallach writes at Sports Law Blog, “A New York court could disregard the ‘game of skill’ label strategically placed into the DFS bills by state legislators and look instead at what the [pre-existing, anti-gambling] law seeks to accomplish. The DFS bill might not fare well under such an analysis.”

3. False advertising and fraud

New York Attorney General Eric Schneiderman brought a complaint against DraftKings and FanDuel last December for false advertising, arguing that their marketing sought to attract users by convincing them they could easily win money, when in fact the lion’s share of contests are won by a talented 1% of DFS veterans. That part of his injunction against them was put on hold by the March settlement that shut the companies down in New York, but not killed permanently, and it is not negated by the passing of the bill. Indeed, over the weekend Schneiderman reiterated his intention to pursue the companies on this basis: “The Legislature has amended the law to legalize daily fantasy sports contests, a law that will be my job to enforce and defend. We will nevertheless continue to pursue our claims that DraftKings and FanDuel previously engaged in false advertising and consumer fraud.”

Even if no more suits come on the basis of New York gambling law, DraftKings and FanDuel will likely have to face Schneiderman’s claims of false advertising and fraud. That means additional legal costs.

Beyond New York, there is federal law to reckon with. As University of New Hampshire law professor Michael McCann writes at Sports Illustrated, “In addition to the New York state law question, the ongoing debate of whether DFS in general comports with federal law remains.” Attorney Alan Milstein (who has represented clients in lawsuits against DraftKings and FanDuel) tells McCann that he believes, “New York somehow does not understand” that daily fantasy sports violates PASPA, the Professional and Amateur Sports Act of 1992.

Still, New York’s bill, if it becomes law, is generally expected to have a positive domino effect for daily fantasy sports. Six other states, before New York, had already passed regulatory frameworks to protect DFS (including California, Mississippi, and Tennessee), but it is the Big Apple’s legislation that will clear the runway for this industry.

“New York is obviously the most visible, and the biggest, and just in general a lot of states look to New York,” DraftKings CEO Jason Robins tells Yahoo Finance. “Particularly on this issue, given New York was the limelight and New York was the place where the battle was being waged, I wouldn’t be surprised if others looked to New York. But that will differ state by state.”

It’s worth noting that the New York bill does not legalize all contests that operate as “daily fantasy.” The language, “still seems to exclude against-the-house contests such as HotRoster, which presumably constitute bookmaking under New York State law,” says Baruch College law professor Marc Edelman. “In addition, one can reasonably debate whether the bill keeps illegal, under state law, fantasy sports contests based on individual athletes and a single event, such as DraftKings fantasy golf.” (FanDuel does not offer golf.)

Considering all these potential hurdles, the green is not yet fully manicured, so to speak, for the two leading giants of this exploding industry.

Disclaimer: Yahoo, parent company of Yahoo Finance, launched its own daily fantasy sports product last year.

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Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. Follow him on Twitter at @readDanwrite.

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