DraftKings Inc. on Monday announced it would temporarily stop doing business in New York, a tactical move that shifts its long-running court battle to the state capital, where legislators are considering a bill that would expressly legalize daily fantasy sports.
The Boston-based company and its main competitor, FanDuel Inc., struck the cease-fire agreement with New York Attorney General Eric Schneiderman, who in return agreed to suspend his efforts to shut down the companies for running cash contests that he says amount to illegal gambling.
The agreement means the companies will, for the next few months, sacrifice revenue from the second-largest market for daily fantasy sports in the United States.
Delaying the legal battle until September gives New York legislators an opportunity to pass a bill that would explicitly legitimize daily fantasy sports, allowing the companies to resume doing business in the state legally.
The deal with Schneiderman would also substantially reduce DraftKings’ risk of being hit with millions of dollars in sanctions should Schneiderman prevail in his legal case against fantasy sports.
The anticipated legislation would regulate the industry and require the companies to pay fees to operate in New York. Neither branch of the New York Legislature has voted on the bill, but key lawmakers in the Assembly and state Senate have expressed support for such a measure.
Jeff Ifrah, a lawyer who represents several smaller daily fantasy operators, said the truce suggests FanDuel and DraftKings believe the Legislature will pass a bill in their favor.
“For an agreement like this to be negotiated there must be some confidence on the side of the industry that legislation is likely to pass,” Ifrah said. The settlement “is a good resolution, because it allows them to avoid potentially massive liability for the gaming-related counts” in Schneiderman’s complaint.
Schneiderman had threatened to force DraftKings and FanDuel to pay back hundreds of millions of dollars in entry fees collected from New York residents, and face additional penalties, if he prevailed in court. The agreement makes it less likely they will face such back-breaking sanctions.
Ifrah said the deal was prompted by building pressure on both sides: The legalization of daily fantasy sports would have severely undermined Schneiderman’s gambling charges, he noted, while the threat of harsh penalties was a dark cloud over DraftKings, FanDuel, and their financial partners.
If a new law takes effect before June 30, DraftKings and FanDuel could resume accepting entries in New York as early as July 1 and would abandon lawsuits they filed against Schneiderman, according to the settlement.
Schneiderman would drop the illegal-gambling charges but could still go after the companies for false advertising.
“As I’ve said from the start, my job is to enforce the law, and starting today, DraftKings and FanDuel will abide by it,” said Schneiderman, who has sued the companies, contending that their games constitute illegal gambling. The agreement, he said in a statement, “creates an expedited path to resolve this litigation should that law change or upon a decision” by the New York court reviewing the case.
Any proposed law would require the signature of Governor Andrew M. Cuomo, a Democrat who has avoided any direct role in the roiling debate over daily fantasy sports. On Monday, a Cuomo spokesman said only that “we look forward to reviewing the settlement and proposed legislation.”
If New York does not enact a law legalizing daily fantasy sports, the settlement stipulates that DraftKings and FanDuel would stay out of the state, in exchange for Schneiderman’s dropping the more serious charges against them.
The compromise would only be invalidated if a panel of state judges subsequently rules that Schneiderman is unlikely to succeed in his case.
In a statement, FanDuel acknowledged that halting games in its own state was a tough decision.
“While it is disheartening for us to restrict access to paid contests in our home state, we believe this is in the best interest of our company, the fantasy industry, and our players while we continue to pursue legal clarity in New York,” FanDuel said.
DraftKings said it will concentrate on lobbying legislators.
“We will continue to work with state lawmakers to enact fantasy sports legislation so that New Yorkers can play the fantasy games they love,” DraftKings said in its statement.
Both companies have previously said that losing the New York market would be devastating. Players in New York paid more than $267 million in entry fees last year, according to the research firm Eilers & Krejcik Gaming, worth nearly $25 million in revenue for daily fantasy sites. In court filings, DraftKings has said that it had about 375,000 customers in New York.
Losing access to the New York market would “have a catastrophic effect,” Joshua Schiller, a lawyer for DrafKings, said in February. “It could be enough to put us out of business, I think.”
Ifrah speculated that the companies were more willing to negotiate with Schneiderman after the end of the National Football League season, which forms the basis of their most popular contests.
The legal uncertainty in New York has put pressure on financial firms that provide critical services to the daily fantasy sports companies and their customers to withdraw from the industry. Several major credit card companies, including Citigroup Inc., are refusing to process customer payments to DraftKings and other companies.Material from wire services was used in this report. Dan Adams can be reached at email@example.com. Follow him on Twitter @DanielAdams86.