FanDuel Faults New York AG for "Flawed" Analysis of Website's Legality

As the daily fantasy sports operator is told to stop operations in New York, media companies have a direct stake in the outcome.
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On Wednesday, daily fantasy sports operator FanDuel announced it would be mounting a "legal challenge" to New York Attorney General Eric Schneiderman's demand that it and its main competitor DraftKings cease operating in the state. However, the company later clarified that it was not ready to go to court.

After deeming FanDuel to be engaged in illegal gambling, Schneiderman announced a cease-and-desist had been sent on Tuesday. New York's top prosecutor didn't explain the rationale behind the decision, but in making the gambling evaluation, the state uses what's known as the "material element test" that examines whether chance plays a consequential role in determining the outcome of a game. Thus, even if skill is involved, the contest can still be classified as gambling. Other states use different tests.

On a conference call on Wednesday, FanDuel outside counsel Marc Zwillinger said Schneiderman's legal analysis was "flawed" and that a court would conclude that it is not a game of chance but rather a contest that requires "more skill rather than less." He added that if players are determined not to be violating the law, the same analysis should be applied to FanDuel.

That said, FanDuel isn't immediately proceeding to court in order to get an injunction. The company says it has five days, and in that time it plans to meet with Schneiderman to try to get him to change his mind. "We're still weighing options," said Zwillinger. "All legal options are being considered." 

The legality of FanDuel and DraftKings is important to the tens of millions who assemble rosters of athletes and aim to win money based on their performance. It also is of consequence to some of the biggest companies in the media industry.

21st Century Fox, for example, owns more than 10 percent of DraftKings after investing approximately $150 million into the company in July. DraftKings has also committed to $250 million in advertising on Fox through 2017, according to a recent filing with the SEC.

Disney reportedly explored a similar equity deal this past summer before backing off in the due diligence stage for unspecified reasons. But ESPN is still accepting a ton of ad money as evidenced by a barrage of commercials and brand integrations that its viewers see each weekend when professional football games are played.

Other entertainment companies with stakes in FanDuel reportedly include Time Warner, Comcast and Google.

Besides hundreds of millions of dollars potentially on the line, the relationship between media companies and daily sports operators could raise other important concerns. For instance, in 2003 the Department of Justice sent a letter to the National Association of Broadcasters warning that entities that ran advertisements for gambling sites could be pursued criminally for aiding and abetting illegal activities.

The Justice Department and the FBI are currently pursuing their own investigation on the operations of daily fantasy sports websites. DraftKings and FanDuel both came in the wake of the Unlawful Internet Gambling Enforcement Act of 2006, which created an exemption for games of skill. Although the federal law looked at first blush to inoculate the companies from gambling charges, the statute explicitly didn't supplant state laws on the subject. And the huge amount of marketing devoted to these sites appears to have caught the attention of several law enforcement officials throughout the nation.

Asked whether the ad campaign sparked the exposure, FanDuel CEO Nigel Eccles acknowledged that it "put us on everyone's radar," but added it was only a matter of time before the company became prominent anyhow.