Action in the daily fantasy sports (DFS) controversy continued last week: DraftKings, Inc. changed its user rules, and DFS litigation faces a motion to dismiss from the Illinois attorney general.
In October 2015, an insider trading scandal was alleged against DraftKings and FanDuel, Inc. — the industry leaders in DFS. Thereafter, the companies faced government scrutiny and a myriad of consumer-based class action lawsuits. Currently at issue in states across the country is whether DFS violates state and federal anti-gambling laws.
In several class action complaints, plaintiffs claim DraftKings and FanDuel permit “shark betting,” which opponents view as unfair. Shark betting — also known as apex predation — refers to computer programs that allegedly allow users a competitive edge against non-using DFS players. Lawsuits have claimed the complex programs permit users to run “elaborate statistical modeling and automated tools that can manage hundreds of entries at once and identify the weakest opponents.”
While the lawsuits are a thorn in the side of DFS companies, the real threat is posed by government prohibition. Under current law in many states, an activity qualifies as unlawful gambling if the element of chance outweighs the element of skill. Government opponents claim that shark betting eliminates a substantial amount of skill from DFS.
In response, DraftKings has chosen to ban the use of offsite scripts ran by shark betters. On January 22, 2016, the company announced the installation of a tool that will prohibit shark betting computer scripts. The tool will be put into effect on January 29, 2016. DraftKings’ announcement stated:
With the implementation of the new tool . . . DraftKings will prohibit the use of scripts and other automated means of interacting with our site. Though all customers were previously allowed to use scripts, going forward, all users must use only the tools available on the DraftKings site to submit lineups, enter contests and perform all site activity.
As for the litigation in Illinois, state Attorney General Lisa Madigan issued a DFS advisory opinion. In a letter dated December 23, 2015, Madigan argued that DFS internet operations qualify as unlawful gambling under Illinois law. Madigan follows in the footsteps of states like New York; NY AG Eric Schneiderman issued cease and desist notices to DraftKings and FanDuel in November 2015. Litigation in New York continues.
DraftKings and FanDuel responded to Madigan’s opinion by filing state court lawsuits in Illinois. (An Arizona-based DFS company, Head2Head, is also a plaintiff in FanDuel’s action). The complaints, filed in December 2015, are an attempt “to stop Madigan from enforcing her interpretation of the law and putting [the DFS companies] out of business in Illinois.”
Madigan fired back with the public release of motions papers for a motion to dismiss. The papers argue the claims are “at the outset barred by sovereign immunity because the Attorney General was acting on behalf of the State, and her advisory opinion was well within her constitutional and statutory powers and did not violate any law.” The AG also pointed out that her opinion did not “create an actual controversy that is ripe for determination” because it neither ordered the plaintiffs to cease operation not threatened a civil or criminal lawsuit. Madigan announced she plans to officially file the motions in court on February 1.