Business

DraftKings files suit to prevent N.Y. shutdown

Fantasy sports fans demonstrated outside the Financial District offices of New York state Attorney General Eric Schneiderman, in New York.
Richard Drew/AP
Fantasy sports fans demonstrated outside the Financial District offices of New York state Attorney General Eric Schneiderman, in New York.

FanDuel Inc. stopped taking paid entries from New York-based fantasy sports players Friday after alleging in a lawsuit that the state’s attorney general had pressured payment processing companies to stop the flow of money into its business.

Similarly, Boston-based DraftKings Inc. said in a separate lawsuit filed Friday that New York Attorney General Eric Schneiderman used “dishonest, unfair, and improper means” to pressure two of its vendors, Vantiv LLC and PayPal Holdings Inc., to stop payments from customers in New York.

Unlike FanDuel, DraftKings chief executive Jason Robins said his company would continue to accept New York entries while pursuing its legal options. FanDuel said it will continue to let New York residents maintain their accounts, including accessing balances, but they would not be able to enter paid contests this weekend.

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The fantasy sports companies are battling Schneiderman’s efforts to have them shut down in New York for running illegal gambling businesses. In their lawsuits, DraftKings and FanDuel asked a New York county court to declare their businesses legal and block Schneiderman. DraftKings also announced it had added high-powered attorney David Boies, who represented Al Gore in the 2000 presidential vote count, to its legal team.

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In its lawsuit, DraftKings said Schneiderman’s pressure included “explicit or implied threats of legal action, including potential criminal prosecution to Vantiv and PayPal. The purpose of these threats was to interfere with DraftKings’ prospective business relations with Vantiv and PayPal and to shut down DraftKings’ business in New York State.”

Indeed, at one point earlier this week, Vantiv told DraftKings it planned to stop handling payments “imminently” after hearing from Schneiderman, but reversed course after talking with the company.

Vantiv did not return requests for comment. PayPal reiterated an earlier statement that said it adheres to all applicable laws “and will work with our merchants and regulators to ensure we are in compliance.”

A Schneiderman spokesman would not directly respond to the companies’ allegations of intimidation. Instead, the spokesman, Eric Soufer, said in a statement that the risks to payments companies should be obvious in light of Schneiderman’s finding that fantasy sports constitutes illegal gambling in New York.

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“Anyone who asks us about the legality of online sports betting will be told exactly what we wrote in our letters: DraftKings and FanDuel are operating illegal gambling operations,” Soufer said. “It should come as no surprise that companies associated with DraftKings or FanDuel are actively reviewing this matter in the context of business decisions.”

Jeff Ifrah, a Washington, D.C.-based gaming attorney who has represented fantasy sports companies, said Schneiderman was well within his rights to threaten the payment processors after declaring fantasy contests illegal.

“He got right to the heart of the matter,” he said. “Smart prosecutors don’t attack an industry by going into drawn-out litigation about its legality — they shut it down cutting the legs out from under it, and in this case the legs are the payment processors and the banks.”

It was not immediately clear how soon the New York trial court would respond to the lawsuits. Schneiderman’s orders Tuesday to the fantasy sports companies served as a five-day notice that he planned to seek legal orders to shut them down.

Both companies have been operating under the assumption they had a grace period of five working days with New York customers while they reviewed legal options.

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At a fantasy sports conference in Manhattan Friday, Robins said Schneiderman overstepped his bounds by immediately pressuring the payment processors. “I’m a bit disappointed, because I have a lot of respect for the attorney general, that he’s not adhering to the five business days he gave us and that he’s going and interfering with some of our critical services,” Robins said.

Robins added that DraftKings would decide next week whether it will continue to accept entries from New York.

“If it comes to the end of it and there’s no legal means by which we can continue to stay in New York, we will exit New York, because we’re intent on following the law,” he said. “But we’re entitled to five business days.”

Losing the New York market could seriously harm DraftKings and FanDuel. A survey by industry analysis firm Eilers Research LLC estimated that about 13 percent of active, paying daily fantasy sports players are based in New York.

“Certainly the economic impact here will not be insignificant” if daily fantasy sports are banned in New York, Robins acknowledged at the conference. “Hopefully that won’t be the end outcome, but it’s not really something we can control.”

In its lawsuit, FanDuel hinted at similar pressure from Schneiderman, but did not name the financial companies he targeted. “These actions were intended to immediately disrupt FanDuel’s New York business adversely, and they have done so,” FanDuel said.

The situation puts processors like Vantiv between paying clients and the threat of prosecution.

“They’ve got to make a business decision as to whether or not they want to break the contractual relationship,” said Doug Gansler, a former Maryland attorney general who now advises clients targeted by federal and state prosecutors.

In fantasy sports, contestants assemble a virtual roster of real-life athletes and amass points based on those players’ statistical performance. Their entry fees fuel pots that range from a few dollars to more than $1 million, and the companies typically keep about 10 percent of the take.

Fantasy sports providers maintain their contests are protected by a 2006 federal antigambling law that contains a specific exemption for fantasy sports. But other federal laws also govern the topic, and there is a patchwork of state laws that determine whether fantasy contests are legal.

Massachusetts Attorney General Maura Healey is studying the legality of fantasy sports and whether the operations should be regulated. Governor Charlie Baker said this week that he believes the games do not constitute gambling, but he left open the possibility for new regulations.

In their lawsuits, DraftKings and FanDuel both cited that federal law as legal justification for keeping their contests operating. They also said fantasy sports contests are complicated games of skill, rather than contests governed mostly by chance — a key distinction in many state laws that determine whether a contest is illegal gambling.

Curt Woodward can be reached at curt.woodward@globe.com. Dan Adams can be reached at dadams@globe.com.