Legal challenge to New York DFS law: real threat or nuisance?

The New York legislature's decision that daily fantasy sports (DFS) does not constitute gambling is being challenged by a group of citizens. Christopher L. Soriano weighs up their chances.

During the fall of 2015, daily fantasy sports was vaulted onto the national radar in the US because of substantial promotions offered by a number of DFS providers during the NFL season. What had been a relatively quiet area of the law was suddenly in the national spotlight. 

New York was one of the states that was an early battleground for a number of fundamental questions involving DFS: is DFS gambling, and is DFS legal?

The Attorney General began pursuing DFS operators — some DFS operators ceased operations in New York and a deal was reached between the Attorney General and a number of DFS operators.

Ultimately, this series of events culminated with the New York legislature enacting a statute to regulate DFS in the summer of 2016. Many thought this would lead to the settlement of the legal questions surrounding DFS in New York and that the New York model could possibly be used as a model for other states that were considering regulatory measures with respect to DFS. 

On October 5 a lawsuit was filed by several citizens of New York against the State, seeking a judgment that the New York statute violates the state constitution and must be struck down.

Is this lawsuit just a nuisance or does it have the ability to stop state DFS regulation not just in New York, but elsewhere? The answer is unclear, but a review of the lawsuit shows what the issues are and what arguments the parties are likely to address.

The fate of those arguments could lead to more states taking the DFS regulatory plunge – or to states avoiding DFS entirely.

New York’s DFS Law
New York’s DFS law sought to make very clear that the legislature did not believe DFS to be a form of gambling. The legislation has a “Legislative Findings and Purpose” section that contains a number of policy statements by the legislature.

The legislature states, for example, that DFS is not a game of chance because the skill and knowledge of the players is important; and also that the outcome of a DFS contest does not depend on the outcome of any sporting event, but on how a player’s roster compares to another player’s roster.

The legislature also states that its intention is to safeguard the integrity of the games and participants and ensure accountability and public trust.

Under the law, the New York State Gaming Commission has regulatory authority over DFS, and providers are required to register with the Commission. Temporary permits have been made available to allow operators to continue operating while their applications are pending. 

A key provision of the legislation is in Section 1402(b)(4), which says that a fantasy sports contest offered pursuant to the legislation “shall not constitute gambling” as defined under New York’s criminal law. And it's that sentence which has led to the DFS lawsuit.

The DFS lawsuit
The lawsuit was brought by several persons who identify themselves as residents and taxpayers of New York “who either have gambling disorders or are relatives and family members of such persons”.

At its essence, the lawsuit asserts that the New York state constitution prohibits the authorisation of DFS, because according to the plaintiffs, DFS is a form of gambling and the constitution prohibits the authorising of new forms of gambling without a constitutional amendment.

The state constitution provides that the legislature may pass no law authorising a “lottery or the sale of lottery tickets, pool-selling, bookmaking, or any other kind of gambling…”

There are exceptions that have been enacted over time. These include the state lottery, pari-mutuel betting on horse races, and seven casinos that may be authorised by the legislature. The key question, therefore, is whether, having enacted the DFS legislation, the legislature has passed a law authorising a “kind of gambling.”

If it has, plaintiffs argue, then it did so in violation of the state constitution’s prohibition on the authorisation of gambling without an amendment to do so. 

The legislature stated in the DFS legislation that it does not view DFS as gambling; however, courts often look beyond a legislature’s characterisation of an activity.

Instead, the court often ascertains for itself what it believes the activity actually is. This was seen most recently in the New Jersey sports betting litigation, where New Jersey stated that its partial repeal of its criminal prohibitions on sports betting did not constitute an authorisation of sports betting (and therefore did not violate federal law prohibiting a state from authorizing sports betting).

The Third Circuit Court of Appeals stated that despite the legislature’s characterisation of the activity, it would take its own look at the activity to determine what it was. There, the Court of Appeals concluded that the repeal was, in fact, a prohibited “authorisation”.

To support their position that DFS constitutes a “kind of gambling”, plaintiffs make a number of references. First, plaintiffs cite former Representative Jim Leach, one of the sponsors of the Unlawful Internet Gaming Enforcement Act (“UIGEA”).

According to plaintiffs, Representative Leach stated that there was no intent in UIGEA to sanction DFS. 

Plaintiffs cite the fact that several DFS providers have registered in other countries, such as the UK, to operate “gambling software”, and, therefore, if the same product is used in the United States, it must be considered gambling.

The plaintiffs also refer to statements made in the press by officers of several gaming companies to the effect that, in their view, DFS constitutes gambling.

The plaintiffs then analyse DFS to reach their conclusion that DFS constitutes gambling. Factors cited by plaintiffs include the fact that the operator takes a “rake”, “vig”, or “commission”, making DFS activities look like traditional gambling.

Plaintiffs also attempt to debunk the argument that DFS is based on skill and is instead based on the performance of athletes – plaintiffs say “just as the most sophisticated sports handicapper has no control over whether the team he chose will beat the point spread, a DFS player in a [DFS] contest has no control over whether the lineup he or she chose will perform.”

Game of chance = gambling?
Plaintiffs argue, therefore, that DFS constitutes a game of chance and is therefore gambling.

Plaintiffs cite the lawsuit brought by the New York Attorney General against several fantasy sports providers as further evidence that DFS constitutes gambling. They cite statements by the Attorney General that DFS violated New York law and that the Attorney General characterised DFS entry fees as “bets” under New York law.

Taken together, the Court will have to consider whether the legislature’s decision to declare that DFS does not constitute gambling in New York is a valid exercise of the legislature’s authority without a constitutional amendment.

One challenge for the plaintiffs is that under New York law (and the law of most other states) an act of the legislature is presumed to be valid, and a person challenging the constitutionality of a statute bears a heavy burden to show the statute’s unconstitutionality.

Some courts, including New York’s Court of Appeals, have characterised this burden as requiring the showing of unconstitutionality “beyond a reasonable doubt”, which is a high legal standard. In constitutional cases, courts often state that it is not their role to opine on the wisdom of policy choices made by the legislature.

Here, the state will likely argue that it was permissible for the legislature to make a determination that DFS is not a form of gambling, and that plaintiffs cannot establish beyond a reasonable doubt that that determination is unconstitutional.

Thus, it remains to be seen whether plaintiffs can sustain their heavy burden and essentially establish beyond a reasonable doubt that the legislature’s conclusion that DFS does not constitute gambling is erroneous.

This decision will likely be closely watched by other states that are considering or have enacted DFS regulatory legislation, as it could call into question their own laws.

Christopher L. Soriano is a partner specialising in gaming law in the Cherry Hill, N.J. office of Duane Morris LLP.