Business

Fantasy sports firms get break at last minute

A DraftKings logo was displayed on a board inside of the DFS Players Conference in New York.
Lucas Jackson/REUTERS
A DraftKings logo was displayed on a board inside of the DFS Players Conference in New York.

DraftKings Inc. narrowly avoided a disastrous shutdown in New York on Friday, but after a tumultuous day in court, the company’s long-term survival in one of its most important markets remained deeply uncertain.

An Appellate Division judge late Friday allowed Boston-based DraftKings to continue running its controversial daily fantasy sports contests in New York, temporarily freezing a shutdown order from a lower court judge earlier in the day.

“This should send a powerful message about the strength of our appeal,” said Randy Mastro, an attorney for DraftKings. “We hope that everyone will appreciate the significance of that, and that DraftKings remains in business in New York.”

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Also, DraftKings’ main rival in the business, FanDuel Inc., which had voluntarily stopped allowing players from New York after the state’s attorney general, Eric Schneiderman, sued the companies in November, said Friday it would again let those customers enter its contests.

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Schneiderman argued that daily fantasy sports contests for cash prizes are a form of gambling prohibited by state law. A spokesman said his office would fight to reinstate the shutdown order.

The emergency reprieve — in effect until at least Jan. 4 — could, for the moment, help DraftKings soothe growing jitters among the financial firms that handle money for the company and provide the lifeblood of its business. But it did little to ease the fears of avid daily fantasy players, who sense that momentum in the legal battle over the games has turned against them and the industry.

“Me and all my friends in New York are pretty upset. Everyone is pulling their money out,” said Ben Joselson, a 27-year-old player from Westbury, N.Y. “But you have to understand, it’s not just people who live in New York who are being affected. Players in other states are like, ‘the Redcoats are coming, the British are coming.’ It’s knocking on their door next.”

The most troubling development for DraftKings on Friday came early in the day when lower court Judge Manual Mendez ruled that Schneiderman was likely to prevail in arguing the contests are a form of gambling prohibited by state law. He issued an injunction order blocking the firms from operating in New York — an order that was overturned hours later.

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In his ruling, Mendez said the balance of interests favored Schneiderman and the state “due to their interest in protecting the public, particularly those with gambling addictions.”

“The protection of the general public outweighs any potential loss of business,” Mendez wrote.

Moreover, Mendez expressed skepticism of the defenses DraftKings’ high-powered legal team had offered, including that the entry fees it charges are not bets and that its contests are legal games of skill. The judge noted that New York’s laws do not define gambling activity by the words “wagering or betting,” but rather, as risking “something of value.”

“The payment of an ‘entry fee’ as high as $10,600.00 on one or more contests daily could certainly be deemed risking ‘something of value,’ ” Mendez wrote in his decision. “The language [of the law] is broadly worded and as currently written sufficient for finding that [daily fantasy sports] involves illegal gambling.”

Though Mendez’s order was suspended later Friday, it underscored DraftKings’ potential vulnerability under New York law and prompted two of its critical financial partners, PayPal Holdings Inc. and Bank of America Corp., to say they would no longer facilitate payments to the site from players in that state.

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PayPal later said it would resume payments now that DraftKings has temporary permission to operate in the state. Bank of America would not say if it, too, would resume processing payments.

Both FanDuel and DraftKings had filed their own legal actions to prevent Schneiderman from bringing actions against them and their business partners, but Mendez denied those requests.

The New York case is being watched around the country as a bellwether for the industry, which grew quickly after an advertising blitz earlier this year but is under investigation by federal prosecutors in three states. Officials in multiple states are also examining the legality of daily fantasy sports.

Earlier this year, regulators in Nevada ruled the games were a form of gambling that required a state license. The companies subsequently withdrew their contests from that state. In Massachusetts, meanwhile, Attorney General Maura Healey has proposed a set of new regulations that would allow the games to be played by state residents but under stricter limitations.

DraftKings has hired a team of prominent lawyers and lobbyists, including David Boies and former Massachusetts attorney general Martha Coakley, to fight Schneiderman in court and persuade legislators to explicitly legalize the contests.

A final decision in the case is not likely for months, and even then it could be appealed to a higher court. For now the next major legal showdown will come sometime after Jan. 4, when a panel of five New York judges will decide whether to extend the freeze or allow Mendez’s shutdown order to go into effect.

Being shut out of the lucrative New York market, DraftKings has said, would be “devastating” to its business and cause it to lose the support of key investors and business partners, many of whom are based in New York.

DraftKings has said in court filings that about 113,000 customers from New York state paid to enter its contests during October, and that it has collected about $100 million in entry fees from them this year.

DraftKings has raised more than $600 million from investors since launching its fantasy games in 2012. Its investors include Fox Sports and several major sports leagues or owners of professional teams, including the Kraft family, owner of the New England Patriots.

The company, which employs about 250 people in Boston, has planned to pay $1 billion in prizes this year. Fantasy sports companies typically keep about 10 percent of player entry fees as revenue, paying the rest in prizes.

Dan Adams can be reached at dadams@globe.com. Follow him on Twitter @DanielAdams86.