The Death of Daily Fantasy: Welcome to the Beginning of the End

New York Attorney General says DraftKings and FanDuel are illegal, as the challenges to the billion-dollar industry continue to mount

Daily fantasy sites face a growing number of legal challenges. Is this the beginning of the end? Credit: Andrew Harrer/Bloomberg/Getty

You can blame it on those damn ads.

The daily fantasy sports industry faces a crucible of various legal challenges that could result in anything from slight regulation of the billion-dollar business to its all-out collapse. The latest marker includes New York Attorney General Eric Schneiderman's call for daily fantasy giants DraftKings and FanDuel to cease operations in the state, which, in and of itself, could deal a crippling blow to business.

Operators face a confluence of legal obstacles that include the Nevada Gaming Control Board's recent ruling that daily fantasy is no different than gambling, a growing number of class-action lawsuits from New York to Florida against them, the intense scrutiny in some state legislatures as to how to deal with the growing industry and Schneiderman's letter this week, which demanded the companies stop accepting wagers from New York residents, and gave them five days to comply with his orders.

"They all share the same connective tissue of being brought about by the rapid growth of daily fantasy sports. I think if that growth would have happened in a more organic way, stretched over a number of years, you wouldn't see necessarily the confluence of those factors at this particular point in time," says Chris Grove, the editor of LegalSportsReport.com. "I think, in many ways, the advertising campaigns served maybe not as a trigger for these efforts, but certainly as fuel. It may not be the factor for why each one of these [legal challenges] exists, but it's certainly a reason why they are all coming to a head simultaneously."

All four separate but equally impactful legal fronts have materialized in a relatively short span, and all have the industry fighting for its life in the courts. Daily fantasy has quickly and forcefully injected itself into popular culture, and that assault has made it an easy and newsworthy target for politicians and lawyers.

"The massive advertising spend by DraftKings and FanDuel created an atmosphere where one slip up, one mistake, caused the roof to cave in," says Daniel Wallach, a sports and gaming legal expert and a shareholder at Becker & Poliakoff in Ft. Lauderdale, Florida.

That slip came with the revelation that DraftKings employee Ethan Haskell accidentally leaked data about player ownership percentages that was equated to insider trading, though many within the industry maintain the controversy was largely manufactured and the information was already available to players. Still, it didn't smell right, and the accusations provided enough traction for future legal challenges to the industry and inquiries into its business practices.

New York is the latest state to challenge the legality of the games. On Tuesday, Schneiderman came out forcefully against daily fantasy after a month-long investigation and wants to shut down the games based on his interpretation of the Unlawful Internet Gambling Enforcement Act of 2006 that helped to bring down the online poker industry in 2011. The law differentiates between games of skill and games of chance, and Schneiderman said daily fantasy is no more than a game of chance, according to his interpretation of New York State law.

The future of DFS may rest on the very interpretation of those terms. 

Martha Coakley is the former Attorney General of Massachusetts and is currently a legal adviser for DraftKings, which is based in Boston. While she did not lay out the legal defense the industry will wage in court – and boy, are they going to challenge Schneiderman with everything they've got – she does maintain that fantasy sports are skill-based contests. 

"We feel pretty strongly that given this business model, it is a game of skill," she says. "At any rate, the New York Attorney General didn't take the time to examine, from an evidence-based decision, whether or not this is a game of skill – because that's the determinative thing."

There is an argument both for and against the notion that fantasy sports rely on skill over luck. On the one hand, there is some skill involved in selecting players for your lineup, but once you lock your roster, there is also an element of luck – the players need to perform. This is the signature argument that will play out in the courts.

"What this requires is analysis," Coakley says. "As you join this contest, you become a general manager. You are playing a game. You have a salary cap and you have to use your judgment and your skill to pick what you think will be the best team. That's the fantasy piece of it. But for anyone to be successful in this, you can't just close your eyes, and like a lottery ticket, pick a player. You have to use knowledge and skill to put your team together.

"In anything, there is chance," she says, adding that some states interpret the game of chess as a game of chance because it begins with the flip of a coin. "And anyone who makes the first move has a 5-10 percent better chance of winning."

Daily fantasy is complicated because it seems to involve a little of both: skill and luck. And it will eventually fall to a judge to determine how exactly the game fits under the law.

"If it is determined that daily fantasy is a game of skill, it could be permitted to continue operating as it has," says Justin Fielkow, an attorney at the Franklin Law Group in Illinois, which represents fantasy sports organizations. "But drawing a line is not as simple as it sounds, because they are very subjective and opinion-based, and that criteria varies from state to state."

New York joins a growing list of battleground states that are attempting to define exactly what the daily fantasy industry is and how it should be regulated. And with any court decision, it creates a precedent and a basis for future rulings. That could present a problem for the sites and their operators, according to Wallach, who forecasts massive changes for the industry.

"If a jury concludes that chance plays an important role in the outcome of a daily fantasy sports contest, there's your violation of New York law, which in turn, sets the stage for a federal prosecution," Wallach says. "This is their Waterloo. They have to fight this. If they fight and lose, these companies will be on the fringes. You can't dominate the market and be ubiquitous and ascend to the height of popularity that they already have without New York, without the world's largest financial market, without the biggest population base in daily fantasy sports. This will severely limit the future growth of daily fantasy sports.

"If you can't operate in a bunch of critical states such as New York, New Jersey and Nevada," he continues, "it is obviously going to be a different future for the industry than what they've been accustomed to over the last two or three years."

The fight is just beginning, and billions are on the line. But it's a legal battle that may have been avoided if not for all those damn fantasy sports ads.