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Entertainment, Media & Sports Alert >> Back in the Ring: New York Legislative Victory Continues Comeback Story for Daily Fantasy Sports

June 29, 2016

After a year of taking it on the chin in 2015, the daily fantasy sports (DFS) industry is showing that it still has some fight left in it. On June 18, the New York state legislature passed a bill legalizing DFS and ensuring that the industry is not classified as illegal gambling in the state. As this latest major legislative development shows, 2016 might be the year that solidifies the legal future of DFS.

New York Legislation
While New York Governor Andrew Cuomo still has not signed the New York bill, it is expected that it will become law by the end of June. This would put to rest one of the most significant challenges that arose as DFS leagues surged in popularity during the second half of 2015, when New York Attorney General Eric Schneiderman brought enforcement actions against two of the largest DFS companies, DraftKings Inc. and FanDuel Inc. Those actions had essentially forced the companies to cease all operations within New York, the second-largest DFS market in the country.

The bill defines an “interactive fantasy sports contest” as “a game of skill wherein one or more contestants compete against each other by using their knowledge and understanding of athletic events and athletes to select and manage rosters of simulated players whose performance directly corresponds with the actual performance of human competitors on sports teams and in sports events.” By referring to DFS as “a game of skill,” New York is clearly indicating that DFS leagues are separate from gambling, games of chance or wagers on future contingent events not under the contestant’s control, thereby providing the statutory basis for the leagues to be reinstated.

The legislation would put regulatory and oversight responsibility for the DFS industry in the hands of the New York State Gaming Commission (NYSGC). Each company will be subject to a 15-percent tax on gross revenues generated by New York players, as well as an additional tax, capped at $50,000, of 0.5 percent on all revenue. Companies will be required to register with the NYSGC for renewable three-year permits, and any DFS company that was operating prior to November 10, 2015 may receive a temporary permit to restart its operation while the full permit is reviewed. DFS games related to National Collegiate Athletic Association (NCAA) and/or high school sports are prohibited under the bill, which would also require DFS companies to institute a number of consumer protection safeguards, including:

  • Limiting each player to one active and continuously used account
  • Ensuring that references to chances of winning are accurate and make clear and conspicuous statements about the number of winners
  • Restricting the number of entries a single user can submit
  • Ensuring that bots or other automated entry methods are not used

The bill also establishes a long list of “prohibited players” who may not participate in DFS, including minors, employees of DFS companies and any individual with access to nonpublic confidential information about the contests.

The Future of the DFS Industry
Commentators have already noted that regulation will help venture capitalists and payment processing companies gain comfort with the DFS field, and the same will likely be true for advertisers and publishers. While there still could be more bumps in the road, regulation in New York follows similar legislation passed by seven other states, as well as regulations promulgated by Massachusetts, and it now appears possible that DFS will be unequivocally legal across the majority of the country in the near- to medium-term future.

Interestingly, beyond putting DFS on solid legal ground in New York, the new legislation may also lead to consolidation in the industry. The obligation to track player accounts and ensure that prohibited players do not participate will likely require significant capital investments, increasing pressure on smaller players in the market to merge or disappear. Recent rumblings of merger discussions between FanDuel and DraftKings may not come to fruition, but an industry roll-up does appear to be on the horizon.

But this is not the last word on DFS in New York. The NYSGC will issue its more fulsome regulations, and the New York Attorney General’s office is still moving forward with lawsuits against both DraftKings and FanDuel regarding allegations of consumer fraud and deceptive and false advertising practices during 2015, as discussed in Davis & Gilbert’s previous Alert. While these suits do not pose the same existential threat to the DFS industry as the previous possibility of being categorized as illegal gambling, media companies, sponsors and marketers should monitor such developments, as they will continue to shape the specific contours of this still-growing industry.

Bottom Line

After a challenging 2015 overflowing with lawsuits and attorney general actions, the DFS industry continues to find success in state legislatures in 2016 and may thus prove to be a more stable and attractive field for advertisers, venture capitalists and others to explore in the future. Expect a reinvigorated industry to emerge with larger, better financed players able to comply with complex multi-state regulations aimed at protecting consumers and ensuring fairness.