Anyone Want to Bet How New York Courts Will Rule on Daily Fantasy Sports? The Volley in State Court Continues

The issue whether daily fantasy sports (DFS) is illegal in New York State will continue its back-and-forth volley following an exciting day in state court on Friday, December 11, 2015. The actions filed in New York are related to the national debate on the legality of DFS — opponents in many states argue that DFS constitutes illegal gambling.

On November 10, 2015, New York Attorney General Eric Schneiderman sent DraftKings, Inc. and FanDuel, Inc. — the two industry leaders of DFS — cease and desist letters. Schneiderman ordered the companies to refrain from accepting New Yorkers’ DFS wagers.

DraftKings and FanDuel responded by initiating lawsuits against the NYAG, followed by the filing of preliminary injunction motions, which requested that Schneiderman’s action be temporarily enjoined. Schneiderman then initiated his own actions against the DFS companies. He also filed his own preliminary injunction motions, requesting that DraftKings and FanDuel be temporarily prohibited from conducting business in New York.

On the morning of Friday December 11, 2015, Judge Manuel Mendez issued his decision (available here) on preliminary injunction, which granted Schneiderman’s motions and denied the motions of DraftKings and FanDuel. Mendez’s written opinion stated that Scheiderman showed the DFS companies’ business operations likely meet New York’s definition of “illegal gambling.” Therefore, the court held the NYAG met the requirements for obtaining preliminary injunctive relief. Where a court grants preliminary injunction, however, the defendant is only enjoined from engaging in the proscribed activity until a final determination; meaning, the movant for preliminary injunction must still win the case (i.e. at trial or on a dispositive motion) for the defendant to be permanently enjoined.

Nevertheless, just hours after Mendez issued his December 11th decision, the appellate court (New York Appellate Division, First Department) issued an interim stay of Mendez’s order. DraftKings and FanDuel may therefore continue business operations in New York until the hearing before the appellate court, which is scheduled for January 4, 2016.

Damien LaVera, spokesman for the NYAG, stated that the AG office looks “forward to demonstrating to the appellate division why they should uphold [Mendez’s] decision to grant a preliminary injunction barring DraftKings and FanDuel from continuing their illegal gambling operations in New York.”

FanDuel responded in a statement:

This is only the beginning of the legal process and, perhaps more importantly, the New York legislature is already moving forward on action to ensure our game remains legal and is regulated, which we strongly support. The court specifically noted that this was not a final determination of the issue and that discovery would be needed to fully resolve the legal question, which we think should be decided in our favor when all of the evidence is in.

FanDuel’s response is accurate. The issue is not over, and New York legislators can legalize and regulate DFS through drafting new laws. Why would legislators want to do this? DFS is a multibillion dollar industry and is projected to grow at a rate over 41% annually through 2020. Accordingly, states choosing to regulate DFS have the opportunity to tax DFS companies, thus generating state income. Massachusetts, for example, seems to realize this benefit. Massachusetts Attorney General Maura Healey proposed sweeping DFS regulations on November 19, 2015, which seek to impose consumer protections rather than ban DFS altogether.

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