DraftKings Inc. settled a long-running lawsuit from the New York attorney general Tuesday, shedding the final part of an aggressive legal challenge that threatened to drive the fantasy sports startup out of business and prodded the nascent industry to seek new regulations.
Boston’s DraftKings and its New York-based top competitor, FanDuel Inc., each agreed to pay $6 million to settle state Attorney General Eric Schneiderman’s claims that the companies misled consumers about the chances of winning money in their online contests.
They also agreed to additional consumer-protection regulations, including a requirement to make available detailed records of their advertising campaigns and a dedicated webpage that displays how much prize money flows to the top players, who claim most of the industry’s winnings.
The companies acknowledged Monday that they were negotiating a settlement with the state.
Schneiderman said the settlements will “help ensure that both companies operate honestly and lawfully in the future,” and “permanently end the misrepresentations they made to millions of consumers.”
“We are pleased to move forward and as our business continues to grow, we are focused on ensuring that millions of passionate sports fans across the country are able to continue engaging in an innovative way with the sports and athletes they love,” DraftKings said in a statement.
The companies are able to pay the settlements in stages, with $1 million due annually for three years and a final $3 million payment in 2019.
Schneiderman sued DraftKings and FanDuel last fall, arguing the companies’ cash-prize online fantasy sports games violated New York gambling laws.
DraftKings and FanDuel resisted the lawsuit, but later suspended operations in New York while they lobbied the New York Legislature to explicitly legalize the games and enact a suite of consumer-protection regulations, part of a multi-state lobbying campaign to clarify the legal standing of the contests.
The false-advertising claims settled Tuesday revolved around a multimillion-dollar advertising blitz that DraftKings and FanDuel unleashed last fall after raising nearly $900 million in combined private investments.
That campaign drew the attention of regulators, and Schneiderman’s challenge was the most serious threat to the industry — a top DraftKings lawyer conceded that if it lost the New York gambling lawsuit, the company could go out of business .
Both sides have reason to claim victory in the settlement, said David O. Klein, a lawyer who represents several smaller fantasy sports companies.
While Schneiderman won stiff concessions from the industry, DraftKings and FanDuel are able to put a trying and expensive court case behind them with relatively small payments, he said.
“If fantasy sports continues to be what it was before a year ago, they should be able to make up that money real quickly,” Klein said. “Having said that, they had to agree to certain checks and balances above and beyond what the New York state law required. It’s not going to be as easy to make money in New York.”
Fantasy sports were never seriously threatened with a legal challenge in Massachusetts, where officials said state gambling laws did not clearly prohibit nor allow fantasy sports played for cash prizes.
But Attorney General Maura Healey instituted a broad array of consumer-protection regulations, including limits on advertising and a ban on players under 21, which were seen as a template for similar efforts in other states.