Legal blow for DFS in California
A district court in California dealt a blow to FanDuel, DraftKings and other DFS operators last week when it held that the payment of entry fees to enter daily fantasy horse racing contests that are returned to winners as cash prizes constituted a wager.
The court was handing down a preliminary ruling in a suit originally filed in December 2015 by racetrack and wagering business the Stronach Group against Kentucky-based Horse Racing Labs, LLC, operator of the Derby Wars website.
Derby Wars was providing free and pay-to-play contests, with points accumulated based on the performance of horses in real races and their associated pari mutuel returns.
Attorneys for Derby Wars had argued the contests were not wagers, but contests as defined under the California Business and Professions Code as: “Any game, contest…or plan that holds out or offers to prospective participants the opportunity to receive or compete for gifts, prizes, or gratuities as determined by skill or any combination of chance and skill and that is, or in whole or in part may be, conditioned upon the payment of consideration.”
However, attorneys for Stronach Group successfully argued that Derby Wars’ model most closely resembled exchange wagering, with contestants paying entry fees into a pool and playing against each other for cash prizes, with the operator retaining a percentage of the entry fee, described by the Judge as the takeout or “vigorish”.
Judge Otero added: “The court agrees with [Stronach Group] that Derby Wars entry fees are more akin to the wagers which form the ‘pot’ in poker.”
Therefore, according to the court, the entry fees collected by Derby Wars constituted a wager on horse racing in violation of the federal Interstate Horseracing Act (IHA) as Derby Wars did not hold the requisite advance deposit wagering licence.
The Court also found that whether skill predominated over chance in picking winners was irrelevant to the interpretation and application of the IHA.
According to an analysis piece (paywall) by leading California gaming lawyer, David Fried: “This decision could prove costly for the fantasy sports companies like FanDuel and DraftKings who operate similar contests. Should the California courts similarly treat contest entry fees as bets or wagers, the California Penal Code prohibits bets or wagers on any contest “of skill, speed or power of endurance of person or animal, or between persons, animals or … upon the result .. of any .. chance, casualty, unknown or contingent event whatsoever.”
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