Is New York done with DraftKings, FanDuel?

Andrew Harrer | Bloomberg | Getty Images

New York State Attorney General Eric Schneiderman has begun his crackdown on daily fantasy sports (DFS), threatening the continuation of the online sports games.

Experts say this is just the beginning. While it certainly is a strike against companies like DraftKings and FanDuel, which are trying to argue that their companies operate as skill-based competitions, the cease-and-desist letter is just the tip of a lengthy legal process.

"The short answer is sitting here today folks can continue in their fantasy football games, especially here with the Jets and Bills here tonight," said lawyer Anthony Sabino, who is not associated with either company. "They can still have fun, people can relax and enjoy themselves. Long term, that's a tough call. The general consensus is this is some form of gambling, and let's face it, on the books in New York, it is still illegal."

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On Tuesday night, the New York state attorney general's office served a cease-and-desist letter to DraftKings and FanDuel. The letter stated that it believed the companies' business models constituted "illegal gambling."

The office noted that DFS varied greatly from traditional fantasy sports, especially in the fact that the companies were in complete control of the betting and profits they received from the games. It also pointed out that the companies were advertising their games like a lottery, and could create public health and economic problems associated with gambling.

According to daily fantasy sports analytics provider, DraftKings and FanDuel brought in upward of $49 million in fees last week alone.

"The fantasy industry is spending $100 million a week on advertising," said Joe Colangelo, executive director of Consumers' Research. "They are going up against the toughest attorney general in the country. If you're into technology and regulation, it's time to break out the popcorn."

Martha Coakley, a lawyer for Foley Hoag, which is representing DraftKings, said that ever since Schneiderman made the announcement that he was looking into the DFS business models, DraftKings has been open to explaining its company and being as transparent and cooperative as possible. Though there had been a few conversations and inquiries, Tuesday night's letter was "not really anticipated."

Coakley noted that DraftKings has five days to legally respond to the letter, which will give consumers plenty of notice whether or not they will be able to play in this week's contests.

"It came as a surprise and a huge disappointment," she said. "They don't feel that he had taken the time to make the decisions he made. Obviously, it has a huge impact on this new, smart industry."

Sabino, who is also a professor of law at St. John's University Tobin College of Business and specializes in complex business litigation, said that since Schneiderman has not filed an injunction, there is no legal reason stopping DraftKings and FanDuel from operating as usual. He added that if Schneiderman makes the decision to get the injunction, he still has to convince a more than likely "skeptical" judge that he will be able to win a case. Even if Schneiderman does take the case to court, it will probably go through years of appeals through the New York system, with the case going in front of 13 judges who will each have their take on what constitutes gambling.

Consumers' Research's Colangelo believes that what may hurt DFS operators is the tone of their advertising. Although they preach about being skill games, their ads talk about how easy it is to take a chance so you can be a millionaire.

"When you are creating new industries, so much of your ability to succeed in the marketplace has to do with your perception," Colangelo pointed out.

But, even if the sports are deemed gambling, Sabino pointed out that it does not mean DFS is done for good. More than likely if the DFS operators lose, it will mean that the state government will be able to collect taxes from the games. He likened it to when the state legalized the lottery and turned it into a revenue driver.

"I think it goes without argument that the athletes on the field, it's all skill for them, but is it skill for you and I as armchair quarterbacks to pick who does well?" Sabino said. "This is a collision between sports and money and politics and big business in America."

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Both DraftKings and FanDuel said they plan to contest the cease and desist order.

"We are very disappointed that New York Attorney General Eric Schneiderman took such hasty action today, particularly since he did not take any time to understand our business or why daily fantasy sports are clearly a game of skill," DraftKings said in a statement. "We strongly disagree with the reasoning in his opinion and will examine and vigorously pursue all legal options available to ensure our over half a million customers in New York state can continue to play the fantasy sports games they love."

"Fantasy sports is a game of skill and legal under New York state law," FanDuel said in a statement. "This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, co-workers and players across the country. The game has been played — legally — in New York for years and years, but after the attorney general realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the attorney general's mind."

The president of the Fantasy Sports Trade Association, Paul Charchian, said he was "deeply disappointed" about the cease-and-desist letter in a statement.

"Without providing a full and fair opportunity to be heard — the very hallmark of the American system — the New York attorney general is threatening to deprive hundreds of thousands of New Yorkers of the ability to play the games that bring them closer to the sports they love," he said. "Fantasy sports is a game of skill and therefore legal under New York state law, yet the New York state government is now threatening to dictate what type of entertainment sports fans can enjoy. The FSTA will strongly support its member companies in attempting to preserve for New Yorkers the right to play and enjoy the games."