Fantasy sports leagues brace for legal war
A decision by New York’s attorney general to ban FanDuel and DraftKings from offering daily fantasy sports betting threatens to cascade across the country — and trigger legal and lobbying wars in other states that might ultimately draw Washington into the fray.
For FanDuel and DraftKings, the immediate challenge comes from New York Attorney General Eric Schneiderman, who said Tuesday that both websites amount to online gambling prohibited under state law. In response, the two companies have threatened to fight Schneiderman’s order in court, while blasting his determination as hasty and incorrect.
But FanDuel and DraftKings may be forced to expand their defense far beyond Albany. Other large states, like Florida and California, are considering restrictions on the daily fantasy sports industry — and they may be newly emboldened to regulate after New York’s action. In Nevada, the state’s gaming commission already ordered FanDuel and DraftKings to shut down until they obtain a gambling license.
The expanding state scrutiny comes as Washington is starting to take notice of the two companies that boast millions of users and are closely tied to professional sports like the NFL. The FBI and Justice Department are looking at whether daily fantasy sports sites violate a 2006 law that effectively bans online gambling. Key members of Congress also are preparing to probe the matter, and some are encouraging the Federal Trade Commission to regulate the industry.
DraftKings and the rest of the daily fantasy sports industry “will fight this, with whatever legal avenues they have,” said Martha Coakley, the former Massachusetts attorney general who is now advising DraftKings, in an interview with POLITICO on Wednesday.
Coakley said New York’s move won’t have a “huge influence on what other states are doing” but acknowledged the companies have considerable work to do to explain their business to state and federal officials.
“Both DraftKings, with whom I work, and others within the industry [have] to talk to legislators, to talk to attorneys general, to make sure they understand what the business model is … before they jump to conclusions to try to regulate,” she said.
As the biggest players in the fast-growing daily fantasy sports industry, FanDuel and DraftKings have taken center stage in the debate over online gambling — not the least because the two companies have blanketed TV with advertisements during this year’s football season. The websites allow sports fans to draft fantasy rosters of professional athletes and bet on their performance each week, with the promise of winnings that can reach into the millions of dollars.
The entire industry exists thanks in part to a 2006 law that essentially bans online gambling but includes a carve-out for fantasy sports, which were deemed games of skill rather than chance. Now, as consumers flock to the sites, state and federal policymakers are taking a closer look at that loophole and mulling the need for greater consumer protections. Fifteen states are considering some form of regulation on daily fantasy sports, according to the research firm GamblingCompliance, compared with just two states last year. The firm predicted in a November report that even more states are likely to follow suit in 2016.
In California, for example, local lawmakers have floated bills to tax and license daily fantasy sports operators, and some have called on state Attorney General Kamala Harris to ban the sites until the matter is resolved. Florida’s legislature is weighing how to impose similar oversight of the industry, while considering whether professional athletes should be barred from participating. Illinois and New Jersey are also exploring legislation.
While FanDuel has said it’s open to limited state regulation, the review in New York could set off a chain reaction that threatens the industry’s very survival.
“The action by the New York attorney general is significant because we’re talking about the chief law enforcement officer of the world’s largest financial markets, the home to the professional sports leagues, [many] payment processors. It is the most important market for the sports industry and the daily fantasy sports industry,” said Daniel Wallach, a sports and gambling attorney at Becker & Poliakoff.
New York has a low bar for determining what qualifies as gambling, according to Wallach. If FanDuel and DraftKings lose, it “could be a pace setter in other jurisdictions” while also providing “ammunition to those legislatures that are inclined to either prohibit those contests or heavily regulate it,” he said.
FanDuel CEO Nigel Eccles, speaking on a call with reporters Wednesday, lambasted Schneiderman’s office for its “very extreme and very sudden decision.”
“We’re going to use every avenue we can to stay open,” Eccles said. A lawyer for FanDuel noted each company now has five days to respond to the attorney general’s letter before he can take them to court.
The uptick in scrutiny is forcing both companies to hire lobbyists around the country. They started early this year in the five states where it’s long been illegal to offer daily fantasy sports — Arizona, Louisiana, Iowa, Montana and Washington. By October, though, FanDuel and DraftKings had also hired their first consultants in Washington, D.C., where lawmakers like Rep. Frank Pallone and Sen. Bob Menendez are pressing for a congressional hearing. The two New Jersey Democrats have publicly raised questions about the companies’ business practices and urged the FTC to more closely regulate the industry. Pallone also has fretted about the industry’s close ties to professional sports leagues.
FanDuel, based in New York, earlier retained Michael Mukasey, a former U.S. attorney general, as an adviser, while Boston-based DraftKings sought out the help of Coakley. And the companies’ primary trade group, the Fantasy Sports Trade Association, has rushed to their defense. The organization has tried to promote the idea of industry self-regulation. It was not immediately available to comment for this story.
The efforts didn’t deter Schneiderman, who opened an initial probe of the companies in October. The investigation focused on FanDuel and DraftKings employees suspected of taking advantage of inside information about athletes’ performance to bet — and win big — on other daily fantasy sports sites.
Ultimately, Schneiderman informed both DraftKings and FanDuel in letters Tuesday that they no longer could operate in the state, and he slammed them as “leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country.”
The AG’s decision drew applause from Pallone, who said he believes in regulating the industry even though he ultimately wants to bring sports betting to New Jersey. The congressman, who is the top Democrat on the House Energy & Commerce Committee, predicted the New York case could have far-reaching repercussions.
“There are a half a million users [in New York], which is the largest for any state,” Pallone said. “So that’s going to clearly have some kind of impact on other states.”