DraftKings is finally going to get its day in court.
Under attack from New York’s attorney general, DraftKings on Wednesday will try to convince a judge in Manhattan that its daily fantasy sports contests are not illegal gambling under state law.
Superior Court Judge Manuel J. Mendez has scheduled a hearing on Attorney General Eric Schneiderman’s lawsuit to prevent DraftKings and its rival FanDuel Inc. from accepting entry fees from residents of New York, one of the most lucrative markets in the United States for the burgeoning daily fantasy sports game.
FanDuel has suspended its contests in New York as it fights Schneiderman’s lawsuit, but DraftKings has continued to accept money from players in that state.
David Boies, a high-profile lawyer hired to lead DraftKings’ legal case, said that shutting down its New York contests would be “a disaster.”
“We believe that the company is entitled to, and indeed has a responsibility to its investors and employees and customers, to have the court decide this,” he said.
Mendez’s decision could radiate far beyond New York, potentially spooking investors and business partners and inviting stronger scrutiny from regulators and law enforcement agencies around the country, industry and legal experts said.
“Everyone who is potentially involved in regulating this activity is watching that courtroom,” said Roger I. Abrams, a Northeastern University law professor.
Perhaps most at risk is the flow of money into DraftKings. New York is one of its largest markets, accounting for about $100 million in entry fees so far this year. Pressure from the attorney general has already prompted DraftKings to get a court order forcing its payment processor, Vantiv LLC, to continue handling money for its New York customers while the company pursues its legal options against Schneiderman.
A court loss in New York could also bring on even bigger legal problems for the companies. Violations of state gambling laws can trigger prosecution under federal laws that ban online gambling.
Jeff Ifrah, a lawyer who represents several small daily fantasy companies, said that losing in New York would leave the companies open to federal prosecution.
“To be able to say in an indictment that an attorney general alleged a violation of state law and a court upheld that opinion? Yeah, that’s nothing to sneeze at, that’s for sure,” Ifrah said.
Already, federal prosecutors in Boston, New York, and Florida are investigating the companies.
The ripple effect could extend to the fantasy companies’ lucrative associations with professional sports, said David O. Klein, an online gaming lawyer in New York. NFL teams, for example, may be forced to reconsider their sponsorship deals with DraftKings and FanDuel if cash contests are declared illegal, as could investors or marketing partners that include Major League Baseball, the National Basketball Association, and the NFL Players Association, Klein said.
All three have declined to say how they might react if Schneiderman prevails in court.
Earlier this year, DraftKings and FanDuel were enjoying a flood of money and attention, locked into a seemingly limitless growth trajectory. Then in October, a DraftKings employee won $350,000 playing on FanDuel’s site, several days after he mistakenly released critical data on that week’s contests to the public. The company said the employee didn’t do anything wrong, but the coincidence of events raised suspicions about the fairness of the games.
Within a few weeks, both DraftKings and FanDuel were under investigation by multiple authorities, while regulators in many states began questioning whether the games were legal under their gambling laws. Nevada determined that fantasy sports should be licensed as gambling operations, prompting DraftKings and FanDuel to pull out of the state.
Massachusetts took the opposite tack. With state law unclear on the legal status of the games, Attorney General Maura Healey proposed a series of limits and operating conditions that she said would protect consumers, including banning players under age 21, banning contests based on college games, and requiring the companies to offer help to problem gamblers. The industry generally prefers that approach, and has praised Healey’s decision not to sue the companies.
Schneiderman’s has been the most forceful response. The fate of DraftKings will largely hang on whether Judge Mendez finds that fantasy sports contests are games of chance — as the attorney general says — or of skill, as the company argues.
DraftKings and FanDuel have argued that New York law bans contests that are predominantly games of chance, while Schneiderman says that games with more than an incidental amount of chance are banned.
In fantasy sports, contestants assemble rosters of real-life athletes who are awarded points, based on their game day performances. Schneiderman has argued that the random events inherent in sports that are beyond the control of contestants — a missed shot in basketball, a star running back’s injury — prove the games are affected by chance.
“There is nothing special” about DraftKings’ and FanDuel’s product, Schneiderman said in court filings. “It is simply a way to wager on a future contingent event — and thereby qualifies as illegal gambling.”
The companies counter that the skill required to pick a winning lineup outweighs the element of chance. They support that claim in part by pointing out that the most dedicated, experienced players tend to win a larger share of prizes, including some diehards who play fantasy sports for a living.
“If most people lose money and the same people continue to win repeatedly, that is absolute proof that this is a game of skill and not of chance,” said Boies, the attorney. “That kind of dispersion of results does not happen in a casino.”