On Wednesday, Attorney General Eric Schneiderman issued cease-and-desist letters against the two major daily fantasy wagering sports sites, FanDuel and DraftKings. Schneiderman claimed that their “operations constitute illegal gambling under New York law,” and that “the illegality of DFS (daily fantasy sports) is clear from any reasonable interpretation of our laws, beginning with the New York State Constitution.”

The attorney general added an assertion that the advertisements of the two companies were misleading. But this allegation is merely the appetizer in this complaint. The entrée is whether daily fantasy sports are illegal gambling under New York law.

Under the federal Unlawful Internet Gambling Enforcement Act enacted in 2006, fantasy sports games played under certain conditions are granted an exemption from federal anti-gambling laws. The fantasy games, in order to qualify for this exemption, (a) must involve games where the makeup of the fantasy team does not constitute the current membership of a sports team, (b) must have prizes known in advance to the players, and these prizes cannot be dependent on the number of participants in the games or on the fees paid by the participants, and (c) have the winners determined predominantly by the performance of individuals in multiple sporting events.

The federal law, however, does not exempt fantasy sports from state laws regulating or prohibiting gambling. The definition of what constitutes “gambling” differs from state to state, and New York’s laws are among the most elusive in the country. This makes the outcome of any litigation on the daily fantasy sports questions extremely difficult to foretell. There are three levels of potential constitutional and statutory reviews of gambling in New York state.

Since 1894, the state constitution has made all gambling illegal, unless there is an exception provided for in the constitutional amendments. While there are exceptions for parimutuel horse racing, a state lottery, bingo, charitable games of chance and four commercial casinos, there is no exception that would clearly cover fantasy sports.

Secondly, the state’s General Obligations Law makes all wagers dependent on chance unlawful and void. Losing bettors are entitled to recover their wagers.

Finally, the state’s Penal Law makes promoting gambling and the possession of gambling records crimes.

Across the country, there are three basic tests for determining whether a game/wager is a gambling game. In most states, there is a “predominance test.” If skill predominates over chance, the game is not gambling. If chance predominates over skill, the game is gambling.

A few states consider all games involving any amount of luck to be gambling. Obviously, daily fantasy sports would not be legal in these states.

As a middle ground, some states find games to constitute gambling where luck is a material element of the game. Under this test, luck would not need to predominate over skill in order to be considered gambling.

New York’s criminal laws on gambling are governed by the “material element” test. A game is criminal gambling where its “outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”

It is uncertain whether gambling as defined under the constitution or under the General Obligations Law is governed by the “material element” test or the “predominance” test.

Moreover, the courts in this country have never been able to agree upon any objective test on how best to evaluate the weight to be given to skill versus luck. Does the game appear to be luck to a novice game player, a reasonable game player, or to a veteran game player? Do you weigh these elements based on one game or hand or on a succession of games or hands?

For example, the attorney general – by asserting that the vast majority of daily fantasy sports players are likely to lose – appears to be saying that the game is luck to most novice players. In return, the daily fantasy sports sites are likely to respond that the fact that 1 percent of the players are the major winners should be evidence that skill and strategy are the major elements in the game.

Similarly, the daily fantasy sports sites are likely to question why Schneiderman has not pursued the seasonal fantasy sites (largely operated by major corporations such as Yahoo, ESPN and CBS). The daily fantasy  sites may argue that Schneiderman is implying that a bet on the Giants to beat the Patriots in a single game is gambling while a bet on the Giants at the beginning of the season to win the Super Bowl is somehow not gambling.

The problem here is that there is no easy end game for the attorney general or the daily fantasy sports sites. If daily fantasy is, in fact, gambling, it cannot be made legal in New York. It would be unconstitutional. Individual district attorneys may be motivated to bring criminal charges against the daily fantasy sports sites. Plaintiffs’ attorneys may bring action against these websites for the return of player fees. Similarly, if daily fantasy sports is considered gambling, we might anticipate copycat suits brought against the seasonal fantasy sites.

And by opining on whether daily fantasy sports is a gambling game, the attorney general has opened a Pandora’s box of possible questions about gambling. There are myriad games and wagers that involve a combination of luck and skill. These include everything from Internet and bricks-and-mortar poker, to hole-in-one contests, blackjack, bridge, backgammon, the ubiquitous claw/crane games, and even mahjong. Will Schneiderman now be on the hook for deciding whether these activities are gambling?

While the overall outcome of this legal fight is unclear, one aspect is certain. The battle between the attorney general and FanDuel and DraftKings will not be a daily contest. This will be a multi-seasonal battle that will not be a fantasy for any of the players.

 

Bennett Liebman currently serves as a government lawyer in residence at Albany Law School. He is the former deputy secretary for gaming and racing in New York state.