FanDuel and DraftKings, the two leaders in the fast-growing daily fantasy sports market, are vowing to fight efforts by New York Attorney General Eric Schneiderman to shut them down on the grounds they're operating an illegal sports betting operation.
Schneiderman sent the companies a "cease-and-desist" letter on Wednesday, ordering them to quit operating in New York. He called the industry a "multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country."
The industry has five days to persuade Schneiderman, who's a Democrat, to defer legal action. Speaking in a teleconference with reporters, FanDuel Chief Executive Nigel Eccles reiterated the company's position that daily fantasy sports is a game of skill and not chance. And DraftKings denounced Schneiderman's move as "hasty and uniformed." It promised to pursue this fight "to the fullest to ensure that New York fantasy sports fans do not need to stop playing the games they love."
This is the industry's second legal setback in recent weeks. Regulators in Nevada ordered FanDuel and DraftKings to quit taking bets from residents there until they secure casino licenses. The games are illegal in Arizona, Iowa, Louisiana, Montana and Washington state, and their status is murky in others.
New York's action has the potential to be precedent-setting because it's a huge market for both companies. FanDuel estimates that 10 percent of its players are in the Empire State.
Schneiderman "better be ready for a long legal struggle because these guys are going to fight him tooth and nail," Father Richard McGowan, a priest who's an adjunct associate professor at Boston College and an expert on gambling, told CBS MoneyWatch. "If his order goes through, it no doubt means their death."
DraftKings and FanDuel are continuing to let players in New York participate in their games. Both the industry and state officials agree that daily fantasy sports games should be regulated like other forms of gaming at the state level. State legislators in Illinois and Florida have crafted regulatory bills. Massachusetts Attorney General Maura Healey, who is conducting her own investigation into the industry, supports a "strong legal and regulatory framework" for daily fantasy sports.
"Our focus remains on protecting consumers, protecting minors and addressing problem gambling," said Cyndi Roy Gonzalez, a spokeswoman for Healey, in an email to CBSMoneyWatch.
If the industry fails to head off Schneiderman's civil suit, it would probably seek a preliminary injunction from a New York State court declaring that daily fantasy sports don't violate the state's gambling laws. To do that, it would have to prove that the games don't have a "material element of chance."
"The material element test is the trickiest," said Marc Edelman, an associate professor of law at New York's Baruch College and an expert on gaming law. "It doesn't pertain to an exact mathematical formula," making it difficult to predict how a court will rule.
About a dozen other states have similar laws, "with some states being stricter than New York and others being more lenient," he said.
About 10,000 players have contacted Schneiderman's office to voice their outrage at his action, according to FanDuel. The company said it hasn't noticed an unusual increase in the numbers of players withdrawing their money because of Schneiderman's letter.
"There is a deep disappointment," said FanDuel CEO Eccles in today's teleconference. "People feel the government shouldn't decide what games they should play."
DraftKings has retained the law firm of Gibson, Dunn & Crutcher to represent it. The firm's team representing DraftKings is led by Randy Mastro, chief of staff to former New York Mayor Rudolph Giuliani.
The daily fantasy sports industry also has formed partnerships with major media companies and sports leagues and has become one of the biggest buyers of advertising both on traditional media like TV and newer types like podcasts.
Editor's Note: CBS has an investment in FanDuel of less than 1 percent of that company's value.