Fantasy Sports for Money Found Illegal in New York

In March 2016, then New York Attorney General Eric Schneiderman reached separate agreements with FanDuel and DraftKings, each of were operating operate fantasy sports games in New York, under which the companies respectively agreed to stop accepting entries from New York residents.  As reported on this blog at the time, in exchange, then Attorney General Schneiderman dropped most of the claims for disgorgement and restitution of prior revenues.  The parties also asked the New York’s Supreme Court Third department (the “New York Appellate Court”), for a stay that would delay ruling on the legality of interactive fantasy sports for monetary prizes (“IFS”) to allow the New York State Legislature (the “Legislature”) to enact a regulatory scheme acceptable to both sides without risk of the disruption that would be caused by a definitive legal ruling. In August 2016, Andrew Cuomo signed into law Chapter 237 of the Laws of 2016, which authorized IFS as a game of skill, and provided for consumer safeguards, minimum standards and the registration, regulation and taxation of IFS providers. 

Subsequently, citizen-taxpayers of the State of New York who either have gambling disorders or are relatives of individuals who have such disorders, brought a declaratory relief action seeking a declaration of illegality as to Chapter 237, claiming that Chapter 237 violated the anti-gambling provisions of the New York State Constitution.  On October 26, 2018, New York Supreme Court, County of Albany, held that Chapter 237, to the extent it excluded IFS from the scope of New York State Penal Law definition of “gambling,” did not violate Article I, §9 of the New York State Constitution (the “Order”) and granted summary judgment to the plaintiffs.  In other words by approving Chapter 237, the Legislature declared that IFS contests do not constitute gambling.  The Order was appealed.

While acknowledging that the Legislature was sympathetic to and supportive of IFS participants, on February 6, 2020, the New York Appellate Court ruled on the 2016 appeal and rejected the Legislature’s basis for removal of IFS from the definition of “gambling” based upon its view that IFS involves games of chance.  The Appellate Court stated: “It is undisputed that IFS contestants pay an entry fee (something of value) in hopes of receiving a prize (also something of value) for performing well in an IFS contest.  Therefore, such contests constitute gambling if their outcomes depend to `a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.’”  The Court stated that while participants may use, in part, their sports knowledge and statistical expertise skills in selecting teams, they cannot control how the athletes on their IFS teams will perform in real-world sporting events.  Therefore, the skill level of an IFS contestant cannot eliminate or outweigh the material role chance plays in IFS contests.  On this basis, the Appellate Court struck down Chapter 237 making IFS in New York illegal again.  In response to the ruling, both FanDuel and DraftKings have suggested that there will be appeals.

TAKEAWAY: Fantasy sports laws continue to be in flux.  Both businesses and participants should continue to review their state’s laws and rules related to fantasy sports with new developments routinely occurring, and new laws going into place.  Further clarification on these points is expected as more cases are appealed to high courts and if or when placed on state voting ballots.

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