Three Takeaways As DraftKings, FanDuel Sue New York Attorney General

Xconomy Boston — 

The fight over the online daily fantasy sports industry has entered the courthouse.

On Friday, DraftKings and FanDuel filed separate lawsuits (see PDFs below) against New York attorney general Eric Schneiderman and the state of New York, challenging Tuesday’s cease-and-desist letter from Schneiderman’s office, which claims the two companies’ websites are illegal gambling operations under state law and should shut down immediately.

Boston-based DraftKings and New York-based FanDuel ignored that demand, and now they’re asking the state’s Supreme Court to declare that their businesses do not constitute gambling in New York and should be allowed to continue operating there.

The push to regulate increasingly popular daily fantasy sports websites has intensified this year, particularly in the wake of a recent scandal involving a DraftKings employee winning $350,000 on FanDuel’s rival site.

Schneiderman’s cease-and-desist letter is a big deal because it not only threatens the two companies’ businesses in one of their more lucrative territories, but also could set the tone for regulators’ approaches in other states.

The outcome of the New York lawsuits could have major ramifications for the daily fantasy sports sector. And if the early sniping between the two sides is any indication, this could be a nasty, drawn-out dispute.

Here are some interesting tidbits and early takeaways from the lawsuits:

1. Skill vs. chance: The court’s ultimate decision will hinge at least partly on the judge’s determination of whether or not daily fantasy sports are games of skill, and not chance. The industry has relied on a 2006 federal law that exempted fantasy sports from gambling laws because they were seen as skill-based contests. DraftKings’ suit also cites a 2007 decision by a New Jersey federal judge stating that success in fantasy sports depends on a user’s skill in selecting players.

But critics, including Schneiderman, have disagreed with that view.

The New York court cases could help settle this debate over games of skill vs. chance—or perhaps even contribute to the creation of a new category.

2. Pulling no punches: Both companies allege that Schneiderman has pressured their business partners, such as payment processors, to stop performing services for DraftKings and FanDuel in New York. “These actions were intended to immediately disrupt FanDuel’s New York business adversely, and they have done so,” FanDuel wrote in its court petition.

DraftKings was more blunt and dramatic, calling the cease-and-desist letter unconstitutional in its press statement Friday. Meanwhile, in the company’s court filing, it called Schneiderman a “bully” who is acting as “judge, jury, and executioner” and “using strong-arm tactics and defying the rule of law.”

“Emergency declaratory and injunctive relief is therefore necessary to bar the attorney general from continuing to abuse his power and to prevent the irreparable harm that will result from it,” DraftKings wrote in the lawsuit.

Schneiderman obviously disagrees. In announcing the cease-and-desist order, he called DraftKings and FanDuel “the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country.”

In a statement released Friday after the lawsuits were filed, Schneiderman’s office said it intends to “take action to enforce state law.”

“The law here is clear,” the statement reads. “Online sports gambling sites are illegal in New York. DraftKings and FanDuel are operating illegal sports betting websites under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling.”

3. User stats: DraftKings and FanDuel are usually mum about exactly how many users they have, but the lawsuits provide a window into their popularity.

DraftKings said it has more than 2 million customers, with around 7 percent—roughly 140,000—of them located in New York state. FanDuel said it has more than 5 million registered users, more than 250,000 of them located in New York.

DraftKings v. Eric Schneiderman and State of New York

FanDuel v. Eric Schneiderman and State of New York